SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
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[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive proxy statement to be filed with
the Securities and Exchange Commission relative to the registrant's 2000 Annual
Meeting of Stockholders are incorporated by reference into Part III of the
Annual Report on Form 10-K.
As of March 16, 2000 there were 19,603,961 shares of the registrant's
common stock outstanding.
The aggregate market value of the voting Common Stock held by
non-affiliates of the registrant was approximately $920 million based on the
last reported sale price of the Common Stock on the Nasdaq consolidated
transaction reporting system on March 16, 2000.
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SILVERSTREAM SOFTWARE, INC.
FISCAL YEAR 1999 FORM 10K ANNUAL REPORT
TABLE OF CONTENTS
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PAGE
PART I
Item 1. Business................................................................................. 3
Item 2. Properties............................................................................... 15
Item 3. Legal Proceedings........................................................................ 15
Item 4. Submission of Matters to a Vote of Security Holders...................................... 15
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholders Matters................... 16
Item 6. Selected Financial Data.................................................................. 17
Item 7. Management's Discussion and Analysis of Financial Position and Results of Operations..... 19
Item 7A. Quantitative and Qualitative Disclosures about Market Risk............................... 25
Item 8. Financial Statements and Supplementary Data.............................................. 26
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure..... 44
PART III
Item 10. Directors and Officers of the Registrant................................................. 44
Item 11. Executive Compensation................................................................... 44
Item 12. Security Ownership of Certain Beneficial Owners and Management........................... 44
Item 13. Certain Relationships and Related Transactions........................................... 44
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.......................... 44
Signatures.................................................................................................. 47
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PART I
ITEM 1. BUSINESS
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 two important 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.
We have also 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. Both of these
additions to our product and service offerings will be build 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 500 customers in a wide variety of industries, including
communication, financial services, government, manufacturing, oil and gas,
pharmaceutical, technology and transportation.
THE SILVERSTREAM SOLUTION
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. Organizations use our
products for such diverse Web applications as e-commerce, employee self-service,
supply chain management and customer service. We believe our products and
services provide the following benefits:
Enable Creation and Deployment of Business-Focused Web Applications.
Business-focused Web applications enable the dynamic delivery of information and
transactional capabilities to a broad group of users. Our products enable large
organizations to manage scalable, reliable and secure Web applications and
address the unpredictable traffic volumes and patterns and other challenges
faced by Web applications. By addressing performance, connectivity and security
issues, our products allow customers to focus their resources on the business
elements of their Web applications such as reaching new customers, developing
new businesses, providing superior customer service, shortening supply cycles
and improving the flow of information.
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Extend Reach of Applications and Simplify Administration. The SilverStream
Application Server allows organizations to leverage the advantages of thin
client computing, which eliminates the need for application software to be
installed on the user's computer. Our Application Server allows users to access
Web applications through common, easy-to-use Web browsers and other graphical
interfaces. The central location of Web applications permits organizations to
rapidly modify and deploy applications, enabling organizations to respond
quickly to evolving business requirements. These benefits allow organizations to
extend Web applications to a broader audience and assist these organizations in
reducing their administrative and maintenance costs.
Enable Creation of Applications that Access Multiple Information Sources.
The existence of diverse systems, information and data sources often results in
stand-alone applications that are unable to interact with one another.
SilverStream's products allow Web applications to access information and data
seamlessly from various sources, such as databases, software applications that
run on mainframe computers, and manufacturing, accounting, inventory, purchasing
and document management systems. By using our products, customers can focus on
the design and functionality of strategic Web applications to create
comprehensive solutions while preserving their investments in legacy systems.
Reduce the Complexity of Developing Web Applications. SilverStream's
integrated set of development tools provide a common development environment and
a consistent look and feel that span multiple, diverse technologies, such as the
language used to describe Web pages known as Hyper-Text Markup Language and
commonly referred to as HTML, a widely used programming language known as Java,
and reusable software objects. We provide a consistent development interface
that is familiar to application developers and we offer powerful development
functionality. Our products and related consulting, education and support
services enhance the productivity of Web application developers, allowing our
customers to leverage the existing capabilities of their development staff in an
environment where skilled Web application developers are in short supply.
PRODUCTS AND SERVICES
PRODUCTS
Our product offerings are summarized below:
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Product Description Shipment Dates
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Application Server Application server for the creation, deployment and Version 3.0 shipped in March
management of Web applications. 2000. First version shipped
in November 1997.
Available for Windows NT, Solaris or HP-UX
operating systems.
Licensed on a per processor basis for unlimited
users with no per seat or per connection charges.
Single Developer Pack A complete set of development and testing software Version 2.5 shipped in May 1999.
Group Developer Pack products for creating Web applications integrated First version shipped in
(5 or 10 Developers) with the SilverStream Application Server. November 1997.
The Single Developer Pack is for standalone
development on a single Windows NT machine.
The Group Developer Packs are for teams of up to 5
or 10 developers to work both independently on
their own computers and as a group. Includes 5 or10
Single Developer Packs and a 5- or 10-user
SilverStream Application Server for group testing
on Windows NT, Solaris or HP-UX operating systems.
Each of the Developer Packs is priced and sold
separately.
Enterprise Data Products that provide connections to SAP, Lotus First shipped in April 1999.
Connectors Notes and PeopleSoft applications.
Each Enterprise Data Connector is priced and sold
separately.
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SERVICES
As part of our ongoing commitment to provide a complete solution for our
customers, we offer comprehensive consulting, education and technical support
services that complement our product offerings. As of December 31, 1999, our
services organization comprised 100 professionals.
To complement our service organization, we train and promote a broad network
of SilverStream partners, ranging from international consulting firms to local
consultants that offer consulting, education and technical support services. Our
customers are encouraged to engage consultants, instructors and developers whose
proficiency with our products has been certified by us and who have been
designated Certified SilverStream Developers or Certified SilverStream Field
Application Engineers.
CONSULTING SERVICES. We provide application engineering and implementation
services to assist our customers in developing and implementing Web applications
using our products. Consulting services include advisory, prototyping, design,
test and configuration, deployment and tuning services, and technical account
management services. We generally provide our consulting services on a time and
materials basis.
EDUCATION SERVICES. We offer our customers and partners introductory and
advanced training in the use of our software products. Our employees as well as
Certified SilverStream Trainers offer our training classes around the world. We
price these services by course.
TECHNICAL SUPPORT SERVICES. We believe that a high level of technical
support services is critical to our customers' success and an important
competitive advantage. We offer technical support to our customers, ranging from
dedicated on-site support personnel, to telephone support from our Burlington
and Belgium offices during normal business hours, to 24-hour on-line support
available through our Website. The pricing of our technical support services
varies according to the level of support required.
SALES, MARKETING AND DISTRIBUTION
We market our products through a worldwide combination of a direct sales
force, partners and distributors. As of December 31, 1999, our sales and
marketing organization consisted of 114 employees, of whom:
o 39 are located in our headquarters in Burlington, Massachusetts,
o 33 are located in sales offices in North America, and
o 42 are located in sales offices in the United Kingdom, The Netherlands,
Belgium, Germany, Norway, the Czech Republic, France, Hong Kong,
Singapore and Taiwan.
We have three types of partners that either sell, or help us sell, our
products:
o Value added reseller partners, or VAR partners, resell our products to
customers;
o Consulting partners introduce new potential customers to us and provide
consulting services to our customers; and
o Independent software vendor partners, or ISV partners, use our products
to create their own software products.
We enter into partnership agreements with our partners which include some or
all of the following terms and conditions:
o Term of agreement is generally one year with subsequent one-year
renewals;
o Grant of license to demonstrate, use and resell SilverStream products;
o Grant of license to include SilverStream products in partner products;
o Grant of license to use SilverStream trademarks;
o Payment to SilverStream of initial and annual partnership fees; and
o SilverStream product discounts for value added resellers and independent
software vendors.
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As of December 31, 1999, we had approximately 300 partners.
Our products are also sold in Japan, South Africa, South America and Spain
through distributors who sell our products and provide consulting, training and
educational courses to customers in those countries. In Japan, our distributor
has translated our products into Kanji. Our products allow customers to create
applications in different languages.
We also have marketing relationships with other companies who have products
that work well with our products. Our SilverNet technology partners are
comprised of companies who have created commercial products which complement our
products or who market and sell these complementary products. As of December 31,
1999, we had 69 SilverNet technology partners, including Actuate, IBM,
PeopleSoft, Rational and SAP. We work with SilverNet partners to help make it
easier for customers to use our products with the SilverNet partners' products.
Our marketing programs are designed to attract potential customers so that
we, or one of our partners, can demonstrate our products directly to potential
customers. We hold many seminars, some with our partners, send out direct mail
and attend trade shows, and provide information about our company and our
products on our Web site. We also conduct public relations activities, including
interviews and demonstrations for industry analysts and product reviewers.
RESEARCH AND DEVELOPMENT
As of December 31, 1999, we had 68 employees responsible for product
development, quality assurance and documentation. Our research and development
organization is divided into five teams: server, client, application
development, quality assurance and documentation.
We are very focused on enhancing the scalability, performance and
reliability of our Application Server. Our quality assurance department has a
dedicated performance and tuning laboratory designed to improve the performance
of customers' Web-based applications. This laboratory has the ability to
simulate up to 12,000 simultaneous users communicating with SilverStream
Application Servers running on as many as 24 processors on a dedicated 100
megabits per second network.
We have made, and will continue to make, a substantial investment in
research and development. Research and development expenses were $2.6 million in
1997, $5.1 million in 1998 and $7.1 million in 1999. All of our software
development costs have been expensed as incurred.
While we have developed, and expect to continue to develop, most new
products and enhancements to existing products internally, we have licensed
software technology from third parties.
Competition
The market for application server software products is intensely
competitive, subject to rapid technological change and significantly affected by
new product introductions and other market activities of industry participants.
We expect competition to persist and intensify in the future. We encounter
current or potential competition from a number of sources, including:
o Vendors of application server products and services;
o Internally developed applications; and
o Companies that market business application software.
Our Application Server competes with application server products from other
vendors, including: IBM's WebSphere and Domino server solutions; Sun
Microsystems' NetDynamics and Netscape Application Server; Microsoft's Internet
Information Server, Active Server pages, Transaction Server and COM technology;
BEA Systems' Weblogic, Oracle's Application Server, Allaire's Cold Fusion
product and Bluestone's Sapphire/Web product. In addition, we compete with
various methods of application distribution and management, including the web
browser, and with application server vendors and others that have introduced
software distribution capabilities into their products.
Potential competitors may bundle their products or incorporate an
application server component into existing products in a manner that discourages
users from purchasing our products. Furthermore, new competitors or alliances
among competitors may emerge and rapidly acquire significant market share. Our
competitors may be able to respond more quickly to new or emerging technologies
and changes in customer requirements than we can.
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We believe the primary factors upon which we compete with vendors of
application server software and services are:
o Product performance and functionality;
o Ease of use of our products;
o Ability of our products to handle large volumes of users and transactions;
o The extent to which our products adhere to industry standards;
o The ability of our products to run on computer hardware from various
manufacturers;
o The ability of our products to connect to various data sources;
o Price; and
o Customer service.
In addition, we believe our products and services provide shorter
development time and lower cost of ownership in comparison to in-house
development efforts.
PROPRIETARY RIGHTS AND LICENSING
Our success and ability to compete are dependent on our ability to develop
and maintain the proprietary aspects of our technology and operate without
infringing on the proprietary rights of others. We rely on a combination of
patent, trademark, trade secret and copyright laws and contractual restrictions
to protect the proprietary aspects of our technology. These legal protections
afford only limited protection for our technology. We presently have five patent
applications pending in the United States. We cannot predict whether any of
these applications will result in any issued patents or, if patents are issued,
any meaningful protection. We seek to protect our source code for our software,
documentation and other written materials under trade secret and copyright laws.
We license our software pursuant to "shrinkwrap" and, in some cases, signed
license agreements, which impose restrictions on the licensee's ability to
utilize the software. Finally, we seek to limit disclosure of our intellectual
property by requiring employees and consultants with access to our proprietary
information to execute confidentiality agreements with us and by restricting
access to our source code. Due to rapid technological change, we believe that
factors such as the technological and creative skills of our personnel, new
product developments and enhancements to existing products are more important
than the various legal protections of our technology to establishing and
maintaining a technology leadership position.
Despite our efforts to protect our proprietary rights, unauthorized parties
may attempt to copy aspects of our products or to obtain and use information
that we regard as proprietary. Policing unauthorized use of our products is
difficult and while we are unable to determine the extent to which piracy of our
software exists, software piracy can be expected to be a persistent problem. In
addition, the laws of many countries do not protect our proprietary rights to as
great an extent as do the laws of the United States. Litigation may be necessary
in the future to enforce our intellectual property rights, to protect our trade
secrets, to determine the validity and scope of the proprietary rights of others
or to defend against claims of infringement or invalidity. Any such resulting
litigation could result in substantial costs and diversion of resources and
could have a material adverse effect on our business, operating results and
financial condition. There can be no assurance that our means of protecting our
proprietary rights will be adequate or that our competitors will not
independently develop similar technology. Any failure by us to meaningfully
protect our property could have a material adverse effect on our business,
operating results and financial condition.
There can be no assurance that third parties will not claim infringement
with respect to our current or future products. We expect that developers of
Web-based application software products will increasingly be subject to
infringement claims as the number of products and competitors in our industry
segment grows and as the functionality of products in different segments of the
software industry increasingly overlaps. Any such claims, with or without merit,
could be time-consuming to defend, result in costly litigation, divert
management's attention and resources, cause product shipment delays or require
us to enter into royalty or licensing agreements. Such royalty or licensing
agreements, if required, may not be available on terms acceptable to us or at
all. A successful infringement claim against us and our failure or inability to
license the infringed rights or develop or license technology with comparable
functionality could have a material adverse effect on our business, financial
condition and operating results.
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We integrate third-party software into our products. This third-party
software may not continue to be available on commercially reasonable terms. The
third-party software that we license includes text search software, a database,
a Java compiler, a Java runtime environment, an internet browser and an object
request broker. These licensed components enhance features in our products but
are not critical to the operation of our products. Some of these components are
available, at no charge, to our customers from the supplier but are included in
our products for customer convenience. In cases where the licensed component
provides an operating feature, we believe there are alternative suppliers for
the technology who may license their software to us. We also license encryption
technology from RSA Data Security under a perpetual agreement that is terminable
by either party upon default by the other. RSA is the sole source of this
technology and therefore the loss of this license would seriously harm our
business. In addition, if we cannot maintain licenses to the other third-party
software included in our products, distribution of our products could be delayed
until equivalent software could be developed or licensed and integrated into our
products, which could materially adversely affect our business, operating
results and financial condition.
Employees
As of December 31, 1999, we had a total of 312 employees of whom:
o 68 were in research and development;
o 114 were in sales and marketing;
o 100 were in customer service and support; and
o 30 were in finance and administration.
Our future success will depend in part on our ability to attract, retain and
motivate highly qualified technical and management personnel, for whom
competition is intense. Our employees are not represented by any collective
bargaining unit. We believe our relations with our employees are good.
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
We believe that this document contains "forward-looking statements" within
the meaning of the Private Securities Litigation Reform Act of 1995. These
statements are subject to risks and uncertainties and are based on the beliefs
and assumptions of management of the Company, based on information currently
available to the Company's management. Use of words such as "believes,"
"expects," "anticipates," "intends," "plans," "estimates," "should," "likely" or
similar expressions, indicate a forward-looking statement. Forward-looking
statements involve risks, uncertainties and assumptions. Certain of the
information contained in this Annual Report on Form 10-K consists of
forward-looking statements. Important factors that could cause actual results to
differ materially from the forward-looking statements include the following:
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 December 31, 1999, we
had an accumulated deficit of $44.2 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.
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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 APPLICATION SERVER.
Our future financial performance will depend significantly on revenue from
future enhancements to the SilverStream Application Server 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. The acquired technology
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 Application Server 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.
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.
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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 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.
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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. To date, our cost of
services revenue has been significantly higher than our services revenue, and we
expect to continue to incur losses from our services business in the future.
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.
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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.
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. 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 has not developed a
commercial product and ObjectEra's products have had limited sales. The success
of these acquisitions will depend on our ability to:
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<PAGE>
o successfully integrate and manage the acquired operations;
o retain the software developers and other key employees of ObjectEra and
GemLogic;
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 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 have attempted to assess, and we must continue 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. 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.
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We may experience fewer sales if potential customers delay the purchase and
implementation of our products after January 1, 2000 in order to stabilize their
internal computer systems or divert their information technology budgets to
address Year 2000 issues. If our potential customers delay purchasing or
implementing our products in order to address the Year 2000 problem, our
business would be seriously harmed.
Given the pervasive nature of the Year 2000 problem, we cannot guarantee
that disruptions in other industries and market segments will not adversely
affect our business. Moreover, our costs related to Year 2000 compliance, which
thus far have not been material, could ultimately be significant. In the event
that we experience disruptions as a result of the Year 2000 problem, our
business could be seriously harmed. Our efforts to address Year 2000 issues are
described in more detail in "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Year 2000 Compliance."
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" 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.
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As of March 16, 2000, our executive officers, directors and principal
stockholders beneficially owned, in the aggregate, approximately 41.5% 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 2. PROPERTIES
Our headquarters are currently located in a leased facility in Burlington,
Massachusetts, consisting of approximately 40,000 square feet under a sublease
that expires in July 2000. We have also leased offices for sales and support
personnel in North America, Europe and Asia. In the second quarter of 2000, we
intend to relocate our headquarters to a leased facility in Billerica,
Massachusetts consisting of approximately 100,000 square feet under a lease that
expires in 2006.
ITEM 3. LEGAL PROCEEDINGS
We are not a party to any material legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
(a) Price Range of Common Stock
Our common stock is listed on the Nasdaq National Market under the symbol
"SSSW." Public trading of our common stock commenced on August 17,1999. Prior to
that, there was no public market for our common stock. The following table set
forth, for the periods indicated, the high and low sale price per share of the
common stock on the Nasdaq National Market:
<TABLE>
<CAPTION>
High Low
<S> <C> <C>
Year Ended December 31, 1999:
Third Quarter (From August 17,1999) $42.75 $22.56
Fourth Quarter 123.00 26.88
</TABLE>
As of March 16, 2000, there were 19,603,961 shares of the Common Stock
outstanding held by approximately 285 holders of record.
We have never paid or declared any cash dividends on our common stock or
other securities and do not anticipate paying cash dividends in the foreseeable
future. We currently intend to retain all future earnings, if any, for use in
the operations of our business. Our existing equipment line of credit and term
loans prohibit the payment of dividends without the consent of the lender.
(b) Use of Proceeds from Sales of Registered Securities
On August 20, 1999 the Company closed the initial public offering of its
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. 333-80553) that was
declared effective by the Securities and Exchange Commission on August 16, 1999.
The 3,000,000 shares offered by the Company under the Registration Statement
were sold at a price of $16.00 per share. Morgan Stanley Dean Witter, BancBoston
Robertson Stephens and SG Cowen, the managing underwriters of the offering, also
exercised an overallotment option on August 26, 1999 for 450,000 shares. The
overallotment shares were sold at a price of $16.00 per share. The aggregate
proceeds to the Company from the offering were $55.2 million. In connection with
the offering the Company paid an aggregate of $3.9 million in underwriting
discounts and commission to the underwriters. In addition, the expenses incurred
in connection with the offering were approximately $1.7 million, including
$315,000 in legal costs, $410,000 in accounting costs, $293,000 in printing
costs, $136,000 in registration, filing and related costs, and other costs of
$546,000.
After deducting the underwriting discounts and commission and the offering
expenses described above, the Company received net proceeds from the offering of
approximately $49.6 million. None of the net proceeds of the offering were paid
by the Company, directly or indirectly, to any director, officer or general
partner of the Company or any of their associates, or to any persons owning ten
percent or more of any class of the Company's equity securities, or any
affiliates of the Company.
The net proceeds generated from the offering have been used primarily to
fund the Company's working capital, capital expenditures and general corporate
needs. In addition, the Company used $4.2 million as an initial payment related
to the acquisition of ObjectEra, Inc. Subsequent to December 31, 1999 the
Company made a second payment to ObjectEra, Inc. of $3.9 million, as provided
for in the purchase and sale agreement. Lastly, the Company granted a note
receivable to one of its corporate collaborators for $2.0 million in December,
1999.
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ITEM 6. SELECTED FINANCIAL DATA
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data should be read in
conjunction with our Consolidated Financial Statements and Notes thereto and
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations" included in Item 7 of this Form 10-K and the consolidated financial
statements and notes thereto in Item 14 of this Form 10-K.
<TABLE>
<CAPTION>
Period from
May 8, 1996
(inception) to Years Ended
December 31, December 31,
------------- ----------------------------------
1996 1997 1998 1999
------------- ------------ ------------ --------
(in thousands, except share and per share data)
<S> <C> <C> <C> <C>
Consolidated Statement of Operations
Data:
Revenue:
Software license.................... $ -- $ 249 $ 5,983 $ 13,826
Services............................ -- -- 825 9,239
------ ------ -------- --------
Total revenue............... -- 249 6,808 23,065
Cost of revenue:
Software license.................... -- 90 767 1,412
Services............................ -- 282 1,414 10,253
------ ------ -------- --------
Total cost of revenue....... -- 372 2,181 11,665
------ ------ -------- --------
Gross profit (loss)................... -- (123) 4,627 11,400
Operating expenses:
Sales and marketing................. 35 3,854 10,776 20,419
Research and development............ 850 2,622 5,070 7,090
General and administrative.......... 120 1,961 2,141 4,301
Compensation charge for issuance of
stock options..................... -- -- -- 439
Amortization of goodwill............ -- -- -- 385
In-process research and development
charge............................ -- -- -- 1,987
------ ------ -------- --------
Total operating expenses.... 1,005 8,437 17,987 34,621
------ ------ -------- --------
Loss from operations.................. (1,005) (8,560) (13,360) (23,221)
Other income, net..................... 53 225 475 1,232
------ ------ -------- --------
Net loss.............................. $ (952) $(8,335) $(12,885) $(21,989)
Beneficial conversion feature in
Series D preferred stock............ -- -- -- (263)
------ ------ -------- --------
Net loss applicable to common
stockholders........................ $ (952) $(8,335) $(12,885) $(22,252)
====== ====== ======== ========
Basic and diluted net loss per share
applicable to common stockholders... $(5.12) $(10.61) $ (4.89) $ (2.64)
Weighted-average common shares used
in computing basic and diluted net
loss per share...................... 185,686 785,548 2,632,496 8,419,116
</TABLE>
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<TABLE>
<CAPTION>
As of December 31,
------------------
1996 1997 1998 1999
--------- --------- --------- ---------
(in thousands)
<S> <C> <C> <C> <C>
Consolidated Balance Sheet Data:
Cash and cash equivalents.............. $ 2,734 $ 16,649 $ 1,199 $ 46,799
Working capital........................ 2,591 16,349 5,119 40,549
Total assets........................... 3,056 18,956 10,014 80,663
Long-term debt, less current portion... 189 295 325 509
Redeemable convertible preferred stock. 3,658 11,638 11,638 -
Total stockholders' equity (deficit)... (947) 5,944 (5,048) 63,585
</TABLE>
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL POSITION AND RESULTS
OF OPERATIONS
The following discussion should be read together with the Consolidated
Financial Statements and accompanying Notes thereto appearing elsewhere in this
Annual Report on Form 10-K. This Annual Report on Form 10-K contains
forward-looking statements that involve risks and uncertainties. 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. From our incorporation in
May 1996 through December 1997, we were considered a development stage
enterprise and our activities were primarily focused on raising capital,
conducting research and development, and establishing markets and distribution
channels for our products. In November 1997, we began commercial shipment of the
initial version of our Application Server.
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. 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 represents the amortization of the goodwill related to
the acquisition of some of the company's former distributors in Europe.
-19-
<PAGE>
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 $44.2 million
as of December 31, 1999. 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 achieve or sustain revenue growth or profitability.
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>
Years Ended
December 31,
---------------------------
1997 1998 1999
-------- ------ ------
<S> <C> <C> <C>
Revenue:
Software license......................................... 100.0% 87.9% 59.9%
Services................................................. 0.0 12.1 40.1
-------- ------ ------
Total revenue.................................... 100.0 100.0 100.0
-------- ------ ------
Cost of revenue:
Software license......................................... 36.2 11.2 6.1
Services................................................. 113.4 20.8 44.5
-------- ------ ------
Total cost of revenue............................ 149.6 32.0 50.6
-------- ------ ------
Gross profit (loss)........................................ (49.6) 68.0 49.4
Operating expenses:
Sales and marketing...................................... 1,550.7 158.3 88.5
Research and development................................. 1,055.1 74.5 30.7
General and administrative............................... 789.1 31.4 18.6
Compensation charge for issuance of stock options........ 0.0 0.0 1.9
Amortization of goodwill................................. 0.0 0.0 1.7
In-process research and development charge............... 0.0 0.0 8.7
-------- ------ ------
Total operating expenses......................... 3,394.9 264.2 150.1
-------- ------ ------
Loss from operations....................................... (3,444.5) (196.2) (100.7)
Other income, net.......................................... 90.7 6.9 5.4
-------- ------ ------
Net loss................................................... (3,353.8)% (189.3)% (95.3)%
======== ====== ======
</TABLE>
YEAR ENDED DECEMBER 31, 1999 COMPARED TO 1998
REVENUE
Total revenue increased 239% to $23.1 million for the year ended December
31, 1999 from $6.8 million for the previous year ended December 31, 1998. The
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 $8.1 million, or 35% of total revenue, for the
year ended December 31, 1999 from $1.8 million, or 27% of total revenue, for the
year ended December 31, 1998. 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 131% to $13.8 million
for the year ended December 31, 1999 from $6.0 million for the year ended
December 31, 1998. The increase is attributable to increased unit sales of our
products following the release of Version 2.0 in October of 1998 and Version 2.5
in May of 1999, as well as higher prices realized for our products in 1999 as
compared to 1998.
SERVICES. Services revenue increased 10,199% to $9.2 million for the year
ended December 31, 1999 from $825,000 for the year ended December 31, 1998. The
primary factor for the 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, as well as an increase in the number of
customers and support contracts.
-20-
<PAGE>
We believe that growth in our software license revenue depends on our ability
to provide our customers with support, education, and consulting services and to
educate third-party consulting partners on how to use our products. As a result,
we intend to continue to expand our services organization in the future. We
expect that revenue from professional consulting services will increase in the
future to the extent that additional customers license our products and as we
expand 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 84% to $1.4
million for the year ended December 31, 1999 from $767,000 for the year ended
December 31, 1998. Cost of software license revenue decreased as a percentage of
software license revenue to 10% from 13% for the year ended December 31, 1999 as
compared to the previous year ended December 31, 1998. The dollar 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. In addition, the dollar increase reflects higher fulfillment
costs associated with the increase in international orders. 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 625% to $10.3 million for the
year ended December 31, 1999 from $1.4 million for the year ended December 31,
1998. The 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 business in late 1998 and all of 1999. To date, our services
costs have been higher than our services revenue. We expect services costs to
increase in the future to the extent that we continue to generate new customers
and associated software license and services revenue. 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 89% to $20.4
million for the year ended December 31, 1999 from $10.8 million for the year
ended December 31, 1998. The increase is attributable to increases in the number
of sales employees in North America, as well as the company's expansion of its
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 40%
to $7.1 million for the year ended December 31, 1999 from $5.1 million for the
year ended December 31, 1998. The increase is primarily attributable to
increases in the number of research and development personnel 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
101% to $4.3 million for the year ended December 31, 1999 from $2.1 million for
the year ended December 31, 1998. The increase is attributable to a growing
number of administrative employees, as well as an increase in the bad debt
reserve as our revenue and accounts receivable grew. 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 assume the responsibilities of a public company.
COMPENSATION CHARGE FOR ISSUANCE OF STOCK OPTIONS. We incurred a charge of
$439,000 for the year ended December 31, 1999 related to the issuance of stock
options with exercise prices below fair market value on the date of grant. There
were no such charges for the year ended December 31, 1998. Additional unvested
outstanding options will continue to vest over the next four to seven years,
which will result in additional compensation expense of approximately $7.2
million in the aggregate in periods subsequent to December 31, 1999, which will
be charged to operations over the next four to seven years.
AMORTIZATION OF GOODWILL. We incurred a charge of $385,000 for the year
ended December 31, 1999 related to the amortization of goodwill, as a result of
the company's acquisition of three of its European distributors in The Czech
Republic, Norway and France, along with two domestic companies; ObjectEra, Inc.
and GemLogic, Inc. There were no such charges for the year ended December 31,
1998. Goodwill of approximately $20.7 million in the aggregate will continue to
be charged to operations ratably over the next five years.
-21-
<PAGE>
IN-PROCESS RESEARCH AND DEVELOPMENT CHARGE. We incurred a charge of $2.0
million for the year ended December 31, 1999 related to an in-process research
and development charge as a result of our acquisition of GemLogic, Inc. There
were no such charges for the year ended December 31, 1998.
OTHER INCOME, NET
Other income, net increased 159% to $1.2 million for the year ended
December 31, 1999 from $475,000 for the year ended December 31, 1998. The
increase is attributable to an increase in interest income due to higher cash
balances in the comparable years ended December 31, 1999 versus December 31,
1998.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO 1997
REVENUE
Total revenue increased by approximately $6.6 million from $249,000 in 1997
to $6.8 million in 1998 due to the release of our initial products in November
1997 and the ensuing increase in our customer base. Revenue from international
sales increased by approximately $1.7 million from $68,000, or 27% of total
revenue, in 1997 to $1.8 million, or 27% of total revenue, in 1998 due to the
same factors.
SOFTWARE LICENSE. Software license revenue increased by approximately $5.7
million from $249,000 in 1997 to $6.0 million in 1998. We first began shipping
our products in November 1997. The increase in software license revenue was due
primarily to an increase in the number of customers resulting from a full year
of selling in 1998 and the release of Version 2.0 of our products in October
1998.
SERVICES. We had no services revenue in 1997 and services revenue of
$825,000 in 1998. Approximately 71% of our services revenue in 1998 resulted
from education and support services delivered to an increasing customer base and
the remainder resulted primarily from the sale of professional consulting
services.
COST OF REVENUE
SOFTWARE LICENSE. Cost of software license revenue increased by
approximately $677,000 from $90,000 in 1997 to $767,000 in 1998. The increase is
attributable to increases in software license revenue and the royalties we pay
on third-party software incorporated into Version 2.0 of our products which
began shipping in October 1998.
SERVICES. Cost of services revenue increased by approximately $1.1 million
from $282,000 in 1997 to $1.4 million in 1998. Of this increase, approximately
68% was due to an increase in our support organization and the balance was
primarily due to the creation of our professional consulting services
organization in 1998.
OPERATING EXPENSES
SALES AND MARKETING. Sales and marketing expenses increased by approximately
$6.9 million from $3.9 million in 1997 to $10.8 million in 1998. The increase
was due to increases in sales and marketing personnel and marketing program
expenditures. During 1998, we expanded international sales and marketing
operations in Germany, Belgium, The Netherlands, Hong Kong, Singapore and Taiwan
and we increased the number of personnel and offices in North America.
RESEARCH AND DEVELOPMENT. Research and development expenses increased by
approximately $2.4 million from $2.6 million in 1997 to $5.1 million in 1998.
The increase was primarily due to the hiring of more engineering personnel.
GENERAL AND ADMINISTRATIVE. General and administrative expenses increased by
approximately $180,000 from $2.0 million in 1997 to $2.1 million in 1998. The
increase was primarily due to the hiring of more personnel.
OTHER INCOME, NET
Other income, net increased by approximately $250,000 from $225,000 in 1997
to $475,000 in 1998. The increase was due primarily to an increase in interest
income earned from cash balances on hand in 1998 compared to 1997. Proceeds from
the private sale of equity securities in 1997 and 1998 caused cash and
short-term investment balances in 1998 to be higher than those in 1997.
-22-
<PAGE>
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 $919,000,
respectively. The net operating loss and research and development credit
carryforwards 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 carryforwards in our financial
statements to reflect the uncertainty of future taxable income required to
utilize 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 and our initial public offering resulting in the
aggregate, net proceeds of approximately $115.2 million. We have also funded our
operations through equipment financings. As of December 31, 1998, we had $4.5
million in cash, cash equivalents and marketable securities, and $5.1 million in
working capital. As of December 31, 1999, we had $47.0 million in cash, cash
equivalents and marketable securities, and $40.5 million in working capital. We
have two term loans and a line of credit for amounts borrowed to finance
equipment. These term loans and line of credit are from the same bank and bear
interest at the bank's prime rate, (8.50% at December 31, 1999) plus 0.5%. At
December 31, 1999, we had a total of approximately $1.0 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.
On October 31, 1999, the line of credit converted into a term loan with
principal repayments commencing on November 1, 1999 in 36 equal monthly
payments.
Net cash used in operating activities was $8.0 million in 1997, $13.0
million in 1998 and $17.2 million in 1999. Net cash flows from operating
activities in each period reflect increasing net losses and, to a lesser extent,
accounts receivable offset in part by increases in accounts payable, accrued
expenses and deferred revenue.
Net cash used in investing activities was $1.6 million in 1997, $4.3 million
in 1998 and $1.1 million in 1999. Investing activities in each period reflects
purchases of property and equipment, as well as purchases and sales of
short-term investments. Investing activities in 1999, also reflects the
acquisition of ObjectEra, Inc.
Net cash provided by financing activities was $23.4 million in 1997, $1.9
million in 1998 and $64.9 million in 1999. Cash provided by financing activities
includes proceeds from the issuance of preferred and common stock, offset by the
payments on long-term debt in each period, as well as proceeds from equipment
financings in 1997, 1998 and 1999.
Capital expenditures were $1.6 million in 1997, $1.0 million in 1998 and
$2.2 million in 1999. Our capital expenditures consisted of purchases of
operating resources to manage our operations, including computer hardware and
software, office furniture and equipment and leasehold improvements. Purchases
of computer equipment represent the largest component of our capital
expenditures. We expect this trend to continue as we move our headquarters in
the second quarter of 2000, increase the number of employees, increase the size
of our development and quality assurance testing facilities and improve and
expand our information systems. We expect that our capital expenditures will
continue to increase in the future. Since inception, we have generally funded
capital expenditures either through the use of working capital or with equipment
bank loans.
On August 20, 1999, we completed an initial public offering in which the
company sold 3,000,000 shares of its common stock for net proceeds to the
Company of $42,940,000. On August 26, 1999, the Company's underwriters exercised
their over-allotment option, which resulted in the sale of an additional 450,000
shares of the Company's stock which generated additional proceeds of $6,696,000,
net of issuance costs. Upon closing of the initial public offering, each
outstanding share of the Company's Redeemable Convertible Preferred Stock and
Convertible Preferred Stock was automatically converted into one share of common
stock of the Company resulting in the issuance of 8,659,208 shares of common
stock.
On November 9, 1999 we entered into a lease for our principal executive
offices. The term of the lease is from March 1, 2000 to February 28, 2006.
Annual lease payments are $800,000 for the first year, $1,200,000 for the second
year and $1,375,000 for each of the remaining years.
-23-
<PAGE>
On December 13, 1999 we acquired two companies, GemLogic and ObjectEra. The
total consideration for GemLogic and ObjectEra is $20.2 million paid in shares
of our commons stock and cash. Additional future consideration of up to $1.95
million in cash and up to $6.75 million in common stock will be paid in the
future depending on future events. Of the cash portion of the total
consideration, we paid $4.2 million on December 13, 1999 and subsequent to year
end, we made another cash payment of $3.9 million on February 1, 2000. Employees
of GemLogic were granted non-qualified stock options at exercise prices ranging
between approximately $40 and $60 per share. A compensation charge for the
issuance of these stock options, representing the difference between the
exercise price of options granted and the fair market value, of up to
approximately $5.6 million in the aggregate will be charged to operations based
upon vesting of these options over the next four to seven years.
On January 31, 2000, we completed a secondary public offering in which the
company sold 1,445,851 shares of its common stock for net proceeds to the
Company of $156,136,000. 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 stock which generated additional
proceeds of $35,739,000, net of issuance costs.
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 resources
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 in this offering, together with funds generated from operations
and existing cash and cash equivalents, 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.
We do not believe that inflation has had a material impact on our
operations.
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.
We have defined Year 2000 compliant as the ability to:
o Correctly handle date information needed for the December 31, 1999 to
January 1, 2000 date change;
o Function according to the product documentation provided for this date
change, without changes in operation, assuming correct configuration;
o Where appropriate, respond to two-digit date input in a way that resolves
the ambiguity as to century in a disclosed, defined and predetermined
manner;
o Store and provide output of date information in ways that are unambiguous
as to century if the date elements in interfaces and data storage specify
the century; and
o Recognize year 2000 as a leap year.
In prior periods, the Company discussed the nature and progress of its plans
to become Year 2000 ready. In late 1999, the Company completed its remediation
and testing of systems. As a result of those planning and implementation
efforts, the Company experienced no significant disruptions in mission critical
information technology and non-information technology systems and believes those
systems successfully responded to the Year 2000 date change. The Company
expensed approximately $15,000 during 1999 to remedy its systems. The Company is
not aware of any material problems resulting from Year 2000 issues, either with
its products, its internal systems, or the products and services of third
parties. The Company will continue to monitor its mission critical computer
applications and those of its suppliers and vendors throughout the year 2000 to
ensure that any latent Year 2000 matters that may arise are addressed promptly.
-24-
<PAGE>
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") as amended
by SFAS No. 137, 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. The Company is presently analyzing the impact, if any, that
the adoption of SFAS No. 133 will have on its 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 first fiscal quarter of the
fiscal year beginning after December 15, 1999. The Company is presently
analyzing the impact, if any, that the adherence to the SAB will have on its
financial condition or results of operations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
SilverStream does not currently use derivative financial instruments. We
generally place our marketable security investments in high credit quality
instruments, primarily U.S. 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 December 31,
1999, 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 the Company's investments is carried in "Other income,
net." The Company accounts 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. The Company's 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 stockholder's equity
(deficit).
-25-
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
<TABLE>
SILVERSTREAM SOFTWARE, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<S> <C>
Page
Report of Independent Auditors.................................................................... 27
Consolidated Balance Sheets....................................................................... 28
Consolidated Statements of Operations............................................................. 29
Consolidated Statements of Changes in Redeemable Convertible
Preferred Stock and Stockholders' Equity (Deficit).............................................. 30
Consolidated Statements of Cash Flows............................................................. 31
Notes to Consolidated Financial Statements........................................................ 32
</TABLE>
-26-
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
SilverStream Software, Inc.
We have audited the accompanying consolidated balance sheets of SilverStream
Software, Inc. (the Company) as of December 31, 1998 and 1999, and the related
consolidated statements of operations, redeemable convertible preferred stock
and stockholders' equity (deficit), and cash flows for each of the three years
in the period ended December 31, 1999. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of SilverStream
Software, Inc. at December 31, 1998 and 1999, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended December 31, 1999, in conformity with accounting principles generally
accepted in the United States.
/s/ ERNST & YOUNG LLP
Boston, Massachusetts
February 1, 2000,
-27-
<PAGE>
<TABLE>
<CAPTION>
SILVERSTREAM SOFTWARE, INC.
CONSOLIDATED BALANCE SHEETS
December 31,
--------------------------
1999 1998
------------ ------------
Assets
<S> <C> <C>
Current assets:
Cash and cash equivalents............................................... $46,798,806 $ 1,198,584
Marketable securities................................................... 246,690 3,330,603
Accounts receivable; net of allowances of $763,245 and $475,993 at
December 31, 1999 and 1998, respectively.............................. 6,938,308 3,339,667
Note receivable......................................................... 2,000,000 -
Prepaid expenses........................................................ 1,130,809 247,413
Other current assets.................................................... 3,263 100,930
------------ ------------
Total current assets............................................. 57,117,876 8,217,197
Furniture, equipment and leasehold improvements, net...................... 2,835,698 1,796,346
Intangibles, net.......................................................... 20,708,961 -
------------ ------------
Total assets..................................................... $ 80,662,535 $ 10,013,543
============ ============
Liabilities and stockholders' equity (deficit)
Current liabilities:
Accounts payable........................................................ $ 7,740,194 $ 1,176,190
Accrued expenses........................................................ 3,299,570 422,749
Deferred revenue........................................................ 5,078,728 1,063,658
Current portion of long-term debt....................................... 450,773 435,820
------------ ------------
Total current liabilities........................................ 16,569,265 3,098,417
Long-term debt, less current portion...................................... 508,526 324,787
Redeemable convertible preferred stock:
Series A redeemable convertible preferred stock, $.001 par value -
authorized, issued and outstanding none at December 31, 1999 and
3,683,050 at December 31, 1998...................................... - 3,658,050
Series B redeemable convertible preferred stock, $.001 par value -
authorized 1,600,000 shares; issued and outstanding none at
December 31, 1999 and 1,500,938 at December 31, 1998................ - 7,980,000
Stockholders' equity (deficit):
Series C convertible preferred stock, $.001 par value - authorized
2,000,000 shares; issued and outstanding none at December 31, 1999
and 1,922,588 at December 31, 1998.................................. - 16,856,323
Common stock, $.001 par value - authorized 100,000,000 shares;
issued and outstanding 17,689,870 at December 31, 1999 and 5,206,779
at December 31, 1998 ............................................... 17,689 5,207
Additional paid-in capital........................................... 115,185,253 365,985
Deferred compensation................................................ (7,213,359) -
Accumulated deficit.................................................. (44,161,019) (22,171,726)
Other comprehensive loss............................................. (140,320) -
Notes receivable from stockholders................................... (103,500) (103,500)
------------ ------------
Total stockholders' equity (deficit)............................. 63,584,744 (5,047,711)
------------ ------------
Total liabilities and stockholders' equity (deficit)............. $ 80,662,535 $ 10,013,543
============ ============
</TABLE>
See accompanying notes
-28-
<PAGE>
<TABLE>
<CAPTION>
SILVERSTREAM SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended
December 31,
-----------------------------------------
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Revenue:
Software license.................................... $ 13,825,676 $ 5,982,534 $ 248,524
Services............................................ 9,238,731 825,365 -
------------ ----------- -----------
Total revenue............................... 23,064,407 6,807,899 248,524
Cost of revenue:
Software license.................................... 1,412,175 767,225 89,997
Services............................................ 10,252,589 1,413,962 281,796
------------ ----------- -----------
Total cost of revenue....................... 11,664,764 2,181,187 371,793
------------ ----------- -----------
Gross profit.......................................... 11,399,643 4,626,712 (123,269)
Operating expenses:
Sales and marketing................................. 20,419,430 10,776,396 3,853,766
Research and development............................ 7,090,691 5,069,465 2,622,200
General and administrative.......................... 4,300,713 2,141,187 1,961,205
Compensation charge for issuance of stock options... 438,594 - -
Amortization of goodwill............................ 384,729 - -
In-process research and development charge.......... 1,986,659 - -
------------ ----------- -----------
Total operating expenses.................... 34,620,816 17,987,048 8,437,171
------------ ----------- -----------
Loss from operations.................................. (23,221,173) (13,360,336) (8,560,440)
Interest and other income............................. 1,421,743 559,495 274,331
Interest expense...................................... (189,863) (84,206) (48,986)
------------ ----------- -----------
Net loss.............................................. $(21,989,293) $(12,885,047) $(8,335,095)
Beneficial conversion feature in Series D preferred
stock................................................ (263,158) - -
------------ ----------- -----------
Net loss applicable to common stockholders............ $(22,252,451) $(12,885,047) $(8,335,095)
============ =========== ===========
Basic and diluted net loss per share applicable to
common stockholders................................... $ (2.64) $ (4.89) $ (10.61)
============ =========== ===========
Weighted-average common shares used in computing basic
and diluted net loss per share applicable to common
stockholders.......................................... 8,419,116 2,632,496 785,548
</TABLE>
See accompanying notes
-29-
<PAGE>
SILVERSTREAM SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN
REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS EQUITY (DEFICIT)
<TABLE>
<CAPTION>
Redeemable
Convertible Convertible
Preferred Stock Preferred Stock Common Stock
---------------------- ----------------------- ----------------------
Shares Amount Shares Amount Shares Amount
--------- ---------- ---------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996.......................... 3,683,050 $3,658,050 4,639,367 $ 4,639
Issuance of common stock in April, August, November
and December 1997.................................... 577,914 578
Issuance of Series B preferred stock in June and
September 1997 (net of issuance costs of $20,000).... 1,500,938 7,980,000
Note issued for purchase of common stock in August
1997.................................................
Repurchase and retirement of common stock in February
and October 1997..................................... (130,890) (131)
Issuance of Series C preferred stock in November and
December 1997 (net of issuance costs of $20,000)..... 1,728,283 $15,154,325
Net loss..............................................
--------- ---------- ---------- ----------- ---------- --------
Balance at December 31, 1997.......................... 5,183,988 11,638,050 1,728,283 15,154,325 5,086,391 5,086
Issuance of common stock in January and December 1998. 64,863 65
Issuance of Series C preferred stock in March 1998
(net of issuance costs of $4,000).................... 194,305 1,701,998
Exercise of stock options in June through December
1998................................................. 55,525 56
Net loss..............................................
--------- ---------- ---------- ----------- ---------- --------
Balance at December 31, 1998.......................... 5,183,988 11,638,050 1,922,588 16,856,323 5,206,779 5,207
Issuance of Series D preferred stock in March, April
and May 1999 (net of issuance costs of $22,000)...... 1,552,632 14,727,997
Repurchase and retirement of common stock in March (10,754) (11)
1999.................................................
Exercise of stock options............................. 130,181 129
Issuance of Common Stock in June, July, August and
December 1999........................................ 3,704,456 3,705
Conversion of redeemable convertible preferred stock
in August 1999....................................... (5,183,988) (11,638,050) (3,475,220) (31,584,320) 8,659,208 8,659
Deferred Compensation on grant of stock options.......
Amortization of deferred compensation.................
Net loss..............................................
Currency translation adjustment.......................
Comprehensive loss....................................
--------- ---------- ---------- ---------- ---------- --------
Balance at December 31, 1999.......................... - - - - 17,689,870 $ 17,689
========= ========== ========== ========== ========== ========
</TABLE>
<TABLE>
<CAPTION>
Other Notes
Additional Comprehensive Receivable
Paid-in Deferred Accumulated Income from Sale
Capital Compensation Deficit (Loss) of Stock
------------ -------------- ------------ -------------- -----------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1996.......................... $ (951,584)
Issuance of common stock in April, August, November
and December 1997....................................$ 174,796
Issuance of Series B preferred stock in June and
September 1997 (net of issuance costs of $20,000).....
Note issued for purchase of common stock in August
1997................................................. $ (103,500)
Repurchase and retirement of common stock in February
and October 1997.....................................
Issuance of Series C preferred stock in November and
December 1997 (net of issuance costs of $20,000).....
Net loss.............................................. (8,335,095)
------------ ------------ ------------ -------------- ------------
Balance at December 31, 1997.......................... 174,796 (9,286,679) (103,500)
Issuance of common stock in January and December 1998. 181,887
Issuance of Series C preferred stock in March 1998
(net of issuance costs of $4,000)....................
Exercise of stock options in June through December
1998................................................. 9,302
Net loss.............................................. (12,885,047)
------------ ------------ ------------ -------------- ------------
Balance at December 31, 1998.......................... 365,985 (22,171,726) (103,500)
Issuance of Series D preferred stock in March, April
and May 1999 (net of issuance costs of $22,000)......
Repurchase and retirement of common stock in March
1999.................................................
Exercise of stock options............................. 269,852
Issuance of Common Stock in June, July, August and
December 1999........................................ 63,683,752
Conversion of redeemable convertible preferred stock
in August 1999...................................... 43,213,711
Deferred Compensation on grant of stock options....... 7,651,953 $ (7,651,953)
Amortization of deferred compensation................. 438,594
Net loss.............................................. (21,989,293)
Currency translation adjustment....................... $ (140,320)
--------------
Comprehensive loss....................................
------------ ------------ ----------- -------------- ------------
Balance at December 31, 1999..........................$115,185,253 $ (7,213,359) $(44,161,019) $ (140,320) $ (103,500)
============ ============ =========== ============== ============
</TABLE>
<TABLE>
<CAPTION>
Total
Stockholders'
Equity
(Deficit)
------------
<S> <C>
Balance at December 31, 1996.......................... $ (946,945)
Issuance of common stock in April, August, November
and December 1997.................................... 175,374
Issuance of Series B preferred stock in June and
September 1997 (net of issuance costs of $20,000)..... -
Note issued for purchase of common stock in August
1997................................................. (103,500)
Repurchase and retirement of common stock in February
and October 1997..................................... (131)
Issuance of Series C preferred stock in November and
December 1997 (net of issuance costs of $20,000)..... 15,154,325
Net loss.............................................. (8,335,095)
------------
Balance at December 31, 1997.......................... 5,944,028
Issuance of common stock in January and December 1998. 181,952
Issuance of Series C preferred stock in March 1998
(net of issuance costs of $4,000).................... 1,701,998
Exercise of stock options in June through December
1998................................................. 9,358
Net loss.............................................. (12,885,047)
------------
Balance at December 31, 1998.......................... (5,047,711)
Issuance of Series D preferred stock in March, April
and May 1999 (net of issuance costs of $22,000)...... 14,727,997
Repurchase and retirement of common stock in March
1999................................................. (11)
Exercise of stock options............................. 269,981
Issuance of Common Stock in June, July, August and
December 1999........................................ 63,687,457
Conversion of redeemable convertible preferred stock
in August 1999....................................... -
Deferred Compensation on grant of stock options....... -
Amortization of deferred compensation................. 438,594
Net loss.............................................. (21,989,293)
Currency translation adjustment....................... (140,320)
------------
Comprehensive loss.................................... (22,129,613)
------------
Balance at December 31, 1999.......................... $ 63,584,744
============
</TABLE>
-30-
<PAGE>
SILVERSTREAM SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Year Ended
December 31,
--------------------------------------------
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Operating activities
Net loss......................................................... $(21,989,293) $(12,885,047) $ (8,335,095)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization.................................. 1,673,163 724,045 345,494
Provision for allowances on accounts receivable................ 287,252 431,333 44,660
In-process research and development charge..................... 1,986,659 - -
Operating expenses paid with issuance of preferred stock....... - - 79,998
Operating expenses paid with issuance of common stock.......... - 181,952 20,700
Compensation charge for issuance of stock options.............. 438,594 - -
Changes in operating assets and liabilities:
Accounts receivable.......................................... (3,328,390) (3,577,745) (237,915)
Note receivable.............................................. (2,000,000) - -
Prepaid expenses............................................. (722,227) 69,837 (303,579)
Other current assets......................................... 167,673 166,824 -
Accounts payable and accrued expenses........................ 3,556,812 870,286 385,486
Deferred revenue............................................. 2,731,856 1,026,571 37,087
----------- ------------ ------------
Net cash used in operating activities............................ (17,197,901) (12,991,944) (7,963,164)
----------- ------------ ------------
Investing activities
Purchase of ObjectEra, Inc., net of cash acquired................ (3,089,598) - -
Purchase of furniture and equipment.............................. (2,208,906) (992,236) (1,564,812)
Cash acquired through acquisitions of subsidiaries............... 255,310 - -
Sale (purchase) of available-for-sale securities................. 3,083,913 (3,330,603) -
----------- ------------ ------------
Net cash used in investing
activities..................................................... (1,959,281) (4,322,839) (1,564,812)
----------- ------------ ------------
Financing activities
Net proceeds from issuance of preferred stock.................... 14,727,997 1,701,998 23,054,327
Net proceeds from issuance of common stock....................... 50,006,058 9,358 51,043
Repurchase and retirement of common stock........................ (11) - -
Proceeds from line of credit..................................... 750,000 602,317 513,110
Payments on long-term debt....................................... (551,309) (449,647) (175,087)
----------- ------------ ------------
Net cash provided by financing activities........................ 64,932,735 1,864,026 23,443,393
----------- ------------ ------------
Effects of exchange rate on cash and cash equivalents............ (175,331) - -
Net increase (decrease) in cash and cash equivalents............. 45,600,222 (15,450,757) 13,915,417
Cash and cash equivalents at beginning of period................. 1,198,584 16,649,341 2,733,924
--------- ------------ ------------
Cash and cash equivalents at end of period....................... $46,798,806 $ 1,198,584 $ 16,649,341
=========== ============ ============
Supplemental Information Cash paid during the period for:
Income taxes................................................. $ 21,110 $ 14,283 $ 456
=========== ============ ============
Interest..................................................... $ 78,891 $ 84,206 $ 48,986
=========== ============ ============
</TABLE>
See accompanying notes.
-31-
<PAGE>
SILVERSTREAM SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF BUSINESS
SilverStream Software, Inc. (the Company) was incorporated on May 8, 1996.
The Company 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 their software worldwide and has sales offices in the United
Kingdom, The Netherlands, Belgium, Germany, Norway, the Czech Republic, France,
Hong Kong, Singapore and Taiwan.
The market for application server software has only recently begun to
develop, is rapidly evolving and will likely have an increasing number of
competitors. The market is marked by rapid technological change, frequent new
product introductions and enhancements and evolving industry standards. The
Company's future financial performance will depend on the market's acceptance of
its application server products and the Company's ability to successfully
introduce enhancements to their application server products and to expand its
operations to meet the evolving customer needs within the industry.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its international subsidiaries, all of which are wholly owned, located in
Europe and Asia. All intercompany accounts and transactions have been eliminated
in consolidation.
The accompanying consolidated financial statements reflect the application
of certain significant accounting policies as described in this note and
elsewhere in the accompanying consolidated financial statements and notes.
USE OF ESTIMATES
The preparation of the consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the consolidated financial
statements and accompanying notes. Actual results could differ from those
estimates.
CASH EQUIVALENTS AND MARKETABLE SECURITIES
The Company accounts 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. The Company's marketable securities are
classified as available-for-sale and are recorded at fair value with any
unrealized gain or loss recorded as a separate component of comprehensive loss.
As of December 31, 1999, the Company has a $300,000 restriction on its cash
balance, as a result of a secured Letter of Credit. This Letter of Credit was
issued by the Company's primary bank to the landlord of the Company's new
corporate headquarters, as part of the lease negotiations. The lease commences
on March 1, 2000 and expires on February 28, 2006 at which time the Letter of
Credit will expire, as well. As of December 31, 1999 the Company's marketable
securities consisted of investment-grade corporate bonds.
As of December 31, 1999, all of the Company's marketable securities had
contractual maturities within one year.
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist of cash and cash equivalents, marketable
securities, accounts receivable and other receivables. Concentration of credit
risk with respect to cash equivalents and marketable securities is limited as
these assets are primarily investment-grade corporate bonds with high-credit,
quality financial institutions.
-32-
<PAGE>
Concentration of credit risk with respect to accounts receivable is limited
due to the large number of companies comprising the Company's customer base.
On-going credit evaluations of customers' financial condition are performed and
collateral is generally not required. The Company maintains reserves for
potential credit losses and such losses, in the aggregate, have not exceeded
management's expectations.
FURNITURE AND EQUIPMENT
Furniture and equipment is stated at cost. Depreciation is computed by use
of the straight-line method over the following estimated useful lives:
Leasehold improvements........................ Lesser of remaining
lease-term or useful life
Furniture and fixtures........................ 5 years
Computer equipment and software............... 3 years
Telephone equipment........................... 3 years
ADVERTISING COSTS
The Company expenses advertising costs as incurred. Advertising costs were
$858,000 and $805,000 for the years ended December 31, 1998 and 1999,
respectively.
CAPITALIZED SOFTWARE
Capitalization of software development costs under SFAS No. 86 begins upon
the establishment of technological feasibility. Technological feasibility is
established upon the completion of a working model. The establishment of
technological feasibility and the ongoing assessment of recoverability of
capitalized software development costs require considerable judgment by
management with respect to certain external factors, including, but not limited
to, technological feasibility, anticipated future gross revenues, estimated
economic life, and changes in software and hardware technologies. Costs incurred
by the Company between completion of a working model and the point at which the
product is ready for general release have been insignificant. Therefore, through
December 31, 1998 and 1999, all research and development costs have been
expensed as incurred.
REVENUE RECOGNITION
Revenue recognition from software license fees and from sales of software
products is recognized when persuasive evidence of an agreement exists, delivery
of the product has occurred, no significant Company obligations with regard to
implementation remain, the fee is fixed or determinable and collectibility is
probable. Update assurance agreements represent the right to receive unspecified
upgrades on an if-and-when available basis. Fees from update assurance
agreements, which are separately negotiated and priced, are deferred and
recognized on a straight-line basis over the life of the related agreement,
which is typically one year.
Services revenue is primarily comprised of revenue from consulting,
technical support and education services. Services revenue from consulting and
education is billed on a time and materials basis and is recognized as the
services are performed. Technical support revenue is deferred and recognized on
a straight-line basis as service revenue over the life of the related agreement,
which is typically one year.
Customer advances and billed amounts due from customers in excess of revenue
recognized are recorded as deferred revenue and recognized as the services are
delivered.
Revenue derived from arrangements with resellers of our products is not
recognized until the software is shipped to the customer.
Sales to independent software vendors (ISVs) are deferred and recognized on
a straight line basis as product revenue over the life of the agreement, which
is typically one year, since the only undelivered element under these agreements
is service for which no pattern of performance is discernible. ISV-related
partner fees are deferred and recognized on a straight line basis as an offset
to the related expenses over the life of the agreement, which is typically one
year, since the Company considers such fees to be reimbursement for costs
incurred, primarily marketing support, in connection with its ISV partner
program.
Customer returns are estimated and accrued for as a percentage of net
product revenues based upon historical trends.
The Company adopted Statement of Position (SOP) 97-2, "Software Revenue
Recognition" and SOP 98-4, "Deferral of the Effective Date of a Provision of SOP
97-2, Software Revenue Recognition," as of January 1, 1998. SOP 97-2 and SOP
98-4 provide guidance for recognizing revenue on software transactions and
supersede SOP 91-1.
-33-
<PAGE>
The Company will adopt SOP 98-9, "Modification of SOP 97-2, Software Revenue
Recognition, with Respect to Certain Transactions." SOP 98-9 amends SOP 98-4 to
extend the period of deferral of the application of certain passages of SOP 97-2
provided by SOP 98-4 through fiscal years beginning on or before March 15, 1999.
All other provisions of SOP 97-2 are effective for transactions entered into in
fiscal years beginning after March 15, 1999.
The adoption of SOP 97-2 and SOP 98-4 did not have a material impact on the
Company's financial results. In addition, the Company believes that the adoption
of SOP 98-9 will not have a material impact on the Company's financial results.
LICENSING AGREEMENTS
The Company has entered into various licensing agreements with third-party
software and technology companies, primarily for encryption technology,
requiring royalty payments which are based on either a percentage of product
revenue or per unit sales. Royalty expenses, which are charged to cost of
revenue under these license agreements, totaled $168,000 and $310,000 for the
years ended December 31, 1998 and 1999, respectively. Prepaid royalties related
to these licensing agreements were $113,000 and $399,000 for the years ended
December 31, 1998 and 1999, respectively.
EARNINGS PER SHARE
The Company computes earnings per share in accordance with 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 type 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.
INCOME TAXES
The Company provides for income taxes under SFAS No. 109, "Accounting for
Income Taxes." Under SFAS 109, the liability method is used in accounting for
income taxes. Under this method, deferred tax assets and liabilities are
determined based on differences between the financial reporting and tax basis of
assets and liabilities and are measured using the enacted tax rates and laws
that will be in effect when the differences are expected to reverse.
FINANCIAL INSTRUMENTS
The fair value of the Company's financial instruments, which include cash
and cash equivalents, marketable securities, accounts receivable, other
receivables, accounts payable and long term debt, are based on assumptions
concerning the amount and timing of estimated future cash flows and assumed
discount rates reflecting varying degrees of perceived risk. The carrying value
of these financial instruments approximated their fair value at December 31,
1998 and 1999 due to the short term nature of these instruments and the variable
interest rate on the long term debt.
FOREIGN CURRENCY TRANSLATIONS
Financial statements of foreign subsidiaries are translated into U.S.
dollars at the exchange rate as of the balance sheet dates, with the exception
of revenues, costs and expenses. All revenues, costs and expenses are translated
at a weighted-average of exchange rates in effect during the year. Net exchange
gains or losses resulting from the translation of the foreign financial
statements are recorded as a separate component of comprehensive income.
Transaction adjustments for all foreign subsidiaries are included in income.
-34-
<PAGE>
ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS
Long-lived assets used in operations, such as the excess cost over net
assets of businesses acquired, and property, plan and equipment, are included in
impairment evaluations when events or circumstances exist that indicate the
carrying amount of those assets may not be recoverable. If the impairment
evaluation indicates the affected asset is not recoverable, the asset's carrying
value would be reduced to fair value. No event has occurred that would impair
the value of long-lived assets recorded in the accompanying consolidated
financial statements.
STOCK COMPENSATION ARRANGEMENTS
The Company adopted the disclosure-only provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation." As permitted by SFAS No. 123, the
Company has continued to account for employee stock options in accordance with
Accounting Principles Board Opinion (APB) No. 25, "Accounting for Stock Issued
to Employees," and has included the pro forma disclosures required by SFAS No.
123 for all periods presented.
NON-MONETARY TRANSACTIONS
The Company has entered into certain non-monetary transactions involving the
issuance of preferred or common stock in consideration for professional and
marketing services provided to the Company by third parties. The Company has
accounted for these non-monetary transactions in accordance with SFAS No. 123.
All transactions are accounted for based on the fair value of the goods or
services received or on the fair value of the equity instruments issued,
whichever is more reliably measurable. All expenses related to non-monetary
transactions were recognized in the period incurred.
COMPREHENSIVE INCOME
As of January 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income," which establishes new rules for the reporting and display
of comprehensive income and its components. SFAS 130 requires unrealized gains
and losses on the Company's available-for-sale securities and the foreign
currency translation adjustments, which prior to adoption were reported
separately in shareholders' equity, to be included in other comprehensive
income. Prior to the year ended December 31, 1999, amounts pertaining to
comprehensive income were not material and have therefore not been separately
stated.
SEGMENT REPORTING
Effective January 1, 1998, the Company adopted the SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information." SFAS 131
superseded SFAS No. 14, "Financial Reporting for Segment of a Business
Enterprise." SFAS 131 establishes standards for the way that public business
enterprises report information about operating segments in interim financial
reports. The Company views its operations and manages its business as one
segment: the development and delivery of application server solutions, that
include software and related products and services. Factors used to identify the
Company's single operating segment include the organizational structure of the
Company and the financial information available for evaluation by the chief
operating decision maker in making decisions about how to allocate resources and
assess performance. The adoption of SFAS 131 did not affect results of operation
or financial position, but did affect the disclosure of segment information. See
Note 12.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In March 1998, the Accounting Standard Executive Committee ("AcSEC") issued
SOP 98-1, "Accounting of the Costs of Computer Software Developed or Obtained
for Internal Use." The adoption of SOP 98-1, which is effective for SilverStream
beginning January 1, 1999, did not have a material effect on SilverStream's
financial condition or results of operations.
In April 1998, the AcSEC issued SOP 98-5, "Reporting on the Costs of
Start-Up Activities." SOP 98-5 is effective for SilverStream's calendar year
1999 financial statements and the adoption did not have a material effect on
SilverStream financial condition or results of operations.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivatives Instruments and Hedging Activities," as amended by
SFAS No. 137. The Company is currently analyzing the effect, if any, the
standard will have on its financial condition or results of operations. SFAS No.
133 is effective for fiscal years beginning after June 15, 2000.
-35-
<PAGE>
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulleting (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 first fiscal quarter
of the fiscal year beginning after December 15, 1999. The Company is presently
analyzing the impact, if any, that the adherence to the SAB will have on its
financial condition or results of operations.
3. NOTE RECEIVABLE
On December 23, 1999, the Company entered into a Convertible Promissory Note
Receivable with one of its corporate collaborators for $2.0 million. The
principal sum and all accrued interest (9.00% per annum), of this Note is
payable in full on the earlier of (i) April 30, 2000 or (ii) the date of a
closing of a subsequent financing for the partner. SilverStream, at its option,
may elect to convert this note to equity pursuant to a subsequent financing by
the partner. The number of shares to be issued upon conversion shall be
determined by dividing the principal balance of the note and all accrued and
unpaid interest by the purchase price per share paid by the other investors in
the partner's subsequent financing.
4. FURNITURE, EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Furniture, equipment and leasehold improvements consists of the following:
<TABLE>
<CAPTION>
December 31,
-----------------------
1999 1998
---------- -----------
<S> <C> <C>
Furniture and fixtures................. $ 763,291 $ 502,821
Computer equipment and software........ 4,037,403 2,051,809
Telephone equipment.................... 171,613 162,205
Leasehold improvements................. 251,114 178,800
---------- -----------
5,223,421 2,895,635
Less accumulated depreciation.......... (2,387,723) (1,099,289)
---------- -----------
$2,835,698 $ 1,796,346
</TABLE>
5. ACCRUED EXPENSES
Accrued expenses include the following:
<TABLE>
<CAPTION>
December 31,
-----------------------
1999 1998
---------- ---------
<S> <C> <C>
Fringe benefits.................................... $1,372,637 $ 124,337
Occupancy.......................................... 139,089 130,507
Professional fees.................................. 130,431 66,387
Bonus.............................................. 175,000 19,996
Sales and VAT taxes payable........................ 410,724 -
Deferred tax liability............................. 853,000 -
Other.............................................. 218,689 81,522
---------- ---------
$3,299,570 $ 422,749
========== =========
</TABLE>
6. DEBT
LONG-TERM DEBT
Under the terms of a credit facility, negotiated in 1996 and expiring March
1, 2000, borrowings of approximately $501,598 and $295,286 converted fully into
separate term loans on March 31, 1997 and September 30, 1997, respectively.
Principal repayments began April 1, 1997 and October 1, 1997 in 30 equal monthly
payments. Interest on the loans accrues at prime rate plus 0.5% (9.00% at
December 31, 1999) and is payable monthly in arrears. The outstanding balance
under the facility at December 31, 1998 and 1999 was $308,870 and $0,
respectively.
Under terms of a credit facility, negotiated in 1997 and expiring March 1,
2001, borrowings of approximately $602,000 converted fully into a term loan on
March 31, 1998. Principal repayments began April 1, 1998 in 36 equal monthly
payments. Interest on the loan accrues at prime rate plus 0.5% (9.00% at
December 31, 1999) and is payable monthly in arrears. The outstanding balance
under the facility at December 31, 1998 and 1999 was $451,737 and $250,965,
respectively.
-36-
<PAGE>
Under terms of a credit facility, negotiated in 1999 and expiring October 1,
2002, borrowings of approximately $750,000 converted fully into a term loan on
October 31, 1999. Principal repayments began November 1, 1999 in 36 equal
monthly payments. Interest on the loan accrues at prime rate plus 0.5% (9.00% at
December 31, 1999) and is payable monthly in arrears. The outstanding balance
under the facility at December 31, 1998 and 1999 was $0 and $708,334,
respectively.
Borrowings under the terms of all credit facilities are secured by
substantially all the Company's tangible assets.
The aggregate maturities of long term debt are as follows:
2000......................................... 450,773
2001......................................... 500,961
2002......................................... 7,565
--------
$959,299
7. Leases
The Company leases office space and certain equipment under non cancelable
operating leases expiring through February 2006. Some of these leases contain
renewal options. Future minimum payments under noncancelable operating leases
are as follows:
2000...................................... 1,725,041
2001...................................... 1,273,410
2002...................................... 1,383,909
2003...................................... 1,377,415
2004...................................... 1,375,000
2005 and thereafter....................... 2,750,000
-------------
Total minimum lease payments.............. $ 9,884,775
=============
Rent expense charged to operations for the years ended December 31, 1997,
1998 and 1999 was $336,000, $602,000 and $1,506,000, respectively.
8. EMPLOYEE BENEFITS
RESTRICTED STOCK ISSUED TO FOUNDER
In May and July 1996, the Company sold 1,123,000 shares of common stock to
the founder pursuant to a founder's stock restriction agreement at the fair
value of the stock at the date of the issuance. The shares were issued in the
name of the founder, who has all rights of a stockholder, subject to certain
repurchase and transfer provisions. If the founder ceases to be employed by the
Company, the Company shall have the option to repurchase from the founder a
portion of the shares based upon a predetermined formula. In addition, the
founder shall not sell any of the shares that are subject to repurchase by the
Company.
An aggregate of 168,450 shares of common stock are subject to repurchase at
December 31, 1999.
1996 FOUNDERS STOCK INCENTIVE PLAN
In May 1996, the Company adopted the 1996 Founders Stock Incentive Plan (the
1996 Plan) covering all eligible employees, officers, directors consultants and
advisors. At inception of the 1996 Plan, the Company authorized the issuance of
up to 3,877,000 shares of common stock. The Company issued and sold an aggregate
of 3,775,031 shares of common stock under the 1996 Plan pursuant to founders
stock restriction agreements at the fair value of the stock at the date of the
issuance. The shares were issued in the name of the employee, who has all rights
of a stockholder, subject to certain repurchase and transfer provisions. If the
employee ceases to be employed by the Company, the Company shall have the option
to repurchase from the employee a portion of the shares based upon a
predetermined formula. In addition, the employee shall not sell any of the
shares that are subject to repurchase by the Company. An aggregate of 145,394
shares of common stock have been repurchased and retired by the Company under
the 1996 Plan.
An aggregate of 681,199 shares of common stock are subject to repurchase at
December 31, 1999.
1997 STOCK INCENTIVE PLAN
In February 1997, the Company adopted the 1997 Stock Incentive Plan (the
1997 Plan) covering all eligible employees, officers, directors, consultants and
advisors. As of December 31, 1998 the Company had reserved 1,305,719 shares of
common stock for issuance under the 1997 Plan. As of June 30, 1999, the Company
authorized the issuance of up to 3,500,000 shares of common stock under the 1997
Plan. Under the 1997 Plan, the Company may grant stock options to purchase
shares of the Company's common stock, restricted common stock awards and other
stock-based awards having terms and conditions at the discretion of the
Company's Board of Directors. The prices, terms and vesting periods of stock
awards under the 1997 Plan are determined by the Board of Directors at the date
of the grant. The 1997 Plan also contains provisions which stipulate that upon
an acquisition event the Board of Directors is authorized to determine that any
stock option, restricted stock or other stock-based award granted under the 1997
Plan may become immediately exercisable in full or in part.
-37-
<PAGE>
The Company issued and sold an aggregate of 300,000 shares of common stock
under the 1997 Plan pursuant to founders stock restriction agreements at the
fair value of the stock at the date of issuance. The shares are issued in the
name of the employee, who has all rights of a stockholder, subject to certain
repurchase and transfer provisions. If the employee ceases to be employed by the
Company, the Company shall have the option to repurchase from the employee a
portion of shares based upon a predetermined formula. In addition, the employee
shall not sell any of the shares that are subject to repurchase by the Company.
An aggregate of 89,375 shares of common stock are subject to repurchase at
December 31, 1999.
In March 1999, options to purchase an aggregate of 201,450 shares of common
stock which vest over a five year period were granted to employees with an
exercise price of $4.00 per share. In April 1999, options to purchase an
aggregate of 11,600 and 215,450 shares of common stock which vest over a five
year period were granted to employees with an exercise price of $6.00 and $8.00
per share, respectively. Additionally, on April 30, 1999, an option to purchase
an aggregate of 25,000 shares of common stock which vested immediately was
granted to a director with an exercise price of $8.00 per share. In May 1999,
options to purchase an aggregate of 115,250 shares of common stock which vest
over a five year period were granted to employees with an exercise price of
$8.00 per share. In June 1999, options to purchase an aggregate of 27,000 shares
of common stock which vest over a five-year period were granted to employees
with an exercise price of $10.00 per share. In December 1999, options to
purchase an aggregate of 99,500 shares of common stock which vest over a four to
seven year period were granted to employees at exercise prices ranging from $40
to $60 per share.
The Company has recorded deferred compensation of $7,651,953 relating to
these option grants, which is being charged ratably to operations over the
vesting period of the options.
The Company holds notes receivable totaling $103,500 from employees at
December 31, 1998, and 1999. These notes arose from transactions in September
1997 whereby the Company loaned the employees money to purchase an aggregate of
207,000 shares of the Company's common stock at the then fair market value. The
notes receivable are fully recourse to the employees and are due to be paid in
full, with accrued interest at the rate of 6.39% per annum, on August 26, 2002.
These notes receivable are shown as a reduction in stockholders' equity in the
accompanying balance sheets.
1999 EMPLOYEE STOCK PURCHASE PLAN
In accordance with the 1999 Employee Stock Purchase Plan, eligible
employees may authorize payroll deductions of up to 10% of their compensation
(not to exceed $12,500 in a six-month period) to purchase shares at the lower of
85% of the fair market value of the Company's Common Stock at the beginning or
end of the six-month option period. During 1999, no shares were issued to
employees. At December 31, 1999, a total of 300,000 shares of Common Stock were
reserved for issuance under the plan.
401(k) PLAN
The Company has a 401(k) plan (the Plan), whereby eligible employees may
contribute up to 15% of their compensation, subject to limitations established
by the Internal Revenue Code. The Company may also contribute a discretionary
matching contribution, to each such participant's deferred compensation equal to
a discretionary percentage determined by the Company. As of December 31, 1999,
the Company had not made any discretionary matching contributions in any of the
fiscal periods presented.
STOCK OPTION DISCLOSURES
The Company has adopted the disclosure provisions only of SFAS 123. The fair
values for these options were estimated at the date of grant using the minimum
value method with the following assumptions:
-38-
<PAGE>
<TABLE>
<CAPTION>
Years Ended
December 31,
-------------------------
1997 1998 1999
------- ------- ------
<S> <C> <C> <C>
Expected life (years)..................................... 4.97 5.35 8.94
Risk free interest rate................................... 5.66% 4.75% 6.34%
Dividend yield............................................ -- -- --
</TABLE>
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma information is as follows:
<TABLE>
<CAPTION>
Years Ended
December 31,
-----------------------------------------
1997 1998 1999
------------- ------------ ------------
<S> <C> <C> <C>
Pro forma net loss................... $ (8,351,473) $(12,996,310) $(26,713,375)
Pro forma net loss per share......... $ (10.63) $ (4.94) $ (3.17)
</TABLE>
Compensation expense under SFAS 123 for 1998 and 1999 is not representative
of future expense, as it includes one and two years of expense, respectively. In
future years, the effect of determining compensation cost using the fair value
method will include additional vesting and associated expense.
Option activity under the 1997 Plan is summarized below:
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------------------------------------
1997 1998 1999
-------------------- -------------------- --------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
--------- ------- -------- ------- --------- -------
<S> <C> <C> <C> <C> <C> <C>
Outstanding, beginning of
year..................... - - 607,000 $ .34 895,175 $ 1.15
Granted.................... 614,000 $ .34 381,950 2.21 1,095,300 23.63
Expired or canceled........ (7,000) .20 (38,250) .37 (63,325) 6.25
Exercised.................. - (55,525) .17 (130,181) 2.03
-------- ------- ---------
Outstanding, end of year... 607,000 .34 895,175 1.15 1,796,969 14.61
======== ======= =========
Exercisable at end of year. - 159,850 272,599
Available for future grants 398,719 55,019 1,217,325
Weighted-average fair value of
options granted during year $ .33 $ 2.16 $23.63
</TABLE>
The following table presents weighted-average price and life information
about significant option groups outstanding at December 31, 1999:
<TABLE>
<CAPTION>
Options Outstanding
--------------------------------------------
Weighted-
Average Weighted- Weighted-
Remaining Average Average
Range of Number Contractual Exercise Number Exercise
Exercise Prices Outstanding Life Price Exercisable Price
------------------ ------------- ------------- ----------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C> <C>
$ 0.00 - $ 5.00 955,194 7.7 Years $ 1.80 248,669 $ 1.28
$ 5.01 - $ 10.00 362,250 9.3 Years 8.07 - -
$ 10.01 - $ 50.00 284,375 9.4 Years 17.51 23,930 15.16
$ 50.01 - $ 90.00 107,050 9.9 Years 67.41 - -
$ 90.01 - $119.00 88,100 9.4 Years 106.86 - -
------------------ ------------- ------------- ----------- ------------ --------
$ 0.00 - $119.00 1,796,969 8.5 Years $ 14.61 272,599 $ 2.50
</TABLE>
9. PREFERRED STOCK
In July, August and November 1996, the Company sold 3,683,050 shares of
Series A redeemable convertible preferred stock, par value $.001, at $1.00 per
share. Proceeds to the Company were $3,575,000 (net of $25,000 of issuance
costs).
In June and September 1997, the Company sold 1,500,938 shares of Series B
redeemable convertible preferred stock, par value $.001, at $5.33 per share.
Proceeds to the Company were $7,900,002 (net of $20,000 of issuance costs).
-39-
<PAGE>
In November and December 1997, the Company sold 1,728,283 shares of Series C
convertible preferred stock, par value $.001, at $8.78 per share. Proceeds to
the Company were $15,154,325 (net of $20,000 of issuance costs).
In March 1998, the Company sold 194,305 shares of Series C convertible
preferred stock, par value $.001, at $8.78 per share. Proceeds to the Company
were $1,701,998 (net of $4,000 of issuance costs).
In March, April and May of 1999, the Company sold 1,552,632 shares of Series
D Convertible Preferred Stock, par value $.001, at $9.50 per share. Proceeds to
the Company were $14,727,997 (net of $22,000 of issuance costs).
On August 20, 1999, the Company completed an initial public offering in
which the Company sold 3,000,000 shares of its common stock for net proceeds to
the Company of $44,640,000. On August 26, 1999, the Company's underwriters
exercised their over-allotment option, which resulted in the sale of an
additional 450,000 shares of the Company's stock which generated additional
proceeds of $6,696,000, net of issuance costs. Upon closing of the initial
public offering, each outstanding share of the Company's Redeemable Convertible
Preferred Stock and Convertible Preferred Stock was automatically converted into
one share of common stock of the Company resulting in the issuance of 8,659,208
shares of common stock.
10. NON-MONETARY TRANSACTIONS
In August 1996, the Company issued 83,050 shares of its Series A redeemable
convertible preferred stock in consideration for $83,050 of fees for personnel
placement services. The transaction was accounted for by recognizing
professional fees expense of $83,050 and increasing the preferred stock balance
by the same amount.
In June 1997, the Company issued 15,009 shares of its Series B redeemable
convertible preferred stock in consideration for $79,998 of fees for marketing
services. The transaction was accounted for by recognizing marketing expense of
$79,998 and increasing the preferred stock balance by the same amount.
In September 1997, the Company issued 207,000 shares of common stock in
exchange for interest bearing notes of $103,500 and cash of $11,500.
In November 1997, the Company entered into an agreement to issue up to
48,000 shares of its common stock in consideration of software services and
co-marketing efforts. The Company has issued 48,000 shares under the agreement.
The transaction was accounted for by recognizing marketing expense of $43,200
and increasing the common stock balance by the same amount.
In September 1998, the Company issued 39,863 shares of its common stock in
consideration for $159,452 of fees for marketing services. The transactions were
accounted for by recognizing total marketing expense of $159,452 and increasing
the common stock balance by the same amount.
In June and July 1999, the Company acquired three international distributors
by issuing 140,000 shares of common stock, with a value of $2.0 million. The
transactions have been accounted for as purchases and, accordingly, their
results of operations are included in the consolidated financial statements from
the dates of acquisition. The purchase prices have been allocated to the assets
acquired and liabilities assumed based upon their respective fair values.
11. INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
and income tax purposes. A valuation allowance has been established to reflect
the uncertainty of future taxable income to utilize available tax loss
carryforwards and other deferred tax assets. Significant components of the
Company's deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
Years Ended
December 31,
--------------------------
1998 1999
------------ ------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforward........................ $ 8,900,000 $17,187,000
Research and development credit carryforward........... 350,000 901,000
Other.................................................. 146,000 340,000
Deferred tax liabilities:
Depreciation........................................... (247,000) (404,000)
Amortization........................................... - (256,000)
----------- -----------
9,149,000 17,768,000
Less valuation allowance for deferred tax assets....... (9,149,000) (17,768,000)
----------- -----------
Total.................................................... $ -- $ --
=========== ===========
</TABLE>
-40-
<PAGE>
As of December 31, 1999, the Company has net operating loss carryforwards
and research and development tax carryforwards of approximately $43.0 million
and $919,000, respectively, available to offset future Federal taxable income.
These carryforwards begin to expire in 2012 and may be subject to certain
limitations. The valuation allowance increased by $8.6 million during the twelve
months ended December 31, 1999, due primarily to the additional allowance for
the Net Operating Losses incurred.
The Company believes that, based upon a number of factors, the available
objective evidence creates sufficient uncertainty regarding the realization of
the deferred tax assets such that a full valuation allowance has been recorded.
The Company will continue to assess the realization of the deferred tax assets
based on actual and forecasted operating results.
12. SEGMENT AND GEOGRAPHIC INFORMATION
As discussed in Note 2, the Company operates in one business segment: the
development and delivery of application server software and related software
products and services. In making this determination, the Company considered the
information which management uses to oversee the Company's operations as well as
the manner in which the business is managed.
Foreign operations in 1998 were conducted in four countries in Europe.
During 1999, foreign operations were expanded. Operations are currently
conducted in seven countries in Europe and three countries in the Asia Pacific
region.
Revenues by geographic region are as follows:
Years Ended December 31,
-----------------------------------------
1997 1998 1999
---------- ---------- -----------
United States............... $ 181,017 $4,999,717 $14,984,459
Europe...................... - 817,556 5,700,391
Other....................... 67,507 990,626 2,379,557
---------- ---------- -----------
Total....................... $ 248,524 $6,807,899 $23,064,407
========== ========== ===========
Total long lived assets by geographic region are as follows:
Years Ended December 31,
----------------------------------------
1997 1998 1999
---------- ---------- -----------
United States............... $1,528,155 $1,733,471 $22,907,826
Europe...................... - 62,876 529,440
Other....................... - - 107,393
---------- ---------- -----------
Total....................... $1,528,155 $1,796,347 $23,544,659
========== ========== ===========
Net loss by geographic region are as follows:
Years Ended December 31,
-------------------------------------------
1997 1998 1999
----------- ------------ ------------
United States............... $(8,335,095) $(12,421,546) $(21,840,977)
Foreign subsidiaries........ - (463,501) (148,316)
----------- ------------ ------------
Total....................... $(8,335,095) $(12,885,047) $(21,989,293)
=========== ============ ============
13. Loss Per Share
The following table sets forth the computation of basic and diluted loss per
share:
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------------------
1997 1998 1999
------------- -------------- ------------
<S> <C> <C> <C>
Numerator:
Net loss....................... $ (8,335,095) $(12,885,047) $(21,989,294)
Beneficial conversion
feature in series D
preferred stock.............. -- -- (263,158)
------------ ------------ ------------
Net loss applicable to
common stockholders.......... (8,335,095) (12,885,047) (22,252,452)
============ ============ ============
-41-
<PAGE>
Denominator:
Weighted average common
shares outstanding........... 5,065,356 5,122,480 9,943,728
Weighted average common
shares subject to repurchase. (4,279,808) (2,489,984) (1,524,612)
------------ ------------ ------------
Denominator for basic and
diluted loss per share
applicable to common
stockholders................... 785,548 2,632,496 8,419,116
============ ============ ============
Basic and diluted net
loss per share
applicable to common
stockholders................. $ (10.61) $ (4.89) $ (2.64)
============ ============ ============
</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 antidilutive 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. Weighted-average options outstanding to purchase 348,880 and 1,332,992
shares of common stock for the years ended December 31, 1998, and 1999, were not
included in the computation of net loss per share because the effect would be
antidilutive. Such securities, had they been dilutive, would have been included
in the computation of diluted net loss per share using the treasury stock
method.
14. ACQUISITIONS
On December 13, 1999, the Company acquired GemLogic, Inc. GemLogic, which
was incorporated in January 1999, provides XML software to enable customers to
more easily develop and deploy business-to-business e-commerce applications. The
purchase price was approximately $12.1 million. The acquisition was completed
through the issuance of approximately 114,456 shares of common stock. Under the
terms of the GemLogic purchase agreement, the Company is committed to make
additional issuances of common stock, based upon the achievement of future goals
and deliverables. Contingent consideration, which would be added to goodwill and
amortized over the remaining life, may approximate $4.8 million. In addition we
issued options to purchase common stock to GemLogic employees at exercise prices
ranging from $40 to $60 per share. These options may result in a compensation
charge of up to $5.6 million, which will be charged to operations based upon
vesting of these options over the next four to seven years. 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. GemLogic's results of
operations for the period subsequent to the acquisition date through December
31, 1999, have been included in SilverStream's Consolidated Statement of
Operations for the year ended December 31, 1999. The purchased research and
development totaling $1.9 million represents the value of numerous projects that
were in various stages of development, and had not reached technological
feasibility. No alternative future uses were identified prior to reaching
technological feasibility. The purchased research and development was valued
using the income approach.
On December 13, 1999, the Company acquired ObjectEra, Inc. for $8.1 million.
ObjectEra, which commenced operations in January 1999, developed and distributes
a software program know as an Object Request Broker (ORB). $4.2 million of the
purchase price was paid at the closing, and $3.9 million was paid subsequent to
year end on February 1, 2000. Under the terms of the ObjectEra purchase
agreement, SilverStream is committed to making additional payments in a
combination of cash and common stock, based upon the achievement of future goals
and deliverables. Contingent consideration, which would be added to goodwill and
amortized over the remaining life, may approximate $3.9 million. 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. ObjectEra's results
of operations for the period subsequent to the acquisition date through December
31, 1999, have been included in SilverStream's Consolidated Statement of
Operations for the year ended December 31, 1999.
In fiscal 1999 the Company completed various acquisitions of some of its
distributors as well as the acquisitions of GemLogic, Inc. and ObjectEra, Inc.
These acquisitions were accounted for under the purchase method of accounting
and, accordingly, the operating results are included in the consolidated
statements of income from the date of each respective acquisition.
The unaudited pro forma information below for the twelve months ended
December 31, 1999 gives effect to the acquisitions of GemLogic and ObjectEra, as
if they had occurred on January 1, 1999. The unaudited pro forma information
includes the historical results of operations of GemLogic and ObjectEra for the
twelve months ended December 31, 1999.
-42-
<PAGE>
Pro Forma
December 31,
1999
Revenue................................ $ 23,251,318
Net loss applicable to common stockholders (27,310,325)
============
Basic and diluted net loss per share applicable
to common stockholders............... $ (3.23)
Weighted-average common shares used in
computing basic and diluted net loss per share
applicable to common stockholders.... 8,462,264
============
The primary pro-forma adjustment approximates $3.5 million, and relates to
the amortization of goodwill.
15. SUBSEQUENT EVENTS
SECONDARY PUBLIC OFFERING
On January 31, 2000, the Company completed a secondary public offering in
which the company sold 1,445,851 shares of its common stock for net proceeds to
the Company of $156,136,000. 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 stock which generated
additional proceeds of $35,739,000, net of issuance costs.
-43-
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
None.
PART III
Certain information required by Part III is omitted from this Form 10-K
because the Company will file a definitive Proxy Statement pursuant to
Regulation 14A (the "Proxy Statement") not later than 120 days after the end of
the fiscal year covered by this Form 10K, and certain information to be included
therein is incorporated herein by reference.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item is incorporated by reference to the
Proxy Statement under the section captioned "Election of Directors."
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference to the
Proxy Statement under the section captioned "Executive Compensation."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated by reference to the
Proxy Statement under the section captioned "Security Ownership of Certain
Beneficial Owners and Management."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated by reference to the
Proxy Statement under the section captioned "Certain Relationships and Related
Transactions."
-44-
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Financial Statements, Financial Statement Schedule and Exhibits
1. Financial Statements - see "Index to Financial Statements."
2. Financial Statement Schedule for the Years Ended December 31, 1997,
1998, and 1999:
Schedule II - Valuation and Qualifying Accounts.
Report of Independent Auditors on Financial Statement Schedule
Financial statement schedules not included have been omitted because
of the absence of conditions under which they are required or because
the required information, where material, is shown in the financial
statements or notes
3. Exhibits:
Exhibits submitted with the Annual Report on Form 10-K as filed with
the Securities and Exchange Commission and those incorporated by
reference to other filings are listed on the Exhibit Index.
(b) Reports on Form 8-K
On December 27, 1999, the Company filed a Current Report on Form 8-K
to report under Item 2 (Acquisition or Disposition of Assets) the
consummation of an Agreement and Plan of Merger for the acquisition of
GemLogic, Inc. and the consummation of a Stock Purchase Agreement for
the acquisition of ObjectEra, Inc. The financial statements required
to be filed with such report were filed on January 25, 2000 on
Amendment No. 1 to Current Report on Form 8-K/A.
-45-
<PAGE>
Exhibit Index
<TABLE>
<CAPTION>
Exhibit
No. Description
<S> <C>
3.1(1) Second Amended and Restated Certificate of Incorporation of the Registrant
3.2(1) Amended and Restated By-Laws of the Registrant
4.1(2) Specimen common stock certificate
4.2(2) Third Amended and Restated Investor Rights Agreement dated March 1, 1999, as amended
*10.1(2) 1996 Founders Stock Incentive Plan
*10.2(2) Amended and Restated 1997 Stock Incentive Plan, and forms of agreements thereunder
*10.3(2) Amended and Restated 1999 Employee Stock Purchase Plan
*10.4(2) Form of Founders Stock Restriction Agreement
10.5(2) Sub-Sublease Agreement, dated February 14, 1997, between Rational Software Corporation (as successor to SQA, Inc.)
and the Registrant
10.6(2) First Amendment to Sub-Sublease Agreement, dated April 1998
10.7(2) Term Loan Agreement and Commercial Promissory Note, dated March 1, 1999, between Fleet National Bank and the
Registrant
10.8(2) Term Loan Agreement and Commercial Promissory Note, dated August 11, 1997, between Fleet National Bank and the
Registrant
10.9(2) Term Loan Agreement and Commercial Promissory Note, dated November 5, 1996 between Fleet National Bank and the
Registrant
+10.10(2) OEM Master License Agreement between RSA Data Security, Inc. and the Registrant, dated as of September 30, 1997, as
amended
+10.11(2) Support Agreement between RSA Data Security, Inc. and the Registrant, dated as of June 30, 1999
10.12(2) Form of VAR Business Partner Agreement
10.13(2) Form of ISV Business Partners Agreement
10.14(2) Form of Consulting Partner Agreement
21.1(1) Subsidiaries of the Registrant
23.1 Consent of Ernst & Young LLP
27.1 Financial Data Schedule
</TABLE>
(1) Incorporated by reference from the Company's Registration Statement on
Form S-1 (File No. 333-94103).
(2) Incorporated by reference from the Company's Registration Statement on
Form S-1 (File No. 333-80553).
* Management contract or compensatory plan or arrangement filed as an
Exhibit to this form pursuant to Items 14(a) and 14(c) of Form 10-K.
+ Confidential treatment requested for certain portions of this Exhibit, which
portions are omitted and filed separately with the Securities and Exchange
Commission.
-46-
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, in Burlington,
Massachusetts, on this 22nd day of March 2000.
SILVERSTREAM SOFTWARE, INC.
By: /s/ DAVID A. LITWACK
David A. Litwack
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons in the capacities and on the
dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
/s/ David R. Skok Chairman of the Board of Directors March 22, 2000
- --------------------------------
David R. Skok
/s/ David A. Litwack President, Chief Executive Officer and Director March 22, 2000
- --------------------------------
David A. Litwack (Principal Executive Officer)
/s/ CRAIG A. DYNES Vice President, Chief Financial Officer and Treasurer (Principal March 22, 2000
- --------------------------------
Craig A. Dynes Financial and Accounting Officer)
/s/ Timothy Barrows Director March 22, 2000
- --------------------------------
Timothy Barrows
/s/ Richard A. D'Amore Director March 22, 2000
- --------------------------------
Richard A. D'Amore
/s/ Paul J. Severino Director March 22, 2000
- --------------------------------
Paul J. Severino
</TABLE>
-47-
<PAGE>
VALUATION AND QUALIFYING ACCOUNTS
SILVERSTREAM SOFTWARE, INC.
<TABLE>
<CAPTION>
Additions
-----------------------
Balance At Charged To Charged To Balance
Beginning Costs And Other At End
Description of Period Expenses Accounts Deductions of Period
---------------------------------------- ---------- --------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C>
and Doubtful Accounts................... $475,993 $355,000 $649,634 $ 717,382 $ 763,245
December 31, 1998 Allowances for Returns
and Doubtful Accounts................... $44,660 $218,614 $592,500 $ 379,781 $ 475,993
December 31, 1997 Allowances for Returns
and Doubtful Accounts................... $ -- $ 44,660 -- -- $ 44,660
</TABLE>
S-1
Exhibit 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration
Statement (Form S-8 No. 333-85829) pertaining to the Amended and Restated 1999
Employee Stock Purchase Plan and the Amended and Restated 1997 Stock Incentive
Plan of SilverStream Software, Inc. of our report dated February 1, 2000, with
respect to the financial statements of SilverStream Software, Inc. included in
the Annual Report (Form 10-K) for the year ended December 31, 1999.
Our audits also included the financial statement schedule of SilverStream
Software, Inc. listed in Item 14 (a). This schedule is the responsibility of
SilverStream Software, Inc.'s management. Our responsibility is to express an
opinion based upon our audits. In our opinion, the financial statement schedule
referred to above, when considered in relation to the basic financial statements
taken as a whole, presents fairly in all material respects, the information set
forth therein.
/s/ ERNST & YOUNG LLP
Boston, Massachusetts
March 22, 2000
S-2
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0001042282
<NAME> SilverStream Software, Inc.
<MULTIPLIER> 1
<CURRENCY> USD
<S> <C>
<PERIOD-TYPE> Year
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<EXCHANGE-RATE> 1
<CASH> 46,798,806
<SECURITIES> 246,690
<RECEIVABLES> 8,938,308
<ALLOWANCES> 763,245
<INVENTORY> 0
<CURRENT-ASSETS> 57,117,876
<PP&E> 5,223,421
<DEPRECIATION> 2,387,723
<TOTAL-ASSETS> 80,662,535
<CURRENT-LIABILITIES> 16,569,265
<BONDS> 0
0
0
<COMMON> 17,689
<OTHER-SE> 63,567,055
<TOTAL-LIABILITY-AND-EQUITY> 80,662,535
<SALES> 23,064,407
<TOTAL-REVENUES> 23,064,407
<CGS> 1,412,175
<TOTAL-COSTS> 11,664,764
<OTHER-EXPENSES> 34,620,816
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 189,863
<INCOME-PRETAX> (21,989,293)
<INCOME-TAX> 0
<INCOME-CONTINUING> (21,989,293)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (21,989,293)
<EPS-BASIC> (2.64)
<EPS-DILUTED> (2.64)
</TABLE>
