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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, 1998
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 Identification No.)
incorporation or organization)
1855 South Grant Street
San Mateo, CA 94402
(Address of principal executive offices, including zip code)
(650) 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 March 18,
1999 as reported on the Nasdaq National Market was approximately
$1,432,233,025. Shares of Common Stock held by each current executive officer
and director and by each person who is known by the registrant 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 of the Company. Share
ownership information of certain persons known by the Company to own greater
than 5% of the outstanding common stock for purposes of the preceding
calculation is based solely on information on Schedule 13G filed with the
Commission and is as of December 31, 1998. 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 March 18, 1999, was 90,533,875.
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TABLE OF CONTENTS
Item Page
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PART I.
Item 1. Business........................................................ 1
Item 2. Properties...................................................... 7
Item 3. Legal Proceedings............................................... 7
Item 4. Submission of Matters to a Vote of Security Holders............. 8
PART II.
Item 5. Market for Registrant's Common Stock and Related Stockholder
Matters.................................................................. 8
Item 6. Selected Financial Data......................................... 9
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.................................................... 9
Item 7a. Quantitative and Qualitative Disclosures About Market Risk...... 24
Item 8. Financial Statements and Supplementary Data..................... 25
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure..................................................... 25
PART III.
Item 10. Directors and Executive Officers of the Registrant.............. 25
Item 11. Executive Compensation.......................................... 25
Item 12. Security Ownership of Certain Beneficial Owners and Management.. 26
Item 13. Certain Relationships and Related Transactions.................. 26
PART IV.
Item 14. Exhibits, Financial Statements and Reports on Form 8-K.......... 26
SIGNATURE................................................................. 50
Documents Incorporated By Reference
Portions of the registrant's Proxy Statement for its 1999 Annual
Stockholders Meeting are incorporated by reference in Part III hereof.
PART I
The statements contained in this Annual Report on Form 10-K (the "Report")
that are not historical are forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended (the "Securities Act")
and Section 21E of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), 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, statements
regarding the deployment of the Company's products, and statements regarding
reliance on third parties. 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 as a
result of certain factors, including, without limitation, those discussed
under the heading "Risk Factors" on page 37 in Item 7 and elsewhere in this
Report.
Item 1. Business
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Overview
Siebel Systems, Inc. ("Siebel" or the "Company") is the market leader in
enterprise-class sales, marketing and customer service information systems for
organizations focused on increasing sales, marketing and customer service
effectiveness in field sales, customer service, telesales, telemarketing, call
centers, and third-party resellers. The Company designs, develops, markets,
and supports Siebel Enterprise Applications, a leading web-based application
software product family designed to meet the sales, marketing and customer
service information system requirements of even the largest multi-national
organizations.
Siebel Systems' e-commerce applications deliver the first entirely Web-
based, enterprise class family of sales, marketing, and customer service
applications. Siebel applications fully support ActiveX, Java, and HTML and
can be delivered over the Internet or via an organization's intranet,
supporting multiple desktop platforms.
Designed to run within a browser with no previously installed client-side
software, Siebel e-commerce applications allow organizations to dramatically
reduce the cost of ownership for their Siebel applications and extend their
reach throughout the extraprise.
Organizations configure Siebel applications once and deploy them to mobile
laptop or handheld computers for field sales and service, in call centers, or
via the Internet to resellers and customers.
Siebel's customers are comprised of global market leaders, known for
delivering the highest levels of quality in their products and services and
for their commitment to maintaining the highest levels of customer
satisfaction. Spanning diverse industries and geographies, Siebel's customers
represent global organizations of all sizes.
Deploying Enterprise Relationship Management solutions no longer is viewed
as a means of gaining a competitive advantage, but rather is fundamental to an
organization's ability to survive. Employing enterprise relationship
management technology to better manage their customer relationships today, our
customers continue to be the leaders in their markets.
Through our partnerships with these global, industry-leading organizations,
we continue to enhance our Siebel Enterprise Application product line,
ensuring that we fully support our customers' technology requirements and
industry best practices today and in the future.
Products
Siebel 99, released in December 1998, brings the first entirely Web-based
family of enterprise-class relationship management applications to market.
Siebel's Web-based architecture provides complete support for
1
sales, marketing, and customer service organizations and extends that support
throughout the entire extraprise, seamlessly uniting third-party resellers and
service providers, business partners, and customers into a single information
system.
Siebel Sales Enterprise
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, Message Broadcasting, Siebel Search,
Quotas and Incentives modules.
Siebel Sales Enterprise options, as of December 31, 1998, include Siebel
Quotes, Siebel Revenue Forecasting, Siebel Product Forecasting, Siebel
Proposal Generator, Siebel Presentations, Siebel Campaigns, Siebel Sales
Assistant, Siebel Target Account Selling, Siebel Customer Service Integration,
Siebel Product Configurator, and Siebel Product Configurator Integration
Object.
Siebel Service Enterprise
Siebel Service Enterprise enables teams of customer service, sales, and
marketing professionals to ensure complete customer satisfaction by using
closed-loop, service request management capabilities. The base application
includes the Service Request Management, Account Management, Asset Tracking,
Contact Management, Activity Tracking, Message Broadcasting, Solution
Management, and Siebel Search modules.
Siebel Service Enterprise options, as of December 31, 1998, include Siebel
Service Assistant, Siebel Quality Management, and Siebel Mail Agent.
Siebel Field Service
Siebel Field Service extends upon Siebel's customer service solution and
provides field engineers with service functionality for entitlement/contracts
management, integration with other customer facing departments, dispatch and
scheduling, parts management, and repair center operations. Siebel Field
Service provides a complete solution for the mobile technician as well as the
connected service agent.
Siebel Field Service options, as of December 31, 1998, include Siebel
Service Assistant, Siebel Quality Management, and Siebel Mail Agent.
Siebel Call Center
Siebel Call Center provides blended Sales and Service functionality that
enables call center agents to provide both sales and customer service
assistance to customers. It accesses the power of Siebel Sales and Service
Enterprise to integrate all available customer information. This allows each
service request to result in additional sales opportunities, and provides
integrated sales and service histories for each opportunity. This base
application includes the Opportunity Management, Service Request Management,
Account Management, Asset Tracking, Contact Management, Activity Tracking,
Message Broadcasting, Solution Management and Siebel Search modules.
Siebel Call Center options, as of December 31, 1998, include all of the
options available for both Siebel Sales Enterprise and Siebel Service
Enterprise.
Siebel Marketing Enterprise
The Siebel Marketing Enterprise is designed to allow marketing
professionals, sales and service managers, and business analysts to monitor
overall company performance and the effectiveness of company programs and
2
activities. Siebel Marketing Enterprise is designed to extract information
from Siebel Sales Enterprise, Siebel Service Enterprise and Siebel Call Center
into a customer data mart, designed for fast data analysis. Siebel Marketing
Enterprise is designed to include a broad range of pre-built analyses about
customers, sales pipeline, customer service, competitors, campaigns, and
products, allowing managers and analysts to drill down into key operational
details.
General product options are typically available on any of the Siebel
Enterprise Base applications, and as of December 31, 1998, include Siebel Thin
Client, Siebel Encyclopedia, Siebel Office, Siebel Calendar, Siebel Reports,
Siebel Expense Reporting, Siebel Executive Information System, Siebel Order
Entry, Siebel Contracts, Siebel SmartScript, Siebel Remote, Siebel Anywhere,
Siebel Workflow Manager and Siebel Advanced Search.
Vertical Market Products
The Company's products are available in industry-specific versions designed
for the pharmaceuticals, consumer goods, telecommunications, insurance and
finance vertical markets.
During 1998, 1997, and 1996, the Company had product development expenses of
$42.7 million, $26.1 million, and $14.8 million, respectively.
Professional Services
Siebel provides implementation consulting and other technical services to
license customers through its worldwide professional services organization.
Customer Support and Training
Siebel offers a comprehensive, integrated family of global support programs,
including technical support, professional services and customer
communications, as well as extensive educational offerings.
Marketing and Sales
In the United States, the Company markets and sells its products and
services primarily through its direct sales and services organization. The
Company has sales and service professionals in 33 offices throughout the
United States. Outside the United States, the Company sells its product
primarily through its direct sales and services organization in the countries
where the Company has an office. The Company has sales and service
professionals in 22 offices outside of the United States. The Company also
markets and sell its products through distributors, primarily in Japan, Latin
America, South Africa, and Asia.
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. 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.
The Company's marketing and sales strategy includes the following key
elements:
Target Large Multi-National Customers in a Broad Range of Industries
The Company's products are intended to be deployed on a global basis, and
provide shared, up-to-date information for field sales, telemarketing,
telesales, marketing, customer service, and third party reseller sales
organizations. The Company has a considerable number of large, multinational
companies in it's customer base and intends to leverage its experience and
continue to target sales and marketing activities through it's direct sales
force to expand worldwide market acceptance of Siebel Enterprise Applications.
3
Maintain and Extend Advanced Technology Position
The Siebel Enterprise Applications utilize advanced information technology.
The Company intends to continue to commit substantial resources to maintain
and extend its advanced technology position.
Global Strategic Alliances
Long-term strategic business partnerships with leading technology providers
continue to serve as a core component of Siebel's strategy to maintain its
technology and market leadership, consistently deliver superior customer
satisfaction, and enable corporate growth.
Siebel has partnered with best-of-class business and systems integrators,
hardware, software, support, and training partners to ensure the successful
deployment of Siebel Enterprise Applications. These strategic global
partnerships with industry leaders help ensure that Siebel delivers
comprehensive solutions that completely meet our global customers' sales,
marketing, and customer service information systems needs.
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. 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, South America and North America. The Company has operations in
Australia, Brazil, Canada, Colombia, France, Germany, Italy, Japan, Mexico,
the Netherlands, Norway, Sweden, Switzerland, the United Kingdom, and the
United States, and has introduced, with Itochu, localized versions of Siebel
Enterprise Applications for the Japanese market. The Company also has
developed localized versions for several major European markets. The Company
is currently developing other localized versions, which will be released as
market conditions warrant.
During each of 1998, 1997, and 1996, no individual customer accounted for
more than 10% of revenues. Export sales for 1998, 1997, and 1996 were $88.2
million, $41.8 million and $7.7 million, respectively. This represented 30%,
27%, and 10% of total license revenues, respectively.
Acquisitions
The Company entered into two acquisitions in 1998, as described below:
In May 1998, the Company acquired Scopus Technology, Inc. ("Scopus") of
Emeryville, California, a leading provider of customer service, field service,
and call center software solutions. Under the terms of the agreement, each
outstanding share of Scopus common stock was exchanged for newly issued shares
of common stock of the Company. This resulted in the issuance of approximately
15.1 million additional shares of the Company's Common Stock. In addition, all
outstanding stock options of Scopus were converted into the right to acquire
the Company's Common Stock at the same exchange ratio with a corresponding
adjustment to the exercise price. The transaction was valued at approximately
$415 million and was accounted for as a pooling of interests.
In December 1998, the Company acquired all of the outstanding securities of
the privately-held 20*20, a provider of end-user training for the enterprise
relationship management software market. The transaction was valued at
approximately $6.0 million and was accounted for as a purchase.
4
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, marketing and customer 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
Many of the Company's customers and potential customers have in the past
attempted to develop sales, marketing and customer service information
systems, in-house either alone or with the help of systems integrators.
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 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. There can be
no assurance that the Company will be able to compete effectively against such
internal development efforts.
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 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. 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 Silknet (eBusiness
System), Rubric (EMA), Exchange Applications, Portera (ServicePort), Relavis
(OverQuota), Symantec (ACT!), Borealis Corporation (Arsenal), Saratoga Systems
(Avenue), Corepoint (Corepoint Field Sales, Corepoint Telesales), Epiphany
(e.4 System), Clarify Inc. (ClearSales, ClearSupport), ONYX (Customer Center),
IMA (EDGE), Applix (Enterprise), Dendrite International, Inc. (Force One),
Marketrieve Company (Marketrieve PLUS), Firstwave Technologies, Inc.
(Netgain), Broadvision, Inc. (One-To-One Application System), Oracle
Corporation (Oracle Field Sales Online, Oracle Service and Oracle Call, Front
Office Application), Pivotal Software, Inc. (Relationship), SAP AG (Sales
5
Force Automation Solution), SalesLogix (SalesLogix), Aurum (BaanFrontOffice)
(recently acquired by Baan Company N.V.), MEI (UniverSell) and The Vantive
Corporation (Vantive Enterprise) 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 of 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 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.
Employees
As of December 31, 1998, the Company had a total of 1,418 employees, of
which 1,181 were based in the United States, 7 in Australia, 1 in Brazil, 2 in
Colombia, 23 in Canada, 19 in France, 48 in Germany, 3 in Italy, 19 in Japan,
1 in Malaysia, 6 in Mexico, 10 in the Netherlands, 2 in Norway, 5 in Spain, 5
in Sweden, 2 in Switzerland and 84 in the United Kingdom. Of the total, 576
were engaged in sales and marketing, 254 were in product development, 456 were
in customer support and 132 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.
Executive Officers
The executive officers of the Company as of February 1, 1999, and their ages
as of such date, are as follows:
Name Age Position
---- --- --------
Thomas M. Siebel............. 46 Chairman, Chief Executive Officer and
President
Patricia A. House............ 44 Executive Vice President and Co-Founder
Howard H. Graham............. 51 Senior Vice President, Finance and
Administration and Chief Financial Officer
Craig D. Ramsey.............. 52 Senior Vice President, Worldwide Operations
R. David Schmaier............ 35 Senior Vice President, Products
Myron Saranga................ 61 Senior Vice President, Engineering
6
Thomas M. Siebel has served as Chairman, Chief Executive Officer, and
President of the Company since its inception in July 1993.
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 Co-Founder, and from July 1993 to February 1996,
she served as Senior Vice President of Marketing.
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 Senior Vice President and
Chief Financial Officer of Informix, Inc.
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.
R. David Schmaier has served as Senior Vice President, Products since March
1994.
Myron Saranga has served as Senior Vice President, Engineering since October
1998. From 1993 to 1998, Mr. Saranga served as Senior Vice President of
Research and Development for Informix, Inc
The Company's current officers, directors and affiliated entities together
beneficially owned approximately 31.1% of the outstanding shares of Common
Stock as of December 31, 1998. In particular, Thomas M. Siebel, the Company's
Chairman and Chief Executive Officer, owned approximately 18.6% of the
outstanding shares of Common Stock as of December 31, 1998. 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.
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 2. Properties
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The Company's principal administrative, sales, marketing, support and
research and development facilities are located in San Mateo, California,
pursuant to a lease which expires in August 2008. The Company currently
occupies a number of domestic and international sales and support offices.
Item 3. Legal Proceedings
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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. On May 15,
1998, a jury returned verdicts in favor of Mr. Siebel and against the Company
for an immaterial amount. Both the plaintiff and the Company have filed
notices of appeal. The Company intends to pursue the appeal vigorously and
believes that the ultimate outcome of the action 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.
7
In March 1998, a purported class action complaint was filed against the
Company, Scopus Technology, Inc. ("Scopus") and the members of the Scopus
board of directors in the Superior Court of the State of California for the
County of Alameda by a person claiming to be a Scopus stockholder. Scopus
became a wholly owned subsidiary of the Company on May 18, 1998, upon the
merger of a subsidiary of the Company with and into Scopus (the "Merger"). The
complaint alleges that the Scopus board of directors breached its fiduciary
duties to the shareholders of Scopus in connection with its approval of the
Merger. The complaint further alleges that the Company aided and abetted the
alleged breach of fiduciary duty. The complaint seeks monetary and other
relief. On October 26, 1998, the court sustained defendants' demurrers to the
complaint, with leave to amend. Defendants' demurrers to the amended complaint
are pending. The Company believes the suit is completely without merit and
intends to continue to defend itself vigorously, although there can be no
assurance as to the outcome of such litigation.
Item 4. Submission of Matters to a Vote of Security Holders
- -----------------------------------------------------------
Not Applicable.
PART II
Item 5. Market for Registrant's Common Stock and Related Stockholder Matters
- -----------------------------------------------------------------------------
(a) The Company's common stock is traded on the Nasdaq National Market under
the symbol "SEBL." The following high and low sales prices were reported by
Nasdaq in each quarter during the last two years:
High Low
------ -----
Quarter Ended March 31, 1997................................... $12.75 $7.50
Quarter Ended June 30, 1997.................................... 16.13 6.63
Quarter Ended September 30, 1997............................... 21.28 15.16
Quarter Ended December 31, 1997................................ 24.50 16.38
Quarter Ended March 31, 1998................................... 30.75 20.50
Quarter Ended June 30, 1998.................................... 32.25 21.94
Quarter Ended September 30, 1998............................... 35.88 18.75
Quarter Ended December 31, 1998................................ 33.94 16.56
As of December 31, 1998, the Company had approximately 402 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.
(b) The effective date of the Company's first registration statement, filed
on Form S-1 under the Securities Act of 1933 (No. 333-12061) relating to the
Company's initial public offering of its Common Stock, was June 27, 1996.
There has been no change to the disclosure contained in the Company's report
on Form 10-Q for the quarter ended March 31, 1998 regarding the use of
proceeds generated by the Company's initial public offering.
8
Item 6. Selected Financial Data
- -------------------------------
The acquisition of Scopus Technology, Inc. ("Scopus") has been accounted for
as a pooling of interests. Accordingly, the financial statements of Siebel
have been restated to include the financial position and results of operations
of Scopus for all periods presented. Prior to the merger with Siebel, Scopus
used a fiscal year ending March 31.
Year Ended December 31,
-------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- ------- -------
(in thousands, except per share data and
employees)
Operating Data
Net revenues................... $391,539 $207,628 $101,362 $35,834 $15,300
Operating income (loss)........ $ 66,847 $ 6,619 $ 17,426 $ 2,263 $ (293)
Net income (loss).............. $ 42,875 $ (1,187) $ 12,861 $ 1,802 $ (793)
Diluted net income (loss) per
share......................... $ 0.43 $ (0.01) $ 0.16 $ 0.03 $ --
Basic net income (loss) per
share......................... $ 0.49 $ (0.01) $ 0.18 $ 0.03 $ --
Total assets................... $441,946 $268,164 $206,945 $57,167 $12,627
Mandatorily redeemable
preferred stock............... $ -- $ -- $ -- $ -- $ 1,400
Total equity................... $290,628 $209,368 $172,431 $42,884 $ 7,089
Employees...................... 1,418 907 471 216 112
Item 7. Management's Discussion and Analysis of Financial Condition and
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Results of Operations
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Overview
Siebel Systems, Inc. is the market leader in enterprise-class sales,
marketing and customer service information systems for organizations focused
on increasing sales, marketing and customer service effectiveness in field
sales, customer service, telesales, telemarketing, call centers, and third-
party resellers. The Company designs, develops, markets, and supports Siebel
Enterprise Applications, a leading web-based application software product
family designed to meet the sales, marketing and customer service 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,
marketing and customer service processes. Unlike previous automation efforts,
which have focused on decreasing expenses, sales, marketing and customer
service information systems focus primarily on increasing revenues.
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 and support.
This Report contains forward looking statements that involve known and
unknown risks, uncertainties and other factors which may cause the actual
results, performance or achievements of the Company, or industry results, to
be materially different from any future results, performance or achievements
expressed or implied by such forward-looking statements. Some of these factors
are discussed in "Risk Factors" below.
9
Results of Operations
The following table sets forth statement of operations data for the three
years ended December 31, 1998 expressed as a percentage of total revenues:
Year Ended December 31,
------------------------
1998 1997 1996
------- ------- -------
Revenues:
Software.......................................... 74.3 75.6 79.3
Professional services, maintenance and other...... 25.7 24.4 20.7
------- ------- -------
Total revenues.................................. 100.0 100.0 100.0
Cost of revenues:
Software.......................................... 1.4 2.1 2.2
Professional services, maintenance and other...... 15.7 13.9 13.0
------- ------- -------
Total cost of revenues.......................... 17.1 16.0 15.2
------- ------- -------
Gross margin.................................... 82.9 84.0 84.8
Operating expenses:
Product development............................... 10.9 12.6 14.6
Sales and marketing............................... 44.2 47.5 43.4
General and administrative........................ 7.3 8.2 9.6
Merger-related expenses........................... 3.4 12.5 --
------- ------- -------
Total operating expenses........................ 65.8 80.8 67.6
------- ------- -------
Operating income................................ 17.1 3.2 17.2
Other income, net................................... 1.6 2.6 3.1
------- ------- -------
Income before income taxes...................... 18.7 5.8 20.3
Income taxes........................................ 7.7 6.3 7.6
------- ------- -------
Net income (loss)............................... 11.0 (0.5) 12.7
======= ======= =======
Revenues
Software. License revenues increased to $290,890,000 for the year ended
December 31, 1998 from $156,971,000 and $80,413,000 for the years ended
December 31, 1997 and 1996, respectively. License revenues as a percentage of
total revenues were 74% in the fiscal 1998 period as compared to 76% in the
fiscal 1997 period and 79% in the fiscal 1996 period. License revenues
increased in absolute dollar amount during these periods from the respective
prior year periods due to an increase in the number of licenses of Siebel
applications sold to new and existing customers and also due to licenses of
new modules, released with the latest version of Siebel applications, to
existing users of Siebel base applications. This increase in the number of
licenses was primarily due to continued demand by new and existing customers
for products in the Siebel applications family both in the United States and
internationally. During 1998, approximately $20,000,000 of license revenue was
attributable to products developed from technology acquired from Nomadic
Systems, Inc. ("Nomadic") and InterActive WorkPlace, Inc. ("InterActive"). The
Company expects that license revenues will continue to increase in absolute
dollars, but will remain the same or decrease as a percentage of total
revenues as the Company's maintenance revenues continue to grow as a result of
increases in the installed base of customers on maintenance.
Professional Services, Maintenance and Other. Professional services,
maintenance and other revenues increased to $100,649,000 for the year ended
December 31, 1998 from $50,657,000 and $20,949,000 for the years ended
December 31, 1997 and 1996, respectively, and as a percentage of total
revenues were 26% in the fiscal 1998 period as compared to 24% and 21% in the
fiscal 1997 and 1996 periods, respectively. These increases in absolute dollar
amount were due to growth in the Company's consulting business and growth in
the
10
installed base of customers with a maintenance component and maintenance
renewals from products licensed in prior periods. First-year maintenance is
typically sold with the related software license. Revenue related to such
maintenance is deferred based on vendor-specific objective evidence of fair
value and amortized over the term of the maintenance contract, typically
twelve months. The Company expects that professional services, maintenance and
other revenues will remain the same or increase as a percentage of total
revenues due to increased maintenance revenues derived from the Company's
growing installed base and due to the Company's expansion of its consulting
organization to meet anticipated customer demands in connection with product
implementation.
A relatively small number of customers account for a significant percentage
of the Company's license revenues. For 1998, 1997 and 1996, sales to the
Company's ten largest customers accounted for 22%, 27% and 28% of total
revenues, respectively. The Company expects that licenses of its products to a
limited number of customers will continue to account for a large percentage of
revenue for the foreseeable future.
The Company markets its products in the United States through its direct
sales force and internationally through its sales force and distributors
primarily in Japan, Latin America, South Africa and Asia. International
revenues accounted for 30%, 27% and 10% of license revenues in 1998, 1997 and
1996, respectively. The Company is increasing its international sales force
and is seeking to establish distribution relationships with appropriate
strategic partners and expects international revenues will continue to account
for a substantial portion of total revenues in the future.
Cost of Revenues
Software. Cost of software license revenues includes third-party software
royalties, product packaging, documentation and production. Cost of license
revenues through December 31, 1998 has averaged less than 3% of software
license revenues. All costs incurred in the research and development of
software products and enhancements to existing products have been expensed as
incurred, and, as a result, cost of license revenues includes no amortization
of capitalized software development costs. These costs are expected to remain
the same or increase as a percentage of total revenues.
Professional Services, Maintenance and Other. Cost of professional services,
maintenance and other revenues consist primarily of personnel, facilities and
systems costs incurred in providing customer support. Cost of professional
services, maintenance and other revenues increased to $61,547,000 for the year
ended December 31, 1998 from $28,787,000 and $13,183,000 for the years ended
December 31, 1997 and 1996, respectively, and as a percentage of professional
services, maintenance and other revenues were 61% for the year ended December
31, 1998 as compared to 57% in fiscal 1997 and 63% in fiscal 1996. The
increases in the absolute dollar amount reflect the effect of fixed costs
resulting from the Company's expansion of its maintenance and support
organization and growth in the Company's consulting business. The Company
expects that professional services, maintenance and other costs will continue
to increase in absolute dollar amount as the Company expands both its customer
support organization to support a growing installed base and its consulting
organization to meet anticipated customer demands in connection with product
implementation. These costs are expected to remain the same or increase as a
percentage of total revenues.
Operating Expenses
Product Development. Product development expenses include expenses
associated with the development of new products, enhancements of existing
products and quality assurance activities, and consist primarily of employee
salaries, benefits, consulting costs and the cost of software development
tools. Product development expenses increased to $42,698,000 for the year
ended December 31, 1998 from $26,105,000 and $14,775,000 for the years ended
December 31, 1997 and 1996, respectively, and decreased as a percentage of
total revenues to 11% in the fiscal 1998 period from 13% and 15% in the fiscal
1997 and 1996 periods, respectively. 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
11
devote substantial resources to product development. The Company expects
product development expenses to increase in absolute dollar amount but remain
at a similar percentage of total revenues as in 1998. The Company considers
technological feasibility of its software products to have been reached upon
completion of a working model that has met certain performance criteria. The
period between achievement of technological feasibility and general release of
a software product is typically very short, and development costs incurred
during that period have not been material. Accordingly, the Company has not
capitalized any software development costs to date.
Sales and Marketing. Sales and marketing expenses consist primarily of
salaries, commissions and bonuses earned by sales and marketing personnel,
field office expenses, travel and entertainment and promotional expenses.
Sales and marketing expenses increased to $172,946,000 for the year ended
December 31, 1998 from $98,748,000 and $44,044,000 for the years ended
December 31, 1997 and 1996, respectively, and as a percentage of total
revenues sales and marketing expenses were 44% in 1998, from 48% and 43% in
the fiscal 1997 and 1996 periods, respectively. The increases in the dollar
amount of sales and marketing expenses reflect primarily the hiring of
additional sales and marketing personnel, costs associated with expanded
promotional activities, and indirect merger-related costs, such as corporate
sales training and marketing programs. The Company expects that sales and
marketing expenses will continue to increase in absolute dollar amount as the
Company continues to expand its sales and marketing efforts, establishes
additional sales offices in the United States and internationally and
increases promotional activities. These expenses are expected to remain at a
similar percentage of total revenues as in 1998.
General and Administrative. General and administrative expenses consist
primarily of salaries and occupancy costs for administrative, executive and
finance personnel. General and administrative expenses increased to
$28,401,000 for the year ended December 31, 1998 from $16,938,000 and
$9,737,000 for the years ended December 31, 1997 and 1996, respectively, and
as a percentage of total revenues were 7% in the fiscal 1998 period as
compared to 8% and 10% in the fiscal 1997 and 1996 periods, respectively. The
increases in the absolute dollar amount of general and administrative expenses
were primarily due to increased staffing and associated expenses necessary to
manage and support the Company's increased scale of operations. The Company
believes that its general and administrative expenses will continue to
increase in absolute dollar amount as a result of the continued expansion of
the Company's administrative staff and facilities to support growing
operations. The Company anticipates that its general and administrative
expenses as a percentage of total revenues should remain at a similar
percentage as in 1998.
Merger-Related Expenses. In connection with the merger with Scopus, the
Company incurred direct merger-related expenses of approximately $13,500,000,
comprised primarily of investment bankers, attorneys, accountants and other
professional fees of $9,100,000, duplicate facilities and equipment of
$3,100,000 and other miscellaneous expenses of $1,300,000. The Company also
incurred indirect merger-related expenses of approximately $1,800,000 for
joint sales training and merger-related marketing costs, which are included
within sales and marketing expenses.
The Company incurred merger costs of approximately $3,300,000 in the third
quarter of 1997 in connection with Scopus' planned merger with Clear With
Computers, Inc. The merger plan was terminated early in the fourth quarter of
1997.
On October 1, 1997, the Company completed its purchase of InterActive, a
developer of intranet-based business intelligence software technology that has
been incorporated into the Siebel InterActive product. The acquisition was
accounted for by the purchase method of accounting. The Company recorded a
charge to income of $14,017,000, or $0.17 per diluted share, pursuant to an
allocation of the purchase price by an independent appraiser, as a write-off
of acquired research and development. Purchased in-process research and
development is related to the completion of InterActive's data integration,
filtering and formatting technology and its integration into the Company's
products. At the time of acquisition, a prototype of InterActive's product
existed and was in limited trials, however, the prototype was not stable or
sufficiently developed to be scalable on an
12
enterprise-wide basis. InterActive's technology was completed, at a cost of
approximately $400,000, and incorporated as a separate module into the Siebel
98 product suite, which was released in June 1998. The Company estimated that
technology was approximately 75% complete as of the acquisition date. At that
date, the only identifiable asset acquired was the technology under
development. Accordingly, essentially all of the excess purchase price over
net assets acquired, except for amounts assigned to net current assets, fixed
assets and workforce-in-place, was assigned to in-process research and
development.
The valuation of acquired research and development was prepared using the
income approach and contemplated that sales of products incorporating
InterActive's technology would be $11,500,000 in 1998, increasing to
$35,000,000 in 2000, and declining significantly thereafter. Revenue increases
were based upon the historical growth rate of software sales for the ERM
market and the Company. Operating costs as a percentage of revenue ranged from
56% in 1998 to 47% in 2000 based upon the Company's normal operating margin.
Operating cash flows were reduced by an expected effective tax rate of 38%
consistent with the Company's effective tax rate. Net cash flows were
discounted to their present value at the acquisition date using an after-tax
risk-adjusted discount rate of 30%. The Company believes this discount rate is
consistent with that required by venture capitalists for investments in
unproven but partially developed software products. Through the end of 1998,
total revenues from Siebel Interactive were approximately $5,000,000; however,
the Company is unable to quantify the effect of Siebel Interactive as a
competitive differentiator. The Company does not track selling, general and
administrative costs by product but believes the incremental costs associated
with selling and distributing Siebel Interactive were substantially lower than
those used in the valuation due to synergies associated with selling the
product as a separate module in the Siebel 98 product suite. If the Company is
unable to continuously upgrade the Siebel Interactive product or existing and
future customers do not elect to purchase this module, the Company's ability
to recover the value assigned to the acquired research and development will be
impaired and revenue and profitability will be adversely affected.
On November 1, 1997, the Company completed its purchase of Nomadic, a
provider of innovative business solutions to pharmaceutical sales forces. The
acquisition was accounted for by the purchase method of accounting. Technology
acquired from Nomadic has been incorporated into the Siebel Pharma product.
The Company recorded a charge to income of $8,723,000 or $0.10 per diluted
share, pursuant to an allocation of the purchase price by an independent
appraiser, as a write-off of acquired research and development. The appraisal
of the acquired research and development was based upon the present value of
forecasted operating cash flows from the technology acquired, giving effect to
the stage of completion at the acquisition date. These forecasted cash flows
were then discounted at a rate commensurate with the risk involved in
completing the acquired technology. The forecasted cash flows assumed
inclusion of the product developed from acquired technology into the existing
Siebel product suite. The purchased in-process research and development
expense related to completion of Nomadic's second generation pharmaceutical
sales force automation product. This product was completed and enterprise-wide
deployment to end-user customers commenced in March 1998. Much of the
functionality was incorporated into the Company's Pharma product, which was
released in June 1998. At the time of the acquisition, Nomadic had a first-
generation product at a limited number of customers, with a very small user
base. There were a considerable number of uncertainties as to increasing the
product's scalability for deployment on an enterprise-wide basis, improving
the stability of the application and identifying and fixing bugs. The Company
allocated limited excess purchase price over net assets acquired to net
current assets, fixed assets and workforce-in-place. The majority of the
excess purchase price was allocated to in-process research and development and
other intangible assets (goodwill) based upon the expected cash flows from
Nomadic's existing product and the product under development, giving
consideration to the stage of completion of the technology under development
at the acquisition date. This technology was completed, at a cost of
approximately $1,300,000, for enterprise-wide release in March 1998.
The valuation of acquired research and development was prepared using the
income approach and contemplated that sales of products incorporating
Nomadic's technology would be $11,500,000 in 1998, increasing to $35,000,000
in 2000, and declining significantly thereafter. Revenue increases were based
upon the historical growth rate of software sales for the ERM market and the
Company. Operating costs as a percentage
13
of revenue were estimated at 70%, based upon the Company's normal operating
margin. Operating cash flows were reduced by an expected effective tax rate of
39% consistent with the Company's effective tax rate. Net cash flows were
discounted to their present value at the acquisition date using an after-tax
risk-adjusted discount rate of 25%. The Company believes this discount rate is
consistent with that required by venture capitalists for investments in
unproven but partially developed software products. Through the end of 1998,
total revenues from products incorporating the Nomadic technology under
development at the acquisition date were approximately $24,000,000. Although
the Company does not track selling, general and administrative costs by
product, because these products are sold as vertical ERM solutions for the
pharmaceutical industry, the Company believes the operating margin is similar
to the Company's consolidated operating margin. If the Company is unable to
continuously upgrade the Pharma product or superior products are released by
competitors, the Company's ability to recover the value assigned to the
acquired research and development will be impaired and revenue and
profitability will be adversely affected.
Operating Income and Operating Margin
Operating income increased to $66,847,000 for the year ended December 31,
1998 from $6,619,000 for the year ended December 31, 1997 and $17,426,000 for
the year ended December 31, 1996 and operating margin was 17% in the fiscal
1998 period, as compared with 3% and 17% in the fiscal 1997 and 1996 periods,
respectively. Excluding merger-related expenses, operating income increased to
$82,131,000 for the year ended December 31, 1998 from $32,657,000 and
$17,426,000 for the years ended December 31, 1997 and 1996, respectively, and
operating margin was 21% in the fiscal 1998 period as compared to 16% and 17%
in the fiscal 1997 and 1996 periods, respectively. These increases in
operating income and margin, excluding merger-related expenses, were due to
increases in license revenues without a proportional increase in cost,
particularly costs associated with the hiring of new personnel.
Other Income, Net
Other income, net, is primarily comprised of interest income earned on the
Company's cash and cash equivalents and short-term investments and reflects
earnings on increasing cash and cash equivalents and short-term investment
balances.
Provision for Income Taxes
Income taxes are comprised primarily of federal and state taxes. The
provision for income taxes was $30,255,000, $13,180,000, and $7,683,000 in
1998, 1997, and 1996, respectively. The provision for income taxes as a
percentage of pretax income was 41%, 110% and 37%, respectively. The tax rate
in 1997 was higher than the rates in 1998 and 1996 primarily due to non-
deductible items related to acquisitions. The Company expects its effective
tax rate in 1999 to be approximately 37%, excluding the effect of non-
deductible costs such as merger-related expenses.
Net Income (Loss)
The Company had net income of $42,875,000 for the year ended December 31,
1998 compared to a net loss of $1,187,000 and net income of $12,861,000 for
the years ended December 31, 1997 and 1996, respectively. Net income per share
was $0.43 per diluted share in fiscal 1998, compared with a net loss of $0.01
and net income of $0.16 in the fiscal 1997 and 1996 periods, respectively.
Excluding merger-related expenses, the Company had pro-forma net income of
$55,701,000 for the year ended December 31, 1998 compared to net income of
$23,712,000 and $12,861,000 for the years ended December 31, 1997 and 1996,
respectively. Pro forma net income per diluted share was $0.56 per share in
fiscal 1998, compared with pro forma net income of $0.25 and $0.16 in the
fiscal 1997 and 1996 periods, respectively. Pro-forma net income as a
percentage of total revenues was 14% in the year ended December 31, 1998
compared to 11% and 13% in the years ended December 31, 1997 and 1996,
respectively.
14
Liquidity and Capital Resources
The Company's cash, cash equivalents and short-term investments increased to
$231,849,000 as of December 31, 1998 from $162,201,000 as of December 31,
1997, representing approximately 52% and 60% of total assets, respectively.
This increase was primarily attributable to cash flows from operations and, to
a lesser extent, sale of common stock through the Company's stock option and
stock purchase plans. The increase was partially offset by increases in
accounts receivable, purchases of property and equipment and short-term
investments. The Company has generated positive cash flow from operating
activities in 1998, 1997 and 1996.
Of the approximately $39,200,000 of purchases of property and equipment
during 1998, approximately $14,000,000 related to computer and networking
equipment to support the Company's introduction of SiebelNet. SiebelNet is a
family of application hosting, outsourcing and training services designed to
help customers quickly deploy and easily manage their sales, marketing and
customer service systems.
The Company has used fully serviced office suites on a month-to-month rental
basis to establish its presence in new locations. As these locations expand,
the Company expects to transition more of the office suites to leased space.
This transition will involve build-out of tenant improvements, acquisition of
furniture and fixtures, and other capital costs, which were not incurred in
connection with the use of fully serviced office suites. The Company has
already built-out leased facilities, both domestically and internationally,
and expects this trend to continue.
Capital expenditures of the nature described above are expected to increase
during 1999 and 2000.
The Company believes that the anticipated cash flows from operations, cash,
cash equivalents and short-term investments, will be adequate to meet its cash
needs for working capital and capital expenditures for at least the next
twelve months.
Recent Developments
On May 18, 1998, the Company completed the acquisition of Scopus of
Emeryville, California, a leading provider of customer service, field service,
and call center software solutions. Under the terms of the agreement, each
outstanding share of Scopus common stock was exchanged for newly issued shares
of common stock of the Company. This resulted in the issuance of approximately
15.1 million additional shares of the Company's Common Stock. In addition, all
outstanding stock options of Scopus were converted into the right to acquire
the Company's Common Stock at the same exchange ratio with a corresponding
adjustment to the exercise price. In connection with the merger, the Company
incurred direct merger-related expenses of approximately $13,500,000,
consisting of fees for investment bankers, attorneys, accountants and other
professional fees of $9,100,000, integration charges related to duplicate
facilities and equipment of $3,100,000 and other miscellaneous expenses of
$1,300,000. The Company also incurred indirect merger-related expenses of
approximately $1,800,000 for joint sales training and merger-related marketing
costs, which are included within sales and marketing expenses.
The transaction has been accounted for as a pooling of interests.
Accordingly, the financial statements of Siebel have been restated to include
the financial position and results of operations of Scopus for all periods
presented. Prior to the merger with Siebel, Scopus ended its fiscal year on
March 31. The restated financial statements as of December 31, 1997, and for
prior periods, include Siebel's results of operations for the calendar periods
noted and Scopus' results of operations for the fiscal periods ending three
months later. Beginning January 1, 1998, the reporting periods of Siebel and
Scopus were conformed, and results of operations were combined for the
calendar periods presented. As a result of conforming the reporting periods of
Siebel and Scopus, the operating results of Scopus for the three month period
ended March 31, 1998 are included in the restated financial statements for
both 1997 and 1998. Scopus revenues and net income for the three-month period
ended March 31, 1998 were $27,100,000 and $1,500,000, respectively. Net income
for this period of approximately $1,500,000 is reflected as a reduction of
opening retained earnings in the restated 1998 financial statements.
15
Year 2000 Preparedness
Many existing computer programs and systems use only two-digit fields to
identify the year, e.g. 85=1985, and they are unable to process date and time
information between the twentieth and twenty-first centuries. Accordingly,
computer programs and software may need to be modified prior to the year 2000
in order to remain functional. Failure to complete the necessary modifications
could cause a disruption or failure of such program and system.
The Company's Y2K initiative is being managed by a team of internal staff
and third-party consultants specializing in Y2K issues. The team's activities
are designed to identify potential Y2K problems and to ensure that there is no
adverse effect on our core business operations and that transactions with
clients, suppliers and financial institutions are fully supported. The
Company's efforts have focused on three areas: (i) the Company's products,
(ii) internal operating systems and (iii) interfaces with third-party systems.
. Products. The Company has put in place a certification program to
verify the Y2K compliance of its products. Beginning with version 4.0
(Siebel 98), the Company's programs have been designed to be Y2K
compliant. The Company has applied a number of test approaches and
criteria to each of its products beginning with Siebel 98 and
believes that all such products are Y2K compliant. While we believe
that most of our currently developed and actively marketed products
are Y2K compliant for significantly all functionality, our software
products could contain errors or defects relating to Y2K. The Company
has advised certain of its customers that internal testing of Y2K
compliance should be conducted to ensure that the operations managed
by Siebel products continue without disruption. If such modifications
and conversions are not made, or are not completed in a timely
manner, the Y2K issue could have a material adverse impact on our
operations. The costs incurred to test the Company's products for Y2K
compliance were incurred as normal product development expenses. Any
additional expenses are expected to be minimal.
. Internal Operating Systems. The Company has implemented a plan to
test all internal operating systems, such as computer hardware and
software, telephone/PBX systems, fax machines, facilities systems
such as building access and other miscellaneous systems on a
worldwide basis. The Company is approaching its Y2K internal
readiness program in the following three phases: (i) assessment, (ii)
planning and (iii) implementation. These phases include such
individual steps as taking an inventory of the Company's operating
systems prioritized by risk, identifying failure dates, defining a
solution strategy, estimating repair costs, identifying specific
tasks necessary to ensure readiness, determining resource
requirements and allocations, and finally, testing and fixing the
operating systems as well as putting in place contingency plans for
operating systems that have a high impact on the Company's business.
The Company believes that, with modifications to existing software
and conversions to new software, the Y2K issue will not pose
significant operational problems to our internal operating systems.
As of March 1999, the implementation phase is underway. However, if
such modifications and conversions are not made, or are not completed
in a timely manner, the Y2K issue could have a material adverse
impact on our operations. Costs incurred to date and expected costs
to complete this process are not expected to be material.
. Third-Party Systems. The Company has developed a Y2K process for
dealing with its key suppliers, distributors, vendors and system
integrators and other partners. The Company has been in contact with
its key third-party relationships regarding their Y2K compliance. The
Company has received responses from its critical third-party
relationships, most of whom have stated that they expect to address
all of their significant Y2K issues in a timely manner. The Company
is working to identify and analyze the most reasonably likely worst
case scenarios for third party relationships affected by Y2K. These
scenarios could include possible infrastructure collapse, the failure
of water and power supplies, major transportation disruptions and
failures of communications or financial systems--any of which could
have a material adverse effect on the Company's ability to deliver
its products and services to its customers. While the Company has
contingency plans in place to address most issues under its control,
an infrastructure problem outside of its control could result in a
delay
16
in product shipments, depending on the nature and severity of the
problems. As of February 1, 1999, the Company has initiated the process
of analyzing its third-party systems and expects to complete the
process by the fourth quarter. However, if such analyses and required
modifications, if any, are not made, or are not completed in a timely
manner, the Y2K issue could have a material adverse impact on our
operations. Costs incurred to date and expected costs to complete this
process are not expected to be material.
Although the Company has spent a large amount of time and resource to
address potential Y2K problems, there is no assurance that the Company will be
successful in its efforts to identify and address all Y2K issues. Even if the
Company acts in a timely manner to complete all of its assessments and planned
solutions, some problems may not be identified or corrected in time to prevent
material adverse consequences to the Company. The discussion above regarding
estimated completion dates, costs, risks and other forward-looking statements
regarding Y2K is based on the Company's best estimates given information that
is currently available and is subject to change. As the Company continues to
progress with its Y2K initiatives, it may discover that actual results will
differ materially from these estimates. See "Risk Factors--Year 2000 Problems
may cause an Interruption in our Business".
Risk Factors
A Limited Operating History Upon Which to Evaluate our Business. We began
operations in July 1993. We first shipped our Siebel Sales Enterprise product
in April 1995 and our Siebel Service Enterprise product in December 1996.
Subsequent versions of these products were first shipped in 1996 and 1997.
Accordingly, we have a limited operating history upon which you may evaluate
our business and prospects. You should evaluate our prospects in light of the
risks, expenses and uncertainties that companies in their early stage of
development frequently encounter.
Net Revenue and Operating Results may Fluctuate. Our net revenue and
operating results may fluctuate significantly because of a number of factors,
many of which are outside of our control. These factors include:
. Level of product and price competition;
. Length of our sales cycle and customer purchasing patterns;
. The size and timing of individual license transactions;
. Delay or deferral of customer implementations of our products;
. Success in expanding our customer support organization, direct sales
force and indirect distribution channels;
. Timing of new product introductions and product enhancements;
. Appropriate mix of products and services sold;
. Levels of international sales;
. Activities of and acquisitions by competitors;
. Timing of new hires and the allocation of our resources;
. Changes in the economy and foreign currency exchange rates; and
. Our ability to develop and market new products and control costs.
One or more of the foregoing factors may cause our operating expenses to be
disproportionately high during any given period or may cause our net revenue
and operating results to fluctuate significantly. Based on the preceding
factors, we may experience a shortfall in revenue or earnings or otherwise
fail to meet public market expectations, which could materially adversely
affect our business, financial condition and the market price of our common
stock.
17
Quarterly Operating Results may Fluctuate. Our net revenue and operating
results may vary drastically from quarter to quarter. The main factors, which
may affect these fluctuations, are:
. The discretionary nature of our customer's purchase and budget
cycles;
. The size and complexity of our license transactions;
. The potential delays in recognizing revenue from license
transactions;
. The timing of new product releases;
. Seasonal variations in operating results; and
. Variations in the fiscal or quarterly cycles of our customers.
Each customer's decision to implement our products and services is
discretionary, involves a significant commitment of resources and is subject
to their budget cycles. In addition, the timing of license revenue is
difficult to predict because of the length of our sales cycle, which has
ranged to date from two to eighteen months. We base our operating expenses on
anticipated revenue trends. Because a high percentage of these expenses are
relatively fixed, a delay in recognizing revenue from license transactions
could cause significant variations in operating results from quarter to
quarter and could result in operating losses. If these expenses precede, or
are not subsequently followed by, increased revenues, our operating results
could be materially and adversely affected. Although we have not experienced
significant seasonal variations in operating results, such variations could
develop in the future.
As a result of these and other factors, revenues for any quarter are subject
to significant variation, and we believe that period-to-period comparisons of
our results of operations are not necessarily useful. You should not rely on
these comparisons as indications of future performance. It is likely that our
future quarterly operating results from time to time will not meet the
expectations of market analysts or investors, which would likely have an
adverse effect on the price of our common stock.
Reliance on Strategic Relationship with Systems Integrators. We have
established strategic relationships with a number of organizations that we
believe are important to our sales, marketing and support activities and the
implementation of our products. We believe that our relationships with these
organizations provide marketing and sales opportunities for our direct sales
force and expand the distribution of our products. These relationships allow
us to keep pace with the technological and marketing developments of major
software vendors and provide us with technical assistance for our product
development efforts.
In particular, we have established a non-exclusive strategic relationship
with Andersen Consulting, one of our principal stockholders. We have also
entered into significant relationships with other third-party systems
integrators such as PriceWaterhouseCoopers and Deloitte Consulting. A
significant portion of our revenues have historically been derived from
customers for whom Andersen Consulting, or another systems integrator with
which we have a significant relationship, have been engaged to provide system
integration services. Any deterioration of our relationship with these
significant third-party systems integrators could have a material adverse
effect on our business, financial condition and results of operations. We also
have relationships with Microsoft Corporation, Compaq Computer Corporation,
Itochu Corporation and Itochu Techno-Science Corporation, among others. Our
failure to maintain existing relationships, or to establish new relationships
in the future, could have a material adverse effect on our business, results
of operations and financial condition.
Our current and potential customers may also rely on third-party system
integrators to develop, deploy and/or manage Siebel Enterprise Applications.
If we do not adequately train a sufficient number of system integrators, or if
these integrators do not have or devote the resources necessary to implement
our products, our business, operating results and financial condition could be
materially and adversely affected.
The Internet Presents Unique Risks. The Siebel Enterprise Applications
communicate through public and private networks over the Internet. The success
of our products may depend, in part, on our ability to continue
18
developing products which are compatible with the Internet. We cannot predict
with any assurance whether the Internet will 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 our
products and the introduction of new products. We may not be able to
effectively compete in the Internet-related products and services market.
Critical issues concerning the commercial use of the Internet, including
security, demand, reliability, cost, ease of use, accessibility, quality of
service and potential tax or other government regulation, remain unresolved
and may affect the use of the Internet as a medium to support the
functionality of our products and distribution of our software. If these
critical issues are not favorably resolved, our business, operating results
and financial condition could be materially and adversely affected.
A Competitive and Rapidly Changing Market. The market for client/server
application software is relatively new, highly competitive and rapidly
changing. We market our products only to customers who have migrated or are in
the process of migrating their enterprise computing systems to client/server
computing environments. Our future financial performance will partly depend on
the continued growth of organizations successfully adopting client/server-
computing environments. If the client/server market fails to grow or grows
more slowly than we currently anticipate, our business, operating results and
financial condition could be materially and adversely affected.
The market for customer information software is also highly competitive and
rapidly changing. Our future financial performance will largely depend on
growth in the number of customer information applications developed for use in
client/server environments. If the customer information software market fails
to grow or grows more slowly than we currently anticipate, our business,
operating results and financial condition would be materially and adversely
affected.
Customers may not Successfully Implement our Products. Many of our customers
purchase and implement our products in phases. Our customers frequently deploy
our products to large numbers of sales, marketing and customer service
personnel. These end-users may not accept our products. Our products are also
being deployed on a variety of computer hardware platforms and used with a
number of third-party software applications and programming tools. This use
may present significant technical challenges, particularly as large numbers of
personnel attempt to use our product concurrently. If existing customers have
difficulty further deploying Siebel Enterprise Applications or for any other
reason are not satisfied with Siebel Enterprise Applications, our business,
operating results and financial condition could be materially and adversely
affected.
A Limited Number of Products for our License Revenues. In 1998, a
substantial majority of our license revenues were attributable to sales of
Siebel Sales Enterprise, Siebel Service Enterprise and related products. We
expect that such products and related consulting, maintenance and training
services will continue to account for a substantial majority of our future
revenues. As a result, factors adversely affecting the pricing of or demand
for such products, such as competition or technological change, could have a
material adverse effect on our business, operating results and financial
condition.
The Length of Time Required to Engage a Client and to Implement Our Products
may be Lengthy and Unpredictable. The timing of the sales and implementation
of our products and services is lengthy and not predictable with any degree of
accuracy. You should not rely on prior sales and implementation cycles as any
indication of future cycles.
The license of our software products is often an enterprise-wide decision by
prospective customers and generally requires us to provide a significant level
of education to prospective customers regarding the use and benefits of our
products. In addition, the implementation of our products involves a
significant commitment of resources by prospective customers and is commonly
associated with substantial reengineering efforts that may be performed by the
customer or third-party system integrators. The cost to the customer of our
product is typically only a portion of the related hardware, software,
development, training and integration costs of
19
implementing a large-scale sales and marketing information system. For these
and other reasons, the period between initial contact and the implementation
of our products is often lengthy and is subject to a number of factors which
may cause significant delays, many of which we have little or no control over.
These factors include (i) the size and complexity of our license transactions
and (ii) delays in our customers' implementation of client/server computing
environments. A delay in the sale or implementation of even a limited number
of license transactions could have a material adverse effect on our business
and operations and cause our operating results to vary significantly from
quarter to quarter.
Expanding Distribution May Create Additional Risks. We have expanded the
distribution of our products in recent years. This expansion has placed new
and increased demands on our direct sales force and technical and sales
support staff. Our ability to achieve revenue growth in the future will
depend, in part, on our success in recruiting and training sufficient direct
sales, technical and customer support personnel. Although we invest
significant resources to expand our direct sales force and our technical and
customer support staff, we have experienced difficulty in recruiting qualified
personnel. We also may not be able to successfully expand our direct sales
force or other distribution channels. In addition, such expansion may not
result in increased revenues. Any failure to expand our direct sales force or
technical and customer support staff or to expand our distribution channels
could materially and adversely affect our business, operating results and
financial condition.
Revenue is Concentrated in a Relatively Small Number of Customers. Our
success depends on maintaining relationships with our existing customers. A
relatively small number of customers have accounted for a significant
percentage of our revenues. For 1998, 1997 and 1996, sales to our ten largest
customers accounted for 22%, 27% and 28% of total revenues, respectively. We
expect that sales of our products to a limited number of customers will
continue to account for a significant percentage of revenue for the
foreseeable future. The loss of a small number of customers or any reduction
or delay in orders by any such customer, or failure to successfully market our
products to new customers could have a material adverse effect on our
business, financial condition and results of operations.
Success Requires us to keep Pace with Technological Developments, Evolving
Industry Standards and Changing Customer Needs. The software market in which
we compete is characterized by (i) rapid technological change, (ii) frequent
introductions of new products, (iii) changing customer needs, and
(iv) evolving industry standards. To keep pace with technological
developments, evolving industry standards and changing customer needs, we must
support existing products and develop new products. We may not be successful
in developing, marketing and releasing new products or new versions of the
Siebel Enterprise Applications that respond to technological developments,
evolving industry standards or changing customer requirements. We may also
experience difficulties that could delay or prevent the successful
development, introduction and sale of these enhancements. In addition, these
enhancements may not adequately meet the requirements of the marketplace and
may not achieve any significant degree of market acceptance. If release dates
of any future products or enhancements to the Siebel Enterprise Applications
are delayed, or if these products or enhancements fail to achieve market
acceptance when released, our business, operating results and financial
condition could be materially and adversely affected. In addition, new
products or enhancements by our competitors may cause customers to defer or
forgo purchases of our products, which could have a material adverse effect on
our business, financial condition and results of operations.
Success Requires us to Effectively Compete in the Customer Information
Systems Market. Our products target the customer information systems market.
This market is highly competitive, rapidly changing and significantly affected
by new product introductions. We face competition primarily from our
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 our customers
and potential customers have attempted to develop customer information
systems, in-house either alone or with the help of systems integrators. We may
not be able to compete successfully against such internal development efforts.
We rely on a number of systems consulting and systems integration firms for
implementation and other customer support services, as well as for
recommendations of our products during the evaluation stage of the
20
purchase process. Although we seek to maintain close relationships with these
service providers, many of them have similar, and often more established,
relationships with our competitors. If we are unable to develop and retain
effective, long-term relationships with these third parties, our competitive
position could be materially and adversely affected. Further, many of these
third parties have significantly greater resources than we do and may market
software products that compete with us.
The following table lists some of our current and potential competitors and
their products.
Company Name Product
------------ -------
Acxiom...................................... DirectMedia
Baan N.V./Aurum Software, Inc. ............. FrontOffice
Borealis Corporation........................ Arsenal
Clarify, Inc. .............................. ClearSales, ClearSupport
Dendrite International, Inc. ............... Force One; Dendrite Series 6
Early Cloud & Co. .......................... CallFlow
Exchange Applications....................... ValEX
IMA......................................... EDGE
Marketrieve Company......................... Marketrieve PLUS
Metrix, Inc. ............................... Field Service Dispatch
Onyx........................................ Customer Center
Oracle Corporation.......................... Oracle Sales and Marketing
Pegasystems, Inc. .......................... PegaSURE; PegaWorks; PegaSales
Pivotal Software, Inc. ..................... Relationship
Prime Response.............................. Prime Vantage
Sales Vision................................ Jsales
SAP A.G. ................................... Focus (not yet released)
Saratoga Systems............................ Avenue
Symantec.................................... ACT!
The Vantive Corporation..................... Vantive Enterprise
Trilogy Development Group, Inc. ............ SC Config
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 we do.
In addition, many competitors have well-established relationships with our
current and potential customers. 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 we can.
There are many factors that may increase competition in the customer
information systems market, including (i) entry of new competitors, (ii)
alliances among existing competitors and (iii) consolidation in the software
industry. Increased competition may result in price reductions, reduced gross
margins or loss of market share, any of which could materially adversely
affect our business, operating results and financial condition. If we cannot
compete successfully against current and future competitors or overcome
competitive pressures, our business, operating results and financial condition
may be adversely affected.
If we do not Maintain our Relationship with Third-Party Vendors,
Interruptions in the Supply of Our Products may result. Portions of our
products incorporate software that was developed and is maintained by third-
party software developers. Although we believe there are other sources for
these products, any significant interruption in the supply of these products
could adversely impact our sales unless and until we can secure another
source. We depend in part on these 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.
We may not be able to replace the functionality provided by the third-party
software
21
currently offered with our products if that software becomes obsolete or
incompatible with future versions of our products or is not adequately
maintained or updated. The absence of or any significant delay in the
replacement of that functionality could materially adversely affect our sales.
Software Errors or Defects Could reduce Revenues. Software products
frequently contain errors or failures, especially when first introduced or
when new versions are released. Although we conduct extensive product testing
during product development, we have been forced to delay the commercial
release of products until the correction of software problems. We could lose
revenues as a result of software errors or defects. Our products are intended
for use in sales applications that may be critical to a customer's business.
As a result, we expect that our customers and potential customers will have a
greater sensitivity to product defects than the market for software products
generally. Testing errors may also be found in new products or releases after
commencement of commercial shipments, resulting in loss of revenue or delay in
market acceptance, damage to our reputation, or increased service and warranty
costs, any of which could have a material adverse effect upon our business,
operating results and financial condition.
If we do not Successfully Manage Our Growth, our Business may be Negatively
Impacted. Our business has grown rapidly in recent years. This growth has
placed a significant strain on our management systems and resources. To manage
future growth we must continue to (i) improve our financial and management
controls, reporting systems and procedures on a timely basis and (ii) expand,
train and manage our employee work force. If we fail to manage our growth
effectively, our business, financial condition and results of operations could
be materially and adversely affected.
The Loss of our Key Personnel Could Negatively Affect our Performance. Our
performance depends on the continued service of our key technical, sales and
senior management personnel, particularly Thomas M. Siebel, our Chairman and
Chief Executive Officer. None our key employees has entered into an employment
agreement with us. The loss of the services of one or more of our executive
officers could have a material adverse effect on our business, operating
results and financial condition.
The Protection of Our Proprietary Information is Limited. We rely primarily
on a combination of patent, copyright, trade secret and trademark laws,
confidentiality procedures and contractual provisions to protect our
proprietary rights. We also believe that the technological and creative skills
of our personnel, new product developments, frequent product enhancements,
name recognition and reliable product maintenance are essential to
establishing and maintaining a technology leadership position. We seek to
protect our software, documentation and other written materials under patent,
trade secret and copyright laws, which afford only limited protection. Any
patents issued to us may be invalidated, circumvented or challenged. Any of
our pending or future patent applications, whether or not being currently
challenged, may not be issued with the scope of the claims we seek, if at all.
Furthermore, others may develop technologies that are similar or superior to
our technology or design around our patents. Despite our efforts to protect
our proprietary rights, unauthorized parties may attempt to copy aspects of
our products or to obtain and use information that we regard as proprietary.
Policing unauthorized use of our products is difficult. In addition, the laws
of some foreign countries do not protect our proprietary rights as fully as do
the laws of the United States. Our means of protecting our proprietary rights
in the United States or abroad may not be adequate. We have entered into
agreements with substantially all of our customers that require us 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 if (i) there is a bankruptcy proceeding by or against us,
(ii) we cease to do business, or (iii) we fail to meet our support
obligations.
Although we do not believe that we are infringing any proprietary rights of
others, third parties may claim that we have infringed their intellectual
property rights. Furthermore, former employers of our former, current or
future employees may assert claims that such employees have improperly
disclosed to us the confidential or proprietary information of such former
employers. Any such claims, with or without merit, could (i) be time consuming
to defend, (ii) result in costly litigation, (iii) divert management's
attention and resources, (iv) cause product shipment delays, and (v) require
us to pay money damages or enter into royalty or licensing agreements. A
successful claim of product infringement against us and our failure or
inability to license or create a
22
workaround for such infringed or similar technology may materially and
adversely affect our business, operating results and financial condition.
We license certain software from third parties. These third-party software
licenses may not continue to be available to us on acceptable terms. The loss
of, or inability to maintain, any of these software licenses could result in
shipment delays or reductions. This could materially adversely affect our
business, operating results and financial condition.
Year 2000 Problems may cause an Interruption in our Business. Many existing
computer programs and systems use only two-digit fields to identify the year,
e.g. 85=1985, and the are unable to process date and time information between
the twentieth and twenty-first centuries. Accordingly, computer programs and
software may need to be modified prior to the year 2000 in order to remain
functional. Although the Company has spent a large amount of time and resource
to address potential Y2K problems, there is no assurance that the Company will
be successful in its efforts to identify and address all Y2K issues. Failure
to complete the necessary modifications could cause a disruption or failure of
such program and system. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Year 2000 Preparedness".
International Operations involve Unique Risks. Our revenues are primarily
derived from large multi-national companies. To service the needs of these
companies, we must provide worldwide product support services. We have
expanded, and intend to continue expanding, our international operations and
enter additional international markets. This will require significant
management attention and financial resources that could adversely affect our
operating margins and earnings. We may not be able to maintain or increase
international market demand for Siebel Enterprise Applications. If we do not,
our international sales will be limited, and our business, operating results
and financial condition could be materially and adversely affected.
Our international operations are subject to a variety of risks, including
(i) foreign currency fluctuations, (ii) economic or political instability,
(iii) shipping delays and (iv) various trade restrictions. Any of these risks
could have a significant impact on our ability to deliver products on a
competitive and timely basis. Significant increases in the level of customs
duties, export quotas or other trade restrictions could also have an adverse
effect on our business, financial condition and results of operations. In
situations where direct sales are denominated in foreign currency, any
fluctuation in foreign currency or the exchange rate may adversely affect our
business, financial condition and results of operations.
Certain Stockholders may be able to Exercise Control over Matters Requiring
Stockholders Approval. Our current officers, directors and entities affiliated
with us together beneficially owned approximately 32% of the outstanding
shares of common stock as of December 31, 1998. In particular, Thomas M.
Siebel, our Chairman and Chief Executive Officer, owned approximately 19% of
the outstanding shares of common stock as of December 31, 1998. As a result,
these stockholders will be able to exercise certain control over matters
requiring stockholder approval, including the election of directors and the
approval of mergers, consolidations and sales of our assets. This may prevent
or discourage tender offers for our common stock.
Stock Price may Continue to be Volatile. Our stock price has fluctuated
substantially since our initial public offering in June 1996. The trading
price of our 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 us or our 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 ours 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 our common stock.
Certain Provisions in our Charter Documents may Prevent certain Corporate
Actions. Our Board of Directors is authorized to issue up to 2,000,000 shares
of Preferred Stock and to determine the price, rights,
23
preferences, privileges and restrictions, including voting rights, of those
shares without any further approval by our 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 make it more
difficult for a third party to acquire a majority of our outstanding voting
stock. We have instituted a classified Board of Directors in our Certificate
of Incorporation. This and certain other provisions of our Certificate of
Incorporation and certain provisions of our Bylaws and of Delaware law, could
delay or make more difficult a merger, tender offer or proxy contest.
Audit Committee
The Company has established an Audit Committee of the Board of Directors,
the charter of which is to oversee the activities of management and the
Company's external auditors as they relate to the financial reporting process.
In 1998, the Audit Committee was comprised of James C. Gaither, Charles R.
Schwab and George T. Shaheen. In particular, the Audit Committee's role
includes ensuring that management properly develops and adheres to a sound
system of internal controls, and that the Company's auditors, through their
own review, assess the effectiveness of those controls and management's
adherence to them.
In fulfilling their responsibilities, the Audit Committee conducted regular,
quarterly meetings with the Company's outside auditors. In each of these
meetings, the Audit Committee met with the Company's outside auditors,
independent of management, to assure the Audit Committee an independent and
confidential view of the Company's management and internal controls as they
relate to the quality and reliability of the Company's financial statements.
The Company is committed to supporting this process and the Audit Committee
in fulfilling their role of ensuring the integrity of the Company's internal
controls and financial reporting.
Item 7a. Quantitative and Qualitative Disclosures About Market Risk
- -------------------------------------------------------------------
The tables below provide information about the Company's derivative
financial instruments and financial instruments that are subject to market
risk. These include foreign currency forward contracts used to hedge foreign
currency receivables and intercompany balances, which are subject to exchange
rate risk, and available-for-sale short-term investments, which are subject to
interest rate risk. The Company does not consider its cash equivalents to be
subject to interest rate risk due to their short maturities.
The Company manages its foreign currency exchange rate risk by entering into
contracts to sell foreign currency at the time a foreign currency receivable
is generated. When the foreign currency receivable is collected, the contract
is liquidated, thereby converting the foreign currency to US dollars and
mitigating the exchange rate risk.
The Company manages its interest rate risk by maintaining an investment
portfolio with debt instruments of high credit quality and relatively short
average maturities. The Company also manages interest rate risk by maintaining
sufficient cash and cash equivalent balances such that it is typically able to
hold its investments to maturity.
24
The following summarizes the Company's foreign currency forward contracts,
all of which mature in 1999, by currency, as of December 31, 1998. Contract
amounts are representative of the expected payments to be made under these
instruments (in thousands):
Fair Value
Contract Contract at
Amount (Local Amount December 31,
Currency) (US$) 1998 (US$)
-------------- -------- ------------
German marks (contracts to pay
DM/receive US$)....................... DM 12,900 $ 7,744 $ 14
British pounds (contracts to pay
(Pounds)/receive US$)................. (Pounds)877 $ 1,434 $(10)
Japanese yen (contracts to pay
(Yen)/receive US$).................... (Yen)1,757,500 $15,197 $124
The following summarizes the Company's available-for-sale investments, as of
December 31, 1998.
Expected maturity date
-------------------------------------------------
1999 2000 2001 2002 2003 Thereafter
------- ------- ------- ------- ------ ----------
US treasury securities........ -- -- -- $ 3,108 $2,058 --
Municipal securities.......... $46,187 $38,203 $30,303 $19,270 $2,038 $10,721
Item 8. Financial Statements and Supplementary Data
- ---------------------------------------------------
The Company's consolidated financial statements, together with related notes
and the report of KPMG LLP, the Company's independent auditors, 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.
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 27, 1999, 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.
25
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.
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......................................... 28
Consolidated Financial Statements:
Balance Sheets..................................................... 29
Statements of Operations and Comprehensive Income (Loss)........... 30
Statements of Stockholders' Equity................................. 31
Statements of Cash Flows........................................... 32
Notes to Consolidated Financial Statements........................... 33
2. Financial Statement Schedule
Schedule II--Valuation and Qualifying Accounts....................... 49
3. Exhibits
Exhibit
Number Description of Document
------- -----------------------
2.1 Agreement and Plan of Merger and Reorganization, dated March 1,
1998, among the Registrant, Syracuse Acquisition Sub, Inc. and
Scopus Technology, Inc.(4)
3.1 Restated Certificate of Incorporation of the Registrant.(3)
3.2 Bylaws of the Registrant.(1)
4.1 Reference is made to Exhibits 3.1 and 3.2.
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.(1)
10.1 Registrant's 1996 Equity Incentive Plan, as amended.(3)
10.2 Registrant's Employee Stock Purchase Plan, as amended.(3)
10.3 Form of Indemnity Agreement entered into between the Registrant
and its officers and directors.(1)
10.4 Registrant's Deferred Compensation Plan, dated January 10,
1997.(5)
10.5 Master Alliance Agreement, dated March 17, 1995, between the
Registrant and Andersen Consulting LLP.(1)(2)
10.6 Assignment Agreement, dated September 20, 1995, by and between
the Registrant and Thomas M. Siebel.(1)
10.7 Lease Agreement, dated June 4, 1996, by and between the
Registrant and Crossroad Associates and Clocktower
Associates.(1)
23.1 Consent of KPMG LLP, Independent Auditors.(8)
27.1 Financial Data Schedule.(8)
26
- --------
(1) Incorporated by reference to the Registrant'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 Registrant's Registration Statement on
Form S-8 (No. 333-07983), as amended.
(4) Incorporated by reference to exhibit 99.1 of the Registrant's Current
Report on Form 8-K filed by the Registrant on March 16, 1998.
(5) Incorporated by reference to the Registrant's Annual Report on Form 10-K
for the fiscal year ended December 31, 1996.
(6) Incorporated by reference to exhibit 99.3 of the Registrant's Current
Report on Form 8-K filed by the Registrant on March 16, 1998.
(7) Incorporated by reference to exhibit 99.5 of the Registrant's Current
Report on Form 8-K filed by the Registrant on March 16, 1998.
(8) Filed herewith.
(b) Reports on Form 8-K
On November 25, 1998, the Company filed a report on Form 8-K relating to the
Company's restated audited consolidated financial statements, giving effect to
the merger with Scopus, for the three years ended December 31, 1997, and the
related consolidated financial statement schedule, selected financial data and
management's discussion and analysis of financial condition and results of
operations.
27
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 subsidiaries as of December 31, 1998 and 1997, and the
related consolidated statements of operations and comprehensive income (loss),
stockholders' equity, and cash flows for each of the years in the three-year
period ended December 31, 1998. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Siebel
Systems, Inc. and subsidiaries as of December 31, 1998 and 1997, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1998, in conformity with generally
accepted accounting principles.
KPMG LLP
Mountain View, California
January 26, 1999
28
SIEBEL SYSTEMS, INC.
Consolidated Balance Sheets
(in thousands, except per share data)
December 31,
------------------
1998 1997
-------- --------
Assets
Current assets:
Cash and cash equivalents................................ $ 79,961 $ 70,202
Short-term investments................................... 151,888 91,999
Accounts receivable, net................................. 122,818 63,056
Deferred income taxes.................................... 13,120 4,778
Prepaids and other....................................... 13,908 6,701
-------- --------
Total current assets................................... 381,695 236,736
Property and equipment, net.............................. 45,537 24,843
Other assets............................................. 14,714 6,585
-------- --------
Total assets........................................... $441,946 $268,164
======== ========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable......................................... $ 3,899 $ 5,684
Accrued expenses......................................... 84,917 28,362
Income taxes payable..................................... 10,917 2,345
Deferred revenue......................................... 50,875 22,243
-------- --------
Total current liabilities.............................. 150,608 58,634
Deferred income taxes...................................... 710 162
-------- --------
Total liabilities...................................... 151,318 58,796
-------- --------
Commitments and contingencies
Stockholders' equity:
Common stock; $0.001 par value; 300,000 shares
authorized; 89,630 and 85,864 shares issued and
outstanding, respectively............................... 90 86
Additional paid-in capital............................... 235,302 195,432
Notes receivable from stockholders....................... (406) (406)
Deferred stock compensation.............................. (360) (639)
Accumulated other comprehensive losses................... (669) (365)
Retained earnings........................................ 56,671 15,260
-------- --------
Total stockholders' equity............................. 290,628 209,368
-------- --------
Total liabilities and stockholders' equity............. $441,946 $268,164
======== ========
See accompanying notes to consolidated financial statements.
29
SIEBEL SYSTEMS, INC.
Consolidated Statements of Operations and Comprehensive Income (Loss)
(in thousands, except per share data)
Year Ended December 31,
----------------------------
1998 1997 1996
-------- -------- --------
Revenues:
Software........................................ $290,890 $156,971 $ 80,413
Professional services, maintenance and other.... 100,649 50,657 20,949
-------- -------- --------
Total revenues................................ 391,539 207,628 101,362
-------- -------- --------
Cost of revenues:
Software........................................ 5,600 4,393 2,197
Professional services, maintenance and other.... 61,547 28,787 13,183
-------- -------- --------
Total cost of revenues........................ 67,147 33,180 15,380
-------- -------- --------
Gross margin.................................. 324,392 174,448 85,982
-------- -------- --------
Operating expenses:
Product development............................. 42,698 26,105 14,775
Sales and marketing............................. 172,946 98,748 44,044
General and administrative...................... 28,401 16,938 9,737
Merger-related expenses......................... 13,500 26,038 --
-------- -------- --------
Total operating expenses...................... 257,545 167,829 68,556
-------- -------- --------
Operating income.............................. 66,847 6,619 17,426
Other income, net................................. 6,283 5,374 3,118
-------- -------- --------
Income before income taxes.................... 73,130 11,993 20,544
Income taxes...................................... 30,255 13,180 7,683
-------- -------- --------
Net income (loss)............................. $ 42,875 $ (1,187) $ 12,861
======== ======== ========
Diluted net income (loss) per share............... $ 0.43 $ (0.01) $ 0.16
======== ======== ========
Shares used in diluted net income (loss) per share
computation...................................... 99,948 83,798 78,198
======== ======== ========
Basic net income (loss) per share................. $ 0.49 $ (0.01) $ 0.18
======== ======== ========
Shares used in basic net income (loss) per share
computation...................................... 87,569 83,798 69,736
======== ======== ========
Comprehensive income (loss):
Net income (loss)............................... $ 42,875 $ (1,187) $ 12,861
-------- -------- --------
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments........ (505) (365) --
Unrealized gains on securities.................. 201 -- --
-------- -------- --------
Other comprehensive loss.......................... (304) (365) --
-------- -------- --------
Total comprehensive income (loss)............. $ 42,571 $ (1,552) $ 12,861
======== ======== ========
See accompanying notes to consolidated financial statements.
30
SIEBEL SYSTEMS, INC.
Consolidated Statements of Stockholders' Equity
(in thousands)
Convertible Notes Accumulated
preferred stock Common stock Additional receivable Deferred other Total
----------------- -------------- paid-in from stock comprehensive Retained stockholders'
Shares Amount Shares Amount Capital stockholders compensation losses earnings equity
-------- ------- ------ ------ ---------- ------------ ------------ ------------- -------- -------------
Balances,
December 31,
1995............ 19,622 $ 19 45,780 $ 46 $ 39,899 $ (13) $ (652) $ -- $ 3,586 $ 42,885
Issuance of
common stock
under Employee
Stock Option
Plans........... -- -- 2,675 3 2,018 -- -- -- -- 2,021
Issuance of
common stock
under Employee
Stock Purchase
Plans........... -- -- 295 -- 1,641 -- -- -- -- 1,641
Issuance of
common stock,
net of issuance
costs of $1,849. -- -- 12,891 13 109,477 (507) -- -- -- 108,983
Repayment of
note receivable. -- -- -- -- -- 12 -- -- -- 12
Issuance of
convertible
preferred stock. 494 1 -- -- 1,094 -- -- -- -- 1,095
Convertible
preferred stock
issued for
exercise of
warrant......... 300 -- -- -- 437 -- -- -- -- 437
Tax benefit from
stock options... -- -- -- -- 2,173 -- -- -- -- 2,173
Compensation
related to stock
options......... -- -- -- -- 893 -- (893) -- -- --
Cancellation of
stock options
issued below
fair value...... -- -- -- -- (48) -- 48 -- -- --
Conversion of
convertible
preferred stock
into common
stock........... (20,416) (20) 20,416 20 -- -- -- -- -- --
Repurchase and
retirement of
common stock.... -- -- (88) -- (1) -- -- -- -- (1)
Amortization of
deferred
compensation
related to stock
options......... -- -- -- -- -- -- 324 -- -- 324
Net income...... -- -- -- -- -- -- -- -- 12,861 12,861
-------- ------ ------ ---- -------- ----- ------- ----- ------- --------
Balances,
December 31,
1996............ -- -- 81,969 82 157,583 (508) (1,173) -- 16,447 172,431
Issuance of
common stock
under Employee
Stock Option
Plans........... -- -- 2,067 2 4,788 -- -- -- -- 4,790
Issuance of
common stock
under Employee
Stock Purchase
Plans........... -- -- 626 1 4,299 -- -- -- -- 4,299
Issuance of
common stock
related to
InterActive
acquisition..... -- -- 602 1 14,580 -- -- -- -- 14,581
Issuance of
common stock
related to
Nomadic
acquisition..... -- -- 600 -- 10,393 -- -- -- -- 10,394
Repayment of
note receivable. -- -- -- -- -- 102 -- -- -- 102
Compensation
related to stock
options......... -- -- -- -- (256) -- 256 -- -- --
Cancellation of
stock options
issued below
fair value...... -- -- -- -- (1) -- 1 -- -- --
Tax benefit from
stock options... -- -- -- -- 4,046 -- -- -- -- 4,046
Amortization of
deferred
compensation
related to stock
options......... -- -- -- -- -- -- 277 -- -- 277
Currency
translation
adjustment (net
of taxes of
$214)........... -- -- -- -- -- -- -- (365) -- (365)
Net loss........ -- -- -- -- -- -- -- -- (1,187) (1,187)
-------- ------ ------ ---- -------- ----- ------- ----- ------- --------
Balances,
December 31,
1997............ -- -- 85,864 86 195,432 (406) (639) (365) 15,260 209,368
Issuance of
common stock
under Employee
Stock Option
Plans........... -- -- 3,135 3 17,859 -- -- -- -- 17,862
Issuance of
common stock
under Employee
Stock Purchase
Plans........... -- -- 631 1 8,534 -- -- -- -- 8,535
Adjustment to
conform acquired
company's year-
end............. -- -- -- -- -- -- -- -- (1,464) (1,464)
Cancellation of
stock options
issued below
fair value...... -- -- -- -- (39) -- 39 -- -- --
Tax benefit from
stock options... -- -- -- -- 13,516 -- -- -- -- 13,516
Amortization of
deferred
compensation
related to stock
options......... -- -- -- -- -- -- 240 -- -- 240
Unrealized gain
on short-term
investments (net
of taxes of
$118)........... -- -- -- -- -- -- -- 201 -- 201
Currency
translation
adjustment (net
of taxes of
$297)........... -- -- -- -- -- -- -- (505) -- (505)
Net income...... -- -- -- -- -- -- -- -- 42,875 42,875
-------- ------ ------ ---- -------- ----- ------- ----- ------- --------
Balances,
December 31,
1998............ -- -- 89,630 $ 90 $235,302 $(406) $ (360) $(669) $56,671 $290,628
======== ====== ====== ==== ======== ===== ======= ===== ======= ========
See accompanying notes to consolidated financial statements.
31
SIEBEL SYSTEMS, INC.
Consolidated Statements of Cash Flows
(in thousands)
Year Ended December 31,
----------------------------
1998 1997 1996
-------- -------- --------
Cash flows from operating activities:
Net income (loss).............................. $ 42,875 $ (1,187) $ 12,861
Adjustments to reconcile net income to net cash
provided by operating activities:
Compensation related to stock options........ 240 277 324
Depreciation and amortization................ 13,464 8,125 3,363
Deferred income taxes........................ (9,496) (1,615) (1,617)
Tax benefit from exercise of stock options... 13,516 4,046 2,173
Loss on disposal of property and equipment... 4,544 307 155
Provision for doubtful accounts and returns.. 6,613 2,348 1,275
Write-off of acquired research and
development................................. -- 22,740
Software licenses exchanged for equipment and
prepaid assets.............................. -- -- (3,408)
Changes in operating assets and liabilities:
Accounts receivable........................ (67,658) (40,485) (20,326)
Prepaids and other......................... (6,423) (1,736) (3,313)
Accounts payable........................... (280) 126 3,287
Accrued expenses........................... 49,257 13,723 10,326
Income taxes payable....................... 9,228 (1,611) 2,821
Deferred revenue........................... 30,056 15,963 3,632
-------- -------- --------
Net cash provided by operating
activities.............................. 85,936 21,021 11,553
-------- -------- --------
Cash flows from investing activities:
Purchases of property and equipment............ (39,236) (17,640) (13,742)
Purchases, sales and maturities of short-term
investments, net.............................. (56,751) (17,866) (66,671)
Proceeds from disposal of property and
equipment..................................... -- -- 16
Cash acquired in acquisitions.................. (31) 129 --
Other assets................................... (2,641) (1,764) (947)
-------- -------- --------
Net cash used in investing activities.... (98,659) (37,141) (81,344)
-------- -------- --------
Cash flows from financing activities:
Proceeds from issuance of common stock, net of
repurchases................................... 26,622 8,725 112,559
Proceeds from issuance of preferred stock...... -- -- 1,532
Repayment of stockholder notes................. -- 102 12
-------- -------- --------
Net cash provided by financing
activities.............................. 26,622 8,827 114,103
-------- -------- --------
Change in cash and cash equivalents.............. 13,899 (7,293) 44,312
Adjustment to conform acquired company's year end (4,140) -- --
Cash and cash equivalents, beginning of year..... 70,202 77,495 33,183
-------- -------- --------
Cash and cash equivalents, end of year........... $ 79,961 $ 70,202 $ 77,495
======== ======== ========
Supplemental disclosures of cash flows
information:
Purchase price payable 20*20 Group, Ltd........ $ 6,000 $ -- $ --
======== ======== ========
Common stock issued for acquisitions........... $ -- $ 24,975 $ --
======== ======== ========
Exercise of common stock options in exchange
for stockholder note $ -- $ -- $ 507
======== ======== ========
Cash paid for income taxes..................... $ 14,194 $ 14,077 $ 4,597
======== ======== ========
See accompanying notes to consolidated financial statements.
32
SIEBEL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Summary of Significant Accounting Policies
The Company
Siebel Systems, Inc. ("Siebel" or the "Company") is the market leader in
enterprise-class sales, marketing and customer service information systems for
organizations focused on increasing sales, marketing and customer service
effectiveness in field sales, customer service, telesales, telemarketing, call
centers, and third-party resellers. The Company designs, develops, markets,
and supports Siebel Enterprise Applications, a leading web-based application
software product family designed to meet the sales, marketing and customer
service information system requirements of even the largest multi-national
organizations.
On May 18, 1998, Siebel merged with Scopus Technology Inc. ("Scopus") in a
transaction accounted for as a pooling of interests. Accordingly, the
financial statements of Siebel have been restated to include the financial
position and results of operations of Scopus for all periods presented. Prior
to the merger with Siebel, Scopus used a fiscal year ending March 31. The
restated financial statements as of December 31, 1997 and for prior periods
include Siebel's results of operations for the calendar periods noted and
Scopus' results of operations for the fiscal periods ending three months
later. Beginning January 1, 1998, the reporting periods of Siebel and Scopus
were conformed, and results of operations were combined for the calendar
periods presented. As a result of conforming the reporting periods of Siebel
and Scopus, the operating results of Scopus for the three month period ended
March 31, 1998 are included in the restated financial statements for both 1997
and 1998. Net income for this period of approximately $1,500,000 is reflected
as a reduction of opening retained earnings in the restated 1998 financial
statements. See note 8.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
the Company and its wholly owned subsidiaries. All intercompany accounts and
transactions have been eliminated.
Revenue Recognition
Prior to January 1, 1998, the Company recognized revenue in accordance with
Statement of Position ("SOP") No. 91-1, "Software Revenue Recognition".
Software license revenue was recognized when all of the following criteria had
been met: there was an executed license agreement; software had been shipped
to the customer; no significant vendor obligations remained; the license fee
was fixed and payable within twelve months and collection was deemed probable.
On January 1, 1998, the Company adopted the provisions of Statement of
Position No. 97-2 "Software Revenue Recognition". Revenue is recognized under
SOP 97-2 when persuasive evidence of an arrangement exists and delivery has
occurred, provided the fee is fixed and determinable, collectibility is
probable and the arrangement does not require significant customization of the
software. Under SOP 97-2, revenue on multiple element arrangements is
allocated to the various elements based on fair values specific to the
Company.
Professional services, maintenance, consulting and other revenues relate
primarily to consulting services, maintenance and training. Maintenance
revenues are recognized ratably over the term of the maintenance contract,
typically 12 months. Consulting and training revenues are recognized as the
services are performed and are usually on a time and materials basis. Such
services primarily consist of implementation services related to the
installation of the Company's products and do not include significant
customization to or development of the underlying software code.
33
SIEBEL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (Continued)
The Company's customer base includes a number of its suppliers (e.g., AT&T,
BankBoston Robertson Stephens, Bank of America, Cabletron Systems, The Charles
Schwab Corporation, Cigna Corporation, Cisco Systems, Inc., Compaq Computer
Corporation, Dell Computer Corporation, Lucent Technologies, MCI
Telecommunications Corporation, Microsoft Corporation, NationsBanc Montgomery
Securities, Inc., PeopleSoft, Inc., Sequent Computer Systems, Inc., Siemens
Corporation and Sun Microsystems, Inc.). On occasion, the Company has
purchased goods or services for company operations from these vendors at or
about the same time Siebel has licensed its software to these organizations.
These transactions are separately negotiated and recorded at terms the Company
considers to be arm's-length. During 1998, the Company recognized
approximately $16,500,000 of revenue in connection with such transactions.
There were no such transactions in the fourth quarter.
Cost of Revenues
Cost of software consists primarily of media, product packaging,
documentation and other production costs, and third-party royalties. Cost of
professional services, maintenance and other consists primarily of salaries,
benefits and allocated overhead costs related to consulting, training and
customer support personnel, including cost of services provided by third party
consultants engaged by the Company.
Use of Estimates
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
consolidated financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
Cash, Cash Equivalents and Short-Term Investments
The Company considers all highly liquid investments with an original
maturity of 90 days or less to be cash equivalents. Short-term investments
generally consist of highly liquid securities with original maturities in
excess of 90 days. The Company has classified its short-term investments as
"available for sale." Such investments are carried at fair value with
unrealized gains and losses reported within accumulated other comprehensive
income (losses). Realized gains and losses on available for sale securities
are computed using the specific identification method.
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation and
amortization. Depreciation is calculated using the straight-line method over
the estimated useful lives of the respective assets, generally three to five
years. Leasehold improvements are amortized over the lesser of the lease term
or the estimated useful lives of the improvements, generally seven years.
Software Development Costs
Software development costs associated with new products and enhancements to
existing software products are expensed as incurred until technological
feasibility in the form of a working model has been established. To date, the
time period between the establishment of technological feasibility and
completion of software development has been short, and no significant
development costs have been incurred during that period. Accordingly, the
Company has not capitalized any software development costs to date.
34
SIEBEL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (Continued)
Intangible Assets
Included in other assets are various intangible assets, primarily goodwill
related to acquisitions. These amounts are being amortized over a three-year
period using the straight-line method. Gross intangible assets were $9,627,000
and $2,085,000 and related accumulated amortization was $2,503,000 and
$285,000 at December 31, 1998 and 1997, respectively.
Advertising
Advertising costs are expensed as incurred. Advertising expense is included
in sales and marketing expense and amounted to $12,126,000 and $7,245,000 in
1998 and 1997, respectively, and was not significant in 1996.
Income Taxes
The Company uses the asset and liability method of accounting for income
taxes. Deferred tax assets and liabilities are recognized for the estimated
future tax consequences attributable to differences between the consolidated
financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets are recognized for deductible
temporary differences, net operating loss carryforwards and credit
carryforwards if it is more likely than not that the tax benefits will be
realized. To the extent a deferred tax asset cannot be recognized under the
preceding criteria, allowances must be established. Deferred tax assets and
liabilities are measured using enacted tax rates in effect for the year in
which those temporary differences are expected to be recovered or settled.
Net Income (Loss) Per Share
Basic earnings per share is computed using the weighted average number of
shares of common stock outstanding. Diluted earnings per share is computed
using the weighted average number of shares of common stock and, when
dilutive, common equivalent shares from options to purchase common stock and
warrants outstanding using the treasury stock method.
Employee Stock Option and Purchase Plans
The Company accounts for its stock-based compensation plans using the
intrinsic value method. As such, compensation expense is recorded on the date
of grant if the current market price of the underlying stock exceeds the
exercise price.
Foreign Currency Translation
The Company considers the functional currency of its foreign subsidiaries to
be the local currency, and accordingly, they are translated into U.S. dollars
using exchange rates in effect at period end for assets and liabilities and
average exchange rates during each reporting period for the results of
operations. Adjustments resulting from translation of foreign subsidiary
financial statements are reported within accumulated other comprehensive
income (losses).
The Company utilizes foreign currency forward contracts to hedge its
exchange risk on foreign currency receivable and intercompany balances. While
these forward contracts are subject to fluctuations in value, which are
recorded in current results of operations, such fluctuations are generally
offset by the changes in value of the underlying exposures being hedged. The
Company does not hold or issue financial instruments for speculative or
trading purposes.
35
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 any particular industry or
geographic area since the Company's business is not concentrated on any one
particular customer or customer base. No single customer accounts for more
than 10% of revenues; and the Company's largest customer base, high
technology, which accounts for approximately 30% of revenues, is sufficiently
broad that the Company does not consider itself significantly exposed to
concentrations of credit risk.
Fair Value of Financial Instruments
The carrying amount of the Company's cash and cash equivalents, short-term
investments, accounts receivable, and accounts payable approximate their
respective fair values. Changes in the fair value of the Company's derivative
financial instruments (foreign currency forward contracts) are generally
offset by changes in the value of the underlying exposures being hedged. The
fair value of the Company's derivative financial instruments at December 31,
1998 was approximately $128,000.
Impairment of Long-Lived Assets
The Company evaluates long-lived assets, including goodwill, for impairment
whenever events or changes in circumstances indicate that the carrying value
of an asset may not be recoverable based on expected undiscounted cash flows
attributable to that asset. The amount of any impairment is measured as the
difference between the carrying value and the fair value of the impaired
asset. The Company does not have any long-lived assets it considers to be
impaired.
Comprehensive Income (Loss)
In 1998, the Company adopted Statement of Financial Accounting Standard
("SFAS") No. 130, "Reporting Comprehensive Income". This statement establishes
rules for the reporting of comprehensive income (loss) and its components. The
Company's comprehensive income (loss) includes net income (loss), foreign
currency translation adjustments and unrealized gains on short-term
investments and is presented in the Consolidated Statements of Operations. The
adoption of SFAS No. 130 had no impact on total stockholders' equity. Prior
year financial statements have been reclassified to conform to the SFAS No.
130 requirements.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133
"Accounting for Derivative Instruments and Hedging Activities". SFAS No. 133
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts,
(collectively referred to as derivatives) and for hedging activities. It
requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those
instruments at fair value. If certain conditions are met, a derivative may be
specifically designated and accounted for as (a) a hedge of the exposure to
changes in the fair value of a recognized asset or liability or an
unrecognized firm commitment, (b) a hedge of the exposure to variable cash
flows of a forecasted transaction, or (c) a hedge of the foreign currency
exposure of a net investment in a foreign operation, an unrecognized firm
commitment, an available-for-sale security, or a foreign-currency-denominated
forecasted transaction. For a derivative not designated as a hedging
instrument, changes in the fair value of the derivative are recognized in
earnings in the period of change. This statement will be effective for all
annual and interim periods beginning after June 15, 1999. Management does not
believe the
36
SIEBEL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (Continued)
adoption of SFAS No. 133 will have a material effect on the Company's
consolidated financial position or results of operations.
In December 1998, the Accounting Standards Executive Committee (AcSEC) of
the AICPA issued SOP 98-9, "Software Revenue Recognition with Respect to
Certain Arrangements", which requires recognition of revenue using the
"residual method" in a multiple element arrangement when fair value does not
exist for one or more of the undelivered elements in the arrangement. Under
the "residual method", the total fair value of the undelivered elements is
deferred and subsequently recognized in accordance with SOP 97-2. Management
does not believe the adoption of SOP 98-9 will have a material effect on the
Company's consolidated financial position or results of operations.
(2) Financial Statement Details
Cash, Cash Equivalents and Short-Term Investments
Cash equivalents consist of securities with original maturities of 90 days
or less. Short-term investments as of December 31, 1998 consisted of
$46,187,000 of securities which mature in less than one year, $94,980,000 of
securities which mature in one to five years and $10,721,000 of securities
which mature in over five years. Cash, cash equivalents and short-term
investments consisted of the following as of December 31, 1998 (in thousands):
Unrealized Unrealized
Cost loss gain Market
-------- ---------- ---------- --------
Cash and cash equivalents:
Cash.............................. $ 38,267 $-- $-- $ 38,267
Certificates of deposit........... 1,685 -- -- 1,685
Auction market preferreds......... 4,350 -- -- 4,350
Money market funds................ 6,199 -- -- 6,199
Municipal securities.............. 29,460 -- -- 29,460
-------- ---- ---- --------
$ 79,961 -- -- $ 79,961
======== ==== ==== ========
Short-term investments:
US treasury securities............ $ 5,181 $(15) $-- $ 5,166
Municipal securities.............. 146,506 (60) 276 146,722
-------- ---- ---- --------
$151,687 $(75) $276 $151,888
======== ==== ==== ========
Short-term investments as of December 31, 1997 consisted of $55,697,000 of
municipal securities which matured in less than one year, and $36,302,000 of
municipal securities which matured in one to five years. As of December 31,
1997, cost approximated market for short-term investments; realized and
unrealized gains and losses were not significant.
Accounts Receivable, Net
Accounts receivable, net, consisted of the following (in thousands):
December 31,
----------------
1998 1997
-------- -------
Trade accounts receivable.................................. $133,148 $67,344
Less: allowances for doubtful accounts and returns......... 10,330 4,288
-------- -------
$122,818 $63,056
======== =======
37
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,
---------------
1998 1997
------- -------
Computer equipment........................................ $38,142 $19,728
Furniture and fixtures.................................... 10,055 6,096
Computer software......................................... 8,735 8,446
Leasehold improvements.................................... 8,993 3,346
------- -------
65,925 37,616
Less: accumulated depreciation............................ 20,388 12,773
------- -------
$45,537 $24,843
======= =======
Accrued Expenses
Accrued expenses consisted of the following (in thousands):
December 31,
---------------
1998 1997
------- -------
Bonuses.................................................... $22,920 $ 7,092
Commissions................................................ 17,318 5,713
Sales tax.................................................. 9,345 3,026
Vacation................................................... 3,922 2,312
Acquisition-related........................................ 7,450 205
Other...................................................... 23,962 10,014
------- -------
$84,917 $28,362
======= =======
Other Income, Net
Other income, net, consisted of the following (in thousands):
Year ended December
31,
-----------------------
1998 1997 1996
------- ------ ------
Interest income................................... $ 7,564 $6,019 $3,281
Interest expense.................................. (15) (4) (8)
Other............................................. (1,266) (641) (155)
------- ------ ------
$ 6,283 $5,374 $3,118
======= ====== ======
38
SIEBEL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (Continued)
(3) Commitments and Contingencies
Lease Obligations
As of December 31, 1998, the Company leased facilities under noncancelable
operating leases expiring between 1999 and 2008. Future minimum lease payments
are as follows (in thousands):
Year Ending
December 31,
------------
1999.............................................................. $ 13,868
2000.............................................................. 11,344
2001.............................................................. 10,310
2002.............................................................. 9,127
2003.............................................................. 8,166
Thereafter........................................................ 24,423
--------
$ 77,238
========
Rent expense for the years ended December 31, 1998, 1997 and 1996, was
$11,098,000, $6,160,000 and $2,834,000, 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 $10,000 in 1998. Employee
contributions and earnings thereon vest immediately. Although the Company may
make discretionary contributions to the 401(k) plan, none have been made to
date.
Legal Actions
The Company is engaged in certain legal actions arising in the ordinary
course of business. The Company believes it has adequate legal defenses and
believes that the ultimate outcome of these actions will not have a material
effect on the Company's consolidated financial position or results of
operations, although there can be no assurance as to the outcome of such
litigation.
(4) Stockholders' Equity
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 March 20, 1998.
Net Income (Loss) per Share
The following is a reconciliation of the number of shares used in the basic
and diluted earnings per share computation for the periods presented (in
thousands):
Year ended December
31,
--------------------
1998 1997 1996
------ ------ ------
Shares used in basic net income (loss) per share
computation........................................... 87,569 83,798 69,736
Effect of dilutive potential common shares............. 12,379 -- 8,462
------ ------ ------
Shares used in diluted net income (loss) per share
computation........................................... 99,948 83,798 78,198
====== ====== ======
39
SIEBEL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (Continued)
The Company excludes potentially dilutive securities from its diluted net
income (loss) per share computation when either the exercise price of the
securities exceeds the average fair value of the Company's common stock or the
Company reported net losses because their effect would be anti-dilutive. For
the year ended December 31, 1998, the Company excluded 3,154,142 employee
stock options with a weighted average exercise price of $28.71 per share from
the earnings per share computation as their exercise prices exceeded the fair
value of the Company's common stock and, accordingly, their inclusion would
have been anti-dilutive. During 1997, the Company excluded a total of
10,716,882 employee stock options with a weighted average exercise price of
$7.48 per share from the earnings per share computation as their inclusion
would have been anti-dilutive.
Employee Stock Option and Purchase Plans
The 1996 Equity Incentive Plan, which amended and restated the Company's
1994 Stock Option Plan and 1996 Supplemental Stock Option Plan and the 1998
Non-Officer Equity Incentive Plan (collectively, the "Plan"), provides for the
issuance of up to an aggregate of 50,000,000 shares of common stock to
employees, directors and consultants. The Plan provides for the issuance of
incentive and nonstatutory stock options, restricted stock purchase awards,
stock bonuses and stock appreciation rights.
Under the Plan, the exercise price for incentive stock options is at least
100% of the fair market value on the date of the grant. Options generally
expire in 10 years; however, incentive stock options may expire in 5 years if
the optionee owns stock representing more than 10% of the voting power of all
classes of stock. Vesting periods are determined by the Board of Directors and
generally provide for shares to vest ratably over 5 years.
The Plan also allows for the exercise of certain unvested options. Shares of
common stock issued to employees upon exercise of unvested options are subject
to repurchase by the Company at the original exercise price. The Company's
ability to repurchase these shares expires at a rate equivalent to the current
vesting schedule of each option. As of December 31, 1998, 3,506,600 shares of
common stock had been issued to employees upon the exercise of unvested
options, which are subject to repurchase, at a weighted average repurchase
price of $0.23 per share. No compensation expense has resulted from
repurchases of restricted shares since the amount of cash paid by the Company
did not differ from the proceeds received from the employee from the sale of
the restricted shares. The Company has not issued any other restricted stock
purchase awards, stock bonuses or stock appreciation rights.
During the period from October 1995 through April 1996, the Company granted
options to purchase an aggregate of 16,305,000 shares of common stock at
exercise prices ranging from $.13 to $1.63 per share. Based in part on an
independent appraisal obtained by the Company's Board of Directors, and other
factors, the Company recorded $748,000 of deferred compensation expense in
1995 and an additional $893,000 of deferred compensation expense in 1996
relating to these options. These amounts are being amortized over the vesting
period of the individual options, generally five years.
The Company has assumed certain options granted to former employees of
acquired companies (the "Acquired Options"). The Acquired Options were assumed
by the Company outside of the Plan, but all are administered as if issued
under the Plan. All of the Acquired Options have been adjusted to give effect
to the conversion under the terms of the Agreements and Plans of
Reorganization between the Company and the companies acquired. The Acquired
Options generally become exercisable over a four year period and generally
expire either five or ten years from the date of grant. No additional options
will be granted under any of the acquired companies' plans.
40
SIEBEL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (Continued)
Combined plans activity is summarized as follows:
Weighted
Shares average
available Number of exercise price
for grant shares per share
----------- ---------- --------------
Balances, December 31, 1995.......... 8,625,467 5,287,816 $ 0.85
Additional shares authorized....... 14,700,000 --
Options granted.................... (19,928,944) 19,928,944 $ 3.83
Options exercised.................. -- (2,674,624) $ 0.45
Options canceled................... 1,355,842 (1,355,842) $ 2.20
----------- ----------
Balances, December 31, 1996.......... 4,752,365 21,186,294 $ 3.61
Additional shares authorized....... 16,000,000 --
Options granted.................... (13,330,274) 13,330,274 $16.55
Options exercised.................. -- (2,067,303) $ 2.25
Options canceled................... 5,409,831 (5,409,831) $16.69
----------- ----------
Balances, December 31, 1997.......... 12,831,922 27,039,434 $ 7.48
Additional shares authorized....... 10,000,000 --
Options granted.................... (18,731,222) 18,731,222 $22.50
Options exercised.................. -- (3,134,648) $ 5.85
Options canceled................... 3,579,254 (3,579,254) $15.83
----------- ----------
Balances, December 31, 1998.......... 7,679,954 39,056,754 $14.07
=========== ==========
The following table summarized information about fixed stock options
outstanding as of December 31, 1998:
Options outstanding Options exercisable
------------------------------------- ------------------------
Weighted
average
Range of remaining Weighted Weighted
exercise Number of contractual average Number of average
prices shares life exercise price shares exercise price
- -------- ---------- ----------- -------------- --------- --------------
$ 0.00 728 0.2 $ 0.00 728 $ 0.00
$ 0.03 187,800 6.0 $ 0.03 187,800 $ 0.03
$ 0.06 168,000 6.3 $ 0.06 168,000 $ 0.06
$ 0.13 258,700 6.6 $ 0.13 258,700 $ 0.13
$ 0.44 972,650 7.1 $ 0.44 972,650 $ 0.44
$ 0.66- 0.75 2,723,416 7.2 $ 0.72 1,196,157 $ 0.73
$ 1.38- 1.83 4,941,007 7.3 $ 1.41 1,769,585 $ 1.40
$ 2.88- 4.25 1,793,558 7.3 $ 3.06 565,369 $ 3.05
$ 5.81- 8.44 1,113,753 7.0 $ 8.04 307,558 $ 7.81
$10.99-16.22 7,280,932 7.8 $12.39 2,006,578 $12.47
$16.57-24.78 15,386,874 9.4 $20.66 951,175 $21.04
$24.88-37.02 4,212,956 9.4 $27.65 86,276 $30.17
$51.50 16,380 9.1 $51.50 5,800 $51.50
---------- --- ------ --------- ------
$ 0.00-51.50 39,056,754 8.4 $14.07 8,476,376 $ 6.59
========== =========
In May 1996, the Company adopted the 1996 Employee Stock Purchase Plan (the
"Purchase Plan") and reserved 1,400,000 shares for issuance thereunder. The
Purchase Plan became effective upon the completion of
41
SIEBEL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (Continued)
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 3,400,000
shares. The Purchase Plan permits eligible employees to purchase common stock,
through payroll deductions of up to 15% of the employee's compensation, at a
price equal to 85% of the fair market value of the common stock at either the
beginning or the end of each offering period, whichever is lower. As of
December 31, 1998, 1,388,642 shares had been purchased under the Purchase
Plan.
In addition, Scopus had adopted the 1995 Employee Stock Purchase Plan (the
"Acquired Purchase Plan"). All shares purchased under the Acquired Purchase
Plan have been adjusted to give effect to the conversion under the terms of
the Agreement and Plan of Merger and Reorganization between the Company and
Scopus. Upon the closing of the Scopus merger, 165,466 shares had been
purchased under the Acquired Purchase Plan. No additional shares will be
issued under the Acquired Purchase Plan.
Fair Value Information
The Company has elected to continue to use the intrinsic value-based method
to account for all of its employee stock-based compensation plans. The Company
has recorded no compensation costs related to its stock option plans for the
years ended December 31, 1998, 1997 and 1996, 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.
Pursuant to SFAS No. 123, the Company is required to disclose the pro forma
effects on net income (loss) and net income (loss) per share data as if the
Company had elected to use the fair value approach to account for all its
employee stock-based compensation plans. Had compensation cost for the
Company's plans been determined consistent with the fair value approach
enumerated in SFAS No. 123, the Company's net income (loss) and net income
(loss) per share for the years ended December 31, 1998, 1997 and 1996 would
have been as indicated below (in thousands, except per share data):
1998 1997 1996
------- -------- -------
Net income (loss):
As reported..................................... $42,875 $ (1,187) $12,861
Pro forma....................................... $22,618 $(13,939) $ 9,613
Diluted net income (loss) per share:
As reported..................................... $ 0.43 $ (0.01) $ 0.16
Pro forma....................................... $ 0.23 $ (0.17) $ 0.12
Basic net income (loss) per share:
As reported..................................... $ 0.49 $ (0.01) $ 0.18
Pro forma....................................... $ 0.26 $ (0.17) $ 0.14
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:
1998 1997 1996
---- ---- ----
Risk-free interest rate.................................... 4.85% 6.1% 6.0%
Expected life (in years)................................... 3.4 3.5 3.5
Expected volatility........................................ 70.5% 83.9% 69.2%
42
SIEBEL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (Continued)
The fair value of employees' stock purchase rights under the Purchase Plan
was estimated using the Black-Scholes model with the following weighted
average assumptions used for purchases:
1998 1997 1996
---- ---- ----
Risk-free interest rate.................................... 5.3% 5.3% 5.5%
Expected life (in years)................................... 0.6 0.7 0.5
Expected volatility........................................ 70.5% 83.9% 68.5%
Under SFAS No. 123, the weighted average estimated fair value of employee
stock options granted at exercise prices equal to market price at grant date
during 1998, 1997 and 1996 was $11.87, $8.59 and $2.06 per share,
respectively.
The Company determined the assumptions to be used in computing the fair
value of stock options or stock purchase rights. The risk-free rate is the
U.S. treasury bill rate for the relevant expected life. The expected useful
lives were estimated giving consideration to vesting and purchase periods,
contractual lives, expected employee turnover and underlying stock volatility.
(5) Income Taxes
Income before taxes includes income from foreign operations of approximately
$3,600,000, $680,000 and $127,000 for the years ended December 31, 1998, 1997
and 1996, respectively.
The components of income tax expense for the years ended December 31, 1998,
1997 and 1996 are as follows (in thousands):
1998 1997 1996
------- ------- -------
Current:
Federal........................................ $18,645 $ 7,631 $ 4,984
State.......................................... 4,598 2,669 1,710
Foreign........................................ 1,289 400 345
------- ------- -------
Total current................................ 24,532 10,700 7,039
Deferred:
Federal........................................ (6,394) (1,349) (1,356)
State.......................................... (1,400) (217) (173)
------- ------- -------
Total deferred............................... (7,794) (1,566) (1,529)
Charge in lieu of taxes attributable to
employer's stock option plans............... 13,517 4,046 2,173
------- ------- -------
Total income taxes........................... $30,255 $13,180 $ 7,683
======= ======= =======
43
SIEBEL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (Continued)
The differences between the income tax expense computed at the federal
statutory rate of 35% and the Company's actual income tax expense for the
years ended December 31, 1998, 1997 and 1996 are as follows (in thousands):
1998 1997 1996
------- ------- ------
Expected income tax expense........................ $25,596 $ 4,198 $7,190
State income taxes, net of federal tax benefit..... 3,177 1,864 1,196
In-process research and development................ -- 7,959 --
Non-deductible merger costs........................ 3,369 -- --
Research and experimentation credit................ (838) (543) (537)
Tax exempt interest................................ (1,740) (995) (204)
Foreign sales corporation benefit.................. (634) -- --
Other, net......................................... 1,325 697 38
------- ------- ------
Total income taxes............................... $30,255 $13,180 $7,683
======= ======= ======
The tax effects of temporary differences that give rise to significant
portions of deferred tax assets and liabilities as of December 31, 1998 and
1997 are as follows (in thousands):
1998 1997
------- ------
Deferred tax assets:
Deferred state taxes...................................... $ 549 $ 900
Accruals and reserves, not currently taken for tax
purposes................................................. 12,336 3,276
Net operating loss carryforward........................... 235 602
------- ------
Deferred assets.......................................... 13,120 4,778
Deferred tax liability--depreciation....................... (710) (162)
------- ------
Net deferred assets...................................... $12,410 $4,616
======= ======
As of December 31, 1998, the Company had a net operating loss carryforward
for federal and state income tax purposes of approximately $370,000. The
federal net operating loss carryforward expires in 2012. The state net
operating loss carryforward expires in 2002.
As of December 31, 1998, Scopus Technology UK Ltd. ("Scopus UK"), a
subsidiary of the Company, had a net operating loss carryforward of
approximately $200,000, which can be carried forward indefinitely to offset
future Scopus UK income.
Management believes it is more likely than not that future operations will
generate sufficient taxable income to realize the deferred tax assets.
(6) Related Party Transactions
Certain members of the Company's Board of Directors serve as officers for
customers of the Company. In 1998, aggregate license revenues associated with
shipments to these customers were $1,763,000 and accounts receivable from
these customers was $1,335,000. In 1997, aggregate revenues associated with
shipments to these customers were $1,598,000 and accounts receivable from
these customers was $654,000.
(7) Segment and Geographic Information
The Company and its subsidiaries are principally engaged in the design,
development, marketing and support of Siebel Enterprise Applications, its
family of proprietary software applications. Substantially all
44
SIEBEL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (Continued)
revenues result from the licensing of the Company's software products and
related consulting and customer support (maintenance) services. The Company's
chief operating decision maker reviews financial information presented on a
consolidated basis, accompanied by disaggregated information about revenues by
geographic region for purposes of making operating decisions and assessing
financial performance. Accordingly, the Company considers itself to be in a
single industry segment, specifically the license, implementation and support
of its software applications.
The Company evaluates the performance of its geographic regions based on
revenues and gross margin only. The Company does not assess the performance of
its geographic regions on other measures of income or expense, such as
depreciation and amortization, operating income or net income. In addition, as
the Company's assets are primarily located in its corporate office in the
United States and not allocated to any specific region, the Company does not
produce reports for, or measure the performance of, its geographic regions
based on any asset-based metrics. Therefore, geographic information is
presented only for revenues and gross margin.
While a majority of the Company's revenues are derived from the United
States, the Company's export sales have been growing. Export sales for the
years ended December 31, 1998, 1997 and 1996 were $88,200,000, $41,800,000 and
$7,700,000, respectively. This represented 30%, 27% and 10% of total license
revenues, respectively. The Company's export sales are principally in Europe
and Asia/Pacific.
The following geographic information is presented for the years ended
December 31, 1998, 1997 and 1996 (in thousands):
United Asia/
Year States Europe Pacific Other Totals
---- -------- ------- ------- ------- --------
Revenues:
1998 $275,525 $75,364 $24,424 $16,226 $391,539
1997 157,048 35,052 10,115 5,413 207,628
1996 91,939 4,538 3,744 1,141 101,362
Gross margin:
1998 $227,022 $62,699 $20,824 $13,847 $324,392
1997 130,392 30,535 9,161 4,360 174,448
1996 77,563 3,796 3,513 1,110 85,982
No single customer has accounted for 10% or more of total revenues in 1998,
1997 or 1996.
(8) Acquisitions
Scopus Technology, Inc.
On May 18, 1998, the Company completed the acquisition of Scopus of
Emeryville, California, a leading provider of customer service, field service,
and call center software solutions. Under the terms of the agreement, each
outstanding share of Scopus common stock was exchanged for newly issued shares
of common stock of the Company. This resulted in the issuance of approximately
15.1 million additional shares of the Company's common stock. In addition, all
outstanding stock options of Scopus were converted into the right to acquire
the Company's common stock at the same exchange ratio, with a corresponding
adjustment to the exercise price. In connection with the merger, the Company
incurred direct merger-related expenses of approximately $13,500,000,
including fees for investment bankers, attorneys, accountants and other
professional fees of $9,100,000, integration charges related to duplicate
facilities and equipment of $3,100,000 and other miscellaneous expenses of
$1,300,000. The Company also incurred indirect merger-related expenses of
approximately $1,800,000 for joint sales training and merger-related marketing
costs, which are included within sales and marketing expenses. At December 31,
1998, accrued liabilities included approximately $1,450,000 of unpaid merger-
related expenses.
45
SIEBEL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (Continued)
The transaction has been accounted for as a pooling of interests.
Accordingly, the financial statements of Siebel have been restated to include
the financial position and results of operations of Scopus for all periods
presented. Prior to the merger with Siebel, Scopus ended its fiscal year on
March 31. The restated financial statements as of December 31, 1997 and for
prior periods include Siebel's results of operations for the calendar periods
noted and Scopus' results of operations for the fiscal periods ending three
months later. Beginning January 1, 1998, the restated financial statements
combine the operating results of Siebel and Scopus for the calendar periods
noted. As a result of conforming the reporting periods of Siebel and Scopus,
the operating results of Scopus for the three month period ended March 31,
1998 are included in the restated financial statements for both 1997 and 1998.
Scopus revenues and net income for the three-month period ended March 31, 1998
were $27,100,000 and $1,500,000, respectively. Net income for this period of
approximately $1,500,000 is reflected as a reduction of opening retained
earnings in the restated 1998 financial statements.
The results of operations for the separate companies and the combined
amounts presented in the consolidated financial statements follow (in
thousands).
Year ended
Quarter December 31,
ended March ------------------
31, 1998 1997 1996
----------- -------- --------
(unaudited)
Total revenues:
Siebel...................................... $47,100 $118,775 $ 39,152
Scopus...................................... 27,072 88,853 62,210
------- -------- --------
$74,172 $207,628 $101,362
======= ======== ========
Net income (loss):
Siebel...................................... $ 8,284 $ (2,427) $ 5,025
Scopus...................................... 1,464 1,240 7,836
------- -------- --------
$ 9,748 $ (1,187) $ 12,861
======= ======== ========
In combining the financial statements of Siebel and Scopus, certain
reclassifications, conforming changes and adjustments relating to revenue
recognition were made to the historical financial statements of Scopus. These
conforming changes and adjustments resulted in a reduction of previously
reported net income of approximately $2,930,000 in fiscal 1997 and $580,000 in
fiscal 1996. These adjustments will not reverse in future periods.
20*20 Group, Ltd.
On December 17, 1998, the Company acquired all of the outstanding securities
of the privately-held 20*20 Group, Ltd. ("20*20"), a provider of end-user
training for the enterprise relationship management software market. The
transaction was valued at approximately $6,000,000 and was accounted for by
the purchase method of accounting. Accordingly, the operating results of 20*20
have been included in the accompanying consolidated financial statements of
the Company from the date of acquisition. The purchase price was allocated to
tangible net assets, including current assets, current liabilities and
property, plant and equipment. The excess of the purchase price over the fair
value of the tangible net assets acquired, $5,500,000, was allocated to
goodwill. This amount will be amortized over three years.
The results of operations of 20*20 prior to the acquisition date are not
considered material to the consolidated results of operations of the Company
and, accordingly, pro forma financial statement information has not been
presented.
46
SIEBEL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (Continued)
InterActive WorkPlace, Inc
On October 1, 1997, the Company issued shares of common stock in exchange
for all outstanding securities of privately-held InterActive WorkPlace, Inc.
("InterActive"), a developer of intranet-based business intelligence software
technology. The transaction was valued at approximately $15,000,000 and was
accounted for by the purchase method of accounting. Accordingly, the operating
results of InterActive have been included in the accompanying consolidated
financial statements of the Company from the date of acquisition. Under the
terms of the agreement, InterActive's securityholders received or will receive
up to approximately 854,000 shares of the Company's common stock in exchange
for all outstanding shares in InterActive. Additionally, InterActive optionees
received options to purchase an aggregate of approximately 64,000 shares of
the Company's common stock in exchange for their options to purchase
InterActive common stock. The excess of the purchase price over the fair value
of the net assets acquired was allocated to purchased in-process research and
development and intangible assets of $14,017,000 and $104,000, respectively.
The purchased in-process research and development was charged to operations in
the fourth quarter of 1997. The amounts allocated to intangible assets will be
amortized over three years.
Purchased in-process research and development is related to the completion
of InterActive's data integration, filtering and formatting technology and its
integration into the Company's products. At the time of acquisition, a
prototype of InterActive's product existed and was in limited trials, however,
the prototype was not stable or sufficiently developed to be scalable on an
enterprise-wide basis. InterActive's technology was completed, at a cost of
approximately $400,000, and incorporated as a separate module into the Siebel
98 product suite which was released in June 1998. The Company estimated that
the technology was approximately 75% complete as of the acquisition date. At
that date, the only identifiable asset acquired was the technology under
development. Accordingly, essentially all of the excess purchase price over
net assets acquired, except for amounts assigned to net current assets, fixed
assets and workforce-in-place, was assigned to in-process research and
development.
The results of operations of InterActive prior to the acquisition date are
not considered material to the consolidated results of operations of the
Company and, accordingly, pro forma financial information has not been
presented.
Nomadic Systems, Inc
On November 1, 1997, the Company issued shares of common stock in exchange
for all outstanding securities of privately-held Nomadic Systems, Inc.
("Nomadic"), a provider of innovative business solutions to pharmaceutical
sales forces. The transaction was valued at approximately $11,000,000 and was
accounted for by the purchase method of accounting. Accordingly, the operating
results of Nomadic have been included in the accompanying consolidated
financial statements of the Company from the date of acquisition. Under the
terms of the agreement, Nomadic's securityholders received approximately
600,000 shares of the Company's common stock in exchange for all outstanding
shares of Nomadic. The purchase price was allocated to net current assets,
fixed assets, purchased in-process research and development and intangible
assets of $557,000, $186,000, $8,723,000 and $1,553,000, respectively. The
purchased in-process research and development was charged to operations in the
fourth quarter of 1997. The amounts allocated to intangible assets will be
amortized over three years.
The appraisal of the acquired research and development was based upon the
present value of forecasted operating cash flows from the technology acquired,
giving effect to the stage of completion at the acquisition date. These
forecasted cash flows were then discounted at a rate which gave consideration
to the risk involved in completing the acquired technology. The forecasted
cash flows assumed inclusion of the product developed from acquired technology
into the existing Siebel product suite.
47
SIEBEL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (Continued)
The purchased in-process research and development expense related to
completion of Nomadic's second generation pharmaceutical sales force
automation product. At the time of the acquisition, Nomadic had a first-
generation product at a limited number of customers, with a very small user
base. There were a considerable number of uncertainties as to increasing the
product's scalability for deployment on an enterprise-wide basis, improving
the stability of the application and identifying and fixing bugs. The Company
allocated limited excess purchase price over net assets acquired to net
current assets, fixed assets and workforce-in-place. The majority of the
excess purchase price was allocated to in-process research and development and
other intangible assets (goodwill) based upon the expected cash flows from
Nomadic's existing product and the product under development, giving
consideration to the stage of completion of the technology under development
at the acquisition date. This technology was completed, at a cost of
approximately $1,300,000, for enterprise-wide release in March 1998.
The results of operations of Nomadic prior to the acquisition date are not
considered material to the consolidated results of operations of the Company
and, accordingly, pro forma financial statement information has not been
presented.
Clear With Computers, Inc.
The Company incurred merger costs of approximately $3,300,000 in the third
quarter of 1997 in connection with Scopus' planned merger with Clear With
Computers, Inc. The merger plan was terminated early in the fourth quarter of
1997.
Selected Quarterly Financial Data (unaudited)
The following table presents selected quarterly information for fiscal 1998
and 1997 (in thousands, except share data):
First Second Third Fourth
quarter quarter quarter quarter
------- ------- -------- --------
1998:
Net revenues............................. $74,172 $90,016 $104,194 $123,157
Gross margin............................. 62,351 72,503 86,503 103,035
Net income (loss)........................ 9,748 (810) 14,063 19,874
Net income (loss) per diluted share...... 0.10 (0.01) 0.14 0.20
Net income (loss) per basic share........ 0.11 (0.01) 0.16 0.22
1997:
Net revenues............................. $39,047 $44,114 $ 55,236 $ 69,231
Gross margin............................. 32,758 37,078 46,064 58,548
Net income (loss)........................ 4,022 4,620 3,655 (13,484)
Net income (loss) per diluted share...... 0.04 0.05 0.04 (0.16)
Net income (loss) per basic share........ 0.05 0.06 0.04 (0.16)
48
Schedule II
Valuation and Qualifying Accounts
Balance at Charged to Balance at
Beginning Costs and End of
of Year Expenses Deductions Year
---------- ---------- ---------- ----------
(in thousands)
Allowance For Doubtful Accounts
Year ended December 31, 1998...... $4,288 $6,230 $ 188 $10,330
Year ended December 31, 1997...... $1,940 $4,920 $2,572 $ 4,288
Year ended December 31, 1996...... $ 665 $2,636 $1,361 $ 1,940
49
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 31, 1998
/s/ Howard H. Graham
By: _________________________________
Howard H. Graham
Senior Vice President Finance and
Administration and Chief Financial
Officer
50
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 Executive March 31, 1999
___________________________________________ Officer and Director
Thomas M. Siebel (Principal Executive Officer)
/s/ Howard H. Graham Senior Vice President Finance March 31, 1999
___________________________________________ and Administration and Chief
Howard H. Graham Financial Officer (Principal
Financial and Accounting
Officer)
/s/ James C. Gaither Director March 31, 1999
___________________________________________
James C. Gaither
/s/ Eric E. Schmidt, Ph.D. Director March 31, 1999
___________________________________________
Eric E. Schmidt, Ph.D.
/s/ Charles R. Schwab Director March 31, 1999
___________________________________________
Charles R. Schwab
/s/ George T. Shaheen Director March 31, 1999
___________________________________________
George T. Shaheen
/s/ A. Michael Spence, Ph.D. Director March 31, 1999
___________________________________________
A. Michael Spence, Ph.D.
51