<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31,1999
OR
[_] TRANSACTION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____ to _____
Commission File number 0- 25315
SAGENT TECHNOLOGY, INC
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 94-3225290
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
800 W. El Camino Real, Suite 300
Mountain View, California 94040
(Address of principal executive offices) (Zip Code)
</TABLE>
(650) 815-3100
(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year,
if changed since last report)
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 [ ] No [X]
The number of shares of the Registrant's Common Stock, $.001 par value per
share, outstanding at April 30, 1999 was 24,991,529.
Page 1 of 25
<PAGE> 2
SAGENT TEHCNOLOGY, INC.
FORM 10-Q
INDEX
<TABLE>
<CAPTION>
PAGE
<S> <C> <C>
PART I. CONSOLIDATED CONDENSED FINANCIAL INFORMATION
Item 1. Unaudited Consolidated Condensed Financial Statements:
Consolidated Condensed Statements of Operations
Three months ended March 31, 1999 and 1998 3
Consolidated Condensed Balance Sheets
March 31, 1999 and December 31, 1998 4
Consolidated Condensed Statements of Cash Flows
Three months ended March 31, 1999 and 1998 5
Notes to Unaudited Consolidated Condensed Financial Statements 6-8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations and
Factors That May Affect Results 9-22
Item 3. Quantitative and Qualitative Disclosure about Market Risk 23
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 23
Item 2. Changes in Securities and Use of Proceeds 23
Item 3. Defaults Upon Senior Securities 24
Item 4. Submission of Matters to a Vote of Security Holders 24
Item 5. Other Information 24
Item 6. Exhibits and Reports on Form 8-K 24
Signatures 25
</TABLE>
Page 2 of 25
<PAGE> 3
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
SAGENT TECHNOLOGY, INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended March 31,
1999 1998
------------ ------------
<S> <C> <C>
Revenues, net:
Licenses $ 4,260 $ 1,798
Services 2,240 1,199
------------ ------------
Total revenues, net 6,500 2,997
------------ ------------
Cost of Revenues:
Licenses 43 36
Services 998 729
------------ ------------
Total cost of revenues 1,041 765
------------ ------------
Gross Profit 5,459 2,232
------------ ------------
Operating Expenses:
Sales and marketing 3,799 2,203
Research and development 1,597 1,516
General and administrative 950 1,199
Acquired in-process technology -- 2,425
------------ ------------
Total operating expenses 6,346 7,343
------------ ------------
Loss from operations (887) (5,111)
------------ ------------
Interest expense (income) 72 (24)
------------ ------------
Net loss before income taxes (959) (5,087)
------------ ------------
Provision for income taxes 72 2
Net loss $ (1,031) $ (5,089)
============ ============
Historical basic net loss per share $ (0.24) $ (1.36)
============ ============
Historical diluted net loss per share $ (0.26) $ (1.54)
============ ============
Number of shares used in calculation of
historical basic net loss per share 4,313,853 3,731,494
Number of shares used in calculation of
historical diluted net loss per share 4,017,022 3,315,235
Pro forma basic net loss per share $ (0.05) $ (0.28)
============ ============
Pro forma diluted net loss per share $ (0.06) $ (0.28)
============ ============
Number of shares used in calculation of
pro forma basic net loss per share 18,858,111 18,321,537
Number or shares used in calculation of
pro forma diluted net loss per share 18,561,280 17,905,278
</TABLE>
See accompanying notes to consolidated condensed financial statements.
Page 3 of 25
<PAGE> 4
SAGENT TECHNOLOGY, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(In thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
--------- -----------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 3,261 $ 3,093
Accounts receivable, net 5,704 5,376
Other current assets 1,402 832
-------- --------
Total current assets 10,367 9,301
Property and equipment, net 2,805 3,044
Other assets 827 851
-------- --------
Total assets $ 13,999 $ 13,196
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 1,497 $ 1,478
Accrued liabilities 3,475 4,216
Deferred revenue 1,857 1,304
Obligations under capital leases 1,073 1,181
-------- --------
Total current liabilities 7,902 8,179
Long-term portions of capital lease obligations 5,208 3,346
-------- --------
Total liabilities 13,110 11,525
-------- --------
Commitments and contingencies (see Part II Item I)
STOCKHOLDERS' EQUITY:
Convertible preferred stock, par value $.001
per share:
Authorized: 15,556 in 1999 and 1998
Issued and outstanding: 14,544 in 1999 and 1998 15 15
Common stock, par value $.001 per share:
Authorized: 25,000 in 1999 and 1998
Issued and outstanding: 4,545 in 1999 and
4,125 shares in 1998 5 4
Additional paid-in capital 32,093 30,699
Notes receivable from stockholders (1,655) (522)
Cumulative translation adjustment 88 101
Accumulated deficit (29,657) (28,626)
-------- --------
Total stockholders' equity 889 1,671
-------- --------
Total liabilities and stockholders' equity $ 13,999 $ 13,196
======== ========
</TABLE>
See accompanying notes to consolidated condensed financial statements.
Page 4 of 25
<PAGE> 5
SAGENT TECHNOLOGY, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1999 1998
-------- --------
<S> <C> <C>
Cash flows from operations:
Net loss $ (1,031) $ (5,089)
Adjustments to reconcile net loss to net cash
used in operating activities:
Acquired in-process technology -- 2,425
Depreciation and amortization 335 293
Change in operating assets and liabilities,
net of acquisition:
Accounts receivable (328) (808)
Other current assets (570) (80)
Other assets 24 (534)
Accounts payable 19 1,103
Accrued liabilities (741) 1,363
Deferred revenue 553 162
-------- --------
Net cash used in operating activities (1,739) (1,165)
-------- --------
Cash flows from investing activities:
Purchases of property and equipment (96) (633)
Acquisition of Talus Incorporated -- (2,696)
-------- --------
Net cash used in investing activities (96) (3,329)
-------- --------
Cash flows from financing activities:
Proceeds from capital lease financing 3,795 493
Payment of principal under capital lease obligations (2,041) (108)
Proceeds from issuance of common stock
(net of repurchases) 262 142
Proceeds from issuance of preferred stock
(net of issuance costs and repurchases) -- 10,374
-------- --------
Net cash provided by financing activities 2,016 10,901
-------- --------
Effect of exchange rate changes in cash (13) (3)
Net increase in cash and cash equivalents 168 6,404
-------- --------
Cash and cash equivalents beginning of the period 3,093 3,813
-------- --------
Cash and cash equivalents end of the period $ 3,261 $ 10,217
-------- --------
Supplemental disclosure of cash flow information:
Cash payments for interest 111 46
Supplemental non-cash financing activities:
Issuance of common stock for notes and
interest receivable 1,133 522
Liabilities assumed in connection with acquisition
of Talus, Incorporated
Fair value of assets acquired............................................ 3,526
Cash paid................................................................ (1,170)
Preferred stock issued................................................... (1,400)
-------
Liabilities assumed...................................................... $ 956
=======
</TABLE>
See accompanying notes to consolidated condensed financial statements.
Page 5 of 25
<PAGE> 6
Sagent Technology, Inc.
Notes To Unaudited Consolidated Condensed Financial Statements
(In thousands, except per share data)
NOTE 1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
Description of Business
Sagent Technology, Inc., develops, markets and supports software designed
to address organizations' information access, analysis and delivery needs.
Sagent was incorporated under the laws of the State of California in April
1995 under the name of Savant Software, Inc. In June 1995, Sagent changed its
name to Sagent Technology, Inc. Sagent was reincorporated under the laws of the
State of Delaware in September 1998.
Basis of Presentation:
The unaudited consolidated condensed financial statements have been
prepared pursuant to the rules and regulations of the Securities and Exchange
Commission. Certain information and footnote disclosures, normally included in
financial statements prepared in accordance with generally accepted accounting
principles, have been condensed or omitted pursuant to such rules and
regulations. Certain prior year amounts have been reclassified to conform to the
current year presentation. In the opinion of Sagent, the financial statements
reflect all adjustments, consisting only of normal recurring adjustments
necessary for a fair presentation of the financial position at March 31, 1999,
the operating results for the three months ended March 31, 1999 and 1998 and
cash flows for the three months ended March 31, 1999 and 1998. These financial
statements and notes should be read in conjunction with Sagent's audited
financial statements and notes thereto for the year ended December 31, 1998,
included in the Company's Form S-1 filed with the Securities and Exchange
Commission in April 1999. The results of operations for the three months ended
March 31, 1999 are not necessarily indicative of the results that may be
expected for the year ending December 31, 1999.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of Sagent
Technology, Inc., and its wholly-owned subsidiaries, Sagent Technology, Japan KK
and Sagent Technology (Canada) Inc. collectively ("Sagent" or the "Company").
All significant intercompany accounts and transactions have been eliminated.
Use of Estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Revenue Recognition:
Sagent's revenues are derived from two sources, product license revenues
and service revenues. License revenues are derived from product sales to end
users, resellers and distributors and enterprise application vendors as well as
royalties from enterprise application vendors. For enterprise application
vendors, Sagent receives quarterly reports from these vendors on sell-through of
Sagent's products to end users. The reports also indicate the amount of royalty
revenue the enterprise application vendor owes to Sagent. License revenues are
based upon the number and capacity of servers on which a product is installed,
as well as on a per user basis. Service revenues are derived from providing
consulting and training, maintenance and support services to end users.
Page 6 of 25
<PAGE> 7
Sagent Technology, Inc.
Notes To Unaudited Consolidated Condensed Financial Statements
(In thousands, except per share data)
Sagent recognizes revenues in accordance with the American Institute of
Certified Public Accountants Statement of Position No. 97-2, "Software Revenue
Recognition." License revenues from sales to end users are recognized upon
shipment of the product if a signed contract exists, the fee is fixed and
determinable and collection is deemed probable. If an acceptance period is
provided, revenue is recognized upon the earlier of customer acceptance or the
expiration of that period. Sagent recognizes royalties as revenues based upon an
enterprise application vendor's sell-through of Sagent's products. Fees for
services are recognized upon completion of the work to be performed. Revenues
from maintenance and support agreements which includes product updates are
deferred and recognized on a straight-line basis as service revenues over the
term of the related agreement, which is typically one year.
Sagent performs ongoing credit evaluations of its customer's financial
condition and does not require collateral. Sagent maintains allowances for
potential credit losses and the amount of such losses have been within
management's expectations.
Recent Accounting Pronouncements
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income." SFAS No. 130 is effective for fiscal years beginning after December 15,
1997. There was no difference between Sagent's net loss and its total
comprehensive loss for the quarters ended March 31, 1999 and 1998, respectively.
The American Institute of Certified Public Accountants issued Statement of
Position No. 98-1, "Software for Internal Use, " which provides guidance on
accounting for the cost of computer software developed or obtained for internal
use. Statement of Position No. 98-1 is effective for financial statements for
fiscal years beginning after December 15, 1998. The adoption of Statement of
Position No. 98-1 has had no material effect on Sagent's business, financial
condition and operating results for the first quarter of 1999.
In June 1998 the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133 is
effective for all fiscal quarters of all years beginning after June 15, 1999.
SFAS No. 133 requires that all derivative instruments be recorded on the balance
sheet at their fair value. Sagent does not currently engage in hedging
activities and had no holdings of derivative financial or commodity instruments
at March 31, 1999. Sagent does not expect that the adoption of SFAS No. 133 will
have a material impact on its condensed financial statements.
In April 1998, the AICPA issued Statement of Position 98-5, "Reporting on
the Costs of Start-Up Activities." This standard requires companies to expense
the costs of start-up activities and organization costs as incurred. In general,
Statement of Position 98-5 is effective for fiscal years beginning after
December 15, 1998. Sagent believes the adoption of Statement of Position 98-5
will not have a material impact on its results of operations.
Net Loss Per Share and Pro Forma Net Loss Per Share
Sagent computes net loss per share in accordance with SFAS No. 128,
"Earnings per Share," and Securities and Exchange Commission Staff Accounting
Bulletin No. 98. Under the provisions of SFAS No. 128 and SAB 98, basic net loss
per share is computed by dividing the net loss available to common stockholders
for the period by the weighted average number of common shares outstanding
during the period. Diluted net loss per share is computed by dividing the net
loss for the period by the weighted average number of common and common
equivalent shares outstanding during the period. Options, warrants and
convertible preferred stock were not included in the computation of diluted net
loss per share because the effect would be antidilutive.
Page 7 of 25
<PAGE> 8
Sagent Technology, Inc.
Notes To Unaudited Consolidated Condensed Financial Statements
(In thousands, except per share data)
Pro forma net loss per share has been computed as described previously and
also gives effect, even if antidilutive, to common equivalent shares from
preferred stock that converted upon the closing of Sagent's initial public
offering, under the as-if-converted method. The convertible preferred stock
outstanding, as of the closing date was automatically converted into an
aggregate of 14,544 shares of common stock.
A reconciliation of shares used in the calculation of historical basic and
diluted net loss per share follows:
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1999 1998
-------- --------
<S> <C> <C>
Historical net loss per share, basic and diluted:
Net loss.................................................................. $ (1,031) $ (5,089)
Shares used in computing basic net loss per share......................... 4,314 3,731
-------- --------
Basic net loss per share.................................................. $ (0.24) $ (1.36)
======== ========
Shares used in computing diluted net loss per share....................... 4,017 3,315
Diluted net loss per share................................................ $ (0.26) $ (1.54)
======== ========
Antidilutive securities including options, warrants and preferred
stock not included historical net loss per share calculations.......... 16,626 16,926
PRO FORMA NET LOSS PER SHARE
Net loss.................................................................. $ (1,031) $ (5,089)
======== ========
Shares used in computing basic and diluted net loss per share ............ 4,314 3,731
======== ========
Adjustment to reflect assumed conversion of
convertible preferred stock............................................. 14,544 14,590
-------- --------
Shares used in computing pro forma basic net loss per share .............. 18,858 18,321
Adjustment to reflect shares subject to repurchase........................ (464) (603)
Adjustment to reflect reverse stock treasury method....................... 167 187
Shares used in computing pro forma diluted net loss per share............. 18,561 17,905
======== ========
Pro forma net basic loss per share........................................ $ (0.05) $ (0.28)
======== ========
Pro forma net diluted loss per share...................................... $ (0.06) $ (0.28)
======== ========
</TABLE>
NOTE 3. INITIAL PUBLIC OFFERING ("IPO")
On April 13,1999, Sagent issued 5,750,000 shares of its common stock
(including 750,000 shares issued upon the exercise of the underwriter's over
allotment option) at an initial public offering price of $9.00 per share. The
net proceeds to Sagent from the offering, net of offering costs were
approximately $47.2 million. Concurrent with the IPO, warrants were exercised to
purchase 110,308 shares of common stock at prices ranging from $3.18 to $6.48
per share, resulting in additional capital proceeds to the Company totaling
$656,000. In addition, upon completion of the IPO, each outstanding share of the
Company's redeemable convertible preferred stock was automatically converted
into one share of common stock and remaining preferred stock warrants for
135,317 shares were automatically converted into warrants for the purchase of
135,317 shares of common stock.
Page 8 of 25
<PAGE> 9
Sagent Technology, Inc.
Management's Discussion and Analysis of Financial Condition
and Results of Operations
PART I. FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
All statements, trend analysis and other information contained in the
following discussion relative to markets for Sagent's products and trends in
revenues, gross margins and anticipated expense levels, as well as other
statements including words such as "anticipate," "believe," "plan," "estimate,"
"expect," "intend" and other similar expressions constitute forward-looking
statements. These forward-looking statements are subject to business and
economic risks and uncertainties, including but not limited to those described
in, "Factors That May Affect Results" below as well as those discussed in
Sagent's registration statement on form S-1. Sagent's actual results of
operations may differ materially from those contained in the forward-looking
statements.
OVERVIEW
Sagent develops, markets and supports Enterprise Intelligence software
designed to address organizations' rapidly growing information access, analysis
and delivery needs. Sagent also provides design, systems engineering and
professional services to facilitate the successful implementation of its Sagent
DMS product suite. Sagent was incorporated in April 1995, commenced operations
in June 1995 and began selling the first products of the Sagent DMS product
suite during the fourth quarter of 1996. Although Sagent's revenues have grown
significantly during these periods, there can be no assurance that such growth
will continue, nor that Sagent can achieve or sustain profitability in the
future.
Sagent's revenues are derived from two sources, product license revenues
and service revenues. License revenues are derived from product sales to end
users, resellers, distributors and enterprise application vendors as well as
royalties from enterprise application vendors. License revenues are based upon
the number and capacity of servers on which a product is installed, as well as
on a per user basis. Service revenues are derived from providing consulting and
training, maintenance and support services to end-users.
On February 28, 1998, Sagent acquired Talus, Incorporated, a privately held
company that has significant experience in the design and implementation of
Enterprise Intelligence applications. The total purchase price was $3.5 million,
and the acquisition was recorded under the purchase method of accounting. In
connection with the acquisition, Sagent expensed $2.4 million of in-process
technology in the quarter ended March 31, 1998. In addition, Sagent recorded
other intangible assets of $587,000, which are being amortized on a
straight-line basis over the six months to three years following the
acquisition.
Sagent sells its products and services to corporations in North America
primarily through its direct sales and services organization. Sagent has
domestic sales offices in seventeen states. A separate group within Sagent's
direct sales organization, targets strategic partnerships with industry-leading
enterprise application vendors such as Siebel Systems and Advent Software. These
vendors embed all or a portion of Sagent's products within their own
applications and sell the integrated products to their customers. Sagent also
utilizes resellers such as Unisys Corporation, USinternetworking, Inc., and Cap
Gemini Group, which remarket Sagent's products to their customer base.
Page 9 of 25
<PAGE> 10
Sagent Technology, Inc.
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Sagent also sells its products internationally through distributors located
in France, Germany, Spain, Benelux, Japan, South Africa and the United Kingdom
and through a direct sales subsidiary in Canada, Sagent Technology Canada.
Revenues from licenses and services to customers outside the United States were
$697,000 and $229,000 in the three months ended March 31, 1999 and 1998,
respectively. Historically, as a result of the relatively small amount of
international sales, fluctuations in foreign currency exchange rates have not
had a material effect on Sagent's business, financial condition and operating
results. Sagent has agreements with all its European distributors, under each of
which Sagent has an option to acquire such distributors. In the event of a
change of control, Sagent could be required to acquire the German and French
distributors. Any such acquisition may have the effect of diluting existing
stockholders, reducing Sagent's available cash for working capital and other
purposes, requiring substantial management attention, increasing annual
amortization expense or imposing costs on Sagent associated with integrating the
acquired entity.
Sagent recognizes revenues in accordance with the American Institute of
Certified Public Accountants Statement of Position No. 97-2. License revenues
from sales to end users are recognized upon shipment of the product, if a signed
contract exists, the fee is fixed and determinable and collection is deemed
probable. If an acceptance period is provided, revenue is recognized upon the
earlier of customer acceptance or the expiration of that period. Sagent
recognizes royalties as revenues based on an enterprise application vendor's
sell-through of Sagent's products. Fees for services are charged separately from
licenses. Service revenues from consulting and training are recognized upon
completion of the work to be performed. Revenues from maintenance and support
agreements which includes product updates are deferred and recognized on a
straight-line basis as service revenues over the term of the related agreement,
which is typically one year.
Since inception, Sagent has incurred substantial research and development
costs to develop its product suite and has invested heavily in the expansion of
sales, marketing and professional services organizations to support increased
annual revenue. In addition, Sagent has invested significantly in general and
administrative areas to build an infrastructure to support its growth strategy.
The number of full-time employees increased from 122 as of March 31, 1998, to
154 as of March 31, 1999, representing an increase of 26%. As a result of these
investments, Sagent has incurred a net accumulated deficit of $29.7 million as
of March 31, 1999. Sagent expects to continue to incur significant sales and
marketing, research and development and general and administrative expenses. As
a result, we may experience losses and negative cash flows. If Sagent does
achieve profitability, it may not be able to sustain or increase profitability
on a quarterly or annual basis in the future.
Sagent believes that period-to-period comparisons of its operating results
are not a good indication of future performance. Although our operating results
have generally improved from quarter to quarter in the past, Sagent's future
operating results may not follow any past trends. Our prospects must be
considered in light of the risks, expenses and difficulties frequently
encountered by companies in new and rapidly evolving markets. There can be no
assurance we will be successful in addressing such risks and difficulties.
Page 10 of 25
<PAGE> 11
Sagent Technology, Inc.
Management's Discussion and Analysis of Financial Condition
and Results of Operations
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998
The following table sets forth for the periods indicated certain financial data,
derived from the Company's unaudited statements of operations, as a percentage
of total revenues for the periods indicated:
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-----------------------
1999 1998
------- -------
<S> <C> <C>
Revenues, net:
Licenses 65.5% 60.0%
Services 34.5 40.0
------- -------
Total revenues, net 100.0 100.0
Cost of revenues
Licenses 0.7 1.2
Services 15.3 24.3
------- -------
Total cost of revenues 16.0 25.5
Gross margin 84.0 74.5
Operating expenses:
Sales and marketing 58.4 73.5
Research and development 24.6 50.6
General and administrative 14.6 40.0
Acquired in-process technology -- 80.9
------- -------
Total operating expenses 97.6 245.0
------- -------
Loss from operations (13.6) (170.5)
Other income (expense) net (1.2) 0.8
------- -------
Net loss before incme taxes (14.8) (169.7)
------- -------
Provision for income taxes 1.1 0.1
------- -------
Net loss (15.9)% (169.8)%
======= =======
</TABLE>
REVENUES
Total revenues: Sagent's revenues were derived from software licenses and
related services. Total revenues were $6.5 million and $3.0 million for the
three months ended March 31, 1999 and 1998, respectively, representing an
increase of $3.5 million or 117%. International revenues were $697,000 and
$229,000 for the three months ended March 31, 1999 and 1998, respectively.
Sagent had no customer that accounted for more than 10% of its revenues during
the quarter ended March 31, 1999, however 34% of revenues during the comparable
quarter in the prior year, was attributed to two customers.
License revenues: Sagent's license revenues were $4.3 million and $1.8
million for the three months ended March 31, 1999 and 1998, respectively,
representing an increase of $2.5 million or 139%. License revenues represented
65.5% and 60% of total revenues for the three months ended March 31, 1999 and
1998, respectively. The increase in revenues from the comparable period in the
prior year was primarily attributed to a substantial increase in sales of the
Sagent DMS product suite reflecting the increased market acceptance of the
products. Also driving the increase in sales was an increase in the size and
productivity of Sagent's sales force. Sagent anticipates that license revenues,
which have represented a significant portion of Sagent's total revenue to date,
will continue to represent the substantial majority of its revenues for the
foreseeable future.
Page 11 of 25
<PAGE> 12
Sagent Technology, Inc.
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Service revenues: Sagent's service revenues were $2.2 million and $1.2
million for the three months ended March 31, 1999 and 1998, respectively,
representing an increase of $1 million, or 83%. Service revenues consist
primarily of revenues from consulting and implementation service fees,
maintenance and to a lesser extent, training services. Service revenues
represented 34.5% and 40% of total revenues for the three months ended March 31,
1999 and 1998 respectively. This increase was primarily due to growth in
training and consulting services as a result of the acquisition of Talus,
Incorporated on February 28, 1998.
COST OF REVENUES
Cost of license revenues: Cost of revenues consists primarily of product
packaging, shipping, media and documentation costs and license fees for
sub-licensing third-party software. Sagent's cost of license revenue was $43,000
and $36,000 for the three months ended March 31, 1999 and 1998 respectively,
representing an increase of $7,000 or 19%. Cost of license revenue represented
1% of license revenues for the three months ended March 31, 1999 and 2% of
license revenues for the three months ended March 31, 1998.
Cost of Services: Cost of services consists primarily of personnel costs
associated with providing software maintenance, technical support, training and
consulting services. Sagent's cost of service revenues was $998,000 and $729,000
for the three months ended March 31, 1999 and 1998, respectively, representing
an increase of $269,000 or 37%. This increase resulted from the addition of
costs from the acquisition of Talus, Incorporated. Cost of service revenues was
45% and 61% of service revenues for the three months ended March 31, 1999 and
1998, respectively. The improvement in service costs as a percent of service
revenues was primarily due to providing higher margin consulting services during
the current year quarter ended March 31.
GROSS MARGIN
Gross margins were $5.4 million and $2.2 million for the three months ended
March 31, 1999 and 1998, respectively. Gross margin as a percent of total
revenues increased to 84% for the three months ended March 31,1999 from 74.5%
for the three months ended March 31, 1998. The increase was primarily due to an
increase in license revenues as a percent of total revenue and providing higher
margin consulting services. In the future, Sagent's total gross margin
percentages may be adversely affected by mix of software products and services
revenue and increased competition.
OPERATING EXPENSES
Sales and marketing: Sales and marketing expenses consist primarily of
salaries, benefits, commissions, bonuses and travel expenses for sales and
marketing personnel as well as marketing programs costs. Sales and marketing
expenses were $3.8 million and $2.2 million in the three months ending March 31,
1999 and 1998, respectively, representing an increase of $1.6 million or 73%.
This increase reflects the overall increase in expenses such as those related to
new hires, for commissions and for promotional activities associated with the
increase in revenues. Sales and marketing expenses represented 58% and 74% of
total revenues for the three months ended March 31, 1999 and 1998 respectively,
a decline of 16%. This decrease was attributable to Sagent's increased revenues.
Sagent believes that as it continues to expand its direct sales force, its third
part partnering relationships and its indirect channel sales organization on a
worldwide basis, sales and marketing expenses will continue to increase in
absolute dollars, although such expenses may vary as a percentage of revenue.
Page 12 of 25
<PAGE> 13
Sagent Technology, Inc.
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Research and development: Research and development expenses consist
primarily of personnel and related costs associated with the development of new
products, the enhancement and localization of existing products, quality
assurance and testing. Research and development expenses were $1.6 million and
$1.5 million for the three months ended March 31, 1999 and 1998, respectively,
an increase of $100,000 or 7%. Research and development costs represented 25%
and 51% of total revenues for the three months ended March 31, 1999 and 1998,
respectively. Sagent anticipates that it will continue to invest significantly
in product research and development for the foreseeable future, and research and
development expenses are likely to increase in absolute dollars in future
periods, although such expenses may vary as a percentage of total revenues. In
the development of Sagent's new products and enhancements of existing products,
the technological feasibility of the software is not established until
substantially all product development is complete. Historically, Sagent's
software development costs eligible for capitalization have been insignificant,
and all costs related to internal research and development have been expensed as
incurred.
General and administrative: General and administrative expenses consist
primarily of personnel costs for Sagent's executive, finance, human resources,
information systems and other administrative departments. General and
administrative expenses were $1 million and $1.2 million for the three months
ended March 31, 1999 and 1998, respectively, a decrease of $200,000. The
decrease was primarily attributable to lower reserve requirements for bad debts
as a result of improved credit and collection processes. General and
administrative expenses represented 15% and 40% of total revenues for the three
months ended March 31, 1999 and 1998, respectively. The 25% decrease was
primarily due to the increase in total revenue. Sagent believes that general and
administrative expenses will increase in the future in absolute dollars as a
result of the continued expansion of administrative staff and expenses
associated with being a public company, including public reporting expenses,
investor relations programs and professional services fees.
ACQUIRED IN PROCESS TECHNOLOGY
In connection with the February 1998 acquisition of Talus, Incorporated, a
privately held company with experience in the design and implementation of
Enterprise Intelligence applications, Sagent acquired certain in-process
technology. This technology under development consisted of analytical software
applications for manufacturing, food service and hospitality, and high
technology industries. After considering such factors as degree of completion,
technological uncertainties, costs incurred and projected costs to complete,
Sagent expensed $2.4 million of in-process technology in the quarter ended March
31, 1998. No such expense occurred in the first quarter of 1999. Acquired in-
process technology projects continue to progress consistent with management's
original assumptions used to value the acquired in-process technology.
OTHER INCOME AND EXPENSE
Other income and expense consists primarily of interest income from
short-term investments and interest bearing cash accounts and interest expense
in connection with Sagent's bank line of credit and equipment lease lines.
Interest expense was $111,000 and $46,000 for the quarters ended March 31, 1999
and March 31, 1998, respectively. Interest income was $39,000 and $70,000 for
the quarters ended March 31, 1999 and 1998, respectively. The increase in
interest expense resulted from increased borrowings under the bank line of
credit and Sagent's equipment lease lines.
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<PAGE> 14
Sagent Technology, Inc.
Management's Discussion and Analysis of Financial Condition
and Results of Operations
INCOME TAXES
Income taxes: As of December 31, 1998 Sagent had available net operating
loss carryforwards for federal and state income tax purposes of approximately
$21 million and $18 million, respectively, which expire from 2003 to 2018. The
Tax Reform Act of 1986 imposes limitations on the use of net operating loss
carryforwards if certain stock ownership changes have occurred or could occur in
the future. As of March 31, 1999 a provision for $70,000 was booked for
withholding taxes payable in connection with cash payments from Sagent's
customers in Japan.
OBLIGATIONS UNDER CAPITAL LEASES
During the quarter ended March 31, 1999 capital lease obligations and
obligations under the bank line of credit increased by $1.7 million. This
increase was primarily to fund operations.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1999 Sagent had cash and cash equivalents totaling $3.3
million, an increase of $168,000 from December 1998. Since inception, Sagent has
funded its operations primarily through the private sales of equity securities,
the use of equipment leases and a bank line of credit, not from cash generated
by operations. As of March 31, 1999, Sagent had raised $30.5 million, net of
offering costs, from the issuance of preferred stock and the exercise of stock
options and warrants, had financed equipment purchases totaling $2.6 million and
had borrowed $3.5 million under its line of credit with a bank. On April 13,
1999, Sagent completed its initial public offering of common stock and Sagent
received approximately $47.2 million in cash, net of underwriting discounts,
commissions and other offering costs. This amount includes the proceeds from the
overallotment of 750,000 shares exercised by the underwriters on April 15, 1999.
Net cash used in operating activities was $1.7 million and $2.4 million in
the three months ended March 31, 1999 and 1998 respectively, representing a
decrease of $700,000 or 29%. The decrease was primarily the result of increased
revenues.
Sagent's investing activities have primarily consisted of purchase of
property and equipment. Capital expenditures including those under capital
leases totaled $96,000 and $633,000 for the three months ended March 31, 1999
and 1998, respectively. The decrease is attributable to significant investments
made to acquire enterprise software as well as computer hardware purchases
associated with network expansion and increased staffing during the quarter
ended March 31, 1998. Capital leases have been used to finance the majority of
Sagent's acquisition of property and equipment In addition, investing activities
associated with the acquisition of Talus, Inc. on February 28, 1998 amounted to
$2.7 million. Sagent anticipates that it will experience an increase in its
capital expenditures and lease commitments consistent with its anticipated
growth in operations, infrastructure and personnel.
Sagent's financing activities provided $2.0 million and $10.9 million in
the three-month period ending March 31, 1999 and 1998, respectively, a decrease
of $8.9 million or 82%. Sagent's financing activities have primarily included
the use of its bank credit lines and sales of preferred stock. Proceeds from
bank financing totaled $1.7 million, net of payments, during the quarter ending
March 31, 1999 and proceeds from the issuance of preferred stock totaled $10.4
million net of issuance costs during the quarter ending March 31, 1998.
As of March 31, 1999, Sagent had borrowed $3.5 million under a $4.0 million
revolving line of credit with a bank which expires in January 2000 and which
bears interest at the lending bank's prime rate. Borrowings are limited to the
lesser of 80% of eligible accounts receivable or $4.0 million and are secured by
substantially all of Sagents non-leased assets. Subsequent to March 31, 1999,
Sagent repaid all amounts outstanding under the revolving credit line from the
proceeds from its initial public offering.
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<PAGE> 15
Sagent Technology, Inc.
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Sagent currently anticipates that for the foreseeable future it will
continue to experience significant growth in its operating expenses related to
expansion of its distribution channels, improving operational and financial
systems, possibly acquiring or investing in complementary businesses, products
or technologies or investing in joint ventures. Such expenditures will be a
material use of our cash resources. Sagent believes that its sources of
liquidity as of March 31, 1999 together with the net proceeds from its initial
public offering, will be sufficient to meet its working capital and anticipated
capital expenditure requirements for at least the next 12 months. Thereafter,
Sagent may require additional funds to support its working capital requirements
or for other purposes, and may seek, even before such time, to raise additional
funds through public or private equity financing or from strategic
relationships, bank debt, financing under leasing arrangements, or other
sources. There can be no assurance that additional financing will be available
at all, or that if available, such financing will be obtainable on terms
acceptable to Sagent or that are not dilutive to its stockholders. If adequate
funds are not available or are not available on acceptable terms, Sagent may be
unable to develop or enhance its products, take advantage of future
opportunities, or respond to competitive pressures or unanticipated
requirements, which could have a material adverse effect on its business,
financial condition and operating results.
YEAR 2000 ISSUES
Sagent has completed its assessment of the potential overall impact of the
impending century change on Sagent's business, financial condition and operating
results. Based on Sagent's current assessment, Sagent believes the current
versions of its products are year 2000 compliant, that is, they are capable of
adequately distinguishing 21st century dates from 20th century dates. However
Sagent's products operate in complex network environments and directly or
indirectly interact with a number of other hardware and software systems that
Sagent cannot adequately evaluate for year 2000 compliance. Sagent may face
claims based on year 2000 problems in other companies' products or issues
arising for the integration of multiple products within an overall system.
Sagent has not been a part to any litigation or arbitration proceeding involving
Sagent's products or services related to year 2000 compliance issues.
Sagent has reviewed its internal management information and other critical
business systems to identify any year 2000 problems. Sagent also has
communicated with the external vendors that supply it with material software and
information systems and with significant suppliers to determine their year 2000
readiness. Based on Sagent's vendors' representations, Sagent believes that the
third-party hardware and software Sagent uses is year 2000 compliant except for
the applications Sagent uses to track technical support request. The application
vendor is currently undertaking modification of this application for Sagent, and
Sagent estimates that the modification will be complete in the second quarter of
1999 and will cost approximately $20,000. Although Sagent does not believe that
the cost of such modifications will materially affect its operating results, if
Sagent is not able to modify the technical support application in a timely and
successful manner Sagent may not be able to process technical support reports
effectively, which may adversely affect Sagent's business. Sagent currently
anticipates conducting additional year 2000 testing in mid 1999 when it replaces
servers in its internal network.
Sagent did not incur any material costs directly associated with year 2000
compliance in the first quarter of 1999. Sagent does not expect the total cost
of year 2000 problems to be material to its business, financial condition and
operating results. However during the months prior to the century change, Sagent
will continue to evaluate new version of its products, new software and
information systems provided by third parties and any new infrastructure systems
that Sagent acquires, to determine whether they are year 2000 compliant. Despite
Sagent' current assessment Sagent may not identify and correct all significant
year 2000 problems on a timely basis. Year 2000 compliance efforts may involve
significant time and expense and unremediated problems could harm Sagent's
business, financial condition and operating results. Sagent currently has no
contingency plans to address the risks associated with unremediated year 2000
problems.
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<PAGE> 16
Sagent Technology, Inc.
FACTORS THAT MAY EFFECT RESULTS
OUR FUTURE OPERATING RESULTS MAY NOT FOLLOW PAST TRENDS DUE TO MANY FACTORS AND
ANY OF THESE COULD CAUSE OUR STOCK PRICE TO FALL
We believe that quarter-to-quarter comparisons of our operating results are
not a good indication of future performance. Although our operating results have
generally improved from quarter to quarter in the past, our future operating
results may not follow any past trends. It is likely that in some future quarter
our operating results may be below the expectation of public market analysts and
investors due to factors beyond our control, and as a result, the price of our
common stock may fall.
Factors which may cause our future operating results to be below
expectations and cause our stock price to fall include:
- The demand for and acceptance of our products, product enhancements and
services
- The maintenance and development of our strategic relationships with
enterprise application vendors, resellers and distributors
- The introduction, timing and competitive pricing of our products and
services and those of our competitors
- The expansion and rate of success of our direct sales force and indirect
distribution channels both domestically and internationally
- The attraction and retention of key personnel, particularly in our sales,
services and support groups
- The commercialization of our products incorporating advanced technologies
- The growth of the market for Enterprise Intelligence solutions
- The timing and successful integration of and costs related to
technologies and businesses we may acquire in the future
We plan to significantly increase our operating expenses to expand our
administration, consulting and training, maintenance and technical support,
research and development and sales and marketing groups. Our operating expenses
are based on our expectations of future revenues and are relatively fixed in the
short term. If revenues fall below our expectations in any quarter and we are
not able to quickly reduce our spending in response, our operating results would
be lower than expected and our stock price may fall.
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<PAGE> 17
WE MAY LOSE EXISTING CUSTOMERS OR BE UNABLE TO ATTRACT NEW CUSTOMERS IF WE DO
NOT DEVELOP NEW PRODUCTS
If we are not able to maintain and improve our product line and develop new
products that keep pace with competitive product introductions and technological
developments, satisfy diverse and evolving customer requirements and achieve
market acceptance, we may lose existing customers or be unable to attract new
customers. For example, we are developing the next version of the Sagent DMS
product suite, which is scheduled for release in the first half of 1999. We may
not be successful in developing and marketing this new version, other product
enhancements or new products that respond to technological advances by others on
a timely or cost-effective basis, or that these products, if developed, will
achieve market acceptance.
We have experienced delays in releasing new products and product
enhancements and may experience similar delays in the future. These delays or
problems in the installation or implementation of our new releases may cause
customers to forego purchases of our products to purchase those of our
competitors.
CHANGES IN INTERNET TECHNOLOGY AND OPERATING SYSTEM STANDARDS MAY IMPEDE MARKET
ACCEPTANCE FOR OUR PRODUCTS
Rapidly changing Internet technology and operating system standards may
impede market acceptance for our products. We have a software application known
as WebLink that allows users to query, analyze and report business information
from a Web browser. This product has been designed based upon prevailing
Internet technology. If new Web technologies emerge that are incompatible with
deployment of our WebLink applications, our WebLink product may become obsolete
and existing and potential new customers may seek alternatives to our products.
We may not be able to quickly adapt our products to any new Internet technology.
Additionally, our products allow connectivity to databases on a variety of
operating systems, including mainframes, AS/400, UNIX and Windows NT. However,
our application server component currently runs only on the Windows NT operating
system. Therefore, our ability to increase sales of our products will depend on
the continued acceptance of the Windows NT operating system. To the extent that
potential customers use UNIX operating systems as their application server, we
would need to develop a UNIX product. The development of a UNIX product would
require us to commit a substantial investment of resources, and we may not
successfully introduce such a product on a timely or cost-effective basis, or at
all, which could lead potential customers to choose alternatives to our
products.
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<PAGE> 18
THE GROWTH OF OUR BUSINESS DEPENDS ON THE GROWTH OF THE MARKET FOR ENTERPRISE
INTELLIGENCE SOFTWARE
Since all of our revenues are attributable to the sale of Enterprise
Intelligence software and related maintenance, consulting and training services,
if the market for Enterprise Intelligence software does not grow, our business
will not grow. We expect Enterprise Intelligence software and services to
account for substantially all of our revenues for the foreseeable future.
Although demand for Enterprise Intelligence software has grown in recent years,
the market may not continue to grow or, even if the market does grow, businesses
may not adopt our products.
We are focusing our selling efforts on large, enterprise-wide
implementations of our products, and we expect such sales to constitute an
increasing portion of any future revenue growth. While we have devoted
significant resources to promoting market awareness of our products and the
problems such products address, we do not know whether these efforts will be
sufficient to support significant growth in the market for Enterprise
Intelligence products.
IF OUR RELATIONSHIPS WITH CHANNEL PARTNERS ARE NOT SUCCESSFUL AND IF WE CANNOT
RECRUIT ADDITIONAL CHANNEL PARTNERS WE MAY NOT BE ABLE TO EXPAND OUR SALES
In addition to our direct sales force, we rely on successful relationships
with a variety of channel partners, such as enterprise application vendors,
resellers and distributors, for licensing and support of our products in the
United States and internationally. If we cannot maintain successful
relationships with these partners and cannot recruit additional strategic
partners, we believe that we will have difficulty expanding the sales of our
products. Our enterprise application vendor partners resell our products
incorporated in their own software application. In addition, our channel
partners offer products of several different companies, including, in some
cases, products that compete with our products. These strategic partners may not
develop or customize our applications to their needs or devote adequate
resources to selling our products.
We intend to expand our relationships with strategic partners and to
increase the proportion of our customers licensed through these indirect
channels. We may not be able to maintain strategic partnerships and attract
additional strategic partners that will market our products effectively and will
be qualified to provide timely and cost-effective customer support and service.
Further, our relationships with our strategic partners may not generate enough
royalty revenue to offset the significant resources used to develop these
channels. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Business--Sales and Marketing."
WE NEED TO EXPAND OUR MANAGEMENT SYSTEMS AND CONTROLS TO SUPPORT OUR ANTICIPATED
GROWTH
Our growth has placed, and our anticipated future growth will continue to
place, a significant strain on our management systems and controls. If we cannot
effectively establish and improve our processes we may not be able to manage our
growth successfully or sustain and manage the growth rates we have experienced
in the past.
We have grown rapidly and will need to continue to grow in all areas of
operation in order to execute our business strategy. Our total number of
employees grew from 87 on December 31, 1997 to 152 on December 31, 1998, and we
anticipate further significant increases in the number of employees. Sustaining
our growth has placed significant demands on management as well as on our
administrative, operational and financial resources and controls. In particular,
we need to substantially upgrade our enterprise resource planning functions,
including accounting, order entry and customer entry, which will become
insufficient as we grow. We also will need to institute new systems such as
human resource management and time and billing. See "Business -- Sales and
Marketing."
Page 18 of 25
<PAGE> 19
WE INTEND TO EXPAND INTERNATIONAL OPERATIONS BUT WE MAY ENCOUNTER A NUMBER OF
PROBLEMS IN DOING SO WHICH COULD LIMIT OUR FUTURE GROWTH
We may not be able to successfully market, sell, deliver and support our
products and services internationally. Our failure to manage our international
operations effectively could limit the future growth of our business.
International sales represented approximately 8.4% of our total revenue for the
year ended December 31, 1998. We conduct our international sales through local
subsidiaries in Japan and Canada and through distributor relationships in
France, Germany, Japan, South Africa and the United Kingdom. The expansion of
our existing international operations and entry into additional international
markets will require significant management attention and financial resources to
open additional international offices and hire international sales personnel.
Localizing our products is difficult and may take longer than we anticipate due
to difficulties in translation and delays we may experience in recruiting and
training international staff. In addition, we currently have limited experience
in developing local versions of our products, as well as marketing, selling and
supporting our products and services as overseas. See "Business -- Sales and
Marketing."
OUR MARKETS ARE HIGHLY COMPETITIVE AND COMPETITION COULD HARM OUR ABILITY TO
SELL PRODUCTS AND SERVICES AND REDUCE OUR MARKET SHARE
Competition could seriously harm our ability to sell additional software
and maintenance and support renewals on prices and terms favorable to us.
Additionally, if we cannot compete effectively, we may lose market share. The
markets for our products are intensely competitive and subject to rapidly
changing technology. We compete against providers of decision support software,
data warehousing software and enterprise application software. We also compete
with providers of e-Business software, which allows for the electronic delivery
of products and services that enable commerce among businesses and end users.
Companies in each of these areas may expand their technologies or acquire
companies to support greater Enterprise Intelligence functionality and
capability, particularly in the areas of query response time and the ability to
support large numbers of users. We may also face competition from vendors of
products and turn-key solutions for e-Business applications that include
Internet based information functionality.
Many of our competitors have longer operating histories, significantly
greater financial, technical, marketing or other resources, or greater name
recognition than we do. Our competitors may be able to respond more quickly than
we can to new or emerging technologies and changes in customer requirements. See
"Business -- Competition."
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<PAGE> 20
OUR OPERATING RESULTS MAY VARY SIGNIFICANTLY DUE TO OUR LENGTHY SALES AND
IMPLEMENTATION CYCLES FOR OUR PRODUCTS WHICH COULD CAUSE OUR STOCK PRICE TO FALL
Because our products and services have lengthy sales and implementation
cycles, it is difficult for us to forecast the timing and recognition of
revenues from sales of our products and services. Since we are unable to control
many of the factors that will influence our customers' buying decisions, the
lengthy sales cycle could cause our operating results to be below the
expectations of analysts and investors, which could cause our stock price to
fall.
A key element of our strategy is to market our products and services to
large organizations with significant data management and access needs. These
customers take an extended time evaluating our products before purchasing them.
The period of time between initial customer contact and a purchase order may
span six months or more. Our products have had, and we expect them to continue
to have, an even longer sales cycle in international markets than in the United
States and Canada. During the evaluation period, a variety of factors may lead
customers to not purchase or scale down orders of our products including:
- Reductions in demand for Enterprise Intelligence solutions
- Introduction of new products by competitors or pricing pressures
- Changes in our customers' budgets and purchasing priorities
- Diversion of resources and management's attention to other information
technology issues, such as year 2000 issues
In addition, we often must provide a significant level of education to our
prospective customers regarding the use and benefit of our products, which may
cause additional delays during the evaluation and acceptance process. See
"Business -- Sales and Marketing."
OUR EXECUTIVE OFFICERS AND KEY PERSONNEL ARE CRITICAL TO OUR BUSINESS AND THESE
OFFICERS AND KEY PERSONNEL MAY NOT REMAIN WITH US IN THE FUTURE
Our future success depends upon the continued service of our executive
officers and other key employees as well as our ability to hire a significant
number of new employees. We are particularly dependent on the continued services
of employees in our professional services and sales groups. Competition for
these individuals is intense, and we may not be able to attract, assimilate or
retain additional highly qualified personnel in the future.
In particular, it would be difficult for us to replace the services of
Kenneth C. Gardner, our co-founder, President and Chief Executive Officer, John
E. Zicker, our co-founder, Executive Vice President, Technology, and Chief
Technology Officer, Thomas M. Lounibos, our Executive Vice President, Sales and
Marketing, and W. Virginia Walker, our Executive Vice President, Finance and
Administration and Chief Financial Officer. We do not maintain "key-person" life
insurance policies covering any of our employees.
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<PAGE> 21
OUR ACQUISITIONS COULD BE DIFFICULT TO INTEGRATE, DISRUPT OUR BUSINESS AND
DILUTE STOCKHOLDER VALUE
We intend to make investments in or acquire complementary companies,
products and technologies. We have limited organizational experience in these
matters and will need to develop the relevant skills if we are to be successful
in any such endeavor. Any development of these skills could consume management's
time and other resources. If we buy a company, we could have difficulty in
assimilating that company's operations. In addition, we may be unsuccessful in
retaining the key personnel of the acquired company. Moreover, we currently do
not know and cannot predict the accounting treatment of any such acquisition, in
part because we cannot be certain what accounting regulations, conventions or
interpretations may prevail in the future. If we acquire complementary
technologies or products, we could experience difficulties assimilating the
acquired technology or products into our operations. These difficulties could
disrupt our ongoing business, distract our management and employees and increase
our expenses. Furthermore, we may have to incur debt or issue equity securities
to pay for any future acquisitions, the issuance of which could be dilutive to
our existing stockholders, and adversely affect the price of our common stock.
FAILURE OF COMMERCIAL USERS TO ACCEPT INTERNET SOLUTIONS COULD LIMIT OUR FUTURE
GROWTH
A key element of our strategy is to offer users the ability to access,
analyze and report information from a data server through a Web browser. Our
growth would be limited if businesses do not accept Internet solutions or
perceive them to be cost-effective. Continued viability of the Internet depends
on several factors, including:
- Third parties' abilities to develop new enabling technologies in a timely
manner
- The Internet's ability to handle increased activity
- The Internet's ability to operate as a fast, reliable and secure network
- Potential changes in government regulation
Moreover, critical issues concerning the commercial use of the Internet,
including data corruption, cost, ease of use, accessibility and quality of
service, remain unresolved and may negatively affect commerce and communication
on the Internet. These issues will need to be addressed in order for the market
for our products and services to grow.
OUR PROPRIETARY TECHNOLOGY MAY BE SUBJECTED TO INFRINGEMENT CLAIMS OR MAY BE
INFRINGED UPON AND TIMELINE, INC. HAS FILED AN INFRINGEMENT SUIT AGAINST US
Our intellectual property is important to our business. We expect that we
could be subject to intellectual property infringement claims as the number of
our competitors grows and the functionality of our applications overlaps with
competitive offerings. These claims, even if not meritorious, could be expensive
and divert our attention from operating our company. If we become liable to
third parties for infringing their intellectual property rights, we would be
required to pay a substantial damage award and to develop noninfringing
technology, obtain a license or cease selling the applications that contain the
infringing intellectual property. We may be unable to develop noninfringing
technology or obtain a license on commercially reasonable terms, or at all. In
addition, we may not be able to protect against misappropriation of our
intellectual property. Third parties may infringe upon our intellectual property
rights, we may not detect this unauthorized use and we may be unable to enforce
our rights. See "Business -- Intellectual Property."
On March 19, 1999, we received written notice from Timeline, Inc. alleging
that the Sagent DMS product suite infringes one or more of the claims of a
Timeline patent. On March 22, 1999, Timeline filed suit against us in the United
States District Court for the Western District of Washington alleging patent
infringement. Other than the filed complaint, we have not received information
or documentation regarding this claim and therefore cannot fully evaluate it.
Pursuing potential litigation with Timeline could be costly and could divert
management and our technical staff from operating our company, regardless of the
outcome. See "Business -- Legal Proceedings."
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<PAGE> 22
IF WE LOSE KEY LICENSES WE MAY BE REQUIRED TO DEVELOP OR LICENSE ALTERNATIVES
WHICH MAY CAUSE DELAYS OR REDUCTIONS IN SALES
We rely on software that we have licensed from Opalis S.A. to perform key
functions of our Sagent Automation product which automates common tasks in
managing data. We also rely on software we have licensed from Microsoft
Corporation to allow users to be able to customize the user interface provided
by our Sagent Design Studio product. These licenses may not continue to be
available to us on commercially reasonable terms. The loss of either of these
licenses could result in delays or reductions of shipments of our product suite
until equivalent software could be developed, identified, licensed and
integrated. If customers require the automation and/or the user interface
customization features when licenses for either of those is not available, they
may delay or decline to purchase our product suite.
IF WE DISCOVER SOFTWARE DEFECTS WE MAY HAVE PRODUCT-RELATED LIABILITIES WHICH
MAY LEAD TO LOSS OF REVENUE OR DELAY IN MARKET ACCEPTANCE FOR OUR PRODUCTS
Our software products are internally complex and may contain errors,
defects or failures, especially when first introduced or when new versions are
released. We test our products extensively prior to releasing them; however, in
the past we have discovered software errors in some of our products after their
introduction. Despite extensive testing, we may not be able to detect and
correct errors in products or releases before commencing commercial shipments,
which may result in loss of revenue or delays in market acceptance.
Our license agreements with our customers typically contain provisions
designed to limit our exposure to potential product liability claims. All
domestic and international jurisdictions may not enforce these limitations.
Although we have not experienced any product liability claims to date, we may
encounter such claims in the future. Product liability claims, whether or not
successful, brought against us could divert the attention of management and key
personnel and could be expensive to defend.
POTENTIAL YEAR 2000 PROBLEMS WITH OUR PRODUCTS OR INTERNAL SYSTEMS MAY INVOLVE
SIGNIFICANT TIME AND EXPENSE AND MAY REDUCE OUR FUTURE SALES
Many currently installed computer systems and software products store dates
using only the last two digits of the calendar year. As a result, such systems
may not be able to distinguish whether "00" means 1900 or 2000, which may cause
system failures or erroneous results. Year 2000 problems could subject us to
liability claims and disrupt our customers' purchasing patterns, either of which
could harm our business.
Our products operate in complex network environments and directly or
indirectly interact with a number of other hardware and software systems that we
cannot adequately evaluate for year 2000 compliance. We may face claims based on
year 2000 problems in other companies' products, or issues arising from the
integration of multiple products within an overall system. Although we have not
been a party to any litigation or arbitration proceeding involving our products
or services related to year 2000 compliance issues, we may in the future be
required to defend our products or services in such proceedings, or to negotiate
resolutions of claims based on year 2000 issues. Defending and resolving year
2000-related disputes, regardless of the merits of such disputes, and any
liability we have for year 2000-related damages, including consequential
damages, could be expensive to us. In addition, we believe that customers and
potential customers limit purchases of new systems due to year 2000 issues as
companies expend significant resources to correct or upgrade their current
software systems for year 2000 compliance. These expenditures may result in
reduced funds available to purchase our products. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
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<PAGE> 23
Sagent Technology, Inc.
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk
Sagent considered the provision of Financial Reporting Release No. 48
"Disclosure of Accounting Policies for Derivative Financial Instruments and
Derivative Commodity Instruments, and Disclosure of Quantitative and Qualitative
Information about Market Risk inherent in Derivative Financial Instruments,
Other Financial Instruments and Derivative Commodity Instruments." Sagent had no
holdings of derivative financial or commodity instruments at March 31, 1999. Its
revenue, capital expenditures and nearly all of its expenses rare transacted in
U. S. dollars. Sagent believes it has minimal exposure to financial market risks
and risks associated with changes in foreign currency exchange rates at this
time.
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
On March 22, 199 Timeline, Inc. filed a complaint against Sagent in the
United States District Court for the Western District of Washington at Seattle.
Timeline alleges that the Sagent DMS product suite infringes one or more of the
claims of a Timeline patent. Timeline is seeking relief in the form of an
injunction, damages, punitive damages, attorney's fees, prejudgment and
postjudgment interest and costs. On April 19, 1999 Sagent filed its answer
denying Timeline's allegations. Sagent is not currently a party to any other
material legal proceedings.
ITEM 2. Changes in Securities and Use of Proceeds
Since January 1, 1999 the Registrant has issued and sold unregistered
securities as follows:
(a) Between January 1, 1999 and March 31, 1999, an aggregate of 397,693
shares of Common Stock were issued to employees upon exercise of
options net of repurchases. The net aggregate consideration received
for such shares was $1.4 million , of which 262 thousand was paid in
cash and approximately $1.1 million was paid in the form or promissory
notes. The notes were entered into by two officers of the Company in
connection with their exercise of an aggregate of 294,765 shares and
bear interest at rates ranging from 4.6% to 4.66%. Each of these notes
have a three year term.
(b) Between January 1, 1999 and March 31, 1999 an aggregate of 22,000
shares were issued to holders of warrants. The aggregate consideration
received for such shares was $118,800. Concurrent with the IPO,
warrants were exercised to purchase 110,308 shares of common stock at
prices ranging from $3.18 to $6.48 per share, resulting in additional
capital proceeds to the Company totaling $656,000.
Sagent's registration statement (Registration No. 333-71369) under the
Securities Act of 1933, as amended, for its initial public offering became
effective April 13, 1999. Sagent issued 5,750,000 shares of its common stock
(including 750,000 shares issued upon the exercise of the underwriter's over
allotment option) at an initial public offering price of $9.00 per share.
Offering proceeds net of aggregate expenses to the Registrant, were
approximately $47.2 million. The principal underwriters were Donaldson, Lufkin &
Jenrette, Hambrecht & Quist and U.S. Bancorp Piper Jaffray. The aggregate
underwriting fees were approximately $3.6 million. The Registrant expects to use
the net offering proceeds for general corporate purposes, including working
capital, capital expenditures and has subsequently repaid $3.4 million in
long-term debt. A portion of the proceeds may also be used to acquire licenses
or invest in complementary businesses or products, although there are no
current plans, negotiations, or discussions relating to any such transactions.
Concurrent with the IPO, each outstanding share of the Company's redeemable
convertible preferred stock was automatically converted into one share of common
stock and remaining preferred stock warrants for 135,317 shares were
automatically converted into warrants for the purchase of 135,317 shares of
common stock.
Page 23 of 25
<PAGE> 24
Sagent Technology, Inc.
ITEM 3. Defaults Upon Senior Securities
None.
ITEM 4. Submission of Matters to a Vote of Security Holders
None.
ITEM 5. Other Information
Not applicable.
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
The Company did not file any reports on Form 8-K during the quarter ended
March 31, 1999.
Page 24 of 25
<PAGE> 25
Sagent Technology, Inc.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SAGENT TECHNOLOGY, INC.
(Registrant)
/s/ Virginia Walker
-------------------
VIRGINA WALKER
Executive Vice President, Finance
and Chief Financial Officer
(Principal Financial and Accounting Officer)
May 25, 1999
Page 25 of 25
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