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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
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: 0-20725
SIEBEL SYSTEMS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 94-3187233
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
1855 SOUTH GRANT STREET
SAN MATEO, CA 94402
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, INCLUDING ZIP CODE)
(415) 295-5000
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Sections 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 the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of the Form 10-K. [_]
The aggregate market value of the voting stock held by non-affiliates of the
registrant, based on the closing sale price of the Common Stock on December
31, 1996, as reported on the Nasdaq National Market was approximately
$414,340,000. Shares of Common Stock held by each current executive officer
and director and by each person who is known by the Company to own 5% or more
of the outstanding Common Stock have been excluded from this computation in
that such persons may be deemed to be affiliates. This determination of
affiliate status is not a conclusive determination for other purposes.
The number of shares outstanding of the registrant's common stock, par value
$.001 per share, as of February 25, 1997, was 33,963,179.
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TABLE OF CONTENTS
ITEM PAGE
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PART I.
Item 1. Business......................................................... 2
Item 2. Properties....................................................... 19
Item 3. Legal Proceedings................................................ 19
Item 4. Submission of Matters to a Vote of Security Holders.............. 19
PART II.
Item 5. Market for Registrant's Common Stock and Related Stockholder
Matters........................................................ 20
Item 6. Selected Financial Data.......................................... 20
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.......................................... 20
Item 8. Financial Statements and Supplementary Data...................... 33
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure........................................... 33
PART III.
Item 10. Directors and Executive Officers of the Registrant............... 34
Item 11. Executive Compensation........................................... 34
Item 12. Security Ownership of Certain Beneficial Owners and Management... 34
Item 13. Certain Relationships and Related Transactions................... 34
PART IV.
Item 14. Exhibits, Financial Statements and Reports on Form 8-K........... 35
SIGNATURE................................................................. 52
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Proxy Statement for its 1997 Annual
Stockholders Meeting are incorporated by reference in Part III hereof.
PART I
The statements contained in this Annual Report on Form 10-K that are not
historical are forward-looking statements within the meaning of Section 27A of
the Securities Act of 1933 and Section 21E of the Securities Exchange Act of
1934, including statements regarding the Company's expectations, beliefs,
intentions or strategies regarding the future. Forward-looking statements
include, without limitation, statements regarding the extent and timing of
future revenues and expenses and customer demand under "Management's
Discussion and Analysis of Financial Condition and Results of Operations--Risk
Factors;" "--Uncertainty of Future Operating Results; Fluctuations in
Quarterly Operating Results," "--Lengthy Sales and Implementation Cycles," "--
Dependence on Large License Fee Contracts and Customer Concentration" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations;" statements regarding the deployment of the Company's products
under "Management's Discussion and Analysis of Financial Condition and Results
of Operations--Risk Factors--Limited Deployment;" statements regarding
reliance on third parties under "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Risk Factors--Reliance on
Andersen Consulting and Other Relationships: Dependence on System Integrators"
and "Business--Global Strategic Alignment;" and statements regarding product
development and future technological change under "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Risk Factors--
Dependence on the Internet," "--Risk Associated with Emerging Client/Server
and Sales Information Markets," "--Risk Associated with New Versions and New
Products; Rapid Technological Change" and "Business." All forward-looking
statements included in this document are based on information available to the
Company as of the date hereof, and the Company assumes no obligation to update
any such forward-looking statement. It is important to note that the Company's
actual results could differ materially from those in such forward-looking
statements.
ITEM 1. BUSINESS
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OVERVIEW
Siebel Systems, Inc. ("Siebel," or "Siebel Systems" or the "Company") is an
industry leading provider of enterprise-class sales and marketing information
software systems. The Company designs, develops, markets, and supports Siebel
Enterprise Applications, a leading Internet-enabled, object oriented
client/server application software product family designed to meet the sales
and marketing information system requirements of even the largest multi-
national organizations.
In today's increasingly competitive global markets, businesses must
continuously improve their operations. Having spent considerable effort and
resources in previous years automating finance, manufacturing, distribution,
human resources management, and general office operations, many businesses are
now looking to apply the leverage of information technology to their sales and
marketing processes. Unlike previous automation efforts which have focused on
decreasing expenses, sales and marketing information systems focus primarily
on increasing revenues.
The Siebel Enterprise Applications are comprised of a broad range of
advanced client/server application products designed to allow corporations to
deploy comprehensive customer information systems, product information
systems, competitive information systems, and decision support systems on a
global basis. The Company's products provide support for multiple languages
and multiple currencies with support for a number of frequently interdependent
distribution channels, including direct field sales, telesales, telemarketing,
distribution, retail and Internet-based selling.
THE SIEBEL SOLUTION
The Company is a leading provider of Internet-enabled, object oriented,
enterprise-class sales and marketing information systems designed to meet the
needs of the largest and often multi-national corporations.
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The Siebel Enterprise Applications are designed to offer users a sales
information solution that is functionally comprehensive, is built upon a
modern technology foundation, and scales to meet the requirements of global
organizations with thousands of concurrent users and very large data stores.
The Siebel solution is designed to be easily and extensively configured to
meet industry-specific and company-specific data processing and data
presentation requirements.
Functionally Complete
The Siebel Enterprise Applications are designed to provide comprehensive
functionality for sales and marketing information systems. The products are
intended to enable the organization to deploy enterprise-wide customer
information systems, product information systems, competitive information
systems and decision support systems. Specific functionality includes
opportunity and account management, product and revenue forecasting, quote
generation, on-line sales tools, contact and activity management,
correspondence and fulfillment. The Siebel Enterprise Applications fully
support team selling across multiple distribution channels, including field
sales, telesales, telemarketing and resellers. The Siebel products are
designed to improve internal and external communications by integrating with
e-mail, Intranet and Internet services.
Modern Technology Foundation
The Siebel solution takes advantage of advanced developments in technology
and computing trends, including Internet and intranet interoperability,
client/server architecture, configurable business object technology
(BusObjects), 32-bit processing capability, modern client operating systems
(Microsoft Windows 95 and Windows NT), relational database servers, modern
development environments (Microsoft Visual C++ and Microsoft Foundation Class
Libraries (MFC)), inter-application communications technologies (Microsoft OLE
2 automation) and database synchronization and replication.
The Company believes that the use of these modern and industry-standard
development tools and technologies has allowed Siebel Systems to rapidly
develop a comprehensive, configurable, scalable, enterprise-wide sales and
marketing information solution. The Company has found that sales of the Siebel
Enterprise Applications have been facilitated by the fact that its customers
and prospects have often adopted as their MIS standards these same
technologies used by the Company to build its products.
The Company believes that the technologies utilized to build Siebel
Enterprise Applications--many of which became commercially available in the
mid-1990s--are required to build applications of this nature and scope. Prior
to the advent of these technologies, it was technically difficult to build an
application robust enough to solve the information requirements of global
sales and marketing organizations. The Company believes that its use of these
technologies provides the Company with a significant market advantage.
Internet-Enabled
The Siebel Enterprise Applications are designed to allow organizations to
harness the power of the Internet to facilitate the sales and marketing
process. The Siebel Enterprise Applications enable organizations to use the
Internet today for collecting leads, for accessing product, company and
competitive information through the World Wide Web, for communicating with
prospects and customers via Internet-based electronic mail and for
synchronizing and replicating data for remote computing.
Many companies are using their home page to collect sales leads. The
information that prospects enter on these web-based forms, (e.g., name,
address, etc.) can be automatically loaded into Siebel Enterprise Applications
using a standard CGI (Common Gateway Interface) interface to the Siebel Open
Interface product. These leads can then be automatically processed by the
Siebel Enterprise Applications Territory Manager, assigned, and distributed to
the appropriate sales representatives for follow up.
Siebel customers can also integrate Siebel Enterprise Applications and the
Siebel Marketing Encyclopedia with a web browser, such as Netscape Navigator,
to allow their sales and marketing professionals to
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automatically access remotely stored and managed sales and marketing
information using the World Wide Web. In this fashion, sales and marketing
personnel can readily gain remote access to a broad range of product marketing
materials including product catalogues, data sheets and annual reports.
Using Siebel Enterprise Applications, sales professionals can send
correspondence and quotes to their prospects and customers via Internet-based
electronic mail.
Siebel Remote offers support for sales representatives using the Internet to
synchronize their remote laptop computers with the corporate databases. Users
can employ a local Internet access point to communicate "directly" with the
corporate headquarters to exchange account information, access new leads, and
transfer new orders. The Company believes the ability to use the Internet for
data synchronization or "docking" offers significant communications cost
savings to Siebel users and allows easy, local and lower cost computer access
globally.
Enterprise Scalability
The Siebel solution is designed to scale to meet the needs of organizations
whose sales forces range in size from fifty to thousands, including even the
largest global organizations. Many of the Company's customers have purchased
Siebel Enterprise Applications with the goal of automating thousands of sales
professionals, accessing multiple gigabyte data repositories. Most of the
Company's customers are currently in the early stages of enterprise-wide
deployment. The largest production deployments of Siebel Enterprise
Applications to date are measured in thousands of sales professionals. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Risk Factors--Limited Deployment."
BusObject Configurability
Siebel Systems employs the use of BusObjects, highly configurable object
oriented business objects, as the basic building blocks of Siebel Enterprise
Applications. Included in the family of Siebel BusObjects are Opportunity,
Account, Customer, Product, Competitor and Campaign. The BusObjects contain
semantic information about the sales and marketing entities as well as
presentation and navigation logic. BusObjects control the physical access of
information from data sources, organize and inter-relate that information and
present the information to the user. The Siebel Enterprise Applications are
comprised of a collection of these BusObjects. Highly configurable at the
object code level, Siebel BusObjects are designed to allow organizations to
rapidly configure the application to meet their business requirements while
ensuring a clear and consistent upgrade path for future releases. This
flexibility is expected to substantially reduce the long term maintenance
costs associated with deploying a highly configured application.
MARKET STRATEGY
The Company's objective is to establish and maintain a clear market
leadership position in the sales and marketing information systems market. The
Company's strategy incorporates the following key elements:
Target Large Multi-National Customers in a Broad Range of Industries
The Company has designed Siebel Enterprise Applications to satisfy the most
rigorous sales and marketing information requirements of multi-national
corporations that frequently employ multi-tiered distribution strategies.
Siebel Enterprise Applications are intended to be deployed on a global basis,
and provide shared, up-to-date information for field sales, telemarketing,
telesales, marketing, as well as third party reseller sales organizations. The
Company intends to leverage its experience and continue to target product
development, sales and marketing activities to expand worldwide market
acceptance of Siebel Enterprise Applications.
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Maintain and Extend Advanced Technology Position
The Siebel Enterprise Applications utilize advanced information technology.
The Company employs the use of configurable business objects (BusObjects)
designed to allow organizations to configure the Siebel application to fit
their unique needs while ensuring a clear and consistent upgrade path for
future releases. The Company has developed sophisticated database
synchronization capabilities intended to allow large numbers of mobile users
to intermittently connect and synchronize their local database with a server
database. The Company has made extensive use of object oriented technology to
develop a multi-tiered architecture that supports Internet-enabled
client/server, three-tiered and N-tiered deployment strategies. The Company
intends to continue to commit substantial resources to maintain and extend its
advanced technology position.
Global Strategic Alignment
The Company seeks to promote widespread adoption of Siebel Enterprise
Applications through the establishment of strategic relationships with leading
systems integrators, technology providers and distributors.
Siebel Systems has formalized a global strategic business alliance with
Andersen Consulting to maximize the growth and establish the market leadership
position of both companies in the sales and marketing information systems
marketplace. Under this worldwide alliance agreement, Andersen Consulting
provides Siebel-related professional services including sales force
reengineering, change management, systems integration, configuration,
installation, project management and training. This relationship provides
Siebel and Siebel's customers immediate access to a highly trained global
professional service organization to customize, integrate and deploy medium-
and large-scale Siebel implementations.
The relationship between Siebel Systems and Andersen Consulting is non-
exclusive. Siebel Systems frequently utilizes other systems integrators,
including KPMG Peat Marwick LLP, Deloitte & Touche LLP, Price Waterhouse LLP
and Cambridge Technology Partners (Massachusetts), Inc. to provide Siebel-
related professional services.
The Company has technology and marketing relationships with other leading
companies such as Itochu Corporation and Itochu Techno-Science Corporation
("Itochu"), Microsoft Corporation, and Adobe Systems, Inc. and intends to
establish additional relationships.
These relationships allow the Company to focus on its core areas of
expertise of developing and marketing sales and marketing information systems
software, while leveraging the strength and influence of complementary
information technology leaders in their respective domains.
Fully Exploit Intranets and the Internet
The Siebel Enterprise Applications have been designed to expand the
accessibility of comprehensive sales and marketing information to sales
representatives through the use of intranets and the Internet as a global,
low-cost, virtual private network. The Company believes that the Internet will
enable the entire corporate sales and marketing information base, currently
only available to users connected over a LAN (local area network) or WAN (wide
area network), to be available without geographic limitation for the low cost
of a local Internet connection. This capability will allow organizations to
deploy targeted, fully-informed sales professionals wherever needed without
the expense and overhead of physical offices or private leased lines. The
Company plans to continue to exploit the Internet and believes that in the
future it will allow customers to access comprehensive information systems
which recommend and deliver customized products, goods and services directly
to customers worldwide.
Promote Successful Customer Implementations
The Company's success is dependent upon its customers' successful
implementation of Siebel Enterprise Applications. As a result, the Company
actively supports the customer's deployment efforts by providing Internet and
telephone technical support, providing comprehensive instructor-led training
and assigning an account management team that consists of a sales
representative, technical account manager and an executive sponsor.
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To objectively measure customer satisfaction, Siebel Systems employs an
independent third-party organization to perform periodic customer satisfaction
audits.
Expand Global Sales Capabilities
The Company intends to expand its global sales capabilities by increasing
the size of its direct sales organization in major markets and continuing to
leverage distributors in other selected markets. In particular, the Company
plans to expand its direct sales and marketing activities in Asia, Australia,
Europe, Latin America and North America. The Company has operations in
Australia, Canada, France, Germany, Italy, Japan, the Netherlands, Sweden, the
United Kingdom, and the United States, and has recently introduced with Itochu
localized versions of Siebel Sales Enterprise for the Japanese market. The
Company is developing localized versions for major European markets.
PRODUCTS
The Siebel Sales Enterprise and Siebel Service Enterprise are client/server
application software product families designed to meet the sales and marketing
information system requirements of large, frequently multi-national,
organizations. Each is comprised of a broad range of advanced client/server
application products designed to allow corporations to deploy comprehensive
customer information systems, product information systems, competitive
information systems and decision support systems on a global basis. The
Company shipped Siebel Sales Enterprise version 1.0 in April 1995 and
subsequently shipped version 2.0 in November 1995. The Company shipped Siebel
Service Enterprise version 2.2 in December 1996.
The Siebel Sales Enterprise and Siebel Service Enterprise support Windows
for Workgroups, Windows 95 and Windows NT Workstation clients. The Siebel
application server operates on Windows NT and can work with Oracle, Sybase and
Informix relational databases operating on a variety of leading UNIX servers
and Windows NT database server platforms.
The Company generally licenses its software based on the number of users.
Siebel Sales Enterprise and Siebel Service Enterprise have U.S. list prices of
$1,750 per user. Additional product options range from $250 to $500 per
module, resulting in a total list price of $5,500 per user for an end-user
system that includes all software options. The Siebel application server
products are priced and licensed separately. Initial direct sales to an end-
user customer have typically ranged from $200,000 to $2,000,000, with certain
transactions that have been considerably greater than $2,000,000. The Company
also provides software maintenance service, training and associated
professional services. The Siebel Sales Applications are usually licensed to
customers who intend to automate the sales and/or service organizations of an
entire corporation or of a large division. Licenses to date of the Company's
products range from 50 to 5,000 users.
Siebel Sales Enterprise
The Siebel Sales Enterprise is designed to allow teams of sales and
marketing professionals to manage sales information throughout the entire
sales cycle. This core application includes the Opportunity Management,
Account Management, Contact Management, Activity Tracking and Calendar
Systems.
The Siebel Sales Enterprise product family includes Siebel Marketing
Encyclopedia, Siebel Office, Siebel Quotes, Siebel Revenue Forecasting, Siebel
Product Forecasting, Siebel Reports, Siebel EIS, Siebel Tele-Business, Siebel
Remote Client, Siebel CPG, Siebel Target Account Selling and Siebel BusObject
Designer, as well as Siebel Systems Administration and Management Software.
Siebel Systems Administration and Management Software components include
Siebel BusObject Configurator, Siebel Marketing Manager, Siebel Sales Manager,
Siebel Anywhere, Siebel Enterprise Integration Manager and Siebel Database
Extension Manager.
Siebel Service Enterprise
The Siebel Service Enterprise enables service and sales organizations,
including customer support, help desks, call centers, telesales and field
sales, to provide higher levels of customer service by easily sharing all
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customer information across functions. The Siebel Service Enterprise is
designed to increase the productivity of service personnel, allowing them to
assist more customers with high levels of customer satisfaction.
The base Siebel Service Enterprise application includes the Service Request
Management, Account Management and Profile, Contact Management, Activity
Tracking, Service Agreement Management, Customer Satisfaction Surveying and
Calendar Systems. Additional options include Siebel Service Encyclopedia,
Siebel Reports, Siebel EIS, Siebel BusObject Configurator, Siebel Service
Manager, Siebel Tele-Business, Siebel Enterprise Integration Manager and
Siebel Database Extension Manager.
Siebel Product Advantages
Application Configuration
The Company's customers each have unique business needs requiring varying
levels of application configuration. For instance, different organizations may
use a combination of direct sales, field sales, telesales or third-party
sales. The Company believes it has anticipated these needs and provides
configurable business objects to allow organizations to configure the
application to fit their unique requirements. Each business object defines the
look and feel, the information displayed and the workflow of the application
to address major areas of business functionality. For example, a business
object may contain the business logic and rules that describe how leads and
prospects are shared across multiple sales channels. The Company provides a
range of business objects that address the sales and marketing process.
The Siebel Sales Enterprise and Siebel Service Enterprise are designed to
allow organizations to configure and modify the properties and attributes of
the business objects without needing to change application source code. The
Company believes this approach to configuration provides several key benefits:
. Reduces cost of configuration and maintenance,
. Permits a clear and consistent upgrade path for future releases of
Siebel software, and
. Allows the Company to maintain and support a single source code base
that addresses the varied needs of its customers.
Application configuration is typically performed by a Siebel systems
integration partner or the customer's MIS department. The software may be
configured in a number of manners including:
. User Preferences
. System Administration Preferences
. Server Preferences
. Database Extensibility
. Object Definitions
This combination of configuration options offers customers extensive
configurability without having to write or modify source code.
Data Synchronization and Replication
Typically, field sales, telesales and order administration personnel all
have contact with the same customers. Sharing information about customers
across often geographically dispersed sales teams can be difficult. The
challenge is to provide every member of the sales team with up-to-date
information on the account or prospect. Siebel Remote, the Company's
asynchronous replication technology, addresses the data synchronization and
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distribution needs of these sales teams. Siebel has applied for a patent on
its proprietary data synchronization and replication technology. See "--
Intellectual Property and Other Proprietary Rights." Siebel considers this
technology a major source of competitive market advantage.
Mobile users can utilize Siebel Remote to synchronize their laptop or hand-
held computer with the central data repository. Adhering to pre-established
visibility rules, Siebel users can share overlapping subsets of data to
support team selling. Traditional data synchronization approaches are
typically limited, allowing only the primary user to update shared data. With
such limited approaches, other synchronized users only have read access to
information entered by the primary owner. Siebel Remote is designed to allow
any designated member of the sales team to update records and to automatically
synchronize the updates with all other users.
Giving multiple users update rights can create conflicts, particularly when
some users operate in a mobile environment and are not permanently connected
to the central data repository. The Siebel application supports an extensive
set of configurable business rules that detect and resolve conflicts at the
database field level.
Siebel uses a sophisticated "net change" architecture with highly compressed
transaction instructions designed to minimize network traffic, reduce data
synchronization time and limit network expense. Siebel's architecture is
network independent, allowing data synchronization to occur over LAN, WAN,
dial-up, as well as intranet and Internet connections.
User Interface
The Siebel Enterprise Applications have been ergonomically designed by human
factors experts to be easy to use and easy to learn. The use of Microsoft
Windows and Microsoft Office compliant user interface technology is intended
to ensure that users are immediately familiar with buttons, menus and
industry-standard commands. A tab metaphor allows users to click a mouse and
view the key components of their sales and marketing information system.
Siebel's patent-pending Thread Manager technology displays, records and
restores the user's screen-by-screen navigation. System-wide, context
sensitive help provides immediate answers to questions.
Scalability and Performance
Scalability and performance are key considerations in enterprise-wide
deployments of sales information systems. For large deployments, thousands of
users need to access a common data repository that may contain tens of
gigabytes of information. Scalability and performance are impacted by design
and implementation of both the client and server side of the application. The
Siebel Enterprise Applications are designed to address the performance and
usability issues that arise in large-scale deployments.
Efficient Use of Network Bandwidth to Optimize Performance
The Siebel client/server architecture is designed to minimize network
traffic to optimize performance. The client is designed to intelligently cache
data and group database queries and updates, thereby minimizing the number of
transactions over the network. This feature is intended to allow large numbers
of users to be simultaneously connected over a LAN or WAN to a single
centralized database while exhibiting acceptable performance characteristics.
High Performance Application Server
The Siebel Application Server has been designed to permit high throughput.
Multiple application servers can run in parallel with a single database
server. The number of users each Siebel Application Server can support varies
depending on the type and frequency of data updates, as well as the particular
server hardware.
High Performance Computer Hardware and Database Support
The Siebel products are designed to support scalability for large user
communities by taking advantage of leading, high-performance databases and
computer hardware. The Company supports industry-standard
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approaches to high-performance such as symmetric multi-processing hardware
which allows multiple processors within one server machine.
Support for Global Enterprises
Built for multi-national customers, Siebel software supports international
standards in several ways, including support for:
. Local language support for non-English application deployment
. Multiple currencies, exchange rates and automatic currency
conversions
. International time, date and phone number conventions
. Double-byte Asian character sets
The Company recently introduced with Itochu a localized version of Siebel
Sales Enterprise for the Japanese market. The Company is currently developing
other localized versions, which will be developed and released as market
conditions warrant.
TECHNOLOGY
The Siebel Enterprise Applications exploit an advanced information
technology platform. The Siebel products embrace and incorporate the utility
and power of the Internet. The applications are built on a multi-tiered
client/server architecture supporting Microsoft Windows clients and a variety
of Windows NT and UNIX servers running Informix, Oracle and Sybase relational
databases. The technology foundation includes object oriented application
development, Microsoft Visual C++, MFC Libraries, OLE 2 automation, 32- or 16-
bit processing and Microsoft Windows and Microsoft Office user interface
compliance. The Siebel applications are modern, scalable and customizable
enterprise-wide client/server sales and marketing information systems. The
applications use a multi-tiered architecture with separate client, application
server and database server layers connected together over a LAN or a WAN.
The Siebel N-Tiered Architecture
The Company has developed an advanced, N-tiered object oriented software
architecture. The software architecture is designed to provide Siebel
customers with robust flexibility in application deployment to meet the unique
needs of the organization. Using Siebel's N-tiered architecture, customers
have the flexibility of deploying their applications on remote pen-based and
laptop computers, on standalone desktop workstations, on client/server
systems, on highly distributed replicated "mainframe" server environments, and
in the future, on the Internet, or any combination thereof.
The Company believes that the utility offered by this flexible architecture
provides a major source of competitive market advantage.
Siebel's N-tiered architecture separates the information presentation,
application logic, database access, and interprocess communications layers
into separate tiers in order to partition and distribute the application
components to run where necessary.
Siebel's N-tiered architecture currently supports the following application
deployments: Personal Computing for mobile sales professionals and
Client/Server for connected sales professionals. The Company expects that this
architecture can be further exploited to support additional Internet-enabled
application deployment configurations in future Siebel product releases,
including the Virtual Computing for Internet-connected sales professionals,
resellers, partners and individual buyers.
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Personal Computing
Siebel Personal Computing supports mobile sales professionals who typically
use either laptops or hand-held portable computers. These users are not
permanently connected to their organization's network and usually run the
client disconnected from the central database. Mobile clients have a local SQL
database that contains a subset of the information in the server database.
While the field sales representative is disconnected from the LAN or WAN, the
local database is used for information access and updates. This gives mobile
users the complete range of functionality available to connected users
anywhere their business takes them. The Company's patent-pending technology
allows for exchange and synchronization of information between the mobile and
server databases, using LANs, WANs, dial-up or the Internet.
Client/Server
The Siebel Client/Server software connects the client to the server database
via a LAN or WAN. Connected clients access and update information directly
against the server database. A typical use for a connected client is a
telesales representative based in the headquarters office or possibly in a
regional office connected to headquarters through a WAN.
Virtual Computing
Siebel Virtual Computing is being designed to expand the accessibility of
comprehensive sales and marketing information to sales representatives through
use of the Internet as a global, low-cost, virtual private network. The
Company believes that the Internet will enable the entire corporate sales and
marketing information base, previously available only to users connected over
a LAN or WAN, to be available without geographic limitation for the cost of a
local Internet connection. The Company believes that this capability will
allow organizations to deploy targeted, fully-informed sales professionals
wherever needed without the expense and overhead of private leased lines or
physical offices.
Siebel Virtual Computing is being designed to deliver one-to-one sales and
marketing on a global basis. The Company believes this may well re-define the
concept of "selling on the Internet." Today, buyers can order anything from
consumer goods to automobiles using the Internet to browse home pages and tour
virtual shopping malls. This passive approach to selling can be characterized
as using the Internet simply as an inexpensive way to deliver an electronic
catalog. Electronic catalogs do not currently lead customers through the
product evaluation and selection phase, do not up-sell or cross-sell, only
offer limited customized alternatives, and add no incremental value to the
selling process. The Company believes that such electronic catalogs are not a
replacement for a true sales professional who can identify the specific
product configuration that best suits the customers' needs and requirements.
The Company believes that its N-tiered architecture will, in the future, be
able to provide organizations with the technology foundation to deliver a
powerful new generation of selling applications over the Internet. For
example, through a web page, buyers may have access to a virtual sales
consultant, fully knowledgeable about the buyer's demographics, interests and
buying patterns. The Company believes that this virtual sales approach will
allow organizations to dynamically target marketing programs, tailor solutions
and deliver customized products, goods and services worldwide, directly to
customers based on their needs. The Company believes that this use of the
Internet may fundamentally change the economics of selling by permitting
organizations to reduce distribution and selling costs, while simultaneously
increasing revenues and growing new markets through disintermediation. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Risk Factors--Risk Associated with New Versions and New Products;
Rapid Technological Change."
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CUSTOMERS AND MARKETS
Siebel has targeted large organizations operating globally and conducting
business through multiple sales channels. The Company believes this market has
been underserved by existing vendors and offers substantial opportunities to
the Company. The following were customers of the Company as of December 31,
1996.
FINANCIAL SERVICES CONSUMER PACKAGED GOODS
. Charles Schwab & Co., Inc. . British-American Tobacco Company
. Diversified Distribution Limited
Services, a member of The . The Dial Corp
Travelers Group . The Quaker Oats Company
. Frank Russell Company
. Montgomery Securities
. Nationsbanc Services, Inc. MANUFACTURING
. Nationwide Mutual Insurance . AMP Incorporated
Company . Cisco Systems, Inc.
. Texas Commerce Bank National . Compaq Computer Corporation
Association . Digital Equipment Corporation
. Hewlett-Packard Japan, Ltd.
. LSI Logic Corporation
SERVICE . Newbridge Networks, Inc.
. Andersen Consulting LLP . Pioneer--Standard Electronics,
Inc.
. Pyramid Technology
SOFTWARE . The Dow Chemical Company
. BMC Software, Inc. . Unisys Corporation
. Informix Software, Inc.
. Mentor Graphics Corporation
. Peoplesoft, Inc. UTILITIES
. Platinum Technology, Inc. . AEP Energy Solutions, Inc.
. Pure Atria Software, Inc.
. Sybase, Inc.
TRANSPORTATION
. American President Companies Ltd.
. Viking Freight System, Inc.
The Siebel Enterprise Applications has been selected for use by a wide
variety of industries as illustrated by the following customer examples:
Financial Services
In December 1995, Charles Schwab & Co., Inc. licensed the Siebel Sales
Enterprise software as an important sales system to be used by more than 4,000
brokers. After reviewing multiple products in the areas of configurability,
scalability and functionality, the firm chose the Siebel Sales Enterprise. The
Siebel Sales Enterprise is designed to allow shared access to updated customer
profiles and histories to improve the organization's responsiveness to its
nearly 3.5 million active customer accounts and prospects.
Transportation
American President Companies Ltd. was challenged with providing their sales
representatives with the tools necessary to compete in a global marketplace.
After conducting an extensive review of sales and marketing information
systems, they selected Siebel Sales Enterprise. This implementation is being
designed to integrate internal customer information and government trade data,
to optimize work loads and to provide increased customer service. Utilizing
Siebel's work flow capabilities, these sales representatives are expected to
be able to balance multiple customer inquiries and increase their revenue
generating capacity.
Manufacturing
After an extensive review of the sales information systems software
marketplace, Cisco Systems, Inc. selected Siebel as its global sales
information solution based on Siebel's comprehensive, integrated functionality
11
and its advanced technology platform. This implementation was designed to
equip the Cisco sales force with complete, accurate and up-to-date information
about accounts, opportunities, products, and prices, so they can quickly
respond to their customers' requirements and maximize time spent selling.
MARKETING
The Company's marketing efforts are directed at establishing a market
leadership position for Siebel Systems. Targeted at sales, marketing and
information technology executives within large, multi-national organizations,
Siebel's marketing programs are focused on creating awareness and generating
interest in the Siebel solution.
Siebel Systems is an active participant in the Digital Consulting Inc. (DCI)
Field and Sales Automation and Internet EXPO, a leading international
conference and trade show in the sales and marketing information systems
marketplace. In 1996, the DCI Field and Sales Automation/Internet Conferences
were held in San Jose, Chicago, Toronto, Boston and Atlanta. These week-long
conferences featured Thomas M. Siebel, Chairman and Chief Executive Officer of
the Company, delivering the plenary Keynote Address. In addition, Siebel
Systems demonstrated its products and showcased its partners' solutions. The
Company intends to participate in each of the 1997 DCI Field and Sales
Automation/Internet Conferences being held in San Jose, Chicago, Toronto,
Boston and New York. In addition, Thomas Siebel is a frequent speaker at many
software industry events, including the Sales Automation Association and
Insight Technology Group's Chief Sales Officer Conferences, as well as the
Andersen Global Consulting Seminar.
Siebel's marketing personnel engage in a variety of marketing activities,
including managing and maintaining the Siebel web site, issuing newsletters,
making direct mailings, placing advertisements, conducting public relations
and establishing and maintaining close relationships with recognized industry
analysts.
Siebel has introduced an industry-specific version of its sales and
marketing information system solution designed to address the specific needs
of the consumer packaged goods (CPG) marketplace. This version of the Siebel
Sales Enterprise, called Siebel for CPG, has been selected by The Dial Corp
and The Quaker Oats Company.
SALES
As of December 31, 1996 the Company's sales force consisted of 79 employees
located in 13 domestic offices (Atlanta, Austin, Bellevue, Boston, Chicago,
Cincinnati, Dallas, Denver, Houston, Los Angeles, McLean, New York and San
Mateo) and ten international offices (Amsterdam, Frankfurt, Melbourne, Milan,
Munich, Paris, Sydney, Tokyo, Toronto and Windsor). Sales in the Asia/Pacific
market are leveraged through a co-exclusive distribution agreement with
Itochu. The Company intends to continue to add sales representatives and sales
consultants worldwide.
The Company deploys sales teams consisting of both sales and technical
professionals who work with strategic systems integration partners to create
industry specific proposals, presentations and demonstrations which address
the exact requirements of the customer. The decision makers within Siebel's
prospective customers for the Siebel products are their executive management
teams, frequently consisting of the Chief Information Officer, VP Sales, VP
Marketing, the Chief Financial Officer and the Chief Executive Officer.
The Company manages its business using Siebel Sales Enterprise, running on
the Company's intranet. The Siebel product is used to manage all aspects of
the sales process and to share information among members of the sales team and
Siebel management.
The Company believes that the deployment of an integrated sales and
marketing information system offers a distinct competitive advantage and that
focusing corporate resources on revenue generating systems offers greater
return than automation efforts focused on cost reduction in areas such as
human resources and accounting. The Company believes its customers'
understanding of this fact establishes the value of the Siebel Enterprise
Applications and shortens the sales cycle.
12
The Company's sales process consists of several phases: lead generation,
initial contact, lead qualification, needs assessment, company overview,
product demonstration, proposal generation and contract negotiations. In a
number of instances the Company believes that its relationships with strategic
partners, including systems integrators, has substantially shortened the
Company's sales cycle. Partners have generated and qualified sales leads, made
initial customer contacts and assessed needs prior to Siebel's introduction.
Additionally, systems integration partners have assisted the Company in the
creation of customized presentations and demonstrations which the Company
believes enhance the competitive position. While the sales cycle varies
substantially from customer to customer, for initial sales it has ranged to
date from two to eighteen months. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
GLOBAL STRATEGIC ALIGNMENT
An important element of the Company's sales and marketing strategy is to
continue to enhance and expand its strategic partnerships with key industry
leaders in order to increase market awareness and acceptance of Siebel
Systems. The Company believes these relationships with industry leaders help
to ensure that Siebel Systems delivers a comprehensive solution to its
customers for their sales and marketing information system needs. The Company
has established relationships with organizations in two general categories:
systems integrators and technology and distribution partners.
Systems Integrators
Andersen Consulting--Strategic Business Alliance
Siebel Systems and Andersen Consulting have formalized a strategic business
alliance designed to maximize the growth and establish the market leadership
position of both organizations in the sales and marketing information systems
marketplace. Worldwide in scope, the parties' agreement includes cooperative
specification and development of products and solutions, technology transfer
and training and joint marketing and sales programs. Under this agreement,
Siebel promotes Andersen as its preferred systems integration partner and
Andersen promotes Siebel as its preferred software solution for sales and
marketing information systems. In connection with the strategic alignment,
Andersen Consulting has made an equity investment in Siebel Systems and George
Shaheen, the Managing Partner of Andersen Consulting, serves on the Company's
Board of Directors.
Andersen Consulting provides Siebel-related professional services including
sales force reengineering, change management, system integration,
configuration, installation, project management and training. Andersen
Consulting operates Siebel Configuration Centers in San Mateo, Minneapolis,
London and Tokyo. Siebel believes that this relationship provides Siebel and
Siebel's customers immediate access to a highly trained global professional
service organization to customize, integrate and deploy medium-and large-scale
Siebel deployments. Andersen Consulting has provided system integration
services in connection with a majority of the Company's customers to date. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Risk Factors--Reliance on Andersen Consulting and Other
Relationships; Dependence on Other Relationships."
Siebel Systems and Andersen Consulting conduct joint market development and
promotional activities, including joint advertising, joint public relations,
jointly developed brochures and market-specific product demonstrations, and
collateral. The two companies jointly participate in industry events and
conduct Executive Briefings both in worldwide seminar programs as well as in
DCI Field and Sales Automation tradeshows. Siebel and Andersen Consulting have
created a global joint selling model targeted at specific vertical markets and
major accounts.
Other Systems Integrators
The relationship between Siebel Systems and Andersen Consulting is non-
exclusive. Siebel Systems frequently utilizes other systems integrators,
including KPMG Peat Marwick LLP, Deloitte & Touche LLP, Price Waterhouse LLP
and Cambridge Technology Partners (Massachusetts), Inc. to provide Siebel-
related professional services.
13
Technology and Distribution Partners
Itochu Techno-Science Corporation--Strategic Business Alliance
Siebel and Itochu Techno-Science Corporation have entered into a strategic
alliance agreement under which the two companies have agreed to jointly
develop, promote, market, sell and support the Company's products in Japan.
The companies are working together to localize the Siebel products for the
Japanese market and jointly promote and support these products in Japan. In
connection with the alliance, Itochu Techno-Science Corporation and related
entities have made an equity investment in the Company. Itochu Techno-Science
Corporation is a large technology provider to the Japanese market,
representing many leading companies including Sun Microsystems, Inc., Compaq
Computer Corporation and Sybase, Inc. Itochu Techno-Science Corporation is a
subsidiary of Itochu Corporation, which is one of the largest companies in the
world with revenues in excess of $140 billion per annum.
Under the agreement, Itochu Techno-Science Corporation has agreed to prepare
Japanese localized versions of the Company's products, including the software,
on-line help and training materials. Acting as the co-exclusive distributor of
the Siebel products in Japan, Itochu Techno-Science Corporation promotes and
markets the Siebel software to Japanese end-user organizations. A dedicated,
full-time marketing team within Itochu Techno-Science Corporation coordinates
the marketing, promotion and distribution efforts for the Siebel products.
This marketing team promotes the Siebel products through marketing programs
including seminars, trade shows and conferences. In addition, Itochu Techno-
Science Corporation produces Japanese versions of Siebel sales tools and
collateral.
Itochu Techno-Science Corporation provides the installation, training,
technical support and maintenance to Siebel end-users. To promote customer
satisfaction in the Japanese market, Itochu provides technical support and
administers maintenance and software upgrade programs.
Other Strategic Relationships
Microsoft Corporation
The Company and Microsoft have a strategic technology and marketing
relationship. As a member of the Microsoft Developer Network and Microsoft
Solution Provider programs, the Company receives frequent briefings on
Microsoft's strategic and technical product direction, as well as early access
to new software releases.
The Company uses Microsoft development tools extensively, including
Microsoft Visual C++, MFC and OLE 2. The Siebel applications run under Windows
for Workgroups in 16-bit, and Windows 95 and Windows NT in a native 32-bit
environment. Microsoft has promoted Siebel's extensive use of its technology
in a Siebel Systems Solutions Datasheet, a Siebel Systems focus brochure, and
has featured the Siebel Sales Enterprise in multiple Microsoft product
launches.
Siebel and Microsoft have collaborated in numerous joint marketing programs
targeted at Microsoft's key customers and prospects. The two companies have
conducted a nationwide series of Executive Sales Information Systems Briefings
and jointly participated with each other in trade shows and industry events.
Adobe Systems, Inc.
Siebel Systems and Adobe have a joint technology and marketing relationship.
The Siebel Enterprise Applications utilizes Adobe Acrobat technology which is
designed to allow sales people to more quickly access sales information and
enable sales professionals to have immediate, on-line access to all of their
sales tools including annual reports, brochures, customer stories and
presentations.
The companies have jointly promoted the integrated solution through a number
of joint marketing programs, including collaboration in product announcements,
tradeshows and joint sales collateral.
14
In connection with the strategic relationship, Adobe Ventures L.P., a
venture partnership associated with Adobe, has made an equity investment in
the Company.
Mobile and Hand-Held Computer Providers
Siebel Systems has relationships with Norand and Telxon Corporation, leading
providers of mobile hand-held devices used by field sales personnel. Telxon
and Norand's line of hand-held information workstations integrate point-and-
touch pen-based computing devices with barcode data capture and wireless
communications. Siebel's products will run on these hand-held devices for use
in industries such as consumer packaged goods where hand-held devices enable
sales representatives to implement more effective in-store promotions.
Siebel collaborates with Norand and Telxon in numerous marketing activities,
including joint trade shows and industry events, joint participation in user
groups and targeted joint customer calls.
CUSTOMER SUPPORT AND TRAINING
The Company has implemented a multi-tiered strategy designed to provide
comprehensive customer support programs to ensure successful implementation
and customer satisfaction. This multi-tiered approach includes on-line support
via the Internet, toll-free telephone technical support and direct support
from a customer satisfaction team.
Through on-line support, a suite of Internet-based User Groups for specific
topics is available to Siebel customers. Internet support also includes a
knowledge repository to address customers' questions. The Company's Internet
service programs provide links to selective Siebel product documentation,
technical notes and frequently asked questions (FAQs). Customers can directly
check the status of their technical support requests over the Internet.
Separately, a toll-free phone number provides customers with direct access to
technical service professionals.
Another facet of Siebel's customer support is provided by the customer
satisfaction team. Each Siebel customer is assigned a team which consists of a
sales representative, a technical account manager and an executive sponsor.
The goal of this team is to ensure the success and satisfaction of the
customer by facilitating open communications to quickly identify, analyze and
solve problems. Through a combination of regularly scheduled conference calls,
on-site visits, and project team planning meetings, Siebel personnel
participate in every phase of the customer implementation from planning to
project management to system test and organizational design. Customer
satisfaction is tracked on an account-by-account basis and reported weekly to
the Company's executive management. Customer satisfaction is also audited
periodically by an independent, objective third-party organization.
The Company and independent third-party training organizations offer a wide
range of training courses in the configuration, administration and use of the
Siebel products. Training is available at the Company's Learning Center or at
the customer site. Andersen Consulting also offers training services in
connection with implementation of Siebel Enterprise Applications.
INTELLECTUAL PROPERTY AND OTHER PROPRIETARY RIGHTS
The Company relies primarily on a combination of patent, copyright and
trademark laws, trade secrets, confidentiality procedures and contractual
provisions to protect its proprietary rights. The Company also believes that
factors such as the technological and creative skills of its personnel, new
product developments, frequent product enhancements, name recognition and
reliable product maintenance are essential to establishing and maintaining a
technology leadership position. The Company seeks to protect its software,
documentation and other written materials under patent, trade secret, and
copyright laws, which afford only limited protection. The Company currently
has eleven patent applications pending in the United States. There can be no
assurance that any patents issued to the Company will not subsequently be
invalidated, circumvented or challenged, that the rights granted thereunder
will provide competitive advantages to the Company or that any of the
Company's pending or future patent applications, whether or not being
currently challenged by applicable governmental patent examiners, will be
issued with the scope of the claims sought by the Company, if at all.
Furthermore,
15
there can be no assurance that others will not develop technologies that are
similar or superior to the Company's technology or design around any patents
owned by the Company. Despite the Company's efforts to protect its proprietary
rights, unauthorized parties may attempt to copy aspects of the Company's
products or to obtain and use information that the Company regards as
proprietary. Policing unauthorized use of the Company's products is difficult,
and while the Company is unable to determine the extent to which piracy of its
software products exists, software piracy can be expected to be a persistent
problem. In addition, the laws of some foreign countries do not protect the
Company's proprietary rights as fully as do the laws of the United States.
There can be no assurance that the Company's means of protecting its
proprietary rights in the United States or abroad will be adequate or that
competition will not independently develop similar technology. The Company has
entered into agreements with substantially all of its customers which require
the Company to place Siebel Enterprise Applications source code into escrow.
Such agreements generally provide that such parties will have a limited, non-
exclusive right to use such code in the event that there is a bankruptcy
proceeding by or against the Company, if the Company ceases to do business or
if the Company fails to meet its support obligations. Entering into such
agreements may increase the likelihood of misappropriation by third parties.
The Company is not aware that it is infringing any proprietary rights of
third parties. There can be no assurance, however, that third parties will not
claim infringement by the Company of their intellectual property rights. The
Company expects that software product developers will increasingly be subject
to infringement claims as the number of products and competitors in the
Company's industry segment grows and the functionality of products in
different industry segments overlaps. Furthermore, there can be no assurance
that former employers of the Company's present and future employees will not
assert claims that such employees have improperly disclosed confidential or
proprietary information to the Company. Any such claims, with or without
merit, could be time consuming to defend, result in costly litigation, divert
management's attention and resources, cause product shipment delays or require
the Company to pay money damages or enter into royalty or licensing
agreements. Such royalty or licensing agreements, if required, may not be
available on terms acceptable to the Company, if at all. In the event of a
successful claim of product infringement against the Company and failure or
inability of the Company to license the infringed or similar technology, the
Company's business, operating results and financial condition would be
materially and adversely affected.
The Company relies upon certain software that it licenses from third
parties, including software that is integrated with the Company's internally
developed software and used in Siebel Enterprise Applications to perform key
functions. There can be no assurance that these third-party software licenses
will continue to be available to the Company on commercially reasonable terms.
The loss of, or inability to maintain, any such software licenses could result
in shipment delays or reductions until equivalent software could be developed,
identified, licensed and integrated which could materially and adversely
affect the Company's business, operating results and financial condition.
COMPETITION
The market for the Company's products is intensely competitive, subject to
rapid change and significantly affected by new product introductions and other
market activities of industry participants. The Company's products are
targeted at the emerging market for sales and marketing information systems.
The Company faces competition from customers' internal development efforts,
custom system integration products, as well as other application software
providers that offer a variety of products and services designed to address
this market. The Company believes that the market for global sales and
marketing information systems has historically not been well served by the
application software industry. The Company believes that most customer
deployments have been the result of large internal development projects,
custom solutions from systems integrators or the application of personal and
departmental productivity tools to the global enterprise.
Internal Development
The Company's major competition continues to come from its customers' and
potential customers' internal development efforts. Internal Information
Technology departments have staffed projects to build their own systems
utilizing a variety of tools. In some cases, such internal development
projects have been successful in
16
satisfying the needs of an organization. However, since software development,
support and maintenance are not core competencies of these organizations in
some cases such projects are unsuccessful. The competitive factors in this
area require that the Company produce a product that conforms to the
customer's information technology standards, scales to meet the needs of large
enterprises, operates globally and costs less than the result of an internal
development effort.
Custom System Integration Projects
A second source of competition results from system integrators engaged to
build a custom development application. The introduction of a system
integrator typically increases the likelihood of success for the customer.
However, this approach can be expensive as compared to the purchase of third
party products and typically results in a product that has not been designed
to be supported, maintained and enhanced by a focused software development
company. Maintenance and support for the custom code can become burdensome in
future years, with enhancements and modifications being cost-prohibitive. The
competitive factors in this area require that the Company demonstrate to the
customer the cost savings and advantages of a configurable, upgradeable and
commercially-supported product developed by a dedicated professional software
organization.
The Company relies on Andersen Consulting and other system consulting and
system integration firms for implementation and other customer support
services, as well as recommendations of its products during the evaluation
stage of the purchase process. Although the Company seeks to maintain close
relationships with these service providers, many of these third parties have
similar, and often more established, relationships with the Company's
competitors. If the Company is unable to develop and retain effective, long-
term relationships with Andersen Consulting or other such third parties, the
Company's competitive position would be materially and adversely effected.
Further, there can be no assurance that these third parties, many of which
have significantly greater resources than the Company, will not market
software products in competition with the Company in the future or will not
otherwise reduce or discontinue their relationships with or support of the
Company and its products.
Other Competitors
A large number of personal, departmental and other products exist in the
sales automation market. Companies (Products) such as Symantec (ACT!),
Borealis Corporation (Arsenal), Brock International (Brock Activity Manager),
Early Cloud & Co. (CallFlow), Clarify Inc. (ClearSales), IMA (EDGE),
Marketrieve Company (Marketrieve PLUS), Oracle Corporation (Oracle Sales
Manager), SaleSoft (PROCEED), Pivotal Software, Inc. (Relationship), SalesBook
Systems (SalesBook), SalesKit Software Corporation (SalesKit), Scopus
Technology, Inc. (SalesTeam), Aurum (SalesTrak), Sales Technologies (SNAP for
Windows), Saratoga Systems (SPS for Windows) and The Vantive Corporation
(Vantive Sales) are among the many firms in this market segment. Some of these
competitors have longer operating histories, significantly greater financial,
technical, marketing and other resources, significantly greater name
recognition and a larger installed base of customers than the Company. In
addition, many competitors have well-established relationships with current
and potential customers of the Company. As a result, these competitors may be
able to respond more quickly to new or emerging technologies and changes in
customer requirements, or to devote greater resources to the development,
promotion and sale or their products, than can the Company. The Company
believes it competes favorably in this marketplace based on the following
competitive advantages: breadth and depth of functionality, configurable
business objects, Internet and intranet enablement, strategic alignments with
industry leaders, support for the global enterprise, scalability allowing
support for large user communities and a modern and enduring product
architecture. In general, the Company has priced its products at or above
those of its competitors, which pricing the Company believes is justified by
the scope of functionality delivered and the performance characteristics
afforded by the Company's products.
It is also possible that new competitors or alliances among competitors may
emerge and rapidly acquire significant market share. The Company also expects
that competition will increase as a result of consolidation in the software
industry. Increased competition may result in price reductions, reduced gross
margins and loss of market share, any of which could materially adversely
affect the Company's business, operating results and financial condition.
There can be no assurance that the Company will be able to compete
successfully against
17
current and future competitors or that competitive pressures faced by the
Company will not materially and adversely affect its business, operating
results and financial condition. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Risk Factors--Competition."
EMPLOYEES
As of December 31, 1996, the Company had a total of 213 employees, of which
179 were based in the United States, four in Australia, one in Brazil, two in
Canada, two in France, six in Germany, one in Italy, five in Japan, three in
the Netherlands, one in Sweden and nine in the United Kingdom. Of the total,
94 were engaged in sales and marketing, 55 were in product development, 38
were in customer support and 26 were in finance, administration and
operations. The Company's future performance depends in significant part upon
the continued service of its key technical, sales and senior management
personnel, particularly Thomas M. Siebel, the Company's Chairman and Chief
Executive Officer, none of whom is bound by an employment agreement. The loss
of the services of one or more of the Company's key employees could have a
material adverse effect on the Company's business, operating results and
financial condition. The Company's future success also depends on its
continuing ability to attract, train and retain highly qualified technical,
sales and managerial personnel. Competition for such personnel is intense, and
there can be no assurance that the Company can retain its key technical, sales
and managerial personnel in the future. None of the Company's employees are
represented by a labor union. The Company has not experienced any work
stoppages and considers its relations with its employees to be good. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Risk Factors--Management of Growth; Dependence upon Key
Personnel."
EXECUTIVE OFFICERS
The executive officers of the Company as of February 1, 1997, and their ages
as of such date, are as follows:
NAME AGE POSITION
---- --- --------
Chairman, Chief Executive Officer and
Thomas M. Siebel................. 44 President
Patricia A. House................ 42 Executive Vice President and Chief
Operating Officer
Howard H. Graham................. 49 Senior Vice President Finance and
Administration and Chief Financial
Officer
Craig D. Ramsey.................. 50 Senior Vice President Worldwide
Operations
R. David Schmaier................ 33 Vice President Product Marketing
THOMAS M. SIEBEL has served as Chairman, Chief Executive Officer, and
President of the Company since its inception in July 1993. From July 1991
until December 1992, he served as Chief Executive Officer of Gain Technology,
a multimedia software company which merged with Sybase in December 1992. Mr.
Siebel served as President and Chief Operating Officer of Gain Technology from
May 1991 to July 1991. From January 1984 until September 1990, Mr. Siebel
worked at Oracle Corporation where he held a number of executive management
positions including Vice President Product Line Marketing, Group Vice
President Industry Marketing, Group Vice President and General Manager Direct
Marketing Division, and most recently Group Vice President Oracle USA. Mr.
Siebel is a graduate of the University of Illinois at Urbana-Champaign from
which he holds a B.A. in History, an M.B.A. and an M.S. in Computer Science.
PATRICIA A. HOUSE has been with the Company since its inception in July
1993. From February 1996 to the present, she has served as the Company's
Executive Vice President and Chief Operating Officer, and from July 1993 to
February 1996, she served as Senior Vice President of Marketing. From
September 1989 to June 1993, Ms. House served in various senior management
positions including Executive Vice President of Frame Technology Corporation,
a document authoring software company. Ms. House received a B.A. in Education
from Western Michigan University.
HOWARD H. GRAHAM has served as the Company's Senior Vice President Finance
and Administration and Chief Financial Officer since January 1997. From
February 1990 to December 1996, Mr. Graham served as
18
Senior Vice President and Chief Financial Officer of Informix, Inc. From April
1988 to February 1990, Mr. Graham served as Senior Vice President Finance and
Chief Financial Officer of Wyse Technology. From 1973 to 1988, Mr. Graham was
employed by Zenith Electronics, most recently as Vice President Finance and
Chief Financial Officer. Mr. Graham received a B.S. in management science from
Carnegie-Mellon University and an M.B.A. from the University of Chicago.
CRAIG D. RAMSEY has served as the Company's Senior Vice President Worldwide
Operations since March 1996. From March 1994 to March 1996, Mr. Ramsey served
as Senior Vice President of Worldwide Sales, Marketing and Support for nCUBE,
a leader in distribution of digitized media. From February 1986 to March 1994,
Mr. Ramsey was employed by Oracle Corporation and held a variety of executive
positions, including Vice President of U.S. Commercial Sales and Vice
President of OEM Strategic Accounts. Mr. Ramsey received a B.A. in Economics
from Denison University.
R. DAVID SCHMAIER has served as Vice President Product Marketing since March
1994. From 1989 to 1993, Mr. Schmaier worked at Oracle Corporation where he
held a variety of positions including Product Marketing Manager, as well as a
variety of field sales positions. From 1985 to 1987, Mr. Schmaier worked as
Management Consultant at Braxton Associates, a strategic consulting firm based
in Boston. Mr. Schmaier received a B.S. in mechanical engineering from
Rensselaer Polytechnic Institute and an M.B.A. from Harvard Business School.
ITEM 2. PROPERTIES
- ------------------
The Company's principal administrative, sales, marketing, support and
research and development facilities are located in approximately 66,000 square
feet of space in San Mateo, California, pursuant to a lease which expires in
July 2006. The Company currently occupies other domestic sales and support
offices in Colorado, Georgia, Illinois, Massachusetts, New York, Ohio, Texas,
Virginia and Washington. The Company also maintains international offices in
Australia, Canada, France, Germany, Italy, Japan, the Netherlands and the
United Kingdom.
ITEM 3. LEGAL PROCEEDINGS
- -------------------------
In June 1996, Debra Christoffers, a former sales person of the Company,
filed a complaint for wrongful termination against the Company and Thomas
Siebel, in the Superior Court of California, County of San Mateo. The Company
and Mr. Siebel have responded to the complaint and the parties are currently
in discovery. The Company believes it has adequate legal defenses and believes
that the ultimate outcome of these actions will not have a material effect on
the Company's financial position or result of operations, although there can
be no assurance as to the outcome of such litigation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- -----------------------------------------------------------
On December 2, 1996, the Company held a special meeting of stockholders to
consider and vote upon the following two matters:
1. To approve an amendment to the Company's Amended and Restated
Certificate of Incorporation to increase the authorized number of shares of
Common Stock from 40,000,000 to 100,000,000 shares.
2. To approve an amendment to the Company's 1996 Equity Incentive Plan
to increase the number of shares of Common Stock authorized for issuance
under such plan by 4,000,000 shares from 6,000,000 to 10,000,000 shares.
As to the first matter, 11,393,175 votes were cast for approval, 535,999
votes were cast against, and there were 78,764 abstentions. As to the second
matter, 9,824,223 votes were cast for approval, 1,052,382 were cast against
and there were 79,836 abstentions and 1,051,497 broker non-votes. Based on
these voting results, both matters were approved.
Immediately subsequent to the special meeting, the Company declared a 100%
dividend on the Company's outstanding Common Stock. The dividend was paid on
December 19, 1996 to all stockholders of record as of December 13, 1996.
19
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
- ----------------------------------------------------------------------------
The Company's Common Stock is traded on the Nasdaq National Market under the
symbol "SEBL." Following the Company's initial public offering on June 27,
1996, the following high and low sales prices were reported by Nasdaq in each
quarter:
HIGH LOW
------ ------
Quarter Ended June 30, 1996 (subsequent to June 27, 1996)..... $17.56 $12.37
Quarter Ended September 30, 1996.............................. 23.94 11.13
Quarter Ended December 31, 1996............................... 30.25 23.00
As of December 31, 1996, the Company had approximately 149 holders of record
of its Common Stock.
The Company has never paid any cash dividends on its capital stock and does
not expect to pay any such dividends in the foreseeable future.
ITEM 6. SELECTED FINANCIAL DATA
- -------------------------------
YEAR ENDED DECEMBER 31,
--------------------------------
1996 1995 1994 1993(1)
------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE
DATA)
Revenues.................................... $39,152 $ 8,038 $ 50 $ --
Operating income (loss)..................... 6,714 372 (1,779) (114)
Net income (loss)........................... 5,025 317 (1,766) (114)
Earnings per share (2)...................... .14 .01
Total assets................................ 99,501 16,091 1,203 --
Total liabilities........................... 18,310 6,157 14 --
Stockholders' equity........................ 81,191 9,934 1,189 --
- --------
(1) Period from September 13, 1993 (inception) to December 31, 1993.
(2) Per share information applicable to prior periods has been restated to
reflect a two-for-one stock split (effected in the form of a stock
dividend) which was effective December 19, 1996.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
- -----------------------------------------------------------------------
RESULTS OF OPERATIONS
---------------------
OVERVIEW
Siebel Systems, Inc. is an industry leading provider of enterprise-class
sales and marketing information software systems. The Company designs,
develops, markets, and supports Siebel Enterprise Applications, a leading
Internet-enabled, object oriented client/server application software product
family designed to meet the sales and marketing information system
requirements of even the largest multi-national organizations.
Approximately 92% of the Company's revenues to date have been derived from
non-recurring license fees of the Siebel Sales Enterprise product family. The
remaining revenues are primarily attributable to lower margin maintenance and
other revenues, including training revenues. The Company currently expects
that license revenues from Siebel Sales Enterprise will continue to account
for a substantial majority of the Company's revenues for the foreseeable
future. As a result, factors adversely affecting the pricing of or demand for
Siebel Sales Enterprise could have a material adverse effect on the Company's
business, operating results and financial condition. Most of the Company's
revenues to date have been derived from one-time license fees from customers
who have received a perpetual license to the Company's products.
A relatively small number of customers account for a significant percentage
of the Company's license revenues. For 1996 and 1995, sales to the Company's
ten largest customers accounted for 55% and 93% of total
20
revenues, respectively. The Company expects that licenses of its products to a
limited number of customers will continue to account for a large percentage of
revenue for the foreseeable future. The license of the Company's software
products is often an enterprise-wide decision by prospective customers and
generally requires the Company to provide a significant level of education to
prospective customers regarding the use and benefits of the Company's
products. In addition, the implementation of the Company's products involves a
significant commitment of resources by prospective customers and is commonly
associated with substantial reengineering efforts which may be performed by
the customer or third-party system integrators. The cost to the customer of
the Company's product is typically only a portion of the related hardware,
software, development, training and integration costs of implementing a large-
scale sales and marketing information system. For these and other reasons, the
sales and implementation cycles associated with the license of the Company's
products is often lengthy (ranging to date from between two and twenty-four
months from initial contact to product implementation) and is subject to a
number of significant delays over which the Company has little or no control.
Given these factors and the expected customer concentration, the loss of a
major customer or any reduction or delay in sales to or implementations by
such customers could have a material adverse effect on the Company's business,
operating results, and financial condition.
As of December 31, 1996, many of the Company's customers were in the pilot
phase of implementation of Siebel Sales Enterprise. Only a few of the
Company's customers have completed a significant portion of their enterprise-
wide development and deployment of Siebel Sales Enterprise, while most have
only recently commenced such development and deployment. As a result, the
Company's products are currently being used by only a limited number of sales
professionals. If any of the Company's customers are not able to customize and
deploy Siebel Sales Enterprise successfully and on a timely basis to the
number of anticipated users, the Company's reputation could be significantly
damaged, which could have a material adverse effect on the Company's business,
operating results and financial condition.
The Company markets its products in the United States through its direct
sales force and internationally through its sales force and a distributor in
Japan. International revenues accounted for 11% and 12% of total revenues in
1996 and 1995, respectively. The Company has significantly increased its
international sales force in 1996 and is seeking to establish distribution
relationships with appropriate strategic partners and expects international
revenues will account for an increasing portion of total revenues in the
future. As a result, failure to cost-effectively maintain or increase
international sales could have a material adverse effect on the Company's
business, operating results and financial condition.
The Company's limited operating history makes the prediction of future
operating results difficult. Prior growth rates in the Company's revenue and
net income should not be considered indicative of future operating results.
Future operating results will depend upon many factors, including the demand
for the Company's products, the level of product and price competition, the
length of the Company's sales cycle, the size and timing of individual license
transactions, the delay or deferral of customer implementations, the Company's
relationships with systems integrators, the Company's success in expanding its
direct sales force, indirect distribution channels and customer support
organization, the timing of new product introductions and product
enhancements, the mix of products and services sold, levels of international
sales, activities of and acquisitions by competitors, the timing of new hires,
changes in foreign currency exchange rates, the ability of the Company to
develop and market new products and control costs and the ability to attract
and retain key personnel. There can be no assurance that any of the Company's
business or strategies will be successful or that the Company will be able to
sustain profitability on a quarterly or annual basis.
The Company's sales generally reflect a relatively high amount of revenue
per order. The loss or delay of individual orders, therefore, can have a
significant impact on the revenue and quarterly results of the Company. The
timing of license revenue is difficult to predict because of the length of the
Company's sales cycle, which to date has ranged from two to eighteen months
from initial contact to the execution of a license agreement. Because the
Company's operating expenses are based on anticipated revenue trends and
because a high percentage of the Company's expenses are relatively fixed, a
delay in the recognition of revenue from a limited number of license
transactions could cause significant variations in operating results from
quarter to quarter and
21
could result in losses. To the extent such expenses precede, or are not
subsequently followed by, increased revenues, the Company's operating results
would be materially adversely affected. As a result of these and other
factors, revenues for any quarter are subject to significant variation, and
the Company 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. It is likely that in some future quarter
the Company's operating results will be below the expectations of public
market analysts and investors. In such event, the price of the Company's
Common Stock would likely be adversely affected.
To date, the Company has not experienced significant seasonality of
operating results. The Company expects that future revenues for any period may
be affected by the fiscal or quarterly budget cycles of its customers.
RESULTS OF OPERATIONS
The following table sets forth statement of operations data for the two
years ended December 31, 1996 expressed as a percentage of total revenues:
YEAR ENDED
DECEMBER
31,
------------
1996 1995
----- -----
Revenues:
Software..................................................... 91.1% 95.0%
Maintenance and other........................................ 8.9 5.0
----- -----
Total revenues............................................. 100.0 100.0
Cost of revenues:
Software..................................................... 0.3 0.5
Maintenance and other........................................ 5.4 4.8
----- -----
Total cost of revenues..................................... 5.7 5.3
----- -----
Gross margin............................................... 94.3 94.7
Operating expenses:
Product development.......................................... 15.1 35.0
Sales and marketing.......................................... 50.0 40.2
General and administrative................................... 12.1 14.8
----- -----
Total operating expenses................................... 77.2 90.0
----- -----
Operating income........................................... 17.1 4.7
Other income, net.............................................. 3.6 1.9
----- -----
Income before income taxes................................. 20.7 6.6
Income tax expense............................................. 7.9 2.6
----- -----
Net income................................................. 12.8% 4.0%
===== =====
REVENUES
Software. License revenues increased to $35,658,000 for the year ended
December 31, 1996, from $7,636,000 and $50,000 for the years ended December
31, 1995 and 1994, respectively. License revenues increased during these
periods from the respective prior year periods due to an increase in the
number of licenses of Siebel Sales Enterprise. This increase in the number of
licenses was primarily due to the increased market and customer awareness of
the Siebel Sales Enterprise product family, and, to a lesser degree, an
expansion of the Company's direct sales organization.
22
Maintenance and Other. Maintenance and other revenues increased to
$3,494,000 for the year ended December 31, 1996 from $402,000 and $0 for the
years ended December 31, 1995 and 1994, respectively. These increases were due
to the more widespread licensing of products to customers pursuant to
agreements with a maintenance component. Earlier licenses typically involved
pilot installations which did not include maintenance.
COST OF REVENUES
Software. Cost of software license revenues includes product packaging,
documentation and production. Cost of license revenues through December 31,
1996 have averaged less than 1% of software license revenues. All costs
incurred in the research and development of software products and enhancements
to existing products have been expensed as incurred, and, as a result, cost of
license revenues includes no amortization of capitalized software development
costs.
Maintenance and Other. Cost of maintenance and other revenues consists
primarily of personnel, facility and systems costs incurred in providing
customer support. Cost of maintenance and other revenues aggregated $2,113,000
for the year ended December 31, 1996 and $385,000 and $0 for the years ended
December 31, 1995 and 1994, respectively. These increases reflect the effect
of fixed costs resulting from the Company's expansion of its maintenance and
support organization in anticipation of entering into an increasing number of
licenses with a maintenance component. The Company expects that maintenance
and other costs will continue to increase in absolute dollar amounts as the
Company expands its customer support organization to meet anticipated customer
demands in connection with product implementation.
OPERATING EXPENSES
Product Development. Product development expenses include expenses
associated with the development of new products, enhancements of existing
products and quality assurance activities, and consist primarily of employee
salaries, benefits, consulting costs and the cost of software development
tools. Product development expenses increased to $5,894,000 for the year ended
December 31, 1996 from $2,816,000 and $868,000 for the years ended December
31, 1995 and 1994, respectively. These expenses generally decreased, as a
percentage of total revenues, to approximately 15% for fiscal 1996 from
approximately 35% for fiscal 1995. The increases in the dollar amount of
product development expenses were primarily attributable to costs of
additional personnel in the Company's product development operations. The
Company anticipates that it will continue to devote substantial resources to
product development. The Company expects product development expenses to
increase in absolute dollar amount but to remain at approximately the same or
somewhat lower percentage of total revenues as fiscal 1996.
Sales and Marketing. Sales and marketing expenses consist primarily of
salaries, commissions and bonuses earned by sales and marketing personnel,
field office expenses, travel and entertainment and promotional expenses.
Sales and marketing expenses increased to $19,577,000 for the year ended
December 31, 1996 from $3,232,000 and $718,000 for the years ended December
31, 1995 and 1994, respectively. These expenses increased, as a percentage of
total revenues, to approximately 50% in fiscal 1996 from approximately 40% for
fiscal 1995. The increases in the dollar amount of expenditures on sales and
marketing and the increase in these expenses as a percentage of total revenues
reflect primarily the hiring of additional sales and marketing personnel and,
to a lesser degree, costs associated with expanded promotional activities. The
Company expects that sales and marketing expenses will continue to increase in
absolute dollar amount as the Company continues to expand its sales and
marketing efforts, establishes additional sales offices and increases
promotional activities. These expenses are expected to remain at approximately
the same or somewhat higher percentage of total revenues as fiscal 1996.
General and Administrative. General and administrative expenses consist
primarily of salaries and occupancy costs for administrative, executive and
finance personnel. These expenses increased to $4,748,000 for the year ended
December 31, 1996 from $1,192,000 and $243,000 for the years ended December
31, 1995 and 1994, respectively. These expenses decreased as a percentage of
total revenues to approximately 12% in fiscal 1996 from approximately 15% in
fiscal 1995. The increases in the absolute dollar amount of general and
23
administrative expenses were primarily due to increased staffing and
associated expenses necessary to manage and support the Company's increased
scale of operations. The Company believes that its general and administrative
expenses will continue to increase in absolute dollar amount as a result of
the continued expansion of the Company's administrative staff and facilities
to support growing operations and the expenses associated with being a public
company. The Company anticipates that its general and administrative expenses
as a percentage of total revenues should remain at approximately the same or
somewhat lower percentage as fiscal 1996.
OTHER INCOME, NET
Other income, net is primarily comprised of interest income earned on the
Company's cash and cash equivalents and short-term investments and reflects
earnings on increasing cash and cash equivalents and short-term investment
balances during 1996.
PROVISION FOR INCOME TAXES
Income taxes have been provided at an effective rate of approximately 38%,
which is comprised primarily of federal and state taxes.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash, cash equivalents and short-term investments increased to
$72,387,000 as of December 31, 1996 from $11,391,000 as of December 31, 1995,
representing approximately 73% of total assets. This increase was primarily
attributable to net income, proceeds from the Company's initial public
offering of common stock which closed on July 3, 1996 (the "Initial Offering")
and the Company's additional public offering of common stock which closed on
September 25, 1996 and October 8, 1996 (with respect to an underwriter's over-
allotment option) (the "Follow-On Offering") (together, the "Offerings"), and
increases in accrued expenses and other current liabilities, offset by
increases in accounts receivable, prepaids and other, and purchases of
property and equipment. The Company received approximately $33.1 million in
proceeds (prior to expenses) in connection with the Initial Offering and
approximately $30.6 million in proceeds (prior to expenses) in connection with
the Follow-On Offering.
The Company intends to use the net proceeds of the Offerings primarily for
working capital and other general corporate purposes, including expansion of
general sales and marketing and customer support activities to accommodate
continued growth in the Company's business and customer base. The amounts
actually expended by the Company for working capital purposes will vary
significantly depending upon a number of factors, including future revenue
growth, if any, the amount of cash generated by the Company's operations and
the progress of the Company's product development efforts. In addition, the
Company may make one or more acquisitions of complementary technologies,
products or businesses which broaden or enhance the Company's current product
offerings. Pending the uses described above, the net proceeds of the Offerings
have been invested in short-term, interest-bearing, investment-grade
securities.
In August 1996, the Company moved its principal administrative, sales,
marketing, support and research and development operations to a 66,000 square
foot site in San Mateo, California. The Company currently has no material
commitments for capital expenditures other than normal purchases of property
and equipment, primarily computer workstations used for product development,
demonstration and customer support purposes.
The Company believes that the net proceeds from the Offerings, together with
the anticipated cash flows from operations, cash, cash equivalents and short-
term investments, will be adequate to meet its cash needs for working capital
and capital expenditures for at least the next twelve months.
RISK FACTORS
Limited Operating History; History of Operating Losses. The Company
commenced operations in July 1993 and shipped version 1.0 of its product,
Siebel Sales Enterprise, in April 1995. The Company has only a
24
limited operating history, and its prospects must be evaluated in light of the
risks and uncertainties encountered by a company in its early stage of
development. The new and evolving markets in which the Company operates make
these risks and uncertainties particularly pronounced. To address these risks,
the Company must, among other things, successfully implement its sales and
marketing strategy, respond to competitive developments, attract, retain, and
motivate qualified personnel, continue to develop and upgrade its products and
technologies more rapidly than its competitors, and commercialize its products
and services incorporating these enhanced technologies. The Company expects to
continue to devote substantial resources to its product development and sales
and customer support and, as a result, will need to generate significant
quarterly revenues to achieve and maintain profitability. The Company's
limited operating history makes it difficult to predict accurately future
operating results. There can be no assurance that any of the Company's
business strategies will be successful or the Company will be profitable in
any future quarter or period. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
Uncertainty of Future Operating Results; Fluctuations in Quarterly Operating
Results. Prior growth rates in the Company's revenue and net income should not
be considered indicative of future operating results. Future operating results
will depend upon many factors, including the demand for the Company's
products, the level of product and price competition, the length of the
Company's sales cycle, the size and timing of individual license transactions,
the delay or deferral of customer implementations, the Company's success in
expanding its customer support organization, direct sales force and indirect
distribution channels, the timing of new product introductions and product
enhancements, the mix of products and services sold, levels of international
sales, activities of and acquisitions by competitors, the timing of new hires,
changes in foreign currency exchange rates and the ability of the Company to
develop and market net products and control costs. In addition, the decision
to implement a sales and marketing information system is discretionary,
involves a significant commitment of customer resources and is subject to the
budget cycles of the Company's customers. The Company's sales generally
reflect a relatively high amount of revenue per order. The loss or delay of
individual orders, therefore, would have a significant impact on the revenue
and quarterly results of the Company. The timing of license revenue is
difficult to predict because of the length and variability of the Company's
sales cycle, which has ranged to date from two to eighteen months from initial
contact to the execution of a license agreement. The Company's operating
expenses are based on anticipated revenue trends and, because a high
percentage of these expenses are relatively fixed, a delay in the recognition
of revenue from a limited number of license transactions could cause
significant variations in operating results from quarter to quarter and could
result in operating losses. To the extent such expenses precede, or are not
subsequently followed by, increased revenues, the Company's operating results
would be materially and adversely affected. To date, the Company has not
experienced significant seasonality of operating results. The Company expects
that future revenues for any period may be affected by the fiscal or quarterly
budget cycles of its customers. As a result of these and other factors,
revenues for any quarter are subject to significant variation, and the Company
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. It is likely that the Company's future quarterly operating
results from time to time will not meet the expectations of market analysis or
investors, which would likely have an adverse effect on the price of the
Company's Common Stock. In addition, fluctuations in operating results may
also result in volatility in the price of the Company's Common Stock. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," and "Business--Marketing" and "--Sales."
Reliance on Andersen Consulting and Other Relationships; Dependence on
System Integrators. The Company has established strategic relationships with a
number of organizations that it believes are important to its worldwide sales,
marketing and support activities and the implementation of its products. The
Company believes that its relationships with such organizations provide
marketing and sales opportunities for the Company's direct sales force and
expand the distribution of its products. These relationships also assist it in
keeping pace with the technological and marketing developments of major
software vendors, and, in certain instances, provide it with technical
assistance for its product development efforts. In particular, the Company has
established a non-exclusive strategic relationship with Andersen Consulting, a
principal stockholder of the Company. In fiscal 1996, approximately 46% of the
revenues of the Company were derived from customers for
25
which Andersen Consulting had been engaged to provide system integration
services. Any deterioration of the Company's relationship with Andersen
Consulting could have a material adverse effect on the Company's business,
financial condition and results of operations. In addition, the Company has
relationships with Itochu, among others. The failure by the Company to
maintain its existing relationships, or to establish new relationships in the
future, could have a material adverse effect on the Company's business,
results of operations and financial condition. The Company's customers and
potential customers frequently rely on Andersen Consulting, as well as other
third-party system integrators to develop, deploy and/or manage Siebel
Enterprise Applications. If the Company is unable to train adequately a
sufficient number of system integrators or, if for any reason such integrators
do not have or devote the resources necessary to facilitate implementation of
the Company's products or if such integrators adopt a product or technology
other than Siebel Enterprise Applications, the Company's business, operating
results and financial condition could be materially and adversely affected.
See "Business--Global Strategic Alignment."
Dependence on the Internet. The Siebel Enterprise Applications facilitate
online communications over public and private networks. The success of the
Company's products may depend, in part, on the Company's ability to introduce
products which are compatible with the Internet and on the broad acceptance of
the Internet and the World Wide Web as a viable commercial marketplace. It is
difficult to predict with any assurance whether the Internet will prove to be
a viable commercial marketplace or whether the demand for Internet related
products and services will increase or decrease in the future. The increased
commercial use of the Internet could require substantial modification and
customization of the Company's products and services and the introduction of
new products and services, and there can be no assurance that the Company
would be able to effectively migrate its products to the Internet or to
successfully compete in the market for Internet-related products and services.
The Internet may not prove to be a viable commercial marketplace because of
inadequate development of the necessary infrastructure, such as a reliable
network backbone with the necessary speed, data capability, and security, or
timely development of complementary products, such as high speed modems. The
Internet has experienced, and is expected to continue to experience,
significant growth in the number of users and amount of traffic. There can be
no assurance that the Internet infrastructure will continue to be able to
support the demands placed on it by this continued growth. In addition, the
Internet could lose its viability due to delays in the development or adoption
of new standards and protocols to handle increased levels of Internet activity
or due to increased governmental regulation. Moreover, critical issues
concerning the commercial use of the Internet (including security,
reliability, data corruption, cost, ease of use, accessibility and quality of
service) remain unresolved and may negatively affect the attractiveness of
commerce and communication on the Internet. Because global commerce and online
exchange of information on the Internet and other similar open wide area
networks are new and evolving, there can be no assurance that the Internet
will prove to be a viable commercial marketplace. If critical issues
concerning the commercial use of the Internet are not favorably resolved, if
the necessary infrastructure and complementary products are not developed, or
if the Internet does not become a viable commercial marketplace, the Company's
business, operating results and financial condition could be materially and
adversely affected. See "Business--Products" and "--Technology."
Risk Associated with Emerging Client/Server and Sales Information
Markets. The client/server application software market is a relatively new
market and is intensely competitive, highly fragmented and subject to rapid
change. The Company markets its products only to customers who have migrated
or are in the process of migrating their enterprise computing systems to
client/server computing environments. The Company does not market its products
to customers exclusively using legacy computer systems. The Company's future
financial performance will depend in large part on continued growth in the
number of organizations successfully adopting client/server computing
environments. There can be no assurance that the client/server market will
maintain its current level of growth or continue to grow at all. If the
client/server market fails to grow or grows more slowly than the Company
currently anticipates, the Company's business, operating results and financial
condition could be materially and adversely affected. Similarly, the market
for sales and marketing information software is intensely competitive, highly
fragmented and subject to rapid change. The Company's future financial
performance will depend primarily on growth in the number of sales information
applications developed for use
26
in client/server environments. There can be no assurance that the market for
sales and marketing information software will continue to grow. If the sales
information software market fails to grow or grows more slowly than the
Company currently anticipates, the Company's business, operating results and
financial condition would be materially and adversely affected. See
"Business--Products," "--Technology" and "--Competition."
Limited Deployment. The Company first shipped Siebel Sales Enterprise
version 1.0 in April 1995. The Company first shipped Siebel Service Enterprise
version 2.2 in December 1996. As of December 31, 1996, many of the Company's
customers were in the pilot phase of implementing the Company's software.
There can be no assurance that such enterprise-wide deployments will be
successful. The Company's customer licenses frequently contemplate the
deployment of its products commercially to large numbers of sales and
marketing personnel, many of whom have not previously used application
software systems, and there can be no assurance of such end-users' acceptance
of the product. The Company's products are expected to be deployed on a
variety of computer-hardware platforms and to be used in connection with a
number of third-party software applications and programming tools. Such
deployment presents very significant technical challenges, particularly as
large numbers of sales personnel attempt to use the Company's products
concurrently. If any of the Company's customers are not able to customize and
deploy Siebel Enterprise Applications successfully and on a timely basis to
the number of anticipated users, the Company's reputation could be
significantly damaged, which could have a material adverse effect on the
Company's business, operating results and financial condition. In addition to
revenues from new customers, the Company expects that a significant percentage
of any future revenues will be derived from sales to existing customers.
However, such customers are not contractually committed in all cases to
purchase additional licenses. If existing customers have difficulty further
deploying Siebel Enterprise Applications or for any other reason are not
satisfied with Siebel Enterprise Applications, the Company's business,
operating results and financial condition could be materially and adversely
affected. See "Business--Products."
Reliance on Single Product Family. Approximately 92% of the Company's
revenues to date have been attributable to sales of Siebel Sales Enterprise.
The remaining revenues were primarily attributable to maintenance and training
services related to such product family. The Company currently expects Siebel
Sales Enterprise and related maintenance and training services to continue to
account for a substantial majority of the Company's future revenues. As a
result, factors adversely affecting the pricing of or demand for Siebel Sales
Enterprise, such as competition or technological change, could have a material
adverse effect on the Company's business, operating results and financial
condition. The Company's future financial performance will depend, in
significant part, on the successful deployment of current versions of Siebel
Sales Enterprise and the development, introduction and customer acceptance of
new and enhanced versions of Siebel Sales Enterprise and other products. There
can be no assurance that the Company will be successful in marketing Siebel
Sales Enterprise product or other products. In the event that the Company
continues to derive a substantial percentage of its revenues from perpetual
license fees for Siebel Sales Enterprise and is successful in licensing such
product to a very large portion of the customers in the markets targeted by
the Company, the Company's business, financial condition and results of
operations could be materially and adversely affected unless the Company is
able to establish additional sources of revenue. See "Business--Products" and
"--Marketing."
Lengthy Sales and Implementation Cycles. The license of the Company's
software products is often an enterprise-wide decision by prospective
customers and generally requires the Company to provide a significant level of
education to prospective customers regarding the use and benefits of the
Company's products. In addition, the implementation of the Company's products
involves a significant commitment of resources by prospective customers and is
commonly associated with substantial reengineering efforts which may be
performed by the customer or third-party system integrators. The cost to the
customer of the Company's product is typically only a portion of the related
hardware, software, development, training and integration costs of
implementing a large-scale sales and marketing information system. For these
and other reasons, the period between initial contact and the implementation
of the Company's products is often lengthy (ranging to date from between two
and twenty-four months) and is subject to a number of significant delays over
which the Company has little or no control. The Company's implementation cycle
could be lengthened by increases in the size and
27
complexity of its license transactions and by delays in its customers'
implementation of client/server computing environments. Delay in the sale or
implementation of a limited number of license transactions could have a
material adverse effect on the Company's business and operations and cause the
Company's operating results to vary significantly from quarter to quarter.
Therefore, the Company believes that its quarterly operating results are
likely to vary significantly in the future. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations," "Business--Sales"
and "--Marketing."
Risks Associated with Expanding Distribution. To date, the Company has sold
its products primarily through its direct sales force and has supported its
customers with its technical and customer support staff. The Company's ability
to achieve significant revenue growth in the future will depend in large part
on its success in recruiting and training sufficient direct sales, technical
and customer support personnel and establishing and maintaining relationships
with its strategic partners. Although the Company is currently investing, and
plans to continue to invest, significant resources to expand its direct sales
force and its technical and customer support staff and to develop distribution
relationships with strategic partners, the Company has at times experienced
and continues to experience difficulty in recruiting qualified personnel and
in establishing necessary third-party relationships. There can be no assurance
that the Company will be able to expand successfully its direct sales force or
other distribution channels or that any such expansion will result in an
increase in revenues. The Company believes the complexity of its products and
the large-scale deployment anticipated by its customers will require a number
of highly trained customer support personnel. There can be no assurance that
the Company will successfully expand its technical and customer support staff
to meet customer demands. Any failure by the Company to expand its direct
sales force or other distribution channels, or to expand its technical and
customer support staff, could materially and adversely affect the Company's
business, operating results and financial condition. See "--Management of
Growth; Dependence upon Key Personnel," "Business--Market Strategy," "--
Sales," "--Marketing," and "--Customer Support and Training."
Dependence on Large License Fee Contracts and Customer Concentration. A
relatively small number of customers have accounted for a significant
percentage of the Company's revenues. For 1996, sales to the Company's 10
largest customers accounted for 55% of total revenues. For 1996, Cisco
Systems, Inc. accounted for 13% of total revenues. The Company expects that
sales of its products to a limited number of customers will continue to
account for a significant percentage of revenue for the foreseeable future.
The loss of any major customer or any reduction or delay in orders by any such
customer, or the failure of the Company to market successfully its products to
new customers could have a material adverse effect on the Company's business,
financial condition and results of operations. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and "Business--
Customers and Markets."
Risk Associated with New Versions and New Products; Rapid Technological
Change. The software market in which the Company competes is characterized by
rapid technologic change, frequent introductions of new products, changes in
customer demands and evolving industry standards. The introduction of products
embodying new technologies and the emergence of new industry standards can
render existing products obsolete and unmarketable. For example, the Company's
customers have adopted a wide variety of hardware, software, database and
networking platforms, and as a result, to gain broad market acceptance, the
Company must support Siebel Sales Enterprise and the Company's other products
on a variety of such platforms. The Company's future success will depend upon
its ability to address the increasingly sophisticated needs of its customers
by supporting existing and emerging hardware, software, database and
networking platforms and by developing and introducing enhancements to Siebel
Enterprise Applications and new products on a timely basis that keep pace with
technological developments, evolving industry standards and changing customer
requirements. The Company currently ships production versions of its software
running on MS Windows 3.1, MS Windows 95 and Windows NT clients, as well as on
NT application servers, and NT, Sun and HP UNIX database server platforms. The
Company plans, in the future, to support subsequent versions of Microsoft's
Windows client operating system, as well as UNIX application servers and
Digital Alpha and additional UNIX database server platforms. There can be no
assurance that the Company will be successful in releasing Siebel Enterprise
Applications for use on such platforms or in developing and marketing
enhancements, including Siebel Virtual Computing, that respond
28
to technological developments, evolving industry standards or changing
customer requirements, or that the Company will not experience difficulties
that could delay or prevent the successful development, introduction and sale
of such enhancements or that such enhancements will adequately meet the
requirements of the marketplace and achieve any significant degree of market
acceptance. If release dates of any future Siebel Enterprise Applications
enhancements or new products are delayed or if these products or enhancements
fail to achieve market acceptance when released, the Company's business,
operating results and financial condition could be materially and adversely
affected. In addition, the introduction or announcement of new product
offerings or enhancements by the Company or the Company's competitors or major
hardware, systems or software vendors may cause customers to defer or forgo
purchases of the Company's products, which could have a material adverse
effect on the Company's business, financial condition and results of
operations. See "Business--Technology."
Competition. The market for the Company's products is intensely competitive,
subject to rapid change and significantly affected by new product
introductions and other market activities of industry participants. The
Company's products are targeted at the emerging market for sales and marketing
information systems, and the Company faces competition primarily from
customers' internal information technology departments and systems
integrators, as well as from other application software providers that offer a
variety of products and services to address this market. Many of the Company's
customers and potential customers have in the past attempted to develop sales
and marketing information systems in-house either alone or with the help of
systems integrators. The Company is able to compete successfully against these
customers' and potential customers' internal development efforts only to the
extent such development efforts fail.
The Company relies on a number of systems consulting and systems integration
firms for implementation and other customer support services, as well as
recommendations of its products during the evaluation stage of the purchase
process, particularly Andersen Consulting. Although the Company seeks to
maintain close relationships with these service providers, many of them have
similar, and often more established, relationships with the Company's
competitors. If the Company is unable to develop and retain effective, long-
term relationships with these third parties, the Company's competitive
position could be materially and adversely effected. Further, there can be no
assurance that these third parties, many of which have significantly greater
resources than the Company, will not market software products in competition
with the Company in the future or will not otherwise reduce or discontinue
their relationships with or support of the Company and its products.
A large number of personal, departmental and other products exist in the
sales automation market. Some of the Company's current and potential
competitors and their products include Symantec (ACT!), Borealis Corporation
(Arsenal), Brock International (Brock Activity Manager), Early Cloud & Co.
(CallFlow), Clarify, Inc. (Clear Sales), IMA (EDGE), Marketrieve Company
(Marketrieve PLUS), Oracle Corporation (Oracle Sales Manager), SaleSoft
(PROCEED), Pivotal Software, Inc. (Relationship), SalesBook Systems
(SalesBook), SalesKit Software Corporation (SalesKit), Scopus Technology, Inc.
(SalesTeam), Aurum (SalesTrak), Sales Technologies (SNAP for Windows),
Saratoga Systems (SPS for Windows), and The Vantive Corporation (Vantive
Sales). Many of these competitors have longer operating histories,
significantly greater financial, technical, marketing and other resources,
significantly greater name recognition and a larger installed base of
customers than the Company. In addition, many competitors have well-
established relationships with current and potential customers of the Company.
As a result, these competitors may be able to respond more quickly to new or
emerging technologies and changes in customer requirements, or to devote
greater resources to the development, promotion and sale of their products,
than can the Company.
It is also possible that new competitors or alliances among competitors may
emerge and rapidly acquire significant market share. The Company also expects
that competition will increase as a result of consolidation in the software
industry. Increased competition may result in price reductions, reduced gross
margins and loss of market share, any of which could materially adversely
affect the Company's business, operating results and financial condition.
There can be no assurance that the Company will be able to compete
successfully against current and future competitors or that competitive
pressures faced by the Company will not materially and adversely affect its
business, operating results and financial condition. See "Business--
Competition."
29
Reliance on Third-Party Vendors. The Company incorporates into its products
certain software licensed to it by third-party software developers. Although
the Company believes there are other sources for these products, any
significant interruption in the supply of such products could have a material
adverse impact on the Company's sales unless and until the Company can replace
the functionality provided by these products. Because the Company's products
incorporate software developed and maintained by third parties, the Company is
to a certain extent dependent upon such third parties' abilities to enhance
their current products, to develop new products on a timely and cost-effective
basis and to respond to emerging industry standards and other technological
changes. There can be no assurance that the Company would be able to replace
the functionality provided by the third-party software currently offered in
conjunction with the Company's products in the event that such software
becomes obsolete or incompatible with future versions of the Company's
products or is otherwise not adequately maintained or updated. The absence of
or any significant delay in the replacement of that functionality could have a
material adverse effect on the Company's sales. See "Business--Products."
Risk of Product Defects. Software products as internally complex as those
offered by the Company frequently contain errors or failures, especially when
first introduced or when new versions are released. Although the Company
conducts extensive product testing during product development, the Company has
been forced to delay commercial release of products until the correction of
software problems and, in some cases, has provided product enhancements to
correct errors in released products. The Company could, in the future, lose
revenues as a result of software errors or defects. The Company's products are
intended for use in sales applications that may be critical to a customer's
business. As a result, the Company expects that its customers and potential
customers have a greater sensitivity to product defects than the market for
software products generally. There can be no assurance that, despite testing
by the Company and by current and potential customers, errors will not be
found in new products or releases after commencement of commercial shipments,
resulting in loss of revenue or delay in market acceptance, diversion of
development resources, damage to the Company's reputation, or increased
service and warranty costs, any of which could have a material adverse effect
upon the Company's business, operating results and financial condition.
Management of Growth; Dependence upon Key Personnel. In the event that the
significant growth of the Company's revenues continues, such growth may place
a significant strain upon the Company's management systems and resources. The
Company's ability to compete effectively and to manage future growth, if any,
will require the Company to continue to improve its financial and management
controls, reporting systems and procedures on a timely basis and expand, train
and manage its employee work force. There can be no assurance that the Company
will be able to do so successfully. The Company's failure to do so could have
a material adverse effect upon the Company's business, operating results and
financial condition. The Company's future performance depends in significant
part upon the continued service of its key technical, sales and senior
management personnel, particularly Thomas M. Siebel, the Company's Chairman
and Chief Executive Officer, none of whom has entered into an employment
agreement with the Company. The loss of the services of one or more of the
Company's executive officers could have a material adverse effect on the
Company's business, operating results and financial condition. The Company's
future success also depends on its continuing ability to attract and retain
highly qualified technical, customer support, sales and managerial personnel.
Competition for such personnel is intense, and there can be no assurance that
the Company will be able to retain its key technical, sales and managerial
employees or that it can attract, assimilate or retain other highly qualified
technical, sales and managerial personnel in the future. See "--Risks
Associated with Expanding Distribution," "Business--Sales," "--Marketing" and
"--Executive Officers."
Proprietary Rights; Risks of Infringement. The Company relies primarily on a
combination of patent, copyright, trade secret and trademark laws,
confidentiality procedures and contractual provisions to protect its
proprietary rights. The Company also believes that factors such as the
technological and creative skills of its personnel, new product developments,
frequent product enhancements, name recognition and reliable product
maintenance are essential to establishing and maintaining a technology
leadership position. The Company seeks to protect its software, documentation
and other written materials under patent, trade secret and copyright laws,
which afford only limited protection. The Company currently has eleven patent
applications pending in the
30
United States. There can be no assurance that any patents issued to the
Company will not be invalidated, circumvented or challenged, that the rights
granted thereunder will provide competitive advantages to the Company or that
any of the Company's pending or future patent applications, whether or not
being currently challenged by applicable governmental patent examiners, will
be issued with the scope of the claims sought by the Company, if at all.
Furthermore, there can be no assurance that others will not develop
technologies that are similar or superior to the Company's technology or
design around any patents issued to the Company. Despite the Company's efforts
to protect its proprietary rights, unauthorized parties may attempt to copy
aspects of the Company's products or to obtain and use information that the
Company regards as proprietary. Policing unauthorized use of the Company's
products is difficult, and while the Company is unable to determine the extent
to which piracy of its software products exists, software piracy can be
expected to be a persistent problem. In addition, the laws of some foreign
countries do not protect the Company's proprietary rights as fully as do the
laws of the United States. There can be no assurance that the Company's means
of protecting its proprietary rights in the United States or abroad will be
adequate or that the Company's competitors will not independently develop
similar technology. The Company has entered into agreements with substantially
all of its customers which require the Company to place Siebel Enterprise
Applications source code into escrow. Such agreements generally provide that
such parties will have a limited, non-exclusive right to use such code in the
event that there is a bankruptcy proceeding by or against the Company, if the
Company ceases to do business or if the Company fails to meet its support
obligations. Entering into such agreements may increase the likelihood of
misappropriation by third parties.
The Company is not aware that it is infringing any proprietary rights of
third parties. There can be no assurance, however, that third parties will not
claim infringement by the Company of their intellectual property rights. The
Company expects that software product developers will increasingly be subject
to infringement claims as the number of products and competitors in the
Company's industry segment grows and the functionality of products in
different industry segments overlaps. Furthermore, there can be no assurance
that former employers of the Company's present and future employees will not
assert claims that such employees have improperly disclosed confidential or
proprietary information to the Company. Any such claims, with or without
merit, could be time consuming to defend, result in costly litigation, divert
management's attention and resources, cause product shipment delays or require
the Company to pay money damages or enter into royalty or licensing
agreements. Such royalty or licensing agreements, if required, may not be
available on terms acceptable to the Company, if at all. In the event of a
successful claim of product infringement against the Company and failure or
inability of the Company to license the infringed or similar technology, the
Company's business, operating results and financial condition would be
materially and adversely affected.
The Company relies upon certain software that it licenses from third
parties, including software that is integrated with the Company's internally
developed software and used in Siebel Sales Enterprise and the Company's other
products to perform key functions. There can be no assurance that these third-
party software licenses will continue to be available to the Company on
commercially reasonable terms. The loss of, or inability to maintain, any such
software licenses could result in shipment delays or reductions until
equivalent software could be developed, identified, licensed and integrated
which would materially adversely affect the Company's business, operating
results and financial condition. See "Business--Intellectual Property and
Other Proprietary Rights."
International Operations. The Company's sales are primarily to large multi-
national companies. To service the needs of such companies, both domestically
and internationally, the Company must provide worldwide product support
services. As a result, the Company has expanded and intends to continue to
expand its international operations and enter additional international
markets, which will require significant management attention and financial
resources and could adversely affect the Company's operating margins and
earnings, if any. Revenues from international sales accounted for
approximately 11% of the Company's total revenues in fiscal 1996. The Company
believes that in order to increase sales opportunities and profitability it
will be required to expand its international operations. The Company has
committed and continues to commit significant management time and financial
resources to developing direct and indirect international sales and support
31
channels. There can be no assurance, however, that the Company will be able to
maintain or increase international market demand for Siebel Sales Enterprise
or the Company's other products. To the extent that the Company is unable to
do so in a timely manner, the Company's international sales will be limited,
and the Company's business, operating results and financial condition could be
materially and adversely affected. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
The Company has significantly expanded its international operations over the
past twelve months and seeks to continue such expansion in the future.
International operations are subject to inherent risks, including the impact
of possible recessionary environments in economies outside the United States,
costs of localizing products for foreign markets, longer receivables
collection periods and greater difficulty in accounts receivable collection,
unexpected changes in regulatory requirements, difficulties and costs of
staffing and managing foreign operations, reduced protection for intellectual
property rights in some countries, potentially adverse tax consequences and
political and economic instability. There can be no assurance that the Company
or its distributors or resellers will be able to sustain or increase
international revenues from licenses or from maintenance and service, or that
the foregoing factors will not have a material adverse effect on the Company's
future international revenues and, consequently, on the Company's business,
operating results and financial condition. The Company's direct international
revenues are generally denominated in local currencies. The Company does not
currently engage in hedging activities. Revenues generated by the Company's
distributors and resellers are generally paid to the Company in United States
dollars. Although exposure to currency fluctuations to date has been
insignificant, as the Company expands its international operations there can
be no assurance that fluctuations in currency exchange rates in the future
will not have a material adverse impact on revenues from international sales
and thus the Company's business, operating results and financial condition.
See "Management's Discussion and Analysis of Financial Condition and Results
of Operations" and "Business--Customers and Markets," "--Sales" and "--
Marketing."
Product Liability. The Company's license agreements with its customers
typically contain provisions designed to limit the Company's exposure to
potential product liability claims. It is possible, however, that the
limitation of liability provisions contained in the Company's license
agreements may not be effective under the laws of certain jurisdictions.
Although the Company has not experienced any product liability claims to date,
the sale and support of products by the Company may entail the risk of such
claims, and there can be no assurance that the Company will not be subject to
such claims in the future. A successful product liability claim brought
against the Company could have a material adverse effect upon the Company's
business, operating results and financial condition.
Control by Existing Stockholders. The Company's current officers, directors
and affiliated entities together beneficially owned approximately 54.5% of the
outstanding shares of Common Stock as of December 31, 1996. In particular,
Thomas M. Siebel, the Company's Chairman and Chief Executive Officer, owned
approximately 38.2% of the outstanding shares of Common Stock as of December
31, 1996. As a result, these stockholders will be able to exercise control
over matters requiring stockholder approval, including the election of
directors, and the approval of mergers, consolidations and sales of all or
substantially all of the assets of the Company. This may prevent or discourage
tender offers for the Company's Common Stock unless the terms are approved by
such stockholders.
Possible Volatility of Stock Price. The Company's stock price has fluctuated
substantially since its initial public offering in June 1996. The trading
price of the Company's Common Stock is subject to significant fluctuations in
response to variations in quarterly operating results, the gain or loss of
significant orders, changes in earning estimates by analysts, announcements of
technological innovations or new products by the Company or its competitors,
general conditions in the software and computer industries and other events or
factors. In addition, the stock market in general has experienced extreme
price and volume fluctuations which have affected the market price for many
companies in industries similar or related to that of the Company and which
have been unrelated to the operating performance of these companies. These
market fluctuations have adversely affected and may continue to adversely
affect the market price of the Company's Common Stock.
32
Effect of Certain Charter Provisions; Antitakeover Effects of Certificate of
Incorporation, Bylaws and Delaware Law. The Company's Board of Directors has
the authority to issue up to 2,000,000 shares of Preferred Stock and to
determine the price, rights, preferences, privileges and restrictions,
including voting rights, of those shares without any further vote or action by
the stockholders. The Preferred Stock could be issued with voting,
liquidation, dividend and other rights superior to those of the Common Stock.
The rights of the holders of Common Stock will be subject to, and may be
adversely affected by, the rights of the holders of any Preferred Stock that
may be issued in the future. The issuance of Preferred Stock, while providing
desirable flexibility in connection with possible acquisitions and other
corporate purposes, could have the effect of making it more difficult for a
third party to acquire a majority of the outstanding voting stock of the
Company. Pursuant to the Company's Certificate of Incorporation, the Company
has instituted a classified Board of Directors. This and certain other
provisions of the Company's Certificate of Incorporation and certain
provisions of the Company's Bylaws and of Delaware law, could delay or make
more difficult a merger, tender offer or proxy contest involving the Company.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- ---------------------------------------------------
The Company's consolidated financial statements, together with related notes
and the report of KPMG Peat Marwick LLP, the Company's independent
accountants, are set forth on the pages indicated in Item 14.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
- -----------------------------------------------------------------------
FINANCIAL DISCLOSURE
--------------------
Not Applicable.
33
PART III
Certain information required by Part III is omitted from this Report on Form
10-K since the Company will file a definitive Proxy Statement for its Annual
Meeting of Stockholders to be held on April 14, 1997, pursuant to Regulation
14A of the Securities Exchange Act of 1934, as amended (the "Proxy
Statement"), not later than 120 days after the end of the fiscal year covered
by this Report, and certain information included in the Proxy Statement is
incorporated herein by reference.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
(a) Executive Officers
Please refer to the Section entitled "Executive Officers" in Part I,
Item 1 hereof.
(b) Directors
The information required by this Item is incorporated by reference to
the section entitled "Election of Directors" in the Proxy Statement.
ITEM 11. EXECUTIVE COMPENSATION
- -------------------------------
The information required by this Item is incorporated by reference to the
section entitled "Executive Compensation" in the Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- -----------------------------------------------------------------------
The information required by this Item is incorporated by reference to the
section entitled "Security Ownership of Certain Beneficial Owners and
Management" in the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- -------------------------------------------------------
The information required by this Item is incorporated by reference to the
section entitled "Certain Transactions" in the Proxy Statement.
34
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS AND REPORTS ON FORM 8-K
- ---------------------------------------------------------------
(a) The following documents are filed as part of this Report:
1. Financial Statements
PAGE
----
Independent Auditors' Report......................................... 36
Consolidated Financial Statements:
Balance Sheets..................................................... 37
Statements of Operations........................................... 38
Statements of Stockholders' Equity................................. 39
Statements of Cash Flows........................................... 40
Notes to Consolidated Financial Statements........................... 41
2. Financial Statement Schedule
Schedule II--Valuation and Qualifying Accounts....................... 51
3. Exhibits
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
(3)3.3 Restated Certificate of Incorporation of the Registrant, as
amended.
(1)3.4 Bylaws of the Registrant.
(1)(3)4.1 Reference is made to Exhibits 3.3 and 3.4.
(1)4.2 Specimen Stock Certificate.
(1)4.3 Restated Investor Rights Agreement, dated December 1, 1995,
between the Registrant and certain investors, as amended
April 30, 1996 and June 14, 1996.
(3)10.1 Registrant's 1996 Equity Incentive Plan, as amended.
(3)10.2 Registrant's Employee Stock Purchase Plan, as amended.
(1)10.3 Form of Indemnity Agreement entered into between the
Registrant and its officers and directors.
(4)10.4 Registrant's Deferred Compensation Plan, dated January 10,
1997.
(1)(2)10.6 Master Alliance Agreement, dated March 17, 1995, between the
Registrant and Andersen Consulting LLP.
(1)10.9 Assignment Agreement, dated September 20, 1995, by and
between the Registrant and Thomas M. Siebel.
(1)10.10 Lease Agreement, dated June 4, 1996, by and between the
Registrant and Crossroad Associates and Clocktower
Associates.
(4)11.1 Statement Regarding Computation of Net Income Per Share.
(4)23.1 Consent of KPMG Peat Marwick LLP, Independent Auditors.
(4)27.1 Financial Data Schedule.
- --------
(1) Incorporated by reference to the Company's Registration Statement on Form
S-1 (No. 333-03751), as amended.
(2) Confidential treatment has been granted with respect to portions of this
exhibit.
(3) Incorporated by reference to the Company's Registration Statement on Form
S-8 (No. 333-07983), as amended.
(4) Filed herewith.
(b) Reports on Form 8-K
None.
35
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Siebel Systems, Inc.:
We have audited the accompanying consolidated balance sheets of Siebel
Systems, Inc. and subsidiary as of December 31, 1996 and 1995, and the related
consolidated statements of operations, stockholders' equity, and cash flows
for each of the years in the three-year period ended December 31, 1996. Our
audits also included the financial statement schedule listed in the Index at
Item 14(a)2. These consolidated financial statements and financial statement
schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements and financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Siebel
Systems, Inc. and subsidiary as of December 31, 1996 and 1995, and the results
of their operations and their cash flows for each of the years in the three-
year period ended December 31, 1996, in conformity with generally accepted
accounting principles. Also, in our opinion, the related financial statement
schedule, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly, in all material respects, the
information set forth therein.
KPMG Peat Marwick llp
San Jose, California
January 17, 1997
36
SIEBEL SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
DECEMBER 31, DECEMBER 31,
1996 1995
------------ ------------
ASSETS
------
Current assets:
Cash and cash equivalents.......................... $22,671 $11,391
Short-term investments............................. 49,716 --
Accounts receivable, net........................... 12,855 3,066
Deferred income taxes.............................. 1,067 314
Prepaids and other................................. 4,258 440
------- -------
Total current assets............................. 90,567 15,211
Property and equipment, net........................ 8,310 863
Other assets....................................... 624 17
------- -------
Total assets..................................... $99,501 $16,091
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable................................... $ 3,107 $ 493
Accrued expenses................................... 6,768 1,075
Income taxes payable............................... 2,018 395
Deferred revenue................................... 6,212 4,166
------- -------
Total current liabilities........................ 18,105 6,129
Deferred income taxes.............................. 205 28
------- -------
Total liabilities................................ 18,310 6,157
Commitments and contingencies
Stockholders' equity:
Convertible preferred stock; $.001 par value; 2,000
and 20,000 shares
authorized; 9,811 shares issued and outstanding in
1995.............................................. -- 10
Common stock; $.001 par value; 100,000 and 40,000
shares authorized;
33,604 and 16,498 shares issued and outstanding,
respectively...................................... 34 16
Additional paid-in capital......................... 77,359 9,986
Notes receivable from stockholders................. (508) (13)
Deferred stock compensation........................ (1,035) (381)
Retained earnings.................................. 5,341 316
------- -------
Total stockholders' equity....................... 81,191 9,934
------- -------
Total liabilities and stockholders' equity....... $99,501 $16,091
======= =======
See accompanying notes to consolidated financial statements.
37
SIEBEL SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
YEAR ENDED DECEMBER
31,
----------------------
1996 1995 1994
------- ------ -------
Revenues:
Software.............................................. $35,658 $7,636 $ 50
Maintenance and other................................. 3,494 402 --
------- ------ -------
Total revenues...................................... 39,152 8,038 50
Cost of revenues:
Software.............................................. 106 41 --
Maintenance and other................................. 2,113 385 --
------- ------ -------
Total cost of revenues.............................. 2,219 426 --
------- ------ -------
Gross margin........................................ 36,933 7,612 50
Operating expenses:
Product development................................... 5,894 2,816 868
Sales and marketing................................... 19,577 3,232 718
General and administrative............................ 4,748 1,192 243
------- ------ -------
Total operating expenses............................ 30,219 7,240 1,829
------- ------ -------
Operating income (loss)............................. 6,714 372 (1,779)
Other income, net....................................... 1,391 156 13
------- ------ -------
Income (loss) before income taxes................... 8,105 528 (1,766)
Income tax expense...................................... 3,080 211 --
------- ------ -------
Net income (loss)................................... $ 5,025 $ 317 $(1,766)
======= ====== =======
Net income per share.................................... $ 0.14 $ 0.01
======= ======
Shares used in net income per share computation......... 36,667 32,679
======= ======
See accompanying notes to consolidated financial statements.
38
SIEBEL SYSTEMS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands)
CONVERTIBLE
PREFERRED NOTES RETAINED
STOCK COMMON STOCK ADDITIONAL RECEIVABLE DEFERRED EARNINGS TOTAL
PARTNERS' --------------- -------------- PAID-IN FROM STOCK (ACCUMULATED STOCKHOLDERS'
CAPITAL SHARES AMOUNT SHARES AMOUNT CAPITAL STOCKHOLDERS COMPENSATION DEFICIT) EQUITY
--------- ------- ------ ------ ------ ---------- ------------ ------------ ------------ -------------
Balances, Decem-
ber 31, 1993... $ 696 -- $ -- 100 $ 1 $ 49 $ -- $ -- $ -- $ 746
Partners' capi-
tal
contributions.. 2,222 -- -- -- -- -- (13) -- -- 2,209
Net loss........ (1,765) -- -- -- -- -- -- -- (1) (1,766)
------ ------- ----- ------ --- ------- ----- ------- ------ -------
Balances, Decem-
ber 31, 1994... 1,153 -- -- 100 1 49 (13) -- (1) 1,189
Conversion of
partners'
capital........ (1,153) 4,689 5 16,161 14 1,134 -- -- -- --
Compensation re-
lated to stock
options........ -- -- -- -- -- 381 -- (381) -- --
Issuance of com-
mon stock...... -- -- -- 657 1 82 -- -- -- 83
Repurchase of
common stock... -- -- -- (420) -- (9) -- -- -- (9)
Issuance of Se-
ries B
preferred
stock.......... -- 3,933 4 -- -- 4,890 -- -- -- 4,894
Issuance of Se-
ries C
preferred
stock.......... -- 1,189 1 -- -- 3,459 -- -- -- 3,460
Net income...... -- -- -- -- -- -- -- -- 317 317
------ ------- ----- ------ --- ------- ----- ------- ------ -------
Balances, Decem-
ber 31, 1995... -- 9,811 10 16,498 16 9,986 (13) (381) 316 9,934
Issuance of com-
mon stock, net
of issuance
costs of
$1,216......... -- -- -- 6,842 8 63,731 (507) -- -- 63,232
Repurchase and
retirement of
common stock... -- -- -- (44) -- (1) -- -- -- (1)
Shares issued
under
Employee Stock
Purchase Plan.. -- -- -- 100 -- 722 -- -- -- 722
Repayment of
note
receivable..... -- -- -- -- -- -- 12 -- -- 12
Issuance of Se-
ries B
preferred
stock.......... -- 67 -- -- -- 195 -- -- -- 195
Exercise of war-
rant for
Series C pre-
ferred stock... -- 150 -- -- -- 437 -- -- -- 437
Issuance of Se-
ries D
preferred
stock.......... -- 180 -- -- -- 900 -- -- -- 900
Conversion of
preferred stock
into common
stock.......... -- (10,208) (10) 10,208 10 -- -- -- -- --
Compensation re-
lated to stock
options........ -- -- -- -- -- 893 -- (893) -- --
Amortization of
deferred stock
compensation... -- -- -- -- -- -- -- 239 -- 239
Tax benefits re-
lated to stock
options........ -- -- -- -- -- 496 -- -- -- 496
Net income...... -- -- -- -- -- -- -- -- 5,025 5,025
------ ------- ----- ------ --- ------- ----- ------- ------ -------
Balances, Decem-
ber 31, 1996... $ -- -- $ -- 33,604 $34 $77,359 $(508) $(1,035) $5,341 $81,191
====== ======= ===== ====== === ======= ===== ======= ====== =======
See accompanying notes to consolidated financial statements.
39
SIEBEL SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
YEAR ENDED DECEMBER 31,
-------------------------
1996 1995 1994
------- ------- -------
Cash flows from operating activities:
Net income (loss)................................. $ 5,025 $ 317 $(1,766)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Compensation related to stock options........... 239 -- --
Depreciation and amortization................... 1,197 142 75
Deferred income taxes........................... (576) (286) --
Tax benefits related to stock options........... 496 -- --
Loss on disposal of property and equipment...... 155 -- --
Provision for doubtful accounts................. 269 -- --
Software licenses exchanged for equipment and
prepaid assets................................. (3,408) -- --
Changes in operating assets and liabilities:
Accounts receivable........................... (10,058) (3,066) --
Prepaids and other............................ (1,868) (411) (23)
Accounts payable.............................. 2,614 479 10
Accrued expenses.............................. 5,693 1,075 --
Income taxes payable.......................... 1,623 395 --
Deferred revenue.............................. 2,046 4,166 --
------- ------- -------
Net cash provided by (used in) operating ac-
tivities................................... 3,447 2,811 (1,704)
------- ------- -------
Cash flows from investing activities:
Purchases of property and equipment............... (7,341) (872) (176)
Purchases of short-term investments............... (49,716) -- --
Other assets...................................... (607) 7 (15)
------- ------- -------
Net cash used in investing activities....... (57,664) (865) (191)
------- ------- -------
Cash flows from financing activities:
Partners' capital contributions................... -- -- 2,209
Proceeds from issuance of common stock............ 63,954 83 --
Repurchases of common stock....................... (1) (9) --
Proceeds from issuance of preferred stock......... 1,532 8,354 --
Repayment of stockholder notes.................... 12 -- --
------- ------- -------
Net cash provided by financing activities... 65,497 8,428 2,209
------- ------- -------
Change in cash and cash equivalents................. 11,280 10,374 314
Cash and cash equivalents, beginning of year........ 11,391 1,017 703
------- ------- -------
Cash and cash equivalents, end of year.............. $22,671 $11,391 $ 1,017
======= ======= =======
Supplemental disclosures of cash flow information:
Cash paid for income taxes........................ $ 1,488 $ 100 $ --
======= ======= =======
Noncash investing and financing activities:
Conversion of partnership units into common stock
and Series A preferred stock..................... $ -- $ 1,153 $ --
======= ======= =======
Conversion of preferred stock into common stock... $ 10 $ -- $ --
======= ======= =======
Exercise of common stock options in exchange for
stockholder notes receivable..................... $ 507 $ -- $ 13
======= ======= =======
See accompanying notes to consolidated financial statements.
40
SIEBEL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (CONTINUED)
(1)SUMMARY OF THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES
THE COMPANY
Siebel Systems, Inc. (the "Company") is a provider of enterprise-class sales
and marketing information software systems. The Company designs, develops,
markets, and supports Siebel Enterprise Applications, an Internet-enabled,
object oriented client/server application software product family designed to
meet the sales and marketing information system requirements of large multi-
national organizations.
The Company was incorporated in the state of California on September 13,
1993 and elected to be treated as an S corporation effective on that date. Its
principal activity prior to January 1995 was serving as the general partner of
Siebel Systems, L.P. (the Partnership), a limited partnership. Accordingly,
the accompanying consolidated statements of operations, stockholders' equity
and cash flows for the year ended December 31, 1994 reflect the operating
results of the Company and the Partnership. The Company terminated its S
corporation election on January 1, 1995. On January 3, 1995, under provisions
of the Partnership agreement, all partners elected to dissolve the Partnership
and convert their partnership units into common stock and preferred stock of
the Company.
In June of 1996, in connection with its initial public offering, the Company
reincorporated under the laws of the state of Delaware.
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
the Company and its wholly owned subsidiary. All intercompany accounts and
transactions have been eliminated.
REVENUE RECOGNITION
The Company recognizes revenue in accordance with Statement of Position No.
91-1, Software Revenue Recognition. Software license revenue is recognized
when all of the following criteria have been met: there is an executed license
agreement, software has been shipped to the customer, no significant vendor
obligations remain, the license fee is fixed and payable within twelve months
and collection is deemed probable. Maintenance and other revenues consist
primarily of maintenance and are recognized ratably over the term of the
maintenance contract, typically 12 to 36 months.
USE OF ESTIMATES
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
consolidated financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
CASH AND CASH EQUIVALENTS, AND SHORT-TERM INVESTMENTS
The Company considers all highly liquid investments with an original
maturity of 90 days or less to be cash equivalents. Short-term investments
generally consist of highly liquid municipal securities with original
maturities in excess of 90 days.
The Company has classified its investments in certain debt and equity
securities as "available for sale." Such investments are carried at fair
value, with gross unrealized gains and losses reported as a separate component
of stockholders' equity. As of December 31, 1996, gross unrealized gains and
losses have not been material.
41
SIEBEL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (CONTINUED)
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost less accumulated depreciation and
amortization. Depreciation is calculated using the straight-line method over
the estimated useful lives of the respective assets, generally three to five
years. Leasehold improvements are amortized over the lesser of the lease term
or the estimated useful lives of the improvements, generally seven years.
CAPITALIZED SOFTWARE
Development costs incurred in the research and development of new software
products and enhancements to existing software products are expensed as
incurred until technological feasibility in the form of a working model has
been established. To date, the Company's software development has been
completed concurrent with the establishment of technological feasibility, and,
accordingly, no costs have been capitalized.
INCOME TAXES
The Company uses the asset and liability method of accounting for income
taxes. Under the asset and liability method, deferred tax assets and
liabilities are recognized for the estimated future tax consequences
attributable to differences between the consolidated financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax
rates in effect for the year in which those temporary differences are expected
to be recovered or settled.
NET INCOME PER SHARE
Net income per share is computed using net income and is based on the
weighted average number of shares of common stock outstanding, convertible
preferred stock, on an "as if converted" basis, using the conversion ratio in
effect at the initial public offering date, and dilutive common equivalent
shares from stock options and warrants outstanding using the treasury stock
method. In accordance with certain Securities and Exchange Commission (SEC)
Staff Accounting Bulletins, such computations include all common and common
equivalent shares issued within 12 months of the offering date as if they were
outstanding for all periods presented using the treasury stock method and the
anticipated initial public offering price.
STOCK SPLIT
All share and per share amounts for all periods presented have been restated
to reflect a two-for-one stock split (effected in the form of a stock
dividend) which was effective December 19, 1996.
EMPLOYEE STOCK OPTION AND PURCHASE PLANS
The Company accounts for its stock-based compensation plans in accordance
with the provisions of Accounting Principles Board (APB) Opinion No. 25,
Accounting for Stock Issued to Employees, and related interpretations. As
such, compensation expense would be recorded on the date of grant only if the
current market price of the underlying stock exceeded the exercise price. On
January 1, 1996, the Company adopted the disclosure requirements of Statement
of Financial Accounting Standards (SFAS) No. 123, Accounting for Stock-Based
Compensation. Under SFAS No. 123, the Company must disclose pro forma net
income and pro forma earnings per share for employee stock option grants and
employee stock purchases made in 1995 and future years as if the fair-value-
based method defined in SFAS No. 123 had been applied.
42
SIEBEL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (CONTINUED)
CONCENTRATIONS OF CREDIT RISK
Financial instruments that potentially subject the Company to a
concentration of credit risk principally consist of trade accounts receivable.
The Company performs ongoing credit evaluations of its customers and generally
does not require collateral on accounts receivable, as the majority of the
Company's customers are large, well established companies. The Company
maintains reserves for potential credit losses, but historically has not
experienced any significant losses related to individual customers or groups
of customers in any particular industry or geographic area.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of the Company's cash and cash equivalents, accounts
receivable, and accounts payable approximate their respective carrying amounts
defined as the amount at which the instrument could be exchanged in a current
transaction between willing parties.
IMPAIRMENT OF LONG-LIVED ASSETS
The Financial Accounting Standards Board recently adopted SFAS No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to Be Disposed Of. This statement requires long-lived assets to be evaluated
for impairment whenever events or changes in circumstances indicate that the
carrying value of an asset may not be recoverable. The Company adopted SFAS
No. 121 on January 1, 1996. The adoption of SFAS No. 121 did not have a
material impact on the Company's consolidated results of operations.
(2)FINANCIAL STATEMENT DETAILS
SHORT-TERM INVESTMENTS
Short-term investments, $18,393,000 of which mature in less than one year,
and $31,323,000 of which mature in one to five years, consisted of the
following (in thousands):
DECEMBER 31,
----------------
1996 1995
------- --------
Certificates of deposit..................................... $ 1,325 $ --
Municipal securities........................................ 48,391 --
------- --------
$49,716 $ --
======= ========
ACCOUNTS RECEIVABLE, NET
Accounts receivable, net consisted of the following (in thousands):
DECEMBER 31,
--------------
1996 1995
------- ------
Trade accounts receivable..................................... $13,124 $3,066
Less allowance for doubtful accounts.......................... 269 --
------- ------
$12,855 $3,066
======= ======
43
SIEBEL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (CONTINUED)
PROPERTY AND EQUIPMENT, NET
Property and equipment, net consisted of the following (in thousands):
DECEMBER 31,
-------------
1996 1995
------ ------
Computer equipment.......................................... $5,506 $ 662
Furniture and fixtures...................................... 1,380 46
Computer software........................................... 2,202 374
Leasehold improvements...................................... 575 4
------ ------
9,663 1,086
Less accumulated depreciation............................... 1,353 223
------ ------
$8,310 $ 863
====== ======
ACCRUED EXPENSES
Accrued expenses consisted of the following (in thousands):
DECEMBER 31,
-------------
1996 1995
------ ------
Bonuses...................................................... $1,672 $ 133
Commissions.................................................. 1,846 152
Vacation..................................................... 388 79
Sales tax.................................................... 513 486
Other........................................................ 2,349 225
------ ------
$6,768 $1,075
====== ======
OTHER INCOME, NET
Other income, net consisted of the following (in thousands):
YEAR ENDED DECEMBER 31,
---------------------------
1996 1995 1994
--------- ------- -------
Interest income............................... $1,554 $163 $15
Interest expense.............................. (8) (7) (2)
Loss on disposal of property and equipment.... (155) -- --
--------- ------- ------
$1,391 $156 $13
========= ======= ======
(3) COMMITMENTS AND CONTINGENCIES
LEASE OBLIGATIONS
As of December 31, 1996, the Company leased facilities under noncancelable
operating leases expiring between 1996 and 2006. Future minimum lease payments
are as follows (in thousands):
YEAR ENDING
DECEMBER 31,
------------
1997........................................................... $ 1,554,400
1998........................................................... 1,554,400
1999........................................................... 1,554,400
2000........................................................... 1,554,400
2001........................................................... 1,554,400
Thereafter..................................................... 7,124,200
-----------
$14,896,200
===========
44
SIEBEL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (CONTINUED)
Rent expense for the years ended December 31, 1996, 1995 and 1994, was
$1,245,000, $191,000, and $86,000, respectively.
EMPLOYEE BENEFIT PLAN
The Company has a 401(k) plan that allows eligible employees to contribute
up to 20% of their compensation, limited to $9,500 in 1996. Employee
contributions and earnings thereon vest immediately. Although, the Company may
make discretionary contributions to the 401(k) plan, none have been made to
date.
LEGAL ACTIONS
The Company is engaged in certain legal actions arising in the ordinary
course of business. The Company believes it has adequate legal defenses and
believes that the ultimate outcome of these actions will not have a material
effect on the Company's financial position or results of operations, although
there can be no assurance as to the outcome of such litigation.
(4) STOCKHOLDERS' EQUITY
EMPLOYEE STOCK OPTION AND PURCHASE PLANS
In May 1996, the Board of Directors approved the 1996 Equity Incentive Plan
(the Plan) which amended and restated the Company's 1994 Stock Option Plan and
1996 Supplemental Stock Option Plan which provided for the issuance of up to
an aggregate of 12,000,000 shares of common stock to employees, directors and
consultants. The Plan provides for the issuance of incentive and nonstatutory
stock options, restricted stock purchase awards, stock bonuses and stock
appreciation rights.
In October 1996, the Board of Directors approved an amendment to the Plan to
increase the number of shares authorized for issuance thereunder by 8,000,000
shares from 12,000,000 to 20,000,000 shares.
Under the Plan, the exercise price for incentive options is at least 100% of
the fair market value on the date of the grant. The exercise price for
incentive stock options is at least 110% of the fair market value on the date
of the grant for persons with greater than 10% of the voting power of all
classes of stock.
Under the Plan, options generally expire in 10 years; however, incentive
stock options may expire in 5 years if the optionee owns stock representing
more than 10% of the voting power of all classes of stock. Vesting periods are
determined by the Board of Directors and generally provide for shares to vest
ratably over 5 years.
45
SIEBEL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (CONTINUED)
Plan activity is summarized as follows:
OPTIONS
AVAILABLE NUMBER OF EXERCISE PRICE
FOR GRANT SHARES PER SHARE
---------- ---------- ----------------
Authorized......................... 6,000,000 -- $ -
Options granted.................... (184,000) 184,000 .03 - .05
---------- ----------
Balances, December 31, 1994......... 5,816,000 184,000 .03 - .05
Options granted.................... (2,881,570) 2,881,570 .05 - .25
Options exercised.................. -- (656,570) .05 - .25
Options canceled................... 491,000 (491,000) .05 - .25
---------- ----------
Balances, December 31, 1995......... 3,425,430 1,918,000 .03 - .25
Additional shares authorized....... 14,000,000 -- -
Options granted.................... (9,701,000) 9,701,000 .88 - 26.25
Options exercised.................. -- (1,127,600) .05 - 1.45
Options canceled................... 650,500 (650,500) .05 - 11.63
---------- ----------
Balances, December 31, 1996......... 8,374,930 9,840,900 $.05 - 26.25
========== ==========
The Plan also allows for the exercise of certain unvested options. Common
shares issued to employees upon exercise of unvested options are subject to
repurchase by the Company at the original exercise price. The Company's
ability to repurchase these shares expires at a rate equivalent to the current
vesting schedule of each option. As of December 31, 1996, 1,206,900 common
shares had been issued to employees upon the exercise of unvested options,
which are subject to repurchase.
During the period from October 1995 through April 1996, the Company granted
options to purchase an aggregate of 8,152,500 shares of common stock at
exercise prices ranging from $.25 to $3.25 per share. Based in part on an
independent appraisal obtained by the Company's Board of Directors, and other
factors, the Company recorded $381,000 of deferred compensation expense in
1995 and an additional $893,000 of deferred compensation expense in 1996
relating to these options. These amounts are being amortized over the vesting
period of the individual options, generally five years.
In May 1996, the Company adopted the 1996 Employee Stock Purchase Plan (the
"Purchase Plan") and reserved 700,000 shares for issuance thereunder. The
Purchase Plan became effective upon the completion of the Company's initial
public offering. In January 1997, the Board of Directors of the Company
adopted an amendment to the Purchase Plan to increase the number of shares
authorized for issuance under the Purchase Plan to 1,700,000 shares. The
Purchase plan permits eligible employees to purchase common stock, through
payroll deductions of up to 10% of the employee's compensation, at a price
equal to 85% of the fair market value of the common stock at either the
beginning or the end of each offering period, whichever is lower. As of
December 31, 1996, 99,817 shares had been purchased under the Purchase Plan.
ACCOUNTING FOR STOCK-BASED COMPENSATION
The Company has elected to continue to use the intrinsic value-based method
to account for all of its employee stock-based compensation plans. Under APB
Opinion No. 25, Accounting for Stock Issued to Employees, the Company has
recorded no compensation costs related to its stock option plans for the years
ended December 31, 1996, 1995 and 1994, except for the options granted during
the period from October 1995 through April 1996, because the exercise price of
each option equals or exceeds the fair value of the underlying common stock as
of the grant date for each stock option.
46
SIEBEL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (CONTINUED)
Pursuant to SFAS No. 123, Accounting for Stock-Based Compensation, the
Company is required to disclose the pro forma effects on net income and net
income per share data as if the Company had elected to use the fair value
approach to account for all its employee stock-based compensation plans. Had
compensation cost for the Company's plans been determined consistent with the
fair value approach enumerated in SFAS No. 123, the Company's net income and
net income per share for the year ended December 31, 1996 and 1995 would have
been decreased as indicated below (in thousands, except per share data):
DECEMBER 31,
------------
1996 1995
------ -----
Net Income As Reported $5,025 $ 317
Pro Forma $2,847 $ 297
Net Income Per Share As Reported $ 0.14 $0.01
Pro Forma $ 0.08 $0.01
The fair value of options granted was estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in 1996 and 1995; risk-free interest rate of 6%;
expected life of 3.5 years; 68.5% expected volatility; and no dividends.
The fair value of employees' stock purchase rights under the Purchase Plan
was estimated using the Black-Scholes model with the following assumptions for
1996: risk-free interest rate of 5.5%; expected life of 0.5 years: 68.5%
expected volatility; and no dividends.
A summary of the status of the Company's fixed option plans as of December
31, 1996 and 1995, and changes during the years ended on those dates is
presented below:
DECEMBER 31, 1996 DECEMBER 31, 1995
---------------------------- ---------------------------
WEIGHTED AVERAGE WEIGHTED AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE
---------- ---------------- --------- ----------------
Fixed Options
Outstanding at
beginning of year.... 1,918,000 $0.19 184,000 $0.05
Granted............... 9,701,000 $6.85 2,881,570 $0.17
Exercised............. (1,127,600) $0.60 (656,570) $0.12
Canceled.............. (650,500) $3.64 (491,000) $0.14
---------- ---------
Outstanding at end of 9,840,900 1,918,000
period............... ========== $6.46 ========= $0.19
Options vested at
period-end........... 955,220 $0.68 41,900 $0.19
Weighted-average fair
value of options
granted during the
period at exercise
price equal to market
price at grant date.. $3.72 $0.09
47
SIEBEL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (CONTINUED)
The following table summarizes information about fixed stock options
outstanding at December 31, 1996:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------------------- ----------------------------------
NUMBER WEIGHTED AVERAGE NUMBER
OUTSTANDING AT REMAINING WEIGHTED AVERAGE EXERCISABLE AT WEIGHTED AVERAGE
EXERCISE PRICES DECEMBER 31, 1996 CONTRACTUAL LIFE EXERCISE PRICE DECEMBER 31, 1996 EXERCISE PRICE
- --------------- ----------------- ---------------- ---------------- ----------------- ----------------
$ 0.05- 0.88 2,508,900 8.7 $ 0.57 2,502,900 $0.57
$ 1.45- 1.45 1,469,500 9.2 $ 1.45 340,000 $1.45
$ 2.75- 2.75 2,300,000 9.3 $ 2.75 -- --
$ 3.25- 3.25 542,000 9.3 $ 3.25 -- --
$ 5.75- 5.75 352,000 9.4 $ 5.75 -- --
$ 6.25- 6.25 883,000 9.5 $ 6.25 -- --
$ 8.50- 8.50 23,000 9.5 $ 8.50 -- --
$11.63-11.63 73,000 9.5 $11.63 -- --
$22.88-22.88 302,000 9.5 $22.88 -- --
$26.25-26.25 1,387,500 9.6 $26.25 -- --
- ------------ --------- --- ------ --------- -----
$ 0.05-26.25 9,840,900 9.2 $ 6.46 2,842,900 $0.68
========= =========
Pro forma net income reflects only options granted in 1996 and 1995.
Therefore, the full impact of calculating compensation cost for stock options
under SFAS No. 123 is not reflected in the pro forma net income amounts
presented above because compensation cost is reflected over the options'
vesting period of generally five years, and compensation cost for options
granted prior to January 1, 1995 is not considered.
(5)INCOME TAXES
The components of income tax expense for the years ended December 31, 1996
and 1995 are as follows (in thousands):
1996 1995
------ -----
Current:
Federal................................................. $2,316 $ 289
State................................................... 544 108
Foreign................................................. 300 100
------ -----
Total current......................................... 3,160 497
Deferred:
Federal................................................. (480) (228)
State................................................... (96) (58)
------ -----
Total deferred........................................ (576) (286)
Charge in lieu of taxes attributable to employer's
stock
option plans......................................... 496 --
------ -----
Total income taxes.................................... $3,080 $ 211
====== =====
48
SIEBEL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (CONTINUED)
The difference between the "expected" income tax expense computed at the
federal statutory rate of 34% and the Company's actual income tax expense for
the years ended December 31, 1996 and 1995 are as follows (in thousands):
1996 1995
------ ----
Expected income tax expense................................. $2,756 $180
State income taxes, net of federal tax benefit.............. 381 33
Research and experimentation credit......................... (136) --
Tax exempt interest......................................... (204) --
Other, net.................................................. 283 (2)
------ ----
Total income taxes....................................... $3,080 $211
====== ====
The tax effects of temporary differences that give rise to significant
portions of deferred tax assets and liabilities as of December 31, 1996 and
1995 are as follows (in thousands):
1996 1995
------ ----
Deferred tax assets:
Deferred state taxes...................................... $ 145 $ 17
Accruals and reserves, not currently taken for tax purpos-
es....................................................... 922 297
------ ----
Deferred assets.......................................... 1,067 314
Deferred tax liability--depreciation....................... (205) (28)
------ ----
Net deferred assets...................................... $ 862 $286
====== ====
Management believes it is more likely than not that future operations will
generate sufficient taxable income to realize the deferred tax assets.
(6) RELATED PARTIES, SIGNIFICANT CUSTOMERS, AND GEOGRAPHIC INFORMATION
In 1996, the Company had revenues from each of two related parties who are
stockholders of the Company for $3 million and $346,000, respectively, (8% and
1% of total revenues, respectively). Accounts receivable from these parties as
of December 31, 1996 were $2 million and $38,000, respectively. The Company
also had revenue in 1996 of $5 million or approximately 13% of total revenues
from one customer.
The Company's export sales for the years ended December 31, 1996 and 1995
were $4.3 million and $1.0 million, respectively, (11% and 12% of total
revenues, respectively), principally in Europe and Asia.
49
SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
The following table presents selected quarterly information for fiscal 1996
and 1995:
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE
DATA)
1996:
Net revenues............................. $4,709 $7,546 $11,171 $15,726
Gross profit............................. 4,340 7,113 10,626 14,854
Net income............................... 198 701 1,593 2,533
Net income per share..................... 0.01 0.02 0.04 0.06
1995:
Net revenues............................. $ 30 $1,284 $ 2,564 $ 4,160
Gross profit............................. 21 1,233 2,439 3,919
Net income (loss)........................ (720) 42 287 708
Net income (loss) per share.............. (0.02) 0.00 0.01 0.02
50
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
BALANCE AT CHARGED TO BALANCE AT
BEGINNING COSTS AND END OF
OF YEAR EXPENSES DEDUCTIONS YEAR
---------- ---------- ---------- ----------
(IN THOUSANDS)
Allowance For Doubtful Accounts
Year ended December 31, 1996...... $ -- $ 269 $ -- $ 269
Year ended December 31, 1995...... $ -- $ -- $ -- $ --
Year ended December 31, 1994...... $ -- $ -- $ -- $ --
51
SIGNATURE
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.
SIEBEL SYSTEMS, INC.
Date: March 7, 1997
/s/ Howard H. Graham
By: _________________________________
HOWARD H. GRAHAM
SENIOR VICE PRESIDENT FINANCE AND
ADMINISTRATION AND CHIEF FINANCIAL
OFFICER
52
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each of the persons whose signature
appears below hereby constitutes and appoints Thomas M. Siebel and Howard H.
Graham, each of them acting individually, as his or her attorney-in-fact, each
with the full power of substitution, for him or her in any and all capacities,
to sign any and all amendments to this Annual Report on Form 10-K, and to file
the same, with all exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact, and each of them, full power and authority to do and
perform each and every act and thing requisite and necessary to be done in and
about the premises as fully to all intents and purposes as he or she might or
could do in person, hereby ratifying and confirming our signatures as they may
be signed by ours said attorney-in-fact and any and all amendments to this
Annual Report on Form 10-K.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Annual Report on Form 10-K has been signed by the following persons in the
capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ Thomas M. Siebel Chairman, Chief March 7, 1997
- ------------------------------------- Executive Officer and
THOMAS M. SIEBEL Director (Principal
Executive Officer)
/s/ Howard H. Graham Senior Vice President March 7, 1997
- ------------------------------------- Finance and
HOWARD H. GRAHAM Administraiton and
Chief Financial
Officer (Principal
Financial and
Accounting Officer)
/s/ James C. Gaither Director March 7, 1997
- -------------------------------------
JAMES C. GAITHER
/s/ Eric E. Schmidt, Ph.D. Director March 7, 1997
- -------------------------------------
ERIC E. SCHMIDT, PH.D.
/s/ Charles R. Schwab Director March 7, 1997
- -------------------------------------
CHARLES R. SCHWAB
/s/ George T. Shaheen Director March 7, 1997
- -------------------------------------
GEORGE T. SHAHEEN
/s/ A. Michael Spence, Ph.D. Director March 7, 1997
- -------------------------------------
A. MICHAEL SPENCE, PH.D.
53