<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER: 0-20725
SIEBEL SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 94-3187233
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1855 SOUTH GRANT STREET
SAN MATEO, CA 94402
(Address of principal executive offices, including zip code)
(415) 295-5000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
The number of shares outstanding of the registrant's common stock, par value
$.001 per share, as of August 4, 1997, was 34,430,450.
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SIEBEL SYSTEMS, INC.
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1997
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION PAGE
<S> <C>
Item 1. Financial Statements
a) Consolidated Balance Sheets
as of June 30, 1997 and December 31, 1996 3
b) Consolidated Statements of Operations
for the three and six months ended June 30, 1997 and 1996 4
c) Consolidated Statements of Cash Flows
for the six months ended June 30, 1997 and 1996 5
d) Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 7
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 14
Item 4. Submission of Matters to a Vote of Security Holders 14
Item 6. Exhibits and Reports on Form 8-K 15
SIGNATURE 16
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<TABLE>
<CAPTION>
Part I. Financial Information
Item 1. Financial Statements
SIEBEL SYSTEMS, INC.
Consolidated Balance Sheets
(In thousands, except per share data)
June 30, December 31,
1997 1996
--------- -------------
Assets (unaudited)
<S> ------ <C> <C>
Current assets:
Cash and cash equivalents........................................ $ 28,035 $ 22,671
Short-term investments .......................................... 47,552 49,716
Accounts receivable, net ........................................ 18,187 12,855
Deferred income taxes ........................................... 1,067 1,067
Prepaids and other .............................................. 6,256 4,258
-------- --------
Total current assets 101,097 90,567
Property and equipment, net ........................................... 10,878 8,310
Other assets .......................................................... 743 624
-------- --------
Total assets .......................................... $112,718 $ 99,501
======== ========
Liabilities and Stockholders' Equity
------------------------------------
Current liabilities:
Accounts payable ................................................ $ 2,786 $ 3,107
Accrued expenses ................................................ 10,646 6,768
Income taxes payable ............................................ 778 2,018
Deferred revenue ................................................ 7,943 6,212
--------- ---------
Total current liabilities ............................. 22,153 18,105
Deferred income taxes ........................................... 205 205
--------- ---------
Total liabilities ..................................... 22,358 18,310
Stockholders' equity:
Common stock; $.001 par value; 100,000 shares authorized;
34,420 and 33,604 shares issued and outstanding, respectively 34 34
Additional paid-in capital ...................................... 79,296 77,359
Notes receivable from stockholders .............................. (450) (508)
Deferred compensation ........................................... (679) (1,035)
Retained earnings ............................................... 12,159 5,341
--------- ---------
Total stockholders' equity ............................ 90,360 81,191
--------- ---------
Total liabilities and stockholders' equity ............ $ 112,718 $ 99,501
========= =========
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See accompanying notes to consolidated financial statements.
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<CAPTION>
SIEBEL SYSTEMS, INC.
Consolidated Statements of Operations
(unaudited)
(In thousands, except per share data)
Three Months Ended Six Months Ended
June 30, June 30,
------------------- -------------------
1997 1996 1997 1996
------- ------- -------- -------
<S> <C> <C> <C> <C>
Revenues:
Software ............................... $20,835 $ 6,736 $37,396 11,138
Maintenance, consulting and other ...... 3,679 810 6,603 1,117
------- ------- ------- -------
Total revenues ............. 24,514 7,546 43,999 12,255
Cost of revenues:
Software ............................... 330 10 443 36
Maintenance, consulting and other ...... 1,610 423 3,211 766
------- ------- ------- -------
Total cost of revenues ..... 1,940 433 3,654 802
------- ------- ------- -------
Gross margin ............... 22,574 7,113 40,345 11,453
Operating expenses:
Product development .................... 2,841 1,164 5,422 2,150
Sales and marketing .................... 11,462 4,053 20,829 6,606
General and administrative ............. 2,491 838 4,474 1,428
------- ------- ------- -------
Total operating expenses ... 16,794 6,055 30,725 10,184
------- ------- ------- -------
Operating income ........... 5,780 1,058 9,620 1,269
Other income, net ............................. 770 110 1,377 229
------- ------- ------- -------
Income before income taxes . 6,550 1,168 10,997 1,498
Income tax expense ............................ 2,489 467 4,179 599
------- ------- ------- -------
Net income ................. $ 4,061 $ 701 $ 6,818 $ 899
======= ======= ======= =======
Net income per share .......................... $ 0.10 $ 0.02 $ 0.17 $ 0.03
======= ======= ======= =======
Shares used in net income per share computation 40,381 34,162 40,440 33,910
======= ======= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
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<TABLE>
<CAPTION>
SIEBEL SYSTEMS, INC.
Consolidated Statements of Cash Flows
(In thousands)
(unaudited)
Six Months Ended
June 30,
1997 1996
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income ............................................................................................. $ 6,818 $ 899
Adjustments to reconcile net income to net cash provided by
operating activities:
Compensation related to stock options .......................................................... 108 108
Depreciation and amortization .................................................................. 1,453 346
Loss on disposal of property and equipment ..................................................... 292 40
Provision for doubtful accounts ................................................................ 123 --
Changes in operating assets and liabilities:
Accounts receivable ......................................................................... (5,455) (3,885)
Prepaids and other .......................................................................... (1,998) (281)
Accounts payable ............................................................................ (321) 280
Accrued expenses ............................................................................ 3,878 1,857
Income taxes payable ........................................................................ (917) (62)
Deferred revenue ............................................................................ 1,731 3,858
-------- --------
Net cash provided by operating activities ...................................... 5,712 3,160
-------- --------
Cash flows from investing activities:
Purchases of property and equipment ................................................................ (4,313) (2,033)
Purchases of short-term investments ................................................................ (14,161) --
Maturities of short-term investments ............................................................... 16,325 --
Other assets ....................................................................................... (119) (339)
-------- --------
Net cash used in investing activities ........................................... (2,268) (2,372)
-------- --------
Cash flows from financing activities:
Proceeds from issuance of common stock ............................................................. 1,862 159
Proceeds from issuance of preferred stock .......................................................... -- 1,532
Repayment of stockholder notes ..................................................................... 58 --
-------- --------
Net cash provided by financing activities ....................................... 1,920 1,691
-------- --------
Change in cash and cash equivalents ...................................................................... 5,364 2,479
Cash and cash equivalents, beginning of period ........................................................... 22,671 11,391
-------- --------
Cash and cash equivalents, end of period ................................................................. $ 28,035 $ 13,870
======== ========
Supplemental disclosures of cash flows information:
Cash paid for income taxes .................................................................... $ 5,096 $ 612
======== ========
Tax benefit from exercise of stock options .................................................... $ 323 $ --
======== ========
Noncash investing and financing activities:
Exercise of common stock options in exchange for
stockholder notes receivable ................................................................ $ -- $ 507
======== ========
</TABLE>
See accompanying notes to consolidated financial statements
<PAGE>
SIEBEL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared on substantially the same basis as the audited consolidated
financial statements, and in the opinion of management include all
adjustments, consisting only of normal recurring adjustments, necessary for
their fair presentation. The interim results presented are not necessarily
indicative of results for any subsequent quarter or for the year ending
December 31, 1997.
For information as to the significant accounting policies followed by the
Company and other financial and operating information, see the Company's
Annual Report on Form 10-K, filed with the Securities and Exchange
Commission on March 7, 1997 (the "Form 10-K"). These consolidated financial
statements should be read in conjunction with the consolidated financial
statements included in that Annual Report.
The Financial Accounting Standards Board recently issued SFAS No. 130,
"Reporting Comprehensive Income" and SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information." These new accounting
standards are not expected to have a material effect on the Company's
consolidated financial statements.
2. NET INCOME PER SHARE
Net income per share is computed based on the weighted average number of
common and preferred (on an "as if converted" basis) shares outstanding and
is adjusted for shares issuable upon the exercise of stock options (unless
antidilutive) using the treasury stock method.
The Financial Accounting Standards Board recently issued Statement of
Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS No.
128"). SFAS No. 128 requires the presentation of basic earnings per share
("EPS") and, for companies with potentially dilutive securities, such as
options, diluted EPS. SFAS No. 128 is effective for annual and interim
periods ending after December 15, 1997. Had SFAS No. 128 been effective for
the quarter ended June 30, 1997, basic EPS and diluted EPS would have been
$0.12 and $0.10 per share, respectively.
3. CASH AND CASH EQUIVALENTS, AND SHORT-TERM INVESTMENTS
The Company considers all highly liquid investments with an original
maturity of 90 days or less to be cash equivalents. Short-term investments
generally consist of highly liquid municipal securities with original
maturities in excess of 90 days.
The Company has classified its investments in certain debt and equity
securities as "available for sale." Such investments are carried at fair
value, with gross unrealized gains and losses reported as a separate
component of stockholders' equity. As of June 30, 1997, gross unrealized
gains and losses have not been material.
June 30, December 31,
(In thousands) 1997 1996
--------------------------------------------------------------
(unaudited)
Certificates of deposit $ 1,325 $ 1,325
Municipal securities 46,227 48,391
--------------------------------------------------------------
$ 47,552 $ 49,716
--------------------------------------------------------------
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
THIS FORM 10-Q CONTAINS FORWARD-LOOKING STATEMENTS WHICH INVOLVE RISKS AND
UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS MAY DIFFER SIGNIFICANTLY FROM THE
RESULTS DISCUSSED IN THE FORWARD-LOOKING STATEMENTS. FACTORS THAT MIGHT CAUSE
SUCH A DIFFERENCE INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED HEREIN AND
UNDER THE CAPTION "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS--RISK FACTORS" IN THE COMPANY'S ANNUAL REPORT ON FORM
10-K. ANY SUCH FORWARD-LOOKING STATEMENTS SPEAK ONLY AS OF THE DATE SUCH
STATEMENTS ARE MADE AND THE COMPANY UNDERTAKES NO OBLIGATION TO PUBLICLY RELEASE
THE RESULTS OF ANY REVISION TO THESE FORWARD-LOOKING STATEMENTS.
OVERVIEW
Siebel Systems, Inc. is an industry leading provider of enterprise-class sales
and marketing information software systems. The Company designs, develops,
markets, and supports Siebel Enterprise Applications, a leading
Internet-enabled, object oriented client/server application software product
family designed to meet the sales and marketing information system requirements
of even the largest multi-national organizations.
The Company currently expects that license revenues from Siebel Enterprise
Applications will continue to account for a substantial majority of the
Company's revenues for the remainder of 1997 and for the foreseeable future. As
a result, factors adversely affecting the pricing of or demand for Siebel
Enterprise Applications could have a material adverse effect on the Company's
business, operating results and financial condition. Most of the Company's
revenues to date have been derived from one-time license fees from customers who
have received a perpetual license to the Company's products. The Company's
remaining revenues are primarily attributable to lower margin maintenance and
other revenues, including consulting and training revenues.
A relatively small number of customers account for a significant percentage of
the Company's license revenues. For the fiscal year ended 1996 and the first six
months of 1997, sales to the Company's ten largest customers accounted for 59%
and 62% of total revenues, respectively. The Company expects that licenses of
its products to a limited number of customers will continue to account for a
large percentage of revenue for the foreseeable future. The license of the
Company's software products is often an enterprise-wide decision by prospective
customers and generally requires the Company to provide a significant level of
education to prospective customers regarding the use and benefits of the
Company's products. In addition, the implementation of the Company's products
involves a significant commitment of resources by prospective customers and is
commonly associated with substantial reengineering efforts which may be
performed by the customer or third-party system integrators. The cost to the
customer of the Company's product is typically only a portion of the related
hardware, software, development, training and integration costs of implementing
a large-scale sales and marketing information system. For these and other
reasons, the sales and implementation cycles associated with the license of the
Company's products is often lengthy (ranging to date from between two and
twenty-four months from initial contact to product implementation) and is
subject to a number of significant delays over which the Company has little or
no control. Given these factors and the expected customer concentration, the
loss of a major customer or any reduction or delay in sales to or
implementations by such customers could have a material adverse effect on the
Company's business, operating results, and financial condition.
As of June 30, 1997, many of the Company's customers were in the pilot phase of
implementation of Siebel Enterprise Applications. Several of the Company's
customers have completed a significant portion of their enterprise-wide
development and deployment of Siebel Enterprise Applications, however, many have
only recently commenced such development and deployment. As a result, the
Company's products are currently being used by only a limited number of sales
professionals. If any of the Company's customers are not able to customize and
deploy Siebel Enterprise Applications successfully and on a timely basis to the
number of anticipated users, the Company's reputation could be significantly
damaged, which could have a material adverse effect on the Company's business,
operating results and financial condition.
<PAGE>
The Company markets its products in the United States through its direct sales
force and internationally through its sales force and a distributor in Japan.
International revenues accounted for 11% and 30% of total revenues in the fiscal
year ended 1996 and the first six months of 1997, respectively. The Company is
increasing its international sales force and is seeking to establish
distribution relationships with appropriate strategic partners and expects
international revenues will continue to account for a substantial portion of
total revenues in the future. As a result, failure to cost-effectively maintain
or increase international sales could have a material adverse effect on the
Company's business, operating results and financial condition.
The Company's limited operating history makes the prediction of future operating
results difficult. Prior growth rates in the Company's revenue and net income
should not be considered indicative of future operating results. Future
operating results will depend upon many factors, including the demand for the
Company's products, the level of product and price competition, the length of
the Company's sales cycle, the size and timing of individual license
transactions, the delay or deferral of customer implementations, the Company's
relationships with systems integrators, the Company's success in expanding its
direct sales force, indirect distribution channels and customer support
organization, the timing of new product introductions and product enhancements,
the mix of products and services sold, levels of international sales, activities
of and acquisitions by competitors, the timing of new hires, changes in foreign
currency exchange rates, the costs of establishing and maintaining international
operations, the ability of the Company to develop and market new products and
control costs and the ability to attract and retain key personnel. There can be
no assurance that the Company's business or strategies will be successful or
that the Company will be able to sustain profitability on a quarterly or annual
basis.
The Company's sales generally reflect a relatively high amount of revenue per
order. The loss or delay of individual orders, therefore, can have a significant
impact on the revenues and quarterly results of the Company. The timing of
license revenue is difficult to predict because of the length of the Company's
sales cycle, which to date has ranged from two to eighteen months from initial
contact to the execution of a license agreement. Because the Company's operating
expenses are based on anticipated revenue trends and because a high percentage
of the Company's expenses are relatively fixed, a delay in the recognition of
revenue from a limited number of license transactions could cause significant
variations in operating results from quarter to quarter and could result in
losses. To the extent such expenses precede, or are not subsequently followed
by, increased revenues, the Company's operating results would be materially
adversely affected. As a result of these and other factors, revenues for any
quarter are subject to significant variation, and the Company believes that
period-to-period comparisons of its results of operations are not necessarily
meaningful and should not be relied upon as indications of future performance.
It is likely that in some future quarter the Company's operating results will be
below the expectations of public market analysts and investors. In such event,
the price of the Company's Common Stock would likely be adversely affected.
To date, the Company has not experienced significant seasonality of operating
results. The Company expects that future revenues for any period may be affected
by the fiscal or quarterly budget cycles of its customers.
RESULTS OF OPERATIONS
REVENUES
Software. License revenues increased to $20,835,000 for the three months ended
June 30, 1997 from $6,736,000 for the three months ended June 30, 1996 and
decreased as a percentage of total revenues to 85% in the fiscal 1997 period
from 89% in the fiscal 1996 period. For the six months ended June 30, 1997,
license revenue increased to $37,396,000 from $11,138,000 for the six months
ended June 30, 1996 and decreased as a percentage of total revenues to 85% in
the fiscal 1997 period from 91% in the fiscal 1996 period. License revenues
increased in absolute dollar amount during these periods from the respective
prior year periods due to an increase in the number of licenses of Siebel
Enterprise Applications to new and existing customers. This increase in the
number of licenses was primarily due to continued demand by new and existing
customers for products in the Siebel Enterprise Applications family both in the
United States and internationally. In December 1996, the Company introduced
Siebel Service Enterprise, its customer service applications suite. Increases in
revenues during the 1997 periods
<PAGE>
were due in part to new and existing customers licensing Siebel Service
Enterprise to manage their customer service functions. The decrease in license
revenues as a percentage of total revenues was primarily due to increased levels
of maintenance, consulting and other revenues as discussed below.
Maintenance, Consulting and Other. Maintenance, consulting and other revenues
increased to $3,679,000 for the three months ended June 30, 1997 from $810,000
for the three months ended June 30, 1996 and increased as a percentage of total
revenues to 15% in the fiscal 1997 period from 11% in the fiscal 1996 period.
For the six months ended June 30, 1997, maintenance, consulting and other
revenue increased to $6,603,000 from $1,117,000 for the six months ended June
30, 1996 and increased as a percentage of total revenues to 15% in the fiscal
1997 period from 9% in the fiscal 1996 period. These increases in absolute
dollar amount and as a percentage of total revenues were due to the widespread
licensing of products to customers pursuant to agreements with a maintenance
component, maintenance renewals from products licensed in prior periods and one
customer obtaining implementation services for the Siebel Enterprise Application
through the Company. The Company expects that maintenance, consulting and other
revenues will remain the same or increase as a percentage of total revenues due
to maintenance components of new and existing license agreements.
COST OF REVENUES
Software. Cost of software license revenues includes product packaging,
documentation and production. Cost of license revenues through June 30, 1997
have averaged less than 1% of software license revenues. All costs incurred in
the research and development of software products and enhancements to existing
products have been expensed as incurred, and, as a result, cost of license
revenues includes no amortization of capitalized software development costs.
These costs are expected to remain the same or increase as a percentage of total
revenues.
Maintenance, Consulting and Other. Cost of maintenance, consulting and other
revenues consists primarily of personnel, facility and systems costs incurred in
providing customer support. Cost of maintenance, consulting and other revenues
increased to $1,610,000 for the three months ended June 30, 1997 from $423,000
for the three months ended June 30, 1996 and increased as a percentage of total
revenues to 7% in the fiscal 1997 period from 6% in the fiscal 1996 period. For
the six months ended June 30, 1997, cost of maintenance, consulting and other
increased to $3,211,000 from $766,000 for the six months ended June 30, 1996 and
increased as a percentage of total revenues to 7% in the fiscal 1997 period from
6% in the fiscal 1996 period. These increases reflect the effect of fixed costs
resulting from the Company's expansion of its maintenance and support
organization and due to the costs of one customer obtaining implementation
services for the Siebel Enterprise Application through the Company. The Company
expects that maintenance, consulting and other costs will continue to increase
in absolute dollar amount as the Company expands its customer support
organization to meet anticipated customer demands in connection with product
implementation. These costs are expected to remain the same or increase as a
percentage of total revenues.
OPERATING EXPENSES
Product Development. Product development expenses include expenses associated
with the development of new products, enhancements of existing products and
quality assurance activities, and consist primarily of employee salaries,
benefits, consulting costs and the cost of software development tools. Product
development expenses increased to $2,841,000 for the three months ended June 30,
1997 from $1,164,000 for the three months ended June 30, 1996 and decreased as a
percentage of total revenues to 12% in the fiscal 1997 period from 15% in the
fiscal 1996 period. For the six months ended June 30, 1997, product development
expenses increased to $5,422,000 from $2,150,000 for the six months ended June
30, 1996 and decreased as a percentage of total revenues to 12% in the fiscal
1997 period from 18% in the fiscal 1996 period. The increases in the dollar
amount of product development expenses were primarily attributable to costs of
additional personnel in the Company's product development operations. The
Company anticipates that it will continue to devote substantial resources to
product development. The Company expects product development expenses to
increase in absolute dollar amount but remain at a similar percentage of total
revenues as the first six months of 1997.
Sales and Marketing. Sales and marketing expenses consist primarily of salaries,
commissions and bonuses earned
<PAGE>
by sales and marketing personnel, field office expenses, travel and
entertainment and promotional expenses. Sales and marketing expenses increased
to $11,462,000 for the three months ended June 30, 1997 from $4,053,000 for the
three months ended June 30, 1996 and decreased as a percentage of total revenues
to 47% in the fiscal 1997 period from 54% in the fiscal 1996 period. For the six
months ended June 30, 1997, sales and marketing expenses increased to
$20,829,000 from $6,606,000 for the six months ended June 30, 1996 and decreased
as a percentage of total revenues to 47% in the fiscal 1997 period from 54% in
the fiscal 1996 period. The increases in the dollar amount of expenditures on
sales and marketing reflect primarily the hiring of additional sales and
marketing personnel and, to a lesser degree, costs associated with expanded
promotional activities. The Company expects that sales and marketing expenses
will continue to increase in absolute dollar amount as the Company continues to
expand its sales and marketing efforts, establishes additional sales offices in
the United States and internationally and increases promotional activities.
These expenses are expected to remain at a similar percentage of total revenues
as the first six months of 1997.
General and Administrative. General and administrative expenses consist
primarily of salaries and occupancy costs for administrative, executive and
finance personnel. General and administrative expenses increased to $2,491,000
for the three months ended June 30, 1997 from $838,000 for the three months
ended June 30, 1996 and decreased as a percentage of total revenues to 10% in
the fiscal 1997 period from 11% in the fiscal 1996 period. For the six months
ended June 30, 1997, general and administrative expenses increased to $4,474,000
from $1,428,000 for the six months ended June 30, 1996 and decreased as a
percentage of total revenues to 10% in the fiscal 1997 period from 12% in the
fiscal 1996 period. The increases in the absolute dollar amount of general and
administrative expenses were primarily due to increased staffing and associated
expenses necessary to manage and support the Company's increased scale of
operations. The Company believes that its general and administrative expenses
will continue to increase in absolute dollar amount as a result of the continued
expansion of the Company's administrative staff and facilities to support
growing operations and the expenses associated with being a public company. The
Company anticipates that its general and administrative expenses as a percentage
of total revenues should remain at a similar percentage as the first six months
of 1997.
OTHER INCOME, NET
Other income, net is primarily comprised of interest income earned on the
Company's cash and cash equivalents and short-term investments and reflects
earnings on increasing cash and cash equivalents and short-term investment
balances.
PROVISION FOR INCOME TAXES
Income taxes have been provided at an effective rate of approximately 38%, which
is comprised primarily of federal and state taxes. The Company accounts for
income taxes in accordance with Statement of Financial Accounting Standards No.
109, "Accounting for Income Taxes."
NET INCOME
The Company had net income (after provision for income taxes) of $4,061,000 for
the three months ended June 30, 1997 compared to net income of $701,000 for the
three months ended June 30, 1996. Net income per share increased to $0.10 per
share in the second quarter of 1997 from $0.02 in the comparable period in 1996.
Net income increased as a percentage of total revenues to 17% in the three
months ended June 30, 1997 from 9% in the three months ended June 30, 1996. The
Company had net income of $6,818,000 for the six months ended June 30, 1997,
compared to net income of $899,000 for the six months ended June 30, 1996. Net
income per share increased to $0.17 per share for the six months ended June 30,
1997 from $0.03 in the comparable period in 1996. Net income increased as a
percentage of total revenues to 16% in the six months ended June 30, 1997 from
7% in the six months ended June 30, 1996.
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash, cash equivalents and short-term investments increased to
$75,587,000 as of June 30, 1997 from $72,387,000 as of December 31, 1996,
representing approximately 67% of total assets. This increase was primarily
attributable to net income and increases in accrued expenses and deferred
revenue and issuances of common stock, partially offset by increases in accounts
receivable and prepaids and other and purchases of property and equipment.
The Company believes that the anticipated cash flows from operations, cash, cash
equivalents and short-term investments, will be adequate to meet its cash needs
for working capital and capital expenditures for at least the next twelve
months.
FACTORS AFFECTING OPERATING RESULTS
Limited Operating History. The Company commenced operations in July 1993 and
shipped version 1.0 of Siebel Sales Enterprise in April 1995 and version 2.2 of
Siebel Service Enterprise in December 1996. The Company has only a limited
operating history, and its prospects must be evaluated in light of the risks and
uncertainties encountered by a company in its early stage of development. The
new and evolving markets in which the Company operates make these risks and
uncertainties particularly pronounced. To address these risks, the Company must,
among other things, successfully implement its sales and marketing strategy,
respond to competitive developments, attract, retain, and motivate qualified
personnel, continue to develop and upgrade its products and technologies more
rapidly than its competitors, and commercialize its products and services
incorporating these enhanced technologies. The Company expects to continue to
devote substantial resources to its product development and sales and customer
support and, as a result, will need to generate significant quarterly revenues
to achieve and maintain profitability. The Company's limited operating history
makes it difficult to predict accurately future operating results. There can be
no assurance that any of the Company's business strategies will be successful or
the Company will be profitable in any future quarter or period.
Reliance on Andersen Consulting and Other Relationships; Dependence on System
Integrators. The Company has established strategic relationships with a number
of organizations that it believes are important to its worldwide sales,
marketing and support activities and the implementation of its products. The
Company believes that its relationships with such organizations provide
marketing and sales opportunities for the Company's direct sales force and
expand the distribution of its products. These relationships also assist it in
keeping pace with the technological and marketing developments of major software
vendors, and, in certain instances, provide it with technical assistance for its
product development efforts. In particular, the Company has established a
non-exclusive strategic relationship with Andersen Consulting, a principal
stockholder of the Company. In 1996 and the first six months of 1997,
approximately 46% and 49%, respectively, of the revenues of the Company were
derived from customers for which Andersen Consulting had been engaged to provide
system integration services. Any deterioration of the Company's relationship
with Andersen Consulting could have a material adverse effect on the Company's
business, financial condition and results of operations. In addition, the
Company has relationships with Itochu Corporation and Itochu Techno-Science
Corporation, among others. The failure by the Company to maintain its existing
relationships, or to establish new relationships in the future, could have a
material adverse effect on the Company's business, results of operations and
financial condition. The Company's customers and potential customers frequently
rely on Andersen Consulting, as well as other third-party system integrators to
develop, deploy and/or manage Siebel Enterprise Applications. If the Company is
unable to train adequately a sufficient number of system integrators or, if for
any reason such integrators do not have or devote the resources necessary to
facilitate implementation of the Company's products or if such integrators adopt
a product or technology other than Siebel Enterprise Applications, the Company's
business, operating results and financial condition could be materially and
adversely affected.
Limited Deployment. As of June 30, 1997, many of the Company's customers were in
the pilot phase of implementing the Company's software. There can be no
assurance that enterprise-wide deployments by such customers will be successful.
The Company's customers frequently contemplate the deployment of its products
commercially to large numbers of sales and marketing personnel, many of whom
have not previously used
<PAGE>
application software systems, and there can be no assurance of such end-users'
acceptance of the product. The Company's products are being deployed on a
variety of computer hardware platforms and used in connection with a number of
third-party software applications and programming tools. Such deployment
presents significant technical challenges, particularly as large numbers of
sales personnel attempt to use the Company's product concurrently. If any of the
Company's customers are not able to customize and deploy Siebel Enterprise
Applications successfully and on a timely basis to the number of anticipated
users, the Company's reputation could be significantly damaged, which could have
a material adverse effect on the Company's business, operating results and
financial condition. In addition to revenues from new customers, the Company
expects that a significant percentage of any future revenues will be derived
from sales to existing customers. However, such customers are not contractually
committed in all cases to purchase additional licenses. If existing customers
have difficulty further deploying Siebel Enterprise Applications or for any
other reason are not satisfied with Siebel Enterprise Applications, the
Company's business, operating results and financial condition could be
materially and adversely affected.
Competition. The market for the Company's products is intensely competitive,
subject to rapid change and significantly affected by new product introductions
and other market activities of industry participants. The Company's products are
targeted at the emerging market for sales and marketing information systems, and
the Company faces competition primarily from customers' internal information
technology departments and systems integrators, as well as from other
application software providers that offer a variety of products and services to
address this market. Many of the Company's customers and potential customers
have in the past attempted to develop sales and marketing information systems,
in-house either alone or with the help of systems integrators and there can be
no assurance that the Company will be able to compete successfully against such
internal development efforts.
The Company relies on a number of systems consulting and systems integration
firms, particularly Andersen Consulting, for implementation and other customer
support services, as well as recommendations of its products during the
evaluation stage of the purchase process. Although the Company seeks to maintain
close relationships with these service providers, many of them have similar, and
often more established, relationships with the Company's competitors. If the
Company is unable to develop and retain effective, long-term relationships with
these third parties, the Company's competitive position could be materially and
adversely affected. Further, there can be no assurance that these third parties,
many of which have significantly greater resources than the Company, will not
market software products in competition with the Company in the future or will
not otherwise reduce or discontinue their relationships with or support of the
Company and its products.
A large number of personal, departmental and other products exist in the sales
automation market. Some of the Company's current and potential competitors and
their products include Symantec (ACT!), Borealis Corporation (Arsenal), Brock
International (Brock Activity Manager), Early Cloud & Co. (CallFlow), Clarify,
Inc. (Clear-Sales), IMA (EDGE), Marketrieve Company (Marketrieve PLUS), Oracle
Corporation (Oracle Sales Manager), SaleSoft (PROCEED), Pivotal Software, Inc.
(Relationship), SalesBook Systems (SalesBook), SalesKit Software Corporation
(SalesKit), Scopus Technology, Inc. (SalesTeam), Aurum (SalesTrak), Sales
Technologies (SNAP for Windows), Saratoga Systems (SPS for Windows) and The
Vantive Corporation (Vantive Sales). Some of these competitors have longer
operating histories, significantly greater financial, technical, marketing and
other resources, significantly greater name recognition and a larger installed
base of customers than the Company. In addition, many competitors have
well-established relationships with current and potential customers of the
Company. As a result, these competitors may be able to respond more quickly to
new or emerging technologies and changes in customer requirements, or to devote
greater resources to the development, promotion and sale of their products, than
can the Company.
It is also possible that new competitors or alliances among competitors may
emerge and rapidly acquire significant market share. The Company also expects
that competition will increase as a result of consolidation in the software
industry. Increased competition may result in price reductions, reduced gross
margins and loss of market share, any of which could materially adversely affect
the Company's business, operating results and financial condition. There can be
no assurance that the Company will be able to compete successfully against
current and future competitors or that competitive pressures faced by the
Company will not materially and adversely affect its business, operating results
and financial condition.
<PAGE>
Management of Growth; Dependence upon Key Personnel. In the event that the
significant growth of the Company's revenues continues, such growth may place a
significant strain upon the Company's management systems and resources. The
Company's ability to compete effectively and to manage future growth, if any,
will require the Company to continue to improve its financial and management
controls, reporting systems and procedures on a timely basis and expand, train
and manage its employee work force. There can be no assurance that the Company
will be able to do so successfully. The Company's failure to do so could have a
material adverse effect upon the Company's business, operating results and
financial condition. The Company's future performance depends in significant
part upon the continued service of its key technical, sales and senior
management personnel, particularly Thomas M. Siebel, the Company's Chairman and
Chief Executive Officer, none of whom has entered into an employment agreement
with the Company. The loss of the services of one or more of the Company's
executive officers could have a material adverse effect on the Company's
business, operating results and financial condition. The Company's future
success also depends on its continuing ability to attract and retain highly
qualified technical, customer support, sales and managerial personnel.
Competition for such personnel is intense, and there can be no assurance that
the Company will be able to retain its key technical, sales and managerial
employees or that it can attract, assimilate or retain other highly qualified
technical, sales and managerial personnel in the future.
International Operations. The Company's sales are primarily to large
multi-national companies. To service the needs of such companies, both
domestically and internationally, the Company must provide worldwide product
support services. As a result, the Company has expanded and intends to continue
to expand its international operations and enter additional international
markets, which will require significant management attention and financial
resources and could adversely affect the Company's operating margins and
earnings, if any. Revenues from international sales accounted for approximately
30% of the Company's total revenues in the first six months of 1997. The Company
believes that in order to increase sales opportunities and profitability it will
be required to expand its international operations. The Company has committed
and continues to commit significant management time and financial resources to
developing direct and indirect international sales and support channels. There
can be no assurance, however, that the Company will be able to maintain or
increase international market demand for Siebel Enterprise Applications. To the
extent that the Company is unable to do so in a timely manner, the Company's
international sales will be limited, and the Company's business, operating
results and financial condition could be materially and adversely affected.
The growth in the Company's revenues from international sales is expected to
continue to subject a portion of the Company's revenues to the risks associated
with international sales, including foreign currency fluctuations, economic or
political instability, shipping delays and various trade restrictions, any of
which could have a significant impact on the Company's ability to deliver
products on a competitive and timely basis. Future imposition of, or significant
increases in the level of, customs duties, export quotas or other trade
restrictions, could have an adverse effect on the Company's business, financial
condition and results of operations. As the Company develops an international
sales force, it expects to be more directly subject to foreign currency
fluctuations. To the extent such direct sales are denominated in foreign
currency, any such fluctuation may adversely affect the Company's business,
financial condition and results of operations. Finally, the laws of certain
foreign countries do not protect the Company's intellectual property rights to
the same extent as do the laws of the United States.
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In April 1997, Terence M. Lenaghan, a former employee and financial officer of
the Company, filed a complaint against the Company and Thomas M. Siebel in the
Superior Court of California, County of San Mateo alleging violation of an
implied contract of employment, violation of an implied covenant of good faith
and fair dealing, and fraudulent inducement of employment acceptance in
connection with the termination of his employment in February 1996. The Company
believes the allegations in the complaint are without merit and intends to
vigorously defend the action. There can be no assurance, however, that the
ultimate outcome of this action will not have a material effect on the Company's
financial position or results of operations. Trial of the matter is scheduled
before the end of fiscal 1997.
The Company is engaged in certain other legal proceedings as disclosed in the
Company's Annual Report on Form 10-K.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's annual meeting of stockholders was held on April 14, 1997 (the
"Annual Meeting").
The following matters were considered and voted upon at the Annual Meeting:
The first matter related to the election of two director nominees, Eric E.
Schmidt, Ph.D. and A. Michael Spence, Ph.D. as Class I Director to serve until
the 2000 annual meeting of stockholders. The votes cast and withheld for such
nominees were as follows:
Name For Withheld
---- --- --------
Eric E. Schmidt, Ph.D. 25,034,600 5,770
A. Michael Spence, Ph.D. 25,034,600 5,770
The second matter related to the approval of an amendment to the Company's
Employee Stock Purchase Plan to increase the aggregate number of shares of
Common Stock authorized for issuance under such plan by 1,000,000 shares.
24,039,745 votes were cast for approval, 927,542 votes were cast against
approval, and there were 22,683 abstentions and 50,400 broker non-votes.
The third matter related to the ratification of the appointment of KPMG Peat
Marwick LLP as independent auditors of the Company for its fiscal year ending
December 31, 1997. 25,029,476 votes were cast for ratification, 8,454 votes were
cast against ratification and there were 2,440 abstentions.
Based on these voting results, each of the directors nominated was elected and
the second and third matters were approved.
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
<TABLE>
<CAPTION>
(a) Exhibits
Exhibit
Number Description of Document
------- -----------------------
<C> <S>
(3) 3.3 Restated Certificate of Incorporation of the Registrant, as amended.
(1) 3.4 Bylaws of the Registrant.
(1)(3) 4.1 Reference is made to Exhibits 3.3 and 3.4.
(1) 4.2 Specimen Stock Certificate.
(1) 4.3 Restated Investor Rights Agreement, dated December 1,
1995, between the Registrant and certain investors, as amended
April 30, 1996 and June 14, 1996.
(3)10.1 Registrant's 1996 Equity Incentive Plan, as amended.
(3)10.2 Registrant's Employee Stock Purchase Plan, as amended.
(1)10.3 Form of Indemnity Agreement entered into between the Registrant and its officers and
directors.
(4)10.4 Registrant's Deferred Compensation Plan, dated January 10, 1997.
(1)(2)10.6 Master Alliance Agreement, dated March 17, 1995, between the Registrant and Andersen
Consulting LLP.
(1)10.9 Assignment Agreement, dated September 20, 1995, by and between the Registrant and
Thomas M. Siebel.
(1)10.10 Lease Agreement, dated June 4, 1996, by and between the Registrant and Crossroad
Associates and Clocktower Associates.
(5)11.1 Statement Regarding Computation of Net Income Per Share.
(5)27.1 Financial Data Schedule.
</TABLE>
(1) Incorporated by reference to the Company's Registration
Statement on Form S-1 (No. 333-03751), as amended.
(2) Confidential treatment has been granted with respect to portions
of this exhibit.
(3) Incorporated by reference to the Company's Registration
Statement on Form S-8 (No. 333-07983), as amended.
(4) Incorporated by reference to the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 1996.
(5) Filed herewith.
(b) Reports on Form 8-K
None.
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SIEBEL SYSTEMS, INC.
Date: August 12, 1997 By: /s/ Howard H. Graham
-------------------------------------------------
Howard H. Graham
Senior Vice President Finance and Administration
and Chief Financial Officer
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT 11.1
SIEBEL SYSTEMS, INC.
Statement Regarding Computation of Net Income Per Share
(In thousands, except per share data)
(unaudited)
Three Months Ended Six Months Ended
June 30 June 30
----------------- ------------------
1997 1996 1997 1996
------- -------- -------- -------
<S> <C> <C> <C> <C>
Net income .................................................... $ 4,061 $ 701 $ 6,818 $ 899
======= ======= ======= =======
Weighted average number of shares outstanding
Common stock ..................................... 34,204 17,441 34,093 17,079
Preferred stock, as if converted ................. -- 10,025 -- 9,919
Number of common stock equivalents as a result of stock options
outstanding using the treasury stock method ...... 6,177 1,058 6,347 1,068
Number of common stock issued and stock options granted in
accordance with SAB No. 83 ....................... -- 5,638 -- 5,844
------- ------- ------- -------
Shares used in net income per share computation .. 40,381 34,162 40,440 33,910
======= ======= ======= =======
Net income per share ............................. $ 0.10 $ 0.02 $ 0.17 $ 0.03
======= ======= ======= =======
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1996
<PERIOD-START> JAN-01-1997 JAN-01-1996
<PERIOD-END> JUN-30-1997 JUN-30-1996
<CASH> 28,035 22,671
<SECURITIES> 47,552 49,716
<RECEIVABLES> 18,187 12,855
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 101,097 90,567
<PP&E> 10,878 8,310
<DEPRECIATION> 0 0
<TOTAL-ASSETS> 112,718 99,501
<CURRENT-LIABILITIES> 22,153 18,105
<BONDS> 0 0
0 0
0 0
<COMMON> 34 34
<OTHER-SE> 90,326 81,157
<TOTAL-LIABILITY-AND-EQUITY> 112,718 99,501
<SALES> 20,835 6,736
<TOTAL-REVENUES> 24,514 7,546
<CGS> 1,940 433
<TOTAL-COSTS> 16,794 6,055
<OTHER-EXPENSES> (770) (110)
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 0 0
<INCOME-PRETAX> 6,550 1,168
<INCOME-TAX> 2,489 467
<INCOME-CONTINUING> 0 0
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 4,061 701
<EPS-PRIMARY> 0.10 0.02
<EPS-DILUTED> 0.10 0.02
</TABLE>
