SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
FORM 10-Q
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[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED September 30, 2000.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934.
Commission file number 000-26981
SILVERSTREAM SOFTWARE, INC.
(Exact name of registrant as specified in its charter)
Delaware 04-3318325
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
Two Federal Street
Billerica, Massachusetts 01821-3559
(978) 262-3000
(Address, Including Zip Code, and Telephone Number, Including Area Code,
of Registrant's 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 [X] No [ ]
As of November 8, 2000 there were 20,615,640 shares of the registrant's
common stock outstanding.
<PAGE>
SilverStream Software, Inc.
Form 10-Q
For the Quarterly Period Ended September 30, 2000
Table of Contents
<TABLE>
<CAPTION>
<S> <C> <C> <C>
PART I. Financial Information Page
----
Item 1. Financial Statements........................................................................ 3-7
Condensed Consolidated Balance Sheets as of September 30, 2000 and December 31, 1999........ 3
Condensed Consolidated Statements of Operations for the Three and the Nine Months Ended
September 30, 2000 and 1999................................................................. 4
Condensed Consolidated Statements of Cash Flows for the Nine Months Ended
September 30, 2000 and 1999................................................................. 5
Notes to Condensed Consolidated Financial Statements........................................ 6-7
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations....... 8-20
Item 3. Quantitative and Qualitative Disclosures About Market Risk.................................. 20
PART II. Other Information
Item 2. Changes in Securities and Use of Proceeds...................................................20-21
Item 6. Exhibits and Reports on Form 8-K............................................................ 21
Signatures.................................................................................. 22
</TABLE>
2
<PAGE>
PART I. Financial Information
Item 1. Financial Statements
SILVERSTREAM SOFTWARE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
(Unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
------------- ------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents....................................................... $ 55,603 $ 46,799
Marketable securities........................................................... 147,561 247
Accounts receivable; net of allowances of $1,347 at September 30, 2000
and $763 at December 31, 1999 ............................................... 21,740 6,938
Prepaid expenses................................................................ 2,480 1,131
Other current assets............................................................ 765 2,003
----------- ------------
Total current assets..................................................... 228,149 57,118
Furniture, equipment and leasehold improvements, net.............................. 9,813 2,836
Other assets...................................................................... 2,081 -
Intangibles, net................................................................. 62,383 20,709
----------- ------------
Total assets............................................................. $ 302,426 $ 80,663
=========== ============
Liabilities and stockholders' equity
Current liabilities:
Accounts payable................................................................ $ 5,401 $ 7,740
Accrued expenses................................................................ 10,033 3,299
Deferred revenue................................................................ 10,544 5,079
Current portion of long-term debt............................................... 451 451
----------- ------------
Total current liabilities................................................ 26,429 16,569
Long-term debt, less current portion.............................................. 214 509
Stockholders' equity:
Common stock.................................................................... 22 18
Additional paid-in capital...................................................... 349,121 115,185
Deferred compensation........................................................... (7,777) (7,213)
Accumulated deficit............................................................. ( 64,934) (44,161)
Other accumulated comprehensive income/(loss)................................... (617) (140)
Notes receivable from stockholders.............................................. (32) (104)
----------- ------------
Total stockholders' equity............................................... 275,783 63,585
----------- ------------
Total liabilities and stockholders' equity............................... $ 302,426 $ 80,663
=========== ============
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
3
<PAGE>
SILVERSTREAM SOFTWARE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------- --------------------------
2000 1999 2000 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenue:
Software license.................................... $ 12,069 $ 3,495 $ 28,519 $ 9,010
Services............................................ 11,432 2,757 26,014 5,024
----------- ----------- ----------- -----------
Total revenue............................... 23,501 6,252 54,533 14,034
Cost of revenue:
Software license.................................... 760 391 2,315 1,076
Services............................................ 10,259 3,296 24,212 6,463
----------- ----------- ----------- -----------
Total cost of revenue....................... 11,019 3,687 26,527 7,539
----------- ----------- ----------- -----------
Gross profit.......................................... 12,482 2,565 28,006 6,495
Operating expenses:
Sales and marketing................................. 11,934 4,962 31,916 13,220
Research and development............................ 4,435 1,831 10,633 5,173
General and administrative.......................... 2,282 940 6,492 2,600
Compensation charge for issuance of stock options... 456 108 1,219 298
Amortization of goodwill............................ 3,402 81 7,502 81
----------- ----------- ----------- -----------
Total operating expenses.................... 22,509 7,922 57,762 21,372
----------- ----------- ----------- -----------
Loss from operations.................................. (10,027) (5,357) (29,756) (14,877)
Other income, net..................................... 3,345 337 8,983 515
----------- ----------- ----------- -----------
Net loss.............................................. $ (6,682) $ (5,020) $ (20,773) $ (14,362)
=========== =========== =========== ===========
Beneficial conversion feature in Series D preferred
stock................................................. - - - (263)
----------- ----------- ----------- -----------
Net loss applicable to common stockholders............ $ (6,682) $ (5,020) $ (20,773) $ (14,625)
=========== =========== =========== ===========
Basic and diluted net loss per share applicable to
common stockholders................................... $ (0.33) $ (.51) $ (1.07) $ (2.58)
=========== =========== =========== ===========
Weighted-average common shares used in computing basic
and diluted net loss per share applicable to common
stockholders.......................................... 20,164 9,860 19,352 5,678
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
4
<PAGE>
SILVERSTREAM SOFTWARE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
2000 1999
------------ ------------
<S> <C> <C>
Operating activities
Net loss............................................................................. $ (20,773) $ (14,362)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization...................................................... 9,271 998
Provision for allowances on accounts receivable.................................... 583 234
Compensation charge for issuance of stock options.................................. 1,219 298
Changes in operating assets and liabilities:
Accounts receivable.............................................................. (15,002) (2,216)
Other receivable................................................................. 2,303 -
Prepaid expenses................................................................. (1,268) (593)
Other current assets............................................................. 3 157
Accounts payable and accrued expenses............................................ 2,831 2,324
Deferred revenue................................................................. 5,329 1,573
------------ ------------
Net cash used in operating activities................................................ (15,504) (11,587)
------------ ------------
Investing activities
Purchase of furniture and equipment.................................................. (8,425) (1,693)
Acquisitions of businesses, net of cash acquired..................................... (12,887) -
Cash acquired through acquisitions of subsidiaries................................... - 171
Purchase of available-for-sale securities............................................ (147,314) (1,817)
------------ ------------
Net cash used in investing
Activities......................................................................... (168,626) (3,339)
------------ ------------
Financing activities
Net proceeds from issuance of preferred stock........................................ - 14,728
Net proceeds from issuance of common stock........................................... 194,298 50,070
Proceeds from line of credit......................................................... - 750
Payments on long-term debt........................................................... (959) (461)
Payment of note receivable from stockholders......................................... 72 -
------------ ------------
Net cash provided by financing activities............................................ 193,411 65,087
------------ ------------
Effects of exchange rate on cash and cash equivalents................................ (477) (36)
Net increase (decrease) in cash and cash equivalents................................. 8,804 50,125
Cash and cash equivalents at beginning of period..................................... 46,799 1,199
------------ ------------
Cash and cash equivalents at end of period........................................... $ 55,603 $ 51,324
============ ============
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
5
<PAGE>
SILVERSTREAM SOFTWARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Nature of Business
The condensed consolidated financial statements include the accounts of
SilverStream Software, Inc. and its U.S. and international subsidiaries, all of
which are wholly owned, located in North America, Europe and Asia. All
intercompany accounts and transactions have been eliminated in consolidation.
SilverStream Software, Inc. and its subsidiaries are collectively referred to as
the "Company" or "SilverStream."
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with accounting principles generally accepted in the
United States for interim financial information and with the instructions to
Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all
financial information and disclosures required for complete financial statements
pursuant to accounting principles generally accepted in the United States. In
the opinion of management, these financial statements include all adjustments
(consisting only of normal recurring adjustments) necessary for a fair
presentation of the results of operations for the interim periods reported and
of the financial condition of the Company as of the date of the interim balance
sheet. The results of operations for the interim periods are not necessarily
indicative of the results to be expected for the full year.
SilverStream is a leading provider of solutions for building, deploying and
managing large-scale Internet, e-commerce, business-to-business, enterprise
portal and intranet applications. The Company markets its software worldwide and
has sales offices in the United States, Canada, United Kingdom, The Netherlands,
Belgium, Germany, Norway, The Czech Republic, France, Luxembourg, Denmark,
Sweden, Hong Kong, Singapore, Taiwan and Australia.
Earnings per Share
The Company computes earnings per share in accordance with Statement of
Financial Accounting Standard (SFAS) No. 128, "Earnings per Share." SFAS 128
requires calculation and presentation of basic and diluted earnings per share.
Basic earnings per share is calculated based on the weighted average number of
common shares outstanding and excludes any dilutive effects of warrants, stock
options, common stock subject to repurchase or other types of securities.
Diluted earnings per share is calculated based on the weighted average number of
common shares outstanding and the dilutive effect of warrants, stock options,
and related securities calculated using the treasury stock method. Dilutive
securities are excluded from the diluted earnings per share calculation if their
effect is anti-dilutive.
The following table sets forth the computation of basic and diluted loss per
share:
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
2000 1999 2000 1999
------------ ------------ ------------ ------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Numerator:
Net loss........................ $ (6,682) $ (5,020) $ (20,773) $ (14,362)
Beneficial conversion feature
in series D preferred stock... -- -- -- (263)
------------ ------------ ------------ ------------
Net loss applicable to common
stockholders.................. $ (6,682) $ (5,020) $ (20,773) $ (14,625)
============ ============ ============ ============
Denominator:
Weighted average common shares
outstanding.................. 20,477 11,146 19,924 7,222
Weighted average common shares
subject to repurchase........ (313) (1,286) (572) (1,544)
------------ ------------ ------------ ------------
Denominator for basic and
diluted loss per share
applicable to common
stockholders.................... 20,164 9,860 19,352 5,678
============ ============ ============ ============
Basic and diluted net loss per
share applicable to common
stockholders.................... $ (0.33) $ (0.51) $ (1.07) $ (2.58)
============ ============ ============ ============
</TABLE>
6
<PAGE>
The Company has excluded all preferred stock, outstanding stock options and
shares subject to repurchase by the Company from the calculation of loss per
share because all such securities are anti-dilutive for all periods presented.
Shares subject to repurchase by the Company will be included in the computation
of earnings per share when the Company's option to repurchase these shares
expires.
Comprehensive Loss
Total comprehensive loss was $7,025,000 and $21,250,000 for the three and
nine months ended September 30, 2000, respectively, and $5,009,000 and
$14,687,000 for the three and nine months ended September 30, 1999,
respectively. Other comprehensive loss consisted of adjustments for foreign
currency translation losses in the amounts of $343,000 and $477,000 for the
three and nine months ended September 30, 2000, respectively.
Secondary Public Offering
On January 31, 2000, the Company completed a secondary public offering in
which it sold 1,445,851 shares of its common stock for net proceeds to the
Company of $155.9 million. Also on January 31, 2000, the Company's underwriters
exercised their over-allotment option, which resulted in the sale of an
additional 330,000 shares of the Company's common stock which generated
additional proceeds of $35.8 million, net of issuance costs.
Acquisitions
On March 31, 2000, the Company acquired Power 2000, Inc., an e-business
services provider. The purchase price was approximately $15.7 million. The
acquisition was completed through the issuance of approximately 134,000 shares
of common stock along with approximately $5.3 million in cash consideration. The
merger has been accounted for using the purchase method of accounting and the
goodwill will be charged to operations ratably over the next five years.
On April 5, 2000, the Company acquired eObject, Inc., the developer of
"enTellect," a java based framework for the access control, personalization and
metering of corporate resources. The purchase price was approximately $23.2
million. The acquisition was completed through the issuance of approximately
473,581 shares of the Company's common stock. Pursuant to the terms of the
eObject purchase agreement, the Company issued an additional 175,000 shares of
the Company's common stock and made a cash payment of approximately $1.0 million
on May 26, 2000 to the shareholders of eObject, due to the achievement of
certain goals and deliverables. The merger has been accounted for using the
purchase method of accounting and the goodwill will be charged to operations
ratably over the next five years
The unaudited pro forma information below for the nine months ended
September 30, 2000 gives effect to the acquisition of eObject as if it occurred
on January 1, 2000. The unaudited pro forma information includes the historical
results of operations of eObject for the nine months ended September 30, 2000.
<TABLE>
<CAPTION>
Pro Forma
September 30, 2000
------------------
<S> <C>
Revenue............................................ $ 54,533
Net loss applicable to common stockholders......... (22,666)
==================
Basic and diluted net loss per share applicable
to common stockholders........................... $ (1.16)
Weighted-average common shares used in
computing basic and diluted net loss per share
applicable to common stockholders................ 19,507
==================
</TABLE>
The primary pro forma adjustment is approximately $1.4 million, and relates
to the amortization of goodwill.
On August 11, 2000, the Company acquired Excelnet Systems Limited, a
provider of Web-based business solutions through the provision of quality
software products, training, applications development and consultancy services.
The purchase price was $7 million, $5 million of which was paid at closing, $1
million of which is contingent upon Excelnet achieving certain revenue targets
for the year ended December 31, 2000, and $1 million of which is contingent upon
Excelnet achieving certain revenue targets for the year ended December 31, 2001.
The closing acquisition price was paid by the issuance of 32,620 shares of the
Company's common stock along with $3.5 million of cash. The acquisition has been
accounted for using the purchase method of accounting and the goodwill will be
charged to operations ratably over the next five years. The contingent payments
of $2.0 million will be capitalized to intangible assets as goodwill if incurred
and will be amortized over the remaining life of the asset.
7
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
This Form 10-Q contains forward-looking statements within the meaning of
Section 21E of the Securities Exchange Act of 1934, as amended. For this
purpose, statements contained herein that are not statements of historical fact
may be deemed to be forward-looking statements. Without limiting the foregoing,
the words "believes," "anticipates," "plans," "expects" and similar expressions
are intended to identify forward-looking statements. These forward-looking
statements involve risks and uncertainties and are not guarantees of future
performance. Actual results may differ materially from those indicated in such
forward-looking statements as a result of certain factors including, but not
limited to, those set forth under the heading "Certain Factors That May Affect
Future Results."
Overview
We are a leading provider of solutions for building, deploying and managing
large-scale Internet, e-commerce, business-to-business, enterprise portal and
intranet applications. The advantages of Web-based technology are driving the
creation of a new generation of business-transforming software programs. These
powerful Web-based programs, or Web applications, link a broad universe of
customers, vendors, employees and partners with multiple, diverse data sources.
We believe our products and services help our customers to rapidly develop Web
applications that are scalable, reliable and secure. Using our products and
services, organizations can create and deploy robust Web applications in diverse
areas such as e-commerce, business-to-business commerce, enterprise portals,
employee self-service, supply chain management and customer service.
We accelerate customer success through several enterprise-class offerings.
The SilverStream Application Server offers customers a proven, scalable and
reliable platform with comprehensive support for the Java2 Enterprise Edition
(J2EE) standard, plus value-added features for rapid application development and
deployment. Our advanced ePortal and XML-based integration solutions, using our
Application Server or other standards-based application servers as foundations,
drive our customer success. A brief summary of each product offering is as
follows:
Application Server
The SilverStream Application Server allows corporations to build and deploy
complex Java and HTML applications on which they can run their businesses.
It is designed and optimized for the intra/Inter/extranet, and delivers
both client- and server-side Java and client-side HTML. The SilverStream
Application Server is one of the first application servers to tightly
integrate business logic, extensive database access, content creation,
publishing, collaboration and communications in one solution. The
comprehensive solution is designed to make developers productive with its
design tools that lets them build secure enterprise Web applications using
the power of a database to store, retrieve and manipulate content and data.
xCommerce
The xCommerce products are designed specifically to permit business
analysts and software engineers to rapidly enable their proprietary systems
for XML integration, map the data flows of those systems to other
XML-enabled applications and manage the runtime environment through which
integrated applications interoperate. By leveraging the power of XML,
enterprises are forging a new generation of connections with customers,
suppliers and business partners.
SilverStream ePortal
In addition to the xCommerce products, we have recently released an
end-to-end portal solution - comprehensive consulting services, along with
the SilverStream Enterprise Portal Framework and component technologies -
built on top of the SilverStream Application Server. This framework is a
Web application that provides an integrated, personalized view of all
applications and information an employee, customer and partner may need on
a regular basis.
All of the above product offerings also include comprehensive application
engineering, implementation, training and support services to help ensure the
successful development and implementation of Web applications by our customers.
We market our products and services globally through our direct sales force
and a network of independent software vendors, system integrators, value-added
resellers and consulting partners. To date, we have licensed the SilverStream
Application Server to over 1,300 customers in a wide variety of industries,
including communications, financial services, government, manufacturing, oil and
gas, pharmaceutical, technology and transportation.
8
<PAGE>
We derive our revenue from the sale of software product licenses and from
professional consulting, education and technical support services. We plan to
generate future revenue from both new and existing customers. As existing
customers create new software applications based on the SilverStream Application
Server, they may require more application servers to run these applications. We
plan to widen our customer base by selling licenses and services to new
customers. We anticipate that we will continue to sell annual update assurance
and support agreements to most customers.
We recognize our software license revenue in accordance with Statement of
Position (SOP) 97-2, "Software Revenue Recognition," as amended by SOP 98-4. SOP
97-2 generally requires revenue earned on software arrangements involving
multiple elements to be allocated to each element based on the relative fair
values of the elements. We generally recognize revenue allocated to software
licenses upon delivery of the software products, provided that (i) we have no
remaining significant obligations with regard to implementation, (ii) the
license fee is fixed or determinable and (iii) collection of the fee is
probable. However, when we sell software product licenses to a reseller, revenue
is not recognized until the product is shipped to the ultimate customer. This is
because the reseller is functioning as a distributor and may order products
without a specific customer.
Our customers often contract for update assurance, which provides them with
new releases of software for a period of typically one year. These agreements
are separately negotiated and priced. We recognize update assurance revenue
ratably over this 12-month period.
We license our software to independent software vendors who use our
products to create their own software products for resale. Independent software
vendors typically pay us a prepayment at the beginning of their contract. We
recognize this revenue ratably over the period of the contract, typically one
year, because the only undelivered element under these agreements is service,
for which no pattern of performance is discernable.
We also earn partner fees, which are deferred and recognized on a
straight-line basis as an offset to operating expenses over the life of the
agreement, typically one year. We consider such fees to be reimbursement for
costs incurred in connection with our partner program.
We recognize revenue from the sale of technical support services ratably
over the maintenance term and revenue from the sale of consulting and education
services as the services are performed.
We record cash receipts and billed amounts due from customers in excess of
recognized revenue as deferred revenue. The timing and amount of cash receipts
from customers can vary significantly depending on specific contract terms and,
therefore, can have a significant impact on the amount of deferred revenue in
any given period.
Our cost of software license revenue includes royalties paid to third
parties for technology included in our products, cost of manuals and product
documentation, media used to deliver our products, shipping and fulfillment
costs and costs associated with license revenues from independent software
vendors. Our cost of services revenue includes salaries and related expenses for
our consulting, education and technical support services organizations, costs of
third parties contracted to provide consulting services to customers and an
allocation of our facilities, communications and depreciation expenses.
Our operating expenses are classified into five general categories: sales
and marketing, research and development, general and administrative,
compensation charge for issuance of stock options and goodwill amortization.
Sales and marketing expenses consist primarily of salaries and other related
costs for sales and marketing personnel, sales commissions, travel, public
relations, marketing materials, advertising campaigns and tradeshows. Research
and development expenses consist primarily of personnel costs to support product
development. General and administrative expenses consist primarily of salaries
and other related costs for operations and finance employees, legal and
accounting services and facilities-related expenses. Compensation charge for the
issuance of stock options represents the difference between the exercise price
of options granted and the estimated fair market value of the underlying common
stock on the date of the grant. Goodwill amortization relates to our
acquisitions made to support our business strategy.
Since our inception, we have incurred substantial costs to develop our
technology and products, to recruit and train personnel for our engineering,
sales and marketing and professional services departments, and to establish an
administrative organization. As a result, we have incurred net losses in each
fiscal quarter since inception and had an accumulated deficit of $64.9 million
as of September 30, 2000. We anticipate that our operating expenses will
continue to increase in future quarters as we increase sales and marketing
operations, expand distribution channels, increase research and development,
broaden professional services, expand facilities and support, and improve
operational and financial systems. Accordingly, we expect to incur additional
losses for the foreseeable future. In addition, our limited operating history
makes it difficult for us to predict future operating results and, accordingly,
there can be no assurance that we will sustain revenue growth or achieve
profitability.
9
<PAGE>
Results of Operations
The following table sets forth for the periods indicated the percentage of
revenues represented by certain lines in our condensed consolidated statements
of operations.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------- -------------
2000 1999 2000 1999
------- ------ ------ ------
<S> <C> <C> <C> <C>
Revenue:
Software license......................................... 51.4% 55.9% 52.3% 64.2%
Services................................................. 48.6 44.1 47.7 35.8
------- ------ ------ ------
Total revenue.................................... 100.0 100.0 100.0 100.0
------- ------ ------ ------
Cost of revenue:
Software license......................................... 3.2 6.3 4.2 7.7
Services................................................. 43.7 52.7 44.4 46.0
------- ------ ------ ------
Total cost of revenue............................ 46.9 59.0 48.6 53.7
------- ------ ------ ------
Gross profit (loss)........................................ 53.1 41.0 51.4 46.3
Operating expenses:
Sales and marketing...................................... 50.8 79.4 58.5 94.2
Research and development................................. 18.9 29.3 19.5 36.9
General and administrative............................... 9.7 15.0 11.9 18.5
Compensation charge for issuance of stock options........ 1.9 1.7 2.2 2.1
Amortization of goodwill................................. 14.5 1.3 13.8 0.6
------- ------ ------ ------
Total operating expenses......................... 95.8 126.7 105.9 152.3
------- ------ ------ ------
Loss from operations....................................... (42.7) (85.7) (54.5) (106.0)
Other income, net.......................................... 14.2 5.4 16.5 3.7
------- ------ ------ ------
Net loss................................................... (28.5)% (80.3)% (38.0)% (102.3)%
======= ====== ====== ======
</TABLE>
Revenue
Total revenue increased 276% to $23.5 million in the three months ended
September 30, 2000 from $6.3 million in the three months ended September 30,
1999. Total revenue increased 289% to $54.5 million in the nine months ended
September 30, 2000 from $14.0 million in the nine months ended September 30,
1999. These increases are attributable to an increase in our customer base, as
well as the release of Version 1.0 of our ePortal and xCommerce products during
the third quarter of 2000. Revenue from international sales increased to $8.5
million, or 36% of total revenue, in the three months ended September 30, 2000
from $2.4 million, or 39% of total revenue, in the three months ended September
30, 1999. Revenue from international sales increased to $19.5 million, or 36% of
total revenue, in the nine months ended September 30, 2000 from $5.0 million, or
36% of total revenue, in the nine months ended September 30, 1999. The increases
in international sales are primarily attributable to the same factors noted
above.
Software License. Software license revenue increased 245% to $12.1 million
in the three months ended September 30, 2000 from $3.5 million in the three
months ended September 30, 1999. Software license revenue increased 217% to
$28.5 million in the nine months ended September 30, 2000 from $9.0 million in
the nine months ended September 30, 1999. These increases are attributable to
increased unit sales of our products following the release of ePortal Version
1.0 and xCommerce Version 1.0 in July 2000, along with the release of
Application Server Version 3.5 in September 2000, as well as higher prices for
our products in 2000 as compared to 1999.
Services. Services revenue increased 315% to $11.4 million in the three
months ended September 30, 2000 from $2.8 million in the three months ended
September 30, 1999. Services revenue increased 418% to $26.0 million in the nine
months ended September 30, 2000 from $5.0 in the nine months ended September 30,
1999. The three and nine month comparative increases, respectively, are
attributable to the continued expansion of our professional consulting
organization (both internally and through our acquisition of Excelnet Systems
Limited and Power 2000), the offering of a wider range of consulting services to
customers, the introduction of our ePortal and xCommerce 1.0 products, and an
increase in the number of customers and support contracts.
10
<PAGE>
We believe that growth in our software license revenue depends on our
ability to provide our customers with support, education, and consulting
services and to educate third-party consulting partners on how to use our
products. As a result, we intend to continue to expand our services organization
in the future. We expect that revenue from professional consulting services will
increase in the future to the extent that additional customers license our
products and as we expand our capacity for the delivery of these services and
the scope of our services offerings. We expect that services revenue from
support agreements will increase in the future as a result of new and existing
license agreements.
Cost of Revenue
Software License. Cost of software license revenue increased 94% to
$760,000 in the three months ended September 30, 2000 from $391,000 in the three
months ended September 30, 1999. Cost of software license revenue increased 115%
to $2.3 million in the nine months ended September 30, 2000 from $1.1 million in
the nine months ended September 30, 1999. These increases are attributable to
increased product, shipping and third-party royalty costs from a larger volume
of sales orders and to costs associated with our independent software vendors.
Cost of software license revenue decreased as a percentage of software license
revenue to 6% from 11% for the three months ended September 30, 2000 as compared
to the three months ended September 30, 1999. Cost of software license revenue
decreased as a percentage of software license revenue to 8% from 12% for the
nine months ended September 30, 2000 as compared to the nine months ended
September 30, 1999. These decreases occurred because product license revenue
growth outpaced increases in product license costs and because of a higher
average sales price in 2000 versus 1999. In addition, our new products (ePortal
and xCommerce) have lower costs associated with them, due to the fact that they
contain fewer sublicensed components than our traditional Application Server
product. We expect software license costs to increase, in conjunction with
license revenue, in the future due to additional customers licensing our
products, both domestically and internationally, as well as the licensing of
additional third-party technology that we may choose to embed in our product
offerings.
Services. Cost of services revenue increased 211% to $10.3 million in the
three months ended September 30, 2000 from $3.3 million in the three months
ended September 30, 1999. Cost of services revenue increased 275% to $24.2
million in the nine months ended September 30, 2000 from $6.5 million in the
nine months ended September 30, 1999. These increases are due to additional
education and technical support personnel and to the rapid expansion of our
consulting services business, including an increase in the number of
consultants, due in part to our acquisition of Power 2000 and Excelnet. Services
costs as a percentage of services revenue can be expected to vary significantly
from period to period depending on the mix of services we provide, whether such
services are provided by us or third-party contractors, and overall utilization
rates.
Operating Expenses
Sales and Marketing. Sales and marketing expenses increased 141% to $11.9
million in the three months ended September 30, 2000 from $5.0 million in the
three months ended September 30, 1999. Sales and marketing expenses increased
141% to $31.9 million the nine months ended September 30, 2000 from $13.2
million in the nine months ended September 30, 1999. These increases are
attributable to additional sales employees in North America, as well as our
expansion of our international sales operations. We believe these expenses will
continue to increase in future periods because we expect to continue to expand
our sales and marketing efforts. We also anticipate that sales and marketing
expenses may fluctuate as a percentage of total revenue from period to period as
new sales personnel are hired and become more productive.
Research and Development. Research and development expenses increased 142%
to $4.4 million in the three months ended September 30, 2000 from $1.8 million
in the three months ended September 30, 1999. Research and development expenses
increased 106% to $10.6 million in the nine months ended September 30, 2000 from
$5.2 million in the nine months ended September 30, 1999. These increases are
primarily attributable to additional research and development personnel to
support our product development activities. We believe that continued investment
in research and development is critical to attaining our strategic objectives,
and, as a result, we expect research and development expenses to continue to
increase in future periods.
General and Administrative. General and administrative expenses increased
143% to $2.3 million in the three months ended September 30, 2000 from $940,000
in the three months ended September 30, 1999. General and administrative
expenses increased 150% to $6.5 million in the nine months ended September 30,
2000 from $2.6 million in the nine months ended September 30, 1999. These
increases are attributable to a growing number of administrative employees. We
believe general and administrative expenses will increase as we hire additional
personnel and incur additional costs to support our expanding operations and the
growth of our business.
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Compensation Charge for Issuance of Stock Options. We incurred a charge of
$456,000 and $1.2 million for the three and nine months ended September 30,
2000, respectively, related to the issuance of stock options with exercise
prices below fair market value on the date of grant. We incurred a charge of
$108,000 and $298,000 in the comparable three and nine month periods ended
September 30, 1999, respectively. Additional outstanding options relating to
existing stock options granted at less than fair market value will continue to
vest over the next five years resulting in an aggregate compensation expense of
approximately $7.8 million in periods subsequent to September 30, 2000. This
additional compensation expense will be amortized to operations ratably over the
next five years.
Amortization of Goodwill. We incurred a charge of $3.4 million and $7.5
million for the three and nine months ended September 30, 2000, respectively,
related to the amortization of goodwill, as a result of our acquisition of three
of our European distributors in The Czech Republic, Norway and France, along
with five private companies: ObjectEra, GemLogic, Power 2000, eObject and
Excelnet. We incurred a charge of $81,000 for the three and nine months ended
September 30, 1999. Goodwill of approximately $62.4 million in the aggregate
will continue to be amortized to operations ratably over the next five years.
Other Income, Net
Other income, net increased 893% to $3.3 million in the three months ended
September 30, 2000 from $337,000 in the three months ended September 30, 1999.
Other income, net increased 1,644% to $9.0 million in the nine months ended
September 30, 2000 from $515,000 in the nine months ended September 30, 1999.
These increases are attributable to an increase in interest income due to higher
cash balances in the comparable three and nine months ended September 30, 2000
versus September 30, 1999.
Net Operating Losses and Tax Credit Carryforwards
As of December 31, 1999, we had net operating losses and research and
development credit carryforwards of approximately $43.0 million and $901,000,
respectively. The net operating loss and research and development credit
carryforwards will expire at various dates, beginning in 2012, if not used.
Under the provisions of the Internal Revenue Code of 1986, as amended (referred
to as the Code), substantial changes in our ownership may limit the amount of
net operating loss carryforwards that can be used annually in the future to
offset taxable income. A valuation allowance has been established to fully
reserve the potential benefits of these carryforwards in our financial
statements to reflect the uncertainty of future taxable income required to use
available tax loss carryforwards and other deferred tax assets.
Liquidity and Capital Resources
Since inception, we have funded our operations primarily through the private
sale of our equity securities, our initial public offering and our secondary
public offering aggregating approximately $317.0 million. We have also funded
our operations through equipment financings. As of September 30, 2000, we had
$203.2 million in cash, cash equivalents and marketable securities, and $201.7
million in working capital. We have a term loan for amounts borrowed to finance
equipment. This term loan is from a bank and bears interest at the bank's prime
rate (9.5% at September 30, 2000), plus 0.5%. At September 30, 2000, we had a
total of approximately $665,000 outstanding under this term loan. Borrowings
under this term loan are secured by substantially all of our tangible assets.
Net cash used in operating activities increased to $15.8 million in the nine
months ended September 30, 2000 from $11.6 million in the nine months ended
September 30, 1999. Net cash flows from operating activities in each period
reflect increases in net losses and, to a lesser extent, increases in accounts
receivable offset in part by increases in accounts payable, accrued expenses and
deferred revenue.
Net cash used in investing activities increased to $168.3 million in the
nine months ended September 30, 2000 from $3.3 million used in investing
activities in the nine months ended September 30, 1999. Investing activities
reflects purchases of personal property and equipment in each period, as well as
purchases and sales of short-term investments. Investing activities in 2000 also
reflect the purchases of Power 2000, eObject and Excelnet.
Net cash provided by financing activities increased to $193.4 million in the
nine months ended September 30, 2000 from $65.1 million in the nine months ended
September 30, 1999. Cash provided by financing activities in the nine months
ended September 30, 2000 includes proceeds from the issuance of common stock,
including the secondary public offering in January of 2000, offset by the
payments on long-term debt. Cash provided by financing activities in the nine
months ended September 30, 1999 includes proceeds from the issuance of preferred
and common stock, as well as proceeds from equipment financings, offset by
payments on long-term debt.
Capital expenditures increased to $8.4 million in the nine months ended
September 30, 2000 from $1.7 million in the nine months ended September 30,
1999. Of the $8.4 million incurred in the nine months ended September 30, 2000,
approximately $3.9 million was related to the relocation of our corporate
headquarters from Burlington, Massachusetts to Billerica, Massachusetts.
Specifically, we expended approximately $1.4 million on furniture, fixtures and
office equipment, $760,000 on computer equipment and $1.7 million on leasehold
improvements in connection with the relocation.
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Our other capital expenditures consist of purchases of computer hardware and
software, office furniture and equipment and leasehold improvements. Purchases
of computer equipment and leasehold improvements represent the largest component
of our capital expenditures. We expect this trend to continue as we increase the
number of our employees, increase the size of our development and quality
assurance testing facilities and improve and expand our information systems.
Since inception, we have generally funded capital expenditures either with the
use of working capital or equipment bank loans.
We expect to experience significant growth in our operating expenses,
particularly research and development and sales and marketing expenses, for the
foreseeable future in order to execute our business plan. As a result, we
anticipate that such operating expenses, as well as planned capital expenditures
and the expansion of our professional services organization, will constitute a
material use of our cash resources. In addition, we may use cash to fund
acquisitions of, or investments in, complementary businesses, technologies or
product lines. We believe that the net proceeds from the sale of the common
stock generated by our initial and secondary public offerings, together with
funds generated from operations, will be sufficient to meet our working capital
requirements for at least the next 12 months. Thereafter, we may find it
necessary to obtain additional equity or debt financing. In the event additional
financing is required, we may not be able to raise it on acceptable terms or at
all.
Conversion to Euro
Eleven of the 15 common member countries of the European Union have agreed
to adopt the Euro as their legal currency. We have arranged for the necessary
modifications of our internal information technology and other systems to
accommodate Euro-denominated transactions. In addition, our products support the
Euro currency symbol. We are also assessing the business implications of the
conversion to the Euro, including long-term competitive implications and the
effect of market risk with respect to financial instruments. Based on the
foregoing, we do not believe the Euro will have a significant effect on our
business, financial position, cash flows or results of operations. We will
continue to assess the impact of Euro conversion issues as the applicable
accounting, tax, legal and regulatory guidance evolves.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivatives and Hedging Activities" ("SFAS No. 133"), which
establishes accounting and reporting standards for derivative instruments,
including derivative instruments embedded in other contracts, (collectively
referred to as derivatives) and for hedging activities. SFAS No. 133 is
effective for all fiscal quarters of fiscal years beginning after June 15, 2000.
We are presently analyzing the impact, if any, that the adoption of SFAS No. 133
will have on our financial condition or results of operations.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin (SAB) No. 101 "Revenue Recognition in Financial Statements."
SAB 101 formalizes positions the staff has expressed in speeches and comment
letters. SAB 101 is effective no later than the fourth fiscal quarter of the
fiscal year beginning after December 15, 1999. We are still currently analyzing
the impact, if any, that the adherence to SAB 101 will have on our financial
condition or results of operations.
Certain Factors That May Affect Future Results
The following important factors, among other things, could cause our actual
operating results to differ materially from those indicated or suggested by
forward-looking statements made in this Form 10-Q or presented elsewhere by our
management from time to time.
We Have Incurred Substantial Losses and Expect Continued Losses that Will
Harm Our Business.
We have never been profitable. Our failure to significantly increase our
revenue would seriously harm our business and operating results. We have
experienced operating losses in each quarterly and annual period since inception
and we expect to incur significant losses in the future. We incurred net losses
of $952,000 for the period from our inception to December 31, 1996, $8.3 million
for the year ended December 31, 1997, $12.9 million for the year ended December
31, 1998 and $22.3 million for the year ended December 31, 1999. As of September
30, 2000, we had an accumulated deficit of $64.9 million. We expect to
significantly increase our research and development, sales and marketing and
general and administrative expenses in future periods. As a result, we will need
to significantly increase our quarterly revenue to achieve and maintain
profitability. If our revenue grows more slowly than we anticipate or if our
operating expenses increase more than we expect or cannot be reduced in the
event of lower revenue, our business will be materially and adversely affected.
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We Expect to Depend on Our Application Server and Related Services for a
Majority of Our License Revenue for the Foreseeable Future and If Our
Application Server Does Not Achieve Widespread Market Acceptance, Our Business
and Results of Operations Will Suffer.
We expect to continue to derive a majority of our license revenue from the
SilverStream Application Server and related products and services. Failure to
achieve broad market acceptance of the SilverStream Application Server, or a
decline in the price of, or demand for, our Application Server and related
products and services would seriously harm our business and operating results.
We cannot predict the level of market acceptance that will be achieved or
maintained by our products and services.
Our Business and Results of Operation Will Suffer if Recent Product
Introductions Are Not Successful.
We introduced two products to the marketplace in July 2000. They are
SilverStream ePortal, a suite of eCRM (Electronic Customer Relationship
Management) software for building e-business solutions, and xCommerce, a family
of B2B integration server products that utilize XML (extensible markup
language). The newness of these products, coupled with the fact that the markets
for them are at early stages of development, make it difficult to predict
whether they will be successful. We cannot be certain that SilverStream
xCommerce and ePortal will meet customer performance needs or expectations or
that they will be free of significant bugs or defects. We also cannot be sure
that our third party distribution partners will actively market SilverStream
xCommerce and ePortal, and it will be difficult to track their efforts. Our
failure to achieve broad market acceptance of these products would seriously
harm our business and operating results.
Our Business Will Suffer if We Do Not Successfully Introduce Enhancements to
Our Current Product Offerings.
Our future financial performance will depend significantly on revenue from
future enhancements to our product offerings that we are currently developing.
Any delays or difficulties in completing these enhancements would seriously harm
our business and operating results. We have recently released Version 3.5 of our
Application Server, which contains new functionality including improvements to
the programming environment as well as improved support for computing standards,
such as Enterprise JavaBeans and Java2, and third-party development tools. The
new version will also provide a highly visual development and deployment
environment for Linux desktops. We cannot be certain that enhanced versions of
the SilverStream Application Server or new and enhanced versions of xCommerce
and ePortal and other complementary products will meet customer performance
needs or expectations when shipped or that new versions will be free of
significant software defects or bugs.
We Have Only Been in Business for a Short Period of Time and Your Basis for
Evaluating Us is Limited.
We began commercial shipments of our first software products in November
1997. You must consider the risks, expenses and uncertainties that an early
stage company like ours faces, particularly in the new and rapidly evolving
Internet market. Because we have only recently commenced commercial sales, our
past results and rates of growth may not be meaningful and you should not rely
on them as an indication of our future performance.
Our Limited Operating History Makes Forecasting Difficult and the Failure to
Meet Expectations Could Cause the Price of Our Common Stock to Decline.
As a result of our limited operating history, it is difficult to forecast
accurately our revenues, and we have limited meaningful historical financial
data upon which to base planned operating expenses. If we do not achieve our
expected revenues, our operating results will be below our expectations and the
expectations of investors and market analysts, which could cause the price of
our common stock to decline. Specifically, we were founded in May 1996, and
began shipping our first products, the SilverStream Application Server 1.0 and
related software development tools, in November 1997. We began shipping
SilverStream xCommerce 1.0 and ePortal 1.0 in July 2000. Our operating expenses
are largely based on anticipated revenue trends and a high percentage of our
expenses are and will continue to be fixed in the short-term. The revenue and
income potential of our products and business are unproven and the market that
we are addressing is rapidly evolving.
The Market for Our Products is Emerging and Our Business Will Suffer if It
Does Not Develop as We Expect.
The market for Web application server software has only recently begun to
develop, is rapidly evolving and will likely have an increasing number of
competitors. We cannot be certain that a viable market for our products will
emerge or be sustainable. If the application server market fails to develop, or
develops more slowly than expected, our business and operating results would be
seriously harmed.
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The Unpredictability of Our Quarterly Operating Results May Adversely Affect
the Trading Price of Our Common Stock.
Our quarterly operating results have varied significantly in the past and
will likely vary significantly in the future, making it difficult to predict
future performance. These variations result from a number of factors, many of
which are outside of our control. Because of this difficulty in predicting
future performance, our operating results will likely fall below the
expectations of securities analysts or investors in some future quarter or
quarters. Our failure to meet these expectations would likely adversely affect
the market price of our common stock.
Although we have limited historical financial data, we believe that our
quarterly operating results may experience seasonal fluctuations. For instance,
quarterly results may fluctuate based on our clients' calendar year budgeting
cycles, deferral of customer orders in anticipation of product enhancements or
new products, slow summer purchasing patterns in Europe and our compensation
policies that tend to compensate sales personnel, typically in the latter half
of the year, for achieving annual quotas.
We Depend on Increased Business from Our Current and New Customers and If We
Fail to Grow Our Customer Base or Generate Repeat Business, Our Operating
Results Could Be Harmed.
If we fail to grow our customer base or generate repeat and expanded
business from our current and new customers, our business and operating results
would be seriously harmed. Most of our customers initially make a limited
purchase of our products and services for pilot programs. Many of these
customers may not choose to purchase additional licenses to expand their use of
our products. Many of these customers have not yet developed or deployed initial
applications based on our products. If these customers do not successfully
develop and deploy such initial applications, they may choose not to purchase
deployment licenses or additional development licenses. Our business model
depends on the expanded use of our products within our customers' organizations.
In addition, as we introduce new versions of our products or new products,
our current customers may not require the functionality of our new products and
may not ultimately license these products. Because the total amount of
maintenance and support fees we receive in any period depends in large part on
the size and number of licenses that we have previously sold, any downturn in
our software license revenue would negatively impact our future services
revenue. In addition, if customers elect not to renew their maintenance
agreements, our services revenue could be significantly adversely affected.
Our Markets are Highly Competitive and Our Failure to Compete Successfully
Will Limit Our Ability to Retain and Increase Our Market Share.
Our markets are new, rapidly evolving and highly competitive, and we expect
this competition to persist and intensify in the future. Our failure to maintain
and enhance our competitive position will limit our ability to retain and
increase our market share resulting in serious harm to our business and
operating results.
Some of our competitors have longer operating histories and significantly
greater financial, technical, marketing and other resources than we do. Many of
these companies have more extensive customer bases, broader customer
relationships and broader industry alliances that they could leverage, including
relationships with many of our current and potential customers. These companies
also have significantly more established customer support and professional
services organizations. In addition, these companies may adopt aggressive
pricing policies, may bundle their competitive products with broader product
offerings or may introduce new products and enhancements.
Our Lengthy Sales Cycle Makes it Difficult to Predict Our Quarterly Results.
A customer's decision to purchase our products typically involves that
customer's senior information technology managers, as the customer applications
to be built and deployed using our products are generally critical to the
customer's business. We generally need to educate potential customers on the use
and benefits of an application server and on the performance features of the
SilverStream Application Server, xCommerce and ePortal. Our long sales cycle
makes it difficult to predict the quarter in which sales may occur. The sale of
our products is also subject to delays from the lengthy budgeting, approval and
competitive evaluation processes that typically accompany significant
information technology purchasing decisions. For example, customers frequently
begin by evaluating our products on a limited basis and devote time and
resources to testing our products before they decide whether or not to purchase
a license for deployment. Customers may also defer orders as a result of
anticipated releases of new products or enhancements by us or by our
competitors.
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Failure to Develop and Expand Our Sales and Marketing Capabilities Would
Harm Our Business.
We need to expand our sales and marketing operations in order to increase
market awareness of our products, market the SilverStream Application Server,
xCommerce and ePortal to a greater number of organizations and generate
increased revenue. However, competition for qualified sales personnel is intense
and we may not be able to hire enough qualified individuals in the future. If we
are unable to attract or retain such qualified sales personnel, our business and
operating results would be seriously harmed. Our products and services require a
sophisticated sales effort targeted at senior information technology management
of our prospective customers. New hires require extensive training typically for
at least six months to achieve full productivity. We have limited experience
managing a large, expanding and geographically dispersed direct sales force. In
addition, we have limited experience marketing our products broadly to a large
number of potential customers.
Failure to Maintain Existing Third Party Distribution Relationships, or to
Create New Distribution Relationships and Relationships with Larger Distribution
Partners, May Limit Our Ability to Penetrate the Markets for Our Products.
We may not be able to maintain our existing distribution relationships,
create new relationships or create relationships with larger distributors. Our
failure to do so may limit our ability to penetrate the markets for our
products. Current agreements with our distribution partners do not prevent them
from selling products of other companies, including products that may compete
with our products, and generally do not require these partners to purchase
minimum quantities of our products. These distributors could give higher
priority to the products of other companies or to their own products, than they
give to our products. The loss of, or inability to generate, sales volume to our
current or future distribution partners could seriously harm our revenue and
operating results. In addition, a significant increase in sales through these
channels could also negatively impact our gross margins, as sales through these
channels generally have lower revenue per unit than direct sales.
We Recently Have Begun to Provide Solutions Services to Address Customer
Issues and Our Failure to Deliver Successful Solutions Could Harm Our Business.
A new aspect of our business is to provide customers with unique solutions
and custom-tailored applications to solve customer issues in connection with
their e-business activities. We have limited experience providing solutions
services and cannot be certain that we will be successful generating significant
revenue from such services, or if we do, that such services will be profitable.
We anticipate the need to offer solutions services for negotiated sums,
determined in advance of actually providing such services, as opposed to pricing
contracts based directly on time and materials. Our limited experience, coupled
with the nature of solutions services, makes pricing contracts in such manner
difficult. Furthermore, we may not succeed in delivering solutions to issues we
have not previously encountered, which could harm our reputation and customer
relationships. Our failure to achieve sufficient revenues and profitability
rendering solutions services may have a material adverse effect on our business
and operating results.
Failure to Attract and Retain Service Personnel and Expand Our Services
Offerings Would Harm Our Business.
We believe that growth in our product sales depends on our ability to
provide our customers with comprehensive services, including application
engineering, implementation, training and support, and to educate third-party
resellers, instructors and consultants on how to provide similar services. If we
fail to attract, train and retain the skilled persons who deliver these
services, our business and operating results would be harmed. We plan to
increase the number of our services personnel to meet these needs. However,
competition for qualified service personnel is intense and we may not be able to
attract, train or retain the number of highly qualified service personnel that
our business needs.
We expect our services revenue to increase in dollar amount as we continue
to provide consulting, education and technical support services that complement
our products and as our installed base of customers grows. Service costs as a
percentage of services revenue can be expected to vary significantly from period
to period depending on the mix of services we provide, whether such services are
provided by us or third-party contractors, and overall utilization rates.
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We Face Risks Associated with International Operations That Could Harm Our
Business.
To be successful, we believe we must expand our international operations
and, therefore, we expect to commit significant resources to expand our
international sales and marketing activities. However, we may not be able to
maintain or increase market demand for our products which may harm our business.
We are increasingly subject to a number of risks associated with international
business activities which may increase our costs, lengthen our sales cycle and
require significant management attention. These risks generally include:
o increased expenses associated with customizing products for foreign
countries;
o general economic conditions in our international markets;
o currency exchange rate fluctuations;
o unexpected changes in regulatory requirements resulting in
unanticipated costs and delays;
o tariffs, export controls and other trade barriers;
o longer accounts receivable payment cycles and difficulties in
collecting accounts receivable;
o potentially adverse tax consequences, including restrictions on the
repatriation of earnings; and
o the risks related to the recent global economic turbulence and adverse
economic circumstances in Asia.
Our Future Success Depends on Continued Use of the Internet and Growth of
Electronic Business.
Our future success depends heavily on the acceptance and use of the Internet
for electronic business. If electronic business does not continue to grow or
grows more slowly than expected, demand for our products and services will be
reduced. Consumers and businesses may reject the Internet as a viable commercial
medium for a number of reasons, including potentially inadequate network
infrastructure, slow development of enabling technologies, insufficient
commercial support or privacy concerns. The Internet's infrastructure may not be
able to support the demands placed on it by increased usage. In addition, delays
in the development or adoption of new standards and protocols required to handle
increased levels of Internet activity, or increased governmental regulation,
could cause the Internet to lose its viability as a commercial medium. Even if
the required infrastructure, standards, protocols and complementary products,
services or facilities are developed, we may incur substantial expenses adapting
our solutions to changing or emerging technologies.
If We Fail to Respond to Rapid Technological Change and Evolving Industry
Standards, Our Products May Become Obsolete.
The markets for our products and services are marked by rapid technological
change, frequent new product introductions and enhancements, uncertain product
life cycles, changes in customer demands and evolving industry standards. New
products based on new technologies or new industry standards may quickly render
an existing product obsolete and unmarketable. Any delays in our ability to
develop and release enhanced or new products could seriously harm our business
and operating results. Our technology is complex, and new products and product
enhancements can require long development and testing periods. Our failure to
conform to prevailing standards could have a negative effect on our business and
operating results.
In Order to Manage Our Growth and Expansion, We Will Need to Improve Our
Management and Operational Systems on a Timely Basis.
We have expanded our operations rapidly since inception. We intend to
continue to expand in the foreseeable future to pursue existing and potential
market opportunities. This rapid growth places a significant demand on
management and operational resources. To be successful, we will need to
implement additional management information systems, improve our operating,
administrative, financial and accounting systems, procedures and controls, train
new employees and maintain close coordination among our executive, engineering,
professional services, accounting, finance, marketing, sales and operations
organizations. In addition, our growth has resulted, and any future growth will
result, in increased responsibilities for management personnel.
Failure to Retain and Attract Key Personnel Would Harm Our Business.
Our success depends largely on the skills, experience and performance of the
members of our senior management and other key personnel, including our
Chairman, David Skok, and our President and Chief Executive Officer, David
Litwack. If we lose one or more of the members of our senior management or other
key employees, our business and operating results could be seriously harmed. In
addition, our future success will depend largely on our ability to continue
attracting, training, motivating and retaining highly skilled personnel. None of
our senior management or other key personnel is bound by an employment
agreement. Like other software companies in the Boston, Massachusetts area, we
face intense competition for qualified personnel including software engineering,
service and support, and sales and marketing personnel.
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We Include Third-Party Software and Technology in Our Products and Our
Business Would Be Harmed if We Were Not Able to Continue Using this Third-Party
Software and Technology.
Our products integrate third-party text search, object middleware, compiler,
encryption, transaction processing and monitoring, Java virtual machine and
database technology and products. There are inherent limitations in the use and
capabilities of much of the technology that we license from third parties. Our
business would be seriously harmed if the providers from whom we license
software and technology ceased to deliver and support reliable products, enhance
their current products in a timely fashion or respond to emerging industry
standards. In addition, the third-party software may not continue to be
available to us on commercially reasonable terms or at all. For example, we
license some of the components of our products from limited or sole source
suppliers, including encryption technology that we license from RSA Data
Security. Many of these licenses are subject to periodic renewal. The loss of,
or inability to maintain or obtain this software for any reason could result in
significant shipment delays or reductions. Furthermore, we might be forced to
limit the features available in our current or future product offerings. Either
alternative could seriously harm our business and operating results.
Almost all of our products are written in Java and require a Java virtual
machine made available by Sun Microsystems in order to operate. Sun may not
continue to make the Java virtual machines available at commercially reasonable
terms or at all. Furthermore, if Sun were to make significant changes to the
Java language or its Java virtual machines, or fail to correct defects and
limitations in these products, our ability to continue to improve and ship our
products could be impaired. In the future, our customers may also require the
ability to deploy our products on platforms for which technically acceptable
Java implementations either do not exist or are not available on commercially
reasonable terms.
We May Not Achieve the Expected Benefits of Our Recent Acquisitions.
In December 1999, we acquired ObjectEra, a developer of object request
broker computer products, and GemLogic, a developer of XML integration server
technology. This year, we acquired Power 2000 and Excelnet Systems, providers of
e-business services and solutions, and eObject, the developer of "enTellect," a
java based framework for the access, control, personalization and metering of
corporate resources. Our failure to successfully address the risks associated
with these acquisitions could have a material adverse effect on our ability to
develop and market products based on the acquired technologies. We have just
recently developed enhanced features to our Application Server, ePortal,
xCommerce and complementary products based on certain of the acquired
technologies, and will continue to devote significant resources to product
development, sales and marketing. The success of these acquisitions will depend
on our ability to continue to:
o successfully integrate and manage the acquired operations;
o retain the software developers and other key employees of ObjectEra,
GemLogic, Power 2000, eObject and Excelnet;
o develop, integrate and market products and product enhancements based
on the acquired technologies; and
o control costs and expenses as well as demands on our management
associated with the acquisitions.
If we are unable to successfully develop and market products and product
enhancements as a result of these acquisitions, we may not achieve enhanced
revenue or other anticipated benefits from our acquisitions.
Any Acquisitions We Make Could Disrupt Our Business and Consequently Harm
Our Financial Condition.
In the past we have acquired businesses with complementary products and
technologies and, in order to remain competitive, we may find it necessary to
acquire additional businesses, products or technologies. If we identify an
appropriate acquisition candidate, we may not be able to negotiate the terms of
the acquisition successfully, finance the acquisition, or integrate the acquired
business, products or technologies into our existing business and operations.
Furthermore, completing a potential acquisition and integrating an acquired
business will cause significant diversions of management time and resources. If
we consummate one or more significant acquisitions in which the consideration
consists of stock or other securities, our stockholders' equity could be
significantly diluted. If we were to proceed with one or more significant
acquisitions in which the consideration included cash, we could be required to
use a substantial portion of our available cash to consummate an acquisition.
Acquisition financing may not be available on favorable terms, or at all. In
addition, we may be required to amortize significant amounts of goodwill and
other intangible assets in connection with future acquisitions, which would
seriously harm our operating results.
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Our Software Products May Contain Errors or Defects that Could Result in Lost
Revenues, Delayed or Limited Market Acceptance or Product Liability Claims with
Substantial Litigation Costs.
Complex software products like ours can contain errors or defects,
particularly when first introduced or when new versions or enhancements are
released. Defects or errors in current or future products, including the
SilverStream Application Server Version 3.5, ePortal Version 1.0 and xCommerce
Version 1.0, could result in lost revenue or a delay in market acceptance, which
would seriously harm our business and operating results. We have in the past
discovered software errors in our new releases and new products after their
introduction and expect that this will continue. Despite internal testing and
testing by current and potential customers, our current and future products may
contain serious defects.
As many of our customers use our products for business-critical
applications, errors, defects or other performance problems could result in
financial or other damage to our customers and could significantly impair their
operations. Our customers could seek damages for losses related to any of these
issues. A product liability claim brought against us, even if not successful,
likely would be time consuming and costly to defend and could adversely affect
our marketing efforts.
Our Business May Suffer if We Cannot Protect Our Intellectual Property.
We have only one patent, and none may be issued from our existing patent
applications. We rely on a combination of contractual provisions,
confidentiality procedures, and patent, trademark, trade secret and copyright
laws to protect the proprietary aspects of our technology. These legal
protections afford only limited protection and competitors may gain access to
our intellectual property, which may result in the loss of our customers. In
addition, despite our efforts to protect our proprietary rights, unauthorized
parties may attempt to copy aspects of our products or to obtain and use our
proprietary information. Litigation may be necessary to enforce our intellectual
property rights, to protect our trade secrets and to determine the validity and
scope of the proprietary rights of others. Any litigation could result in
substantial costs and diversion of resources with no assurance of success and
could seriously harm our business and operating results. In addition, we sell
our products internationally, and the laws of many countries do not protect our
proprietary rights as well as the laws of the United States. Our future patents,
if any, may be successfully challenged or may not provide us with any
competitive advantages.
We obtain a major portion of our software license revenue from licensing our
products under standardized "click-through" agreements that our customers do not
sign. If any of these agreements were deemed unenforceable, those customers may
seek to use and copy our technology without appropriate limitations.
We Could Incur Substantial Costs Defending Our Intellectual Property from
Infringement or a Claim of Infringement.
Other companies, including our competitors, may obtain patents or other
proprietary rights that would prevent, limit or interfere with our ability to
make, use or sell our products. As a result, we may be found to infringe on the
proprietary rights of others. In the event of a successful claim of infringement
against us and our failure or inability to license the infringed technology, our
business and operating results would be significantly harmed. Companies in the
software market and the Internet market are increasingly bringing suits alleging
infringement of their proprietary rights, particularly patent rights. We have
been subject to such claims in the past. Any litigation or claims, whether or
not valid, could result in substantial costs and diversion of resources with no
assurance of success. Intellectual property litigation or claims could force us
to do one or more of the following:
o cease selling, incorporating or using products or services that
incorporate the challenged intellectual property;
o obtain a license from the holder of the infringed intellectual
property right, which license may not be available on reasonable
terms; and
o redesign products or services.
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We May Incur Significant Costs from Class Action Litigation Due to Our
Expected Stock Price Volatility.
In the past, securities class action litigation has often been brought
against companies following periods of volatility in the market price of their
securities. We may be the target of similar litigation in the future. Securities
litigation could result in substantial costs and divert management's attention
and resources.
Anti-Takeover Provisions in Our Charter Documents and Delaware Law Could
Prevent or Delay a Change in Control of Our Company.
Provisions of our certificate of incorporation and bylaws, as well as
provisions of Delaware law, could make it more difficult for a third party to
acquire us, even if doing so would be beneficial to our stockholders.
Insiders Have Substantial Influence Over Our Company and Could Delay or
Prevent a Change in Corporate Control.
As of November 8, 2000, our executive officers, directors and principal
stockholders beneficially owned, in the aggregate, approximately 24.7% of our
outstanding common stock. As a result, these stockholders have the ability to
exercise significant influence over 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 SilverStream.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
We do not currently use derivative financial instruments. We generally place
our marketable security investments in high credit quality instruments,
primarily United States Government and Federal Agency obligations, tax-exempt
municipal obligations and corporate obligations with contractual maturities of
ten years or less. We do not expect any material loss from our marketable
security investments and therefore believe that our potential interest rate
exposure is not material.
Internationally, we invoice customers primarily in local currency. We are
exposed to foreign exchange rate fluctuations from when customers are invoiced
in local currency until collection occurs. We do not currently enter into
foreign currency hedge transactions. Through September 30, 2000, foreign
currency fluctuations have not had a material impact on our financial position
or results of operations.
Investments in both fixed rate and floating rate interest earning
instruments carry a degree of interest rate risk. Fixed rate securities may have
their fair market value adversely impacted due to a rise in interest rates,
while floating rate securities may produce less income than expected if interest
rates fall. Due in part to these factors, our future investment income may fall
short of expectations due to changes in interest rates or we may suffer losses
in principal if forced to sell securities that have seen a decline in market
value due to changes in interest rates. A hypothetical 10% increase or decrease
in interest rates, however, would not have a material adverse effect on our
financial condition.
Interest income on our investments is carried in "other income, net." We
account for cash equivalents and marketable securities in accordance with
Statement of Financial Accounting Standards (SFAS) No. 115, "Accounting for
Certain Investments in Debt and Equity Securities." Cash equivalents are
short-term, highly liquid investments with original maturity dates of three
months or less. Cash equivalents are carried at cost, which approximates fair
market value. Our marketable securities are classified as available-for-sale and
are recorded at fair value with any unrealized gain or loss recorded as an
element of stockholders' equity.
PART II. Other Information
Item 2. Changes in Securities and Use of Proceeds
(c) Sales of Unregistered Securities
On August 11, 2000, we acquired all of the outstanding capital stock of
Excelnet Systems Limited from Excelnet's two stockholders. The purchase price
for these Excelnet shares was $7 million; $5 million of which was paid at the
closing and $2 million of which may be paid in the future if Excelnet achieves
certain revenue targets. Part of the $5 million purchase price paid at the
closing was 32,620 shares of our common stock which were issued on August 11,
2000. These shares were issued to the former Excelnet stockholders in a private
placement in reliance upon the exemption from registration contained in Rule 506
of Regulation D promulgated under the Securities Act of 1933, as amended. The
conditions specified in Rule 506 were satisfied. Among other things, there was
no general solicitation or general advertising in the offering and both of the
Excelnet stockholders represented to us that they were "accredited investors"
under Regulation D. No underwriters were involved in connection with the
issuance and sale of these shares.
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(d) Use of Proceeds from Sales of Registered Securities
On August 20, 1999, we closed our initial public offering of our common
stock. The shares of common stock sold in the offering were registered under the
Securities Act of 1933, as amended, on a Registration Statement on Form S-1
(Registration No. 333-80553) that was declared effective by the Securities and
Exchange Commission on August 16, 1999. After deducting the underwriting
discounts and commission and the offering expenses, we received net proceeds
from the offering of approximately $49.6 million. We did not pay any of our net
proceeds of the offering, directly or indirectly, to any director, officer or
general partner of SilverStream or any of their associates, or to any persons
owning ten percent or more of any class of our equity securities, or any of our
affiliates.
The net proceeds generated from the initial public offering have been
used primarily to fund our working capital, capital expenditures and general
corporate needs. In addition, we used $4.2 million as an initial payment related
to the acquisition of ObjectEra, and we made a loan of $2.0 million to one of
our corporate collaborators pursuant to a Convertible Promissory Note, which was
converted to an equity investment on May 31, 2000. After December 31, 1999, we
made a second payment to ObjectEra of $3.9 million, as provided for in the
purchase and sale agreement. As part of the consideration for the purchase of
eObject, we made a payment of $1.0 million. As part of the consideration for the
purchase of Power 2000, we made a payment of $5.3 million, as well as a payment
of $665,000 to pay off Power 2000's line of credit, a liability we assumed as
part of the purchase price. As part of the consideration for the purchase of
Excelnet Systems we made a payment of $3.5 million. Our capital expenditures
included $3.9 million related to the relocation of the Company's corporate
headquarters from Burlington, Massachusetts to Billerica, Massachusetts.
Specifically, we incurred approximately $1.4 million on furniture, fixtures and
office equipment, $760,000 on computer equipment and $1.7 million on leasehold
improvements in connection with the relocation.
On January 31, 2000, we closed a secondary public offering of our
common stock. The shares of common stock sold in the offering were registered
under the Securities Act of 1933, as amended, on a Registration Statement on
Form S-1 (Registration No. 333-94103) that was declared effective by the
Securities and Exchange Commission on January 25, 2000. After deducting the
underwriting discounts and commission and the offering expenses described above,
we received net proceeds from the offering of approximately $191.7 million. We
did not pay any of SilverStream's net proceeds of the offering, directly or
indirectly, to any director, officer or general partner of SilverStream or any
of their associates, or to any persons owning ten percent or more of any class
of our equity securities, or to any of our affiliates.
The net proceeds to us generated from the secondary public offering are
currently invested primarily in U.S. Government and Federal Agency obligations,
tax-exempt municipal obligations and corporate obligations with contractual
maturities of ten years or less.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27 Financial Data Schedule.
----------
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the quarter ended September
30, 2000.
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SIGNATURES
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.
Dated: November 14, 2000 SILVERSTREAM SOFTWARE, INC.
By: /s/ Craig A. Dynes
--------------------
Craig A. Dynes
Vice President, Chief Financial
Officer, Secretary and Treasurer
(Principal Financial Officer and
Chief Accounting Officer)
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