UNITED
STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
ý |
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For the quarterly period ended June 30, 2003 |
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OR |
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o |
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITES EXCHANGE ACT OF 1934 |
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For the transition period from to |
Commission File No. 000-30207
SEEBEYOND TECHNOLOGY CORPORATION
(Exact name of Registrant as Specified in Its Charter)
Delaware |
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95-4249153 |
(State
or Other Jurisdiction of |
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(I.R.S.
Employer |
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800 E. Royal Oaks Drive |
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(Address,
including Zip Code, of Registrants Principal Executive Offices |
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes ý No o
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 under the Act). Yes ý No o
The number of shares outstanding of the registrants Common Stock, $0.0001 par value, as of August 13, 2003 was 82,924,258.
SeeBeyond Technology Corporation and Subsidiaries
INDEX
2
PART I FINANCIAL INFORMATION
Item 1 . Financial Statements
SeeBeyond Technology Corporation and Subsidiaries
Condensed Consolidated Balance Sheets
|
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June 30, |
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December
31, |
|
||
|
|
(Unaudited) |
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|
|
||
Assets: |
|
|
|
|
|
||
Current assets: |
|
|
|
|
|
||
Cash and cash equivalents |
|
$ |
80,091 |
|
$ |
94,114 |
|
Accounts receivable, net of allowances of $2,965 and $2,539 at June 30, 2003 and December 31, 2002, respectively |
|
20,350 |
|
33,550 |
|
||
Prepaid expenses and other current assets |
|
4,559 |
|
4,180 |
|
||
Total current assets |
|
105,000 |
|
131,844 |
|
||
Property and equipment, net |
|
16,823 |
|
22,429 |
|
||
Goodwill |
|
1,391 |
|
1,391 |
|
||
Other assets |
|
2,239 |
|
1,379 |
|
||
Total assets |
|
$ |
125,453 |
|
$ |
157,043 |
|
Liabilities and stockholders equity: |
|
|
|
|
|
||
Current liabilities: |
|
|
|
|
|
||
Accounts payable |
|
$ |
6,305 |
|
$ |
11,343 |
|
Accrued compensation and related expenses |
|
10,678 |
|
11,818 |
|
||
Accrued expenses |
|
8,734 |
|
8,891 |
|
||
Deferred revenues |
|
27,132 |
|
28,141 |
|
||
Equipment line and advance payable - current portion |
|
3,151 |
|
2,988 |
|
||
Capital lease payable current portion |
|
243 |
|
214 |
|
||
Total current liabilities |
|
56,243 |
|
63,395 |
|
||
Equipment line and advance payable |
|
1,522 |
|
3,260 |
|
||
Capital lease payable |
|
645 |
|
750 |
|
||
Total liabilities |
|
58,410 |
|
67,405 |
|
||
Commitments and contingencies |
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|
|
|
|
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Stockholders equity: |
|
|
|
|
|
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Common stock, $.0001 par value - 200,000,000 shares authorized; 84,122,945 shares issued and 82,922,945 shares outstanding as of June 30, 2003 and 83,738,243 shares issued and 82,538,243 shares outstanding as of December 31, 2002 |
|
8 |
|
8 |
|
||
Additional paid-in capital |
|
219,962 |
|
219,246 |
|
||
Treasury stock |
|
(2,760 |
) |
(2,760 |
) |
||
Deferred stock compensation |
|
(128 |
) |
(317 |
) |
||
Accumulated other comprehensive loss |
|
(191 |
) |
(99 |
) |
||
Accumulated deficit |
|
(149,848 |
) |
(126,440 |
) |
||
Total stockholders equity |
|
67,043 |
|
89,638 |
|
||
Total liabilities and stockholders equity |
|
$ |
125,453 |
|
$ |
157,043 |
|
The accompanying notes are an integral part of these financial statements.
3
SeeBeyond Technology Corporation and Subsidiaries
Condensed Consolidated Statements of Operations
(Unaudited)
|
|
Three
Months Ended |
|
Six Months
Ended |
|
||||||||
In thousands, except per share data |
|
2003 |
|
2002 |
|
2003 |
|
2002 |
|
||||
Revenues: |
|
|
|
|
|
|
|
|
|
||||
License |
|
$ |
7,137 |
|
$ |
14,269 |
|
$ |
20,127 |
|
$ |
35,338 |
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Services |
|
9,823 |
|
9,960 |
|
21,055 |
|
20,705 |
|
||||
Maintenance |
|
11,897 |
|
9,441 |
|
23,497 |
|
18,509 |
|
||||
Total revenues |
|
28,857 |
|
33,670 |
|
64,679 |
|
74,552 |
|
||||
Cost of revenues: |
|
|
|
|
|
|
|
|
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||||
License |
|
276 |
|
130 |
|
821 |
|
1,189 |
|
||||
Services and maintenance revenues (exclusive of stock-based compensation of $11 and $34 and $27 and $76 for the three and six months ended June 30, 2003 and 2002, respectively.) |
|
10,572 |
|
10,729 |
|
22,120 |
|
20,696 |
|
||||
Total cost of revenues |
|
10,848 |
|
10,859 |
|
22,941 |
|
21,885 |
|
||||
Gross profit |
|
18,009 |
|
22,811 |
|
41,738 |
|
52,667 |
|
||||
Operating expenses: |
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|
|
|
|
|
|
|
|
||||
Research and development (exclusive of stock-based compensation $17 and $39 and $35 and $86 for the three and six months ended June 30, 2003 and 2002, respectively.) |
|
10,449 |
|
8,109 |
|
21,076 |
|
15,764 |
|
||||
Sales and marketing (exclusive of stock-based compensation of $36 and $125 and $95 and $281 for the three and six months ended June 30, 2003 and 2002, respectively.) |
|
13,959 |
|
17,106 |
|
28,440 |
|
31,606 |
|
||||
General and administrative (exclusive of stock-based compensation $7 and $17 and $15 and $37 for the three and six months ended June 30, 2003 and 2002, respectively.) |
|
4,599 |
|
4,831 |
|
9,225 |
|
9,041 |
|
||||
Restructuring and impairment charges |
|
6,386 |
|
|
|
6,386 |
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|
|
||||
Amortization of sales and marketing warrants |
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13 |
|
(41 |
) |
124 |
|
400 |
|
||||
Amortization of stock-based compensation |
|
71 |
|
215 |
|
172 |
|
480 |
|
||||
Total operating expenses |
|
35,477 |
|
30,220 |
|
65,423 |
|
57,291 |
|
||||
Loss from operations |
|
(17,468 |
) |
(7,409 |
) |
(23,685 |
) |
(4,624 |
) |
||||
Other income (expense): |
|
|
|
|
|
|
|
|
|
||||
Interest, net |
|
193 |
|
339 |
|
363 |
|
532 |
|
||||
Loss before income tax provision |
|
(17,275 |
) |
(7,070 |
) |
(23,322 |
) |
(4,092 |
) |
||||
Provision for income taxes |
|
8 |
|
(4 |
) |
86 |
|
79 |
|
||||
Net loss |
|
$ |
(17,283 |
) |
$ |
(7,066 |
) |
$ |
(23,408 |
) |
$ |
(4,171 |
) |
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|
|
|
|
|
|
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Basic and diluted net loss per share |
|
$ |
(0.21 |
) |
$ |
(0.08 |
) |
$ |
(0.28 |
) |
$ |
(0.05 |
) |
Number of shares used in calculating basic and diluted net loss per share |
|
82,808 |
|
83,360 |
|
82,718 |
|
81,096 |
|
The accompanying notes are an integral part of these financial statements.
4
SeeBeyond Technology Corporation and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
|
|
Six Months
Ended |
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||||
|
|
2003 |
|
2002 |
|
||
Cash flows from operating activities: |
|
|
|
|
|
||
Net loss |
|
$ |
(23,408 |
) |
$ |
(4,171 |
) |
Adjustments to reconcile net loss to net cash (used in) provided by operating activities: |
|
|
|
|
|
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Gain on disposal of fixed assets |
|
(21 |
) |
|
|
||
Depreciation and amortization |
|
3,005 |
|
2,888 |
|
||
Provision for doubtful accounts receivable |
|
433 |
|
50 |
|
||
Amortization of sales and marketing warrants |
|
124 |
|
400 |
|
||
Amortization of stock-based compensation |
|
172 |
|
480 |
|
||
Non-cash restructuring and impairment charges |
|
4,274 |
|
|
|
||
Changes in assets and liabilities: |
|
|
|
|
|
||
Accounts receivable |
|
12,767 |
|
8,705 |
|
||
Prepaid expenses and other current assets |
|
(379 |
) |
(2,033 |
) |
||
Accounts payable |
|
(2,763 |
) |
(1,791 |
) |
||
Accrued compensation and related expenses |
|
(1,297 |
) |
(1,766 |
) |
||
Deferred revenues |
|
(1,009 |
) |
1,009 |
|
||
|
|
|
|
|
|
||
Net cash (used in) provided by operating activities |
|
(8,102 |
) |
3,771 |
|
||
|
|
|
|
|
|
||
Cash flows from investing activities: |
|
|
|
|
|
||
Purchases of property and equipment |
|
(3,888 |
) |
(4,670 |
) |
||
Related party receivable |
|
|
|
366 |
|
||
Other |
|
(860 |
) |
(995 |
) |
||
|
|
|
|
|
|
||
Net cash used in investing activities |
|
(4,748 |
) |
(5,299 |
) |
||
|
|
|
|
|
|
||
Cash flows from financing activities: |
|
|
|
|
|
||
Net repayments on bank lines of credit |
|
(1,575 |
) |
(326 |
) |
||
Proceeds from issuance of common stock pursuant to secondary public offering, net |
|
|
|
59,012 |
|
||
Proceeds from issuance of common stock pursuant to employee stock option plan |
|
264 |
|
3,464 |
|
||
Proceeds from issuance of common stock pursuant to employee stock purchase plan |
|
345 |
|
563 |
|
||
Repayments of capital lease obligation |
|
(115 |
) |
|
|
||
|
|
|
|
|
|
||
Net cash (used in) provided by financing activities |
|
(1,081 |
) |
62,713 |
|
||
|
|
|
|
|
|
||
Effect of exchange rate changes on cash and cash equivalents |
|
(92 |
) |
1,068 |
|
||
|
|
|
|
|
|
||
Net (decrease) increase in cash and cash equivalents |
|
(14,023 |
) |
62,253 |
|
||
Cash and cash equivalents at beginning of the period |
|
94,114 |
|
47,039 |
|
||
|
|
|
|
|
|
||
Cash and cash equivalents at end of the period |
|
$ |
80,091 |
|
$ |
109,292 |
|
The accompanying notes are an integral part of these financial statements.
5
SeeBeyond Technology Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note 1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared by SeeBeyond Technology Corporation (the Company or SeeBeyond) in accordance with the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in consolidated financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted in accordance with such rules and regulations. In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all adjustments, consisting only of normal recurring adjustments, necessary to present fairly the financial position of the Company, and its results of operations and cash flows. These condensed consolidated financial statements should be read in conjunction with the annual audited consolidated financial statements and notes as of and for the year ended December 31, 2002 included in the Companys Form 10-K filed with the Securities and Exchange Commission on March 28, 2003, as amended on April 9, 2003.
The results of operations for the three and six months ended June 30, 2003 are not necessarily indicative of the results that may be expected for the year ending December 31, 2003 or any other interim period, and the Company makes no representations related thereto.
The consolidated financial statements include the accounts of the Company and its subsidiaries. All material intercompany accounts and transactions have been eliminated in consolidation.
Certain reclassifications have been made to prior year information to conform to the current periods presentation.
Note 2. Revenue Recognition
The Company recognizes revenue when an agreement has been signed by both parties or other persuasive evidence of an arrangement exists, the software has been shipped or electronically delivered, the fees are fixed or determinable, collection of the resulting receivable is probable and no other significant obligations remain. For multiple element arrangements where vendor-specific objective evidence of fair value exists for all undelivered elements, we account for the delivered elements in accordance with the residual method prescribed by Statement of Position 98-9. Vendor-specific objective evidence of fair value is based on the price a customer is required to pay when the element is sold separately. The Company enters into arrangements with end users, which may include the sale of licenses of software, maintenance and services under the arrangement or various combinations of each element, including the sale of such elements separately.
For multi-element arrangements, each element of the arrangement is analyzed and the Company allocates a portion of the total fee under the arrangement to the undelivered elements, primarily services and maintenance, using vendor-specific objective evidence of fair value of the element and the remaining portion of the fee is allocated to the delivered elements (i.e. generally the software license), regardless of any separate prices stated within the contract for each element, under the residual method prescribed by SOP 98-9. Vendor-specific objective evidence of fair value is based on the price the customer is required to pay when the element is sold separately (i.e. hourly rates charged for consulting services when sold separately from a software license and the renewal rate for maintenance arrangements). Each license agreement offers additional maintenance renewal periods at a stated price. If vendor-specific objective evidence of fair value does not exist for the undelivered elements, all revenue is deferred and recognized ratably over the service period if the undelivered element is services, or over the period the maintenance is provided if the undelivered element is maintenance, or until sufficient objective evidence exists or all elements have been delivered.
License Revenues: Amounts allocated to license revenues under the residual method are recognized at the time of delivery of the software when vendor specific objective evidence of fair value exists for the undelivered elements, if any, and all the other revenue recognition criteria discussed above have been met.
Services Revenues: Revenues from services are comprised of consulting and implementation services and, to a limited extent, training. Services are generally sold on a time-and-materials or fixed fee basis and include a range of services including installation of off-the-shelf software, data conversion and building non-complex interfaces to allow the software to operate in customized environments. Services are generally separable from the other elements under the arrangement since the performance of the services are not essential to the functionality (i.e. do not involve significant production, modification or customization of the software or building complex interfaces) of any other element of the transaction and are described in the contract such that the total price of the arrangement would be expected to vary as the result of the inclusion or exclusion of the services. Revenues for services are recognized as the services are performed. Training services are sold either on a per student basis or per class and are recognized as classes are attended.
Maintenance Revenues: Maintenance revenues consist primarily of fees for providing unspecified software upgrades on a when-and-
6
if-available basis and technical support over a specified term, which is typically twelve months. Maintenance revenues are typically paid in advance and are recognized on a straight-line basis over the term of the contract.
Revenues on sales made by alliance partners are generally recognized upon shipment of the software to the end user, if all other revenue recognition criteria noted above are met. Under limited arrangements with certain distributors, when all the revenue recognition criteria have been met upon delivery of the product to the distributor, revenues are recognized at that time. The Company does not offer a right of return on its products.
Note 3. Recently Issued Accounting Pronouncements
In May 2003, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 150, Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity. SFAS 150 requires that certain instruments with certain characteristics be classified as liabilities as opposed to equity. This statement is effective for financial instruments entered into or modified after May 30, 2003, and otherwise is effective July 1, 2003. We do not believe that the adoption of this standard will have a material impact on our financial position, results of operations and cash flows.
In January 2003, the FASB issued FASB Interpretation No. 46, Consolidation of Variable Interest Entities (FIN 46). FIN 46 provides guidance on the identification of entities for which control is achieved through means other than through voting rights, variable interest entities, and how to determine when and which business enterprises should consolidate variable interest entities. This interpretation applied immediately to variable interest entities created after January 31, 2003. It applies in the first fiscal year or interim period beginning after June 15, 2003, to variable interest entities in which an enterprise holds a variable interest that it acquired before February 1, 2003. The adoption of this interpretation is not expected to have an impact on the Companys financial statements.
In December 2002, the FASB issued SFAS No. 148, Accounting for Stock Based CompensationTransition and Disclosurean Amendment to FAS 123. SFAS 148 provides two additional transition methods for entities that adopt the fair value method of accounting for stock-based compensation. The statement requires disclosure of comparable information for all companies regardless of whether, when, or how an entity adopts the preferable, fair value based method of accounting. These disclosures are now required for interim periods in addition to annual disclosure. The Company adopted the additional disclosure provision of SFAS No. 148 in the fourth quarter of 2002. As permitted, the Company has not adopted the fair value method and continues to account for options under APB No. 25.
In November 2002, the FASB issued Interpretation No. 45, Guarantors Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others(FIN 45). FIN 45 elaborates on the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under certain guarantees it has issued. It also clarifies that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. The disclosure requirements are effective for financial statements of interim or annual periods ending after December 15, 2002. The recognition and measurement provisions of FIN 45 are applicable on a prospective basis to guarantees issued or modified after December 31, 2002. The application of FIN 45 is not expected to materially impact the financial condition, results of operations, and cash flows of the Company.
In July 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities. SFAS No. 146 requires a liability for costs associated with an exit or disposal activity be recognized and measured initially at fair value only when the liability is incurred rather than the date of commitment to an exit or disposal plan. SFAS No. 146 is effective for exit or disposal activities that are initiated after December 31, 2002. Restructuring and impairment charges recorded by the Company in the three months ended June 30, 2003, were recorded under SFAS No. 146 and restructuring and impairment charges recorded in the three months ended December 31, 2002, were recorded under Emerging Issues Task Force No. 94-3.
Note 4. Operations by Reportable Segments and Geographic Area
SeeBeyond has developed a comprehensive solution for business integration, enabling the seamless flow of information across systems applications and enterprises in real-time, on a global basis. The Company operates in one industry segment, which is the development and marketing of a comprehensive solution for business integration where all key integration technologies, including application-to-application, business-to-business and business process management, are seamlessly integrated.
7
Revenues and long-lived assets by geographic area were as follows (in thousands):
|
|
Three
Months Ended |
|
Six Months
Ended |
|
||||||||
|
|
2003 |
|
2002 |
|
2003 |
|
2002 |
|
||||
Revenues: |
|
|
|
|
|
|
|
|
|
||||
North America |
|
$ |
17,194 |
|
$ |
21,828 |
|
$ |
39,877 |
|
$ |
50,032 |
|
Europe |
|
8,572 |
|
9,286 |
|
18,225 |
|
18,497 |
|
||||
Pacific Rim |
|
3,091 |
|
2,556 |
|
6,577 |
|
6,023 |
|
||||
Total revenues |
|
$ |
28,857 |
|
$ |
33,670 |
|
$ |
64,679 |
|
$ |
74,552 |
|
|
|
June 30, |
|
December
31, |
|
||
Long-lived assets: |
|
|
|
|
|
||
North America |
|
$ |
17,251 |
|
$ |
22,143 |
|
Europe |
|
1,831 |
|
2,047 |
|
||
Pacific Rim |
|
1,371 |
|
1,009 |
|
||
Total long-lived assets |
|
$ |
20,453 |
|
$ |
25,199 |
|
No single customer accounted for more than 10% of the Companys net revenues during the three months or six months ended June 30, 2003 and 2002.
Note 5. Computation of Net Loss Per Share
Basic net loss per share is computed on the basis of the weighted average number of common shares outstanding. Diluted net loss per share is computed on the basis of the weighted average number of common shares outstanding plus the effect of outstanding stock warrants and outstanding employee stock options using the treasury stock method.
The following table sets forth the components of basic and diluted net loss per share for the periods indicated (in thousands, except per share amounts):
|
|
Three
Months Ended |
|
Six Months
Ended |
|
||||||||
|
|
|
|
|
|
|
|
|
|
||||
|
|
2003 |
|
2002 |
|
2003 |
|
2002 |
|
||||
Net loss |
|
$ |
(17,283 |
) |
$ |
(7,066 |
) |
$ |
(23,408 |
) |
$ |
(4,171 |
) |
Weighted average outstanding shares of common stock used to compute basic net loss per share |
|
82,808 |
|
83,360 |
|
82,718 |
|
81,096 |
|
||||
Dilutive effect of: |
|
|
|
|
|
|
|
|
|
||||
Stock warrants |
|
|
|
|
|
|
|
|
|
||||
Employee stock options |
|
|
|
|
|
|
|
|
|
||||
Common stock and common stock equivalents |
|
82,808 |
|
83,360 |
|
82,718 |
|
81,096 |
|
||||
|
|
|
|
|
|
|
|
|
|
||||
Net basic and diluted loss per share |
|
$ |
(0.21 |
) |
$ |
(0.08 |
) |
$ |
(0.28 |
) |
$ |
(0.05 |
) |
Options to purchase approximately 11,903,000 shares of common stock for the three months and six months ended June 30, 2003 and options to purchase 12,720,000 shares of common stock for the three months and six months ended June 30, 2002 were not included in the calculations of diluted net loss per share because their effect would be antidilutive. Common stock warrants to purchase 650,000 shares for the three months and six months ended June 30, 2003 and common stock warrants to purchase 1,850,000 shares for the three months and six months ended June 30, 2002 were not included in the calculations of diluted net loss per share because their effect would be antidilutive.
Note 6. Stock-Based Compensation
As permitted under SFAS No. 123 Accounting for Stock-based Compensation, the Company continues to apply the provisions of APB No. 25, Accounting for Stock Issued to Employees, for its recording of stock-based compensation arrangements. Accordingly,
8
the Company accounts for its stock-based compensation using the intrinsic value method, which requires recognition of expense when the option exercise price is less than the fair value of the stock at the date of grant. The Company provides the required pro forma net income (loss) and pro forma earnings (loss) per share disclosures for employee stock option grants made in 1995 and future years as if the fair value based method defined in SFAS No. 123 had been applied. Under the fair value method stock options are valued and expensed based on the fair value of the options determined under an option-pricing model.
The following table sets forth pro forma net loss and pro forma loss per share (in thousands, except per share amounts):
|
|
Three
Months Ended |
|
Six Months
Ended |
|
||||||||
|
|
2003 |
|
2002 |
|
2003 |
|
2002 |
|
||||
Net loss, as reported |
|
$ |
(17,283 |
) |
$ |
(7,066 |
) |
$ |
(23,408 |
) |
$ |
(4,171 |
) |
Stock-based employee compensation costs, included in net loss, as reported |
|
71 |
|
215 |
|
172 |
|
480 |
|
||||
Stock-based employee compensation costs if fair value based method had been applied |
|
(3,322 |
) |
(4,043 |
) |
(6,677 |
) |
(7,481 |
) |
||||
Pro forma net loss |
|
$ |
(20,534 |
) |
$ |
(10,894 |
) |
$ |
(29,913 |
) |
$ |
(11,172 |
) |
Earning per share: |
|
|
|
|
|
|
|
|
|
||||
Basic and diluted - as reported |
|
$ |
(0.21 |
) |
$ |
(0.08 |
) |
$ |
(0.28 |
) |
$ |
(0.05 |
) |
Basic and diluted - pro forma |
|
$ |
(0.25 |
) |
$ |
(0.13 |
) |
$ |
(0.36 |
) |
$ |
(0.14 |
) |
Note 7. Commitments, Contingencies and Debt
Bank Lines of Credit and Equipment Line Payable
In November 2000, the Company established a $15.0 million line of credit facility (the Line) with a lending institution that bears interest at an annual rate of either prime plus 0.5% or the London InterBank Offered Rate (LIBOR) rate plus 2.50% (payable monthly) and was to expire May 31, 2003. In May 2003, the Company amended the Line to extend the expiration date through May 31, 2004. As of June 30, 2003, $7.0 million was available under the Line and there were no borrowings outstanding. The Company may use up to $5.0 million of the Line to issue letters of credit. As of June 30, 2003, approximately $386,000 was available for the issuance of letters of credit. The Line is secured by intellectual property rights, accounts receivable and certain other assets and is subject to certain borrowing base restrictions. The Line requires maintenance of certain financial covenants pertaining to key financial ratios.
In October 2001, the Companys $3.0 million equipment line (the Equipment Line) with the same lending institution providing the Line was amended, reducing the maximum amount available for borrowing under the Equipment Line to $2.0 million. The Equipment Line bears interest at an annual rate of prime plus 0.75%, or the LIBOR rate plus 2.75% (payable monthly) and expires on November 30, 2004. The rate at June 30, 2003 was 4.75%. The Company could draw against the Equipment Line through November 30, 2001. Interest is payable monthly and principal is payable in 36 monthly installments commencing in December 2001. As of June 30, 2003, the balance outstanding under this Equipment Line was approximately $923,000. The Equipment Line is secured by certain assets of the Company.
In December 2002, the Companys credit facility was amended to include an equipment advance (the Equipment Advance) in the amount of $5.0 million from the same lending institution. Interest on the Equipment Advance is payable monthly and principal is payable in 24 equal monthly installments, beginning January 31, 2003. The Equipment Advance bears interest at an annual rate of prime plus 0.75% or the LIBOR rate plus 3.0%. The rate at June 30, 2003 was 4.75%. As of June 30, 2003 the balance outstanding under this Equipment Advance was approximately $3.8 million.
Future principal payments on the Equipment Line and the Equipment Advance will aggregate approximately $1.6 million for the remainder of 2003 and $3.1 million in 2004, based on the total outstanding balance of approximately $4.7 million.
Legal Proceedings
Beginning on July 3, 2002, several purported class action shareholder complaints were filed in the United States District Court for the Central District of California against the Company and several of our officers and directors. The actions were subsequently consolidated and a consolidated amended complaint was filed purportedly brought on behalf of purchasers of common stock of SeeBeyond Technology Corporation between December 10, 2001 and May 7, 2002. The complaint generally alleges that defendants made false statements about SeeBeyonds operating results and business, while concealing material information. The plaintiffs seek unspecified monetary damages. The Company believes the suit to be without merit and intends to defend against it vigorously.
9
Beginning on September 5, 2002, several derivative lawsuits were filed by purported Company shareholders in the Superior Court of California for the County of Los Angeles. The complaints name certain of the Companys present and former officers and directors as defendants and name the Company as a nominal defendant. The complaints generally allege that the defendants breached their fiduciary duties to the Company through the dissemination of allegedly misleading and inaccurate information and other allegations.
Although we have begun to accrue amounts relating to legal costs and expenses, we have not accrued any amounts relating to potential damages associated with the putative class action lawsuits. However, because of uncertainties relating to litigation, our decision as to whether to accrue and the amount of our estimates could be wrong. In addition, although we are unable to determine the amount, if any, we may be required to pay in connection with the resolution of the lawsuits by settlement or otherwise, such a payment could seriously harm our results of operation, financial condition and liquidity.
The Company is party to claims and suits brought against it in the ordinary course of business. In the opinion of management, such claims should not have any material adverse effect upon the results of operation, cash flows or the financial position of the Company.
Note 8. Comprehensive Loss
The Company accounts for comprehensive loss using SFAS No. 130, Reporting Comprehensive Income. SFAS No. 130 establishes standards for reporting comprehensive income and its components in financial statements. Comprehensive income, as defined, refers to revenues, expenses, gains and losses that are not included in net loss but rather are recorded directly in stockholders equity.
Total comprehensive loss was as follows (in thousands):
|
|
Three
Months Ended |
|
Six Months
Ended |
|
||||||||
|
|
2003 |
|
2002 |
|
2003 |
|
2002 |
|
||||
Net loss |
|
$ |
(17,283 |
) |
$ |
(7,066 |
) |
$ |
(23,408 |
) |
$ |
(4,171 |
) |
Other comprehensive loss: |
|
|
|
|
|
|
|
|
|
||||
Foreign translation adjustment |
|
72 |
|
1,154 |
|
(92 |
) |
1,068 |
|
||||
Comprehensive loss |
|
$ |
(17,211 |
) |
$ |
(5,912 |
) |
$ |
(23,500 |
) |
$ |
(3,103 |
) |
Note 9. Stockholders Equity
Secondary Public Offering
In February 2002, the Company completed a public offering of 6,572,623 shares of common stock at $9.57 per share and realized proceeds, net of underwriting discounts, commissions and issuance costs, of approximately $59.0 million.
Common Stock Warrants
In January 2002, a strategic alliance partner of the Company exercised its warrant and converted its right to purchase 1,200,000 shares of common stock at $5.33 per share into 666,337 shares of common stock of the Company.
In March 2002, a warrant agreement between another strategic alliance partner and the Company was cancelled and all rights under the warrant agreement, including all fully vested shares were forfeited.
Note 10. Restructuring and Impairment Charges
During the three months ended December 31, 2002, the Company recorded restructuring and impairment charges totaling $6.6 million, consisting of $2.1 million for employee termination benefits and related costs associated with headcount reductions, $2.7 million related to future rent obligations for properties abandoned in connection with facilities consolidation and $1.8 million related to the write-down of leasehold improvements, furniture, computer equipment and software in connection with facilities consolidation and headcount reductions.
The headcount reduction of 57 employees was made up of approximately 56% sales and marketing staff, 15% professional services staff, 19% general and administrative staff and 10% research and development staff. The restructuring and impairment charges recorded in the three months ended December 31, 2002 were recorded under EITF No. 94-3. Under EITF No. 94-3 the accrual for future rent obligations recorded in the three months ended December 31, 2002 was made when a commitment to abandon the facilities was reached in December 2002.
During the three months ended June 30, 2003, the Company recorded restructuring and impairment charges totaling $6.4 million,
10
consisting of $1.1 million for employee termination benefits and related costs associated with headcount reductions, $1.0 million related to future rent obligations for properties abandoned in connection with facilities consolidation and $4.3 million related to the write-down of leasehold improvements, furniture, computer equipment and software in connection with the facilities consolidation and headcount reductions.
The headcount reduction of 44 employees was made up of approximately 34% sales and marketing staff, 52% professional services staff and 14% general and administrative staff. The restructuring and impairment charges recorded in the three months ended June 30, 2003 were recorded under SFAS No. 146. Under SFAS No. 146 the accrual for future rent obligations recorded in the three months ended June 30, 2003 was recorded when the facilities were abandoned.
These restructuring and impairment charges were recorded to better align the companys cost structure with changing market conditions.
The following table sets forth the Companys accrued restructuring costs as of June 30, 2003 (in thousands).
|
|
Future
rent |
|
Asset |
|
Involuntary |
|
Total |
|
||||
Balance at December 31, 2002 |
|
$ |
3,100 |
|
$ |
|
|
$ |
870 |
|
$ |
3,970 |
|
Activity during three months ended March 31, 2003: |
|
|
|
|
|
|
|
|
|
||||
Cash payments |
|
(543 |
) |
|
|
(578 |
) |
(1,121 |
) |
||||
|
|
|
|
|
|
|
|
|
|
||||
Balance at March 31, 2003 |
|
2,557 |
|
|
|
292 |
|
2,849 |
|
||||
Activity during three months ended June 30, 2003: |
|
|
|
|
|
|
|
|
|
||||
Restructuring and impairment charges recorded |
|
981 |
|
4,274 |
|
1,131 |
|
6,386 |
|
||||
Non cash write down of leasehold improvements, furniture, computer equipment and software |
|
|
|
(4,274 |
) |
|
|
(4,274 |
) |
||||
|
|
|
|
|
|
|
|
|
|
||||
Cash payments |
|
(467 |
) |
|
|
(977 |
) |
(1,444 |
) |
||||
|
|
|
|
|
|
|
|
|
|
||||
Balance at June 30, 2003 |
|
$ |
3,071 |
|
$ |
|
|
$ |
446 |
|
$ |
3,517 |
|
Accrued future rent obligations represent the estimated future rent expense on abandoned excess facilities, net of sublease income, expected to be paid over the next thirty-one months. Accrued involuntary termination benefits are expected to be paid during 2003.
11
Item 2 .. Managements Discussion and Analysis of Financial Condition and Results of Operations
You should read the following discussion in conjunction with the consolidated financial statements and related notes of SeeBeyond Technology Corporation appearing elsewhere in this Form 10-Q. The following discussion contains forward-looking statements that involve risks and uncertainties, including statements regarding anticipated costs and expenses, mix of revenues and plans for introducing new products and services. Our actual results could differ materially from the results contemplated by these forward-looking statements as a result of a number of factors, including those discussed below, under Risk Factors and elsewhere in this Form 10-Q.
Overview
We were founded in 1989 and sold our first products and services in 1991 under the name Software Technologies Corporation. From 1991 to 1998 our sales and marketing efforts were primarily focused on customers in the healthcare industry. In 1998, we began to significantly increase our sales and marketing expenses to target customers in other vertical markets, such as financial services/insurance, manufacturing, retail/e-Commerce/services, telecommunications, energy services and government. In November 1999 we launched the fourth generation of our product e*Gate 4.0, which introduced a fully distributed, fault tolerant architecture. We are currently shipping an enhanced version of our eBusiness Integration Suite, version 4.5.3 to our customers and in March 2003 we announced our new suite of products, the SeeBeyond Integrated Composite Application Network (ICAN) version 5.0, which we expect to begin shipping in the third quarter 2003, however, the determination of when and if version 5.0 will be made available remains at the sole discretion of the Company. We incurred significant losses in fiscal years 2001, 2002 and in the first and second quarters of fiscal 2003. As of June 30, 2003, we had an accumulated deficit of approximately $149.9 million.
We derive revenues primarily from three sources: licenses, services and maintenance. We market our products and services on a global basis through our direct sales force, and augment our marketing efforts through relationships with systems integrators, and in other instances, through value-added resellers and technology vendors. Our products are typically licensed directly to customers for a perpetual term, with pricing based on the number of systems or applications the customer is integrating or connecting with our products. We record license revenues when a license agreement has been signed by both parties, the fee is fixed or determinable, collection of the fee is probable, delivery of our products has occurred and no other significant obligations remain. Payments for licenses, services and maintenance received in advance of revenue recognition are recorded as deferred revenue.
We currently have operations in sixteen countries outside of the United States. Revenues derived from international sales were 38% of total revenues for the six months ended June 30, 2003 compared to 33% of total revenues for the six months ended June 30, 2002. We believe that international revenues will continue to be significant in future periods. To date, we have not experienced significant seasonality of revenues. However, we expect that our future results will fluctuate in response to the fiscal or quarterly budget cycles of our customers.
Revenues from services include consulting and implementation services, training and reimbursable out-of-pocket expenses. A majority of our customers use third-party systems integrators to implement our products. Customers also typically purchase additional consulting services from us to support their implementation activities. These consulting services are generally sold on a time and materials or fixed fee basis, and services revenues are recognized as the services are performed. We also offer training services, which are sold on a per student basis and for which revenues are recognized as the classes are attended.
Customers who license our products normally purchase maintenance contracts. These contracts provide unspecified software upgrades and technical support over a fixed term, which is typically 12 months. Maintenance contracts are usually paid in advance, and revenues from these contracts are recognized ratably over the term of the contract.
Our cost of revenues includes cost of license revenues and cost of services and maintenance revenues. Each category, except cost of license revenues, includes related expenses for salaries, employee benefits, incentive compensation, bonuses, travel, telephone, communications, rent and allocated facilities and professional fees.
Cost of license revenues includes the cost of third-party licensed software embedded or bundled with our products. Cost of services and maintenance revenues consists of compensation and related overhead costs for personnel engaged in implementation consulting and services and maintenance and support activities, training and out-of-pocket expenses. For the three months and six months ended June 30, 2003, our gross margin was 96.1% and 95.9%, respectively on our license revenues and 51.3% and 50.4%, respectively on our services and maintenance revenues. We expect in the future to continue to earn substantially higher gross margins on our license revenues as compared to our services and maintenance revenues. As a result, our overall gross margin depends significantly on our revenue mix.
Our sales and marketing expenses include additional expenditures specific to the marketing group, such as public relations and advertising, trade shows, and marketing collateral materials and expenditures specific to the sales group, such as commissions.
To date, all software product development costs have been expensed as incurred. Also included in our total costs and expenses are restructuring and impairment charges, sales and marketing warrants and stock compensation.
12
In March 2001, we entered into a four-year co-marketing agreement with General Motors Corporation (GMC) and issued GMC a warrant to purchase 625,000 shares of common stock at an exercise price of $11.34 per share. As a result of the December 2001 private placement of 2,574,298 shares of our common stock, the exercise price of this warrant was adjusted to $5.83 per share. The warrant expires in March 2006 and 175,000 shares under the warrant were exercisable immediately. The remaining 450,000 shares subject to the warrant are performance based and vest and become exercisable over the thirty-six month period following the issuance of the warrant provided the warrant holder has achieved various milestones related to providing certain sales and marketing support. The unvested portion of the warrant was valued as of the date of issuance and is being amortized as a charge to marketing expense over the term of the co-marketing agreement. As of June 30, 2003, a total of 550,000 shares subject to the warrant were vested. We recognized amortization of approximately $13,000 and $(41,000) for the three months ended June 30, 2003 and 2002, respectively and $124,000 and $400,000 for the six months ended 2003 and 2002, respectively. The value of the unvested portion of the warrant will be adjusted in each reporting period based on changes in the fair value of the warrants until such date as the warrants are fully vested. There is no obligation for GMC to make future product purchases from us.
In connection with stock option grants to our employees, we have recorded deferred stock compensation totaling $8.5 million through December 31, 2000, of which approximately $109,000 remains to be amortized as of June 30, 2003. This amount represents the difference between the exercise price and the deemed fair value of our common stock on the date the options were granted multiplied by the number of option shares granted. This amount is included as a component of stockholders equity and is being amortized by charges to operations over the vesting period of the options, consistent with the method described in Financial Accounting Standards Board Interpretation No. 28. We recognized amortization of deferred compensation expense of approximately $71,000 and $215,000 for the three months ended June 30, 2003 and 2002, respectively and $172,000 and $480,000 for the six months ended June 30, 2003 and 2002, respectively. The amortization of stock compensation is classified as a separate component of operating expenses in our consolidated statement of operations.
Critical Accounting Policies
The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets and liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities at the date of our financial statements. Actual results may differ from these estimates under different assumptions or conditions.
Our significant accounting policies are described in Note 1 to the annual consolidated financial statements as of and for the year ended December 31, 2002 in Item 8: Financial Statements and Supplementary Data. We believe our most critical accounting policies include the following:
revenue recognition,
estimating allowance for doubtful accounts,
accounting for income taxes
Revenue recognition. We recognize revenue when an agreement has been signed by both parties or other persuasive evidence of an arrangement exists, the software has been shipped or electronically delivered, the fees are fixed or determinable, collection of the resulting receivable is probable, and no other significant obligations remain. For multiple element arrangements where vendor specific objective evidence of fair value exists for all undelivered elements, we account for the delivered elements in accordance with the residual method prescribed by Statement of Position 98-9. Vendor-specific objective evidence of fair value is based on the price a customer is required to pay when the element is sold separately.
We assess whether the fee is fixed and determinable and collection is probable at the time of the transaction. In assessing whether the fee is fixed and determinable we analyze the payment terms of the transaction and other factors, including the nature and class of customer, our historical experience of collecting under our payment terms without granting a concession, the possibility of the product becoming technologically obsolete before the payments become due and the likelihood of the customer asking for a refund. If we determine the fee is not fixed or determinable we defer the revenue until the payments under the arrangement become due. We assess whether collection is probable based on a number of factors, including the customers past transaction history and credit worthiness. If we determine that collection of a fee is not probable, we defer the fee and recognize revenue at the time collection become probable, which is generally upon the receipt of cash.
Maintenance revenues consist primarily of fees for providing unspecified software upgrades on a when-and-if-available basis and technical support over a specified term, which is typically twelve months. Maintenance revenues are typically paid in advance and are recognized on a straight-line basis over the specified term.
13
Revenues on sales made by alliance partners are generally recognized upon shipment of the software to the end user, if all other revenue recognition criteria noted above are met. Under limited arrangements with certain distributors when all the revenue recognition criteria have been met upon delivery of the product to the distributor, revenues are recognized at that time. The Company does not offer a right of return on its products.
The fair value of services such as consulting or training is based upon separate sales of these services. Consulting and training services are generally sold on a time-and-materials or fixed fee basis and are generally recognized as the services are performed. Consulting services primarily consist of implementation services related to the installation of the Companys products and generally do not involve significant production, modification or customization to or development of the software.
Significant management judgments and estimates must be made in connection with determination of the revenue to be recognized in any accounting period. If we made different judgments or estimates for any period, material differences in the amount and timing of revenue could result.
Allowance for doubtful accounts. We maintain allowances for doubtful accounts based on our analyses of the likelihood that our customers will not pay us all the money they owe. In circumstances where there is knowledge of a specific customers inability to meet its financial obligations, a specific reserve is recorded against amounts due to reduce the net recognized receivable to the amount that is reasonably believed to be collected. For all our customers we perform analyses, which includes a review of their credit profiles, the terms and conditions of the contracts with our customers, and the current economic trends and payment history. We reassess these allowances each accounting period. If actual payment experience with our customers is different than our estimates, adjustments to these allowances may be necessary resulting in additional charges to our income statement.
Accounting for income taxes. We record a valuation allowance to reduce our deferred tax assets by an estimated amount of tax benefits we estimate, which is not expected to be realized. Tax benefits will not be realized if we do not generate sufficient taxable income in the future to apply the deferred tax balance against. As of June 30, 2003, a valuation allowance equal to the value of the deferred tax assets was maintained. In the event we were to determine that we would be able to realize our deferred tax assets in the future in excess of its net recorded amount, an adjustment to the deferred tax asset would increase income in the period such a determination was made.
Significant management judgment is required in determining our provision for income tax assets and liabilities and our future taxable income for purposes of assessing our ability to realize any future benefit from our deferred tax assets. In the event actual results differ from these estimates or we adjust these estimates in future periods, our operating results and financial position could be materially affected.
14
Results of Operations
The following table sets forth our results of operations for the three and six months ended June 30, 2003 and 2002, respectively, expressed as a percentage of total revenues:
|
|
Three
Months Ended |
|
Six Months
Ended |
|
||||
|
|
2003 |
|
2002 |
|
2003 |
|
2002 |
|
Revenues: |
|
|
|
|
|
|
|
|
|
License |
|
25 |
% |
42 |
% |
31 |
% |
47 |
% |
Services |
|
34 |
|
30 |
|
33 |
|
28 |
|
Maintenance |
|
41 |
|
28 |
|
36 |
|
25 |
|
Total revenues |
|
100 |
|
100 |
|
100 |
|
100 |
|
Cost of revenues: |
|
|
|
|
|
|
|
|
|
License |
|
1 |
|
|
|
1 |
|
2 |
|
Services and maintenance |
|
37 |
|
32 |
|
34 |
|
28 |
|
Total cost of revenues |
|
38 |
|
32 |
|
35 |
|
30 |
|
Gross profit |
|
62 |
|
68 |
|
65 |
|
70 |
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
Research and development |
|
36 |
|
24 |
|
33 |
|
21 |
|
Sales and marketing |
|
48 |
|
51 |
|
44 |
|
42 |
|
General and administrative |
|
16 |
|
14 |
|
14 |
|
12 |
|
Restructuring and impairment charges |
|
22 |
|
|
|
10 |
|
|
|
Amortization of sales and marketing warrants |
|
|
|
|
|
|
|
|
|
Amortization of stock-based compensation |
|
|
|
1 |
|
|
|
1 |
|
Total operating expenses |
|
122 |
|
90 |
|
101 |
|
76 |
|
Loss from operations |
|
(60 |
) |
(22 |
) |
(36 |
) |
(6 |
) |
Other income (expense), net |
|
|
|
1 |
|
|
|
1 |
|
Loss before income tax provision |
|
(60 |
) |
(21 |
) |
(36 |
) |
(5 |
) |
Provision for income taxes |
|
|
|
|
|
|
|
(1 |
) |
Net loss |
|
(60 |
)% |
(21 |
)% |
(36 |
)% |
(6 |
)% |
Results of operations for the three months ended June 30, 2003 and 2002:
Revenues
Total revenues. Total revenues for the three months ended June 30, 2003 decreased 14% from the same period last year, from $33.7 million to $28.9 million. Total revenues for the three months ended June 30, 2003 decreased primarily due to the decrease in license revenues as a result of delayed purchasing decision making by our customers due to cost-cutting pressures, reduced capital spending budgets and general economic weakness.
License revenues. License revenues for the three months ended June 30, 2003, decreased 50% from the same period last year, from $14.3 million to $7.1 million. License revenues for the three months ended June 30, 2003 as a percentage of total revenues were 25%, as compared to 42% for the same period in the previous year. The decreases in license revenues were due primarily to delayed purchasing decision-making by our customers due to cost-cutting pressures, reduced capital spending budgets and general economic weakness.
Services revenues. Services revenues for the three months ended June 30, 2003, decreased 2% from the same period last year, from $10.0 million to $9.8 million. Services revenues for the three months ended June 30, 2003 as a percentage of total revenues were 34% as compared to 30% for the same period in the previous year. The decrease in the absolute dollar amount of services revenues was small due to consistent demand for our consulting services from our customers in certain industry verticals, including healthcare.
Maintenance revenues. Maintenance revenues for the three months ended June 30, 2003 increased 27% from the same period last year, from $9.4 million to $11.9 million. Maintenance revenues for the three months ended June 30, 2003, as a percentage of total
15
revenues were 41%, as compared to 28% for the same period in the previous year. The increase in the absolute dollar amount of maintenance revenues was due primarily to the renewals of prior period maintenance contacts associated with the increase in our cumulative license revenues.
Cost of revenues
Cost of license revenues. Cost of license revenues for the three months ended June 30, 2003 was approximately $276,000, compared to $130,000 in the same period in the previous year. Cost of license revenues consists primarily of the cost of third-party licensed software embedded or bundled with our products. The increase was due to an increase in revenues during the three months ended June 30, 2003 from the sale of our products with third-party embedded or bundled software, as compared to the three months ended June 30, 2002.
Cost of services and maintenance revenues. Cost of services and maintenance revenues for the three months ended June 30, 2003 decreased 1% from the same period in the previous year, from $10.7 million to $10.6 million. Cost of services and maintenance revenues for the three months ended June 30, 2003 as a percentage of total revenues were 37%, as compared to 32% for the same period in the previous year. The decrease in the absolute dollar amount was due primarily to a decrease in the use of third-party contractors during the three months ended June 30, 2003, as compared to the same period in the previous year. We expect that cost of services and maintenance revenues will decrease slightly in absolute dollars for the remainder of 2003.
Operating expenses
Research and development expenses. Research and development expenses for the three months ended June 30, 2003 increased 30% from the same period in the previous year, from $8.1 million to $10.5 million. Research and development expenses as a percentage of total revenues were 36% for the quarter ended June 30, 2003 as compared to 24% for the same period in the prior year. The increase in research and development expenses was due primarily to the increase in the number of software developers and quality assurance personnel to support our product development, documentation and testing activities related to the development of the SeeBeyond ICAN version 5.0 products. We anticipate that research and development expenses will continue to increase in absolute dollars for the remainder of 2003 as we continue to invest in the development of new products.
Sales and marketing expenses. Sales and marketing expenses for the three months ended June 30, 2003 decreased 18% from the same period in the previous year, from $17.1 million to $14.0 million. Sales and marketing expenses as a percentage of total revenues were 48% for the quarter ended June 30, 2003 as compared to 51% for the same period in the prior year. The decrease in the absolute dollar amount of sales and marketing expenses was due primarily to lower headcount and a decrease in promotional and public relations activities, as well as a decrease in sales commissions that resulted from lower license revenues during the three months ended June 30, 2003. We anticipate our sales and marketing expenses will decrease slightly in absolute dollars for the remainder of 2003.
General and administrative expenses. General and administrative expenses for the three months ended June 30, 2003 decreased 4% from the same period in the previous year, from $4.8 million to $4.6 million. General and administrative expenses as a percentage of total revenues were 16% for the quarter ended June 30, 2003 as compared to 14% for the same period in the prior year. The decrease in the absolute dollar amount of general and administrative expenses was due primarily to lower headcount during the quarter ended June 30, 2003. We anticipate general and administrative expenses to remain flat or decrease slightly in absolute dollars for the remainder of 2003.
Restructuring and impairment charges. During the three months ended December 31, 2002, the Company recorded restructuring and impairment charges totaling $6.6 million, consisting of $2.1 million for employee termination benefits and related costs associated with headcount reductions, $2.7 million related to future rent obligations for properties abandoned in connection with facilities consolidation and $1.8 million related to the write-down of leasehold improvements, furniture, computer equipment and software in connection with facilities consolidation and headcount reductions.
The headcount reduction of 57 employees was comprised of approximately 56% sales and marketing staff, 15% professional services staff, 19% general and administrative staff and 10% research and development staff. The restructuring and impairment charges recorded in the three months ended December 31, 2002 were recorded under EITF No. 94-3. Under EITF No. 94-3 the accrual for future rent obligations recorded in the three months ended December 31, 2002 was made when a commitment to abandon the facilities was reached in December 2002.
During the three months ended June 30, 2003, the Company recorded restructuring and impairment charges totaling $6.4 million, consisting of $1.1 million for employee termination benefits and related costs associated with headcount reductions, $1.0 million related to future rent obligations for properties abandoned in connection with facilities consolidation and $4.3 million related to the write-down of leasehold improvements, furniture, computer equipment and software in connection with the facilities consolidation and headcount reductions.
The headcount reduction of 44 employees was comprised of approximately 34% sales and marketing staff, 52% professional services staff and 14% general and administrative staff. The restructuring and impairment charges recorded in the three months ended June 30,
16
2003 were recorded under SFAS No. 146. Under SFAS No. 146 the accrual for future rent obligations recorded in the three months ended June 30, 2003 was recorded when the facilities were abandoned.
These restructuring and impairment charges were recorded to better align the companys cost structure with changing market conditions.
The following table sets forth the Companys accrued restructuring costs as of June 30, 2003 (in thousands).
|
|
Future
rent |
|
Asset |
|
Involuntary |
|
Total |
|
||||
Balance at December 31, 2002 |
|
$ |
3,100 |
|
$ |
|
|
$ |
870 |
|
$ |
3,970 |
|
Activity during three months ended March 31, 2003: |
|
|
|
|
|
|
|
|
|
||||
Cash payments |
|
(543 |
) |
|
|
(578 |
) |
(1,121 |
) |
||||
|
|
|
|
|
|
|
|
|
|
||||
Balance at March 31, 2003 |
|
2,557 |
|
|
|
292 |
|
2,849 |
|
||||
Activity during three months ended June 30, 2003: |
|
|
|
|
|
|
|
|
|
||||
Restructuring and impairment charges recorded |
|
981 |
|
4,274 |
|
1,131 |
|
6,386 |
|
||||
Non cash write down of leasehold improvements, furniture, computer equipment and software |
|
|
|
(4,274 |
) |
|
|
(4,274 |
) |
||||
|
|
|
|
|
|
|
|
|
|
||||
Cash payments |
|
(467 |
) |
|
|
(977 |
) |
(1,444 |
) |
||||
|
|
|
|
|
|
|
|
|
|
||||
Balance at June 30, 2003 |
|
$ |
3,071 |
|
$ |
|
|
$ |
446 |
|
$ |
3,517 |
|
Accrued future rent obligations represents the estimated future rent expense on abandoned excess facilities, net of sublease income, expected to be paid over the next thirty-one months. Accrued involuntary termination benefits are expected to be paid during 2003.
Amortization of sales and marketing warrants. Amortization of warrants for the three months ended June 30, 2003, was $13,000, compared to $(41,000) for the same period in the prior year. The increase in amortization of warrants was a result of a decrease during the prior year period in the value of the unvested portion of a warrant issued to a strategic marketing partner. The amortization of warrant expense for the three months ended June 30, 2003, and the remaining warrant expense to be recognized going forward, relate to this warrant issued under a four-year co-marketing agreement with a strategic partner. The value of the unvested portion of the warrant will be adjusted in each reporting period based on changes in the fair value of the warrant until such date as the warrant is fully vested and therefore the amount of amortization for such warrant is subject to fluctuation based on the value of our stock.
Amortization of stock-based compensation. Amortization of stock-based compensation for the three months ended June 30, 2003, was approximately $71,000, compared to $215,000 for the same period in the previous year.
Other income
Other income consists primarily of interest income (expense). Other income for the three months ended June 30, 2003 was approximately $193,000 compared to $339,000 for the same period last year. The decrease was primarily due to a decrease in interest income as a result of lower interest rates and lower average cash balances during the three months ended June 30, 2003 as compared to the three months ended June 30, 2002.
Results of operations for the six months ended June 30, 2003 and 2002:
Revenues
Total revenues. Total revenues for the six months ended June 30, 2003 decreased 13% from the same period last year, from $74.6 million to $64.7 million. Total revenues for the six months ended June 30, 2003 decreased primarily due to the decrease in license revenues as a result of delayed purchasing decision making by our customers due to cost-cutting pressures, reduced capital spending budgets and general economic weakness.
License revenues. License revenues for the six months ended June 30, 2003 decreased 43% from the same period last year, from $35.3 million to $20.1 million. License revenues for the six months ended June 30, 2003, as a percentage of total revenues were 31%, as compared to 47% for the same period in the previous year. The decrease in license revenues was due primarily to delayed purchasing decision-making by our customers due to cost-cutting pressures, reduced capital spending budgets and general economic
17
weakness.
Services revenues. Services revenues for the six months ended June 30, 2003 increased 2% from the same period in the previous year, from $20.7 million to $21.1 million. Services revenues for the six months ended June 30, 2003 as a percentage of total revenues were 33% as compared to 28% for the same period in the previous year. The small increase in the absolute dollar amount of services revenues was due to consistent demand for our consulting services from our customers in certain industry verticals, including healthcare.
Maintenance revenues. Maintenance revenues for the six months ended June 30, 2003 increased 27% from the same period in the previous year, from $18.5 million to $23.5 million. Maintenance revenues for the six months ended June 30, 2003 as a percentage of total revenues were 36%, as compared to 25% for the same period in the previous year. The increase in the absolute dollar amount of maintenance revenues was due primarily to the renewals of prior period maintenance contacts associated with the increase in our cumulative license revenues.
Cost of revenues
Cost of license revenues. Cost of license revenues for the six months ended June 30, 2003 was approximately $821,000, compared to $1,189,000 in the same period in the previous year. Cost of license revenues consists primarily of the cost of third-party licensed software embedded or bundled with our products. The decrease was due to a decrease in revenues during the six months ended June 30, 2003 from the sale of our products with third-party embedded or bundled software, as compared to the six months ended June 30, 2002.
Cost of services and maintenance revenues. Cost of services and maintenance revenues for the six months ended June 30, 2003 increased 7% from the same period in the previous year, from $20.7 million to $22.1 million. Cost of services and maintenance revenues for the six months ended June 30, 2003, as a percentage of total revenues were 34%, as compared to 28% for the same period in the previous year. The increase in the absolute dollar amount was due primarily to an increase in the use of third-party contractors during the first three months of the six months ended June 30, 2003, as compared to the same period in the previous year.
Operating expenses
Research and development expenses. Research and development expenses for the six months ended June 30, 2003 increased 34% from the same period in the previous year, from $15.8 million to $21.1 million. Research and development expenses as a percentage of total revenues were 33% for the six months ended June 30, 2003 as compared to 21% for the same period in the prior year. The increase in research and development expenses was due primarily to the increase in the number of software developers and quality assurance personnel to support our product development, documentation and testing activities related to the development of the SeeBeyond ICAN 5.0 version products.
Sales and marketing expenses. Sales and marketing expenses for the six months ended June 30, 2003 decreased 10% from the same period in the previous year, from $31.6 million to $28.4 million. Sales and marketing expenses as a percentage of total revenues were 44% for the six months ended June 30, 2003 as compared to 42% for the same period in the prior year. The decrease in the absolute dollar amount of sales and marketing expenses was due primarily to lower headcount and a decrease in promotional and public relations activities, as well as a decrease in sales commissions that resulted from lower license revenues during the six months ended June 30, 2003.
General and administrative expenses. General and administrative expenses for the six months ended June 30, 2003 increased 2% from the same period in the previous year, from $9.0 million to $9.2 million. General and administrative expenses as a percentage of total revenues were 14% for the six months ended June 30, 2003 as compared to 12% for the same period in the prior year. However, general and administrative expenses for the six months ended June 30, 2003, decreased 4% from the six months ended December 31, 2002, from $9.6 million to $9.2 million. This decease was primarily due to lower headcount during the six months ended June 30, 2003, as compared to the six months ended December 31, 2002.
Restructuring and impairment charges. During the six months ended December 31, 2002, the Company recorded restructuring and impairment charges totaling $6.6 million, consisting of $2.1 million for employee termination benefits and related costs associated with headcount reductions, $2.7 million related to future rent obligations for properties abandoned in connection with facilities consolidation and $1.8 million related to the write-down of leasehold improvements, furniture, computer equipment and software in connection with facilities consolidation and headcount reductions.
The headcount reduction of 57 employees was comprised of approximately 56% sales and marketing staff, 15% professional services staff, 19% general and administrative staff and 10% research and development staff. The restructuring and impairment charges recorded in the six months ended December 31, 2002 were recorded under EITF No. 94-3. Under EITF No. 94-3 the accrual for future rent obligations recorded in the six months ended December 31, 2002 was made when a commitment to abandon the facilities was reached in December 2002.
18
During the six months ended June 30, 2003, the Company recorded restructuring and impairment charges totaling $6.4 million, consisting of $1.1 million for employee termination benefits and related costs associated with headcount reductions, $1.0 million related to future rent obligations for properties abandoned in connection with facilities consolidation and $4.3 million related to the write-down of leasehold improvements, furniture, computer equipment and software in connection with the facilities consolidation and headcount reductions.
The headcount reduction of 44 employees was comprised of approximately 34% sales and marketing staff, 52% professional services staff and 14% general and administrative staff. The restructuring and impairment charges recorded in the six months ended June 30, 2003 were recorded under SFAS No. 146. Under SFAS No. 146 the accrual for future rent obligations recorded in the three months ended June 30, 2003 was recorded when the facilities were abandoned.
These restructuring and impairment charges were recorded to better align the companys cost structure with changing market conditions. Accrued future rent obligations were $3.1 million of June 30, 2003 and represent the estimated future rent expense on abandoned excess facilities, net of sublease income, expected to be paid over the next thirty-one months. Accrued involuntary termination benefits were $446,000 as of June 30, 2003 and are expected to be paid during 2003.
Amortization of sales and marketing warrants. Amortization of sales and marketing warrants for the six months ended June 30, 2003, was $124,000, compared to $400,000 for the same period in the previous year. The decrease in amortization of sales and marketing warrants was a result of warrants issued to strategic alliance partners being fully amortized or cancelled during 2002, as well as a decrease in the value of the unvested portion of a warrant issued to a strategic marketing partner. The amortization of sales and marketing warrant expense for the six months ended June 30, 2003, and the remaining warrant expense to be recognized going forward, relate to this warrant issued under a four-year co-marketing agreement with a strategic partner. The value of the unvested portion of the warrant will be adjusted in each reporting period based on changes in the fair value of the warrant until such date as the warrant is fully vested and therefore the amount of amortization for such warrant is subject to fluctuation based on the value of our stock.
Amortization of stock-based compensation. Amortization of stock-based compensation for the six months ended June 30, 2003 was approximately $172,000, compared to $480,000 for the same period in the previous year.
Other income
Other income for the six months ended June 30, 2003 was approximately $363,000 compared to $532,000 for the same period last year. The decrease was primarily due to a decrease in interest income as a result of lower interest rates and lower average cash balances during the six months ended June 30, 2003 as compared to the six months ended June 30, 2002.
Liquidity and capital resources
As of June 30, 2003, we had cash and cash equivalents of $80.1 million, a decrease of $14.0 million from $94.1 million held as of December 31, 2002.
Net cash used in operating activities was $8.1 million during the six months ended June 30, 2003, as compared with $3.8 million net cash provided by operating activities in the same period last year. This period over period increase in cash used in operating activities reflects an increase in net loss and decreases in accounts payable, accrued compensation and related expenses and deferred revenue, partially offset by non-cash restructuring and impairment charges and a decrease in accounts receivable.
During the six months ended June 30, 2003, accounts receivable decreased by approximately $12.8 million, primarily due to lower revenues recorded and the timing of receivable collections during the six months ended June 30, 2003 as compared to the six months ended December 31, 2002. The timing of receivable collections and revenue recorded within a given quarter will affect our accounts receivable going forward.
Net cash used in investing activities was $4.7 million during the six months ended June 30, 2003, as compared with $5.3 million in the same period in the previous year. The decrease primarily was due to a decrease in capital expenditures. We expect capital expenditures in the next six months to decrease slightly compared to the last six months.
Net cash used in financing activities was $1.1 million during the six months ended June 30, 2003, as compared with $62.7 million net cash provided by financing activities in the same period in the previous year. This decrease was due primarily to the completion of the secondary public stock offering in February 2002.
In November 2000, the Company established a $15.0 million line of credit facility (the Line) with a lending institution that bears interest at an annual rate of either prime plus 0.5% or the London InterBank Offered Rate (LIBOR) rate plus 2.50% (payable monthly) and it expires May 31, 2004. As of June 30, 2003, $7.0 million was available under the Line and there were no borrowings outstanding. The Company may use up to $5.0 million of the Line to issue letters of credit. As of June 30, 2003, approximately $386,000 was available for the issuance of letters of credit. The Line is secured by intellectual property rights, accounts receivable and
19
certain other assets and is subject to certain borrowing base restrictions. The Line requires maintenance of certain financial covenants pertaining to key financial ratios.
In October 2001, the Companys $3.0 million equipment line (the Equipment Line) with the same lending institution providing the Line was amended, reducing the maximum amount available for borrowing under the Equipment Line to $2.0 million. The Equipment Line bears interest at an annual rate of prime plus 0.75%, or the LIBOR rate plus 2.75% (payable monthly) and expires on November 30, 2004. The rate at June 30, 2003 was 4.75%. The Company could draw against the Equipment Line through November 30, 2001. Interest is payable monthly and principal is payable in 36 monthly installments commencing in December 2001. As of June 30, 2003, there was approximately $923,000 outstanding under the Equipment Line. The Equipment Line is secured by certain assets of the Company.
In December 2002, the Companys credit facility was amended to include an equipment advance (the Equipment Advance) in the amount of $5.0 million from the same lending institution. Interest on the Equipment Advance is payable monthly and principal is payable in 24 equal monthly installments, beginning January 31, 2003. The Equipment Advance bears interest at an annual rate of prime plus 0.75% or the LIBOR rate plus 3.0%. The rate at June 30, 2003 was 4.75%. As of June 30, 2003 the balance outstanding under this Equipment Advance was approximately $3.8 million.
Future principal payments on the Equipment Line and the Equipment Advance will aggregate approximately $1.6 million for the remainder of 2003 and $3.1 million in 2004, based on the total outstanding balance of approximately $4.7 million.
We believe that our current cash and cash equivalents balance will be sufficient to meet our working capital and capital expenditure requirements for at least the next twelve months. However, we may need to raise additional funds, and we may not be able to obtain additional debt or equity financing on favorable terms, if at all. In addition, we may also utilize cash resources to fund acquisitions or investments in complementary businesses, technologies or product lines.
Risks Related to SeeBeyond
You should carefully consider the risks described below in evaluating the other statements made herein. The risks described below are not the only ones facing our company. Additional risks not presently known to us, or that we currently deem immaterial, may also impair our business operations.
Our business, financial condition or results of operations could be adversely affected by any of these risks. The trading price of our common stock could decline due to any of these risks.
A continued downturn in the general economy or a continuation of the industry trend toward reducing or delaying additional information technology spending due to cost-cutting pressures could reduce demand for our products and services.
We rely significantly upon customers making large information technology purchasing decisions as a source of revenue. During 2001, 2002 and the first six months of 2003, we experienced a general slow-down in the level of capital spending by some of our customers due to the general economic downturn, which has adversely affected our revenues. This slow-down in capital spending, if sustained in future periods, could result in reduced sales or the postponement of sales to our customers. There can be no assurance that the level of spending on information technology in general, or on business integration software by our customers and potential customers in particular, will increase or remain at current levels in future periods. Lower spending on information technology could result in reduced license sales to our customers, reduced overall revenues, diminished margin levels, and could impair our operating results in future periods.
We have a large accumulated deficit, we may incur future losses and we may not achieve or maintain profitability.
We have incurred substantial losses since 1998 as we increased funding of the development of our products and technologies and expanded our sales and marketing organization. As of June 30, 2003, we had an accumulated deficit of approximately $149.9 million. We may continue to incur losses in future periods and we may not achieve or maintain profitability on a quarterly or annual basis.
Our operating results fluctuate significantly, and an unanticipated decline in revenues or gross margin may disappoint securities analysts or investors and result in a decline in our stock price.
Our quarterly operating results have fluctuated significantly in the past and may vary significantly in the future. We believe period-to-period comparisons of our historical results of operations are not a good predictor of our future performance.
Our revenues and operating results depend upon the volume and timing of customer orders and payments and the date of product delivery. Historically, a substantial portion of our revenues in a given quarter has been recorded in the final month of that quarter, with a concentration of these revenues in the last two weeks of the final month. We expect this trend to continue and, therefore, any failure or delay in the closing of orders would have a material adverse effect on our quarterly operating results. Since our operating expenses are based on anticipated revenues and because a high percentage of these expenses are relatively fixed, a delay in the recognition of
20
revenues from one or more license transactions could cause significant variations in operating results from quarter to quarter and cause a decline in our stock price. We realize substantially higher gross margins on our license revenues compared to our services and maintenance revenues. Thus, our margins for any particular quarter will be highly dependent on our revenue mix in that quarter. In our international markets, we have experienced some seasonality of revenues, with lower revenues in the summer months. Although this seasonality has not had a material impact on our operating results in the past, we cannot assure you our operating results will not fluctuate in the future as a result of these and other international trends.
We record as deferred revenue payments from customers that do not meet our revenue recognition policy requirements. Since only a small portion of our revenues each quarter is recognized from deferred revenue, our quarterly results depend primarily upon entering into new contracts to generate revenues for that quarter. New contracts may not result in revenues in the quarter in which the contract was signed, and we may not be able to predict accurately when revenues from these contracts will be recognized. If our operating results are below the expectations of securities analysts or investors for these or other reasons, our stock price would likely decline, perhaps substantially.
We experience long and variable sales cycles, which could have a negative impact on our results of operations for any given quarter.
Our products are often used by our customers throughout their organizations to address critical business problems. Customers generally consider a wide range of issues before committing to purchase our products, including product benefits, the ability to operate with existing and future computer systems, the ability to accommodate increased transaction volumes and product reliability. Many customers are addressing these issues for the first time when they consider whether to buy our products and services. As a result, we or other parties, including systems integrators, must educate potential customers on the use and benefits of our products and services. In addition, the purchase of our products generally involves a significant commitment of capital and other resources by a customer. This commitment often requires significant technical review, assessment of competitive products and approval at a number of management levels within a customers organization. Our sales cycle may vary based on the industry in which the potential customer operates and is difficult to predict for any particular license transaction. The length and variability of our sales cycle makes it difficult to predict whether particular sales will be concluded in any given quarter. If one or more of our license transactions are not consummated in a given quarter, our results of operations for that quarter may be below our expectations and the expectations of analysts and investors.
Our operating results are highly dependent on license revenues from one software suite, and our business could be materially harmed by factors that adversely affect the pricing and demand for this software suite.
Substantially all of our license revenues have been, and are expected to continue to be, derived from the license of our Business Integration Suite. Accordingly, our future operating results will depend on the demand for our Business Integration Suite by future customers, including new and enhanced releases that are subsequently introduced. Our latest version of the Business Integration Suite, called our SeeBeyond Integrated Composite Application Network (ICAN) Suite version 5.0, was announced in March 2003 and we currently expect to begin shipping it to customers in the third quarter of 2003. If our competitors release new products that are superior to our Business Integration Suite in performance or price, or if we fail to enhance our Business Integration Suite and introduce new products in a timely manner, demand for our products may decline, and we may have to reduce the pricing of our products. A decline in demand or pricing for our Business Integration Suite as a result of these or other factors would significantly reduce our revenues.
In the past, we have experienced delays in the commencement of commercial releases of our Business Integration Suite. In the future, we may fail to introduce or deliver new products on a timely basis. If new releases or products are delayed or do not achieve market acceptance, we could experience customer dissatisfaction or a delay or loss of revenues. For example, the introduction of new enterprise and business applications requires us to introduce new e*Way adapters to support the integration of these applications. Our failure to introduce these or other modules in a timely manner could cause our revenues and market share to decline. In addition, customers may delay purchases of our products in anticipation of future releases. If customers defer material orders in anticipation of new releases or new product introductions, our revenues may decline.
Moreover, as we release enhanced versions of our products, we may not be successful in upgrading our customers who purchased previous versions of our Business Integration Suite to the current version. We also may not be successful in selling add-on modules for our products to existing customers. Any failure to continue to upgrade existing customers products or sell new modules, if and when they are introduced, could negatively impact customer satisfaction and our revenues.
Our revenues will likely decline if we do not develop and maintain successful relationships with our systems integration partners and other partners, who also have relationships with our competitors.
We have entered into agreements with a number of systems integrators for them to install and deploy our products and perform custom integration of systems and applications. These systems integrators also engage in joint marketing and sales efforts with us. If these relationships fail, we will have to devote substantially more resources to the sales and marketing and implementation and support of our products than we would otherwise, and our efforts may not be as effective as those of the systems integrators. In many cases, these parties have extensive relationships with our existing and potential customers and influence the decisions of these
21
customers. We rely upon these firms to recommend our products during the evaluation stage of the purchasing process, as well as for implementation and customer support services.
These systems integrators are not contractually required to implement our products, and competition for these resources may preclude us from obtaining sufficient resources to provide the necessary implementation services to support our needs. If the number of installations of our products exceeds our access to the resources provided by these systems integrators, we will be required to provide these services internally, which would increase our expenses and significantly limit our ability to meet our customers implementation needs. A number of our competitors have stronger relationships with some of these systems integrators and, as a result, these systems integrators might be more likely to recommend competitors products and services instead of ours. In addition, a number of our competitors have relationships with a greater number of these systems integrators or have stronger systems integrator relationships based on specific vertical markets and, therefore, have access to a broader base of customers.
Our failure to establish or maintain systems integrator relationships would significantly harm our ability to license and successfully implement our software products. In addition, we rely on the industry expertise and customer contacts of these firms in order to market our products more effectively. Therefore, any failure of these relationships would also harm our ability to increase revenues in key commercial markets. We are currently investing, and plan to continue to invest, significant resources to develop these relationships. Our operating results could be adversely affected if these efforts do not generate license and service revenues necessary to offset this investment.
Our markets are highly competitive and, if we do not compete effectively, we may suffer price reductions, reduced gross margins and loss of market share.
The market for our products is intensely competitive, evolving and subject to rapid technological change. We expect the intensity of competition to increase in the future. As a result of increased competition, we may have to reduce the price of our products and services, and we may experience reduced gross margins and loss of market share, any one of which could significantly reduce our future revenues and operating results. Our current competitors include vendors offering e-Business application integration and traditional electronic data interchange, or EDI, software products, as well as in house information technology departments of potential customers that have developed or may develop systems that provide some or all of the functionality of our Business Integration Suite. We may also encounter competition from major enterprise software developers in the future.
Many of our existing and potential competitors have more resources, broader customer relationships and better-established brands than we do. In addition, many of these competitors have extensive knowledge of our industry. Some of our competitors have established or may establish cooperative relationships among themselves or with third parties to offer a single solution and increase the ability of their products to address customer needs.
Our substantial and expanding international operations are subject to uncertainties, which could adversely affect our operating results.
Revenues from the sale of products and services outside the United States accounted for 38% of our total revenues for the first six months of 2003 and 33% of our total revenues for the same period in the prior year. Revenues from the sale of products and services in the United Kingdom as a percent of our total revenues were 14% for the six months ending June 30, 2003 and 12% for the same period in the prior year. We believe revenues from sales outside the United States will continue to account for a material portion of our total revenues for the foreseeable future. We are exposed to several risks inherent in conducting business internationally, such as:
fluctuations in currency exchange rates, which could result in increased expenses;
unexpected changes in regulatory requirements, including imposition of currency exchange controls, applicable to our business or to the Internet, which could result in increased costs of doing business overseas;
difficulties and costs of staffing and managing international operations;
political and economic instability, which could result in increasing governmental ownership or regulation of businesses or other instrumentalities of commerce, wage and price controls, higher interest rates and spiraling inflation; and
reduced protection for intellectual property rights in some countries.
Any of these factors could adversely affect our international operations and, consequently, our operating results.
We could suffer losses and negative publicity if new versions or releases of our products contain errors or defects.
Our products and their interactions with customers software applications and IT systems are complex and, accordingly, there may be undetected errors or failures when our products are introduced or as new versions are released. In the past we have discovered
22
software errors in our new releases and new products after their introduction, which have resulted in additional product development expenses. To date, these additional expenses have not been material. These errors have resulted in product release delays, delayed revenues and customer dissatisfaction. In the future we may discover errors, including performance limitations, in new releases or new products after the commencement of commercial shipments. Since many customers are using our products for mission-critical business operations, any of these occurrences could seriously harm our business and generate negative publicity, which could have a negative impact on future sales. Although we maintain product liability and errors and omissions insurance, we cannot assure you these policies will be sufficient to compensate for losses caused by any of these occurrences.
If our products do not operate with the many hardware and software platforms used by our customers and keep pace with technological change, our business may fail.
We currently serve a customer base with a wide variety of constantly changing hardware, software applications and networking platforms. If our products fail to gain broad market acceptance due to an inability to support a variety of these platforms, our operating results may suffer. Our business depends on a number of factors, including the following:
our ability to integrate our products with multiple platforms and existing, or legacy, systems and to modify our products as new versions of software applications are introduced;
the portability of our products, particularly the number of operating systems and databases our products can source or target;
our ability to anticipate and support new standards, especially Internet standards;
the integration of additional software modules under development with our existing products; and
our management of software being developed by third parties for our customers for use with our products.
Our industry is characterized by very rapid technological change, frequent new product introductions and enhancements, changes in customer demands and evolving industry standards. We have also found the technological life cycles of our products are difficult to estimate. We believe we must continue to enhance our current products and concurrently develop and introduce new products that anticipate emerging technology standards and keep pace with competitive and technological developments. Failure to do so will harm our ability to compete. As a result, we are required to continue to make substantial product development investments.
The market for business integration software may not grow as quickly as we anticipate, which would cause our revenues to fall below expectations.
The market for business integration software is rapidly evolving. We earn substantially all of our license revenues from sales of our Business Integration Suite. We expect to earn substantially all of our revenues in the foreseeable future from sales of our Business Integration Suite and related products and services. Our future financial performance will depend on continued growth in the number of organizations demanding software and services for application integration and business integration solutions and seeking outside vendors to develop, manage and maintain this software for their critical applications. Many of our potential customers have made significant investments in internally developed systems and would incur significant costs in switching to third-party products, which may substantially inhibit the growth of the market for business integration software. If this market fails to grow, or grows more slowly than we expect, our revenues will be adversely affected.
Pending or future litigation could have a material adverse impact on our results of operation and financial condition.
From time to time, we have been subject to litigation. Several putative securities class action lawsuits are currently pending against us, our directors and officers. The plaintiffs in these suits allege we and the other defendants made false statements about our operating results and business, while concealing material information. We believe these lawsuits are without merit and we intend to defend against them vigorously. The complaint does not specify the amount of damages the plaintiffs seek, and as a result, we are unable to estimate the possible range of damages that might be incurred as a result of the lawsuit. The uncertainty associated with these unresolved lawsuits could harm our business, financial condition and reputation. Negative developments with respect to the lawsuits could cause our stock price to decline. In addition to the related cost and use of cash, pending or future litigation could cause the diversion of managements attention and resources. Although we have begun to accrue amounts relating to legal costs and expenses, we have not accrued any amounts relating to potential damages associated with the putative class action lawsuits. However, because of uncertainties relating to litigation, our decision as to whether to accrue and the amount of our estimates could be wrong. In addition, although we are unable to determine the amount, if any, we may be required to pay in connection with the resolution of the lawsuits by settlement or otherwise, such a payment could seriously harm our results of operation, financial condition and liquidity.
If we fail to adequately protect our proprietary rights, we may lose these rights and our business may be seriously harmed.
We depend upon our ability to develop and protect our proprietary technology and intellectual property rights to distinguish our
23
product from our competitors products. The unauthorized use by others of our proprietary rights could materially harm our business. We rely on a combination of copyright, trademark and trade secret laws, as well as confidentiality agreements and licensing arrangements, to establish and protect our proprietary rights. We currently have no issued patents. Despite our efforts to protect our proprietary rights, existing laws afford only limited protection. Attempts may be made to copy or reverse engineer aspects of our products or to obtain and use information we regard as proprietary. Accordingly, we cannot be certain we will be able to protect our proprietary rights against unauthorized third party copying or use. Furthermore, policing the unauthorized use of our products is difficult, and expensive litigation may be necessary in the future to enforce our intellectual property rights.
Our products could infringe the intellectual property rights of others, causing costly litigation and the loss of significant rights.
Third parties may claim we have infringed their current or future intellectual property rights. We expect software developers in our market will increasingly be subject to infringement claims as the number of products in different software industry segments overlap. Any claims, with or without merit, could be time-consuming, result in costly litigation, prevent product shipment or cause delays, or require us to enter into royalty or licensing agreements, any of which could harm our business. Patent litigation in particular has complex technical issues and inherent uncertainties. In the event an infringement claim against us is successful and we cannot obtain a license on acceptable terms, license a substitute technology or redesign our products to avoid infringement, our business would be harmed. Furthermore, former employers of our current and future employees may assert our employees have improperly disclosed to us or are using their confidential or proprietary information.
Failure to raise additional capital or generate the significant capital necessary to expand our operations and invest in new products could reduce our ability to compete and result in lower revenues.
We currently expect our current cash resources, together with the net proceeds from this offering, will be sufficient to meet our working capital and capital expenditure needs for at least the next 12 months. After that, we may need to raise additional funds, and we cannot be certain we will be able to obtain additional debt or equity financing on favorable terms, or at all. If we raise additional equity financing, our stockholders may experience significant dilution of their ownership interests and the per share value of our common stock could decline. If we engage in debt financing, we may be required to accept terms that restrict our ability to incur additional indebtedness and force us to maintain specified liquidity or other ratios, any of which could harm our business. If we need additional capital and cannot raise it on acceptable terms, we may not be able to, among other things:
develop or enhance our products and services;
maintain or expand our sales and marketing organizations;
acquire complementary technologies, products or businesses;
expand operations, in the United States or internationally;
hire, train and retain employees; or
respond to competitive pressures or unanticipated working capital requirements.
Our failure to do any of these things could result in lower revenues and could seriously harm our business.
If we fail to attract and retain qualified personnel, our ability to compete will be harmed.
We depend on the continued service of our key technical, sales and senior management personnel, including our founder and Chief Executive Officer, James T. Demetriades. Most of these persons are not bound by an employment agreement, and we do not maintain key person life insurance on any of these persons, other than Mr. Demetriades. The loss of any of our senior management or other key product development or sales and marketing personnel could adversely affect our future operating results. In addition, we must attract, retain and motivate highly skilled employees, including sales personnel and software engineers. We face significant competition for individuals with the skills required to develop, market and support our products and services. We may not be able to recruit and retain sufficient numbers of these highly skilled employees. If we fail to do so, our ability to compete will be significantly harmed.
Our growth continues to place a significant strain on our management systems and resources. If we fail to manage our growth, our ability to market and sell our products and develop new products may be harmed.
We must plan and manage our growth effectively in order to offer our products and services and achieve revenue growth and profitability in a rapidly evolving market. Our growth has and will continue to place a significant strain on our management systems and resources, and we may not be able to effectively manage our growth in the future.
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Furthermore, if our relationships with systems integrators succeed and we are able to penetrate additional commercial markets, we may need additional sales and marketing and professional services resources to support these customers. The growth of our customer base will require us to invest significant resources in the training and development of our employees and our systems integration partners. If these organizations fail to keep pace with the number and demands of the customers that license our products, our ability to market and sell our products and services and our ability to develop new products and services will be harmed. To manage our business, we must continue to:
effectively manage our direct sales force;
effectively manage our professional services organization;
hire and retain qualified software engineers;
improve our operational, financial and management controls;
improve our reporting systems and procedures;
enhance our management and information control systems; and
effectively manage, train and motivate our workforce.
In addition, if we acquire or invest in other companies, we may experience further strain on our resources and face risks inherent in integrating two corporate cultures, product lines, operations and businesses.
We have implemented anti-takeover provisions that could discourage or prevent a takeover, even if an acquisition would be beneficial to our stockholders.
Some provisions of Delaware law and our certificate of incorporation and bylaws could have the effect of delaying or preventing a third party from acquiring us, even if a change in control would be beneficial to our stockholders. For example, our certificate of incorporation provides for a classified board of directors whose members serve staggered three-year terms and does not provide for cumulative voting in the election of directors. Our board of directors has the authority, without further action by our stockholders, to fix the rights and preferences of and issue shares of preferred stock. In addition, our stockholders are unable to act by written consent. These and other provisions could make it more difficult for a third party to acquire us, even if doing so would benefit our stockholders.
Concentration of ownership among our existing executive officers and directors may prevent new investors from influencing significant corporate decisions.
Our Chief Executive Officer, James T. Demetriades beneficially owns approximately 32% of our outstanding common stock. Our executive officers and directors beneficially own, in the aggregate, approximately 42% of our outstanding common stock. As a result, these stockholders will be able to exercise a significant level of control over all matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions. This could have the effect of delaying or preventing a change of control of SeeBeyond and will make some transactions difficult or impossible without the support of these stockholders.
External factors such as potential terrorist attacks could have a material adverse affect on the U.S. and global economics.
The possibility of potential terrorist attacks could have an adverse effect upon an already weakened world economy and could cause U.S. and foreign businesses to slow spending on products and services and delay sales cycles. The economic uncertainty resulting from any such future attacks and other responses associated with such attacks may continue to negatively impact short-term consumer and business confidence.
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Item 3 : Quantitative and Qualitative Disclosure About Market Risk
We are exposed to a variety of risks, including changes in interest rates affecting the return on our investments and foreign currency fluctuations. We have established policies and procedures to manage our exposure to fluctuations in interest rates and foreign currency exchange rates.
Interest rate risk. We maintain our funds in money market and certificate of deposit accounts at financial institutions. Our exposure to market risk due to fluctuations in interest rates relates primarily to our interest earnings on our cash deposits. These securities are subject to interest rate risk in as much as their fair value may fall if market interest rates increase. If market interest rates were to increase immediately and uniformly by 10% from the levels prevailing as of December 31, 2002, the fair value of the portfolio would not decline by a material amount. We do not use derivative financial instruments to mitigate risks. However, we do have an investment policy that would allow us to invest in short-term and long-term investments such as money market instruments and corporate debt securities. Our policy attempts to reduce such risks by typically limiting the maturity date of such securities, placing our investments with high credit quality issuers and limiting the amount of credit exposure with any one issuer.
Foreign currency exchange rate risk. Our exposure to market risk due to fluctuations in foreign currency exchange rates relates primarily to the intercompany balances with our subsidiaries located in Australia, Belgium, France, Germany, Italy, Japan, Korea, The Netherlands, New Zealand, Singapore, Spain, Sweden, Switzerland and the United Kingdom. Transaction gains or losses have not been significant in the past and we do not participate in any hedging activity on foreign currencies. We would not experience a material foreign exchange loss based on a hypothetical 10% adverse change in the price of any of the local currencies of these countries. Consequently, we do not expect that a reduction in the value of such accounts denominated in foreign currencies resulting from a sudden or significant fluctuation in foreign exchange rates would have a direct material impact on our financial position, results of operations or cash flows.
Item 4 . Controls and Procedures
Our management evaluated, with the participation of our chief executive officer and chief financial officer, the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the Exchange Act)) as of the end of the period covered by this Quarterly Report on Form 10-Q. Based upon this evaluation, our chief executive officer and chief financial officer have concluded that our disclosure controls and procedures are effective to ensure that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms. There was no change in our internal control over financial reporting (as defined in Rule 13a15(f) under the Exchange Act) during the period covered by this Quarterly Report on Form 10-Q that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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PART II OTHER INFORMATION
The Company is party to routine claims and suits brought against it in the ordinary course of business including disputes arising over the ownership of intellectual property rights and collection matters. In the opinion of management, the outcome of such routine claims will not have a material adverse effect on the Companys business, financial condition or results of operation.
Information with respect to this item is incorporated by reference to Note 7 (Legal Proceedings) of the Notes to the Condensed Consolidated Financial Statements included in this Report on Form 10-Q.
Item 2. |
(a) |
Modification of Constituent Instruments |
|
|
Not applicable |
|
|
|
(b) |
Change in Rights |
|
|
Not applicable |
|
|
|
(c) |
Changes in Securities |
|
|
Not applicable |
Item 4. |
The annual meeting of SeeBeyond Technology Corporation stockholders was held on May 15, 2003, during which the following two proposals were voted on:
Proposal one: Election of two Class III Directors for the ensuing three-year term
Directors standing for election:
|
|
For |
|
Withheld |
|
James T. Demetriades |
|
71,642,314 |
|
4,298,002 |
|
Raymond J. Lane |
|
70,217,814 |
|
5,722,502 |
|
Proposal two: Ratification of the appointment of Ernst & Young LLP as independent auditors
FOR: |
|
71,394,487 |
|
AGAINST: |
|
4,529,524 |
|
ABSTAIN: |
|
16,305 |
|
Item 6. Exhibits and reports on Form 8-K
(a) Exhibits.
Exhibit |
|
Description |
3.1(f) |
|
Restated Articles of Incorporation of the Registrant |
3.2(f) |
|
Bylaws of the Registrant |
4.1(a) |
|
Specimen common stock certificates |
10.1(f) |
|
Form of Indemnification Agreement between the Registrant and each of its directors and officers |
10.2(a)(c) |
|
1998 Stock Plan |
10.3(a)(c) |
|
2000 Employee Stock Purchase Plan and form of agreements there under |
10.5(a) |
|
Registration Rights Agreement dated May 8, 1998, as amended |
10.6(a) |
|
Lease Agreement dated June 6, 1997 between the Registrant and Boone/Fetter/Occidental I for premises in Monrovia, California |
10.7(a) |
|
Lease Agreement dated June 10, 1999 between the Registrant and Franklin Select Realty Trust for premises in Redwood Shores, California |
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10.8(a) |
|
Lease Agreement dated December 30, 1991 between the Registrant and the Demetriades Family Trust (dated December 20, 1983) for premises in Arcadia, California |
10.9(b) |
|
Lease Agreement between The Employees Retirement System of The State of Hawaii and the Registrant dated July 21, 2000 for premises in Monrovia, California |
10.10(b) |
|
Lease Agreement between Grant Regent, LLC and the Registrant dated August 2, 2000 for premises in New York, New York |
10.11(e) |
|
Lease Agreement dated October 9, 2000 between S & F Huntington Millennium LLC and the Registrant for premises in Monrovia, California |
10.12(e) |
|
Loan and Security Agreement, dated December 4, 2000, between the Registrant and Comerica Bank-California |
10.13(d) |
|
Warrant Purchase Agreement and Warrant dated March 16, 2001 issued to General Motors Corporation |
10.14(f) |
|
Amendment to the Loan and Security Agreement dated as of June 25, 2001, between the Registrant and Comerica BankCalifornia) |
10.15(f) |
|
Second amendment to the Loan and Security Agreement dated October 31, 2001, between the Registrant and Comerica Bank-California |
10.16(f) |
|
Lease Agreement dated as of February 24, 2001 between MWB Business Eschange Limited and the Registrant for premises in Berkshire, United Kingdom |
10.17(f) |
|
Lease Agreement as of July 1, 2001 between Trust Company of Australia Limited and the Registrant for premises in Melbourne, Australia |
10.18(g) |
|
Lease Agreement between Monrovia Technology Campus LLC and the Registrant dated November 28, 2000 for premises in Monrovia, California |
10.19(g) |
|
Sublease Agreement between the Registrant (Tenant) and The Employees Retirement System of The State Of Hawaii (Landlord) and Loopnet (Subtenant) dated April 23, 2002 for premises in Monrovia, California |
10.20(g) |
|
Third Amendment to the Loan and Security Agreement dated as of June 30, 2002 between the Registrant and Comerica Bank-California |
10.21(h) |
|
Sublease Agreement between the Registrant (Sublessor) and Fidelity National Information Services (Sublessee) and The Employees Retirement System of the State of Hawaii (Lessor) dated December 17, 2002 for premises in Monrovia, California |
10.22(h) |
|
First Amendment to the Lease Agreement between Monrovia Technology Campus LLC and the Registrant dated January 23, 2002 |
10.23(h) |
|
Second Amendment to the Lease Agreement between Foothill Technology Center LLC, (Boone/Fetter/Occidental I) and the Registrant dated October 25, 2002 |
10.24(h) |
|
Fourth Amendment to the Loan and Security Agreement dated December 24, 2002 between the Registrant and Comerica Bank-California |
10.25(c)(h) |
|
Change of Control Letter Agreement between Alex Demetriades and the Registrant dated March 19, 2001 |
10.26(c)(k) |
|
Form of Change of Control Letter Agreement between the Registrant and certain of its executive officers. |
10.27(c) |
|
Employment Letter Agreement between the Registrant and H. Carvel Moore dated July 21, 2003. |
10.28 |
|
Fifth Amendment to the Loan and Security Agreement dated December 24, 2002 between the Registrant and Comerica Bank-California dated March 26, 2003 |
10.29 |
|
Sixth Amendment to the Loan and Security Agreement dated December 24, 2002 between the Registrant and Comerica Bank-California dated May 30, 2003 |
31.1 |
|
Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act. |
32.1 |
|
Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act. |
(a) |
|
Incorporated by reference to an exhibit in the Registrants Registration Statement on Form S-1 File No. 333-330648. |
(b) |
|
Incorporated by reference to an exhibit in the Registrants Quarterly Report on Form 10-Q filed with the Commission on November 14, 2000. |
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(c) |
|
Denotes a management contract or compensatory plan arrangement. |
(d) |
|
Incorporated by reference to an exhibit in the Registrants Quarterly Report on Form 10-Q filed with the Commission on May 15, 2001. |
(e) |
|
Incorporated by reference to an exhibit in the Registrants Annual Report on Form 10-K filed with the Commission on March 30, 2001. |
(f) |
|
Incorporated by reference to an exhibit in the Registrants Annual Report on Form 10-K filed with the Commission on February 8, 2002. |
(g) |
|
Incorporated by reference to an exhibit in the Registrants Quarterly Report on Form 10-Q filed with the Commission on August 14, 2002. |
(h) |
|
Incorporated by reference to an exhibit in the Registrants Annual Report on Form 10-K filed with the Commission on March 28, 2003. |
(k) |
|
Incorporated by reference to an exhibit in the Registrants Annual Report on Form 10-K/A filed with the Commission on May 30, 2003. |
(b) Reports on Form 8-K.
On April 7, 2003, SeeBeyond filed a report on Form 8-K announcing its preliminary first fiscal quarter 2003 financial results.
On April 22, 2003, SeeBeyond filed a report on Form 8-K announcing its first fiscal quarter 2003 financial results.
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Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized, on August 14, 2003.
SeeBeyond Technology Corporation |
|
/s/ BARRY J. PLAGA |
|
Barry J. Plaga |
|
Senior
Vice President and Chief Financial Officer |
30