SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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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 MARCH 31, 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)
One Burlington Woods, Suite 200
Burlington, Massachusetts 01803
(781) 238-5400
(Address, Including Zip Code, and Telephone Number, Including Area Code,
of Registrant's Principal Executive Offices)
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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 April 28, 2000 there were 20,253,202 shares of the registrant's
common stock outstanding.
1
<PAGE>
SilverStream Software, Inc.
Form 10-Q
For the Quarterly Period Ended March 31, 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 March 31, 2000 and December 31, 1999............ 3
Condensed Consolidated Statements of Operations for the Three Months Ended
March 31, 2000 and 1999..................................................................... 4
Condensed Consolidated Statements of Cash Flows for the Three Months Ended
March 31, 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..................................20-21
PART I. Financial Information
Item 2. Changes in Securities and Use of Proceeds.................................................. 21
Item 6. Exhibits and Reports on Form 8-K........................................................... 22
Signatures................................................................................. 23
</TABLE>
2
<PAGE>
PART I. Financial Information
Item 1. Financial Statements
SILVERSTREAM SOFTWARE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
------------ ------------
(Unaudited) (Audited)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents....................................................... $ 204,583 $ 46,799
Marketable securities........................................................... 20,499 247
Accounts receivable; net of allowances of $1,395 at March 31, 2000 and
$763 at December 31, 1999..................................................... 11,020 6,938
Other Receivables............................................................... 1,068 -
Note Receivable................................................................. 2,000 2,000
Prepaid expenses................................................................ 820 1,131
Other........................................................................... 3 3
----------- -----------
Total current assets..................................................... 239,993 57,118
Furniture, equipment and leasehold improvements, net.............................. 3,907 2,836
Intangibles, net.................................................................. 35,738 20,709
----------- -----------
Total assets............................................................. $ 279,638 $ 80,663
=========== ===========
Liabilities and stockholders' equity
Current liabilities:
Accounts payable................................................................ $ 5,057 $ 7,740
Accrued expenses................................................................ 7,333 3,299
Deferred revenue................................................................ 6,622 5,079
Current portion of long-term debt............................................... 1,116 451
----------- -----------
Total current liabilities................................................ 20,128 16,569
Long-term debt, less current portion.............................................. 396 509
Stockholders' equity:
Common stock.................................................................... 20 18
Additional paid-in capital...................................................... 317,046 115,185
Deferred compensation........................................................... (6,869) (7,213)
Accumulated deficit............................................................. (50,770) (44,161)
Other comprehensive loss........................................................ (209) (140)
Notes receivable from stockholders (104) (104)
----------- -----------
Total stockholders' equity............................................... 259,114 63,585
----------- -----------
Total liabilities and stockholders' equity............................... $ 279,638 $ 80,663
=========== ===========
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
3
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SILVERSTREAM SOFTWARE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
2000 1999
----------- -----------
(Unaudited) (Unaudited)
<S> <C> <C>
Revenue:
Software license.................................... $ 7,443 $ 2,607
Services............................................ 5,561 867
----------- -----------
Total revenue............................... 13,004 3,474
Cost of revenue:
Software license.................................... 744 303
Services............................................ 5,111 1,330
----------- -----------
Total cost of revenue....................... 5,855 1,633
----------- -----------
Gross profit.......................................... 7,149 1,841
Operating expenses:
Sales and marketing................................. 9,868 3,988
Research and development............................ 2,702 1,503
General and administrative.......................... 2,090 697
Compensation charge for issuance of stock options... 345 15
Amortization of goodwill............................ 1,016 -
----------- -----------
Total operating expenses.................... 16,021 6,203
----------- -----------
Loss from operations.................................. (8,872) (4,362)
Other income, net..................................... 2,263 40
----------- -----------
Net loss.............................................. $ (6,609) $ (4,322)
=========== ===========
Basic and diluted net loss per share.................. $ (0.36) $ (1.27)
=========== ===========
Weighted-average common shares used in computing basic
and diluted net loss per share........................ 18,171 3,405
=========== ===========
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
4
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SILVERSTREAM SOFTWARE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
2000 1999
------------- -------------
(Unaudited) (Unaudited)
<S> <C> <C>
Operating activities
Net loss............................................................................. $ (6,609) $ (4,322)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization...................................................... 1,425 238
Provision for allowances on accounts receivable.................................... 631 13
Compensation charge for issuance of stock options.................................. 345 15
Changes in operating assets and liabilities:
Accounts receivable.............................................................. (4,712) (2,072)
Prepaid expenses................................................................. 370 (215)
Other current assets............................................................. (328) 92
Accounts payable and accrued expenses............................................ 448 1,223
Deferred revenue................................................................. 1,497 1,299
------------ ------------
Net cash used in operating activities................................................ (6,933) (3,729)
------------- ------------
Investing activities
Purchase of property, plant and equipment............................................ (1,348) (410)
Purchase of Power 2000, Inc., net of cash acquired................................... (6,032) -
(Purchase) sale of marketable securities............................................. (20,252) 3,084
------------ ------------
Net cash (used) provided by investing activities..................................... (27,632) 2,674
------------ ------------
Financing activities
Net proceeds from issuance of preferred stock........................................ - 12,463
Net proceeds from issuance of common stock........................................... 192,531 8
Payments on long-term debt........................................................... (113) (125)
------------ ------------
Net cash provided by financing activities............................................ 192,418 12,346
------------ ------------
Effects of exchange rate on cash and cash equivalents................................ (69) (41)
Net increase in cash and cash equivalents............................................ 157,784 11,250
Cash and cash equivalents at beginning of period..................................... 46,799 1,198
------------ ------------
Cash and cash equivalents at end of period........................................... $ 204,583 $ 12,448
============ ============
Non cash transactions
Issuance of common stock in exchange for Power 2000, Inc. (9,899) -
</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 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 by accounting principles
generally accepted in the United States for complete financial statements. 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 was incorporated on May 8, 1996. It is a global provider of
application server software and services that enable businesses and other large
organizations to create, deploy and manage software applications for intranets,
extranets and the Internet. 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, 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 March 31,
2000 1999
---- ----
(Unaudited)
<S> <C> <C>
Numerator:
Net loss....................... $ (6,609) $ (4,322)
============ ============
Denominator:
Weighted average common
shares outstanding........... 22,506 5,209
Weighted average common
shares subject to repurchase. 4,335 1,804
------------ ------------
Denominator for basic and
diluted loss per share......... 18,171 3,405
============ ============
Basic and diluted net
loss per share............... $ (0.36) $ (1.27)
============ ============
</TABLE>
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.
6
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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.
Subsequent Events
On April 6, 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. Under the terms of the eObject
purchase agreement, the Company is committed to making additional payments in a
combination of cash and/or common stock, based upon the achievement of future
goals and deliverables. Contingent consideration may approximate $7.0 million.
The merger will be accounted for using the purchase method of accounting.
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
SilverStream is a global provider of software and services that enable
businesses and other large organizations to create, deploy and manage software
programs for intranets, extranets and the Internet. 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. In addition, organizations can design their applications
to include the rules that govern the operation of these applications in a manner
consistent with their business policies. These rules are known as business
logic. 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.
Our products consist of an application server, an integrated set of
development tools and enterprise data connectors. An application server is a
software product that provides access to various forms of electronic information
and communicates, usually in the form of a Web application, with the computers
of users accessing the information. The SilverStream Application Server tightly
integrates data sources, business logic and presentation of content to the user.
Using our Application Server, our customers can seamlessly access information
and data from diverse sources. Our products allow the business logic to be
maintained centrally and therefore easily changed and instantly implemented. The
SilverStream Application Server maintains the presentation, or look and feel, of
the application centrally and presents content to the user locally, without the
need to install application software on the user's remote computer. We believe
our development tools shorten the development time and simplify the development
process required to build complex Web applications. Our enterprise data
connectors facilitate access to data sources associated with some third-party
business applications, such as inventory or employee information systems. We
also offer comprehensive application engineering, implementation, training and
support services to help ensure the successful development and implementation of
Web applications by our customers.
We have recently announced future strategic additions to our product
offerings. Through our recent acquisition of GemLogic, we plan to offer an
Extensible Markup Language, or XML, integration server in addition to our
Application Server to enable customers to more easily develop and deploy
business-to-business e-commerce applications. XML is an emerging standard for
sharing data over the Internet, enabling data to be exchanged among different
software, database packages and legacy systems. Secondly, we have acquired
eObject, the developer of "enTellect," a java based framework for the access
control, personalization and metering of corporate resources. Finally, we have
announced the formation of an e-Business Solutions group to deliver pre-built
application frameworks. These frameworks provide pre-built, reusable software
components and tools that provide some of the key functionality common across
Web applications without sacrificing the customization necessary to preserve
competitive advantage and meet a customer's business needs. Our first planned
product from our e-Business Solutions group is a framework for enterprise
portals, which are Web applications that provide an integrated, personalized
view of all the applications and information that an individual employee,
customer or partner needs on a regular basis. These additions to our product and
service offerings will be built on top of our Application Server, leveraging its
performance and scalability as well as our integrated development tools.
We market our products and services globally through our direct sales force
and a network of independent software vendors, value-added resellers and
consulting partners. To date, we have licensed the SilverStream Application
Server to over 1,000 customers in a wide variety of industries, including
communication, 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
can therefore have a significant impact on the amount of deferred revenue in any
given period.
Our cost of software license revenue includes (i) royalties due to third
parties for technology included in our products, (ii) the cost of manuals and
product documentation, (iii) media used to deliver our products, (iv) shipping
and fulfillment costs and (v) the costs associated with license revenues from
independent software vendors. Our cost of services revenue includes (i) salaries
and related expenses for our consulting, education and technical support
services organizations, (ii) costs of third parties contracted to provide
consulting services to customers and (iii) 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 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 the acquisitions made by the
company in support of 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 $50.8 million
as of March 31, 2000. We anticipate that our operating expenses will increase
substantially 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 consolidated statements of
operations.
<TABLE>
<CAPTION>
Three Months Ended
March 31,
2000 1999
---- ----
<S> <C> <C>
Revenue:
Software license......................................... 57.2% 75.0%
Services................................................. 42.8 25.0
------ ------
Total revenue.................................... 100.0 100.0
------ ------
Cost of revenue:
Software license......................................... 5.7 8.7
Services................................................. 39.3 38.3
------ ------
Total cost of revenue............................ 45.0 47.0
------ ------
Gross profit............................................... 55.0 53.0
Operating expenses:
Sales and marketing...................................... 75.9 114.8
Research and development................................. 20.8 43.3
General and administrative............................... 16.1 20.0
Compensation charge for issuance of stock options........ 2.6 0.4
Amortization of goodwill................................. 7.8 0.0
------ ------
Total operating expenses......................... 123.2 178.5
------ ------
Loss from operations....................................... (68.2) (125.5)
Other income, net.......................................... 17.4 1.1
------ ------
Net loss................................................... (50.8)% (124.4)%
====== ======
</TABLE>
Revenue
Total revenue increased 274% to $13.0 million in the three months ended
March 31, 2000 from $3.5 million in the three months ended March 31, 1999. This
increase is attributable to an increase in our customer base resulting in
substantial growth in software license and services revenue. Revenue from
international sales increased to $5.2 million, or 40% of total revenue, in the
three months ended March 31, 2000 from $1.1 million, or 32% of total revenue, in
the three months ended March 31, 1999. The increase in international sales is
primarily due to increased selling and related activities in The United Kingdom,
Germany, Belgium, The Netherlands, The Czech Republic, Norway, France,
Singapore, Hong Kong and Taiwan.
Software License. Software license revenue increased 186% to $7.4 million in
the three months ended March 31, 2000 from $2.6 million in the three months
ended March 31, 1999. This increase is attributable to increased unit sales of
our products following the release of Version 3.0 in February of 2000, as well
as higher prices realized for our products in 2000 as compared to 1999.
Services. Services revenue increased 541% to $5.6 million in the three
months ended March 31, 2000 from $867,000 in the three months ended March 31,
1999. The primary factor for the three month comparative increase is
attributable to the creation and expansion of our professional consulting
organization and the provision of a wider range of consulting services to
customers, and an increase in the number of customers and support contracts.
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 both our capacity for the delivery of these services,
as well as 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 146% to $744,000
in the three months ended March 31, 2000 from $303,000 in the three months ended
March 31, 1999. This increase is 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 10.0% from
11.6% for the three months ended March 31, 2000 as compared to the three months
ended March 31, 1999. This decrease resulted primarily because significant
product license revenue growth outpaced increases in product license costs in
addition to a higher average sales price in 2000 relative to 1999. We expect
software license costs to increase 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.
10
<PAGE>
Services. Cost of services revenue increased 284% to $5.1 million in the
three months ended March 31, 2000 from $1.3 million in the three months ended
March 31, 1999. This increase is due to an increase in the number of our
education and technical support personnel and to the creation and rapid
expansion of our consulting services organization. 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 147% to $9.9
million in the three months ended March 31, 2000 from $4.0 million in the three
months ended March 31, 1999. This increase is attributable to increases in the
number of sales employees in North America, as well as our expansion of our
international sales operations. We believe these expenses will increase
significantly in future periods as 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 a total revenue from period to period as new sales
personnel are hired and begin to achieve productivity.
Research and Development. Research and development expenses increased 80% to
$2.7 million in the three months ended March 31, 2000 from $1.5 million in the
three months ended March 31, 1999. This increase is primarily attributable to
increases in the number of research and development personnel used to support
SilverStream's 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
increase significantly in future periods. To date, all software development
costs have been expensed in the period incurred.
General and Administrative. General and administrative expenses increased
200% to $2.0 million in the three months ended March 31, 2000 from $697,000 in
the three months ended March 31, 1999. These increases are attributable to a
growing number of administrative employees. We believe general and
administrative expenses will increase, as we expect to add personnel to support
our expanding operations, incur additional costs related to the growth of our
business, and continue to assume the responsibilities of a public company.
Compensation Charge for Issuance of Stock Options. We incurred a charge of
$345,000 for the three months ended March 31, 2000 as compared to $15,000 for
the three months ended March 31, 1999 related to the issuance of stock options
with exercise prices below fair market value on the date of grant. Additional
unvested outstanding options will continue to vest over the next five years,
which will result in additional compensation expense of approximately $6.9
million in the aggregate in periods subsequent to March 31, 2000, which will be
charged to operations ratably over the next five years.
Amortization of Goodwill. We incurred a charge of $1.0 million for the
three months ended March 31, 2000 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 two domestic companies: ObjectEra, Inc.
and GemLogic, Inc. There were no such charges in the comparable three month
period ended March 31, 1999. Goodwill of approximately $35.7 million in the
aggregate will continue to be charged to operations ratably over the next five
years.
Other Income, Net
Other income, net increased to $2.3 million in the three months ended March
31, 2000 from $40,000 in the three months ended March 31, 1999. This increase is
attributable to an increase in interest income due to higher cash balances in
the comparable three-month period ended March 31, 2000 versus March 31, 1999.
Net Operating Losses and Tax Credit Carry-forwards
As of December 31, 1999, we had net operating losses and research and
development credit carry-forwards of approximately $43.0 million and $901,000,
respectively. The net operating losses and research and development credit
carry-forwards will expire at various dates, beginning in 2012, if not utilized.
Under the provisions of the Internal Revenue Code of 1986, as amended (the
"Code"), substantial changes in our ownership may limit the amount of net
operating loss carry-forwards that can be utilized annually in the future to
offset taxable income. A valuation allowance has been established to fully
reserve the potential benefits of these carry-forwards in our financial
statements to reflect the uncertainty of future taxable income required to
utilize available tax loss carry-forwards and other deferred tax assets.
11
<PAGE>
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
offering aggregating approximately $317.0 million. We have also funded our
operations through equipment financings. As of March 31, 2000, we had $225.1
million in cash, cash equivalents and marketable securities, and $219.9 million
in working capital. We have two term loans for amounts borrowed to finance
equipment. These term loans are from the same bank and bear interest at the
bank's prime rate (9.0%; at March 31, 2000) plus 0.5%. On March 31, 2000, we had
a total of approximately $847,000 outstanding under these term loans. Borrowings
under these term loans are secured by substantially all of our tangible assets.
We assumed a $665,000 line of credit with the purchase of Power 2000 which we
paid off in full subsequent to March 31, 2000.
Net cash used in operating activities was $6.9 million in the three months
ended March 31, 2000 and $3.7 million in the three months ended March 31, 1999.
Net cash flows from operating activities in each period reflect increasing net
losses, the compensation charge for the issuance of stock options and, to a
lesser extent, increases in accounts receivable offset in part by increases in
accounts payable, accrued expenses and deferred revenue. Net cash flows from
operating activities in the three months ended March 31, 2000 also reflect
goodwill amortization.
Net cash used in investing activities was $27.6 million in the three months
ended March 31, 2000. Net cash provided by investing activities was $2.7 million
in the three months ended March 31, 1999. Investing activities reflects
purchases of property and equipment in each period, as well as purchases and
sales of short-term investments. Investing activities in 2000 also reflect the
purchase of Power 2000.
Net cash provided by financing activities was $192.4 million in the three
months ended March 31, 2000 and $12.3 million in the three months ended March
31, 1999. Cash provided by financing activities includes proceeds from the
issuance of preferred and common stock, including our secondary public offering
in January of 2000, offset by the payments on long-term debt in each period.
Capital expenditures were $1.3 million in the three months ended March 31,
2000 and $410,000 in the three months ended March 31, 1999. Our capital
expenditures consisted 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 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 through 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 utilize 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.
Year 2000 Compliance
The "Year 2000 Issue" refers generally to the problems that some software
may have in determining the correct century for the year. For example, software
with date-sensitive functions that is not Year 2000 compliant may not be able to
distinguish whether "00" means 1900 or 2000. This could result in failures or
the creation of erroneous results.
In prior periods, we discussed the nature and progress of our plans to
become Year 2000 ready. In late 1999, we completed our remediation and testing
of systems. As a result of those planning and implementation efforts, we
experienced no significant disruptions in mission critical information
technology and non-information technology systems and believe those systems
successfully responded to the Year 2000 date change. We are not aware of any
material problems resulting from Year 2000 issues, either with our products, our
internal systems, or the products and services of third parties. We will
continue to monitor our mission critical computer applications and those of our
suppliers and vendors throughout the year 2000 to ensure that any latent Year
2000 matters that may arise are addressed promptly.
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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."
The SAB formalizes positions the staff has expressed in speeches and comment
letters. SAB 101 is effective no later than the second fiscal quarter of the
fiscal year beginning after December 15, 1999. We are presently analyzing the
impact, if any, that the adherence to the SAB will have on our financial
condition or results of operations.
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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.
Risks Related to Our Business
We Have Incurred Substantial Losses, We Expect Continued Losses and Continued
Losses 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 ended 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 March 31, 2000, we had
an accumulated deficit of $50.8 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.
We Expect to Depend on Our Application Server and Related Services for
Substantially All of Our 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 substantially all of our revenue from our
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 Will Suffer if We Do Not Successfully Introduce Enhancements to
Our Product Offerings.
Our future financial performance will depend significantly on revenue from
future enhancements to our product offerings that we are currently developing
and plan to develop. Any delay or difficulties in completing these enhancements
would seriously harm our business and operating results. We have recently
released Version 3.0 of our Application Server, which includes new functionality
including improvements to the programming environment as well as support for
computing standards, such as Enterprise JavaBeans and Java2, and third-party
development tools. In December 1999, we acquired GemLogic, Inc., a developer of
Extensible Markup Language (XML) integration server technology. XML is an
emerging standard for sharing data over the Internet and is designed to support
business-to-business commerce over the Internet. On April 6, 2000, we acquired
eObject, Inc., the developer of "enTellect," a java based framework for the
access control, personalization and metering of corporate resources. The
acquired technologies will require significant additional development before
release of any commercial product and we cannot predict the time required to
complete development, testing and integration with our product offerings or the
date of commercial release. In addition, we cannot be certain that enhanced
versions of the SilverStream Application Server or new and enhanced versions of
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.
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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. 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.
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.
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Our Lengthy Sales Cycle Makes it Difficult to Predict Our Quarterly Results.
A customer's decision to purchase our products typically involves a
significant decision by the prospective 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. In addition, 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. 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 our competitors.
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 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 and typically require 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, or Increase the Number of, Third-Party
Distribution Relationships May Limit Our Ability to Penetrate the Market.
We have a limited number of third-party distribution agreements and we may
not be able to increase the number of our distribution relationships or maintain
our existing relationships. Our failure to increase the number of our
distribution relationships or maintain our existing relationships may limit our
ability to penetrate the market. Our current agreements with our distribution
partners do not prevent these companies from selling products of other
companies, including products that may compete with our products, and do not
generally 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. As a result, the loss
of, or a significant reduction in 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.
Failure to 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.
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 wide 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.
In addition, our principal executive office lease is due to expire in July
2000. We have entered into a lease for a new facility and plan to move our
headquarters to new office space in the second quarter of 2000. We will likely
experience significant costs, and we could experience a disruption in the
development or marketing of our products, in connection with our planned move.
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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.
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 which 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, an e-Business service provider,
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 plan to develop enhanced
features to our Application Server and complementary products based on the
acquired technologies, and will be devoting significant resources to product
development, sales and marketing. To date, GemLogic and eObject have not
developed a commercial product and ObjectEra's products have had limited sales.
The success of these acquisitions will depend on our ability to:
o successfully integrate and manage the acquired operations;
o retain the software developers and other key employees of ObjectEra,
GemLogic, Power 2000 and eObject;
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.
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Any Acquisitions We Make Could Disrupt Our Business and Consequently Harm
Our Financial Condition.
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.
Further, 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, your 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, including proceeds from this offering, 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.
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 3.0, 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,
would likely be time consuming and costly to defend and could adversely affect
our marketing efforts.
Our Business Could be Adversely Affected if the Systems We Use Are Not Year
2000 Compliant or if Our Customers or Potential Customers Alter Their Purchasing
Patterns As a Result of the Year 2000.
We are continuing to audit Year 2000 issues with the computer,
communications and software systems that we use to deliver our products and to
manage our internal operations. To date, we have experienced no material Year
2000 issues, but if our systems do not operate properly with respect to date
calculations involving the Year 2000 and subsequent dates, we could incur
unanticipated expenses to remedy and problems, which could seriously harm our
business. We may also experience reduced sales of our products as current or
potential customers reduce their budgets for enterprise software and Internet
products due to increased expenditures on their own Year 2000 compliance
efforts.
The risks posed by Year 2000 issues could adversely affect our business in a
number of significant ways. Although we believe that our internally developed
systems and technology are Year 2000 compliant, our information technology
systems nevertheless could be substantially impaired or cease to operate due to
Year 2000 problems. Additionally, we rely on information technology supplied by
third parties, and our other business partners, including third-party
distributors and consultants, also are heavily dependant on information
technology systems and on their own and third-party vendor systems. Year 2000
problems experienced by us or any of these third parties could materially
adversely affect our business. Prior versions of our products may contain
technology from third parties that is not Year 2000 compliant. Additionally, the
Internet could face serious disruptions arising from the Year 2000 problems.
Our Business May Suffer if We Cannot Protect Our Intellectual Property.
We have no patents, 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.
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We obtain a major portion of our software license revenue from licensing our
products under standardized "shrink wrap" 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.
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 a company following periods of volatility in the market price of its
securities. We may in the future be the target of similar litigation. 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 SilverStream and Could Delay or
Prevent a Change in Corporate Control.
As of April 28, 2000, our executive officers, directors and principal
stockholders beneficially owned, in the aggregate, approximately 40.5% 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
SilverStream does 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, SilverStream invoices 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 March 31,
2000, foreign currency fluctuations have not had a material impact on our
financial position or results of operations.
20
<PAGE>
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 March 31, 2000, pursuant to the terms of an Agreement and Plan of
Merger, dated as of March 28, 2000 (the "Merger Agreement"), between
SilverStream, Power 2000 Acquisition Corp., a Delaware corporation and a
wholly-owned subsidiary of SilverStream ("Merger Sub"), Power 2000, Inc., an
Illinois corporation ("Power 2000"), and Donald Peterson, Ryan Peterson, Michael
Peterson, David Spata and Michael Courtin, as the stockholders of Power 2000,
SilverStream acquired Power 2000 through a merger of Merger Sub with and into
Power 2000. The Merger Agreement provided that the Power 2000 stockholders would
exchange their outstanding shares of Power 2000 capital stock for a combination
of cash and 134,000 shares of SilverStream's common stock (the "Merger Shares").
The Registrant issued the Merger Shares in reliance on the exemption from
registration contained in Regulation D promulgated under the Securities Act of
1933, as amended. No underwriters were involved in connection with the issuance
and sale of the Merger Shares.
(d) Use of Proceeds from Sales of Registered Securities
On August 20, 1999, we closed our initial public offering of our
common stock. 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 granted a Convertible Promissory Note
Receivable to one of our corporate collaborators for $2.0 million. 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 Power 2000, we made a payment of $5.3 million. After March
31, 2000, we made a payment of $665,000 to pay off Power 2000's line of credit,
a liability which we assumed as part of the purchase price.
On January 31, 2000, we closed our 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 (the "Registration Statement") (Registration No. 333-94103) that was
declared effective by the Securities and Exchange Commission on January 24,
2000. The 2,200,000 shares offered under the Registration Statement were sold at
a price of $114.00 per share for an aggregate offering price of $250.8 million.
Of these shares, SilverStream sold 1,445,851 shares and the selling stockholders
sold 754,149 shares. The aggregate proceeds to the selling stockholders from
this offering were $85,972,986. After deducting the underwriting discounts and
commission to the underwriters, the selling stockholders received net proceeds
from this offering of approximately $81,674,337.
In addition to the 1,445,851 shares SilverStream sold in this offering,
Morgan Stanley & Co. Incorporated, FleetBoston Robertson Stephens, Inc. and SG
Cowen Securities Corporation, the managing underwriters of the offering,
exercised an overallotment option on January 31, 2000 to purchase 330,000 shares
from SilverStream. The overallotment shares were sold at a price of $114.00 per
share. The aggregate proceeds to SilverStream from the offering were $202.4
million. In connection with the offering SilverStream paid an aggregate of $10.1
million in underwriting discounts and commission to the underwriters. In
addition, the expenses incurred in connection with the offering were
approximately $670,000, including $143,000 in legal costs, $107,000 in
accounting costs, $186,000 in printing costs, $102,000 in registration, filing
and related costs, and other costs of $132,000.
21
<PAGE>
After deducting the underwriting discounts and commission and the
offering expenses described above, we received net proceeds from the offering of
approximately $191,700,000. 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.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10* Agreement and Plan of Merger, dated April 5, 2000, by and among
SilverStream Software, Inc., eObject Acquisition Corp., eObject, Inc.
and the Major Stockholders and Indemnification Representatives named
therein.
27 Financial Data Schedule.
- ----------
* Incorporated by reference to SilverStream's Current Report on Form 8-K filed
with the Securities and Exchange Commission on April 19, 2000.
(b) Reports on Form 8-K.
On January 25, 2000, SilverStream filed Amendment No. 1 to Current
Report on Form 8-K to report under Item 7 (Financial Statements, Pro
Forma Financial Information and Exhibits) the financial statements
required to be filed in connection with the consummation of an
Agreement and Plan of Merger for the acquisition of GemLogic and the
consummation of a Stock Purchase Agreement for the acquisition of
ObjectEra.
.
22
<PAGE>
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: May 3, 2000 SILVERSTREAM SOFTWARE, INC.
By: /s/ CRAIG A. DYNES
--------------------
Craig A. Dynes
Vice President, Chief Financial
Officer, Secretary and Treasurer
(Principal Financing and Accounting
Officer)
23
<PAGE>
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<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
SILVERSTREAM SOFTWARE FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> USD
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<EXCHANGE-RATE> 1
<CASH> 204,583
<SECURITIES> 20,499
<RECEIVABLES> 12,415
<ALLOWANCES> 1,395
<INVENTORY> 0
<CURRENT-ASSETS> 239,993
<PP&E> 7,065
<DEPRECIATION> 3,158
<TOTAL-ASSETS> 279,638
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0
0
<COMMON> 20
<OTHER-SE> 259,094
<TOTAL-LIABILITY-AND-EQUITY> 279,638
<SALES> 13,004
<TOTAL-REVENUES> 13,004
<CGS> 5,855
<TOTAL-COSTS> 5,855
<OTHER-EXPENSES> 16,021
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 15
<INCOME-PRETAX> (6,609)
<INCOME-TAX> 0
<INCOME-CONTINUING> (6,609)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,609)
<EPS-BASIC> (0.36)
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