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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the fiscal year ended November 30, 1999
Commission File Number: 000-26579
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TIBCO SOFTWARE INC.
(Exact name of registrant as specified in its charter)
Delaware 77-0289509
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3165 Porter Drive, Palo Alto, CA 94304
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (650) 846-5000
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Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.001 par value per share
(Title of Class)
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Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]
As of December 15, 1999, there were 181,228,026 shares of the Registrant's
Common Stock outstanding, and the aggregate market value of such shares held by
non-affiliates of the Registrant (based upon the closing sale price of such
shares on the Nasdaq National Market on December 15, 1999) was approximately
$2,297,428,775. Shares of common stock held by each executive officer and
director and by each entity that owns 5% or more of the outstanding common
stock have been excluded in that such persons may be deemed to be affiliates.
This determination of affiliate status is not necessarily a conclusive
determination for other purposes.
DOCUMENTS INCORPORATED BY REFERENCE
Certain sections of the Registrant's Annual Report to Stockholders for the
year ended November 30, 1999 (the "1999 Annual Report") are incorporated by
reference in Parts II and IV of this Form 10-K to the extent stated herein.
Also, certain sections of the Registrant's definitive Proxy Statement for the
2000 Annual Meeting of Stockholders to be held on April 12, 2000 are
incorporated by reference in Part III of this Form 10-K to the extent stated
herein.
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TIBCO Software Inc. Form 10-K
For the Fiscal Year Ended November 30, 1999
TABLE OF CONTENTS
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Part I
Item 1. Business................................................... 3
Item 2. Properties................................................. 13
Item 3. Legal Proceedings.......................................... 13
Item 4. Submission of Matters to a Vote of Security Holders........ 13
Part II
Item 5. Market for the Company's Common Stock and Related
Stockholders Matters....................................... 14
Item 6. Selected Financial Data.................................... 14
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................. 14
Item 7A. Quantitative and Qualitative Disclosure About Market Risk.. 14
Item 8. Financial Statements and Supplementary Data................ 14
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure................................... 14
Part III
Item 10. Directors and Executive Officers of TIBCO Software Inc..... 15
Item 11. Executive Compensation..................................... 15
Item 12. Security Ownership of Certain Beneficial Owners and
Management................................................. 15
Item 13. Certain Relationships and Related Transactions............. 15
Part IV
Item 14. Exhibits, Financial Statements Schedule, and Reports on
Form 8-K................................................... 16
Signatures................................................. 18
Financial Statement Schedule............................... 18
Exhibit Index.............................................. 19
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PART I
Item 1. Business
The following discussion 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. Predictions of future
events are inherently uncertain. Actual events could differ materially from
those predicted in the forward-looking statements as a result of the risks set
forth in the following discussion and, in particular, the risks discussed below
under the caption "Factors that May Affect Operating Results."
Overview
We are a leading provider of eBusiness infrastructure software products that
enable business-to-business, business-to-consumer and business-to-employee
solutions. Our software products that enable businesses to link internal
operations, business partners and customer channels in real-time. Our software
products allow multiple distinct applications, web sites, databases and other
content sources to be integrated and managed within a common framework. Our
products also enable enterprises to extend their information technology
infrastructures and business processes across the Internet to conduct all forms
of electronic business using the Internet: business-to-business, business-to-
consumer and business-to-employee. Our core technology, known as The
Information Bus or the TIB, is an integration platform that enables enterprises
and users to automatically transmit, receive, filter and personalize digital
information in real-time. The Information Bus also facilitates real-time, two-
way communications between distributed computer networks and mobile information
devices such as hand-held computers, pagers and digital cellular phones. Our
products are currently in use by over 300 companies in diverse markets such as
telecommunications, manufacturing, energy, financial services and internet
portals.
Driven by accelerating competition and the increasing demands of customers,
many enterprises today are seeking to expand and improve the scope, speed and
efficiency of their business processes by using the Internet to become
eBusinesses. An eBusiness is a company that integrates its disparate
applications and information sources, connects with customers, partners and
employees using the Internet and engages in commerce with business-to-business,
or B2B, or business-to-consumer, or B2C and business-to-employee, or B2E
communities. Just as markets are becoming increasingly global and corporate
relationships become increasingly complex, the business environment today
demands a more tightly integrated network of supplier, customer and partner
relationships. Emerging challenges and opportunities are forcing businesses to
become more efficient, in many cases by adjusting their operations and
strategies in real-time. The timely exchange of information across intranets
and the Internet provides opportunities to leverage management resources,
create manufacturing efficiencies and improve customer service. For example,
real-time business process integration and information exchange with suppliers
and customers over the Internet expedites order fulfillment, decreases
inventory carrying costs, and provides enhanced sales opportunities through
direct customer interaction.
Our solution allows multiple computer applications and platforms to
communicate in real-time across the Internet and intranets. The TIB technology
facilitates the distribution of information and the integration of business
processes by connecting each application to the network through a single
interface, instead of linking each application directly to all others. The
benefits of the TIB technology are realized through our integrated suite of
software products. These products provide support for a broad range of key
eBusiness technologies such as eXtensible Markup Language, or XML, an emerging
standard for sharing data over the Internet, and related XML e-Commerce
frameworks, such as RosettaNet.
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Our objective is to establish the TIB technology as the leading software
solution for eBusiness infrastructure. The core elements of our strategy
include enhancing our position as a provider of portal infrastructure, pursuing
a license driven business strategy, leveraging our vertical market expertise,
capitalizing on the presence of Reuters in the financial services industry,
expanding our international presence and continuing to enhance our technology
and products.
The TIB Products
TIB Product Suite
The TIB products can be deployed individually or as an integrated solution.
Support for eBusiness protocols and standards such as XML, along with XML
eCommerce frameworks such as RosettaNet, is incorporated throughout our
products. Our products provide the following key elements of eBusiness
infrastructure:
. Messaging--enables the movement of information and facilitates
transactions between applications, databases and portals.
. Connectivity--integrates various legacy and third party applications by
connecting them to a common eBusiness infrastructure.
. Information Transformation and Flow Management--manages the conversion
and translation of data and controls the flow of information and the
interaction of business processes within and between enterprises.
. Monitoring and Management--provides the means for the enterprise to
administer its applications environment and ensure reliable operations.
. Content Display--provides the display console through which users are
notified of and view business event information.
Messaging (Events, Data & Transactions)
Our messaging products are the foundation of our product suite. These
products simplify the problem of integrating diverse computer applications by
connecting each application to the network with a single interface, instead of
linking each application directly to all others. Our products support a wide
range of communication models, including the use of XML-based messages. Our
three complementary messaging products are described below:
. TIB/Rendezvous is our flagship messaging product. TIB/Rendezvous
supports publish/subscribe as well as request/reply messaging, and
facilitates personalized information delivery. TIB/Rendezvous leverages
the networking protocols of the Internet to offer a range of service
levels in the delivery of information and the execution of transactions.
TIB/Rendezvous provides efficient, reliable information delivery and
high scalability, and can be embedded in an enterprise's existing
information system.
. TIB/ETX is a transaction-based messaging system designed for use in
environments that require a greater degree of transaction management and
control than is provided by a standard messaging solution. TIB/ETX
provides a transactional form of publish/ subscribe messaging similar to
traditional computer transaction models.
. TIB/ObjectBus is our object request broker, or ORB. ORBs enable computer
systems to operate more efficiently by employing reusable, self-
contained pieces of software code known as objects. TIB/ObjectBus allows
our TIB products to integrate with CORBA 2.0, a major programming
standard for object-oriented applications. TIB/ObjectBus can be fully
integrated with our messaging software, combining the efficiency of an
object oriented computing model with the scalability, performance and
ease of use benefits of TIB/Rendezvous.
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Connectivity
TIB/Adapters are our software components that link applications to the TIB
environment, thus enabling these applications to communicate with each other.
We take an innovative approach to application integration by using a
TIB/Adapter as the single point of integration for the application. Our
TIB/Adapter products connect leading enterprise applications and complementary
middleware products to the TIB environment. We offer a series of standard
TIB/Adapters designed to link applications and other software developed by SAP,
Siebel Systems, PeopleSoft, IBM and Oracle, among others, to the TIB. We also
have a software toolkit, the TIB/Adapter SDK, that allows our customers and
systems integrators to build custom TIB/Adapters to link applications to the
TIB environment. The TIB/Adapter SDK product provides a common framework for
the rapid development of new TIB/Adapters.
Information Transformation and Flow Management
In order to facilitate the efficient movement of information across
enterprise applications, a solution must have the ability to translate content
from one format to another--including XML and proprietary message types--and to
effectively govern the manner in which information flows between applications.
Our transformation and process flow management products translate data from
each application into a format that is understood by other applications as
described below:
. TIB/MessageBroker is our scalable message routing and transformation
system. TIB/MessageBroker combines and transforms data from applications
into formats that can be understood by other applications, and routes
data according to pre-defined rules. TIB/MessageBroker also allows an
enterprise to conduct transactions and exchange information with
customers and business partners. Unlike many competing technologies,
TIB/MessageBroker requires no independent database or third-party
messaging system.
. TIB/IntegrationManager controls the flow of information and system-to-
system communication among applications and components in the TIB
environment. TIB/IntegrationManager allows the enterprise to define
business rules that govern information processing between applications
and where information should go and under what conditions.
TIB/IntegrationManager coordinates the message transport and
transformation functions of the TIB products for internal process
automation and B2B trading systems.
. TIB/InConcert allows the definition of document-oriented process
workflow, as specified through graphical user interfaces.
TIB/IntegrationManager manages and executes automated system-to-system
processes, while TIB/InConcert manages and executes the document-
oriented workflows that involve human and computer processes. Together
TIB/InConcert and TIB/IntegrationManager span the full range of
requirements for process and workflow automation and execution within
and between enterprises.
. TIB/BusinessConnect, scheduled for release in the second quarter of
fiscal 2000, is a server software product built around TIB/Integration-
Manager and TIB/MessageBroker that will enhance our capabilities for B2B
trading activities and simplify the implementation of B2B solutions.
TIB/BusinessConnect is used to define trading relationships through a
graphical user interface and then execute the resulting transactions
between trading partners. TIB/BusinessConnect supports the core
technologies and standards for B2B eCommerce.
Content Display
To conduct business in real-time, an enterprise must have the ability to
provide a simple display tool for users to access and view business event
information. Our products in this area are designed to combine information from
the TIB environment with content from external sources, such as web pages, to
create an
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integrated display that can be personalized to the specific needs of the end-
user. Our content display products are described below:
. TIB/ContentBroker aggregates information from enterprise applications,
corporate web sites and other content sources based on an enterprise's
preferences, and delivers the requested information directly to users'
desktops as soon as it becomes available. TIB/ContentBroker reduces the
need for enterprises to support multiple end-user interfaces when users
request information from various sources.
. TIB/EventConsole is a display for users to view the content aggregated
by TIB/ContentBroker. TIB/EventConsole provides personalized
notifications from enterprise information sources, including databases,
document servers, web servers, enterprise resource planning systems and
legacy systems, directly to the desktop computers of the appropriate
users. TIB/EventConsole also enables users to receive up-to-date
information remotely.
Monitoring and Management
TIB/Hawk is our product for monitoring and managing applications. Through an
intuitive graphical user interface, TIB/Hawk can be configured to monitor
systems and applications in a local or wide area network and act autonomously
when pre-defined conditions occur.
TIBCO.NET and TIBCO Portal Products
TIBCO.net
As part of our strategy to extend the reach of our products, TIBCO.net
provides a solution for the creation, monitoring and administration of
demanding, high-performance platforms for eBusiness services, such as Internet
or enterprise portals or corporate web sites. Using our TIB products we can
create real-time, scalable information systems for our customers, such as the
financial information system we created for Yahoo!. TIBCO.net allows our
customers to combine internal business systems with external content, such as
news or market pricing data. Our customers in turn can bundle this information
for real-time delivery to their customers, suppliers, partners and employees.
In addition, TIBCO.net provides our customers with the ability to integrate and
deliver business information in real-time across the Internet through our
reliable multicast technology.
TIBCO.net represents a further evolution of the TIB products for use in
Internet-enabled businesses. TIBCO.net is offered to our customers either as a
TIBCO-hosted service, providing time-to-market advantages, or as a package of
products and services for implementation at the customer's site.
TIBCO.net, through its implementation of the TIBproducts, supports a broad
range of communications methods and protocols enabling the delivery of
information through a wide range of devices and presentation technologies,
including Internet browsers, pagers, hand-held computers and digital cellular
phones.
TIB/PortalBuilder
TIB/PortalBuilder, released in November 1999, provides the tools to create
and build eBusiness portals. TIB/Portal Builder provides portal users with the
ability to determine which content sources and services are delivered through a
portal and to configure how the content is displayed to portal users.
TIB/Portal builder can also work in conjunction with our TIB products to create
and manage the integration of content and services within a portal.
TIB/PortalBuilder allows personalized views of the portal to be created and
stored for each portal user. A graphical user interface is provided to business
users to make it easy to configure and define the content and services of a
portal. The first customer of TIB/PortalBuilder was mySAP.com.
TIB/PortalPaks
TIB/PortalPaks are packaged software components for connecting content
sources such as financial data, news, weather and sports. TIB/PortalPaks are
designed to reduce the time-to-market and effort for portal creation.
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Services
Professional Services
Our professional services offerings include a wide range of consulting
services such as systems planning, architecture and design, custom development
and systems integration for the rapid deployment of our TIB products. We offer
professional services with the initial deployment of our products, as well as
on an ongoing basis to address the continuing needs of our customers. Our
professional services staff is primarily located in Palo Alto, Virginia, London
and Sydney, enabling us to perform installations and respond to customer
demands rapidly across the Americas, Europe and Asia. As of November 30, 1999,
our professional services group consisted of 115 employees, including
individuals with domain expertise in the telecommunications, energy and other
industries. Many of our professional services employees have advanced degrees
and/or substantial industry expertise in systems architecture and design. We
expect that the number of service professionals and the scope of the services
offered will increase as we continue to address the expanding eBusiness
infrastructure needs of large organizations.
We have relationships with resellers, professional service organizations and
system integrators, including Deloitte Consulting, EDS, Ernst & Young, KPMG,
and Sapient, to cooperate in the deployment of our products to clients. These
relationships help promote our TIB products and provide additional technical
expertise to enable us to provide the full range of professional services our
customers require to deploy our products.
Maintenance and Support
We offer an array of software maintenance and support services to our
customers. Our support organization provides services seven days a week,
twenty-four hours a day. We have a worldwide support organization with key
operations centers in Palo Alto, London and Sydney to ensure global coverage
for our customers. These centers provide the infrastructure for our around-the-
clock call centers and hotline support.
We offer a range of support packages that allow our customers to choose the
level of support that fits the needs and budgets of their organizations.
Customers also have access to on-site support which is charged on a time and
materials basis.
Training
We provide training for customer personnel at our main office as well as at
customer locations. We also provide training for our professional services
partners to enhance their effectiveness in integrating our products. In
addition, we develop custom education programs to address the specific needs of
individual customers and partners.
Sales and Marketing
Sales
We currently market our software and services primarily through a direct
sales organization, complemented by indirect sales channels. As of November 30,
1999, our direct sales force included 40 commissioned sales representatives
located in 11 U.S. cities and in 12 locations internationally across North
America, Europe and Asia. We have established distribution and licensing
relationships with several strategic hardware vendors, database providers,
software and toolset developers, systems integrators and implementation
consultants. We have also developed alliances with key solution providers to
target vertical industry sectors, including energy, telecommunications,
manufacturing and Internet portals.
Under the terms of our license agreement with Reuters, we generally cannot
sell our products directly into the financial services market. Accordingly, we
generally sell our products to companies in the financial services industry
through third-party distributors and systems integrators. Reuters is the
preferred distributor of our
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products in that market. We believe that our distribution relationship with
Reuters, a global news and information group, has strengthened the penetration
of our products in the financial services industry. Product fees from Reuters
on its sales of our products in the financial services industry accounted for
16% of our revenue in fiscal 1999, 6% of our revenue in fiscal 1998 and less
than 1% of our revenue in fiscal 1997.
Marketing
We utilize a wide variety of marketing programs which are intended to
attract potential customers and to promote TIBCO Software and its brand names.
We use a mix of market research, analyst updates, seminars, direct mail, print
advertising, trade shows, speaking engagements, public relations, customer
newsletters, and web site marketing in order to achieve these goals. Our
marketing department also produces collateral material for distribution to
potential customers including presentation materials, white papers, brochures,
and fact sheets. We also host annual user conferences for our customers and
provide support to our channel partners with a variety of programs and training
and product marketing support materials.
Product Development
We have been granted a perpetual, royalty-free license to the underlying TIB
messaging technology as it existed on December 31, 1996. We have concentrated
our product development efforts since then both on enhancing this licensed
technology and on developing new products. We expect that most of our
enhancements to existing products and new products will be developed
internally. However, we will evaluate on an ongoing basis the acquisition of
externally developed technologies for integration into our product lines.
We expect that a substantial majority of our research and development
activities will be enhancing and extending our TIB products. Historically, our
product development efforts were focused on creating our core product
solutions. Our development focus has now shifted to expanding the number of
available TIB/Adapters and developing additional packaged integration solutions
for specific markets.
As of November 30, 1999, there were 149 employees in our research and
development organization. We expect that we will continue to commit significant
resources to product development in the future. To date, all product
development costs have been expensed as incurred.
Competition
The market for our products and services is extremely competitive and
subject to rapid change. In addition, we compete with various providers of
single components of application integration solutions, including IBM, New Era
of Networks, Iona and BEA with respect to messaging components and Vitria,
CrossWorlds, STC and Active Software with respect to other components. We also
compete in certain product areas with niche eBusiness connectivity companies
such as WebMethods and other emerging companies. We believe that of these
companies, IBM has the potential to offer the most complete set of products for
application integration. We also compete in certain product areas with niche
eBusiness connectivity companies such as WebMethods and other emerging
companies. We also face competition for certain aspects of our product and
service offerings from major systems integrators. We expect additional
competition from other established and emerging companies. In addition, we may
face pricing pressures from our current competitors and new market entrants in
the future. We believe that the competitive factors affecting the market for
our products and services include product functionality and features; quality
of professional services offerings; product quality, performance and price;
ease of product implementation; quality of customer support services; customer
training and documentation; and vendor and product reputation. The relative
importance of each of these factors depends upon the specific customer
environment. Although we believe that our products and services currently
compete favorably with respect to such factors, we may not be able to maintain
our competitive position against current and potential competitors.
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Many of our current and potential competitors have longer operating
histories, significantly greater financial, technical, product development and
marketing resources, greater name recognition and larger customer bases than we
do. Our present or future competitors may be able to develop products
comparable or superior to those we offer, adapt more quickly than we do to new
technologies, evolving industry trends or customer requirements, or devote
greater resources to the development, promotion and sale of their products than
we do. Accordingly, we may not be able to compete effectively in our markets,
competition may intensify and harm our business and operating results. If we
are not successful in developing enhancements to existing products and new
products in a timely manner, achieving customer acceptance or generating higher
average selling prices, our gross margins may decline, and our business and
operating results may suffer.
Our license agreement with Reuters does not prohibit Reuters from providing
enterprise infrastructure software products and services in competition with
us. Reuters currently sells our products to financial services companies and
creates products based on the TIB technology specifically for financial
services companies. In addition, pursuant to the license agreement, Reuters has
access to the source code for our products. Although Reuters currently does not
create TIB-based products designed for general use in all markets, if Reuters
were to decide to begin providing information integration products and services
in our markets, we would face additional competition for such customers.
Proprietary Technology
Our success is dependent upon our proprietary software technology. We
license the patents for the TIB technology underlying some of our TIB products,
including TIB/Rendezvous and TIB/ETX, from Reuters. Consequently, we can assert
infringement of these products only through Reuters or with the consent of
Reuters. While we have pending patent applications, we do not currently have
any issued patents and rely principally on trade secret, copyright and
trademark laws, nondisclosure and other contractual agreements to protect our
technology. We also believe that factors such as the technological and creative
skills of our personnel, product enhancements and new product developments are
essential to establishing and maintaining a technology leadership position. We
enter into confidentiality and/or license agreements with our employees,
distributors and customers, and limit access to and distribution of our
software, documentation and other proprietary information. Nevertheless, the
steps we have taken may fail to prevent misappropriation of our technology, and
the protections we have may not prevent our competitors from developing
products with functionality or features similar to our products. Furthermore,
third parties might independently develop competing technologies that are
substantially equivalent or superior to our technologies. In addition,
effective copyright and trade secret protection may be unavailable or limited
in certain foreign countries. If we fail to protect our proprietary technology,
our business could be seriously harmed.
Although we do not believe our products infringe the proprietary rights of
any third parties, third parties may nevertheless assert infringement claims
against us or our customers in the future. Furthermore, we may initiate claims
or litigation against third parties for infringement of our proprietary rights
or to establish the validity of our proprietary rights. Litigation, whether
resolved in our favor or not, would cause us to incur substantial costs and
divert our management resources from productive tasks, which could harm our
business. Parties making claims against us could secure substantial damages, as
well as injunctive or other equitable relief which could effectively block our
ability to license our products in the United States or abroad. Such a judgment
could seriously harm our business. If it appears necessary or desirable, we may
seek licenses to intellectual property if we believe that our technology
potentially infringes on such technology. We may not, however, be able to
obtain such licenses on commercially reasonable terms or at all, and the terms
of any offered licenses might not be acceptable to us. The failure to obtain
necessary licenses or other rights could seriously harm our business. As the
number of software products in our industry increases and the functionality of
those products further overlaps, we believe that software developers may become
increasingly subject to infringement claims. Any such claims, with or without
merit, would probably be time consuming and expensive to defend, and could
seriously harm our business. We are not aware of any currently pending claims
that our products, trademarks or other proprietary rights infringe upon the
proprietary rights of third parties.
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"TIBCO", "The Information Bus", "TIB" and the names of our products are our
trademarks or tradenames.
Employees
As of November 30, 1999, we employed 490 persons, including 120 in sales and
marketing, 149 in research and development, 63 in finance and administration
and 158 in client services and technical support. Of our 490 employees, 62 were
located in Europe, and 37 in Australia and Asia. We believe that our
relationship with our employees is good.
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FACTORS THAT MAY AFFECT OPERATING RESULTS
The following factors could materially and adversely affect our future
operating results and could cause actual events to differ materially from those
predicted in forward-looking statements related to its business.
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 $4.7 million, $13.0
million, and $19.5 million in fiscal 1997, 1998 and 1999, respectively. As of
November 30, 1999, we had an accumulated deficit of approximately $37.1
million.
Since the beginning of fiscal 1998, we have invested significantly in
building our sales and marketing organization and in our technology research
and development. We expect to continue to spend substantial financial and other
resources on expanding our direct sales and marketing activities and developing
and introducing enhancements to our existing products and new software
products. As a result, we need to generate significant revenue to achieve and
maintain profitability. We expect that our sales and marketing expenses and our
research and development 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 fiscal quarter. 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 significant 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.
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Our licensing and distribution relationship with Reuters places limitations on
our ability to conduct our business
We have a significant relationship with Reuters for licensing and
distribution. 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 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 and 1999, 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.
Our acquisition strategy could cause financial or operational problems
Our success depends on our ability to continually enhance and broaden our
product offerings in response to changing technologies, customer demands, and
competitive pressures. To this end, we may acquire new and complementary
businesses, products or technologies, and we may use some of the proceeds of
this offering to do so. We do not know if we will be able to complete any
acquisitions or that we will be able to successfully integrate any acquired
business, operate them profitably, or retain their key employees. For example,
we completed the acquisitions of substantially all of the assets of InConcert,
Inc. in November 1999. Integrating
12
<PAGE>
InConcert or any other newly acquired business, product or technology could be
expensive and time-consuming, could disrupt our ongoing business, and could
distract our management. We may face competition for acquisition targets from
larger and more established companies with greater financial resources. In
addition, in order to finance any acquisitions, we might need to raise
additional funds through public or private financings. In that event, we could
be forced to obtain equity or debt financing on terms that are not favorable to
us and, in the case of equity financing, that results in dilution to our
stockholders. If we are unable to integrate InConcert or any other newly
acquired entity, product or technology effectively, our business, financial
condition and operating results would suffer. In addition, any amortization of
goodwill or other assets or other charges resulting from the costs of
acquisitions could harm our operating results.
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.
Item 2. Properties
Our principal administrative, sales, marketing and service development
facilities are located in an approximately 92,000 square feet building in Palo
Alto, California pursuant to a lease which expires in 2005. In addition, we
lease field support offices in 23 cities throughout the world. The field
offices range from small executive offices to a 7,800 square foot facility.
Lease terms range from month-to-month on certain executive offices to five
years on certain direct leases. Because our professional services are generally
performed at the client site, field facilities are generally small. Field
facilities are generally used for periodic meetings, training and
administration and by account managers. We have field facilities in Atlanta,
Georgia; Baltimore, Maryland; Brussels, Belgium; Cambridge, Massachusetts;
Chicago, Illinois, Dallas, Texas; Denver, Colorado; Detroit, Michigan;
Dusseldorf, Germany; Houston, Texas; London, England; Madrid, Spain; Melbourne,
Australia; Minneapolis, Minnesota; Munich, Germany; New York, New York; Paris,
France; Stockholm, Sweden, Sydney, Australia; Taipei, Taiwan; Toronto, Canada
and Woy Woy, Australia. We are continually evaluating the adequacy of existing
facilities and facilities in new cities and believes that suitable additional
space will be available in the future on commercially reasonable terms as
needed.
Item 3. Legal Proceedings
We are not party to any material legal proceedings.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the fourth
quarter of fiscal 1999.
13
<PAGE>
PART II
Item 5. Market for Company's Common Stock and Related Stockholder Matters
The information required by this item is incorporated by reference to the
section entitled "Corporate Information" in the 1999 Annual Report attached as
Exhibit 13.1.
Item 6. Selected Financial Data
The information required by this item is incorporated by reference to the
section entitled "Selected Financial Data" in the 1999 Annual Report attached
as Exhibit 13.1.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The information required by this item is incorporated by reference to the
section entitled "Management's Discussion and Analysis of Financial Condition
and Results of Operations" in the 1999 Annual Report attached as Exhibit 13.1.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The information required by this item is incorporated by reference to the
section entitled "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Quantitative and Qualitative Disclosures about
Market Risk" in the 1999 Annual Report attached as Exhibit 13.1.
Item 8. Financial Statements and Supplementary Data
The information required by this item is incorporated by reference to the
section entitled, "Financial Statements" in the 1999 Annual Report attached as
Exhibit 13.1.
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure.
Not applicable.
14
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Company
The information required by this item concerning the Company's directors and
executive officers is incorporated by reference to the information set forth in
the sections entitled "Election of Directors" and "Executive Officer
Compensation" in the Company's Proxy Statement for the 2000 Annual Meeting of
Stockholders to be filed with the Commission within 120 days after the end of
the Company's fiscal year ended November 30, 1999.
Item 11. Executive Compensation
The information required by this item regarding executive compensation is
incorporated by reference to the information set forth in the sections entitled
"Election of Directors--Director Compensation" and "Executive Officer
Compensation" in the Company's Proxy Statement for the 2000 Annual Meeting of
Stockholders to be filed with the Commission within 120 days after the end of
the Company's fiscal year ended November 30, 1999.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required by this item regarding security ownership of
certain beneficial owners and management is incorporated by reference to the
information set forth in the section entitled "Security Ownership of Certain
Beneficial Owners and Management" in the Company's Proxy Statement for the 2000
Annual Meeting of Stockholders to be filed with the Commission within 120 days
after the end of the Company's fiscal year ended November 30, 1999.
Item 13. Certain Relationships and Related Transactions
The information required by this item regarding certain relationships and
related transactions is incorporated by reference to the information set forth
in the section entitled "Certain Transactions" in the Company's Proxy Statement
for the 2000 Annual Meeting of Stockholders to be filed with the Commission
within 120 days after the end of the Company's fiscal year ended November 30,
1999.
15
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-k
(a) The following documents are filed as part of this Form 10-K:
1. Financial Statements. The following financial statements of the
Company and the Report of Independent Accountants thereon are incorporated
by reference to the portions of the Company's 1999 Annual Report filed as
Exhibit 13.1 to this Form 10-K:
<TABLE>
<S> <C>
Consolidated Balance Sheets at November 30, 1999 and 1998
Consolidated Statements of Operations for each of the two years in
the period ended November 30, 1999 and for eleven months ended
November 30, 1997
Consolidated Statement of Stockholders' Equity for each of the two
years in the period ended November 30, 1999 and for eleven months
ended November 30, 1997
Consolidated Statements of Cash Flows for each of the two years in
the period ended November 30, 1999 and for eleven months ended
November 30, 1997
Notes to Consolidated Financial Statements
Report of Independent Accountants
</TABLE>
2. Exhibits: See Item 14(c) below.
(b) Reports on Form 8-K.
The registrant filed a current report on Form 8-K on November 1, 1999
to announce the registrant's acquisition of substantially all the assets of
InConcert, Inc.
The registrant filed a current report on Form 8-K/A on December 29,
1999 related to the registrant's acquisition of substantially all the
assets of InConert, Inc.
(c) Exhibits. The exhibits listed on the accompanying index to exhibits
immediately following the financial statement schedule are filed as part of, or
incorporated by reference into, this Form 10-K.
(d) Financial Statement Schedules. None
16
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Form 10-K to be
signed on its behalf by the undersigned, thereunto duly authorized, on this
24th day of February, 2000.
TIBCO Software Inc.
/s/ Paul G. Hansen
By: _________________________________
Paul G. Hansen
Executive Vice President,
Finance,
Chief Financial Officer,
Secretary
POWER OF ATTORNEY
KNOW ALL THESE PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Vivek Y. Ranadive and Paul G. Hansen and
each of them, jointly and severally, his attorneys-in-fact, each with full
power of substitution, for him in any and all capacities, to sign any and all
amendments to this Form 10-K, and to file the same, with exhibits thereto and
other documents in connection therewith, with the Securities and Exchange
Commission, hereby ratifying and confirming all that each said attorneys-in-
fact or his substitute or substitutes, may do or cause to be done by virtue
hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Form 10-K has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Vivek Y. Ranadive President, Chief Executive February 24, 2000
______________________________________ Officer and Chairman of
Vivek Y. Ranadive the Board (Principal
Executive Officer)
/s/ Paul G. Hansen Executive Vice President, February 24, 2000
______________________________________ Finance, Chief Financial
Paul G. Hansen Officer
/s/ Ginger M. Kelly Corporate Controller and February 24, 2000
______________________________________ Chief Accounting Officer
Ginger M. Kelly
/s/ Douglas M. Atkin Director February 24, 2000
______________________________________
Douglas M. Atkin
/s/ Yogen K. Dalal Director February 24, 2000
______________________________________
Yogen K. Dalal
Director February 24, 2000
______________________________________
Edward R. Kozel
Director February 24, 2000
______________________________________
Donald J. Listwin
/s/ Larry W. Sonsini Director February 24, 2000
______________________________________
Larry W. Sonsini
</TABLE>
17
<PAGE>
<TABLE>
<S> <C> <C>
Director February 24, 2000
______________________________________
John G. Taysom
Director February 24, 2000
______________________________________
Philip K. Wood
/s/ Phillip White Director February 24, 2000
______________________________________
</TABLE> Phillip E. White
18
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
No. Exhibits
------- --------
<C> <S>
3.1* Certificate of Incorporation of Registrant.
3.2* Bylaws of Registrant.
4.1* Form of Registrant's Common Stock certificate.
10.1* Form of Indemnification Agreement.
10.2* First Amended and Restated License, Maintenance and Distribution
Agreement dated May 28, 1999, among Reuters Limited, TIBCO Finance
Technology, Inc and Registrant
10.3* Draft Form of Third Amended and Restated Stockholders Agreement, among
Reuters Nederland B.V., Reuters Limited, Cisco Systems, Inc., Mayfield
IX, Mayfield Associated Fund III, Vivek Ranadive and Registrant.
10.4* 1996 Stock Plan.
10.5* 1998 Director Option Plan.
10.6* Form of Assignment and Assumption of Lease Agreement, between TIBCO
Finance Technology, Inc and Registrant.
10.7* Form of Employment Agreement between Registrant and Vivek Y. Ranadive.
10.8* Form of Employment Agreement between Registrant and Robert B.
Stefanski.
10.9* Form of Employment Agreement between Registrant and Paul G. Hansen.
10.10* Form of Employment Agreement between Registrant and Richard M. Taven.
10.11* Form of Master Services Agreement among Registrant, TIBCO Finance
Technology, Inc. and Reuters.
10.12* Software Development and License Agreement dated May 11, 1999 between
Cedel Global Services, societe ananyme and Registrant.
10.13* Industrial Lease Agreement dated December 14, 1995 between Porter
Drive Associated LLC and TIBCO Finance Technology, Inc (formerly known
as Teknekron Software Systems (Delaware), Inc.).
13.1 Portions of the Annual Report to Stockholders for the fiscal year
ended November 30, 1999, expressly incorporated by reference herein.
21.1 List of subsidiaries
23.2 Consent of PricewaterhouseCoopers LLP, Independent Accountants.
24.1 Power of Attorney (see page 17).
27.1 Financial Data Schedule.
</TABLE>
- --------
* These exhibits are incorporated by reference to exhibits similarly numbered
in the Registrant's Registration Statement File No. 333-78195.
19
<PAGE>
Exhibit 13.1
TIBCO SOFTWARE INC.
November 30, 1999
STATEMENT OF OPERATIONS DATA
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Eleven
Months Ended
Year Ended November 30, November 30, Year Ended December 31,
----------------------- ------------------------
1999 1998 1997 1996 1995
-------- -------- ----------- ------- ----------
(unaudited)
<S> <C> <C> <C> <C> <C>
Revenue:
License revenue...................................... $ 56,916 $ 17,495 $ 6,219 $ 6,066 $ 4,487
Service and maintenance revenue...................... 39,524 35,262 29,055 24,249 21,507
-------- -------- ----------- ------- ---------
Total revenue..................................... 96,440 52,757 35,274 30,315 25,994
Cost of revenue............................................ 36,612 27,682 15,847 19,606 14,658
-------- -------- ----------- ------- ---------
Gross profit............................................... 59,828 25,075 19,427 10,709 11,336
-------- -------- ----------- ------- ---------
Operating expenses:
Research and development............................. 27,478 14,787 9,385 6,576 3,592
Sales and marketing.................................. 33,130 15,242 7,008 2,949 1,838
General and administrative........................... 8,229 4,025 3,565 2,077 1,483
Amortization of stock-based compensation............. 9,252 5,064 4,672 2,196 20,684
Acquired in-process research and development......... 2,800 -- -- -- --
Amortization of goodwill and acquired intangibles.... 521 -- -- -- --
-------- -------- ----------- ------- ---------
Total operating expenses.......................... 81,410 39,118 24,630 13,798 27,597
-------- -------- ----------- ------- ---------
Loss from operations....................................... (21,582) (14,043) (5,203) (3,089) (16,261)
Other income (expense), net................................ 2,101 1,092 540 (1,551) (468)
-------- -------- ----------- ------- ---------
Net loss................................................... $(19,481) $(12,951) $(4,663) $(4,640) $(16,729)
======== ======== =========== ======= =========
Net loss per share:
Basic and diluted.................................... $ ( 0.19) $ (0.22) $ (0.08)
======== ======== ===========
Weighted average common shares outstanding/(1)/...... 104,112 60,033 57,606
======== ======== ===========
</TABLE>
BALANCE SHEET DATA
(in thousands)
<TABLE>
<CAPTION>
November 30, December 31,
------------------------------------- ------------------------
1999 1998 1997 1996 1995
-------- -------- ----------- ------- ----------
(unaudited)
<S> <C> <C> <C> <C> <C>
Cash, cash equivalents, deposits held by Reuters and
short-term investments................................. $ 89,807 $15,970 $18,318 $ -- $ --
Working capital............................................ 95,603 18,301 15,168 (2,167) (22,155)
Total assets............................................... 179,638 36,289 31,046 10,996 9,539
Owner's net investment (liability)......................... -- -- -- 451 (19,574)
Stockholders' equity....................................... 137,918 21,704 17,167 -- --
</TABLE>
(1) See Note 2 of Notes to Consolidated Financial Statements for an explanation
of shares used to compute net loss per share.
1
<PAGE>
Management's Discussion and Analysis
Of Financial Condition and Results of Operations
The following discussion contains forward-looking statements that involve
risks and uncertainties. Our actual results could differ materially from those
anticipated in these forward-looking statements as a result of certain factors,
including those set forth below in "Risk Factors That May Affect Operating
Results" and under "Risk Factors" in our Annual Report on Form 10K.
We develop and market a suite of electronic business infrastructure software
products that enables our customers to conduct business with other businesses,
employees and consumers electronically by tying together software applications
and business processes in real time. We are the successor to a portion of the
business of Teknekron Software Systems, Inc. Teknekron developed software, known
as the TIB technology, 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 Group PLC, 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 Inc., 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. In connection with
our establishment as a separate entity, Reuters transferred to us certain assets
and liabilities related to our business and granted to us a royalty-free
license to the intellectual property incorporated into some of our current
software products. Reuters also assigned to us at that time license and service
contracts primarily within the high-tech manufacturing and energy markets,
including contracts with Intel, NEC, Motorola, Mobil and Chevron.
During fiscal 1997, our operating activities related primarily to the
development of our TIB/ActiveEnterprise suite of products, supporting the
installed base of financial services companies using TIB-based solutions sold
through Reuters and expanding our presence in the high-tech manufacturing and
energy markets. 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. We also
built our domestic and international direct sales force and created 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. During fiscal 1999, we added approximately 200 new
customers for out TIB/Active Enterprise and TIBCO.net products, and we
strengthened our position in our key vertical markets--telecommunication,
Internet portals, manufacturing, energy and financial services. New customers
included AT&T, AltaVista, AOL/Netscape, Procter and Gamble, SAP, Philips, Enron,
Chemdex, FT.com, Ericsson, Siemens, Williams Communications and Sprint. We also
established and strengthened strategic realtionships with leading companies
aimed at providing complementary business to business e-commerce and Internet
solutions. These companies included Ariba, Cisco Systems, Oracle, Sun
Microsystems, SAP, Yahoo!, Portal Software, AvantGo, Deloitte Consulting,
Selectica, i2 Technologies, Siebel Systems, and Sybase. We also released the
TIB/PortalBuilder, a portal construction product. 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.
In fiscal 1997 and to a lesser extent in fiscal 1998, our revenue consisted
primarily of license and maintenance fees from the contracts assigned to us by
Reuters in connection with our formation, fees from providing integration
services to customers transferred to us by Reuters and development and
maintenance fees paid to us by Reuters. Our revenue in fiscal 1999 and today
consists primarily of license and product fees from our customers and
distributors, including from 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 revenues from our strategic relationships with
business partners who embed our products in their hardware and networking
systems as well as from systems integrators who resell our products.
2
<PAGE>
We recognize license revenue when a signed contract or other persuasive evidence
of an arrangement exists, the software has been shipped or electronically
delivered, the license fee is fixed or determinable, and collection of the
resulting receivable is probable. When contracts contain multiple elements
wherein vendor specific objective evidence exists for all undelivered elements,
we account for the delivered elements in accordance with the "Residual Method"
prescribed by SOP 98-9. Any maintenance revenue included in these arrangements
is recognized ratably over the term of the arrangement. Revenue from
subscription license agreements, which include software, rights to future
products and maintenance, is recognized ratably over the term of the
subscription period. Revenue on shipments to resellers, which is generally
subject to certain rights of return and price protection, is recognized when the
products are sold by the resellers to the end-user customer.
We recognize service revenue 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.
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, minimum
guaranteed product fees are $16 million in calendar 1999, $18 million in
calendar 2000 and $20 million in calendar 2001. We recognized $14.2 million in
fiscal 1999. 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 actual
product fees and cumulative minimum guaranteed product fees will be recognized
as revenue.
In 1997, we changed our fiscal year from the twelve months ending December 31st
to the twelve months ending November 30th. Accordingly, our financial results
for 1997 reflect our operations for the eleven months ended November 30, 1997
and are not comparable to our results for fiscal 1999, 1998 or any prior period.
Our operating results may fluctuate significantly in the future as a result of a
variety of factors, many of which are outside of our control. These factors
include the timing of significant orders and the length of our sales cycle,
technical difficulties in our software, the growth rate of the Ebusiness
infrastructure software market, our ability to continue to attract and retain
customers in international markets, and the success of Reuters and other
distributors in selling our products in the financial services market. Due to
the emerging nature of the markets in which we compete, it may be difficult to
forecast our revenue accurately. Our expense levels are based in part on our
expectations with regard to future revenue. We may be unable to adjust spending
in a timely manner to compensate for any unexpected revenue shortfall. Any of
these factors may have a material adverse effect on our business, results of
operations and financial condition. See "Risk Factors That May Affect Operating
Results" for a further description of these and other factors that could
adversely affect our business, results of operations and financial condition.
3
<PAGE>
The following table sets forth, for the periods indicated, certain financial
information as a percent of total revenue:
<TABLE>
<CAPTION>
Eleven Months
Ended
Year Ended November 30, November 30,
------------------------- --------------
1999 1998 1997
-------- -------- --------------
<S> <C> <C> <C>
Revenue:
License revenue........................................... 59% 33% 18%
Service and maintenance revenue........................... 41 67 82
-------- -------- --------------
Total revenue........................................... 100 100 100
Cost of revenue............................................... 38 52 45
-------- -------- --------------
Gross profit.................................................. 62 48 55
-------- -------- --------------
Operating expenses:
Research and development.................................. 28 28 27
Sales and marketing....................................... 34 29 20
General and administrative................................ 9 8 10
Amortization of stock-based compensation.................. 10 10 13
Acquired in-process research and development.............. 3 - -
Amortization of goodwill and acquired intangibles......... 1 - -
-------- -------- --------------
Total operating expenses................................ 85 75 70
-------- -------- --------------
Loss from operations.......................................... (23) (27) (15)
Other income, net............................................. 2 2 2
-------- -------- --------------
Net loss...................................................... (21%) (25%) (13%)
======== ======== ==============
</TABLE>
Total Revenue
Revenue was $35.3 million, $52.8 million and $96.4 million in fiscal 1997, 1998,
and 1999, respectively, representing increases of $17.5 million, or 50%, from
fiscal 1997 to fiscal 1998 and $43.7 million, or 83%, from fiscal 1998 to fiscal
1999. In fiscal 1998, Cedel Global Services accounted for 17% of total revenue.
NEC Electronics accounted for 17% of total revenue in fiscal 1997. Revenue from
Reuters accounted for 27%, 15% and 19% of our total revenue in fiscal 1997, 1998
and 1999, respectively. In fiscal 1997 and 1998, revenue from Reuters consisted
primarily of maintenance and consulting fees for services we performed for
Reuters, while in fiscal 1999, revenue from Reuters of $18 million consisted
primarily of product fees on its sales of our products under our license
agreement with Reuters.
License Revenue
License revenue was $6.2 million, $17.5 million and $56.9 million in fiscal
1997, 1998, 1999, respectively, representing increases of $11.3 million, or
181%, from fiscal 1997 to fiscal 1998 and $39.4 million, or 225%, from fiscal
1998 to fiscal 1999. These increases were due primarily to the increased volume
of sales of our TIB/ActiveEnterprise products which were introduced during the
second half of fiscal 1998. License revenue was 18%, 33% and 59% of total
revenue in fiscal 1997, 1998 and 1999, respectively. 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 significantly in absolute dollars and, to lesser extent, as a percentage of
total revenue in fiscal 2000.
Service and Maintenance Revenue
Service and maintenance revenue was $29.1 million, $35.3 million and $39.5
million in fiscal 1997, 1998 and 1999, respectively, representing increases of
$6.2 million, or 21%, from fiscal 1997 to fiscal 1998 and $4.2 million, or 12%,
from fiscal 1998 to fiscal 1999. Service and maintenance revenue was 82%, 67%
and 41% of total revenue in fiscal 1997, 1998 and 1999, respectively. The
increase was primarily a result of the additional maintenance revenue related to
the growth in license revenue. We believe service and maintenance revenue will
continue to grow moderately in absolute dollars and will decline modestly in
fiscal 2000 as a percentage of total revenue as license revenue continues to
increase as a percentage of total revenue.
4
<PAGE>
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 was $15.8 million, $27.7 million and $36.6
million in fiscal 1997, 1998 and 1999, respectively, representing increases of
$11.8 million, or 75%, from fiscal 1997 to fiscal 1998 and $8.9 million, or 32%,
from fiscal 1998 to fiscal 1999. Cost of revenue was 45%, 52% and 38% of total
revenue in fiscal 1997, 1998 and 1999, respectively. The increase in cost of
revenue in fiscal 1998, in both amount and as a percent of revenue, was
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 increase in cost of revenue in
absolute dollars in fiscal 1999 was a result of increased service and
maintenance revenue and the decrease 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 were $9.4 million, $14.8 million and $27.5
million in fiscal 1997, 1998 and 1999, respectively representing increases of
$5.4 million, or 58%, from fiscal 1997 to fiscal 1998 and $12.7 million, or 86%,
from fiscal 1998 to fiscal 1999. These increases were due primarily to increases
in our development staff as we continued to expand the TIB/ActiveEnterprise
product suite and upgrade the performance of existing products. Research and
development expenses were 27%, 28% and 28% of total revenue in fiscal 1997, 1998
and 1999, respectively. 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 in
absolute dollars.
Sales and Marketing Expenses
Sales and marketing expenses consist primarily of personnel and related costs of
our direct sales force and marketing staff and the cost of marketing programs,
including advertising, trade shows, promotional materials and customer
conferences. Sales and marketing expenses were $7.0 million, $15.2 million and
$33.1 million in fiscal 1997, 1998 and 1999, respectively, representing
increases of $8.2 million, or 117%, from fiscal 1997 to fiscal 1998 and $17.9
million, or 117%, from fiscal 1998 to fiscal 1999. These increases resulted
primarily from the expansion of our domestic and international direct sales
force in order to sell our expanding suite of TIB/ActiveEnterprise products,
which was released in the second half of fiscal 1998. Sales and marketing
expenses were 20%, 29% and 34% of total revenue in fiscal 1997, 1998, and 1999,
respectively. We intend to continue to increase staff in our direct sales
organization and to develop product marketing and branding campaigns and,
accordingly, expect that sales and marketing expenditures will continue to
increase substantially in absolute dollars and increase moderately as a
percentage of total revenue for fiscal 2000.
General and Administrative Expenses
General and administrative expenses consist primarily of personnel and related
costs for general corporate functions, including executive, legal, finance,
accounting, human resources and information systems. General and administrative
expenses were $3.6 million, $4.0 million and $8.2 million in fiscal 1997, 1998
and 1999, respectively, representing increases of $460,000, or 13%, from fiscal
1997 to fiscal 1998 and $4.2 million, or 104%, from fiscal 1998 to fiscal 1999.
These increases were primarily 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 but remain relatively stable as a
percentage of total revenue for fiscal 2000 as we develop our infrastructure to
support a larger, more global organization.
Amortization of Stock-based Compensation
In connection with the grant of stock options to employees and non-employee
directors during fiscal 1997, 1998 and 1999, we recorded aggregate unearned
compensation of $23.2 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 amount is presented as a reduction of stockholders' equity
and amortized over the vesting period of the applicable option. The increase was
due primarily to the grant of stock options to employees prior to the IPO. We
expect to amortize $4.0 million, $2.3 million, $1.2 million, $0.5 million and
$0.1 million of unearned stock-based compensation in fiscal 2000, 2001, 2002,
2003 and 2004, respectively. Stock-based compensation expense related to
employees and non-employee directors was $4.6 million, $4.7 million and
5
<PAGE>
$5.8 million in fiscal 1997, 1998 and 1999, respectively.
Stock-based compensation expense related to stock options granted to consultants
is recognized as earned, using the multiple option method as prescribed by FASB
Interpretation No. 28. At each reporting date, we re-value the stock-based
compensation using the Black-Scholes option pricing model. As a result, the
stock-based compensation expense will fluctuate as the fair market value of our
common stock fluctuates. In connection with the grant of stock options to
consultants, we recorded stock-based compensation expense of $30,000, $336,000
and $3.5 million in fiscal 1997, 1998 and 1999, respectively. As of November
30, 1999, we expect to amortize stock-based compensation expense of $13.6
million, $5.6 million, $1.9 million and $675,000 in fiscal 2000, 2001, 2002 and
2003, respectively assuming no change in the underlying value of our common
stock.
Acquired in-process research and development
During fiscal 1999, we purchased substantially all the assets of InConcert, Inc.
("InConcert"), a subsidiary of Xerox Corporation for $34.0 million in cash.
InConcert is a developer of business integration solutions for
telecommunications companies. The transaction was recorded under the purchase
method of accounting. The total purchase price of $35.6 million includes cash of
$34 million, accrued severance costs reimbursable to Xerox of approximately $1.3
million and acquisition related expenses, consisting of financial advisory,
accounting and legal fees, of approximately $0.3 million. The allocation of the
purchase price was based upon an independent, third-party appraisal and our
estimates and was allocated to net tangible assets acquired of $1.6 million, in-
process research and development of $2.8 million and other acquired intangible
assets and goodwill of $31.2 million. The acquired intangible assets and
goodwill are being amortized over their estimated useful lives of five years.
Upon consummation of the acquisition, we immediately charged to expense $2.8
million representing acquired in-process research and development that had not
yet reached technological feasibility and had no alternative future use. See
"Notes to Consolidated Financial Statements." The value was determined by
estimating the costs to develop the acquired in-process research and development
into commercially viable products, estimating the resulting net cash flows from
such projects and discounting the net cash flows back to their present value.
The costs to develop the acquired in-process research and development include a
core technology charge. The in-process research and development is expected to
be commercially viable in 2000. InConcert's in-process research and
development projects are related to its simplifying its business integration
solution and enhancing the user interface of the product in order to make it
easier to use for non-technical personnel.
Although we believe we are well positioned to successfully complete the research
and development program, there is risk associated with the completion of the
project and there is no assurance that it will meet with either technological or
commercial success. Our estimate of the net cash flows resulting from the
product enhancements underway at InConcert, which was used to value the
purchased research and development, was based on management's estimates of
revenue, cost of revenue, research and development costs, selling, general and
administrative costs and income taxes from the project. The revenue projections
were based on the potential size of the market for the enhanced business
integration solution in the telecommunications industry, our ability to gain
market acceptance for that product and its life cycle. Estimated revenue from
the acquired in-process product area commences in 2000 and is estimated to grow
for each of the four years thereafter.
The net cash flows generated from the in-process technology are expected to
reflect earnings before interest, taxes and depreciation of approximately 19%
for the sales generated from in-process technology. The discount of the net cash
flows to their present value is based on the weighted average cost of capital
(WACC). The WACC calculation produces the average required rate of return of an
investment in an operating enterprise, based on various required rates of return
from investments in various areas of the enterprise. The discount rate used to
discount the net cash flows from the acquired in-process technology was 29%.
This discount rate reflects the uncertainty surrounding the successful
development of the acquired in-process technology, the useful life of such
technology, the profitability levels of such technology, if any, and the
uncertainty of technological advances, all of which are unknown at this time. If
this project is not successfully developed, our business, operating results and
financial condition may be negatively affected in future periods. In addition,
the value of other intangible assets acquired may become impaired. To date, our
results relating to sales of the InConcert product lines have not differed
significantly from the forecast assumptions. Our research and development
expenditures since the acquisitions have not differed materially from
expectations. Nevertheless, the risks associated with the research and
development are still considered high and no assurance can be made that upcoming
products and product enhancements will meet market expectations.
Existing technology relates to the InConcert 2000 and Teoss 2000 Internet-
enabled object oriented client/server software
6
<PAGE>
solutions that combine process management and application integration that
integrates corporate databases, third-party applications and legacy systems with
other elements of workflow to convert disparate applications into integrated
solutions. This technology was valued at $14 million using the net cash flow
expected as a result of the sale of these products and discounted to the present
using a 24% discount rate. The customer base was also valued using the net cash
flow expected as result of the stream of revenues from existing customers from
license fees, professional services and maintenance support and then discounted
to the present using a 24% discount rate. The workforce was valued by estimating
the cost to replace the current assembled workforce, considering such costs as
recruiting and training. Finally, the trademark was valued by applying a
trademark royalty rate of 1% to forecasted revenue, and then the net cash flow
expected from these amounts was discounted at a rate of 24% to arrive an
estimated fair market value. There can be no assurance that these assumptions
will prove accurate, or that we will realize the anticipated benefit of this
acquisition.
Other Income, Net
Other income, net includes interest and other miscellaneous income and expense
items. Other income, net was $0.5 million, $1.1 million, and $2.1 million in
fiscal 1997, 1998 and 1999, respectively. The increase in fiscal 1999 was due
primarily to interest income earned from our investments which increased
significantly as a result of the money raised in connection with our initial
public offering in July 1999.
Income taxes
We have incurred operating losses for all periods. At November 30, 1999, we had
net operating loss carryforwards of $12.7 million and $6.7 million for federal
and California, respectively, which expire through 2019 and 2006,
respectively. We also have available tax credit carryforwards of $1.6 million
and $1.2 million for federal and California, respectively, which expire
through 2019. In the event of a change in ownership, as defined under federal
and state tax laws, the utilization of these carryforwards could be subject to
certain limitations in future years.
Liquidity and Capital Resources
Prior to our initial public offering, we funded our operations primarily through
the sale of our capital stock. We have raised an aggregate of $26.7 million
from the sale of preferred stock to Cisco Systems and Mayfield venture capital
funds. In July 1999, we completed an initial public offering, which consisted
of 27,485,001 shares of our common stock (including 3,285,000 shares purchased
by the underwriters pursuant to their overallotment option, 1,500,000 shares
sold directly to Sun Microsystems and 800,000 shares sold directly to Yahoo!
Inc.) at $5.00 per share. Net proceeds aggregated approximately $123.5
million (net of underwriters' commission and offering expenses of $13.9
million).
Net cash provided by operating activities in fiscal 1997 was $2.4 million,
resulting primarily from increases in accrued liabilities and receipt of
prepayments on contracts. Net cash used for operating activities in fiscal 1998
and 1999 was $11.8 million and $9.7 million, respectively, resulting primarily
from our net losses.
Net cash used in investing activities was $11.1 million, $8.2 million and $103.8
million in fiscal 1997, 1998 and 1999, respectively. Net cash used in
investing activities in these periods was related primarily to the purchase of
property and equipment, principally desktop and network hardware and software,
and the investment of surplus funds received from the issuance of our capital
stock. Net cash used for investing activities for fiscal 1999 was also related
to the acquisition of InConcert.
Net cash provided by financing activities for fiscal 1997, 1998 and 1999,
respectively, was $16.7 million , $12.4 million and $126.5 million. Cash
provided by financing activities was primarily the result of net proceeds from
the sale of our common stock in 1999 and of our preferred stock in 1998 and
1997.
At November 30, 1999, we had $89.8 million in cash, cash equivalents and
investments. 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 to use our cash resources to fund our operating expenses
and capital expenditures, and additionally, to fund acquisitions or investments
in complementary businesses, technologies or product lines. We believe that our
current cash, cash equivalents and investments, will be sufficient to meet our
anticipated cash requirements for working capital and capital expenditures for
at least the next twelve months.
7
<PAGE>
Risk Factors That May Affect Operating Results
The following risk factors could materially and adversely affect our future
operating results and could cause actual events to differ materially from those
predicted in our forward-looking statements related to our business.
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 $4.7 million, $13.0
million, and $19.5 million in fiscal 1997, 1998 and 1999, respectively. As of
November 30, 1999, we had an accumulated deficit of approximately $37.1 million.
Since the beginning of fiscal 1998, we have invested significantly in building
our sales and marketing organization and in our technology research and
development. We expect to continue to spend substantial financial and other
resources on expanding our direct sales and marketing activities and developing
and introducing enhancements to our existing products and new software products.
As a result, we need to generate significant revenue to achieve and maintain
profitability. We expect that our sales and marketing expenses and our research
and development 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 fiscal quarter. 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 significant 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 have a significant relationship with Reuters for licensing and distribution.
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
8
<PAGE>
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 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 and 1999, 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.
Year 2000 Compliance
Many currently installed computer systems and software products are coded to
accept only two-digit entries in the date code field. In order to distinguish
21st century dates from 20th century dates, the date code field need to be
expanded to 4 digits. As a result, many companies' software and computer
systems were upgraded or replaced in order to comply with these year 2000
requirements. The use of software and computer systems that are not year 2000
compliant could have resulted in
9
<PAGE>
system failures or miscalculations resulting in disruptions of operations,
including among other things, a temporary inability to process transactions,
send invoices, or engage in normal business activities.
To date, we have not suffered any disruptions in our computer systems or
software when the expanded date code field was first used on January 1, 2000.
In addition, to date, we have not been made aware that any third-party systems
we rely on, the manufacturing systems of our vendors or the systems our
customers use to order our services have suffered disruptions in their systems.
To date, we have spent approximately $200,000 on year 2000 compliance. At this
time, we do not expect to incur future expenditures relating to year 2000
compliance matters.
Quantitative and Qualitative Disclosures about Market Risk
The Company invests in marketable securities in accordance with its investment
policy. The primary objectives of the Company's investment policy are to
preserve principal, maintain proper liquidity to meet operating needs and
maximize yields. The Company's investment policy specifies credit quality
standards for the Company's investments and limits the amount of credit exposure
to any single issue, issuer or type of investment. The maximum allowable
duration of a single issue is 2.5 years and the maximum allowable duration of
the portfolio is 1.3 years.
At the end of fiscal 1999, the Company had an investment portfolio of fixed
income securities totaling $76.1 million, excluding those classified as cash and
cash equivalents. The Company's investments consist primarily of bank and
finance notes, various government obligations and asset-backed securities.
These securities are classified as available-for-sale and are recorded on the
balance sheet at fair market value with unrealized gains or losses reported as a
separate component of stockholders' equity. Unrealized losses are charged
against income when a decline in fair market value is determined to be other
than temporary. The specific identification method is used to determine the
cost of securities sold. Gains and losses on marketable securities are included
in net interest income when realized.
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 (approximately 8.3% of
current rates in the portfolio) from levels as of November 30, 1999, the fair
market value of the portfolio would decline by approximately $350,000.
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, however, a strengthening of the dollar could make our products less
competitive in foreign markets.
Recent Accounting Pronouncements
In March 1998, the AICPA issued SOP 98-1, "Software for Internal Use," which
provides guidance on accounting for the cost of computer software developed or
obtained for internal use. SOP 98-1 is effective for financial statements for
fiscal years beginning after December 15, 1998. We do not expect that the
adoption of SOP 98-1 will have a material impact on our financial statements.
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No.
133 "Accounting for Derivative Instruments and Hedging Activities," which
establishes accounting and reporting standards for derivative instruments and
hedging activities. It requires that an entity recognize all derivatives as
either assets or liabilities on the balance sheet and measure those instruments
at fair value. To date we have engaged in limited derivative and hedging
activities, and accordingly, we do not believe that the adoption of SFAS No. 133
will have a material impact on our financial reporting and related disclosures.
We will adopt SFAS No. 133 as required by SFAS 137, "Deferral of the Effective
Date of the FASB Statement No. 133," beginning with the fourth quarter of fiscal
2000.
10
<PAGE>
TIBCO SOFTWARE INC.
Consolidated Balance Sheets
(in thousands, except per share data)
<TABLE>
<CAPTION>
November 30,
----------------------
1999 1998
-------- --------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents.............................................................. $ 13,681 $ 547
Short-term investments................................................................. 76,126 --
Deposits held by Reuters............................................................... -- 15,423
Accounts receivable, net............................................................... 42,199 13,234
Due from related parties............................................................... 286 1,829
Other current assets................................................................... 5,031 1,853
-------- --------
Total current assets.............................................................. 137,323 32,886
Property and equipment, net.............................................................. 10,423 3,171
Other assets............................................................................. 1,171 232
Goodwill and acquired intangibles, net................................................... 30,721 --
-------- --------
$179,638 $ 36,289
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable....................................................................... $ 7,501 $ 3,190
Accrued liabilities.................................................................... 21,128 7,834
Deferred revenue....................................................................... 13,091 3,561
-------- --------
Total current liabilities......................................................... 41,720 14,585
-------- --------
Commitments (Note 7)
Stockholders' equity:
Convertible preferred stock, $0.001 par value; 25,000 shares authorized
no and 81,678 shares issued and outstanding, respectively........................ -- 82
Common stock, $0.001 par value; 300,000 shares authorized;
181,215 and 67,131 shares issued and outstanding, respectively................... 181 67
Additional paid-in capital............................................................. 182,939 46,399
Unearned stock-based compensation...................................................... (8,083) (7,230)
Accumulated other comprehensive loss................................................... (24) --
Accumulated deficit.................................................................... (37,095) (17,614)
-------- --------
Total stockholders' equity........................................................ 137,918 21,704
-------- --------
$179,638 $ 36,289
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
11
<PAGE>
TIBCO SOFTWARE INC.
Consolidated Statements of Operations
(in thousands, except per share data)
<TABLE>
<CAPTION>
Eleven Months
Ended
Year Ended November 30, November 30,
-----------------------
1999 1998 1997
-------- -------- ------------
<S> <C> <C> <C>
License revenue:
Non-related parties............................................... $ 39,680 $ 14,511 $ 6,062
Related parties................................................... 17,236 2,984 157
-------- -------- ------------
Total license revenue............................................ 56,916 17,495 6,219
-------- -------- ------------
Service and maintenance revenue:
Non-related parties............................................... 36,601 30,577 19,648
Related parties................................................... 2,923 4,685 9,407
-------- -------- ------------
Total service and maintenance revenue............................ 39,524 35,262 29,055
-------- -------- ------------
Total revenue................................................. 96,440 52,757 35,274
-------- -------- ------------
Cost of revenue:
Cost of license revenue........................................... 2,402 984 366
Cost of service and maintenance revenue........................... 34,210 26,698 15,481
-------- -------- ------------
Total cost of revenue............................................ 36,612 27,682 15,847
-------- -------- ------------
Gross profit............................................................ 59,828 25,075 19,427
-------- -------- ------------
Operating expenses:
Research and development.......................................... 27,478 14,787 9,385
Sales and marketing............................................... 33,130 15,242 7,008
General and administrative........................................ 8,229 4,025 3,565
Amortization of stock-based compensation.......................... 9,252 5,064 4,672
Acquired in-process research and development...................... 2,800 -- --
Amortization of goodwill and acquired intangibles................. 521 -- --
-------- -------- ------------
Total operating expenses......................................... 81,410 39,118 24,630
-------- -------- ------------
Loss from operations.................................................... (21,582) (14,043) (5,203)
Interest income......................................................... 2,707 1,394 527
Other income (expense), net............................................. (606) (302) 13
-------- -------- ------------
Net loss................................................................ $(19,481) $(12,951) $(4,663)
======== ======== ============
Net loss per share:
Basic and diluted................................................. $ ( 0.19) $ (0.22) $ (0.08)
======== ======== ============
Weighted average common shares outstanding........................ 104,112 60,033 57,606
======== ======== ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
12
<PAGE>
TIBCO SOFTWARE INC.
Consolidated Statement of Stockholders' Equity
(in thousands)
<TABLE>
<CAPTION>
Convertible Preferred Stock Common Stock Additional
--------------------------- -----------------
Shares Amount Shares Amount Paid-in-Capital
-------- ---------- ------ ------ ---------------
<S> <C> <C> <C> <C> <C>
Balance January 1, 1997 -- $ -- -- $ -- $ --
Capitalization from Reuters...................................... -- -- -- -- 451
Net loss......................................................... -- -- -- -- --
Issuance of series A preferred stock to Reuters.................. 60,000 60 -- -- 9,883
Issuance of common stock to Reuters (Note 5)..................... -- -- 57,000 57 --
Return of capital to Reuters..................................... -- -- -- -- (10,000)
Issuance of series B preferred stock, net........................ 13,095 13 -- -- 15,693
Exercise of common stock options................................. -- -- 5,004 5 996
Unearned stock-based compensation, net........................... -- -- -- -- 9,439
-------- ------ ------- ------ ---------------
Balance at November 30, 1997..................................... 73,095 73 62,004 62 26,462
Net loss......................................................... -- -- -- -- --
Issuance of series C preferred stock, net........................ 8,583 9 -- -- 10,989
Exercise of common stock options, net............................ -- -- 5,127 5 1,421
Unearned stock-based compensation, net........................... -- -- -- -- 7,527
-------- ------ ------- ------ ---------------
Balance at November 30, 1998..................................... 81,678 82 67,131 67 46,399
Net loss......................................................... -- -- -- -- --
Translation adjustments.......................................... -- -- -- -- --
Unrealized loss on investments................................... -- -- -- -- --
Comprehensive income.........................................
Issuance of common stock in public offering, net of issuance
costs of $13,925................................................ -- -- 27,486 27 123,470
Conversion of convertible preferred stock in connection with IPO. (81,678) (82) 81,678 82 --
Exercise of common stock options, net............................ -- -- 4,920 5 2,965
Unearned stock-based compensation, net........................... -- -- -- -- 10,105
-------- ------ ------- ------ ---------------
Balance at November 30, 1999..................................... -- $ -- 181,215 $ 181 $ 182,939
======== ====== ======= ====== ===============
</TABLE>
<TABLE>
<CAPTION>
Accumulated
Unearned Other
Stock-Based Comprehensive Accumulated
Compensation Income (Loss) Deficit Total
------------ -------------- ----------- ---------
<S> <C> <C> <C> <C>
Balance December 31, 1996 $ -- $ -- $ -- $ --
Capitalization from Reuters...................................... 458
Net loss......................................................... -- -- (4,663) (4,663)
Issuance of series A preferred stock to Reuters.................. -- -- -- 9,943
Issuance of common stock to Reuters (Note 5)..................... -- -- -- 57
Return of capital to Reuters..................................... -- -- -- (10,000)
Issuance of series B preferred stock, net........................ -- -- -- 15,706
Exercise of common stock options................................. -- -- -- 1,001
Unearned stock-based compensation, net........................... (4,767) -- -- 4,672
------------- -------------- ----------- ---------
Balance at November 30, 1997..................................... (4,767) (4,663) 17,167
Net loss......................................................... -- -- (12,931) (13,951)
Issuance of series C preferred stock, net........................ -- -- -- 10,998
Exercise of common stock options, net............................ -- -- -- 1,426
Unearned stock-based compensation, net........................... (2,463) -- -- 5,064
------------- -------------- ----------- ---------
Balance at November 30, 1998..................................... (7,230) -- (17,614) 21,704
---------
Net loss......................................................... -- -- (19,481) (19,481)
Translation adjustments.......................................... -- 178 -- 178
Unrealized loss on investments................................... -- (202) -- (202)
---------
Comprehensive income......................................... (19,505)
---------
Issuance of common stock in public offering, net of issuance
costs of $13,925................................................ -- -- -- 123,497
Conversion of convertible preferred stock in connection with IPO. -- -- -- --
Exercise of common stock options, net............................ -- -- -- 2,970
Unearned stock-based compensation, net........................... (853) -- -- 9,252
------------- -------------- ----------- ---------
Balance at November 30, 1999..................................... $ (8,083) $ (24) $ (37,095) $ 137,918
============= ============== =========== =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
13
<PAGE>
TIBCO SOFTWARE INC.
Consolidated Statements of Cash Flows
(in thousands)
<TABLE>
<CAPTION>
Eleven Months
Ended
Year Ended November 30, November 30,
-----------------------
1999 1998 1997
--------- -------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss........................................................................... $ (19,481) $(12,951) $ (4,663)
Adjustments to reconcile net loss to net cash provided by (used for) operating
activities:
Depreciation and amortization..................................................... 2,110 1,073 924
Write-off of in-process research and development 2,800 -- --
Amortization of goodwill and other intangibles.................................... 521 -- --
Amortization of unearned compensation............................................. 9,252 5,064 4,672
Changes in assets and liabilities:
Accounts receivable............................................................. (26,119) (5,996) 1,083
Due from related parties........................................................ 1,543 1,339 (3,192)
Other assets.................................................................... (3,005) (1,017) 253
Accounts payable................................................................ 4,019 2,240 659
Accrued liabilities............................................................. 10,279 1,618 1,342
Deferred revenue................................................................ 8,406 (3,152) 1,333
--------- -------- -----------
Net cash provided by (used for) operating activities......................... (9,675) (11,782) 2,411
--------- -------- -----------
Cash flows from investing activities:
Deposits held by Reuters........................................................... 15,423 (5,164) (10,259)
Purchases of investments........................................................... (198,325) -- --
Sales and maturities of investments................................................ 121,997 -- --
Purchases of property and equipment, net........................................... (8,931) (2,990) (800)
Acquisition of InConcert, Inc...................................................... (34,000) -- --
--------- -------- -----------
Net cash used for investing activities....................................... (103,836) (8,154) (11,059)
--------- -------- -----------
Cash flows from financing activities:
Proceeds from issuance of common stock............................................. 126,467 1,426 1,039
Proceeds from issuance of preferred stock.......................................... -- 10,998 25,668
Return of capital to Reuters....................................................... -- -- (10,000)
Borrowings from Reuters............................................................ -- -- 3,000
Repayment of borrowings from Reuters............................................... -- -- (3,000)
--------- -------- -----------
Net cash provided by financing activities.................................... 126,467 12,424 16,707
--------- -------- -----------
Effect of exchange rate changes on cash............................................. 178 -- --
--------- -------- -----------
Net change in cash and cash equivalents............................................ 13,134 (7,512) 8,059
Cash and cash equivalents at beginning of period.................................... 547 8,059 --
--------- -------- -----------
Cash and cash equivalents at end of period.......................................... $ 13,681 $ 547 $ 8,059
========= ======== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
14
<PAGE>
TIBCO SOFTWARE INC.
Notes to Consolidated Financial Statements
November 30, 1999
1. THE COMPANY
TIBCO Software Inc. ("TIBCO Software" or the "Company") is the successor to a
portion of the business of Teknekron Software Systems, Inc. ("Teknekron").
Teknekron was founded in 1985 and pioneered the development of "publish and
subscribe" computing by creating the software infrastructure for the integration
and delivery of market data (e.g., stock quotes, news and other financial
information) in the trading rooms of large banks and financial institutions.
This publish and subscribe technology, know as The Information Bus or "TIB,"
permitted the integration of disparate information from various data sources and
its distribution across a variety of networks and platforms within these banks,
financial institutions and stock exchanges.
Teknekron was acquired by a subsidiary of Reuters Group PLC ("Reuters"), the
global news and information group, in 1994, and the underlying technology rights
owned by Teknekron were assigned to Reuters. In November 1996, TIBCO Software
was incorporated in Delaware as a separate entity from Teknekron and was formed
to create and market software solutions for use in the integration of business
information, processes and applications in diverse industries outside the
financial services market. Through a license and distribution agreement, Reuters
is the exclusive distributor of TIBCO Software products in the financial
services market, subject to limited exceptions.
Effective as of January 1, 1997, the Company's capital structure was
established, and the transfer to TIBCO Software of certain assets, liabilities
and customer contracts previously owned by Reuters was substantially completed.
Prior to January 1, 1997, operations were conducted by Reuters and its
subsidiaries.
In July 1999, the Company completed its initial public offering ("IPO"), of
approximately 27,485,001 shares of common stock (including 3,285,000 shares
purchased by the underwriters over-allotment option, 1,500,000 shares sold
directly to Sun Microsystems, and 800,001 shares sold directly to Yahoo! Inc.)
at $5.00 per share. Net proceeds aggregated approximately $123.5 million. At the
closing of the offering, all issued and outstanding shares of the Company's
preferred stock were converted into an aggregate of 81,678,945 shares of common
stock. At November 30, 1999, Reuters still owned a majority of the Company's
common stock.
2. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
its subsidiaries. All intercompany accounts and transactions have been
eliminated in consolidation.
Change in Year End
Effective January 1, 1997, the Company changed its fiscal year end to November
30/th/ from December 31/st/.
Stock Splits
In June 1999, the Company's Board of Directors approved a one-for-two reverse
stock split of 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 split.
Use of Estimates
15
<PAGE>
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 revenue and expenses during the reporting period.
Actual results could differ from those estimates.
Foreign Currency Translation
The functional currency of the Company's wholly-owned foreign subsidiaries are
the local currencies. Assets and liabilities of these subsidiaries are
translated into U.S. dollars at exchange rates as of at the balance sheet date.
Income and expense items are translated at average exchange rates for the
period. Accumulated translation adjustments are recorded as a component of
accumulated other comprehensive loss in stockholders' equity. Foreign exchange
transaction gains and losses were not material in all periods presented.
Cash, Cash Equivalents and Short-term Investments
The Company considers all highly liquid investment securities with original
maturities of three months or less to be cash equivalents. 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. Interest, dividends and realized gains and losses are
included in interest income. Realized gains and losses are recognized based on
the specific identification method.
Investments consist of the following at November 30, 1999 (in thousands):
Money funds............................................... $ 414
Government debt issues.................................... 13,353
U.S. treasury notes....................................... 15,473
U.S. agency notes......................................... 12,040
Asset-backed securities................................... 15,668
Finance notes............................................. 20,642
Bank notes................................................ 6,227
---------
Total available-for-sale securities.................. 83,817
Less: amounts classified as cash equivalents............. (7,691)
---------
76,126
=========
As of November 30, 1999, short-term investments with contractual maturities of
one year or less and one year through three years were $26.0 million and $50.1
million, respectively.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to a concentration of
credit risk consist of cash, cash equivalents, and accounts receivable. Cash,
cash equivalents and investments are deposited with financial institutions that
management believes are creditworthy. The Company's accounts receivable is
derived from revenue earned from customers located primarily in the United
States, Australia, Europe and Taiwan. The Company performs ongoing credit
evaluations of its customers' financial condition and, generally, requires no
collateral from its customers. The Company maintains an allowance for doubtful
account receivable based upon the expected collectibility of accounts
receivable.
Capitalized Software Development Costs
16
<PAGE>
The Company has not capitalized any software development costs to date and is in
compliance with Statement of Financial Accounting Standards ("SFAS") No. 86,
"Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise
Marketed." Capitalization of software development costs begins upon the
establishment of technological feasibility of the product. After technological
feasibility is established, material software development costs are capitalized.
The capitalized cost is then amortized on a straight-line basis over the
estimated product life, or on the ratio of current revenues to total projected
product revenues, whichever is greater. To date, the period between achieving
technological feasibility, which the Company has defined as the establishment of
a working model which typically occurs when beta testing commences, and the
general availability of such software has been short, and as such, software
development costs qualifying for capitalization have been insignificant.
Property and Equipment
Property and equipment are stated at cost. Depreciation is generally computed
using the straight-line method over the estimated useful lives of the assets as
follows:
<TABLE>
<S> <C>
Equipment................ 2 - 5 years
Furniture and fixtures... 5 - 10 years
Leasehold improvements... Shorter of the lease term or the estimated useful life
</TABLE>
Long-Lived Assets
The Company evaluates the recoverability of its long-lived assets in accordance
with SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of." SFAS No. 121 requires recognition of
impairment of long-lived assets in the event the net book value of such assets
exceeds the future undiscounted cash flows attributable to such assets.
Revenue Recognition
Effective in fiscal 1999, the Company adopted Statement of Position ("SOP")
97-2, "Software Revenue Recognition" and its related amendments. SOP 97-2
provides guidance on applying generally accepted accounting principles in
recognizing revenue on software transactions and supercedes the previous
guidance provided by SOP 91-1. The adoption of SOP 97-2 did not have a material
impact on the Company's consolidated financial position or results of
operations.
License revenue consists principally of revenue earned under software license
agreements. License revenue is generally recognized when a signed contract or
other persuasive evidence of an arrangement exists, the software has been
shipped or electronically delivered, the license fee is fixed or determinable,
and collection of the resulting receivable 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 SOP 98-9. Any maintenance
revenue included in these arrangements is recognized ratably over the term of
the arrangement. Revenue from subscription license agreements, which include
software, rights to future products and maintenance, is recognized ratably over
the term of the subscription period. Revenue on shipments to resellers, which is
generally subject to certain rights of return and price protection, is
recognized when the products are sold by the resellers to the end-user 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
17
<PAGE>
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.
Advertising Expense
Advertising costs are expensed as incurred and totaled approximately $0.7
million, $1.6 million, and less than $100,000 for the years ended November 30,
1999 and 1998 and for the eleven months ended November 30, 1997, respectively.
Stock-Based Compensation
The Company accounts for stock-based employee compensation arrangements in
accordance with provisions of Accounting Principles Board Opinion No. 25 ("APB
No. 25"), "Accounting for Stock Issued to Employees" and complies with the
disclosure provisions of SFAS No. 123, "Accounting for Stock-Based
Compensation." Stock-based compensation expense is amortized, using the multiple
option method prescribed by FASB Interpretation No. 28, over the option's
vesting period.
Comprehensive Income (Loss)
Effective in fiscal 1999, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income." SFAS No.130 establishes standards for reporting
comprehensive income (loss) and its components in financial statements.
Comprehensive income, as defined, includes all changes in equity (net assets)
during the period from non-owner sources. The Company has reported the
components of comprehensive income (loss) on its Consolidated Statement of
Stockholders' Equity.
Net Loss per Share
Net loss per share is calculated in accordance with SFAS No. 128, "Earnings per
Share" and SEC Staff Accounting Bulletin No. 98 ("SAB 98"). Under the provisions
of SFAS No. 128 and SAB 98, basic net loss per share is computed by dividing the
net loss available to common stockholders for the period by the weighted average
number of common shares outstanding during the period. Diluted net loss per
share is computed by dividing the net loss for the period by the weight average
number of common and potential common shares outstanding during the period if
their effect is dilutive. Potential common shares are comprised of common stock
subject to repurchase and incremental shares of common stock issuable upon the
exercise of stock options and upon the conversion of convertible preferred
stock.
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):
18
<PAGE>
<TABLE>
<CAPTION>
Eleven Months
Ended
Year Ended November 30, November 30,
----------------------- -----------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Net loss........................................................... $ (19,481) $ (12,951) $ (4,663)
========= ========= =========
Basic and diluted:
Weighted average common shares outstanding.................... 110,313 65,175 58,452
Weighted average common shares subject to repurchase.......... (6,201) (5,142) (846)
--------- --------- ---------
Weighted average common shares used to
compute basic and diluted net loss per share.................. 104,112 60,033 57,607
========= ========= =========
Net loss per share-basic and diluted............................... $ (0.19) $ (0.22) $ (0.08)
========= ========= =========
</TABLE>
The following table sets forth potential common shares that are not included in
the diluted net loss per share calculation above because to do so would be anti-
dilutive as of the periods indicated (in thousands):
<TABLE>
<CAPTION>
November 30,
------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Preferred stock.................................................... - 81,678 73,095
Common stock subject to repurchase................................. 5,965 5,475 4,014
Stock options...................................................... 31,440 27,258 20,676
------ ------- ------
37,405 114,411 97,785
====== ======= ======
</TABLE>
Derivative Financial Instruments
The Company enters into foreign currency forward exchange contracts ("forward
contracts") to manage exposure related to accounts receivable denominated in
foreign currencies. The Company does not enter into derivative financial
instruments for trading purposes. All outstanding forward contracts at the end
of the period are marked-to-market, with unrealized gains and losses included in
net income as a component of other income (expense), net. The Company had
outstanding forward contracts with notional amounts totaling approximately
$477,000 and $1.6 million at November 30, 1999 and 1998, respectively. The open
contracts at November 30, 1999 mature at various dates through January 2000 and
are hedges of certain foreign currency transaction exposures in the Australian
dollar and British pound. The estimated fair value at November 30, 1999 was
negligible.
Recent Accounting Pronouncements
In March 1998, the AICPA issued SOP 98-1, "Software for Internal Use," which
provides guidance on accounting for the cost of computer software developed or
obtained for internal use. SOP 98-1 is effective for financial statements for
fiscal years beginning after December 15, 1998. The Company does not expect that
the adoption of SOP 98-1 will have a material impact on its financial
statements.
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No.
133 "Accounting for Derivative Instruments and Hedging Activities," which
establishes accounting and reporting standards for derivative instruments and
hedging activities. It requires that an entity recognize all derivatives as
either assets or liabilities on the balance sheet and measure those instruments
at fair value. The Company, to date, has engaged in limited derivative and
hedging activities, and accordingly, does not believe that the adoption of SFAS
No. 133 will have a material impact on the financial reporting and related
disclosures of the Company. The Company will adopt SFAS No. 133 as required by
SFAS 137, "Deferral of the Effective Date of the FASB Statement No. 133,"
beginning with the fourth quarter of fiscal 2000.
19
<PAGE>
3. BALANCE SHEET COMPONENTS
(in thousands)
<TABLE>
<CAPTION>
November 30,
---------------------
1999 1998
---- ----
<S> <C> <C>
Accounts receivable, net:
Accounts receivable................................. $ 39,119 $ 11,024
Unbilled fees and services.......................... 5,313 3,904
---------- --------
44,432 14,928
Less: Allowances for doubtful accounts,
returns and discounts......................... (2,233) (1,694)
---------- --------
$ 42,199 $ 13,234
========== ========
Property and equipment, net:
Equipment........................................... $ 8,141 $ 4,973
Furniture and fixtures.............................. 515 146
Leasehold improvements.............................. 4,420 49
---------- --------
13,076 5,168
Less: Accumulated depreciation and amortization..... (2,653) (1,997)
---------- --------
$ 10,423 $ 3,171
========== ========
Accrued liabilities:
Compensation and employee related................... $ 13,201 $ 5,810
Expenses............................................ 7,927 2,024
---------- --------
$ 21,128 $ 7,834
========== ========
</TABLE>
4. ALLOWANCES FOR DOUBTFUL ACCOUNTS, RETURNS AND DISCOUNTS
(in thousands)
<TABLE>
<CAPTION>
Balance at Charged Balance at
Beginning of against Charged to End of
Period Revenue Expenses Deduction Period
------ ------- -------- --------- ------
<S> <C> <C> <C> <C> <C>
Eleven Months Ended November 30, 1997........ $ 1,548 $ 1,576 $ 16 $ (472) $ 2,668
Year Ended November 30, 1998................. 2,668 1,133 194 (2,301) 1,694
Year Ended November 30, 1999................. 1,694 230 1,321 (1,012) 2,233
</TABLE>
5. RELATED PARTY TRANSACTIONS
Reuters
The Company has significant transactions with Reuters, including licensing
arrangements, development contracts and shared functions and services. The
following is a summary of the transactions for the periods indicated (in
thousands):
20
<PAGE>
<TABLE>
<CAPTION>
Eleven Months
Ended
Year Ended November 30, November 30,
-----------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
License fees......................................................... $ 15,289 $ 2,984 $ 157
Service and maintenance Revenue:
Subscription agreement............................................. - 354 3,896
Maintenance agreement.............................................. 1,168 750 688
Services contracts................................................. 843 485 796
Shared personnel................................................... 307 2,202 4,027
Development reimbursement.......................................... 365 894 -
---------- -------- ---------
Total service and maintenance................................... 2,683 4,685 9,407
---------- -------- ---------
$ 17,972 $ 7,669 $ 9,564
========== ======== =========
</TABLE>
With the formation of TIBCO Software in January 1997, the Company entered into a
license, maintenance and distribution agreement (the "License Agreement") with
Reuters. Under the terms of the License Agreement, the Company was granted a
perpetual, royalty-free license to the underlying TIB messaging technology in
existence on December 31, 1996. The licensed TIB technology includes technology
underlying some of the Company's current products. The license includes rights
to use the TIB technology to develop and maintain products, to provide services
to customers relating to the licensed technology, and to sell, sublicense and
distribute products utilizing the licensed technology both directly and through
third party distributors, resellers and original equipment manufacturers. In
consideration of the License Agreement, the Company paid to Reuters $10.0
million, which was accounted for as a return of capital.
Reuters is the preferred distributor of the Company's TIB/ActiveEnterprise
products to customers in the financial services market segment. As such, the
Company receives a product fee from Reuters, which is computed as a percentage
of sales of product licenses and maintenance, which has been recorded as license
revenue in the accompanying Financial Statements. For the nine months ending
December 31, 1999 and the years ending December 31, 2000 and 2001, Reuters has
guaranteed minimum product fees of $16.0 million, $18.0 million and $20.0
million, respectively. These amounts will be recognized ratably over the
corresponding period. In any period where actual product fees earned exceed the
minimum guaranteed product fees, the difference between the actual product fees
and cumulative minimum product fees recognized to date will be recognized as
revenue currently.
For calendar 1997, Reuters paid the Company a one-time fee of approximately $4.3
million for the purposes of developing middleware infrastructure software and
products. As Reuters was entitled to receive unspecified future enhancements, if
and when available, the fee was accounted for as a subscription and taken to
service revenue ratably over the period (see "subscription agreement" in the
preceding table). Beginning in January 1997, the Company received an annual
maintenance fee of approximately $0.7 million, which is accounted for ratably
over the year. Beginning in 1999, this maintenance fee will be included in the
minimum guarantee. There were various miscellaneous consulting projects during
the years ended November 30, 1999 and 1998 and during the eleven months ended
November 30, 1997 in which the Company recognized approximately $1.0 million,
$0.5 million, and $0.8 million, respectively.
Since its formation in January 1997, Reuters and TIBCO Software agreed to
certain intercompany rates for the sharing of employees on various customer
projects. For the services provided by TIBCO Software personnel to Reuters,
TIBCO Software recognized service revenue of approximately $0.3 million, $2.2
million, and $4.0 million for the years ended November 30, 1999 and 1998 and the
eleven months ended November 30, 1997, respectively. For the services received
by TIBCO Software from Reuters personnel, TIBCO Software recorded, in cost of
service revenue, expenses of approximately $2.3 million, $5.8 million, and $1.2
million for the years ended November 30, 1999 and 1998 and the eleven months
ended November 30, 1997, respectively, and, in research and development,
expenses of approximately $0.4 million in the eleven months ended November 30,
1997.
21
<PAGE>
In 1998, TIBCO Software was reimbursed for approximately $0.9 million for the
development of certain enhancements for Reuters.
Intercompany Services
Through mid 1999, Reuters provided TIBCO Software with shared functions and
services such as cash management, accounting, legal and insurance. The cost of
these functions and services has been directly charged and/or allocated to the
Company using methods that the Company management believes are reasonable. Such
charges and allocations are not necessarily indicative of the costs that would
have been incurred if the Company had been a separate entity. Neither party has
a financial obligation to the other in relation to any shared costs except as
may be agreed in writing in advance.
Administrative Services. Through mid 1999, Reuters provided limited
administrative services to the Company, including certain facilities, human
resources, information technology and finance functions. The expenses related to
these functions have been charged to the Company based on actual costs incurred.
Management believes that such costs are reasonable. Such charges for these
services amounted to approximately $573,000 in the year ended November 30, 1999,
$2.7 million in the year ended November 30, 1998, and $1.6 million in the eleven
months ended November 30, 1997 and are allocated to operating costs and expenses
based on respective salaries.
Operating Leases and Furniture & Fixtures Rental. The Company shared its
corporate headquarters in Palo Alto, California through June 1999, and certain
foreign offices with Reuters. In June 1999, the Company assumed the lease for
the headquarters building from Reuters. In addition, the Company rented certain
furniture and fixtures and computer equipment from Reuters, primarily related to
its corporate headquarters. The Company incurred rent expense of $1.0 million in
the year ended November 30, 1999, $1.6 million in the year ended November 30,
1998, and $1.4 million in the eleven months ended November 30, 1997. In August
1999, the Company purchased $4.6 million in fixed assets from Reuters in
connection with the assumption of the lease for the corporate headquarters
facility. This amount was comprised of $4.2 million in leasehold improvements
and $0.4 million of furniture and fixtures.
Insurance and Legal. The Company participated in an insurance purchasing
agreement with Reuters through April 1999. Under the terms of this arrangement,
Reuters purchased insurance on behalf of the Company and charged the Company for
this insurance on an annual basis. Additionally, a portion of the Company's
legal services were provided by Reuters to the Company until March 1998. Amounts
incurred for legal and insurance expenses were approximately $0.3 million for
the period from January 1, 1997 to November 30, 1999.
Employee Benefit Programs. The Company participated in various employee benefit
programs with Reuters. These programs included medical, dental, life insurance
and pension plans. The Company paid the service providers directly for these
services rendered since January 1997. Until August 1999, the Company also
reimbursed Reuters for its proportionate cost of certain other benefits provided
to TIBCO Software employees based on its historical experience and relative
headcount. The Company recorded expenses related to the reimbursement of these
costs of approximately $0.4 million for the period from January 1, 1997 to
November 30, 1999.
Intercompany Deposits. Prior to July 1999, the Company participated in Reuters
cash management program, investing surplus funds with Reuters Group Treasury
Department. These deposits earned interest at one-month dollar London inter bank
offered rate ("LIBOR"). The Company recorded interest income on these deposits
of approximately $0.3 million, $1.1 million, and $0.3 million for the years
ended November 30, 1999 and 1998, and the eleven months ended November 30, 1997,
respectively. Effective with the Company's IPO, the Company began to manage its
own cash and investments.
Cisco Systems, Inc.
As of November 30, 1999, Cisco Systems, Inc. ("Cisco") owned approximately 7% of
the outstanding common
22
<PAGE>
stock and had 2 representatives on the Company's Board of Directors. The Company
recorded license revenue from Cisco of $1.9 million and service revenue of
$240,000 for the year ended November 30, 1999.
6. INCOME TAXES
No provision for income taxes was recorded due to the net losses incurred to
date. The provision for income taxes was at rates other than the U.S. Federal
statutory tax rate for the following reasons:
<TABLE>
<CAPTION>
Eleven Months
Ended
Year Ended November 30, November 30,
-------------------------
1999 1998 1997
----------- ------------ -------------
<S> <C> <C> <C>
U.S. Federal statutory rate.................................... (34.0)% (34.0)% (34.0)%
State taxes.................................................... (5.7) (5.4) (5.9)
R & D credits.................................................. (9.8) (3.9) (5.8)
Change in valuation allowance................................. 47.9 44.1 48.1
Other.......................................................... 1.6 (0.8) (2.4)
----------- ------------ -------------
0.0% 0.0% 0.0%
=========== ============ =============
</TABLE>
The components of the Company's deferred tax assets are as follows (in
thousands):
<TABLE>
<CAPTION>
November 30,
-----------------------------------------
1999 1998
------------- -------------
<S> <C>
Net operating loss carryforward...................................... $ 4,364 $ 3,430
Stock option compensation............................................ 6,657 4,424
Reserves and accruals................................................ 3,237 1,445
Credit carryforwards................................................. 2,608 759
Depreciation and amortization........................................ 1,523 694
Other................................................................ 83 (9)
------------- -------------
18,472 10,743
Less: Valuation allowance............................................ (18,472) (10,743)
------------- -------------
$ -- $ --
============= =============
</TABLE>
Management believes that, based on a number of factors, it is more likely than
not that the deferred tax assets will not be utilized; and accordingly, a full
valuation allowance has been recorded.
At November 30, 1999, the Company has net operating loss carryforwards of $12.7
million and $6.7 million for federal and California, respectively, which expire
through 2019 and 2006. The Company also has available tax credit carryforwards
of $1.6 million and $1.2 million for federal and California, respectively, which
expire through 2019. In the event of a change in ownership, as defined under
federal and state tax laws, the utilization of these carryforwards could be
subject to certain limitations in future years.
7. COMMITMENTS
The Company leases office space and equipment under non-cancelable operating
leases with various expiration dates through December 2010. Rental expense was
approximately $4.1 million, $2.2 million, and $1.7 million for the years ended
November 30, 1999 and 1998 and the eleven months ended November 30, 1997,
respectively.
23
<PAGE>
Future minimum lease payments under noncancelable operating leases, including
lease commitments entered into subsequent to November 30, 1999 (Note 11), are as
follows (in thousands):
Year Ending November 30,
-------------------------
2000................................................ $ 5,281
2001................................................ 8,410
2002................................................ 8,603
2003................................................ 8,371
2004................................................ 8,412
Thereafter.......................................... 47,134
--------
$ 86,211
========
8. STOCKHOLDERS' EQUITY
Preferred Stock
The Company's Certificate of Incorporation, as amended, authorizes the Company
to issue 25.0 million shares of $0.001 par value preferred stock. Effective as
of January 1, 1997, the Company's initial capital structure was established by
issuing 60.0 million shares of series A convertible preferred stock and 57.0
million shares of common stock to Reuters in exchange for $10.0 million and the
transfer of certain assets and liabilities assumed. In connection with its
formation, the Company signed a perpetual, non-exclusive license agreement for
certain technology with Reuters and paid $10.0 million as consideration (Note
5). This payment was treated as a return of capital in the accompanying
Statement of Stockholders' Equity.
In May 1997, the Company issued approximately 13.2 million shares of series B
convertible preferred stock at $1.20 per share for net proceeds of approximately
$15.7 million. In December 1997, the Company issued approximately 8.7 million
shares of series C convertible preferred stock at $1.29 per share for net
proceeds of approximately $11.0 million. At the closing of the offering, all
issued and outstanding shares of the Company's preferred stock were converted
into an aggregate of 81,678,945 shares of common stock.
Common Stock
The Company's Certificate of Incorporation, as amended, authorizes the Company
to issue 300.0 million shares of $0.001 par value common stock. A portion of the
shares issued are subject to a right of repurchase by the Company subject to
vesting, which is generally over a five year period from the grant date or
employee hire date, as applicable, until vesting is complete. Shares are subject
to repurchase at the original exercise price. As of November 30, 1999, shares of
common stock subject to a repurchase option held by the Company totaled 5.9
million shares at a weighted average price of $0.49 per share.
Benefit Plans
1996 Stock Option Plan. In 1996, the Company adopted the 1996 Stock Option Plan
(the "1996 Plan"). The 1996 Plan provides for the granting of stock options to
employees and consultants of the Company. Options granted under the 1996 Plan
may be either incentive stock options or nonqualified stock options. Incentive
stock options may be granted only to employees (including officers and directors
who are employees). Nonqualified stock options may be granted to Company
employees and consultants. Options under the 1996 Plan may be granted for terms
not to exceed ten years. Options granted before the IPO are exercisable
immediately upon grant and generally vest over five years. Options granted after
the IPO generally vest over four years. Shares of common stock issued upon the
exercise of options granted prior to the IPO are subject to repurchase until
vested. The 1996 Plan provides for an automatic increase to the number of shares
of common stock reserved for issuance (to be added on the first day of each
fiscal year beginning in 2000) equal to the lesser of (i) 15 million shares,
(ii) 3.5% of the outstanding shares of the Company's common stock, or (iii) a
lesser amount determined by the Board of Directors. As of November 30, 1999,
aggregate shares of common stock reserved for issuance under the 1996
24
<PAGE>
Plan was approximately 45,677,000 shares.
1998 Advisory Council Option Sub-plan. In October 1998, the Company adopted
the 1998 Advisory Council Option plan (the "Advisory Plan") as a sub-plan to
the 1996 Plan for the purpose of attracting and retaining personnel for
service on an information technology advisory council. The Advisory Plan
provides for an initial grant of 15,000 shares to each advisory council member
(30,000 shares to the chairman). Options are granted at an exercise price not
less than fair market value of the Common Stock on the date of grant, have a
term not to exceed ten years and become exercisable over a two-year period
with half of the shares vesting annually.
1998 Employee Stock Purchase Sub-plan. In June 1999, the Company adopted the
Employee Stock Purchase Plan (the "ESP Plan") as a sub-plan to the 1996 Plan.
The ESP Plan became effective on July 13, 1999, the first business day on which
price quotations for the Company's common stock were available on the Nasdaq
National Market. Employees are generally eligible to participate in the ESP Plan
if they are customarily employed by the Company for more than 20 hours per week
and more than 5 months in a calendar year and are not (and would not become as a
result of being granted an option under the ESP Plan) 5% stockholders of the
Company. Under the ESP Plan, eligible employees may select a rate of payroll
deduction up to 10% of their eligible compensation subject to certain maximum
purchase limitations. Each offering period has a maximum duration of two years
(the "Offering Period") and consists of four six-month Purchase Periods (each, a
"Purchase Period"), with the exception of the first Offering Period, which began
on July 13, 1999 and will end on or before June 30, 2001. Offering Periods and
Purchase Periods thereafter will begin on January 1 and July 1 of each year. The
price at which the common stock is purchased under the ESP Plan is 85% of the
lesser of the fair market value of the Company's common stock on the first day
of the applicable Offering Period or on the last day of that Purchase Period.
The ESP Plan will terminate after a period of ten years unless terminated
earlier as permitted by the ESP Plan.
1998 Director Option Plan. In February 1998, the Company adopted the 1998
Director Option Plan (the "Director Plan") and reserved 2,475,000 shares of
Common Stock for issuance under the Director Plan. The Director Plan provides
for an automatic initial grant of 150,000 shares to members of the Board who are
not employees of the Company or Reuters ("External Directors"). Any External
Director with over one-year of consecutive service prior to the effective date
of the Director Plan received an initial grant of 450,000 shares. At any
subsequent annual re-election, each External Director shall be granted an option
to purchase 60,000 additional shares. Options are granted at an exercise price
not less than the fair market value of the stock on the date of grant, have a
term not to exceed ten years and become exercisable over a three year period
with a third of the shares vesting annually.
The activity under all stock options plans are summarized as follows (in
thousands, except per share data):
<TABLE>
<CAPTION>
Eleven Months Ended
Year Ended November 30, November 30,
---------------------------------------------------------- --------------------------
1999 1998 1997
------------------------- ------------------------- --------------------------
Weighted Weighted Weighted
Average Average Average
Options Exercise Options Exercise Options Exercise
Price Price Price
--------- --------- -------- --------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning
of period..... 27,258 $0.39 20,676 $0.20 - $ -
Granted...... 10,614 2.77 13,122 0.64 26,316 0.20
Exercised.... (5,235) 0.59 (5,499) 0.27 (5,007) 0.20
Forfeited.... (1,197) 1.34 (1,041) 0.27 (633) 0.20
--------- -------- --------
Outstanding at end of
period....... 31,440 1.12 27,258 0.39 20,676 0.20
========= ======== ========
Options exercisable at
period end... 29,601 0.81 27,258 0.39 20,676 0.20
========= ======== ========
</TABLE>
25
<PAGE>
The following table summarizes information about stock options outstanding at
November 30, 1999 (in thousands, except per share data):
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
----------------------------------------------------------------- ------------------------
Weighted Weighted Weighted
Average Average Average
Number of Remaining Exercise Number of Exercise
Range of Exercise Price Options Contractual Life Price Options Price
- ----------------------- ------------- ---------------- --------------- ---------- ---------
<S> <C> <C> <C> <C> <C>
$0.20 to $ 0.33 16,860 7.3 years $ 0.22 16,662 $0.22
$0.86 to $ 2.00 12,780 9.0 years 1.49 12,348 1.49
$3.00 to $10.75 1,446 9.7 years 5.29 591 3.29
$10.92 to $40.33 354 9.9 years 13.80 - -
------------- ----------
$0.20 to $40.33 31,440 8.1 Years 1.12 29,601 0.81
============= ==========
</TABLE>
At November 30, 1999, the Company had reserved the 417,000 and 1,245,000 shares
of authorized but unissued common stock for future issuance under the 1996 Plan
and the Director Plan, respectively.
401(k) Plan. The Company's employee savings and retirement plan is qualified
under Section 401 of the Internal Revenue Code. Employees may elect to reduce
their current compensation by up to the statutory prescribed annual limit and
have the amount of such reduction contributed to the 401(k) Plan. The Company
provides matches to employee contributions up to 4% of an employee's base pay
and an additional 50% match on employee contributions of the next 2% of base
pay.
Stock-based compensation
In connection with certain stock option grants to employees and External
Directors, the Company recognized approximately $6.6 million, $7.2 million and
$9.4 million of unearned stock compensation for the excess of the deemed fair
market value over the exercise price at the date of grant for the years ended
November 30, 1999 and 1998 and for the eleven months ended November 30, 1997,
respectively. Stock-based compensation expense is being recognized, using the
multiple option method as prescribed by FASB Interpretation No.28, over the
option vesting period of generally five years. As a result, amortization of
stock-based compensation for employees and External Directors as of November 30,
1999 is expected to be $4.0 million in 2000, $2.3 million in 2001, $1.2 million
in 2002, $489,000 in 2003 and $81,000 in 2004.
Stock-based compensation expense related to stock options granted to consultants
is recognized as earned, using the multiple option method as prescribed by FASB
Interpretation No. 28. At each reporting date, the Company re-values the stock-
based compensation using the Black-Scholes option pricing model. As a result,
the stock-based compensation expense will fluctuate as the fair market value of
the Company's common stock fluctuates. In connection with the grant of stock
options to consultants, the Company recorded stock-based compensation expense of
$3.5 million, $336,000 and $30,000 for the years ended November 30, 1999 and
1998 and for the eleven months ended November 30, 1997, respectively. As of
November 30, 1999, the Company expects to amortize stock-based compensation
expense of $13.6 million in 2000, $5.6 million in 2001, $1.8 million in 2002 and
$675,000 in 2003, assuming no change in the underlying value of the Company's
common stock.
26
<PAGE>
Fair Value Disclosures
Had compensation cost for the Company's stock-based compensation plan been
determined based on the fair value at the grant date for the awards under a
method prescribed by SFAS No. 123, the Company's net loss would have increased
to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
Eleven Months
Ended
Year Ended November 30, November 30,
-------------------------
1999 1998 1997
------------ ----------- ----------------
<S> <C> <C> <C>
Net loss:
As reported.......................................... $(19,481) $(12,951) $(4,663)
Pro forma............................................ (22,023) (13,344) (4,778)
Net loss per share -- basic and diluted:
As reported.......................................... $ (0.19) $ (0.22) $ (0.08)
Pro forma............................................ (0.21) (0.22) (0.08)
</TABLE>
The Company calculated the value of each option grant on the date of the grant
using a Black-Scholes option pricing model with the following assumptions:
<TABLE>
<CAPTION>
Stock Option Plans ESP Plan
---------------------------------------------------------- ----------------
1999 1998 1997 1999
------------- --------------- ---------------- -----------------
<S> <C> <C> <C> <C>
Risk free interest rates.............. 4.6% 4.7% 4.7% 4.6%
Expected lives (in years)............. 3.0 3.0 3.0 0.5
Dividend yield........................ 0.0 0.0 0.0 0.0
Expected volatility................... 0 or 92% 0.0 0.0 92%
</TABLE>
These pro forma amounts may not be representative of the effects on reported net
loss for future years as options vest over several years and additional awards
are generally made each year. The weighted average fair value of options granted
was $1.44, $0.63 and $0.38 for the years ended November 30, 1999 and 1998 and
for the eleven months ended November 30, 1997, respectively.
9. SEGMENT INFORMATION
The Company operates primarily in one industry segment: the development and
marketing of a suite of software products that enables businesses to link
internal operations, business partners and customer channels through the real
time distribution of information. Revenue by geographic area is as follows (in
thousands):
27
<PAGE>
<TABLE>
<CAPTION>
Eleven Months
Ended
Year Ended November 30, November 30,
----------------------------------
1999 1998 1997
----------- ------------- ----------------
<S> <C> <C> <C>
Domestic..................................... $ 47,706 $ 25,049 $ 19,426
----------- ------------ ----------------
Europe:
United Kingdom............................ 20,216 7,882 9,564
Luxembourg................................ 7,585 8,973 --
Sweden.................................... 3,532 2,512 2,130
Other..................................... 9,517 2,167 2,387
----------- ------------ ----------------
Total Europe....................... 40,850 21,534 14,081
----------- ------------ ----------------
Pacific Rim:
Australia................................. 2,451 2,351 1,047
Taiwan.................................... 2,570 2,539 489
Other..................................... 2,863 1,284 231
----------- ------------ ----------------
Total Pacific Rim.................. 7,883 6,174 1,766
----------- ------------ ----------------
$ 96,440 $ 52,757 $ 35,274
=========== ============ ================
</TABLE>
Revenue from Reuters accounted for 19%, 15% and 27% of total revenue for the
years ended November 30, 1999 and 1998 and for the eleven months ended November
30, 1997, respectively. Revenue from Cedel Global Services accounted for 17% of
total revenue in fiscal 1998, and NEC Electronics accounted for 17% of total
revenue for fiscal 1997. Customers with balances in excess of 10% of net
accounts receivable at November 30, 1999 included Reuters and Procter and
Gamble, which represented 13% and 15%, respectively. Long lived assets outside
the United States at either November 30, 1999 or 1998 were not material.
10. BUSINESS COMBINATION
In September 1999, the Company entered into an agreement to acquire
substantially all the assets of InConcert, Inc., a subsidiary of Xerox
Corporation and a developer of business integration solutions for
telecommunications companies. The acquisition was consummated on November 4,
1999 and was accounted for under the purchase method of accounting. The results
of operations of InConcert, Inc. and the estimated fair value of the assets
acquired and liabilities assumed are included in the Company's financial
statements from the date of acquisition.
The purchase price of $35.6 million includes cash of $34 million, accrued
severance costs reimbursable to Xerox of approximately $1.3 million and
acquisition related expenses, consisting of financial advisory, accounting and
legal fees, of approximately $0.3 million. The allocation of the purchase price
to intangibles was based upon an independent, third-party appraisal and
management's estimates and was as follows (in thousands):
Net tangible assets received....................... $ 1,515
In-process research and development................ 2,800
Existing technology................................ 14,000
Customer base...................................... 2,900
Workforce.......................................... 3,100
Trademarks......................................... 1,200
Goodwill........................................... 10,042
---------
Net assets acquired........................... $ 35,557
=========
The intangible assets and goodwill acquired have estimated useful lives of 5
years and had related amortization expense of $521,000 for the year ended
November 30, 1999.
Management estimates that $2.8 million of the purchase price represents acquired
in-process research and
28
<PAGE>
development that has not yet reached technological feasibility and has no
alternative future use. Accordingly, this amount was immediately charged to
expense upon consummation of the acquisition. The value assigned to acquired
in-process research and development was determined by identifying research
projects in areas for which technological feasibility has not been established.
The value was determined by estimating the costs to develop the acquired
in-process technology into commercially viable products, estimating the
resulting net cash flows from such projects and discounting the net cash flows
back to their present value. The costs to develop the acquired in-process
research and development include a core technology charge. The discount rate of
29% includes a factor that takes into account the uncertainty surrounding the
successful development of the acquired in-process research and development. If
these projects are not successfully developed, future revenue and profitability
of the Company may be adversely affected. Additionally, the value of other
intangible assets acquired may become impaired.
Existing technology relates to software solutions that combine process
management and application integration that integrates corporate databases,
third-party applications and legacy systems in order to convert disparate
applications into integrated solutions. This technology was valued using the
net cash flow expected as a result of the sale of these products and
discounted to the present using a 24% discount rate. The customer base was
also valued using the net cash flow expected as result of the stream of
revenues from existing customers from license fees, professional services and
maintenance support and then discounted to the present using a 24% discount
rate. The workforce was valued by estimating the cost to replace the current
assembled workforce, considering such costs as recruiting and training.
Finally, the trademark was valued by applying a trademark royalty rate of 1%
to forecasted revenue, and then the net cash flow expected from these amounts
was discounted at a rate of 24% to arrive an estimated fair market value.
The following unaudited pro forma information shows the results of operations
for the combined companies as if the transaction had consummated as of
December 1, 1997 (in thousands, except for per share data):
<TABLE>
<CAPTION>
Year Ended November 30,
-------------------------------------
1999 1998
---------------- -------------
<S> <C> <C>
Revenue...................................... $ 104,735 $ 61,506
Net loss..................................... (34,101) (28,063)
Basic and diluted net loss per share......... $ (0.33) $ (0.47)
</TABLE>
The pro forma results for 1999 combine the Company's results for the year ended
November 30, 1999 with the results of InConcert, Inc. for the period from
January 1, 1999 through the date of acquisition and includes the $2.8 million
writeoff discussed above. The pro forma results for 1998 combine the Company's
results for the year ended November 30, 1998 with the results of InConcert, Inc.
for the year ended December 31, 1998. On a combined basis, there were no
material transactions between the Company and InConcert, Inc. during the periods
presented. The results are not necessarily indicative of what would have
occurred had the acquisition actually been made as of December 1, 1997 or of
future operations of the combined companies.
11. SUBSEQUENT EVENTS
Building Leases
In December 1999, the Company entered into a lease for approximately 282,000
square feet of office space to be constructed in Palo Alto, California. The
lease commences on January 1, 2001 and provides for aggregate payments of $189.7
million through December 31, 2013. This lease is contingent upon design approval
by local regulatory agencies.
In addition, in January 2000, the Company entered into a lease for approximately
97,000 square feet of office space in Palo Alto, California, commencing on
April 1, 2000 and expiring on December 31, 2010. The lease
29
<PAGE>
provides for aggregate payments of $71.4 million to be paid over the term of the
lease. The Company was required to establish an irrevocable standby letter of
credit in the amount of $4,500.000. The Letter of Credit expires on January 31,
2001 but will automatically extended up to January 31, 2011.
Amendment to The 1996 Stock Option Plan
On January, the stockholders of the Company approved an amendment to the
Company's 1996 Stock Option Plan to increase the number of shares reserved for
issuance by 11,467,542 shares and also modify the provisions relating to the
annual increase in the number of shares reserved for issuance such that the
annual increase will be equal to the lesser of (i) 60,000,000 shares or (ii) 5%
of the outstanding shares of the Company's common stock on such date.
Stock Split
In January 2000, the Company's Board of Directors effected a three-for-one stock
split payable in the form a dividend of two additional shares of the Company's
common stock for every share owned by shareholders. All share and per share data
have been adjusted to retroactively reflect this split and the split discussed
in Note 2.
30
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
TIBCO Software Inc.
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, stockholders' equity and cash
flows present fairly, in all material respects, the financial position of TIBCO
Software Inc. and its subsidiaries at November 30, 1999 and 1998, and the
results of their operations and their cash flows for each of the two years in
the period ended November 30, 1999 and for the eleven months ended November 30,
1997, in conformity with accounting principles generally accepted in the United
States. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with auditing standards generally accepted in the United States which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
San Jose, California
December 15, 1999, except for Notes 7 and 11
which are dated as of January 24, 2000
31
<PAGE>
Stock Price History
Our common stock is traded on The NASDAQ National Market under the symbol TIBX.
We completed our initial public offering in July 1999. The following table sets
forth the high and low closing prices for our common stock during the quarter
indicated:
High Low
---------- --------
November 30, 1999....................... $41.17 $9.04
August 31, 1999......................... $13.04 $6.69
We had 332 stockholders of record as of February 2, 2000.
No dividends have been paid on our common stock and we have no plans to pay
cash dividends in the future.
32
<PAGE>
Quarterly Results of Operations
(unaudited)
(In thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended Fiscal 1999 Three Months Ended Fiscal 1998
-------------------------------------- --------------------------------------
Nov 30, Aug. 31, May 31, Feb. 28, Nov. 30, Aug. 31, May. 31, Feb. 28,
1999 1999 1999 1999 1998 1998 1998 1998
-------- -------- ------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue:
License revenue................................ $ 21,702 $ 13,156 $12,340 $ 9,719 $ 6,295 $ 3,346 $ 2,877 $ 4,977
Service and maintenance revenue................ 11,630 10,880 8,710 8,303 10,736 7,526 10,005 6,995
-------- -------- ------- -------- -------- -------- -------- --------
Total revenue............................... 33,332 24,036 21,050 18,022 17,031 10,872 12,882 11,972
Cost of revenue................................. 10,633 9,738 8,727 7,513 7,785 6,592 6,571 6,734
-------- -------- ------- -------- -------- -------- -------- --------
Gross profit.................................... 22,699 14,298 12,323 10,509 9,246 4,280 6,311 5,238
-------- -------- ------- -------- -------- -------- -------- --------
Operating expenses:
Research and development....................... 8,536 7,032 6,265 5,646 4,858 3,995 3,096 2,838
Sales and marketing............................ 12,107 8,093 7,513 5,416 4,826 3,994 3,444 2,978
General and administrative..................... 2,938 1,756 2,004 1,532 1,433 958 898 736
Amortization of stock-based compensation....... 3,823 2,021 1,821 1,587 1,529 1,465 968 1,102
Acquired in-process research and development... 2,800 -- -- -- -- -- -- --
Amortization of goodwill and acquired
intangibles................................... 521 -- -- -- -- -- -- --
-------- -------- ------- -------- -------- -------- -------- --------
Total operating expenses.................... 30,725 18,902 17,603 14,181 12,646 10,412 8,406 7,654
-------- -------- ------- -------- -------- -------- -------- --------
Loss from operations............................ (8,026) (4,604) (5,280) (3,672) (3,400) (6,132) (2,095) (2,416)
Other income (expense), net..................... 1,434 675 267 (274) 207 315 289 281
-------- -------- ------- -------- -------- -------- -------- --------
Net loss........................................ $ (6,592) $ (3,929) $(5,013) $(3,946) $(3,193) $(5,817) $(1,806) $ (2,135)
-------- -------- ------- -------- -------- -------- -------- --------
Net loss per share:
Basic and diluted.............................. $ (0.04) $ (0.03) $ (0.08) $ (0.06) $ (0.05) $ (0.10) $ (0.03) $ (0.04)
======== ======== ======= ======== ======== ======== ======== ========
Weighted average common shares outstanding..... 174,813 113,365 63,059 61,951 61,486 60,385 59,805 58,454
======== ======== ======= ======== ======== ======== ======== ========
</TABLE>
33
<PAGE>
(as a percentage of total revenue)
<TABLE>
<CAPTION>
Three Months Ended Fiscal 1999 Three Months Ended Fiscal 1998
-------------------------------------- ---------------------------------------
Nov 30, Aug. 31, May 31, Feb. 28, Nov. 30, Aug. 31, May. 31, Feb. 28,
1999 1999 1999 1999 1998 1998 1998 1998
------- -------- ------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue:
License revenue.......................... 65% 55% 59% 54% 37% 31% 22% 42%
Service and maintenance revenue.......... 35 45 41 46 63 69 78 58
------- -------- ------- -------- -------- -------- -------- --------
Total revenue.......................... 100 100 100 100 100 100 100 100
Cost of revenue............................ 32 41 41 42 46 61 51 56
------- -------- ------- -------- -------- -------- -------- --------
Gross profit............................... 68 59 59 58 54 39 49 44
------- -------- ------- -------- -------- -------- -------- --------
Operating expenses:
Research and development................. 26 29 30 31 29 37 24 24
Sales and marketing...................... 36 34 36 30 28 37 26 25
General and administrative............... 9 7 9 8 8 9 7 6
Amortization of stock-based
compensation............................ 11 8 9 9 9 13 8 9
Acquired in-process research and
development............................. 8 - - - - - - -
Amortization of goodwill and acquired
intangibles............................. 2 - - - - - - -
------- -------- ------- -------- -------- -------- -------- --------
Total operating expenses............... 92 78 84 78 74 96 65 64
------- -------- ------- -------- -------- -------- -------- --------
Loss from operations....................... (24) (19) (25) (20) (20) (57) (16) (20)
Other income (expense), net................ 4 3 1 (2) 1 3 2 2
------- -------- ------- -------- -------- -------- -------- --------
Net loss................................... (20)% (16)% (24)% (22)% (19)% (54)% (14)% (18)%
======= ======== ======= ======== ======== ======== ======== ========
</TABLE>
34
<PAGE>
Corporate Information
BOARD OF DIRECTORS
Vivek Y. Ranadive
President, Chief Executive Officer and
Chairman of the Board
Douglas M. Atkin
Chief Executive Officer, Instinet Corporation -
A subsidiary of Reuters Group PLC
Yogen K. Dalal
Partner of Mayfield Fund-A venture capital firm
Edward R. Kozel
Director of Cisco Systems, Inc
Donald J. Listwin
Executive Vice President, Cisco Systems
Larry W. Sonsini
Chairman of the Executive Committee,
Wilson Sonsini Goodrich & Rosati
John G. Taysom
Managing Director of Reuters Greenhouse fund
- -A venture capital fund
Phillip E. White
President of Marketing Consultants
Philip Wood
Deputy Finance Director, Reuters Group PLC
MANAGEMENT
Vivek Y. Ranadive
President, Chief Executive Officer and
Chairman of the Board
Paul G. Hansen
Executive Vice President, Finance and Chief
Financial Officer
Rajesh U. Mashruwala
Executive Vice President, Sales and Marketing
Robert P. Stefanski
Executive Vice President, General Counsel and
Secretary
Richard M. Taven
Executive Vice President, Engineering and Operations
Christopher G. O'Meara
Vice President, Finance
Ginger M. Kelly
Vice President, Corporate Controller,
Chief Accounting Officer
ANNUAL MEETING
The Annual Meeting of Stockholders will be held
on Wednesday, April 12, 2000 at 10 a.m., local
time, at the Company's headquarters, located at:
3165 Porter Drive
Palo Alto, California 94304.
FORM 10K
The Company's Form 10K as filed with the
Securities and Exchange Commission, is
available, without charge upon written request to:
Investor Relations
TIBCO Software Inc
3165 Porter Drive
Palo Alto, CA 94304
Telephone: (650) 846-1000
TRANSFER AGENT AND REGISTRAR
Boston Equiserve
150 Royal Street
Canton, MA 02021
INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers LLP
10 Almaden Boulevard, Suite 1600
San Jose, CA 95113
LEGAL COUNSEL
Wilson Sonsini Goodrich & Rosati
650 Page Mill Road
Palo Alto, CA 94304
35
<PAGE>
Exhibit 21.1
List of Subsidiaries
Tibco Software International Inc.
Tibco Software Canada Inc.
Tibco Software France Sarl
Tibco Software GmbH
Tibco Software Limited (UK)
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS
----------------------------------
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (Nos. 333-88811 and 333-30088 of TIBCO Software Inc. of
our report dated December 15, 1999, except for Notes 7 and 11, which are dated
as of January 24, 2000, relating to the financial statements, which appears in
the Annual Report to Stockholders, which is incorporated in this Annual Report
on Form 10-K.
/s/ PricewaterhouseCoopers LLP
San Jose, California
February 24, 2000
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