|
|
|
|
|
|
|
|
|
|
|
|
|
UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________to _________
333-71369
(Commission file number)SAGENT TECHNOLOGY, INC. (Exact name of registrant as specified in its charter)
|
|
|
|
|
|
800 W. El Camino Real, Suite 300
Mountain View, CA 94040
(Address of principal executive offices including zip code)
(650) 815-3100
(Registrant's telephone number, including area code)
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 reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [ ],
The number of shares of the Registrant's Common Stock, $.001 par value per share, outstanding at June 30, 2000 was 28,571,052.
SAGENT TECHNOLOGY, INC.
QUARTERLY REPORT ON FORM 10-Q FOR THE PERIOD ENDED JUNE 30, 2000
INDEX
| PART I. CONSOLIDATED CONDENSED FINANCIAL INFORMATION | Page No. |
| Item 1. Unaudited Consolidated Condensed Financial Statements: |
|
|
Consolidated Condensed Statements of Operations three and Six months ended June 30, 2000 and 1999 |
|
|
Consolidated Condensed Balance Sheets June 30, 2000 and December 31, 1999 |
|
|
Consolidated Condensed Statements of Cash Flows six months ended June 30, 2000 and 1999 |
|
| Notes to Unaudited Consolidated Condensed Financial Statements |
|
| Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations |
|
| Item 3. Quantitative and Qualitative Disclosures About Market Risk |
|
| PART II. OTHER INFORMATION |
|
| Item 1. Legal Proceedings |
|
| Item 2. Changes in Securities and Use of Proceeds |
|
| Item 3. Defaults Upon Senior Securities |
|
| Item 4. Submission of Matters to a Vote of Security Holders |
|
| Item 5. Other Information |
|
| Item 6. Exhibits and Reports on Form 8-K |
|
| Signatures |
|
| Exhibits |
|
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements
SAGENT TECHNOLOGY, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(In thousands, except per share data)
June 30, December 31,
2000 1999
(Unaudited)
------------ ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents......................... $7,702 $15,910
Marketable securities............................. 16,441 22,309
Accounts receivable, net ......................... 14,520 11,027
Other current assets.............................. 7,874 4,576
------------ ------------
Total current assets........................... 46,537 53,822
Property and equipment, net......................... 4,827 3,676
Goodwill and other non-current assets............... 11,111 9,206
------------ ------------
Total assets................................... $62,475 $66,704
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable.................................. $2,019 $1,151
Accrued liabilities............................... 5,728 10,034
Deferred revenue.................................. 6,235 5,910
Accrued merger costs.............................. 1,272 4,109
Current portion of capital lease
obligations.................................... 884 635
------------ ------------
Total current liabilities...................... 16,138 21,839
Deferred revenue.................................... 689 1,140
Long-term portion of capital lease
obligations...................................... 304 351
------------ ------------
Total liabilities.............................. 17,131 23,330
------------ ------------
STOCKHOLDERS' EQUITY
Common stock...................................... 28 28
Additional paid-in capital........................ 91,512 89,135
Notes receivable from stockholders................ (2,692) (2,625)
Accumulated translation adjustment................ 220 73
Accumulated deficit............................... (43,724) (43,237)
------------ ------------
Total stockholders' equity..................... 45,344 43,374
------------ ------------
Total liabilities and stockholders'
equity....................................... $62,475 $66,704
============ ============
See accompanying notes to
consolidated condensed financial statements.
SAGENT TECHNOLOGY, INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
--------------------- ---------------------
2000 1999 2000 1999
---------- ---------- ---------- ----------
Net Revenues:
Licenses..................................... $11,046 $6,823 $19,690 $13,446
Services..................................... 6,456 3,072 12,349 5,447
---------- ---------- ---------- ----------
Total net revenues........................ 17,502 9,895 32,039 18,893
---------- ---------- ---------- ----------
Net cost of revenues:
Licenses..................................... 437 776 956 1,352
Services..................................... 2,478 1,662 4,666 3,314
Amortization of abandoned
development projects..................... 0 800 0 800
---------- ---------- ---------- ----------
Total cost of revenues.................... 2,915 3,238 5,622 5,466
---------- ---------- ---------- ----------
Gross profit................................... 14,587 6,657 26,417 13,427
---------- ---------- ---------- ----------
Operating expenses (credits):
Sales and marketing.......................... 9,210 5,523 18,003 11,159
Research and development..................... 4,276 2,376 8,315 5,478
General and administrative................... 1,719 1,123 3,202 2,292
Merger and integration credits............... (1,950) 0 (1,950) 0
---------- ---------- ---------- ----------
Total operating expenses.................. 13,255 9,022 27,570 18,929
---------- ---------- ---------- ----------
Income (loss) from operations.................. 1,332 (2,365) (1,153) (5,502)
Other income, net ............................. 208 301 683 140
---------- ---------- ---------- ----------
Net income (loss) before income taxes.......... 1,540 (2,064) (470) (5,362)
Provision for income taxes..................... 7 46 17 118
---------- ---------- ---------- ----------
Net income (loss).............................. $1,533 ($2,110) ($487) ($5,480)
========== ========== ========== ==========
Basic net income (loss) per share.............. $0.05 ($0.08) ($0.02) ($0.31)
========== ========== ========== ==========
Number of shares used in calculation of
basic net income (loss) per share............. 28,046 26,926 27,935 17,546
Diluted net income (loss) per share............ $0.05 ($0.08) ($0.02) ($0.31)
========== ========== ========== ==========
Number of shares used in calculation of
diluted net income (loss) per share........... 29,652 26,926 27,935 17,546
See accompanying notes to
consolidated condensed financial statements.
SAGENT TECHNOLOGY, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Six Months Ended
June 30,
------------------------
2000 1999
----------- -----------
Cash flows from operations:
Net loss....................................... ($487) ($5,480)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization................ 2,580 2,023
Provision for Bad Debt....................... 200
Stock option compensation.................... 0 514
Change in operating assets and
liabilities:
Accounts receivable..................... (3,693) (1,373)
Other assets current.................... (3,298) (1,571)
Other assets............................ 147 (472)
Accounts payable........................ 868 18
Accrued liabilities..................... (4,306) 2,516
Deferred revenue........................ (126) 2,303
Accrued merger costs.................... (2,837) 0
----------- -----------
Net cash used in operating activities.......... (10,952) (1,522)
----------- -----------
Cash flows from investing activities:
Sale of marketable securities.................. 37,704 0
Purchase of property and equipment............. (31,836) (12,450)
Investment in Sagent do Brazil and others...... (1,166) 0
Investment in eGlobal joint venture, net....... (900) 0
Purchases of property and equipment............ (4,427) (2,115)
Disposals of property and equipment............ 1,210 0
----------- -----------
Net cash provided by (used in) investing
activities................................... 585 (14,565)
----------- -----------
Cash flows from financing activities:
Proceeds from capital lease financing.......... 548 3,974
Payments of principal under capital lease
obligations.................................. (346) (5,962)
Proceeds from issuance of common stock......... 692 48,963
Proceeds from exercise of stock options........ 1,118 36
----------- -----------
Net cash provided by financing activities...... 2,012 47,011
----------- -----------
Effect of exchange rate changes................. 147 (19)
----------- -----------
Net increase (decrease) in cash and
cash equivalents............................. (8,208) 30,905
Cash and cash equivalents, beginning
of the period.................................. 15,910 3,383
----------- -----------
Cash and cash equivalents, end of the period..... $7,702 $34,288
=========== ===========
See accompanying notes to consolidated condensed financial statements.
Six Months Ended
June 30,
------------------------
2000 1999
----------- -----------
Supplemental disclosure of cash flow information:
Cash payments for interest................... $82 $204
Cash payments for taxes...................... $6 $112
Supplemental disclosure of non-cash investing
and financing activity:
Issuance of common stock to Sagent do Brazil. $500
SAGENT TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(000's)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business. Sagent Technology, Inc., (Sagent), develops, markets and supports software designed to address organizations' information access, analysis and delivery needs. Sagent, formerly Savant Software, Inc., was incorporated under the laws of the State of California in April 1995 and reincorporated in Delaware in 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 June 30, 2000 and December 31, 1999, the operating results for the three and six months ended June 30, 2000 and 1999 and cash flows for the six months ended June 30, 2000 and 1999. 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, 1999, included in the Company's Form 10-K filed with the Securities and Exchange Commission on March 16, 2000. The results of operations for the three and six months ended June 30, 2000 are not necessarily indicative of the results that may be expected for the year ending December 31, 2000.
Principles of consolidation. The unaudited consolidated condensed financial statements include the accounts of Sagent Technology, Inc. and its wholly-owned subsidiaries, Qualitative Marketing Software, Inc. (QMS), Sagent U.K., Ltd., Sagent
Technology GmbH, Sagent France, S.A., Sagent Technology Japan KK, Sagent Technology Canada Inc., and Sagent do Brazil. All 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.
Cash and cash equivalents. Sagent considers all highly liquid investments with an original maturity of three months or less at the time of purchase to be cash equivalents. Sagent's cash and cash equivalents at June 30, 2000 and 1999 consisted of deposits in domestic banks and money market funds.
Marketable securities. Management determines the appropriate classifications of investments in debt and equity securities at the time of purchase. At June 30, 2000, Sagent's investments consist of commercial paper corporate debt securities, are classified as available-for-sale, and are carried at fair value. The fair value of Sagent's available-for-sale securities is based on quoted market prices at the balance sheet dates. The cost of securities sold is based on the specific identification method. Interest on securities classified as available-for-sale is included in interest and other income (expense), in the accompanying consolidated statements of operations.
Business risk and concentration of credit risk. Financial instruments which potentially subject Sagent to concentrations of credit risk consist primarily of marketable securities and trade accounts receivable. Sagent places its cash investments with four major financial institutions and has investment policies that limit investments to investment grade securities. Sagent maintains allowances for potential credit losses and such losses to date have been within management's expectations. There were no customers with balances due to Sagent in excess of 10% of aggregate accounts receivable at June 30, 2000 or 1999.
Goodwill and other intangible assets. The costs of businesses acquired in excess of the fair value of net assets acquired (goodwill), are amortized over their estimated useful lives, generally five years. If events or changes in circumstances indicate the goodwill will not be recoverable, as determined based on the undiscounted cash flows of the acquired business over the remaining amortization period, the carrying value is reduced to net realizable value. There were no such reductions in carrying value during the six months ended June 30, 2000 or 1999.
Revenue recognition. Sagent's revenues are derived from two sources, licenses and services. License revenues include product sales, Internet hosting, royalties and data. Service revenues include consulting, training, processing and maintenance.
Effective January 1, 1998, Sagent adopted SOP 97-2,"Software Revenue Recognition" with the exception of the provision deferred by SOP 98-4, "Deferral of the Effective Date of a Provision of SOP 97-2." License revenues from direct product sales to end users customers are recognized upon shipment of the product, after execution of a signed license agreement or a definitive purchase order, provided no significant vendor obligation 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. Generally, Sagent recognizes license revenues from enterprise application vendors, distributors and resellers based on sell- through of Sagent's products. If, however, the contract stipulates an advance, non-refundable royalty payment, revenue is recognized upon execution of the contract. Sagent's business practice is to provide payment terms that range from thirty days to one year from the invoice date, with the majority being 30 days from the invoice date. Accordingly, payment terms that exceed one year are not considered fixed and determinable and revenue is recognized as payments become due.
Internet hosting revenues are recognized upon the customer's download of data from Sagent's Internet site, provided payment has been received in advance. If payment is not received in advance, revenue from Internet sales is recognized upon download of data, but only if a signed contract exists, the fee is fixed and determinable, and collection is deemed probable. To date internet hosting revenues have not be significant to the financial results of Sagent.
Service fees are charged separately from licenses. In instances where Sagent enters into service agreements with license agreements, Sagent views them as multi-element arrangements for revenue recognition purposes. When arrangements contain multiple elements, and for which vendor specific objective evidence (VSOE) of fair valued exists for the undelivered elements, Sagent recognizes revenue from the delivered elements based on the residual contract value as prescribed by SOP 98-9, "Modifications of SOP 97-2, Software revenue recognition." Undelivered elements consist primarily of post contract support (PCS) such as software upgrades and data upgrades and other services such as training and consulting. VSOE for services and training is established based on the price charged when services are sold separately. VSOE for PCS is based on renewal rates. Services are not considered essential to the functionality of the software. Sagent recognizes revenues allocated to PCS ratably over the PCS period, which is generally 12 months. For revenue allocated to services such as consulting and training, Sagent recognizes revenue as the related services are performed.
Software development costs. Software development costs are included in product development and are expensed as incurred. After technological feasibility is established, material software development costs are capitalized in accordance with SFAS No. 86, "Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed." The capitalized cost is then amortized on a straight-line basis over the estimated product life, or the ratio of current revenues to total product revenues, whichever is greater. To date, with the exception of certain products developed by QMS in 1998 and earlier years, the period between achieving technological feasibility, which Sagent has defined as the establishment of a working model, typically occurring when the beta testing commences, and the general availability of such software has been short, and software development cost qualifying for capitalization have been insignificant.
Net income (loss) per share. Under the provisions of SFAS No. 128, "Earnings per Share," basic net income (loss) per share is computed by dividing the net income (loss) available to common stockholders for the period by the weighted average number of common shares outstanding during the period. Diluted net income (loss) per share is computed by dividing the net income (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.
Comprehensive income. Sagent adopted SFAS No. 130, "Reporting Comprehensive Income" SFAS No. 130 in 1997. Differences between total comprehensive net loss and net loss related to cumulative translation adjustments and are reported as a separate component of stockholders' equity.
Recent accounting pronouncements. In March 2000, the Emerging Issues Task Force reached a consensus on Issue 00-2, "Accounting for the Costs of Developing a
Web Site" (EITF 00-2). In general, EITF 00-2 states that the costs of developing a web site should be accounted for under the provisions of Statement of Position (SOP) 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use." We are currently evaluating EITF 00-2 and do not believe that the pronouncement will have a significant impact on our financial position, results of operations or cash flows. EITF 00-2 is effective for costs incurred after June 30, 2000.
In March 2000, the Emerging Issues Task Force reached a consensus on Issue 00-3, "Application of AICPA Statement of Position 97-2, `Software Revenue Recognition,' to Arrangements That Include the Right to Use Software Stored on Another Entity's
Hardware" (EITF 00-3). In general, EITF 00-3 states that if the customer does not have the option to physically take possession of the software, the transaction is not within the scope of SOP 97-2 and revenue should be recognized ratably over the hosting period as a service arrangement. However, if the customer has the option to take physical delivery of the software and specific pricing information is available for both the software and hosting components of the arrangement, then the software revenue may be recognized when the customer first has access to the software and revenue from the hosting component should be recognized ratably over the hosting period. Sagent is currently evaluating EITF 00-3 and do not expect that the pronouncement will have a significant impact on our financial position, results of operations or cash flows. Sagent will be required to implement EITF 00-3 for the year ending December 31, 2000.
In December 1999, the SEC issued SAB No. 101, "Revenue Recognition in Financial
Statements." SAB No. 101 expresses the views of the SEC Staff in applying generally accepted accounting principles to certain revenue recognition issues. In June 2000, the SEC issued SAB 101B to defer the effective date of the implementation of SAB 101 until the fourth quarter of 2000. Sagent does not anticipate the adoption of SAB 101 will have a material impact on its financial position, results of operations, or cash flows.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133establishes a new model for accounting for derivatives and hedging activities and supercedes and amends a number of existing accounting standards. SFAS No. 133 requires that all derivatives be recognized in the balance sheet at their fair market value and the corresponding derivative gains or losses be either reported in the statement of operations or as a deferred item depending on the type of hedge relationship that exists with respect to any derivatives. In July 1999, the FASB issued SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133. SFAS No. 137 deferred the effective date until fiscal years commencing after June 15, 2000. Sagent will adopt SFAS No. 133 in its quarter ending March 31, 2001. Sagent does not believe the pronouncement will have a material effect on its financial condition, results of operations or cash flows.
NOTE 2. MERGER RESERVE
On December 11, 1999, Sagent completed its merger with Qualitative Marketing Software, Inc. (QMS). The merger was accounted for as a pooling-of-interests. Sagent issued 2.1 million shares of common stock in exchange for all outstanding stock of QMS. Sagent also assumed all options to purchase QMS stock, which were converted into options to purchase 428 shares of Sagent stock.
Costs incurred in connection with the merger were charged to the results of operations for the year ended December 31, 1999. During the three-month period ended June 30, 2000 estimated legal and accounting fees totaling $550 were reclassified to transaction costs from severance and other personnel costs. There is no impact on the financial position or operating results of Sagent related to such reclassification. Activity in the merger reserve during the six months ended June 30, 2000 was as follows:
December 31, June 30,
1999 Costs Credit 2000
Balance Paid Amounts Balance
------------ --------- --------- ----------
Severance and other personnel costs.. $328 $222 $106
Transaction costs.................... 3,213 440 1,950 823
Elimination of duplicate systems
and equipment...................... 118 48 70
Other................................ 450 177 273
------------ --------- --------- ----------
$4,109 $887 $1,950 $1,272
============ ========= ========= ==========
Severance and other personnel costs consist of severance pay and outplacement for nine employees. Transaction costs consist of litigation costs, professional brokerage, legal, and accounting fees.
On December 23, 1999 QMS and Sagent were served with a demand for arbitration prepared by the Corum Group Ltd. (Corum). In its demand, Corum claims that QMS breached an agreement signed in 1998 to convey to Corum a certain percentage of the consideration received by QMS as a result of its acquisition by Sagent. QMS had terminated the agreement in question, which had involved the provision of strategic consulting services by Corum to QMS. On April 27, 2000 the parties agreed to settle the claim in exchange for 125 shares of Sagent common stock valued at approximately $938 on the settlement date. Such common stock was issued and registered for sale in July 2000. The resulting excess reserve of $1,950 was reversed in operations during the three month period ended June 30, 2000.
The remaining merger reserve, after issuance of the common stock to Corum, are estimated to be $334. The remaining severance and other personnel costs accrual relates to one individual. Other remaining accruals consist primarily of fees to be paid to legal, accounting, marketing and other professionals. Sagent expects to complete all merger activities by December 31, 2000.
During 1999 QMS abandoned certain product development projects as changes in technology and competitive factors eliminated their viability as successful projects. Prior to 1999, certain development costs related to these development projects had been capitalized. Upon abandonment of the development efforts, the carrying value of such development costs of $800 was charged to costs of goods sold.
NOTE 3. GOODWILL AND OTHER NON-CURRENT ASSETS
Goodwill and other non-current assets comprise the following:
Economic
Life June 30, 2000 December 31, 199
--------- ------------- ----------------
(Unaudited)
Goodwill:
Sagent UK...................... 5 $3,186 $3,075
Sagent France S.A.............. 5 498 500
Sagent GmbH.................... 5 2,463 2,462
Sagent do Brazil............... 5 1,222 0
Smarter Software, Inc.......... 10 570 750
Other Assets
eGlobal joint venture, net..... 900 0
NetAcumen, Inc. joint venture.. 380 380
Deposits....................... 683 626
Non-compete agreement.......... 80 140
Other.......................... 1,129 1,273
------------- ----------------
$11,111 $9,206
============= ================
Investments in the eGlobal and NetAcumen joint ventures are accounted for under the equity and cost methods, respectively. Sagent's ownership interest in both eGlobal and NetAcumen, Inc. was 19.99% and 9.79%, respectively as of June 30, 2000 and December 31, 1999. Revenues from sales to NetAcumen during the three and six months ended June 30, 2000 were $20 and $770, respectively. There were no sales to eGlobal during the three and six months ended June 30, 2000. There were no sales to eGlobal or NetAcumen during the three or six months ended June 30, 1999. Losses related to Sagent's percentage ownership interest the joint venture accounted for under the equity method were $102 for the three and six months ended June 30, 2000.
NOTE 4. SEGMENT REPORTING
Sagent is organized and operates as one operating segment: the design, development, marketing, and support of software designed to address organizations' information access, analysis and delivery needs. Sagent sells its products domestically and internationally. Revenues by geographic area are:
Three Months Ended Six Months Ended
June 30, June 30,
---------- ----------- --------- ---------
2000 1999 2000 1999
---------- ----------- --------- ---------
United States and Canada............ 86% 81% 88% 86%
Rest of World....................... 14% 19% 12% 14%
No one country in the rest of the world comprised more than 10% of total net revenues during the three or six months periods ended June 30, 2000 and 1999. None of Sagent's international operations have material long-lived assets.
NOTE 5. ACQUIRIED IN-PROCESS RESERARCH AND DEVELOPMENT
In February 1998, Sagent acquired Talus, Inc. for an aggregate purchase price of $3.5 million.
Prior to the acquisition, Talus was in the process of developing analytical software applications to complement its design and implementation business. The four projects underdevelopment were consisted of analytical software applications for food service, hospitality, manufacturing, and high technology industries. These analytical software applications allow organizations to model decision processes unique to their industry, such as decisions on products, sales and distribution channels, and customers.
The method used to estimate the fair value of the analytical software applications under development was a discounted cash flow model, similar to the traditional income approach, adjusted for cost to complete and stage of completion. Sagent first estimated revenue, cost of revenue, and operating expenses for the analytical software applications. Estimated earnings were discounted at a rate of 35% because of uncertainties associated with such estimates. Development of these applications was a significant risk due to the remaining effort to achieve technical feasibility, rapidly changing customer markets and significant threats from numerous companies. The nature of the efforts to develop the acquired technology into commercially viable products consist principally of completing all planning, designing and testing activities necessary to establish that the acquire din-process applications will be successfully developed.
At the time of acquisition, Talus had incurred approximately $2.0 million in research and development expense on these projects. Sagent estimated that development was on average 55% complete and $1.7 million would be required to complete development applications. Development of the applications was expected to be completed in 1999. Development efforts are now substantially complete and the result has been substantially consistent, in all material respects, with Sagent's assumptions at the time of acquisition. The developed applications were introduced to the market in the 1999. Sagent incurred a total of $1.1 million to finalize the development of the application. Revenue from licensing the applications has not been material to Sagent's overall position at the present time. Therefore, it is difficult to assess the accuracy of revenue projections early in the product life cycle.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Amounts in 000's)
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 those set forth in "Factors Affecting Results of Operations" on page 17, and Sagent's actual results of operations may differ materially from those contained in the forward-looking statements.
OVERVIEW
We develop, market, and support products and services that help businesses collect, analyze, understand, and act on customer and operational information in real- time. Our products and services provide a way for an organization's employees, customers, and partners to use the World Wide Web to examine the internal data they already have and to supplement that data with external, value-added information such as demographic, geographic, or other content. We refer to our products as "Real-time eBusiness Intelligence" solutions because they enable organizations to use our software and services to rapidly make more informed, intelligent decisions and to spread that ability across the enterprise. We were incorporated in April 1995, and began selling the first products during the fourth quarter of 1996.
We sell our software products directly to end user customers through our direct sales force and through indirect channel partners such as enterprise application vendors, resellers and distributors. Enterprise application vendors generally integrate our products with their applications and will embed them into their products or resell them with their products. Our other indirect channel partners, principally resellers and distributors, sell our software products to end user customers. We derive revenues primarily from license fees for software products and to a lesser extent, fees for services relating to the software products, including consulting, training, software and data updates, technical support and real time marketing services on the web.
Our revenues are derived from two sources, licenses and services. License revenues include product sales, Internet hosting, royalties and data updates. Service revenues include consulting, training, processing, and maintenance.
Effective January 1, 1998, we adopted SOP 97-2,"Software Revenue Recognition" with the exception of the provision deferred by SOP 98-4, "Deferral of the Effective Date of a Provision of SOP 97-2." License revenues from direct product sales to end users customers are recognized upon shipment of the product, after execution of a signed license agreement or a definitive purchase order, provided no significant vendor obligation 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. Generally, we recognize license revenues from enterprise application vendors, distributors and resellers based on sell-through of our products. If, however, the contract stipulates an advance, non-refundable royalty payment, revenue is recognized upon execution of the contract. Our business practice is to provide payment terms that range from thirty days to one year from the invoice date, with the majority being 30 days from the invoice date. Accordingly, payment terms that exceed one year are not considered fixed and determinable and revenue is recognized as payments become due.
Internet hosting revenues are recognized upon the customer's download of data from our Internet site, provided payment has been received in advance. If payment is not received in advance, revenue from Internet sales is recognized upon download of data, but only if a signed contract exists, the fee is fixed and determinable, and collection is deemed probable. To date Internet hosting revenues have not be significant to the financial results of Sagent.
Service fees are charged separately from licenses. In instances where we enters into service agreements with license agreements, we view them as multi-element arrangements for revenue recognition purposes. When arrangements contain multiple elements, and for which vendor specific objective evidence (VSOE) of fair valued exists for the undelivered elements, we recognize revenue from the delivered elements based on the residual contract value as prescribed by SOP 98-9, "Modifications of SOP 97-2, Software revenue recognition." Undelivered elements consist primarily of post contract support (PCS) such as software upgrades and data upgrades and other services such as training and consulting. VSOE for services and training is established based on the price charged when services are sold separately. VSOE for PCS is based on renewal rates. Services are not considered essential to the functionality of the software. We recognize revenues allocated to PCS ratably over the PCS period, which is generally 12 months. For revenue allocated to services such as consulting and training, we recognize revenue as the related services are performed.
We sell our products outside of the United States through our subsidiaries located in the United Kingdom, France, Germany, Japan, Brazil and through our distributors in Benelux, Spain, South Africa, and the Pacific Rim. Revenues from licenses and services to customers outside the United States represented approximately $2.4 million and $1.9 million, for the three months ended June 30, 2000 and 1999, respectively, and $3.9 million and $2.6 million, for the six months ended June 30, 2000 and 1999, respectively.
Historically, as a result of the comparatively lower international sales activities and the absence of significant exchange rate fluctuation, our business, financial condition and operating results have not been materially affected by exchange rates.
Sagent Technology, Inc.
RESULTS OF OPERATIONS FOR THE THREE MONTHS AND SIX ENDED JUNE 30, 2000 AND 1999
The following table sets forth for the periods indicated certain financial data, derived from Sagent's unaudited consolidated condensed statements of operations, as a percentage of total net revenues for the periods indicated:
Three Months Ended Six Months Ended
June 30, June 30,
--------------------- ---------------------
2000 1999 2000 1999
---------- ---------- ---------- ----------
Net Revenues:
Licenses...................................... 63.1% 69.0% 61.5% 71.2%
Services...................................... 36.9% 31.0% 38.5% 28.8%
---------- ---------- ---------- ----------
Total net revenues........................ 100.0% 100.0% 100.0% 100.0%
Net cost of revenues:
Licenses...................................... 2.5% 7.8% 3.0% 7.2%
development projects...................... 14.2% 24.9% 14.5% 21.7%
---------- ---------- ---------- ----------
Total cost of revenues..................... 16.7% 32.7% 17.5% 28.9%
Gross profit.................................... 83.3% 67.3% 82.5% 71.1%
Operating expenses (credits):
Sales and marketing........................... 52.6% 55.8% 56.2% 59.1%
Research and development...................... 24.4% 24.0% 26.0% 29.0%
General and administrative.................... 9.8% 11.3% 10.0% 12.1%
Merger and integration credits................ -11.1% 0.0% -6.1% 0.0%
---------- ---------- ---------- ----------
Total operating expenses................... 75.7% 91.2% 86.1% 100.2%
---------- ---------- ---------- ----------
Income (loss) from operations................... 7.6% -23.9% -3.6% -29.1%
Interest income, net ........................... 1.2% 3.0% 2.1% 0.7%
---------- ---------- ---------- ----------
Net income (loss) before income taxes........... 8.8% -20.9% -1.5% -28.4%
Provision for income taxes...................... 0.0% -0.4% 0.0% -0.6%
---------- ---------- ---------- ----------
Net income (loss)............................... 8.8% -21.3% -1.5% -29.0%
========== ========== ========== ==========
NET REVENUES
Total net revenues. Our total net revenues increased 76.9% to $17.5 million for the three months ended June 30, 2000 from $9.9 million for the three months ended June 30, 1999. Total revenue also increased 69.6% to $32.0 million for the six months ended June 30, 2000 from $18.9 million for the six months ended June 30, 2000.
International revenues. International revenues were $2.4 million and $1.9 million for the three months ended June 30, 2000 and 1999, respectively, an increase of 26%, and for the six months ended June 30, 2000, international revenues increased 50% to $3.9 million from $2.6 million for the same period in the prior year. No single customer accounted for more than 10% of our net total revenues for the three and six months ended June 30, 2000 or 1999.
License revenues. Our license revenues increased 61.9% to $11.0 million for the three months ended June 30, 2000 from $6.8 million for the same three month period in 1999, and represented 63.1% and 69.0% of total net revenues for the three months ended June 30, 2000 and 1999, respectively. License revenues increased 46.4% to $19.7 million for the six months ended June 30, 2000 from $13.4 million for the same six month period in 1999, and represented 61.5% and 71.2% of total revenues for the six months ended June 30, 2000 and 1999, respectively. The increase in net revenues from the comparable period in the prior year was primarily attributed to increased acceptance of the Sagent Solution and an expansion in the domestic and international sales organizations. In addition, the number of licenses sold and the average transaction size increased substantially compared to prior periods. We anticipate that license revenues, which have represented a significant portion of our total net revenue to date, will continue to represent a majority of our net revenues for the foreseeable future.
Service revenues. Our service revenues increased to $6.5 million and $12.3 million for the three months and six month periods ended June 30, 2000 and 1999, respectively, representing an increase of 110.2% and 126.8%, respectively. The increases were due to increased revenue levels in all components of service revenues - consulting, training, maintenance and internet services. Service revenues represented 36.9% and 31.0% of total net revenues for the three months ended June 30, 2000 and 1999, respectively, and 38.5% and 28.8% for the six months ended June 30, 2000 and 1999, respectively. The increases were due to the unusually high level of services revenues as a percentage of total net revenue during the three month period ended March 31, 2000.
COST OF REVENUES
Cost of license revenues. Cost of license revenues consists primarily of royalties, product packaging, shipping, media, documentation and fees to providers of data updates. Our cost of license revenue was $437 and $776 for the three months ended June 30, 2000 and 1999, respectively, representing 4.0% and 11.4% of license revenues in the three months ended June 30, 2000 and 1999, respectively. Our cost of license revenue was $956 and $1.4 million for the six months ended June 30, 2000 and 1999, respectively, representing 4.9% and 10.1% of license revenues in the six months ended June 31, 2000 and 1999, respectively. We expect these costs to grow in absolute dollars in the foreseeable future.
Cost of services: Cost of services consists primarily of personnel costs associated with providing software maintenance, technical support, training and consulting services. Our cost of service revenues was $2.5 million and $1.7 million for the three months ended June 30, 2000 and 1999, respectively, representing an increase of 49.1% and represented 38.4% and 54.1% of service revenues for the three months ended June 30, 2000 and 1999. Our cost of service revenues was $4.7 million and $3.3 million for the six months ended June 30, 2000 and 1999, respectively, representing an increase of 40.8% and represented 37.8% and 60.8% of service revenues for the six months ended June 30, 2000 and 1999. The improvement in service costs as a percent of service revenues was primarily due to improved utilization of consulting personnel and reduced reliance on outside consultants. We expect these costs to grow in absolute dollars in the foreseeable future.
Amortization related to certain development projects. During 1999 QMS abandoned certain product development projects as changes in technology and competitive factors eliminated their viability as successful projects. Prior to 1999, certain development costs related to these development projects had been capitalized. Upon abandonment of the development efforts, the carrying value of such development costs of $800 was charged to costs of goods sold.
GROSS MARGIN
Gross margin. Gross margins improved to 83.3% for the three months ended June 30, 1999 from 67.3% for the same period in the prior year. For the six month period ended June 30, 2000, gross margin improved to 82.5% from 71.1% for the same period in the prior year. The improvement was primarily due to increase in margins related to service revenues as impacted by improved utilization rates and increased labor rates charged to customers. In the future, our 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, recruiting, bonuses and travel expenses for sales and marketing personnel as well as marketing programs costs. Sales and marketing expenses increased 66.8% to $9.2 million for the three months ended June 30, 2000 from $5.5 million for the three months ended June 30, 1999. During the six month period ended June 30, 2000, sales and marketing expenses increased 61.3% to $18.0 million from $11.2 million for the same six month period in the prior year. Sales and marketing expenses represented 52.6% and 55.8% of total net revenues for the three months ended June 30, 2000 and 1999, respectively. Sales and marketing expenses represented 56.2% and 59.1% of total net revenues for the six month period ended June 30, 2000, and 1999, respectively. These increases in absolute dollars reflect the overall increase in expenses such as those related to new hires, commissions and promotional activities associated with the increase in revenues. We believe that as it expands its direct sales force, presales activities, 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.
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 increased 80.0% to $4.3 million for the three months ended June 30, 2000 from $2.4 million for the three months ended June 30, 1999. For the six month period ended June 30, 2000, research and development expenses increased 51.8% to $8.3 million from $5.5 million for the six month period ended June 30, 1999. Research and development costs represented 24.4% and 24.0% of total net revenues for the three months ended June 30, 2000 and 1999, respectively and 26.0% and 29.0% for the six months ended June 30, 2000 and 1999, respectively. We anticipate 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 our new products and enhancements of existing products, the technological feasibility of the software is not established until substantially all product development is complete and is generally defined as completion of a working model.
General and administrative. General and administrative expenses consist primarily of personnel costs for our executive, finance, human resources, and information systems as well as legal and bad debt reserves. General and administrative expenses increased 53.1% to $1.7 million for the three months ended June 30, 2000 from $1.1 million for the same period in the prior year. During the six month period ended June 30, 2000, general and administrative expenses increased 39.7% to $3.2 million from $2.3 million for the same period in the previous year. General and administrative expenses represented 9.8% and 11.3% of total net revenues for the three months ended June 30, 2000 and 1999,respectively and 10.0% and 12.1% for the six months ended June 30, 2000 and 1999, respectively. The decrease was due
to the increase in total revenue and reduced spending. We believe that general and administrative expenses will increase in the future in absolute dollars.
Merger and integration credits. Included in accrued merger costs as of December 31, 1999 was the estimated cost to settle certain disputes with Corum Group Ltd. (Corum). On December 23, 1999, QMS and Sagent were served with a demand for arbitration prepared by the Corum Group Ltd. (Corum). In its demand Corum claims that QMS breached an agreement to convey to Corum a certain percentage of the consideration received by QMS as a result of its acquisition by Sagent. QMS had terminated the contract in question, which had involved the provision of strategic counseling services by Corum to QMS, in 1998. On April 27, 2000, the parties agreed to settle the claim in exchange for 125 shares of Sagent common stock. Such common stock with a value of $938 on the settlement date was issued and registered for sale in July 2000. Charges in excess of the settlement amount included in accrued merger costs as of December 31, 1999 were credited to income during the three months ended June 30, 2000.
Remaining merger reserve charges , after issues of the common stock to Corum, related to the QMS merger are estimated to be $334. The remaining severance and other personnel costs accrual relates to one individual. Other remaining accruals consist primarily of fees to be paid to legal, accounting, marketing and other professionals. We expect to complete all merger activities by December 31, 2000.
OTHER INCOME
Other income consists of interest earned on invested cash less interest expense related to borrowings and Sagent's percentage share of losses of joint ventures accounted for under the equity method. Net interest income increased $9 for the three months ended June 30, 2000, from $301 earned in the three months ended June 30, 1999.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 2000, we had cash and cash equivalents totaling $7.7 million, a decrease of $8.2 million from December 1999. Since inception, Sagent has funded its operations primarily through the private sales of equity securities, the use of equipment leases, bank lines, and the initial public offering of common stock, not from cash generated by operations.
Net cash used in operating activities was $11.0 million and $1.5 million in the six months ended June 30, 2000 and 1999, respectively. The decrease was primarily the result of funding ongoing operations, including increased receivables, prepaid royalties and other assets, payment of merger related costs and final, fixed payments totaling $2.4 million related to our acquisition of Sagent Technology GmbH entered into during December 1999.
Our investing activities included capital expenditures for property and equipment totaling $4.4 million and $2.1 million for the six months ended June 30, 2000 and 1999, respectively. During the three months ended June 30, 2000, we invested $1.0 million in a joint venture providing distributor services in the Pacific Rim and $1.7 million in connection with it's acquisition of Sagent Do Brazil. During the three months ended June 30, 2000, we recognized losses related to our joint venture investments of $102.
We have agreements with its distributors in Spain, Benelux, South Africa, and the Pacific Rim under which the Sagent has an option to acquire such 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, or increasing operating, amortization and integration expenses.
Our financing activities provided $2.5 million and $47.0 million in the six month period ended June 30, 2000 and 1999, respectively. During the three months and six months ended June 30, 2000, our financing activities consisted primarily of sales of its common stock and issuance of stock options. Net proceeds from the sale
of common stock in its initial public offering in April 1999 amounted to $47.2 million, net of issuance costs.
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 June 30, 2000 will be sufficient to meet its working capital and anticipated capital expenditure requirements for at lease 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.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
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 commenced operations in June 1995 but we did not begin selling our first products until the fourth quarter of 1996, and a number of new products and new versions of existing products were subsequently introduced. As a result, we have experienced the risks and difficulties frequently encountered by early stage companies, particularly companies in new and rapidly evolving markets. We incurred net losses and losses from operations for the period ended December 31, 1995 and each of year ended thereafter. As of June 30, 2000, we had an accumulated deficit of approximately $43.7 million. Since inception, we have funded our business primarily from the sale of our stock and by borrowing funds, not from cash generated by our business We expect to continue to incur significant sales and marketing, research and development and general and administrative expenses Although our revenues have grown in each year since formation, we cannot be certain that we will sustain or increase our revenues or improve our operating results in the future.
QUARTERLY OPERATING RESULTS MAY FLUCTUATE SIGNIFICANTLY
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:
o The demand for and acceptance of Enterpise Intelligence solutions in general and our products, enhancements and services
o The maintenance and development of our strategic relationships with enterprise application vendors, resellers and distributors
o The introduction, timing and competitive pricing of our products and services and those of our competitors
o The size and timing of significant orders
o The expansion and rate of success of our direct sales force and indirect distribution channels both domestically and internationally
o The attraction and retention of key personnel, particularly in our sales, services and support groups
o The commercialization of our products incorporating advanced technologies
o The growth of the market for Enterprise Intelligence solutions
o 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.
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. 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.
ENTERPRISE INTELLIGENCE SOFTWARE MARKETS MAY NOT GROW
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.
WE MAY NOT BE ABLE TO MANAGE OUR GROWTH SUCCESSFULLY OR SUSTAIN AND MANAGE GROWTH RATES WE HAVE EXPERIENCED IN THE PAST
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. We anticipate 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.
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 12% of our total revenue for the six months ended June 30, 2000. We conduct our international sales through local subsidiaries in the United Kingdom, Germany, France, Japan and Canada and through distributor relationships in, Benelux, South Africa and eight Pacific Rim countries. 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 overseas
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.
CUSTOMER ORDER FULFILLMENT
The timing and amount of our sales depend on a number of factors that make estimating operating results prior to the end of any period uncertain. For example, we do not typically maintain a significant backlog and sales are dependent on our ability to appropriately forecast product demand. In addition, our customers historically request fulfillment of orders in a short period of time, resulting in limited visibility to sales trends. Consequently, our operating results depend on the volume and timing of orders and our ability to fulfill orders in a timely manner. Historically, sales in the third month of the quarter have been higher than sales in each of the first two months of the quarter. Non-linear sales patterns make business planning difficult, and increase the risk that our quarterly results will fluctuate.
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:
o Reductions in demand for Enterprise Intelligence solutions
o Introduction of new products by competitors or pricing pressures
o Changes in our customers' budgets and purchasing priorities
o Diversion of resources and management's attention to other information technology 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.
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, sales groups and executive staff. Competition for these individuals is intense, and we may not be able to attract, assimilate or retain additional highly qualified personnel in the future. We do not maintain
"key-person" life insurance policies covering any of our employees.
CONTINUED RESTRUCTURING OF OUR SALES FORCE MAY LIMIT PRODUCTIVITY
We historically have relied heavily on its direct sales force. For the past several years, We have restructured or made other adjustments to its sales force at least once a year. These changes have generally resulted in a lack of focus and temporarily reduced productivity by our sales force that may have affected revenues in a quarter. There can be no assurances that we will not continue to restructure our sales force or that the related transition issues associated with restructuring the sales force will not recur.
OUR ACQUISITIONS COULD BE DIFFICULT TO INTEGRATE, DISRUPT OUR BUSINESS AND DILUTE STOCKHOLDER VALUE
We have and intend to continue to make investments in or acquire complementary companies, products and technologies. We have limited organizational experience in these matters and need to develop the relevant skills if we are to be successful in any such endeavor. Development of these skills could consume management's time and other resources. We could have difficulty in assimilating the acquired 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.
We have no significant history of operations on a combined basis with QMS, which we acquired in December 1999 in a stock exchange transaction. Accordingly, the historical financial statements and pro forma financial information presented in the
Form 10-K filed on March 16, 2000 and the historical financial statements filed in this Form 10-Q may not be indicative of the results that would have been obtained had the acquisition occurred prior to the commencement of the periods covered herein. We may not be successful in integrating the operations and personnel of QMS into our business, incorporating the QMS products and any other acquired technologies into our product lines, derive significant future sales from QMS products. We may also not be able to establish and maintain uniform standards, controls procedures and policies, or avoid the impairment of relationships with employees and customers as a result of changes in management. To the extent that we are unable to do these things, our business, financial condition and results of operations would be materially affected.
WE CANNOT PREDICT THE IMPACT OF RECENT ACTIONS AND COMMENTS BY THE SEC AND FASB
Recent actions and comments from the SEC have indicated they are reviewing the current valuation methodology of in-process research and development related to business combinations. The SEC is concerned that some companies are writing off more of the value of an acquisition than is appropriate. We believe we are in compliance with all of the rules and related guidance as they currently exist. However, there can be no assurance that the SEC will not seek to reduce the amount of in-process research and development previously expensed by us. This would result in the restatement of our previously filed financial statements and could have a material adverse effect on our results of operations and financial condition for periods subsequent to the acquisitions. Additionally, the Financial Accounting Standards Board ("FASB") has announced that it plans to rescind the pooling of interests method of acquisition accounting. If this occurs, it could alter our acquisition strategy and potentially impair our ability to acquire companies.
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:
o Third parties' abilities to develop new enabling technologies in a timely manner
o The Internet's ability to handle increased activity
o The Internet's ability to operate as a fast, reliable and secure network
o 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.
WE MAY NEED TO BRING INFRINGEMENT CLAIMS OR BE SUBJECTED TO INFRINGEMENT -- 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.
If we become subject to litigation it could be costly and time consuming to defend and distract us from focusing on our business and operations.
Timeline, Inc. filed an infringement suit against us. See Legal Proceedings.
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.
IF WE DO NOT KEEP PACE WITH TECHNOLOGICAL CHANGE OUR PRODUCT MAY BE RENDERED OBSOLETE AND OUR BUSINESS MAY FAIL
Our industry is characterized by rapid technological change, changes in customer requirements, frequent new product introductions and enhancements and emerging industry standards. In order to achieve broad customer acceptance, our products must be compatible with major software and e- commerce applications and operating systems. We must continually modify and enhance our products to keep pace with changes in these applications an systems. Internet selling system technology is complex and new products enhancements can require long development and testing periods. If our products were to be incompatible with a popular new systems or applications, our business would be significantly harmed. In addition, the development of entirely new technologies replacing existing software could lead to new competitive products that have better performance or lower prices than our products and could render our products obsolete.
OUR OFFICERS, DIRECTORS AND AFFILIATED ENTITIES WILL HAVE SIGNIFICANT CONTROL OVER US AND MAY APPROVE OR REJECT MATTERS CONTRARY TO YOUR VOTE
Our executive officers and directors, together with their affiliates, beneficially own a significant percentage of our outstanding common stock. These stockholders, if acting together, will be able to significantly influence all matters requiring approval by our stockholders, including the election of directors and the approval of mergers or similar transactions even if other stockholders disagree.
WE HAVE ANTI-TAKEOVER DEFENSES THAT COULD DELAY OR PREVENT AN ACQUISITION OF OUR COMPANY
Provisions of our certificate of incorporation, bylaws, other agreements and Delaware law could make it more difficult for a third party to acquire us, even if doing so would be beneficial to our stockholders.
OUR UNDESIGNATED PREFERRED STOCK MAY INHIBIT POTENTIAL ACQUISITION BIDS FOR US, CAUSE THE MARKET PRICE FOR SAGENT COMMON STOCK TO FALL AND DIMINISH THE VOTING RIGHTS OF THE HOLDERS OF OUR COMMON STOCK
If our board of directors issues preferred stock potential acquirers may not make acquisition bids for us, our stock price may fall and the voting rights of existing stockholders may diminish as a result. Sagent's board of directors has the
authority to issue up to 15,556,000 shares of preferred stock in one or more series. The board of directors can fix the price, rights, preferences, privileges and restrictions of the preferred stock without any further vote or action by our
stockholders. Sagent has no current plans to issue any shares of preferred stock.
WE HAVE BROAD DISCRETION HOW WE INVEST AND MAY NOT YIELD A FAVORABLE RETURN
We intend to invest available funds for general corporate purposes, including working capital, capital expenditures and repayment of long-term indebtedness, and may use a portion to acquire other businesses, products or technologies. Our management may invest in ways with which the stockholders may not agree. Pending any such uses, we plan to continue to invest in investment-grade, interest-bearing securities. We cannot predict that such investments will yield a favorable return.
SHARES ELIGIBLE FOR FUTURE SALE COULD CAUSE OUR STOCK PRICE TO FALL
If our stockholders sell substantial amounts of our common stock in the public, the market price of our common stock could fall. Such sales also might make it more difficult for Sagent to sell equity or equity-related securities in the future at a time and price that we deem appropriate. As of December 31, 1999 we had 27.9 million shares of common stock outstanding.
WE DO NOT INTEND TO PAY DIVIDENDS AND YOU MAY NOT EXPERIENCE A RETURN ON INVESTMENT WITHOUT SELLING SHARES
We have never declared or paid any cash dividends on our capital stock. Therefore, you will not experience a return on your investment in our common stock without selling your shares since we currently intend on retaining future earnings to fund our growth and do not expect to pay dividends in the foreseeable future.
PART II. OTHER INFORMATION
On March 22, 1999 Timeline, Inc. filed a complaint against Sagent in Federal District Court alleging that Sagent's DMS product suite infringes one or more of the claims of a Timeline patent. Sagent filed its original answer to the complaint on
April 19, 1999 denying the material allegations of Timeline's complaint asserting, among other things, that the Timeline patent was invalid and unenforceable. Timeline filed an amended complaint on February 18, 2000 wherein it contends that Sagent's DMS Product Suite infringes one or more claims of three of Timeline's patents. Sagent filed its answer to the new complaint on March 6, 2000, denying the material allegations in Timeline's complaint and asserting that all three of the patents asserted by Timeline are invalid and unenforceable. As a result, the trial date in this matter has been reset for January 29, 2001. Sagent is presently vigorously defending the suit and at this point we cannot reasonably determine the outcome of the dispute.
On December 23, 1999, QMS and Sagent were served with a demand for arbitration prepared by the Corum Group Ltd. ("Corum"). In its demand, Corum claims that QMS breached an agreement to convey to Corum a certain percentage of the consideration received by QMS as a result of its acquisition by Sagent. QMS had terminated the contract in question, which had involved the provision of strategic counseling services by Corum to QMS, in 1998. On April 27, 2000 the parties agreed to settle the claim in exchange for 125,000 shares of Sagent common stock.
From time to time, Sagent may be involved in litigation relating to claims arising out of its ordinary course of business. Sagent provides for costs relating to these matters when a loss is probable and the amount is reasonably estimable. Appropriate reserves have been established for such claims. Sagent believes that, including the matters described above, there are no claims or actions pending or threatened against Sagent, the ultimate disposition of which would have a material impact on Sagent's financial position or results of operations.
Item 2. Changes in Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
(c) Exhibits
Item 6. Exhibits and Reports on Form 8-K
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) |
| By: | /s/ David Eliff |
|
| |
| DAVID ELIFF | |
| Executive Vice President, Finance and Chief Financial Officer | |
| (Principal Financial and Accounting Officer) |
| Exhibit Number | Exhibit Description |
| 27.1 | Financial Data Schedule |
|
|