SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
FORM 10-Q
---------------
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 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 August 1, 2000 there were 20,485,487 shares of the registrant's
common stock outstanding.
<PAGE>
SilverStream Software, Inc.
Form 10-Q
For the Quarterly Period Ended June 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 June 30, 2000 and December 31, 1999............. 3
Condensed Consolidated Statements of Operations for the Three and the Six Months Ended
June 30, 2000 and 1999...................................................................... 4
Condensed Consolidated Statements of Cash Flows for the Six Months Ended
June 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....... 8-19
Item 3. Quantitative and Qualitative Disclosures about Market Risk..................................19-20
PART II. Other Information
Item 2. Changes in Securities and Use of Proceeds...................................................20-21
Item 4. Submission of Matters to a Vote of Security-Holders......................................... 21
Item 6. Exhibits and Reports on Form 8-K............................................................21-22
Signatures.................................................................................. 23
</TABLE>
2
<PAGE>
PART I. Financial Information
Item 1. Financial Statements
SILVERSTREAM SOFTWARE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
------------ ------------
(Unaudited) (Audited)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents....................................................... $ 74,955 $ 46,799
Marketable securities........................................................... 139,899 247
Accounts receivable; net of allowances of $1,136 at June 30, 2000 and
$763 at December 31, 1999..................................................... 18,140 6,938
Prepaid expenses................................................................ 2,185 1,131
Other current assets............................................................ 453 2,003
----------- ------------
Total current assets..................................................... 235,632 57,118
Furniture, equipment and leasehold improvements, net.............................. 6,994 2,836
Other assets...................................................................... 2,081 -
Intangibles, net.................................................................. 61,430 20,709
----------- ------------
Total assets............................................................. $ 306,137 $ 80,663
=========== ============
Liabilities and stockholders' equity
Current liabilities:
Accounts payable................................................................ $ 5,794 $ 7,740
Accrued expenses................................................................ 9,659 3,299
Deferred revenue................................................................ 10,102 5,079
Current portion of long-term debt............................................... 382 451
----------- ------------
Total current liabilities................................................ 25,937 16,569
Long-term debt, less current portion.............................................. 396 509
Stockholders' equity:
Common stock.................................................................... 21 18
Additional paid-in capital...................................................... 346,646 115,185
Deferred compensation........................................................... (8,233) (7,213)
Accumulated deficit............................................................. (58,252) (44,161)
Other comprehensive loss........................................................ (274) (140)
Notes receivable from stockholders (104) (104)
----------- ------------
Total stockholders' equity............................................... 279,804 63,585
----------- ------------
Total liabilities and stockholders' equity............................... $ 306,137 $ 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)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------------- --------------------------
2000 1999 2000 1999
----------- ----------- ----------- -----------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Revenue:
Software license.................................... $ 9,008 $ 2,908 $ 16,450 $ 5,515
Services............................................ 9,021 1,400 14,582 2,267
----------- ----------- ----------- -----------
Total revenue............................... 18,029 4,308 31,032 7,782
Cost of revenue:
Software license.................................... 812 383 1,555 685
Services............................................ 8,841 1,836 13,953 3,167
----------- ----------- ----------- -----------
Total cost of revenue....................... 9,653 2,219 15,508 3,852
----------- ----------- ----------- -----------
Gross profit.......................................... 8,376 2,089 15,524 3,930
Operating expenses:
Sales and marketing................................. 10,114 4,270 19,982 8,258
Research and development............................ 3,496 1,839 6,198 3,342
General and administrative.......................... 2,120 963 4,210 1,660
Compensation charge for issuance of stock options... 419 175 763 190
Amortization of goodwill............................ 3,084 - 4,100 -
----------- ----------- ----------- -----------
Total operating expenses.................... 19,233 7,247 35,253 13,450
----------- ----------- ----------- -----------
Loss from operations.................................. (10,857) (5,158) (19,729) (9,520)
Other income, net..................................... 3,375 138 5,638 178
----------- ----------- ----------- -----------
Net loss.............................................. $ (7,482) $ (5,020) $ (14,091) $ (9,342)
=========== =========== =========== ===========
Beneficial conversion feature in Series D preferred - (263) - (263)
stock................................................. ----------- ----------- ----------- -----------
Net loss applicable to common stockholders............ $ (7,482) $ (5,283) $ (14,091) $ (9,605)
=========== =========== =========== ===========
Basic and diluted net loss per share applicable to
common stockholders................................... $ (0.38) $ (1.44) $ (0.74) $ (2.70)
=========== =========== =========== ===========
Weighted-average common shares used in computing basic
and diluted net loss per share applicable to common 19,690 3,680 18,943 3,551
stockholders.......................................... =========== =========== =========== ===========
</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)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
2000 1999
------------- ------------
(Unaudited) (Unaudited)
<S> <C> <C>
Operating activities
Net loss............................................................................. $ (14,091) $ (9,342)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization...................................................... 5,129 541
Provision for allowances on accounts receivable.................................... 373 262
Compensation charge for issuance of stock options.................................. 763 190
Changes in operating assets and liabilities:
Accounts receivable.............................................................. (11,258) (2,876)
Other receivable................................................................. 2,304 -
Prepaid expenses................................................................. (985) 244
Other current assets............................................................. (328) (476)
Other non-current assets......................................................... - (735)
Accounts payable and accrued expenses............................................ 3,432 2,602
Deferred revenue................................................................. 4,927 1,353
------------ ------------
Net cash used in operating activities................................................ (9,734) (8,237)
------------ ------------
Investing activities
Purchase of property, plant and equipment............................................ (5,031) (1,069)
Purchase of Power 2000, Inc., net of cash acquired................................... (6,032) -
Purchase of eObject, net of cash acquired............................................ (3,117) -
(Purchase) sale of marketable securities............................................. (139,653) 3,084
------------ ------------
Net cash (used) provided by investing activities..................................... (153,833) 2,015
------------ ------------
Financing activities
Net proceeds from issuance of preferred stock........................................ - 14,728
Net proceeds from issuance of common stock........................................... 192,703 723
Proceeds from line of credit......................................................... - 673
Payments on long-term debt........................................................... (847) (250)
------------ ------------
Net cash provided by financing activities............................................ 191,856 15,874
------------ ------------
Effects of exchange rate on cash and cash equivalents................................ (133) (73)
Net increase in cash and cash equivalents............................................ 28,156 9,579
Cash and cash equivalents at beginning of period..................................... 46,799 1,199
------------ ------------
Cash and cash equivalents at end of period........................................... $ 74,955 $ 10,778
============ ============
Non cash transactions
Issuance of common stock in exchange for Power 2000, Inc. (9,899) -
Issuance of common stock in exchange for eObject, Inc. (27,646) -
</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 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, 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 June 30, Six Months Ended June 30,
--------------------------- ---------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Numerator:
Net loss applicable to common
stockholders................. $ (7,482) $ (5,283) $ (14,091) $ (9,605)
============ ============ ============ ============
Denominator:
Weighted average common
shares outstanding........... 20,263 5,226 19,644 5,225
Weighted average common
shares subject to repurchase. 573 1,546 701 1,674
------------ ------------ ------------ ------------
Denominator for basic and
diluted loss per share......... 19,690 3,680 18,943 3,551
============ ============ ============ ============
Basic and diluted net
loss per share............... $ (0.38) $ (1.44) $ (0.74) $ (2.70)
============ ============ ============ ============
</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
<PAGE>
Second Public Offering
On January 31, 2000, the Company completed a second 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 will be accounted for using the
purchase method of accounting.
The unaudited pro forma information below for the six months ended June 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 six months ended June 30, 2000.
<TABLE>
<CAPTION>
Pro Forma
June 30, 2000
-------------
<S> <C>
Revenue............................................ $ 31,032
Net loss applicable to common stockholders......... (15,984)
=============
Basic and diluted net loss per share applicable
to common stockholders........................... $ (0.83)
Weighted-average common shares used in
computing basic and diluted net loss per share
applicable to common stockholders................ 19,332
=============
</TABLE>
The primary pro forma adjustment approximates $1.4 million, and relates to
the amortization of goodwill.
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 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.
SilverStream accelerates 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-add features for rapid
application development and deployment. Advanced ePortal and XML-based
integration solutions, with the SilverStream Application Server or other
best-of-breed, standards-based application servers as a foundation, drives
SilverStream's customer success with e-business initiatives. 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
tightly integrated design tools that lets them build secure enterprise Web
applications utilizing the power of a database to store, retrieve and
manipulate content and data.
xCommerce
The recently released 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 enormous power of XML, winning enterprises are forging a new
generation of connections with customers, suppliers and business partners.
SilverStream ePortal
In addition to the xCommerce products, SilverStream has recently announced
the release of 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 need on a regular basis.
All of the cabove 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.
8
<PAGE>
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.
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 (i) royalties paid to third
parties for technology included in our products, (ii) cost of manuals and
product documentation, (iii) media used to deliver our products, (iv) shipping
and fulfillment costs and (v) 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, 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 $58.3 million
as of June 30, 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 Six Months Ended
June 30, June 30,
-------- --------
2000 1999 2000 1999
------ ------ ------ ------
<S> <C> <C> <C> <C>
Revenue:
Software license......................................... 50.0% 67.5% 53.0% 70.9%
Services................................................. 50.0 32.5 47.0 29.1
------ ------ ------ ------
Total revenue.................................... 100.0 100.0 100.0 100.0
------ ------ ------ ------
Cost of revenue:
Software license......................................... 4.5 8.9 5.0 8.8
Services................................................. 49.0 42.6 45.0 40.7
------ ------ ------ ------
Total cost of revenue............................ 53.5 51.5 50.0 49.5
------ ------ ------ ------
Gross profit (loss)........................................ 41.0 48.5 50.0 50.5
Operating expenses:
Sales and marketing...................................... 56.1 99.1 64.4 106.1
Research and development................................. 19.4 42.7 20.0 43.0
General and administrative............................... 11.8 22.3 13.6 21.3
Compensation charge for issuance of stock options........ 2.3 4.1 2.5 2.4
Amortization of goodwill................................. 17.1 0.0 13.2 0.0
------ ------ ------ ------
Total operating expenses......................... 106.7 168.2 113.7 172.8
------ ------ ------ ------
Loss from operations....................................... (60.0) (119.7) (63.7) (122.3)
Other income, net.......................................... 18.7 3.2 18.1 2.3
------ ------ ------ ------
Net loss................................................... (41.5)% (116.5)% (45.6)% (120.0)%
====== ====== ====== ======
</TABLE>
Revenue
Total revenue increased 319% to $18.0 million in the three months ended
June 30, 2000 from $4.3 million in the three months ended June 30, 1999. Total
revenue increased 299% to $31.0 million in the six months ended June 30, 2000
from $7.8 million in the six months ended June 30, 1999. These increases are
attributable to an increase in our customer base resulting in substantial growth
in software license and services revenue. Revenue from international sales
increased to $5.9 million, or 33% of total revenue, in the three months ended
June 30, 2000 from $1.5 million, or 34% of total revenue, in the three months
ended June 30, 1999. Revenue from international sales increased to $11.0
million, or 35% of total revenue, in the six months ended June 30, 2000 from
$2.6 million, or 33% of total revenue, in the six months ended June 30, 1999.
The increases 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 210% to $9.0 million in
the three months ended June 30, 2000 from $2.9 million in the three months ended
June 30, 1999. Software license revenue increased 198% to $16.5 million in the
six months ended June 30, 2000 from $5.5 million in the six months ended June
30, 1999. These increases are attributable to increased unit sales of our
products following the release of Version 2.5 in May of 1999 and 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 544% to $9.0 million in the three
months ended June 30, 2000 from $1.4 million in the three months ended June 30,
1999. Services revenue increased 543% to $14.6 million in the six months ended
June 30, 2000 from $2.3 million in the six months ended June 30, 1999. The
increases for the three and six month periods are attributable to the continued
expansion of our professional consulting organization, 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 our ability 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.
10
<PAGE>
Cost of Revenue
Software License. Cost of software license revenue increased 112% to
$812,000 in the three months ended June 30, 2000 from $383,000 in the three
months ended June 30, 1999. Cost of software license revenue increased 127% to
$1.6 million in the six months ended June 30, 2000 from $685,000 in the six
months ended June 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 9% from 13% for the three months ended June 30, 2000 as compared to the three
months ended June 30, 1999. Cost of software license revenue decreased as a
percentage of software license revenue to 9.5% from 12% for the six months ended
June 30, 2000 as compared to the six months ended June 30, 1999. These decreases
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.
Services. Cost of services revenue increased 382% to $8.8 million in the
three months ended June 30, 2000 from $1.8 million in the three months ended
June 30, 1999. Cost of services revenue increased 341% to $14.0 million in the
six months ended June 30, 2000 from $3.2 million in the six months ended June
30, 1999. These increases are due to an increase in the number of our education
and technical support personnel and the continued rapid expansion of our
consulting services business, including an increase in the number of
consultants. 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 137% to $10.1
million in the three months ended June 30, 2000 from $4.3 million in the three
months ended June 30, 1999. Sales and marketing expenses increased 142% to $20.0
million in the six months ended June 30, 2000 from $8.3 million in the six
months ended June 30, 1999. These increases are 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 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 90%
to $3.5 million in the three months ended June 30, 2000 from $1.8 million in the
three months ended June 30, 1999. Research and development expenses increased
86% to $6.2 million in the six months ended June 30, 2000 from $3.3 million in
the six months ended June 30, 1999. These increases are primarily attributable
to increases in the number of 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 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
120% to $2.1 million in the three months ended June 30, 2000 from $963,000 in
the three months ended June 30, 1999. General and administrative expenses
increased 154% to $4.2 million in the six months ended June 30, 2000 from $1.7
million in the six months ended June 30, 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
$419,000 and $763,000 for the three and six months ended June 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 $175,000
and $190,000 in the comparable three and six month periods ended June 30, 1999,
respectively. Additional outstanding options will continue to vest over the next
five years resulting in an aggregate compensation expense of approximately $8.2
million in periods subsequent to June 30, 2000. This additional compensation
expense will be charged to operations ratably over the next five years.
Amortization of Goodwill. We incurred a charge of $3.1 million and $4.1
million for the three and six months ended June 30, 2000, respectively, related
to the amortization of goodwill, as a result of the company's acquisition of
three of our European distributors in The Czech Republic, Norway and France
along with four domestic companies: ObjectEra, GemLogic, Power 2000 and eObject.
There were no such charges in the comparable three and six month periods ended
June 30, 1999. Goodwill of approximately $61.4 million in the aggregate will
continue to be charged to operations ratably over the next five years.
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Other Income, Net
Other income, net increased to $3.4 million in the three months ended June
30, 2000 from $138,000 in the three months ended June 30, 1999. Other income,
net increased to $5.6 million in the six months ended June 30, 2000 from
$178,000 in the six months ended June 30, 1999. These increases are attributable
to an increase in interest income due to higher cash balances in the comparable
three and six month periods ended June 30, 2000 versus June 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 (the
"Code"), substantial changes in our ownership may limit the amount of net
operating loss carry-forwards 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
second offering aggregating approximately $317.0 million. We have also funded
our operations through equipment financings. As of June 30, 2000, we had $214.9
million in cash, cash equivalents and marketable securities, and $209.7 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 (9.5%; at June 30, 2000), plus 0.5%. At June 30, 2000, we had
a total of approximately $1.1 million outstanding under these term loans and the
line of credit. Borrowings under these term loans and the line of credit are
secured by substantially all of our tangible assets.
Net cash used in operating activities increased to $9.7 million in the six
months ended June 30, 2000 from $8.2 million in the six months ended June 30,
1999. Net cash flows from operating activities in each period reflect increasing
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 flows from operating activities in the six months ended June 30, 2000
also reflect the additional expenses related to the compensation charge for the
issuance of stock options and goodwill amortization.
Net cash used in investing activities was $153.8 million in the six months
ended June 30, 2000 as compared to $2.0 million provided by investing activities
in the six months ended June 30, 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 and eObject.
Net cash provided by financing activities increaed to $191.9 million in the
six months ended June 30, 2000 from $15.9 million in the six months ended June
30, 1999. Cash provided by financing activities 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 in the six months ended June 30,
2000. Cash provided by financing activities includes proceeds from the issuance
of preferred and common stock, as well as proceeds from equipment financings,
offset by payments on long-term debt in the six months ended June 30, 1999.
Capital expenditures increased to $5.0 million in the six months ended June
30, 2000 from $1.1 million in the six months ended June 30, 1999. Of the $5.0
million incurred in the six months ended June 30, 2000, approximately $2.6
million was related to the relocation of the Company's corporate headquarters
from Burlington, Massachusetts to Billerica, Massachusetts. Specifically, we
incurred approximately $1.2 million on furniture, fixtures and office equipment,
$391,000 on computer equipment and $975,000 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. More
particularly, in connection with the Company's relocation, we incurred 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 with 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."
The SAB 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 presently analyzing the
impact, if any, that the adherence to the SAB 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 June 30,
2000, we had an accumulated deficit of $58.3 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
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 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 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.
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. Also recently, we announced the availability of
SilverStream ePortal, a complete suite of eCRM (Electronic Customer Relationship
Management) software for building e-business solutions. SilverStream ePortal
allows businesses to quickly implement advanced commerce and
business-to-business Web sites that provide a rich, personalized experience for
visitors. Lastly, we just announced the general availability of xCommerce, a
family of B2B integration server products that leverages the power of XML
(extensible markup language), enabling companies to quickly build, integrate and
deploy powerful eCommerce applications. 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.
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.
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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. 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 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.
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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 maintain or increase the number of
our distribution relationships may limit our ability to penetrate the market.
Our 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. 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.
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.
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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.
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.
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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 have just recently developed
enhanced features to our Application Server and complementary products based on
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 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.
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
technology 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.
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 3.5, 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.
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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.
We obtain a major portion of our software license revenue from licensing our
products under standardized "shrink wrap" and "click-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 August 1, 2000, our executive officers, directors and principal
stockholders beneficially owned, in the aggregate, approximately 35.7% 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.
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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 June 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 April 6, 2000, pursuant to the terms of an Agreement and Plan of Merger,
dated as of April 5, 2000 (the "Merger Agreement"), between SilverStream,
eObject Acquisition Corp., a Delaware corporation and a wholly-owned subsidiary
of SilverStream ("Merger Sub"), eObject, Inc., a Delaware corporation
("eObject"), and Jeffrey C. Broberg, John W. Murphy, Stephen Craig, Donald K.
Emery and John M. Sloane, as the stockholders of eObject, and John W. Murphy,
Donald K. Emery and John M. Sloane, as the "Indemnification Representatives" of
eObject, SilverStream acquired eObject through a merger of Merger Sub with and
into eObject. The Merger Agreement provided that the eObject stockholders would
exchange their outstanding shares of eObject capital stock for approximately
473,581 shares of our common stock (the "Merger Shares"). Pursuant to the terms
of the Merger Agreement, we issued an additional 175,000 shares of our common
stock (the "Additional Merger Shares") 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. We issued the Merger Shares and
the Additional 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 or the Additional 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. 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. Our Capital expenditures included $2.6 million
related to the relocation of the Company's corporate headquarters from
Burlington, Massachusetts to Billerica, Massachusetts. Specifically, we incurred
approximately $1.2 million on furniture, fixtures and office equipment, $391,000
on computer equipment and $975,000 on leasehold improvements in connection with
the relocation.
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On January 31, 2000, we closed our second 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 $191,700,000. 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.
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 4. Submission of Matters to a Vote of Security-Holders
On May 2, 2000, We held Our Annual Meeting of Stockholders to vote
on the following proposals:
1. To elect two members of the Board of Directors for a three-year
term ("Proposal No. 1"). Nominees for Director were David R. Skok and
Timothy Barrows.
2. To approve (a) the continuance of our Amended and Restated 1997
Stock Incentive Plan (the "Stock Incentive Plan"); (b) an amendment to the
Stock Incentive Plan increasing from 3,500,000 to 6,000,000 the number of
shares of common stock reserved for issuance under the Stock Incentive
Plan; and (c) other amendments related to the Stock Incentive Plan as more
fully described in the proxy statement furnished in connection with the
solicitation of proxies by our Board of Directors of SilverStream for use
at the Annual Meeting of Stockholders held on May 2, 2000 ("Proposal No.
2").
3. To ratify the appointment of Ernst & Young LLP as our independent
auditors for the fiscal year ending December 31, 2000 ("Proposal No. 3").
Of the 19,621,701 shares of the our common stock of record as of March 27,
2000 able to be voted at the meeting, a total of approximately 16,039,804
shares, or approximately 81% of our issued and outstanding shares of common
stock entitled to vote on these matters, were present at the meeting in person
or by proxy. Each of the proposals was adopted, with the vote total as follows:
<TABLE>
<CAPTION>
Shares Shares Shares Shares
Voting For Voting Against Abstaining Withheld
<S> <C> <C> <C> <C>
Proposal
No. 1
David R. Skok 16,031,751 0 0 8,053
Timothy Barrows 16,029,786 0 0 10,018
No. 2 10,748,744 3,244,198 24,695 0
No. 3 16,034,518 4,015 1,271 0
</TABLE>
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 our Current Report on Form 8-K filed with the
Securities and Exchange Commission on April 19, 2000.
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(b) Reports on Form 8-K.
On April 19, 2000, we filed a Current Report on Form 8-K to report
under Item 2 (Acquisistion of Disposition of Assets) the consummation
of an Agreement and Plan of Merger for the acquisition of eObject,
Inc.
On June 20, 2000, we 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 eObject, Inc.
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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: August 11, 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)
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