<PAGE>
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 August 27, 1999
or
[_]TRANSITION REPORTS PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: 000-26579
TIBCO SOFTWARE INC.
(exact name of registrant as specified in its charter)
Delaware 77-0449727
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
3165 Porter Drive
Palo Alto, CA 94304
(Address of principal executive offices)
(650) 846-5000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. [_] Yes [X] No
The number of outstanding shares of the registrant's Common Stock, $0.001 par
value, was 60,360,563 as of August 27, 1999.
<PAGE>
TIBCO SOFTWARE INC.
INDEX
PART I: FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Item Page
--------- ------------------------------------------------------------- ----
<C> <S> <C>
Item 1. Condensed Consolidated Financial Statements.................. 3
Condensed Consolidated Balance Sheet--August 31, 1999 and
November 30, 1998............................................ 3
Condensed Consolidated Statement of Operations--Three and
Nine Months Ended August 31, 1999 and 1998................... 4
Condensed Consolidated Statement of Cash Flows--Nine Months
Ended August 31, 1999 and 1998............................... 5
Notes to Condensed Consolidated Financial Statements......... 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................... 9
Item 3. Quantitative and Qualitative Disclosure About Market Risk.... 17
PART II: OTHER INFORMATION
Item 1. Legal Proceedings............................................ 18
Item 2. Changes in Securities and Use of Proceeds.................... 18
Item 3. Defaults Upon Senior Securities.............................. 18
Item 4. Submission of Matters to a Vote of Security Holders.......... 18
Item 5. Other Information............................................ 19
Item 6. Exhibits and Reports on Form 8-K............................. 19
Signatures................................................... 19
</TABLE>
2
<PAGE>
PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TIBCO SOFTWARE INC.
CONDENSED CONSOLIDATED BALANCE SHEET
(in thousands)
<TABLE>
<CAPTION>
August November 30,
31, 1999 1998
-------- ------------
(unaudited)
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents.............................. $ 16,344 $ 547
Deposits held by Reuters............................... -- 15,423
Short-term investments................................. 110,326 --
Accounts receivable, net of allowances................. 23,426 13,234
Due from related parties............................... 2,799 1,829
Other current assets................................... 2,743 1,853
-------- --------
Total current assets................................. 155,638 32,886
Property and equipment, net.............................. 9,893 3,171
Other assets............................................. 797 232
-------- --------
$166,328 $ 36,289
======== ========
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C>
Current liabilities:
Accounts payable....................................... $ 5,535 $ 3,190
Accrued liabilities.................................... 14,157 7,834
Deferred revenue....................................... 5,972 3,561
-------- --------
Total current liabilities............................ 25,664 14,585
-------- --------
Stockholders' equity:
Convertible Preferred Stock............................ -- 27
Common Stock........................................... 60 22
Additional paid in capital............................. 181,053 46,499
Unearned compensation.................................. (9,881) (7,230)
Accumulated other comprehensive loss................... (66) --
Accumulated deficit.................................... (30,502) (17,614)
-------- --------
Total stockholders' equity........................... 140,664 21,704
-------- --------
$166,328 $ 36,289
======== ========
</TABLE>
See accompanying notes to the condensed consolidated financial statements.
3
<PAGE>
TIBCO SOFTWARE INC.
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months
Ended Nine Months Ended
August 31, August 31,
---------------- ------------------
1999 1998 1999 1998
------- ------- -------- --------
(unaudited)
<S> <C> <C> <C> <C>
License revenue:
Non-related parties.................... $ 8,239 $ 2,853 $ 22,906 $ 8,995
Related parties........................ 4,917 493 12,308 2,205
------- ------- -------- --------
Total license revenue................ 13,156 3,346 35,214 11,200
------- ------- -------- --------
Service and maintenance revenue:
Non-related parties.................... 10,238 6,900 25,567 21,834
Related parties........................ 642 626 2,326 2,692
------- ------- -------- --------
Total service and maintenance
revenue............................. 10,880 7,526 27,893 24,526
------- ------- -------- --------
Total revenue........................ 24,036 10,872 63,107 35,726
Cost of revenue.......................... 9,738 6,537 25,978 19,719
------- ------- -------- --------
Gross profit............................. 14,298 4,335 37,129 16,007
------- ------- -------- --------
Operating expenses:
Research and development............... 7,032 4,050 18,943 10,107
Sales and marketing.................... 8,093 3,994 21,022 10,416
General and administrative............. 1,756 958 5,291 2,592
Stock compensation..................... 2,021 1,465 5,429 3,535
------- ------- -------- --------
Total operating expenses............. 18,902 10,467 50,685 26,650
------- ------- -------- --------
Loss from operations..................... (4,604) (6,132) (13,556) (10,643)
Other income, net........................ 675 315 668 885
------- ------- -------- --------
Net loss................................. $(3,929) $(5,817) $(12,888) $ (9,758)
======= ======= ======== ========
Net loss per share:
Basic and diluted...................... $ (0.10) $ (0.29) $ (0.49) $ (0.50)
======= ======= ======== ========
Weighted average shares................ 37,857 20,129 26,511 19,653
======= ======= ======== ========
</TABLE>
See accompanying notes to the condensed consolidated financial statements.
4
<PAGE>
TIBCO SOFTWARE INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Nine Months Ended
August 31,
-------------------
1999 1998
--------- --------
(unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net loss................................................. $ (12,888) $ (9,758)
Adjustments to reconcile net loss to net cash used for
operating activities:
Depreciation and amortization.......................... 1,343 720
Amortization of unearned compensation.................. 5,429 3,535
Changes in assets and liabilities:
Accounts receivable.................................. (10,192) (1,510)
Due from related parties............................. (970) 2,380
Other assets......................................... (1,463) 254
Accounts payable..................................... 2,345 (461)
Accrued liabilities.................................. 6,323 (50)
Deferred revenue..................................... 2,411 (551)
--------- --------
Net cash used for operating activities............. (7,662) (5,441)
--------- --------
Cash flows from investing activities:
Deposits held by Reuters............................... 15,423 (10,911)
Purchases of investments............................... (110,384) --
Purchases of property and equipment.................... (8,065) (1,640)
--------- --------
Net cash used for investing activities............. (103,026) (12,551)
--------- --------
Cash flows from financing activities--
Proceeds from issuance of capital stock................ 126,485 12,367
--------- --------
Net change in cash and cash equivalents.................. 15,797 (5,625)
Cash and cash equivalents at beginning of period......... 547 8,059
--------- --------
Cash and cash equivalents at end of period............... $ 16,344 $ 2,434
========= ========
</TABLE>
See accompanying notes to the condensed consolidated financial statements.
5
<PAGE>
TIBCO SOFTWARE INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. Basis of Presentation
The accompanying unaudited financial statements have been prepared by TIBCO
Software Inc. (the "Company") in accordance with 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 in
accordance with such rules and regulations. In the opinion of management, the
accompanying unaudited financial statements reflect all adjustments, consisting
only of normal recurring adjustments, necessary to present fairly the financial
position of the Company, and its results of operations and cash flows. These
financial statements should be read in conjunction with the audited financial
statements and notes thereto for the fiscal year ended November 30, 1998, the
eleven months ended November 30, 1997 and the year ended December 31, 1996,
included in the Company's Registration Statement on Form S-1.
The Company's fiscal year ends on November 30th and its quarters end on the
last Friday of February, May and August. For ease of readership throughout this
report, the Company has indicated its interim fiscal periods as having ended on
the last day of the month in which such period actually ended.
The results of operations for the three months and nine months ended August
31, 1999 are not necessarily indicative of results that may be expected for any
other interim period or for the full fiscal year ending November 30, 1999.
In June 1999, the Company's Board of Directors approved a one for two
reverse stock split of the Company's outstanding shares which became effective
on July 13, 1999. All share and per share information included in these
financial statements have been retroactively adjusted to reflect this reverse
stock split.
The consolidated financial statements include the accounts of the Company
and its subsidiaries. All intercompany accounts and transactions have been
eliminated in consolidation.
2. Initial Public Offering
On July 13, 1999, the Company completed an initial public offering, which
consisted of approximately 9,162,000 shares of Common Stock (including
1,095,000 shares purchased by the underwriters over-allotment option, 500,000
sold directly to Sun Microsystems, and 266,667 shares sold directly to Yahoo!
Inc.) at $15.00 per share. Net proceeds aggregated approximately $123.6
million.
Upon closing of the initial public offering, all of the Company's
Convertible Preferred Stock converted to Common Stock. After the offering, the
Company's authorized capital consisted of 300,000,000 shares of Common Stock,
of which 60,360,563 shares were outstanding at August 31, 1999 and 25,000,000
shares of Preferred Stock, none of which were outstanding at August 31, 1999.
3. Cash, Cash Equivalents and Investments
The Company considers all highly liquid investment securities with original
maturities of three months or less to be cash equivalents. Short-term
investments consist primarily of highly liquid debt securities.
Management determines the appropriate classification of marketable
securities at the time of purchase and evaluates such designation as of each
balance sheet date. To date, all marketable securities have been classified as
available-for-sale and are carried at fair value with unrealized gains and
losses, if any, included in stockholders' equity. Unrealized gains and losses
were not material for all periods presented. Realized gains and losses and
declines in value of securities judged to be other than temporary are included
in interest income. Interest and dividends on all securities are included in
interest income.
6
<PAGE>
4. Comprehensive Net Loss
Comprehensive loss is comprised of net loss, foreign currency translation
gains or losses and unrealized gains or losses on available-for-sale marketable
securities. The Company's unrealized gains and losses on available for sale
marketable securities and foreign currency translation gains or losses have
been insignificant for all periods presented.
5. Revenue Recognition
License revenue consists principally of revenue earned under software
license agreements and is generally recognized when the software has been
shipped, there are no significant obligations remaining, and collection is
probable. When contracts contain multiple elements wherein vendor specific
objective evidence exists for all undelivered elements, the Company accounts
for the delivered elements in accordance with the "residual method" prescribed
by Statement of Position ("SOP") 98-9. Any maintenance included in these
arrangements is recognized ratably over the term of the arrangement. Revenue
from subscription license agreements, which include software, rights to future
software and maintenance, is deferred and recognized ratably over the term of
the subscription period. Software royalties and product fees earned through our
distribution and reseller partners are generally recognized when the partner
sells through to its customer.
Service revenue consists primarily of revenue received for performing
product development, implementation of system solutions, on-site support,
consulting and training. Service revenue is generally recognized as the
services are performed or on the percentage-of-completion method of accounting,
depending on the nature of the project. Under the percentage-of-completion
method, revenue recognized is that portion of the total contract price equal to
the ratio of costs expended to date to the anticipated final total costs, based
on current estimates of the costs to complete the project. To the extent that
these arrangements include license fees, such fees are recorded as license
revenue based on the percentage-of-completion ratio. If the total estimated
costs to complete a project exceed the total contract amount, indicating a
loss, the entire anticipated loss would be recognized currently.
Maintenance revenue consists of fees for providing software updates and
technical support for software products (post-contract support or "PCS").
Maintenance revenue is recognized ratably over the term of the agreement.
Payments received in advance of services performed are recorded as deferred
revenue. Allowances for estimated future returns and discounts are provided for
upon recognition of revenue.
6. Net Loss per Share
Basic net loss per share is computed using the weighted average number of
shares of Common Stock. Diluted net loss per share is computed using the
weighted average number of shares of Common Stock and common equivalent shares
outstanding during the period if their effect is dilutive. Common equivalent
shares consist of Common Stock subject to repurchase and incremental shares of
Common Stock issuable upon the exercise of stock options (using the treasury
stock method) and upon the conversion of Convertible Preferred Stock.
7
<PAGE>
The following table sets forth the computation of basic and diluted net loss
per share for the periods indicated (in thousands, except per share amounts):
<TABLE>
<CAPTION>
Three Months
Ended Nine Months
August 31, Ended August 31,
---------------- -----------------
1999 1998 1999 1998
------- ------- -------- -------
(unaudited)
<S> <C> <C> <C> <C>
Net loss................................. $(3,929) $(5,817) $(12,888) $(9,758)
======= ======= ======== =======
Basic and diluted:
Weighted average shares outstanding.... 39,928 21,980 28,565 21,313
Weighted average shares subject to
repurchase............................ (2,071) (1,851) (2,054) (1,660)
------- ------- -------- -------
Weighted average shares used to compute
basic and diluted net loss per share.... 37,857 20,129 26,511 19,653
======= ======= ======== =======
Net loss per share--basic and diluted.... $ (0.10) $ (0.29) $ (0.49) $ (0.50)
======= ======= ======== =======
</TABLE>
The following table sets forth potential common equivalent shares that are
not included in the diluted net loss per share calculation above because to do
so would be anti-dilutive for the periods indicated (in thousands):
<TABLE>
<CAPTION>
Three Months Nine Months
Ended Ended
August 31, August 31,
------------- -------------
1999 1998 1999 1998
------ ------ ------ ------
(unaudited)
<S> <C> <C> <C> <C>
Weighted average effect of potential common
equivalent shares:
Series A Preferred Stock........................ 11,429 20,000 17,143 20,000
Series B Preferred Stock........................ 2,494 4,365 3,741 4,365
Series C Preferred Stock........................ 1,635 2,861 2,453 2,526
Common Stock subject to repurchase.............. 2,071 1,851 2,054 1,660
Stock options................................... 8,855 5,359 7,831 3,767
------ ------ ------ ------
26,484 34,436 33,222 32,318
====== ====== ====== ======
</TABLE>
7. Related Party Transactions
The Company has transactions with Cisco Systems, Inc., a principal
stockholder of the Company, and with Reuters Group PLC, including its wholly-
owned subsidiaries (collectively, "Reuters"), a majority stockholder of the
Company. In addition to the related party information disclosed in the
financial statements, the Company purchased $4.9 million in fixed assets,
incurred $0.5 million for administrative services and incurred $0.4 million for
fixed asset and building rental from Reuters during the third quarter of fiscal
1999.
8. Subsequent Event
In September 1999, the Company agreed to acquire InConcert, Inc., a
subsidiary of Xerox Corporation and a developer of business integration
solutions for telecommunication companies, in a $34 million cash transaction.
Completion of the acquisition is subject to customary regulatory review. The
Company expects to close the transaction during the fourth quarter of fiscal
1999 and to account for the acquisition using the purchase method of
accounting.
The Company will evaluate the allocation of the purchase price to the net
assets acquired, which may include in-process technology that will be written-
off in the period acquired and goodwill and other intangibles that will be
amortized over their period of benefit. The allocation of the Company's
aggregate purchase price to the tangible and identifiable intangible net assets
acquired will be based on independent appraisals and estimates of fair values.
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following Management's Discussion and Analysis of Financial Condition
and Results of Operations contains forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended. Words such as
"anticipates," "expects," "intends," "plans," "believes," "seeks," "estimates"
and similar expressions identify such forward-looking statements. These
forward-looking statements are subject to risks and uncertainties that could
cause actual results to differ materially from those indicated in the forward-
looking statements. Factors which could cause actual results to differ
materially include those set forth in the following discussion, and, in
particular, the risks discussed below under the subheading "Additional Risk
Factors that Could Affect Operating Results and Market Price of Stock." Unless
required by law, the Company undertakes no obligation to update publicly any
forward-looking statements.
Overview
TIBCO Software Inc. ("TIBCO Software" or the "Company") develops and markets
a suite of software products that enables businesses to link internal
operations, business partners and customer channels in real-time. Our
TIB/ActiveEnterprise product suite facilitates the distribution of information
and integration of business processes by connecting applications to a network
through a technology called The Information Bus or the TIB. We are the
successor to a portion of the business of Teknekron Software Systems, Inc.
("Teknekron"). Teknekron developed software for the integration and delivery of
market data, such as stock quotes, news and other financial information, in
trading rooms of large banks and financial services institutions. In 1992,
Teknekron expanded its development efforts to include solutions designed to
enable complex and disparate manufacturing equipment and software
applications--primarily in the semiconductor fabrication market--to communicate
within the factory environment. Teknekron was acquired by Reuters, the global
news and information group, in 1994. Following the acquisition, continued
development of the TIB technology was undertaken to expand its use in the
financial services markets. In January 1997, our company, TIBCO Software, was
established as an entity separate from Teknekron.
We were formed to create and market software solutions for use in the
integration of business information, processes and applications in diverse
markets and industries outside the financial services sector.
During fiscal 1998, we expanded our product development activities and
continued to invest in creating a product marketing organization, engaging in
advertising programs to build our corporate brand identity, building our
domestic and international direct sales force and creating a general and
administrative infrastructure. During the second half of fiscal 1998, we began
initial shipments of our TIB/ActiveEnterprise products, to companies such as
PageNet, Philips Medical, Compaq and 3Com. We also formally introduced our
TIBCO.net product and service offering for creating and managing e-business
activities, and generated revenue from Yahoo! and Netscape for enabling their
stock quotation services. We intend to continue to fund the development of
additional TIB/ActiveEnterprise products and to increase our sales and
marketing activities at least through the end of fiscal 2000.
Our revenue today consists primarily of license and product fees from our
customers and distributors, including Reuters pursuant to our license agreement
with them, both of which are primarily attributable to sales of our
TIB/ActiveEnterprise product suite. In addition, we receive fees from our
customers for providing project integration services. We also receive revenue
from our TIBCO.net customers. Revenue from these customers is a combination of
fixed service charges, a percentage of the advertising fees generated from
their TIBCO.net-enabled web pages and a charge for each user visit to these web
pages. We also receive a limited amount of revenues from our strategic
relationships with hardware vendors and systems integrators.
We recognize revenue from software license fees upon shipment of our
software products to our customers as long as we have no significant
obligations remaining and we believe that collection of the resulting
receivable is probable. When contracts contain multiple elements wherein vendor
specific objective evidence
9
<PAGE>
exists for all undelivered elements, the Company accounts for the delivered
elements in accordance with the "residual method" prescribed by Statement of
Position ("SOP") 98-9. Any maintenance included in these arrangements is
recognized ratably over the term of the arrangement. Revenue from subscription
license agreements, which include software, rights to future software and
maintenance, is deferred and recognized ratably over the term of the
subscription period. Software royalties and product fees earned through our
distribution and reseller partners are generally recognized when the partner
sells the software through to its customer.
Service revenue is generally recognized as the services are performed or on
the percentage-of-completion method. Revenue recognized is that portion of the
total contract price equal to the ratio of costs expended to date to the
anticipated final total costs, based on current estimates of the costs to
complete the project. To the extent that these arrangements include license
fees, such fees are recorded as license revenue based on the percentage-of-
completion ratio. If the total estimated costs to complete a project exceed the
total contract amount, indicating a loss, the entire anticipated loss would be
recognized currently.
Maintenance revenue consists of fees for providing software updates and
technical support for software products (post-contract support or "PCS").
Maintenance revenue is recognized ratably over the term of the agreement.
Payments received in advance of services performed are recorded as deferred
revenue. Allowances for estimated future returns and discounts are provided for
upon recognition of revenue.
Our distributors generally pay us negotiated royalties on their sales of our
products. Reuters distributes our products to customers in the financial
services market segment. Through December 2001, Reuters must pay us product
fees based on a percentage of the revenue it derives from the sale of licenses
and maintenance for our products. Under our license agreement with Reuters,
this includes minimum guaranteed product fees of $16 million payable in
calendar 1999, with $7.1 million payable in the remainder of calendar 1999,
$18 million payable in calendar 2000 and $20 million payable in calendar 2001.
We will recognize revenue in the amount of these guaranteed product fees
ratably over the contractual period. In any period where actual product fees
exceed the minimum guaranteed product fees for the year, the difference between
the actual product fees and minimum guaranteed product fees will be recognized
as revenue.
Results of Operations
The following table sets forth our results of operations expressed as
percentages of revenue:
<TABLE>
<CAPTION>
Three Months Nine Months
Ended Ended
August 31, August 31,
---------------- --------------
1999 1998 1999 1998
------ ------ ----- -----
<S> <C> <C> <C> <C>
Revenue:
License................................. 55 % 31 % 56 % 31 %
Service and maintenance................. 45 69 44 69
------ ------ ----- -----
Total revenue......................... 100 100 100 100
Cost of revenue........................... 41 60 41 55
------ ------ ----- -----
Gross profit.............................. 59 40 59 45
------ ------ ----- -----
Operating expenses:
Research and development................ 29 37 30 28
Sales and marketing..................... 34 37 33 29
General and administrative.............. 7 9 8 7
Stock and other compensation............ 8 14 9 11
------ ------ ----- -----
Total operating expenses.............. 78 97 80 75
------ ------ ----- -----
Loss from operations...................... (19) (57) (21) (30)
Other income, net......................... 3 3 1 3
------ ------ ----- -----
Net loss.................................. (16)% (54)% (20)% (27)%
====== ====== ===== =====
</TABLE>
10
<PAGE>
Total Revenue. Total revenue increased by $13.1 million, or 121%, from $10.9
million in the third quarter of fiscal 1998 to $24.0 million in the third
quarter of fiscal 1999. In the third quarter of fiscal 1998, Cedel Global
Services accounted for 21% of total revenue. In the third quarter of fiscal
1998, revenue from Reuters accounted for 10% of our total revenue, while in the
corresponding period of fiscal 1999, revenue from Reuters accounted for 24% of
our total revenue. Total revenue increased by $27.4 million, or 77%, from
$35.7 million in the first nine months of fiscal 1998 to $63.1 million in the
first nine months of fiscal 1999. In the first nine months of fiscal 1998, NEC
Electronics and Cedel Global Services accounted for 10% and 18% of total
revenue, while in the corresponding period of 1999 Cedel Global Services
accounted for 10% of total revenue. In the first nine months of fiscal 1998,
revenue from Reuters accounted for 14% of our total revenue, while in the
corresponding period of fiscal 1999, revenue from Reuters accounted for 20% of
our total revenue. In fiscal 1998, revenue from Reuters consisted primarily of
maintenance and consulting fees for services we performed for Reuters, while in
fiscal 1999, revenue from Reuters consisted primarily of product fees from
Reuters, on its sales of our products. Beginning in April 1999, under our
license agreement with Reuters, minimum guaranteed product fees from Reuters
will be approximately $1.8 million per month for the remainder of calendar
1999.
License Revenue. License revenue increased by $9.9 million, or 293%, from
$3.3 million or 31% of total revenue in the third quarter of fiscal 1998 to
$13.2 million or 55% of total revenue in the third quarter of fiscal 1999.
License revenue increased by $24.0 million, or 214%, from $11.2 million or 31%
of total revenue in the first nine months of fiscal 1998 to $35.2 million or
56% of total revenue in the first nine months of fiscal 1999. This increase was
due primarily to increased sales of our TIB/ActiveEnterprise products, which
were introduced during the second half of fiscal 1998. The growth in license
revenue as a percentage of total revenue reflects our strategy of pursuing a
license-driven business model. We believe that license revenue will continue to
grow moderately as a percentage of total revenue for the remainder of fiscal
1999.
Service and Maintenance. Total service and maintenance revenue increased
$3.4 million or 45%, from $7.5 million or 69% of total revenue for the third
quarter of fiscal 1998 to $10.9 million, or 45% of total revenue for the third
quarter of fiscal 1999. Total service and maintenance revenue increased $3.4
million or 14%, from $24.5 million or 69% of total revenue for the first nine
months of fiscal 1998 to $27.9 million, or 44% of total revenue in the first
nine months of fiscal 1999.
Cost of Revenue. Cost of revenue consists primarily of salaries and third-
party contractor and associated expenses primarily related to providing project
implementation services and, to a lesser extent, the cost of providing
maintenance and customer support services. The majority of our cost of revenue
is directly related to our service revenue. Cost of revenue increased by $3.2
million, or 49%, from $6.5 million or 60% of total revenue in the third quarter
of fiscal 1998 to $9.7 million or 41% of total revenue in the third quarter of
fiscal 1999. Cost of revenue increased by $6.3 million, or 32%, from $19.7
million or 55% of total revenue in the first nine months of fiscal 1998 to
$26.0 million or 41% of total revenue in the first nine months of fiscal 1999,
primarily as a result of using third-party contractors to support our contract
with Cedel Global Services and hiring additional technical staff to support our
growing installed base of customers. The decrease in cost of revenue as a
percentage of total revenue was due primarily to the increase in license
revenue as a percentage of total revenue.
Research and Development Expenses. Research and development expenses consist
primarily of personnel and related costs associated with the development of our
TIB/ActiveEnterprise product suite. Research and development expenses increased
by $3.0 million, or 74%, from $4.0 million or 37% of total revenue in the third
quarter of fiscal 1998 to $7.0 million or 29% of total revenue in the third
quarter of fiscal 1999. Research and development expenses increased by $8.8
million, or 87%, from $10.1 million or 28% of total revenue in the first nine
months of fiscal 1998 to $18.9 million or 30% of total revenue in the first
nine months of fiscal 1999. This increase was due primarily to increases in our
development staff as we continued to expand the TIB/ActiveEnterprise product
suite as well as upgrading the performance of existing products. We believe
that continued investment in research and development is critical to attaining
our strategic objectives and, as a result, expect that spending on research and
development will continue to increase moderately in absolute dollars but remain
relatively stable as a percentage of total revenue for the remainder of fiscal
1999.
11
<PAGE>
Sales and Marketing Expenses. Sales and marketing expenses consist primarily
of personnel and related costs of our direct sales force and marketing staff
and marketing programs, including advertising, trade shows, promotional
materials and customer conferences. Sales and marketing expenses increased by
$4.1 million, or 103%, from $4.0 million or 37% of total revenue for the third
quarter of fiscal 1998 to $8.1 million or 34% of total revenue in the third
quarter of fiscal 1999. Sales and marketing expenses increased by $10.6
million, or 102%, from $10.4 million or 29% of total revenue in the first nine
months of fiscal 1998 to $21.0 million or 33% of total revenue in the first
nine months of fiscal 1999. This increase resulted primarily from the expansion
of our domestic and international direct sales force devoted to selling our
expanding suite of TIB/ActiveEnterprise products initially released in the
second half of fiscal 1998. We intend to continue to increase staff in our
direct sales organization and develop product marketing and branding campaigns
and, accordingly, expect that sales and marketing expenditures will continue to
increase substantially in absolute dollars and will increase moderately as a
percentage of total revenue over the remainder of fiscal 1999.
General and Administrative Expenses. General and administrative expenses
consist primarily of personnel and related costs for general corporate
functions, including executive, finance, accounting, human resources and
information systems. General and administrative expenses increased by $0.8
million, or 83%, from $1.0 million in the third quarter of fiscal 1998 to $1.8
million in the third quarter of fiscal 1999. General and administrative
expenses increased by $2.7 million, or 104%, from $2.6 million in the first
nine months of fiscal 1998 to $5.3 million in the first nine months of fiscal
1999, primarily as a result of increased staffing and associated operational
costs related to building our general and administrative infrastructure. We
believe that general and administrative expenses will increase moderately in
absolute dollars and increase slightly as a percentage of total revenue for the
remainder of fiscal 1999 as we expand our infrastructure to support a larger,
more global organization and continue our transition to operating as a stand-
alone entity.
Stock and Other Compensation. In connection with the grant of stock options
to employees and non-employee directors during fiscal 1997 and 1998 and the
first nine months of fiscal 1999, we recorded unearned compensation of $23.5
million, representing the difference between the deemed fair value of our
Common Stock at the date of grant and the exercise price of such options. Such
an amount, net of amortization, is presented as a reduction of stockholders'
equity and amortized over the vesting period of the applicable option. As a
result, we expect to amortize $1.4 million, $4.1 million, $2.4 million, $1.3
million, $0.5 million and $0.2 million of deferred compensation in the fourth
quarter of fiscal 1999, and in 2000, 2001, 2002, 2003 and 2004, respectively.
Stock and other compensation increased from $3.5 million in the first nine
months of fiscal 1998 to $5.4 million in the first nine months of fiscal 1999
due primarily to the grant of stock options to new employees. In addition, the
compensation expense related to options granted to consultants is revalued at
each period end using the Black-Scholes option pricing model. As a result,
fluctuations in our stock price will result in fluctuations in the
corresponding option valuation, thereby increasing or decreasing the
compensation expense for the period.
Other Income, Net. Other income, net includes interest and other
miscellaneous income and expense items. Other income, net decreased from
$885,000 in the first nine months of fiscal 1998 to $668,000 in the first nine
months of fiscal 1999. This decrease was due primarily to a lower average
investment balance, a loss on the disposal of fixed assets and a foreign
currency translation loss related to our foreign sales offices.
Liquidity and Capital Resources
Prior to our initial public offering, we funded our operations primarily
through the sale of our capital stock. On July 13, 1999, we completed an
initial public offering, which consisted of 9,161,667 shares of our common
stock (including 1,095,000 shares purchased by the underwriters pursuant to
their over-allotment option, 500,000 shares sold directly to Sun Microsystems,
and 266,667 shares sold directly to Yahoo! Inc.) at $15.00 per share. Net
proceeds aggregated approximately $123.6 million (net of underwriters'
commission and offering expenses of $13.8 million).
Net cash used for operating activities in the nine months ended August 31,
1998 was $5.4 million, resulting primarily from our net loss. Net cash used for
operating activities in the nine months ended
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August 31, 1999 was $7.7 million, primarily reflecting the net loss reported
for the period as well as an increase in accounts receivable.
Net cash used in investing activities in the nine months ended August 31,
1998 was $12.6 million. Net cash used in investing activities in this period
was related primarily to the purchase of property and equipment, principally
desktop and network hardware and software. Net cash used for investing
activities for the nine months ended August 31, 1999 was $103 million,
primarily related to the purchase of short-term investments and to a lesser
extent purchase of property and equipment. The increase in purchases of
property and equipment relates primarily to the purchase of $4.9 million of
equipment and leasehold improvements from Reuters.
Net cash provided by financing activities in the nine months ended August
31, 1998 and the nine months ended August 31, 1999 was $12.4 and $126.5
million, respectively. Cash provided by financing activities was the result of
net proceeds from the sale of our capital stock.
During the remainder of fiscal 1999, we anticipate capital expenditures of
approximately $1.5 million. Our capital expenditures may increase in the future
consistent with our anticipated growth in operations, infrastructure and
personnel.
We anticipate continued growth in our operating expenses for the foreseeable
future, particularly in sales and marketing expenses and, to a lesser extent,
research and development and general and administrative expenses. As a result,
we expect our operating expenses and capital expenditures to constitute the
primary use of our cash resources. In addition, we may require cash resources
to fund acquisitions or investments in complementary businesses, technologies
or product lines. We believe that the net proceeds from our initial public
offering, together with our current cash and cash equivalents, will be
sufficient to meet our anticipated cash requirements for working capital and
capital expenditures through the end of fiscal 2000.
Year 2000 Readiness Disclosure
Year 2000 Program. We established a Year 2000 program to address the issues
arising from the change of millennium. Many computer systems, as well as
equipment that uses embedded chips, store and process date information using
only the last two digits of the year. From January 1, 2000, these systems may
be unable to distinguish between 1900 and 2000. This is complicated by the fact
that the year 2000 is also a leap year. If not overcome, these problems could
cause system failures and disrupt the normal business operations of companies,
including ours.
We have addressed and are continuing to address the Year 2000 issue through
the following means:
. Awareness--making our customers, suppliers and employees aware of the
problem.
. Inventory--identifying and recording date sensitive information
technology systems and non-information technology systems.
. Development--assessment of date sensitivity and modification or
replacement of date sensitive products.
. Testing--verification of our development efforts.
. Implementation--installation of tested products and systems.
. Contingency Planning--creating and/or evaluating the needs for
contingency plans to address potential worst-case scenarios.
Our state of readiness and business risks. We have completed an assessment
of both our information technology systems and our non-information technology
systems. Based upon our examination, we believe that our non-information
technology systems do not contain any elements that are susceptible to Year
2000 problems. However, we will modify or replace some portions of our internal
information technology systems as
13
<PAGE>
Year 2000-compliant versions of these systems are released by outside vendors
(e.g. Microsoft releases of Windows NT). If, in the worst case scenario, such
replacement is not made, or is not completed on a timely basis, our operations
could be materially affected.
As part of our Year 2000 program, we have assessed, remediated and certified
all of the standard products we currently market. We are also working with our
customers to ensure that they are aware of our Year 2000 program and have
provided them with information on which current and past products are covered
by our standard Year 2000 product warranty. Despite investigation and testing
by us, there can be no assurances that software products we developed will not
contain undetected errors or defects associated with Year 2000 date functions.
If, in the worst case scenario, our products are affected by date-related
issues, our customers may file claims against us or require us to repair any
damage to their systems caused by our products. In addition, our revenues may
be adversely affected, our maintenance, technical support and management costs
could increase and our reputation could be damaged.
Our operations also rely on third party suppliers of data,
telecommunications, utilities and building services. We have completed
contacting our critical suppliers about the nature and progress of their Year
2000 compliance to determine the extent to which their failure to remedy their
own Year 2000 problems could materially affect us. Our critical information
technology suppliers have generally provided assurances as to their Year 2000
readiness, but it has been difficult to obtain full assurances of Year 2000
compliance from telecommunications infrastructure and utility suppliers which
generally do not provide such assurances. We intend to consider use of
alternative telecommunications and utility suppliers if reasonable assurances
are not provided. Any Year 2000-related failure of any of our critical
suppliers could cause a significant disruption of our business.
Costs. To date, we have spent approximately $200,000 on Year 2000
assessment, remediation and communication with customers, vendors and partners.
This cost does not include product development expenses, which inherently
include costs related to addressing date sensitivities in our products. Based
on our experience to date and our internal assessment, we do not anticipate
that additional costs associated with remedying our internal systems will be
material.
Contingency plans. We already have in place as part of our day-to-day
operations plans that can be executed in the event of certain service failures.
These operational plans will form the basis of any Year 2000 contingency plan.
Additional Risk Factors That Could Affect Operating Results and Market Price of
Stock
Because we have a limited operating history as an independent entity, it may be
difficult for prospective investors to evaluate our business and prospects
When making an investment decision, you should consider the risks, expenses
and difficulties that we may encounter as a newly-independent company
implementing a new business strategy. We have operated as a stand-alone company
only since January 1997. Prior to January 1997, our business was conducted by a
subsidiary of Reuters that focused on providing market data, custom messaging
and integration solutions to companies in the financial services, high-tech
manufacturing and energy markets. At the time we were formed as a separate
entity, we implemented an expanded business strategy focused on deriving
license revenue from direct licensing of our TIB/ActiveEnterprise product suite
to a diverse group of customers outside the financial services market. We began
shipments of TIB/ActiveEnterprise products in the second half of fiscal 1998.
These changes have required us to adjust our business processes and hire
additional employees. We cannot be certain that our new business strategy will
be successful or that we can successfully operate as an independent entity.
We have a history of losses, and we expect future losses, and if we do not
achieve and sustain profitability our business will suffer and our stock price
may decline
Although our revenue has increased in recent quarters, we may not be able to
sustain our growth or obtain sufficient revenue to achieve and sustain
profitability. We incurred net losses of approximately $9.8 million and
14
<PAGE>
$12.9 million in the first nine months of fiscal 1998 and 1999. As of August
27, 1999, we had an accumulated deficit of approximately $30.5 million.
Since the beginning of fiscal 1998, we have invested significantly in our
technology research and development and in building our sales and marketing
organization. We expect to continue to spend substantial financial and other
resources on developing and introducing enhancements to our existing products
and new software products and on expanding our direct sales and marketing
activities. As a result, we need to generate significant revenue to achieve and
maintain profitability. We expect that our research and development expenses
and our sales and marketing expenses will continue to increase in absolute
dollars and may increase as percentages of revenue for the foreseeable future.
Our future revenue is unpredictable, and we expect our quarterly operating
results to fluctuate, which may cause our stock price to decline
Period-to-period comparisons of our operating results may not be a good
indication of our future performance. Moreover, our operating results in some
quarters may not meet the expectations of stock market analysts and investors.
In that event, our stock price would likely decline. As a result of our limited
operating history, our new business strategy and the evolving nature of the
markets in which we compete, we may have difficulty accurately forecasting our
revenue in any given period. In addition to the factors discussed elsewhere in
this section, a number of factors may cause our revenue to fall short of our
expectations or cause fluctuations in our operating results, including:
. the announcement or introduction of new or enhanced products or services
by our competitors;
. the amount and timing of operating costs and capital expenditures
relating to the expansion of our operations; and
. the capital and expense budgeting decisions of our customers.
In addition, our quarterly operating results have historically been subject
to variations throughout the year due to a general slow-down in our sales in
the summer months, particularly in Europe. Specifically, we generally
experience relatively lower revenue in our third and, to a lesser extent, our
first fiscal quarters. These seasonal variations in our operating results may
lead to fluctuations in our results of operations from quarter to quarter
throughout the year.
Our dependence on a limited number of customers for a substantial amount of our
sales could lead to fluctuations in our operating results
Our business depends on sales of our products to a limited number of
customers, which may cause fluctuations in our operating results. We do not
have long-term contracts with any of our customers. There can be no assurance
that any of our customers will continue to purchase our products in the future.
As a result, a customer that generates substantial revenue for us in one period
may not be a source of revenue in subsequent periods.
Our licensing and distribution relationship with Reuters places limitations on
our ability to conduct our business
We are substantially dependent on our licensing and distribution
relationship with Reuters. Our relationship with Reuters involves limitations
and restrictions on our business, as well as other risks, described below.
Reuters has access to the intellectual property used in our products, and
could use the intellectual property to compete with us. We license the
underlying TIB messaging technology incorporated into some of our important
TIB/ActiveEnterprise products from Reuters. We do not own this technology.
Reuters is not restricted from using the TIB technology to produce products
that compete with our products, and it can grant limited licenses to the TIB
technology to others who may compete with us. In addition, we must license all
the
15
<PAGE>
intellectual property and products we create through December 2011 to Reuters.
This will place Reuters in a position to more easily develop products that
compete with our product offerings.
We must rely on Reuters and other distributors to sell our products in the
financial services market, and they may not be successful in doing so. Under
our agreements with Reuters, we are restricted from selling our products and
providing consulting services directly to companies in the financial services
market and major competitors of Reuters, and from using the TIB technology we
license from Reuters to develop products specifically for use by these
companies. Accordingly, we must rely on Reuters and other third-party resellers
and distributors to sell our products to these companies.
In fiscal 1998, substantially all of our revenue from sales in the financial
services market, excluding sales to Cedel Global Services, consisted of product
fees paid to us by Reuters. Although Reuters is the preferred distributor of
our products in the financial services market and is required to pay us
guaranteed minimum product fee payments until the end of 2001, Reuters has no
contractual obligation to distribute our products to financial services
customers. Reuters and other distributors may not be successful in selling our
products into the financial services market, or they may elect to sell
competitive third-party products into that market, either of which may
adversely affect our revenue in that market.
Our relationship with Reuters restricts our ability to earn revenue from
sales in the financial services market. Under the license agreement, Reuters is
required to pay us product fees based on a percentage of its revenue from sales
of our products in the financial services market, excluding products that are
embedded in any Reuters' products. These product fees may be materially less
than the product fees we could obtain from other distributors or resellers in
the financial services market. In addition, when we sell our products into the
financial services market through third-party distributors other than Reuters,
Reuters receives a share of our license revenue.
Our license agreement with Reuters imposes practical restrictions on our
ability to acquire other companies. The license agreement places no specific
restrictions on our ability to acquire companies with all or part of their
business in the financial services market. However, under the terms of the
license agreement, we are prohibited from bundling or combining our products
that are based on licensed technology with an acquired company's products and
services and then selling the bundled or combined products directly to
financial services companies. This prohibition could prevent us from realizing
potential synergies with companies we acquire.
The market for enterprise infrastructure software may not grow as quickly as we
anticipate, which would cause our revenues to fall below expectations
The market for enterprise infrastructure software is relatively new and
evolving. We earn a substantial portion of our revenue from sales of our
enterprise infrastructure software, including application integration software,
and related services. We expect to earn substantially all of our revenue in the
foreseeable future from sales of these products and services. Our future
financial performance will depend on continued growth in the number of
organizations demanding software and services for application integration, e-
business and information delivery, and seeking outside vendors to develop,
manage and maintain this software for their critical applications. Many of our
potential customers have made significant investments in internally developed
systems and would incur significant costs in switching to third-party products,
which may substantially inhibit the growth of the market for enterprise
infrastructure software. If this market fails to grow, or grows more slowly
than we expect, our sales will be adversely affected.
Our stock price may be volatile, which could cause investors to lose all or
part of their investments in our stock
The stock market in general, and the stock prices of technology companies in
particular, have recently experienced volatility which has often been unrelated
to the operating performance of any particular company or companies. If market
or industry-based fluctuations continue, our stock price could decline
regardless of our actual operating performance and investors could lose all or
part of their investments.
16
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We develop products in the United States and sell in North America, South
America, Asia and Europe. As a result, our financial results could be affected
by factors such as changes in foreign currency exchange rates or weak economic
conditions in foreign markets. A majority of sales are currently made in U.S.
dollars, a strengthening of the dollar could make our products less competitive
in foreign markets. Our interest income is sensitive to changes in the general
level of U.S. interest rates, particularly since the majority of our
investments are in short-term instruments. The investment portfolio is subject
to interest rate risk and will fall in value in the event market interest rates
increase. If market interest rates were to increase immediately and uniformly
by 50 basis points from levels as of August 31, 1999, the fair market value of
the portfolio would decline by approximately $470,000. However, the Company has
the ability to hold certain of its fixed income securities to maturity thereby
mitigating a decline in income or cash flows.
17
<PAGE>
TIBCO SOFTWARE INC.
PART II: OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 2. Changes in Securities and Use of Proceeds
(a) During the month ended June 30, 1999, the Company issued to employees
519,030 options to purchase Common Stock at an average exercise price of $8.50
per share; during the month ended July 30, 1999, the Company issued to
employees 185,132 options to purchase Common Stock at an average exercise price
of $9.00 per share; during the month ended August 27, 1999, the Company issued
to employees 11,000 options to purchase Common Stock at an average exercise
price of $22.50. These securities were issued under Section 4(2) of the
Securities Act of 1933 and/or Rule 701 thereunder. All options issued during
the quarter ended August 27, 1999 have been adjusted for the stock split which
became effective on July 13, 1999.
(b) On July 13, 1999, we commenced our initial public offering, which
consisted of 9,161,667 shares of our Common Stock (including 1,095,000 shares
purchased by the underwriters pursuant to their over-allotment option, 500,000
shares sold directly to Sun Microsystems, Inc. and 266,667 shares sold directly
to Yahoo! Inc.) at $15.00 per share pursuant to a registration statement (No.
333-78195) declared effective by the Securities and Exchange Commission on July
13, 1999. The offering has been terminated and all shares have been sold. The
managing underwriters for the initial public offering were Goldman, Sachs &
Co., Bear, Stearns & Co. Inc. and Deutsche Banc Alex. Brown. Aggregate gross
proceeds from the offering were $137,425,005.
We incurred the following expenses in connection with the offering:
underwriters' discounts and commissions of $8,814,750 and approximately $5.0
million in other expenses, for total expenses of approximately $13,814,750.
After deducting expenses of the offering, we received net offering proceeds
of $123,610,255. From July 13, 1999, the effective date of the registration
statement, to August 27, 1999, the ending date of the reporting period, the
approximate amount of net offering proceeds used were $4.2 million for the
purchase of leasehold improvements at our Palo Alto, California, headquarters
and $3.1 million for the purchase of computer equipment. The remaining net
proceeds were invested in short-term financial instruments.
No payments constituted direct or indirect payments to any of our directors,
officers or general partners or their associates, to persons owning 10% or more
of any class of our equity securities, or to any of our affiliates, except that
an aggregate of $2.1 million of expenses of the offering were paid to Reuters
Group PLC, a 10% stockholder, in connection with certain investment advisory
and legal fees incurred by it.
Item 3. Defaults upon Senior Securities
Not applicable
Item 4. Submission of Matters to a Vote of Security Holders
During the fiscal quarter ended August 27, 1999, we solicited written
consent (effective May 24, 1999) from our stockholders regarding the approval
of the amendment and restatement of our 1996 Stock Option Plan (the "1996
Plan") including the addition of an employee stock purchase plan and the
reservation of an additional 700,000 shares of Common Stock to be issued under
the 1996 Plan, and the approval of the amendment and restatement of our 1998
Director Option Plan including the reservation of an additional 325,000 shares
of Common Stock to be issued thereunder.
18
<PAGE>
During this quarter, we also solicited written consent (effective July 13,
1999) from our stockholders regarding the approval of: (a) the second amended
and restated certificate of incorporation which provided for a 1-for-2 reverse
stock split of all of our outstanding shares, pursuant to which each
outstanding share of Common and Preferred Stock was converted into one-half of
a share of Common or Preferred Stock, as applicable, and (b) the second
amended and restated certificate of incorporation and amended bylaws which
provide for certain changes in connection with our initial public offering of
Common Stock.
Each written consent and each matter contained therein was approved by a
majority of our stockholders.
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits
27.1 Financial Data Schedule
b) Reports on Form 8-K.
No reports on Form 8-K were filed during the quarter ended August 27,
1999.
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.
TIBCO SOFTWARE, INC.
Date: October 11, 1999 /s/ Vivek Y. Ranadive
By____________________________________
Vivek Y. Ranadive
President, Chief Executive Officer
and
Chairman of the Board
(Principal executive officer)
Date: October 11, 1999 /s/ Paul G. Hansen
By____________________________________
Paul G. Hansen
Executive Vice President, Finance
and
Chief Financial Officer
(Principal financial and
accounting officer)
19
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