<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
FORM 10-Q
---------------------
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2000
OR
[ ] TRANSACTION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _______________ TO _______________.
COMMISSION FILE NO. 000-30207
--------------------------
SEEBEYOND TECHNOLOGY CORPORATION
(Formerly Software Technologies Corporation)
(Exact name of Registrant as Specified in Its Charter)
CALIFORNIA 95-4249153
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
404 E. HUNTINGTON DRIVE
MONROVIA, CALIFORNIA 91016
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE)
(626) 471-6000
(Address, including Zip Code, of Registrant's Principal Executive Offices
and Registrant's Telephone Number, including Area Code)
-------------------------------
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
The number of shares outstanding of the registrant's Common Stock, no par value,
as of November 14, 2000 was 69,460,511.
<PAGE>
SEEBEYOND TECHNOLOGY CORPORATION AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements:
<S> <C>
Condensed Consolidated Balance Sheets as of September 30, 2000 (unaudited)
and December 31, 1999..................................................................3
Condensed Consolidated Statements of Operations for the three months
and nine months ended September 30, 2000 and 1999 (unaudited)..........................4
Condensed Consolidated Statements of Cash Flows for the nine months
ended September 30, 2000 and 1999 (unaudited)..........................................5
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.................................................................14
Item 3. Quantitative and Qualitative Disclosure About Market Risk......................................32
PART II - OTHER INFORMATION
Item 1. Legal Proceedings..............................................................................33
Item 2. Changes in Securities and Use of Proceeds......................................................33
Item 6. Exhibits and Reports of Form 8-K...............................................................33
Signatures
</TABLE>
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<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SEEBEYOND TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
--------------------------------------
In thousands, except share and per share data 2000 1999
============================================================================================================================
(unaudited)
<S> <C> <C>
ASSETS:
Current assets:
Cash and cash equivalents $ 32,845 $ 1,572
Accounts receivable, net of allowances of $1,121 and $1,055 at
September 30, 2000 and December 31, 1999, respectively 30,129 18,522
Prepaid expenses and other current assets 2,553 1,581
----------------------------------
Total current assets 65,527 21,675
Property and equipment, net 8,914 7,206
Related party receivable 256 256
Other assets 1,577 715
----------------------------------
Total assets $ 76,274 $ 29,852
==================================
LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY
(DEFICIT):
Current liabilities:
Bank line of credit $ -- $ 3,361
Accounts payable 9,745 4,994
Accrued expenses 14,803 4,883
Deferred revenue 14,936 10,354
----------------------------------
Total current liabilities 39,484 23,592
Notes payable and capital lease obligation -- 10,000
----------------------------------
Total liabilities 39,484 33,592
----------------------------------
Commitments and contingencies
Redeemable convertible preferred stock - 10,000,000 million shares authorized; 0
shares issued and outstanding as of September 30, 2000
and 5,452,798 shares issued and outstanding as of December 31, 1999 -- 24,681
Stockholders' equity (deficit):
Common stock, par value - 200,000,000 shares authorized, 69,212,797 and
46,531,377 issued and outstanding, at September 30, 2000 and
December 31, 1999, respectively 126,668 19,519
Deferred stock compensation (10,577) (5,379)
Accumulated other comprehensive loss (467) (237)
Accumulated deficit (78,834) (42,324)
----------------------------------
Total stockholders' equity (deficit) 36,790 (28,421)
----------------------------------
Total liabilities, redeemable convertible preferred stock and stockholders'
equity (deficit) $ 76,274 $ 29,852
==================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
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<PAGE>
SEEBEYOND TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------- ----------------------------
In thousands, except per share data 2000 1999 2000 1999
==================================================================================================== ============================
<S> <C> <C> <C> <C>
Revenues:
License $ 17,567 $ 7,580 $ 38,069 $ 16,160
Services 9,287 6,099 22,956 15,608
Maintenance 4,438 2,450 11,035 6,329
Other - 115 - 1,788
--------------------------- ----------------------------
Total revenues 31,292 16,244 72,060 39,885
--------------------------- ----------------------------
Cost of revenues:
License 183 27 414 347
Services (exclusive of stock-based compensation of $132 and $52
for the three months and $496 and $84 for the nine months
ended September 30, 2000 and 1999, respectively) 7,750 5,713 20,507 15,287
Maintenance 879 646 2,499 1,574
Other - 1 - 1,179
--------------------------- ----------------------------
Total cost of revenues 8,812 6,387 23,420 18,414
--------------------------- ----------------------------
Gross profit 22,480 9,857 48,640 21,471
--------------------------- ----------------------------
Operating expenses:
Research and development (exclusive of stock-based compensation
of $149 and $39 for the three months and $545 and $80
for the nine months ended September 30, 2000 and 1999,
respectively) 5,311 2,980 13,533 9,044
Sales and marketing (exclusive of stock-based compensation of
$496 and $371 for the three months and $1,853 and $905 for
the nine months ended September 30, 2000 and 1999,
respectively) 20,792 7,212 49,746 19,403
General and administrative (exclusive of stock-based
compensation of $63 and $17 for the three months and $293 and
$35 for the nine months ended September 30, 2000 and 1999,
respectively) 4,558 2,625 11,989 7,619
Amortization of alliance warrants 1,263 - 5,534 -
Amortization of stock-based compensation 840 479 3,187 1,104
--------------------------- ----------------------------
Total operating expenses 32,764 13,296 83,989 37,170
--------------------------- ----------------------------
Loss from operations (10,284) (3,439) (35,349) (15,699)
Other income (expense), net 379 (85) (392) (74)
--------------------------- ----------------------------
Loss before provision for income taxes (9,905) (3,524) (35,741) (15,773)
Provision for income taxes - - - -
--------------------------- ----------------------------
Net loss (9,905) (3,524) (35,741) (15,773)
--------------------------- ----------------------------
Accretion on preferred stock - 696 769 1,711
--------------------------- ----------------------------
Net loss available to common stockholders $ (9,905) $ (4,220) $ (36,510) $ (17,484)
=========================== ============================
Basic and diluted net loss per share $ (0.14) $ (0.09) $ (0.61) $ (0.38)
=========================== ============================
Number of shares used in computing basic and diluted net loss per share 69,035 46,504 59,397 45,810
=========================== ============================
Pro forma basic and diluted net loss per share $ (0.14) $ (0.06) $ (0.54) $ (0.28)
=========================== ============================
Pro forma basic and diluted weighted average shares 69,035 60,476 65,607 56,288
=========================== ============================
</TABLE>
The accompanying notes are an integral part of these financial statements.
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<PAGE>
SEEBEYOND TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
------------------------------------
In thousands 2000 1999
==================================================================================================================================
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (35,741) $ (15,773)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 2,094 1,259
Provision for doubtful accounts receivable 66 -
Amortization of alliance warrants 5,534 -
Amortization of stock based compensation 3,187 1,104
Changes in assets and liabilities:
Accounts receivable (11,673) (4,526)
Prepaid expenses and other current assets (972) (599)
Accounts payable 4,751 936
Other accrued expenses 9,920 (1,176)
Deferred revenue 4,582 3,041
------------------------------------
Net cash used in operating activities (18,252) (15,734)
------------------------------------
Cash flows from investing activities:
Purchases of property and equipment (3,800) (2,819)
Other (862) (142)
------------------------------------
Net cash used in investing activities (4,662) (2,961)
------------------------------------
Cash flows from financing activities:
Net borrowings (repayments) under bank line of credit (3,361) 2,271
Proceeds from issuance of redeemable convertible preferred stock, net - 10,826
Proceeds from issuance of common stock, net - 4,074
Proceeds from issuance of common stock pursuant to initial public offering, net 49,646 -
Proceeds from issuance of common stock pursuant to concurrent offering, net 14,100 -
Proceeds from (payments on) notes payable, net (10,000) 529
Proceeds from issuance of common stock pursuant to stock option plan 4,032 35
Other - (54)
------------------------------------
Net cash provided by financing activities 54,417 17,681
------------------------------------
Effect of exchange rate changes on cash and cash equivalents (230) (169)
------------------------------------
Net increase in cash and cash equivalents 31,273 (1,183)
Cash and cash equivalents at beginning of the period 1,572 3,255
------------------------------------
Cash and cash equivalents at end of the period $ 32,845 $ 2,072
====================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
-5 -
<PAGE>
SEEBEYOND TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements include the
accounts of SeeBeyond Technology Corporation and its wholly owned subsidiaries
(the "Company"). All material intercompany transactions have been eliminated in
consolidation. The information furnished is unaudited and reflects all
adjustments that, in the opinion of management, are necessary to provide a fair
statement of the results for the interim periods presented. The financial
statements should be read in conjunction with the financial statements for the
year ended December 31, 1999, included in the Company's Form S-1 as filed with
the Securities and Exchange Commission ("SEC"). Certain reclassifications have
been made to the 1999 information to conform to the current period's
presentation.
NOTE 2. SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. Significant
estimates made in preparing the consolidated financial statements include the
allowance for doubtful accounts, certain accrued liabilities and estimates of
future cash flows developed to determine whether conditions of impairment are
present.
SOFTWARE DEVELOPMENT COSTS
Costs related to the research and development of new software products and
enhancements to existing software products are expensed as incurred until
technological feasibility of the product has been established, at which time
such costs are capitalized, subject to expected recoverability. To date, the
Company has not capitalized any development costs related to software products
since the time period between technological feasibility and general release of a
product is not significant and related costs incurred during that time period
have not been material. Certain qualifying costs incurred in the application
development stage for software developed for internal use are capitalized and
amortized over a period of three years.
REVENUE RECOGNITION
In October 1997, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position (SOP) No. 97-2, Software Revenue
Recognition. SOP 97-2, as amended by SOP 98-4 "Deferral of the Effective Date of
a Provision of SOP 97-2", was adopted by the company as of January 1, 1998. In
December 1998, the AICPA issued SOP 98-9, "Modification of SOP 97-2, Software
Revenue Recognition, With Respect to Certain Transactions," which requires
recognition of revenue using the "residual method" when (1) there is
vendor-specific objective evidence of the fair values of all undelivered
elements in a multiple-element arrangement that is not accounted for using
long-term contract accounting,
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<PAGE>
SEEBEYOND TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(2) vendor-specific objective evidence of fair value does not exist for one or
more of the delivered elements in the arrangement, and (3) all
revenue-recognition criteria in SOP 97-2 other than the requirement for
vendor-specific objective evidence of the fair value of each delivered element
of the arrangement are satisfied.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 "Revenue Recognition in Financial Statements." SAB
101 provides guidance on the recognition, presentation, and disclosure of
revenue in financial statements. SAB 101, as amended, is effective for years
beginning after December 15, 1999 and is required to be reported beginning in
the quarter ended September 30, 2000. SAB 101 is not expected to have a
significant effect on the Company's consolidated results of operations,
financial position or cash flows.
The Company enters into arrangements with end users, which may include the
sale of licenses of software, maintenance and services under the arrangement or
various combinations of each element, including the sale of such elements
separately. For each arrangement, revenues are recognized when an agreement has
been signed by both parties, the fees are fixed or determinable, collection of
the fees is probable and delivery of the product has occurred and no other
significant obligations remain.
For multi-element arrangements, each element of the arrangement is analyzed
and the Company allocates a portion of the total fee under the arrangement to
the undelivered elements, primarily services and maintenance, using vendor
specific objective evidence of fair value of the element and the remaining
portion of the fee is allocated to the delivered elements (i.e. generally the
software license), regardless of any separate prices stated within the contract
for each element, under the residual method prescribed by SOP 98-9. Vendor
specific objective evidence of fair value is based on the price the customer is
required to pay when the element is sold separately (i.e. hourly rates charged
for consulting services when sold separately from a software license and the
renewal rate for maintenance arrangements). Each license agreement offers
additional maintenance renewal periods at a stated price. If vendor specific
objective evidence of fair value does not exist for the undelivered elements,
all revenue is deferred and recognized ratably over the service period if the
undelivered element is services, or over the period the maintenance is provided
if the undelivered element is maintenance, or until sufficient objective
evidence exists or all elements have been delivered.
LICENSE REVENUES: Amounts allocated to license revenues under the residual
method are recognized at the time of delivery of the software when vendor
specific objective evidence of fair value exists for the undelivered elements,
if any, and all the other revenue recognition criteria discussed above have been
met.
SERVICES REVENUES: Revenues from services are comprised of consulting and
implementation services and, to a limited extent, training. Consulting services
are generally sold on a time-and-materials or fixed fee basis and include a
range of services including installation of off-the-shelf software, data
conversion and building non-complex interfaces to allow the software to operate
in customized environments. Services are generally separable from the other
elements under the arrangement since the performance of the services are not
essential to the functionality (i.e. do not involve significant production,
modification or customization of the software or building complex interfaces) of
any other element of the
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<PAGE>
SEEBEYOND TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
transaction and are described in the contract such that the total price of the
arrangement would be expected to vary as the result of the inclusion or
exclusion of the services. Revenues for services are recognized as the services
are performed. Training services are sold on a per student basis and are
recognized as classes are attended.
MAINTENANCE REVENUES: Maintenance revenues consist primarily of fees for
providing unspecified software upgrades on a when-and-if-available basis and
technical support over a specified term, which is typically twelve months.
Maintenance revenues are typically paid in advance and are recognized on a
straight-line basis over the term of the contract.
Revenues on sales made by our resellers are generally recognized upon
shipment of our software to the end user, if all other revenue recognition
criteria noted above are met. Under limited arrangements with certain
distributors, all the revenue recognition criteria have been met upon delivery
of the product to the distributor and, accordingly, revenues are recognized at
that time. The Company does not offer a right of return on its products.
Prior to January 1, 1998, the Company recognized revenue in accordance with
the provisions of the AICPA's SOP 91-1, "Software Revenue Recognition."
INCOME TAXES
The Company uses the liability method of accounting for income taxes.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to financial statements carrying amounts of existing
assets and liabilities and their respective tax bases and operating loss and tax
credit carry forwards. The measurement of deferred tax assets and liabilities is
based on provisions of the enacted tax law. The measurement of deferred tax
assets is reduced, if necessary, by a valuation allowance based on the amount of
tax benefits that, based on available evidence, is not expected to be realized.
COMPREHENSIVE INCOME (LOSS)
The Company accounts for comprehensive income (loss) using SFAS No. 130,
"Reporting Comprehensive Income." SFAS No. 130 establishes standards for
reporting comprehensive income and its components in financial statements.
Comprehensive income, as defined, refers to revenues, expenses, gains and losses
that are not included in net income but rather are recorded directly in
stockholders' equity.
Total comprehensive loss was as follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------- ---------------------------
2000 1999 2000 1999
---------------------------- ---------------------------
<S> <C> <C> <C> <C>
Net loss $ (9,905) $ (3,524) $ (35,741) $ (15,773)
Other comprehensive income (loss) :
Foreign translation adjustment (108) 118 (230) (109)
---------------------------- ---------------------------
Comprehensive loss $ (10,013) $ (3,406) $ (35,791) $ (15,882)
============================ ===========================
</TABLE>
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<PAGE>
SEEBEYOND TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOREIGN CURRENCY TRANSLATION
The functional currency for the Company's foreign operations is the local
currency. Foreign currency financial statements are converted into United States
dollars by translating asset and liability accounts at the current exchange rate
at year-end and statement of operations accounts at the average exchange rate
for the year, with the resulting translation adjustment reflected in accumulated
other comprehensive income (loss) in stockholders' equity (deficit).
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In September 1998, SFAS No. 133, "Accounting for Derivative instruments and
Hedging Activities," was issued. SFAS No. 133 establishes accounting and
reporting standards for derivative financial instruments and hedging activities
related to those instruments, as well as other hedging activities. Because it
does not currently hold any derivative instruments and does not engage in
hedging activities, the Company expects the adoption of SFAS No. 133 will not
have a material impact on its financial position, results of operations or cash
flows. In July 1999, SFAS No. 137, "Accounting for Derivative Instruments and
Hedging Activities - Deferral of Effective Date of FASB No. 133," was issued.
The Company adopted SFAS No. 133 in June 2000.
NOTE 3. OPERATIONS BY REPORTABLE SEGMENTS AND GEOGRAPHIC AREA
The Company has adopted the provisions of SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information." The Company's chief
operating decision maker is considered to be the Company's Chief Executive
Officer ("CEO"). The CEO reviews financial information presented on a
consolidated basis similar to the consolidated financial statements. Therefore,
the Company has concluded that it operates primarily in one industry segment and
accordingly, has provided enterprise-wide disclosures.
The Company maintains operations in North America and seven international
territories in Europe and the Pacific Rim: United Kingdom, Germany, France,
Belgium, Italy, Australia and Japan. Information about the Company's operations
in North America and international territories for the three months and nine
months ended September 30, 2000 and September 30, 1999 is presented below.
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<PAGE>
SEEBEYOND TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Revenues by geographic area were as follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------- ---------------------------
2000 1999 2000 1999
---------------------------- ---------------------------
<S> <C> <C> <C> <C>
Revenues:
North America $ 22,027 $ 11,244 $ 53,864 $ 29,0425
Europe 7,001 4,480 13,479 9,359
Pacific Rim 2,264 514 4,717 1,484
---------------------------- ---------------------------
Total net revenues $ 31,292 $ 16,244 $ 72,060 $ 39,885
============================ ===========================
</TABLE>
No single customer accounted for more than 10% of the Company's net revenues
during the three months and nine months ended September 30, 2000 and
September 30, 1999.
NOTE 4. COMPUTATION OF NET LOSS PER SHARE
The following table sets forth the computations of basic and diluted net
loss per share for the periods indicated (in thousands, except per share data):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------- ---------------------------
2000 1999 2000 1999
---------------------------- ---------------------------
<S> <C> <C> <C> <C>
Numerator:
Net loss $ (9,905) $ (3,524) $ (35,741) $ (15,773)
Accretion of preferred stock - (696) (769) (1,711)
---------------------------- ---------------------------
Net loss available to common stockholders $ (9,905) $ (4,220) $ (36,510) $ (17,484)
============================ ===========================
Denominator:
Denominator for basic and diluted net loss per
share - weighted average shares outstanding 69,035 46,504 59,397 45,810
============================ ===========================
Basic and diluted net loss per share $ (0.14) $ (0.09) $ (0.61) $ (0.38)
============================ ===========================
</TABLE>
Options to purchase 14,532,765 and 11,253,609 shares of common stock were
outstanding as of September 30, 2000 and September 30, 1999, respectively, but
were not included in the calculations of diluted net loss per share because
their effect would be antidilutive. Redeemable preferred convertible stock was
not included in the calculations of diluted net loss per share because its
effect would be antidilutive. Common stock warrants were not included in the
calculations of diluted net loss per share because their effect would be
antidilutive.
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<PAGE>
SEEBEYOND TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
PRO FORMA NET LOSS PER SHARE (UNAUDITED)
Pro forma net loss per share for the three months and nine months ended
September 30, 2000 and September 30, 1999 is computed using the weighted average
number of common shares outstanding, including the pro forma effects of the
automatic conversion of the Company's redeemable convertible preferred stock
into shares of common stock effective upon the closing of the Company's initial
public offering of common stock (the "IPO"), as if such conversion occurred on
January 1, 1999 or at the date of original issuance, if later. The resulting pro
forma adjustment includes an increase in the weighted average shares used to
compute basic and diluted net loss per share of 0 and 6,209,850 shares for the
three months and nine months ended September 30, 2000, respectively, and
13,972,163 and 10,478,072 shares for the three months and nine months ended
September 30, 1999, respectively. The pro forma effects of these transactions
are unaudited and have been reflected in the loss per share information in the
accompanying pro forma Statement of Operations for the three months and nine
months ended September 30, 2000 and September 30, 1999.
NOTE 5. COMMITMENTS, CONTINGENCIES AND DEBT
BANK LINE OF CREDIT AND NOTES PAYABLE
As of September 30, 2000, the Company had a $10.0 million senior line of
credit facility (the "Line") with a lending institution that bears interest at
an annual rate of prime plus 2% (payable monthly) and expires on February 1,
2001. At September 30, 2000, there were no borrowings outstanding under the
Line. The Line is secured by accounts receivable and certain other assets and is
subject to certain borrowing base restrictions. The Line contains no financial
covenants, with the exception of restrictions on related party transactions and
restrictions on incurring additional debt.
LEGAL PROCEEDINGS
The Company is party to claims and suits brought against it in the ordinary
course of business. In the opinion of management, such claims should not have
any material adverse effect upon the results of operation, cash flows or the
financial position of the Company.
NOTE 6. STOCKHOLDERS' EQUITY (DEFICIT)
PREFERRED STOCK
In February 2000, the Company authorized 10,000,000 shares of undesignated
preferred stock, none of which was outstanding as of September 30, 2000.
COMMON STOCK
In February 2000, the Company increased its authorized shares of common
stock to 200,000,000 and effected a three-for-two split of the Company's common
stock. All shares and per share amounts have been restated for all periods
presented to reflect this stock split.
-11-
<PAGE>
SEEBEYOND TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
INITIAL PUBLIC OFFERING
In May 2000, the Company completed its IPO of 4,600,000 shares of common
stock at $12 per share and realized proceeds, net of underwriting discounts,
commissions and issuance costs, of approximately $49.6 million.
CONCURRENT OFFERING
Concurrent with the IPO, the Company completed the sale of 1,200,000 shares
of common stock to a purchaser in a private transaction (the "Concurrent
Offering") at a price of $12 per share and realized proceeds, net of
underwriting discounts, commissions and issuance costs, of approximately $14.1
million.
CONVERSION OF CONVERTIBLE PREFERRED STOCK
In May 2000, upon the closing of the Company's IPO, the outstanding shares
of the Company's redeemable convertible preferred stock converted into
13,972,162 shares of common stock.
UNEARNED STOCK-BASED COMPENSATION
When the exercise price of an employee stock option is less than the deemed
fair value of the underlying stock on the date of grant, deferred compensation
is recognized and amortized to expense in accordance with the aggregation
methodology prescribed by the Financial Accounting Standards Board
Interpretation No. 28 over the vesting period of the individual option grants
which is generally four years.
In connection with the grant of certain stock options through April 27,
2000, the Company has recorded deferred stock-based compensation representing
the difference between the exercise price of the option and the estimated fair
value of the Company's common stock on the date of grant. Amortization of
deferred stock-based compensation was approximately $840,000 and $479,000 for
the three month periods and $3,187,000 and $1,104,000 for the nine month periods
ended September 30, 2000 and September 30, 1999, respectively.
WARRANT GRANTS
In January 2000, the Company issued a warrant (the "January 2000 Alliance
Warrant") to a strategic alliance partner to purchase up to 1,200,000 shares of
common stock at $6.67 per share. The January 2000 Alliance Warrant vests
contingently upon the achievement of certain milestones, primarily the
generation of license revenue for the Company, and expires on July 31, 2002. The
fair value of the January 2000 Alliance Warrant was determined using the Black
Scholes pricing model, assuming a risk free interest rate of 5.3%, a volatility
factor of 0.6 and an estimated fair value at the time of grant of $9.25 per
common share.
In March 2000, the Company issued a warrant (the "March 2000 Alliance
Warrant") to another strategic alliance partner to purchase up to 1,200,000
shares of common stock at $14.00 per share. The March 2000 Alliance Warrant
vests contingently upon the achievement of certain milestones, primarily the
creation of e*Gate market offerings and the generation of license revenue for
the Company, and expires on September 22, 2002. Both the January 2000 Alliance
Warrant and the March 2000 Alliance Warrant contain a significant disincentive
for non-performance, and, accordingly, the fair value of these warrants
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<PAGE>
SEEBEYOND TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
was measured at the date of grant in accordance with Emerging Issues Task Force
No. 96-18. The fair value of the March 2000 Alliance Warrant was determined
using the Black Scholes pricing model, assuming a risk free interest rate of
5.3%, a volatility factor of 0.6 and an estimated fair value at the time of
grant of $11.08 per common share.
EMPLOYEE STOCK PURCHASE PLAN
In February 2000, the Board of Directors approved the Company's 2000
Employee Stock Purchase Plan (the "ESPP"). The ESPP became effective on April
28, 2000. A total of 2,250,000 shares of common stock are initially available
for issuance under the ESPP. The number of shares of common stock available for
issuance under the ESPP will be increased on the first day of each calendar year
during the term of the ESPP to 2,250,000 shares of common stock.
The ESPP, which is intended to qualify under Section 423 of the IRS Code,
will be implemented by a series of overlapping offering periods of 24 months'
duration, with new offering periods, other than the first offering period,
commencing on or about May 16 and November 16 of each year. Each offering period
will consist of four consecutive purchase periods of approximately six months'
duration, and at the end of each offering period, an automatic purchase will be
made for participants. The initial offering period commenced on April 28, 2000
and will end on May 15, 2002; the initial purchase period began on April 28,
2000 and will end on November 15, 2000. Participants generally may not purchase
more than 1,500 shares in any calendar year or stock having a value measured at
the beginning of the offering period greater than $25,000 in any calendar year.
The purchase price per share will be 85% of the lower of (1) the fair
market value of our common stock on the purchase date and (2) the fair market
value of a share of our common stock on the last trading day before the offering
date, or, in the case of the first offering period under the plan, the price at
which one share of our common stock is offered to the public in the Company's
IPO.
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<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The information in this 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. Such statements
are based upon current expectations that involve risks and uncertainties. Any
statements contained herein that are not statements of historical facts may be
deemed to be forward-looking statements. For example, words such as "may",
"will", "should", "estimates", "predicts", "potential", "continue", "strategy",
"believes", "anticipates", "plans", "expects", "intends", the negative of these
terms or other comparable terminology are intended to identify forward-looking
statements. Actual results and the timing of certain events may differ
significantly from the results discussed in the forward-looking statement.
Factors that might cause or contribute to such a discrepancy include, but are
not limited to, those discussed below and under the heading "Risk Factors".
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements. Moreover, neither we nor any other person
assumes responsibility for the accuracy and completeness of the forward-looking
statements. We are under no duty to update any of the forward-looking statements
after the date hereof to conform these statements to actual results or to
changes in our expectations.
OVERVIEW
We are a leading provider of e-Business integration software that enables
the seamless flow of information within and among enterprises on a global basis.
We were founded in 1989 and sold our first products and services in 1991. From
1991 to 1998, our sales and marketing efforts were primarily focused on
customers in the healthcare industry. In 1998, we began to significantly
increase our sales and marketing expenses to target customers in other vertical
markets, such as financial services/insurance, manufacturing,
retail/e-Commerce/services and telecommunications/utilities. In November 1999,
we launched the fourth generation of our primary product with the introduction
of e*Gate 4.0 and changed the name of this product from DataGate to e*Gate. In
anticipation of this release, we accelerated the growth of our product
development, services and sales and marketing organizations. In October 2000, we
changed our name to SeeBeyond Technology Corporation.
We derive revenues primarily from three sources: licenses, services and
maintenance. We market our products and services on a global basis through our
direct sales force, and augment our marketing efforts through relationships with
systems integrators, and in other instances, through value-added resellers and
technology vendors. Our products are typically licensed directly to customers
for a perpetual term, with pricing based on the number of systems or
applications the customer is integrating or connecting with our products. We
record license revenues when both parties have signed a license agreement, the
fee is fixed or determinable, collection of the fee is probable, delivery of our
products has occurred and no other significant obligations remain. Payments for
licenses, services and maintenance received in advance of revenue recognition
are recorded as deferred revenue. To date, we have not experienced significant
seasonality of revenues. However, we expect that our future results will
fluctuate in response to the fiscal or quarterly budget cycles of our
customers.
In 1994, we opened our first international sales office in Belgium, and we
completed our first international sale in 1995. We currently have sales offices
in seven countries outside of the United States. Revenues derived from
international sales were 25% for the nine months ended September 30, 2000. We
believe that international revenues will continue to be significant in future
periods.
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<PAGE>
Revenues from services include consulting and implementation services and
training. A majority of our customers use third-party systems integrators to
implement our products. Customers also typically purchase additional consulting
services from us to support their implementation activities. These consulting
services are generally sold on a time and materials or fixed fee basis, and
services revenues are recognized as the services are performed. We also offer
training services, which are sold on a per student basis and for which revenues
are recognized as the classes are attended.
Customers who license our products normally purchase maintenance contracts.
These contracts provide unspecified software upgrades and technical support over
a fixed term, which is typically 12 months. Maintenance contracts are usually
paid in advance, and revenues from these contracts are recognized ratably over
the term of the contract.
In the past, we offered our healthcare customers our expertise in
configuring hardware and software systems in conjunction with their purchase of
our products. In these instances, we would sell third-party hardware and
software to our customers in addition to our products. Other revenues for the
three months and nine months ended September 30, 1999 consist of these sales of
third-party hardware and software. We discontinued offering this service to our
customers during the fourth quarter of 1999.
For 1997 and prior years, we recognized revenues in accordance with
American Institute of Certified Public Accountants Statement of Position, or SOP
91-1 "Software Revenue Recognition". Commencing in 1998, we began recognizing
revenues in accordance with American Institute of Certified Public Accountants
SOP 97-2, "Software Revenue Recognition," as amended by SOP 98-4 and SOP 98-9.
To date, our adoption of these new standards has not had any material effect on
our revenue recognition.
Cost of revenues consists of cost of license revenues, cost of services
revenues, cost of maintenance revenues and cost of other revenues. Cost of
license revenues includes the cost of third-party licensed software embedded or
bundled with our products. Cost of services revenues consists of compensation
and related overhead costs for personnel engaged in implementation consulting
and services and training. Cost of maintenance revenues includes compensation
and related overhead costs for personnel engaged in maintenance and support
activities. Cost of other revenues for the three months and nine months ended
September 30, 1999 consists of the cost of third-party hardware and software
sales that we discontinued in the fourth quarter of 1999.
Our operating expenses are classified as research and development, sales
and marketing and general and administrative. Each category includes related
expenses for salaries, employee benefits, incentive compensation, bonuses,
travel, telephone, communications, rent and allocated facilities and
professional fees. Our sales and marketing expenses include additional
expenditures specific to the marketing group, such as public relations and
advertising, trade show, and marketing collateral materials and expenditures
specific to the sales group, such as commissions. To date, all software product
development costs have been expensed as incurred. Also included in our operating
expenses are the amortization of alliance warrants and the amortization of
stock-based compensation.
In order to increase both our company's and our products' market presence,
we entered into strategic alliances with Andersen Consulting in November 1999,
EDS in January 2000 and CSC in March
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2000. We granted each of these strategic partners a warrant to purchase up to
1,200,000 shares of our common stock which becomes exercisable upon the
achievement of various milestones, which include the creation of e*Gate market
offerings in the case of Andersen Consulting and CSC and the generation of STC
license revenues in the case of EDS and CSC. These warrants expire from July
2002 to November 2003, and have a per share exercise price of $5.33 for Andersen
Consulting, $6.67 for EDS and $14.00 for CSC. These warrants contain a
significant economic disincentive for non-performance, and accordingly, the fair
value of these warrants was measured at the date of grant in accordance with
Emerging Issues Task Force No. 96-18. Using the Black-Scholes option pricing
model, we valued the warrants granted to Andersen Consulting in 1999 at $3.3
million as of December 31, 1999. This amount is included in common stock and is
being amortized by charges to operations over the vesting periods of the
warrants. In the first quarter of 2000, we recorded an additional $10.1 million
related to the valuation of the remaining warrants to purchase 2,400,000 shares
granted to EDS and CSC. We valued these warrants using the Black-Scholes option
pricing model. We recognized amortization of $814,000 for 1999 and $1,263,000
and $5,534,000 for the three months and nine months ended September 30, 2000,
respectively, and we will recognize additional amortization of approximately
$1.3 million in the remainder of 2000, $5.1 million in 2001 and $0.7 million in
2002. The amortization of the alliance warrants is classified as a separate
component of operating expenses in our consolidated statement of operations.
In connection with stock option grants to our employees, we have recorded
deferred stock-based compensation totaling $8.5 million, of which approximately
$3.6 million remains to be amortized. This amount represents the difference
between the exercise price and the estimated fair value of our common stock on
the date the options were granted multiplied by the number of option shares
granted. This amount is included as a component of shareholders' equity and is
being amortized by charges to operations over the vesting period of the options,
consistent with the method described in Financial Accounting Standards Board
Interpretation No. 28. The amortization of the remaining deferred stock
compensation at September 30, 2000 will result in additional charges to
operations through 2004. The amortization of stock-based compensation is
classified as a separate component of operating expenses in our consolidated
statement of operations.
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<PAGE>
RESULTS OF OPERATIONS
The following table sets forth our results of operations for the three
months and nine months ended September 30, 2000 and September 30, 1999 expressed
as a percentage of total revenues:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------- ---------------------------
2000 1999 2000 1999
--------------------------- ---------------------------
<S> <C> <C> <C> <C>
Revenues:
License 56% 47% 53% 41%
Services 30 37 32 39
Maintenance 14 15 15 16
Other - 1 - 4
--------------------------- ---------------------------
Total Revenues 100 100 100 100
Cost of revenues:
License - - 1 1
Services 25 35 28 38
Maintenance 3 4 3 4
Other - 0 - 3
--------------------------- ---------------------------
Gross Profit 72 61 68 54
Operating expenses
Research and development 17 18 19 23
Sales and marketing 66 45 69 48
General and administrative 15 16 17 19
Amortization of alliance warrants 4 - 8 -
Amortization of stock-based compensation 3 3 4 3
--------------------------- ---------------------------
Total operating expenses 105 82 117 93
Loss from operations (33) (21) (49) (40)
Other income (expense), net 1 (1) (1) -
--------------------------- ---------------------------
Loss before provision for income taxes (32) (22) (50) (40)
Provision for income taxes - - - -
--------------------------- ---------------------------
Net loss (32)% (22)% (50)% (40)%
=========================== ===========================
</TABLE>
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2000 AND
SEPTEMBER 30, 1999:
REVENUES
Total revenues for the three months ended September 30, 2000 increased 93%
from the same period last year, from $16.2 million to $31.3 million.
LICENSE REVENUES. License revenues for the three months ended September 30,
2000, increased 133% from the same period last year, from $7.6 million to $17.6
million. License revenues for the three months ended September 30, 2000, as a
percentage of total revenues were 56%, as compared to 47% for the same period in
the previous year. These increases were due primarily to the introduction of
e*Gate 4.0
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<PAGE>
in November 1999, the establishment of our strategic alliance partnerships and
the expansion of our worldwide sales and marketing force.
SERVICES REVENUES. Services revenues for the three months ended September
30, 2000, increased 52% from the same period in the previous year, from $6.1
million to $9.3 million. Services revenues for the three months ended September
30, 2000, as a percentage of total revenues decreased to 30%, as compared to 37%
for the same period in the previous year. The increase in the absolute dollar
amount in services revenues primarily was due primarily to increases in
professional services staff and the growth of consulting revenues associated
with increased licensing revenues.
MAINTENANCE REVENUES. Maintenance revenues for the three months ended
September 30, 2000, increased 76% from the same period in the previous year,
from $2.5 million to $4.4 million. Maintenance revenues for the three months
ended September 30, 2000, as a percentage of total revenues were 14%, as
compared to 15% for the same period in the previous year. The increase in the
absolute dollar amount of maintenance revenues was due primarily to increased
licensed sales of our products and the renewals of prior period maintenance
contacts.
OTHER REVENUES. Other revenues for the three months ended September 30,
2000, were $0, compared to $115,000 in the same period in the previous year. The
decrease in other revenues was due to the Company discontinuing in the fourth
quarter of 1999 the sale of third party hardware with our software to certain
customers.
COST OF REVENUES
Total cost of revenues for the three months ended September 30, 2000,
increased 38% from the same period last year, from $6.4 million to $8.8 million.
Gross margin for the three months ended September 30, 2000, was 72% as compared
to 61% for the same period in the previous year. This increase was due primarily
to an increase in license revenue and a decrease in services revenues as a
percentage of total revenues.
COST OF LICENSE REVENUES. Cost of license revenues for the three months
ended September 30, 2000, was $183,000, compared to $27,000 in the same period
in the previous year.
COST OF SERVICES REVENUES. Cost of services revenues for the three months
ended September 30, 2000, increased 37% from the same period in the previous
year, from $5.7 million to $7.8 million. This increase was due primarily to an
increase in professional services staff and the related increase in services
revenues. Cost of services revenues as a percentage of total revenues was 25%
for the three months ended September 30, 2000, as compared to 35% for the same
period in the previous year. This decrease was due primarily to the decrease in
services revenues as a percentage of total revenues.
COST OF MAINTENANCE REVENUES. Cost of maintenance revenues for the three
months ended September 30, 2000, increased 36% from the same period in the
previous year, from $646,000 to $879,000. Cost of maintenance revenues as a
percentage of total revenues was 3% for the three months ended September 30,
2000, as compared to 4% for the same period in the previous year. The increase
in the amount of cost of maintenance revenues is due to the increase in the
amount of maintenance revenues.
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<PAGE>
OPERATING EXPENSES
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses for
the three months ended September 30, 2000, increased 77% from the same period in
the previous year, from $3.0 to $5.3 million. The increase in the absolute
dollar amount in research and development expenses was due primarily to the
increase in the number of software developers and quality assurance personnel to
support our product development and documentation and testing activities related
to the development and release of the latest versions of our products. Research
and development expenses as a percentage of total revenues were 17% for the
three months ended September 30, 2000, as compared to 18% for the same period in
the previous year. This decrease was due primarily to the increase in total
revenues for the three months ended September 30, 2000, as compared to the same
period in the previous year. We anticipate that research and development
expenses will continue to increase in absolute dollars for the foreseeable
future as we continue to add to our research and development staff.
SALES AND MARKETING EXPENSES. Sales and marketing expenses for the three
months ended September 30, 2000, increased 189% from the same period in the
previous year, from $7.2 million to $20.8 million. Sales and marketing expenses
as a percentage of total revenues for the three months ended September 30, 2000,
was 66%, as compared to 45% for the same period in the previous year. The
increase in sales and marketing expense was due primarily to the expansion of
our domestic and international direct sales forces, and the increase in
marketing staff, promotional and public relations activities and product and
corporate communications. We anticipate that our sales and marketing expense
will increase in absolute dollars for the foreseeable future as we continue to
expand our domestic and international sales forces, expand our marketing staff
and develop marketing and awareness campaigns for both the company and our
products and increase promotional activities.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
for the three months ended September 30, 2000, increased 77% from the same
period in the previous year, from $2.6 million to $4.6 million. General and
administrative expenses as a percentage of total revenues for the three months
ended September 30, 2000, was 15%, as compared to 16% for the same period in the
previous year. The increase in the absolute dollar amount of general and
administrative expenses was due primarily to hiring additional executive,
finance, information technologies and administrative personnel to support the
growth of our business and worldwide infrastructure during these periods. We
expect that general and administrative expenses will increase in absolute
dollars for the foreseeable future as a result of the expansion of our
operations and the expenses associated with operating as a public company.
AMORTIZATION OF ALLIANCE WARRANTS. Amortization of alliance warrants for
the three months ended September 30, 2000, was $1.3 million, compared to $0 for
the same period in the prior year. The increase in amortization of alliance
warrants was due to the issuance, from November 1999 through March 2000, of
warrants to purchase common stock to certain strategic alliance partners.
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<PAGE>
AMORTIZATION OF STOCK BASED COMPENSATION. In connection with the grant of
stock options to employees and non-employee directors, we recorded deferred
compensation, representing the difference between the deemed fair value of our
common stock at the date of grant and the exercise price of such options.
Amortization of stock based compensation for the three months ended September
30, 2000, was $840,000, compared to $479,000 for the same period in the previous
year. The increase is due to additional options granted during the period
between March 31, 1999 and April 27, 2000.
OTHER INCOME (EXPENSE), NET
Other income (expense), net consists primarily of interest income
(expense). Other income, net for the three months ended September 30, 2000, was
($379,000), compared to other expense of $85,000 for the same period last year.
The increase primarily was due to an increase in interest income due to large
cash balances as a result of the Company's IPO in April 1, 2000.
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 AND
SEPTEMBER 30, 1999
REVENUES
Total revenues for the nine months ended September 30, 2000 increased 81%
from the same period last year, from $39.9 million to $72.1 million.
LICENSE REVENUES. License revenues for the nine months ended September 30,
2000, increased 135% from the same period last year, from $16.2 million to $38.1
million. License revenues for the nine months ended September 30, 2000, as a
percentage of total revenues were 53%, as compared to 41% for the same period in
the previous year. These increases were due primarily to the introduction of
e*Gate 4.0 in November 1999, the establishment of our strategic alliance
partnerships, the expansion of our worldwide sales and marketing force.
SERVICES REVENUES. Services revenues for the nine months ended September
30, 2000, increased 47% from the same period in the previous year, from $15.6
million to $23.0 million. Services revenues for the nine months ended September
30, 2000, as a percentage of total revenues were 32%, as compared to 39% for the
same period in the previous year. The increase in the absolute dollar amount in
services revenues was due primarily to increases in professional services staff
and the growth of consulting revenues associated with increased licensing
revenues.
MAINTENANCE REVENUES. Maintenance revenues for the nine months ended
September 30, 2000, increased 75% from the same period in the previous year,
from $6.3 million to $11.0 million. Maintenance revenues for the nine months
ended September 30, 2000, as a percentage of total revenues were 15%, as
compared to 16% for the same period in the previous year. The increase in the
absolute dollar amount of maintenance revenues was due primarily to increased
licensed sales of our products and the renewals of prior period maintenance
contacts.
OTHER REVENUES. Other revenues for the nine months ended September 30,
2000, decreased by $1.8 million from the same period in the previous year. The
decrease in other revenues was due to the Company discontinuing in the fourth
quarter of 1999 the sale of third party hardware with our software to certain
customers.
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<PAGE>
COST OF REVENUES
Total cost of revenues for the nine months ended September 30, 2000,
increased 27% from the same period last year, from $18.4 million to $23.4
million. Gross margin for the nine months ended September 30, 2000, was 68% as
compared to 54% for the same period in the previous year. This increase was due
primarily to an increase in license revenue and a decrease in services revenues
as a percentage of total revenues.
COST OF LICENSE REVENUES. Cost of license revenues for the nine months
ended September 30, 2000, was $414,000 or 1% of revenues, as compared to
$374,000 or 1% of revenue for the same period in the previous year.
COST OF SERVICES REVENUES. Cost of services revenues for the nine months
ended September 30, 2000, increased 34% from the same period in the previous
year, from $15.3 million to $20.5 million. This increase was due primarily to an
increase in professional services staff and the related increase in services
revenues. Cost of services revenues as a percentage of total revenues was 28%
for the nine months ended September 30, 2000, as compared to 38% for the same
period in the previous year. This decrease was due primarily to the decrease in
services revenues as a percentage of total revenues.
COST OF MAINTENANCE REVENUES. Cost of maintenance revenues for the nine
months ended September 30, 2000, increased 56% from the same period in the
previous year, from $1.6 million to $2.5 million. Cost of maintenance revenues
as a percentage of total revenues was 3% for the nine months ended September 30,
2000, as compared to 4% for the same period in the previous year. The increase
in the absolute dollar amount of cost of maintenance revenues is due to the
increase in the amount of maintenance revenues.
COST OF OTHER REVENUES. Cost of other revenues for the nine months ended
September 30, 2000, decreased from the same period in the previous year by $1.2
million. The decrease in cost of other revenues was due to the Company
discontinuing in the fourth quarter of 1999 the provision of third party
hardware with our software to certain customers.
OPERATING EXPENSES
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses for
the nine months ended September 30, 2000, increased 50% from the same period in
the previous year, from $9.0 to $13.5 million. The increase in amount in
research and development expenses was due primarily to the increase in the
number of software developers and quality assurance personnel to support our
product development, documentation and testing activities related to the
development and release of the latest versions of our products. Research and
development expenses as a percentage of total revenues were 19% for the nine
months ended September 30, 2000, as compared to 23% for the same period in the
previous year. This percentage decrease was due primarily to the increase in
total revenues for the nine months ended September 30, 2000, as compared to the
same period in the previous year.
SALES AND MARKETING EXPENSES. Sales and marketing expenses for the nine
months ended September 30, 2000, increased 156% from the same period in the
previous year, from $19.4 million to $49.7 million. Sales and marketing expenses
as a percentage of total revenues for the nine months ended September 30, 2000,
was 69%, as compared to 48% for the same period in the previous year. The
increase in sales and marketing expense was due primarily to the expansion of
our domestic and international direct
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sales forces, and the increase in marketing staff, promotional and public
relations activities and product and corporate communications.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
for the nine months ended September 30, 2000, increased 58% from the same period
in the previous year, from $7.6 million to $12.0 million. General and
administrative expenses as a percentage of total revenues for the nine months
ended September 30, 2000, was 17%, as compared to 19% for the same period in the
previous year. The increase in the amount of general and administrative expenses
was due primarily to hiring additional executive, finance, information
technologies and administrative personnel to support the growth of our business
and worldwide infrastructure during these periods.
AMORTIZATION OF ALLIANCE WARRANTS. Amortization of alliance warrants for
the nine months ended September 30, 2000, was $5.5 million, compared to $0 for
the same period in the prior year. The increase in amortization of alliance
warrants was due to the issuance, from November 1999 through March 2000, of
warrants to purchase common stock to certain strategic alliance partners.
AMORTIZATION OF STOCK BASED COMPENSATION. In connection with the grant of
stock options to employees and non-employee directors, we recorded deferred
compensation, representing the difference between the deemed fair value of our
common stock at the date of grant and the exercise price of such options.
Amortization of stock based compensation for the nine months ended September 30,
2000, was $3.2 million, compared to $1.1 million for the same period in the
previous year. The increase is due to additional options granted during the
period between March 31, 1999 and April 27, 2000.
OTHER INCOME (EXPENSE), NET
Other income (expense), net consists primarily of interest expense. Other
income (expense), net for the nine months ended September 30, 2000, was
($392,000), compared to ($74,000) for the same period last year. The increase
primarily was due to financing fees related to common stock warrants issued in
connection with the company's $10.0 million note payable and $10.0 million
asset-based line of credit and an increase in interest expense due to increased
borrowings under the line of credit, offset by an increase in the amount of
interest income due to higher cash balances as a result of the Company's IPO in
April 1, 2000.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 2000, the Company had cash and cash equivalents of
$32.9 million, an increase of $31.3 million from $1.6 million of cash and cash
equivalents held as of December 31, 1999.
Net cash used in operating activities was $18.3 million during the nine
months ended September 30, 2000, as compared with $15.7 million in the same
period in the previous year. This period over period increase in cash used in
operating activities reflects an increase in net loss and increases in accounts
receivable and prepaid expenses and other current assets, offset by increases in
accounts payable, other accrued expenses and deferred revenue.
Net cash used in investing activities was $4.7 million during the nine
months ended September 30, 2000, as compared with $3.0 million in the same
period in the previous year. The increase primarily was
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due to an increase in capital expenditures as a result of the expansion of the
Company's office facilities and the headcount expansion in research and
development and sales and marketing.
Net cash provided by financing activities was $54.4 million during the nine
months ended September 30, 2000, as compared with $17.7 million in the same
period in the previous year. This increase was due primarily to the completion
of the Company's IPO and a concurrent private placement in May 2000, offset by
the repayment of its line of credit and note payable during the quarter.
In May 2000, the Company completed its IPO of 4,600,000 shares of common
stock at $12 per share and realized proceeds, net of underwriting discounts,
commissions and issuance costs, of approximately $49.6 million. Concurrent with
the IPO, the Company completed the sale of 1,200,000 shares of common stock to a
purchaser in a private placement at a price of $12 per share and realized
proceeds, net of underwriting discounts, commissions and issuance costs, of
approximately $14.1 million.
The Company has a $10.0 million senior line of credit facility that bears
interest at a rate of prime plus 2%, payable monthly, and expires on February 1,
2001. As of September 30, 2000, the Company had no borrowings outstanding
against the line of credit. In May 2000, the Company used a portion of the
proceeds from its recent IPO to repay the then outstanding balance on the line
of credit in its entirety.
In September 2000, the Company also repaid in its entirety a $10.0 million
note payable it had with a financial institution, using a portion of the
proceeds from its recent IPO.
The Company anticipates continued growth in its 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, the Company expects its operating expenses and capital expenditures
to constitute the primary uses of its cash resources. In addition, the Company
may require cash resources to fund acquisitions or investments in complementary
businesses, technologies or product lines. The Company believes that its current
cash and cash equivalents and its expected cash from operations, will be
sufficient to meet its anticipated cash requirements for working capital and
capital expenditures for at least the next 12 months. Thereafter, the Company
may need to raise additional funds, and it cannot be certain that it will be
able to obtain additional debt or equity financing on favorable terms, if at
all.
EURO CURRENCY CONVERSION
The Euro currency ("Euro") was introduced on January 1, 1999, and the
eleven participating European Monetary Union member countries established
irrevocable fixed conversion rates between their local currencies and the Euro.
However, the local currencies in those countries will continue to be used as
legal tender through January 1, 2002. Thereafter, the local currencies will be
canceled and Euro bills and coins will be used for cash transactions in the
participating countries. From January 1, 1999 to December 31, 2001, companies
will be allowed to transact noncash transactions in either Euro or the local
currency.
The Company and certain of its European subsidiaries are currently
evaluating the Euro conversion and the potential impact on their operations. At
the present time, the Company believes the necessary changes and costs incurred
thus far, and expected to be incurred in the future, are not significant.
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RISK FACTORS
WE HAVE A LARGE ACCUMULATED DEFICIT, WE EXPECT FUTURE LOSSES AND WE MAY NOT
ACHIEVE OR MAINTAIN PROFITABILITY.
We have incurred substantial losses since 1998 as we increased funding of
the development of our products and technologies and expanded our sales and
marketing organization. As of September 30, 2000, we had an accumulated deficit
of $78.8 million. We intend to continue to invest heavily in sales and marketing
and research and development. As a result, we expect to incur losses in 2000 and
2001, and we will need to significantly increase our quarterly revenues to
achieve profitability. We cannot predict when we will operate profitably, if at
all.
WE EXPERIENCE LONG AND VARIABLE SALES CYCLES, WHICH COULD HAVE A NEGATIVE
IMPACT ON OUR RESULTS OF OPERATIONS FOR ANY GIVEN QUARTER.
Our products are often used by our customers throughout their organizations
to address critical business problems. Customers generally consider a wide range
of issues before committing to purchase our products, including product
benefits, the ability to operate with existing and future computer systems, the
ability to accommodate increased transaction volumes and product reliability.
Many customers are addressing these issues for the first time when they consider
whether to buy our products and services. As a result, we or other parties,
including systems integrators, must educate potential customers on the use and
benefits of our products and services. In addition, the purchase of our products
generally involves a significant commitment of capital and other resources by a
customer. This commitment often requires significant technical review,
assessment of competitive products and approval at a number of management levels
within a customer's organization. Our sales cycle may vary based on the industry
in which the potential customer operates and is difficult to predict for any
particular license transaction. The length and variability of our sales cycle
makes it difficult to predict whether particular sales will be concluded in any
given quarter. If one or more of our license transactions are not consummated in
a given quarter, our results of operations for that quarter may be below our
expectations and the expectations of analysts and investors.
OUR OPERATING RESULTS ARE HIGHLY DEPENDENT ON LICENSE REVENUES FROM ONE
SOFTWARE SUITE, AND OUR BUSINESS COULD BE MATERIALLY HARMED BY FACTORS THAT
ADVERSELY AFFECT THE PRICING AND DEMAND FOR THIS SOFTWARE SUITE.
Substantially all of our license revenues have been, and are expected to
continue to be, derived from the license of our e*Xchange software suite.
Accordingly, our future operating results will depend on the demand for
e*Xchange by future customers, including new and enhanced releases that are
subsequently introduced. Our core technology engine, e*Gate version 4.0, was
completed in September 1999 and commercially launched in November 1999. If our
competitors release new products that are superior to e*Xchange in performance
or price, or if we fail to enhance e*Xchange and introduce new products in a
timely manner, demand for our products may decline, and we may have to reduce
the pricing of our products. A decline in demand or pricing for e*Xchange as a
result of these or other factors would significantly reduce our revenues.
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In the past, we have experienced delays in the commencement of commercial
releases of our e*Xchange software suite. To date, these delays have not had a
material impact on our revenues. In the future, we may fail to introduce or
deliver new products on a timely basis. If new releases or products are delayed
or do not achieve market acceptance, we could experience customer
dissatisfaction or a delay or loss of revenues. For example, the introduction of
new enterprise and business applications requires us to introduce new e*Ways
adapters to support the integration of these applications. Our failure to
introduce these or other modules in a timely manner could cause our revenues and
market share to decline. In addition, customers may delay purchases of our
products in anticipation of future releases. If customers defer material orders
in anticipation of new releases or new product introductions, our revenues may
decline.
Moreover, as we release enhanced versions of our products, we may not be
successful in upgrading our customers who purchased previous versions of
e*Xchange to the current version. We also may not be successful in selling
add-on modules for our products to existing customers. Any failure to continue
to upgrade existing customers' products or sell new modules, if and when they
are introduced, could negatively impact customer satisfaction and our revenues.
WE MUST CONTINUE TO SUCCESSFULLY SELL OUR PRODUCTS TO COMMERCIAL CUSTOMERS
OUTSIDE OF THE HEALTHCARE INDUSTRY OR OUR REVENUES MAY DECLINE.
Since 1998, we have invested a significant amount of our sales and
marketing resources to target various commercial markets outside of the
healthcare industry, particularly for business-to-business integration. As a
result, license revenues from customers in the healthcare industry accounted for
approximately 13% of total license revenues in the nine months ended September
30, 2000, down from approximately 37% of total license revenues for the same
period in 1999. We expect that license revenues for non-healthcare customers
will continue in the near future to increase as a percentage of license revenues
as a result of this continued investment. A license to a commercial customer is
expected to involve a longer sales cycle and higher revenues compared to a
license to a healthcare customer. We must continue to increase the size of our
direct sales force to implement our strategy of increased sales to commercial
customers. In addition, because the healthcare industry, which has historically
represented our largest customer base, has generally not required
business-to-business capabilities, e*Xchange has been deployed to a greater
extent in intra-enterprise environments than in business-to-business
environments. We cannot assure you that e*Xchange will be commercially
successful for business-to-business environments, and we expect to devote
significant resources to the continued development, support, sales and marketing
of e*Xchange for these environments. If we fail to increase our sales force or
to penetrate additional commercial accounts in a meaningful way, our operating
results will suffer.
The revenue potential from the healthcare market and the various commercial
markets may fluctuate due to industry-specific conditions. For example, in 1999
the healthcare market reduced spending on IT systems because of a downturn in
the healthcare industry. Given our limited market penetration and experience in
other commercial markets, such as financial services, telecommunications and
manufacturing, and the high degree of competition and the rapidly changing
environment in these industries, we cannot assure you that we will be able to
expand sales with respect to these markets. If we fail to successfully penetrate
commercial accounts in these markets, we may experience decreased sales in
future periods. Moreover, if we penetrate additional markets, our results of
operations may fluctuate with the economic conditions in those markets.
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OUR REVENUES WILL LIKELY DECLINE IF WE DO NOT DEVELOP AND MAINTAIN
SUCCESSFUL RELATIONSHIPS WITH OUR SYSTEMS INTEGRATION PARTNERS, AND THESE
SYSTEMS INTEGRATORS ALSO HAVE RELATIONSHIPS WITH OUR COMPETITORS.
We entered into agreements with Andersen Consulting, EDS and CSC for them
to install and deploy our products and perform custom integration of systems and
applications. These systems integrators will also engage in joint marketing and
sales efforts with us. If these relationships fail, we will have to devote
substantially more resources to the sales and marketing, and implementation and
support of our products than we would otherwise, and our efforts may not be as
effective as those of the systems integrators. In many cases, these parties have
extensive relationships with our existing and potential customers and influence
the decisions of these customers. We rely upon these firms to recommend our
products during the evaluation stage of the purchasing process, as well as for
implementation and customer support services.
These systems integrators are not contractually required to implement our
products, and competition for these resources may preclude us from obtaining
sufficient resources to provide the necessary implementation services to support
our needs. If the number of installations of our products exceeds our access to
the resources provided by these systems integrators, we will be required to
provide these services internally, which would increase our expenses and
significantly limit our ability to meet our customers' implementation needs. A
number of our competitors have stronger relationships with some of these systems
integrators and, as a result, these systems integrators might be more likely to
recommend competitors' products and services instead of ours. In addition, a
number of our competitors have relationships with a greater number of these
systems integrators or have stronger systems integrator relationships based on
specific vertical markets and, therefore, have access to a broader base of
customers.
Our failure to establish or maintain systems integrator relationships would
significantly harm our ability to license and successfully implement our
software products. In addition, we rely on the industry expertise and customer
contacts of these firms in order to market our products more effectively.
Therefore, any failure of these relationships would also harm our ability to
increase revenues in key commercial markets. We are currently investing, and
plan to continue to invest, significant resources to develop these
relationships. Our operating results could be adversely affected if these
efforts do not generate license and service revenues necessary to offset this
investment.
OUR MARKETS ARE HIGHLY COMPETITIVE AND, IF WE DO NOT COMPETE EFFECTIVELY,
WE MAY SUFFER PRICE REDUCTIONS, REDUCED GROSS MARGINS AND LOSS OF MARKET
SHARE.
The market for our products is intensely competitive, evolving and subject
to rapid technological change. We expect the intensity of competition to
increase in the future. As a result of increased competition, we may have to
reduce the price of our products and services, and we may experience reduced
gross margins and loss of market share, any one of which could significantly
reduce our future revenues and operating results. Our current competitors
include vendors offering enterprise application integration, or EAI, and
traditional electronic data interchange, or EDI, software products, as well as
"in house" information technology departments of potential customers that have
developed or may develop systems that provide some or all of the functionality
of our e*Xchange product suite. We may also encounter competition from major
enterprise software developers in the future.
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Many of our existing and potential competitors have more resources, broader
customer relationships and better-established brands than we do. In addition,
many of these competitors have extensive knowledge of our industry. Some of our
competitors have established or may establish cooperative relationships among
themselves or with third parties to offer a single solution and increase the
ability of their products to address customer needs.
OUR GROWTH CONTINUES TO PLACE A SIGNIFICANT STRAIN ON OUR MANAGEMENT
SYSTEMS AND RESOURCES. IF WE FAIL TO MANAGE OUR GROWTH, OUR ABILITY TO
MARKET AND SELL OUR PRODUCTS AND DEVELOP NEW PRODUCTS MAY BE HARMED.
We must plan and manage our growth effectively in order to offer our
products and services and achieve revenue growth and profitability in a rapidly
evolving market. We continue to increase the scope of our operations
domestically and internationally and have recently added a number of employees.
Our growth has and will continue to place a significant strain on our management
systems and resources, and we may not be able to effectively manage our growth
in the future.
Furthermore, if our relationships with systems integrators succeed and
we are able to penetrate additional commercial markets, we will need additional
sales and marketing and professional services resources to support these
customers. The growth of our customer base will require us to invest significant
resources in the training and development of our employees and our systems
integration partners. If these organizations fail to keep pace with the number
and demands of the customers that license our products, our ability to market
and sell our products and services and our ability to develop new products and
services will be harmed. For us to effectively manage our growth, we must
continue to:
- expand our direct sales force;
- expand our professional services organization;
- hire and retain qualified software engineers;
- improve our operational, financial and management controls;
- improve our reporting systems and procedures;
- enhance our management and information control systems; and
- expand, train and motivate our workforce.
In addition, in September 1999, we opened an office in Redwood Shores,
California, where our sales and marketing organization is located. This move has
resulted and will continue to result in higher expenses and will require us to
coordinate these activities with our other operations in Monrovia, California.
OUR OPERATING RESULTS FLUCTUATE SIGNIFICANTLY, AND AN UNANTICIPATED DECLINE
IN REVENUES OR GROSS MARGIN MAY DISAPPOINT SECURITIES ANALYSTS OR INVESTORS
AND RESULT IN A DECLINE IN OUR STOCK PRICE.
Our quarterly operating results have fluctuated significantly in the past
and may vary significantly in the future. We believe that period-to-period
comparisons of our historical results of operations are not a good predictor of
our future performance.
Our revenues and operating results depend upon the volume and timing of
customer orders and payments and the date of product delivery. Historically, a
substantial portion of revenues in a given quarter has been recorded in the
final month of that quarter, with a concentration of these revenues in the last
two weeks of the final month. We expect this trend to continue and, therefore,
any failure or delay in the
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closing of orders would have a material adverse effect on our quarterly
operating results. Since our operating expenses are based on anticipated
revenues and because a high percentage of these expenses are relatively fixed, a
delay in the recognition of revenues from one or more license transactions could
cause significant variations in operating results from quarter to quarter and
cause a decline in our stock price. We realize substantially higher gross
margins on our license revenues compared to our services and maintenance
revenues. Thus, our margins for any particular quarter will be highly dependent
on our revenue mix in that quarter. In our international markets, we have
experienced some seasonality of revenues, with lower revenues in the summer
months. Although this seasonality has not had a material impact on our operating
results in the past, we cannot assure you that our operating results will not
fluctuate in the future as a result of these and other international trends.
We record as deferred revenue payments from customers that do not meet our
revenue recognition policy requirements. Since only a small portion of our
revenues each quarter is recognized from deferred revenue, our quarterly results
depend primarily upon entering into new contracts to generate revenues for that
quarter. New contracts may not result in revenues in the quarter in which the
contract was signed, and we may not be able to predict accurately when revenues
from these contracts will be recognized. If our operating results are below the
expectations of securities analysts or investors for these or other reasons, our
stock price would likely decline, perhaps substantially.
IF WE FAIL TO ATTRACT AND RETAIN QUALIFIED PERSONNEL, OUR ABILITY TO
COMPETE WILL BE HARMED.
We depend on the continued service of our key technical, sales and
senior management personnel, including our founder and Chief Executive
Officer, James T. Demetriades. None of these persons is bound by an
employment agreement, and we do not maintain key person life insurance on any
of these persons, other than Mr. Demetriades. The loss of any of our senior
management or other key research and development or sales and marketing
personnel could adversely affect our future operating results. We recently
hired a senior executive to oversee our European operations. In addition, we
must attract, retain and motivate highly skilled employees, including sales
personnel and software engineers. We face significant competition for
individuals with the skills required to develop, market and support our
products and services. We cannot assure you that we will be able to recruit
and retain sufficient numbers of these highly skilled employees. If we fail
to do so, our ability to compete will be significantly harmed.
OUR SUBSTANTIAL AND EXPANDING INTERNATIONAL OPERATIONS ARE SUBJECT TO
UNCERTAINTIES, WHICH COULD ADVERSELY AFFECT OUR OPERATING RESULTS.
Revenues from the sale of our products and services outside the United
States accounted for 15.0% of our total revenues in 1997, 20.3% of our total
revenues in 1998, 27.1% of our total revenues in 1999 and 25% for the nine
months ended September 30, 2000. Revenues from the sale of our products and
services in the United Kingdom as a percent of total revenues were 8.9% in 1997,
9.9% in 1998, 9.7% in 1999 and 11.5% for the nine months ended September 30,
2000, while revenues from the sale of our products and services in Germany as a
percent of total revenues were 2.7% in 1997, 5.6% in 1998, 10.6% in 1999 and
3.9% for the nine months ended September 30, 2000. We believe that revenues from
sales outside the United States will continue to account for a material portion
of our total revenues for the foreseeable future. We are exposed to several
risks inherent in conducting business internationally, such as:
- fluctuations in currency exchange rates, which could result in
increased expenses;
- unexpected changes in regulatory requirements, including imposition of
currency exchange controls, applicable to our business or to the
Internet, which could result in increased costs of doing business
overseas;
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- difficulties and costs of staffing and managing international
operations;
- political and economic instability, which could result in increasing
governmental ownership or regulation of businesses or other
instrumentalities of commerce, wage and price controls, higher
interest rates and spiraling inflation; and
- reduced protection for intellectual property rights in some countries.
Any of these factors could adversely affect our international operations
and, consequently, our operating results.
WE COULD SUFFER LOSSES AND NEGATIVE PUBLICITY IF NEW VERSIONS OR RELEASES
OF OUR PRODUCTS CONTAIN ERRORS OR DEFECTS.
Our products and their interactions with customers' software applications
and IT systems are complex and, accordingly, there may be undetected errors or
failures when products are introduced or as new versions are released. In the
past we have discovered software errors in our new releases and new products
after their introduction, which has resulted in additional research and
development expenses. To date, these additional expenses have not been material.
These errors have resulted in product release delays, delayed revenues and
customer dissatisfaction. In the future we may discover errors, including
performance limitations, in new releases or new products after the commencement
of commercial shipments. Since many customers are using our products for
mission-critical business operations, any of these occurrences could seriously
harm our business and generate negative publicity, which could have a negative
impact on future sales. Although we maintain product liability and errors and
omissions insurance, we cannot assure you that these policies will be sufficient
to compensate for losses caused by any of these occurrences.
IF OUR PRODUCTS DO NOT OPERATE WITH THE MANY HARDWARE AND SOFTWARE
PLATFORMS USED BY OUR CUSTOMERS AND KEEP PACE WITH TECHNOLOGICAL CHANGE,
OUR BUSINESS MAY FAIL.
We currently serve a customer base with a wide variety of constantly
changing hardware, software applications and networking platforms. If our
products fail to gain broad market acceptance due to an inability to support a
variety of these platforms, our operating results may suffer. Our business
depends on a number of factors, including the following:
- our ability to integrate our products with multiple platforms and
existing, or legacy, systems and to modify our products as new
versions of software applications are introduced;
- the portability of our products, particularly the number of operating
systems and databases that our products can source or target;
- our ability to anticipate and support new standards, especially
Internet standards;
- the integration of additional software modules under development with
our existing products; and
- our management of software being developed by third parties for our
customers for use with our products.
Our industry is characterized by very rapid technological change, frequent
new product introductions and enhancements, changes in customer demands and
evolving industry standards. We have also found that the technological life
cycles of our products are difficult to estimate. We believe that we must
continue to enhance our current products and concurrently develop and introduce
new products that
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anticipate emerging technology standards and keep pace with competitive and
technological developments. Failure to do so will harm our ability to compete.
As a result, we are required to continue to make substantial product development
investments.
THE MARKET FOR E-BUSINESS INTEGRATION SOFTWARE MAY NOT GROW AS QUICKLY AS
WE ANTICIPATE, WHICH WOULD CAUSE OUR REVENUES TO FALL BELOW EXPECTATIONS.
The market for e-Business integration software is rapidly evolving. We earn
substantially all of our license revenues from sales of our e*Xchange software
suite. We expect to earn substantially all of our revenues in the foreseeable
future from sales of e*Xchange and related products and services. Our future
financial performance will depend on continued growth in the number of
organizations demanding software and services for application integration and
e-Business solutions 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 e-Business integration
software. If this market fails to grow, or grows more slowly than we expect, our
revenues will be adversely affected.
IF WE FAIL TO ADEQUATELY PROTECT OUR PROPRIETARY RIGHTS, WE MAY LOSE THESE
RIGHTS AND OUR BUSINESS MAY BE SERIOUSLY HARMED.
We depend upon our ability to develop and protect our proprietary
technology and intellectual property rights to distinguish our product from our
competitors' products. The use by others of our proprietary rights could
materially harm our business. We rely on a combination of copyright, trademark
and trade secret laws, as well as confidentiality agreements and licensing
arrangements, to establish and protect our proprietary rights. We have no issued
patents. Despite our efforts to protect our proprietary rights, existing laws
afford only limited protection. Attempts may be made to copy or reverse engineer
aspects of our products or to obtain and use information that we regard as
proprietary. Accordingly, we cannot be certain that we will be able to protect
our proprietary rights against unauthorized third party copying or use.
Furthermore, policing the unauthorized use of our products is difficult, and
expensive litigation may be necessary in the future to enforce our intellectual
property rights.
OUR PRODUCTS COULD INFRINGE THE INTELLECTUAL PROPERTY RIGHTS OF OTHERS,
CAUSING COSTLY LITIGATION AND THE LOSS OF SIGNIFICANT RIGHTS.
Third parties may claim that we have infringed their current or future
intellectual property rights. We expect that software developers in our market
will increasingly be subject to infringement claims as the number of products in
different software industry segments overlap. Any claims, with or without merit,
could be time-consuming, result in costly litigation, prevent product shipment
or cause delays, or require us to enter into royalty or licensing agreements,
any of which could harm our business. Patent litigation in particular has
complex technical issues and inherent uncertainties. In the event an
infringement claim against us is successful and we cannot obtain a license on
acceptable terms, license a substitute technology or redesign our products to
avoid infringement, our business would be harmed. Furthermore, former employers
of our current and future employees may assert that our employees have
improperly disclosed to us or are using their confidential or proprietary
information.
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FAILURE TO RAISE ADDITIONAL CAPITAL OR GENERATE THE SIGNIFICANT CAPITAL
NECESSARY TO EXPAND OUR OPERATIONS AND INVEST IN NEW PRODUCTS COULD REDUCE
OUR ABILITY TO COMPETE AND RESULT IN LOWER REVENUES.
We expect that our current cash and cash equivalents and our expected cash
from operations will be sufficient to meet our anticipated cash requirements for
working capital on capital expenditures for at least the next 12 months. After
that, we may need to raise additional funds, and we cannot be certain that we
will be able to obtain additional debt or equity financing on favorable terms,
or at all. If we raise additional equity financing, our shareholders may
experience significant dilution of their ownership interests and the per share
value of our common stock could decline. If the we engage in debt financing, we
may be required to accept terms that restrict our ability to incur additional
indebtedness and that force us to maintain specified liquidity or other ratios,
any of which could harm our business. If we need additional capital and cannot
raise it on acceptable terms, we may not be able to, among other things:
- develop or enhance our products and services;
- continue to expand our sales and marketing organizations;
- acquire complementary technologies, products or businesses;
- expand operations, in the United States or internationally;
- hire, train and retain employees; or
- respond to competitive pressures or unanticipated working capital
requirements.
Our failure to do any of these things could result in lower revenues and could
seriously harm our business.
WE MAY BE AT RISK OF SECURITIES CLASS ACTION LITIGATION DUE TO OUR
EXPECTED STOCK PRICE VOLATILITY.
In the past, securities class action litigation has often been brought
against a company following a decline in the market price of its securities.
This risk is especially acute for us because technology companies have
experienced greater than average stock price volatility in recent years and, as
a result, have been subject to, on average, a greater number of securities class
action claims than companies in other industries. In the future, we may be the
target of similar litigation. Securities litigation could result in substantial
costs and divert our management's attention and resources, and could seriously
harm our business. The market price of the common stock may fluctuate
significantly in response to the following factors, most of which are beyond our
control, including:
- variations in our quarterly operating results;
- changes in securities analysts' estimates of our financial
performance;
- changes in market valuations of similar companies;
- announcements by us or our competitors of significant contracts,
acquisitions, strategic partnerships, joint ventures or capital
commitments;
- loss of a major customer or failure to complete significant license
transactions;
- additions or departures of key personnel; and
- fluctuations in stock market price and volume, which are particularly
common among securities of software and Internet-oriented companies.
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ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
We develop products in the United States and sell them in North America,
Europe, Africa and the Pacific Rim. 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. If any of the events described above
were to occur, our revenues could be seriously impacted, since a significant
portion of our revenues are derived from international customers. In 1999, we
incurred net gains of approximately $12,000 due to foreign currency
fluctuations, as compared to net losses of ($22,000) in 1998 and ($1,000) in
1997. For the three months ended September 30, 2000, we have not incurred any
significant foreign currency gains or losses. Revenues from international
customers represented 27.1% of total revenues in 1999 and 30% for the three
months ended September 30, 2000. Our line of credit and note payable carry
floating interest rates based on prime plus 2%. Accordingly, we are subject to
the risk of incurring additional interest expense should the prime interest rate
increase in the future. The interest rate on our line of credit and note payable
as of September 30, 2000 was 11.5%.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is party to routine claims and suits brought against it in the
ordinary course of business including disputes arising over the ownership of
intellectual property rights and collection matters. In the opinion of
management, the outcome of such routine claims will not have a material adverse
effect on the Company's business, financial condition or results of operation.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(a) MODIFICATION OF CONSTITUENT INSTRUMENTS
Not applicable.
(b) CHANGE IN RIGHTS
Not applicable
(c) CHANGES IN SECURITIES
Not applicable.
(d) USE OF PROCEEDS
On May 3, 2000, the Company completed the initial public offering of its
common stock. The managing underwriters in the offering were Morgan Stanley Dean
Witter, Merrill Lynch & Co. and Donaldson, Lufkin & Jenrette. The shares of
common stock sold in the offering were registered under the Securities Act of
1933, as amended, on a Registration Statement on Form S-1 (No. 333-30648). The
Securities and Exchange Commission declared the Registration Statement effective
on April 27, 2000. The net offering proceeds have been and will be used for
general corporate purposes.
ITEM 6. EXHIBITS AND REPORTS OF FORM 8-K
(a) EXHIBITS
The exhibits listed in the accompanying Exhibits Index are filed as part of
this Report.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
Date: November 14, 2000
SEEBEYOND TECHNOLOGY CORPORATION
/s/ Barry J. Plaga Senior Vice President and Chief Financial Officer
------------------------ -------------------------------------------------
Barry J. Plaga (Principal Financial Officer)
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EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION OF DOCUMENT
10.1 Lease Agreement by and between The Employees Retirement System
of The State of Hawaii and the Registrant dated, as of,
July 21, 2000
10.2 Lease Agreement by and between Grant Regent, LLC and the
Registrant dated, as of, August 2, 2000
27.1 Financial Data Schedule
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