<PAGE>
United States
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2000.
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the transition period from ____________to
________________
EMBARCADERO TECHNOLOGIES, INC.
------------------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)
--------------------------------------------------------------------------------
DELAWARE 68-0310015
------------------------ --------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
--------------------------------------------------------------------------------
425 MARKET STREET, SUITE 425
SAN FRANCISCO, CA 94105
(415) 834-3131
(Address of principal executive offices)
Indicate by check mark whether the registrant (1) 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 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. [x] Yes [ ] No
The number of shares outstanding of the Registrant's Common Stock as of
September 30, 2000 was 26,765,262
1
<PAGE>
EMBARCADERO TECHNOLOGIES, INC.
INDEX
<TABLE>
<S> <C> <C>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Condensed balance sheets as of September 30, 2000 (unaudited) and December 31, 1999 3
Condensed statements of operations for the three months and
nine months ended September 30, 2000 and September 30, 1999 4
(unaudited)
Condensed statements of cash flows for the nine months ended
September 30, 2000 and September 30, 1999 (unaudited) 5
Notes to condensed financial statements (unaudited) 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL 8
CONDITION AND RESULTS OF OPERATIONS
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK 16
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 18
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS 18
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 18
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 18
ITEM 5. OTHER INFORMATION 19
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 19
SIGNATURE 20
</TABLE>
2
<PAGE>
5
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
EMBARCADERO TECHNOLOGIES, INC.
CONDENSED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
--------------- --------------
(UNAUDITED)
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $51,102 $ 1,804
Trade accounts receivable, net 4,635 2,834
Related party accounts receivable 3,223 696
Prepaid and other current assets 791 310
Deferred tax assets 244 --
--------------- ----------------
Total current assets 59,995 5,644
Property and equipment, net 1,803 958
Other assets 1,099 46
--------------- ----------------
Total assets $ 62,897 $ 6,648
=============== ================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued liabilities $ 4,097 $ 806
Deferred revenue 6,360 4,094
Notes payable to stockholders -- 1,000
Deferred tax liabilities 518 --
--------------- ----------------
Total current liabilities 10,975 5,900
STOCKHOLDERS' EQUITY:
Common stock 26 --
Additional paid-in capital 63,022 14,663
Notes receivable from stockholders (458) --
Deferred stock-based compensation (8,641) (10,049)
Accumulated deficit (2,027) (3,866)
--------------- ----------------
Total stockholders' equity 51,922 748
--------------- ----------------
Total liabilities and stockholders' equity $ 62,897 $ 6,648
=============== ================
</TABLE>
The accompanying notes are an integral part of these condensed
financial statements.
3
<PAGE>
EMBARCADERO TECHNOLOGIES, INC.
CONDENSED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
--------------------------- ----------------------------
2000 1999 2000 1999
------------- ------------- ------------ ---------------
<S> <C> <C> <C> <C>
REVENUES:
License $7,640 $ 4,103 $19,562 $ 8,672
Maintenance 3,211 1,583 8,252 3,834
------------- ------------- ------------ ---------------
10,851 5,686 27,814 12,506
COST OF REVENUES:
License 150 162 445 353
Maintenance (exclusive of non-cash 313 197 913 434
compensation expense of $2 and $6 for
the three months ended September 30, 1999
and 2000, and $6 and $29 for
the nine months ended September 30, 1999
and 2000, respectively) ------------- ------------- ------------ ---------------
Total cost of revenues 463 359 1,358 787
------------- ------------- ------------ ---------------
Gross profit 10,388 5,327 26,456 11,719
OPERATING EXPENSES:
Sales and marketing (exclusive of non-cash 3,106 1,445 8,216 3,687
compensation expense of $6 and $716 for
the three months ended
September 30, 1999 and 2000, respectively
and $22 and $2,821 for the nine months ended
September 30, 1999 and 2000, respectively)
Research and development (exclusive of non-cash 2,790 946 6,640 2,549
compensation expense of $257 and $77 for the three
months ended September 30, 1999 and 2000,
respectively and $338 and $279 for the nine
months ended September 30, 1999 and 2000, respectively)
General and administrative (exclusive of non-cash 866 386 2,439 901
compensation expense of $1,080 and $1,219 for the
three months ended September 30, 1999 and 2000,
respectively and $1,472 and $5,038 for the nine
months ended September 30, 1999 and 2000, respectively)
Amortization of deferred stock-based compensation 2,018 1,345 8,167 1,838
------------- ------------- ------------ ---------------
Total operating expenses 8,780 4,122 25,462 8,975
------------- ------------- ------------ ---------------
Income from operations 1,608 1,205 994 2,744
Interest income 651 20 1,181 52
------------- ------------- ------------ ---------------
Income before income taxes 2,259 1,225 2,175 2,796
Provision for income taxes (1,517) (31) (3,972) (79)
------------- ------------- ------------ ---------------
Income (loss) before share in affiliated company loss 742 1,194 (1,797) 2,717
Share in loss of affiliated company (65) (23) (230) (67)
------------- ------------- ------------ ---------------
Net income (loss) 677 1,171 (2,027) 2,650
Deemed preferred stock dividend -- -- (1,218) --
------------- ------------- ------------ ---------------
Net income (loss) available to common stockholders $677 $ 1,171 $ (3,245) $ 2,650
============= ============= ============ ===============
NET INCOME (LOSS) PER SHARE AVAILABLE TO COMMON
STOCKHOLDERS:
Basic $ 0.03 $ 0.06 $ (0.13) $ 0.13
============= ============= ============ ===============
Diluted $ 0.02 $ 0.05 $ (0.13) $ 0.12
============= ============= ============ ===============
WEIGHTED AVERAGE SHARES USED IN COMPUTATION OF NET
INCOME (LOSS) PER SHARE AVAILABLE TO COMMON STOCKHOLDERS:
Basic 26,613 21,161 24,376 20,248
============= ============= ============ ===============
Diluted 28,011 21,703 24,376 21,465
============= ============= ============ ===============
</TABLE>
4
The accompanying notes are an integral part of these condensed
financial statements.
<PAGE>
EMBARCADERO TECHNOLOGIES, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
2000 1999
----------------- -------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (2,027) $ 2,650
Adjustments to reconcile net income (loss) to net cash provided
by operating activities:
Depreciation and amortization 427 64
Amortization of deferred stock-based compensation 8,167 1,838
Loss on disposal of property and equipment 36 33
Share in loss of affiliated company 230 67
Deferred tax liabilities, net 274 --
Changes in assets and liabilities:
Trade accounts receivable (4,328) (1,398)
Prepaid and other current expenses (481) 253
Accounts payable and accrued liabilities 3,061 362
Deferred revenue 2,266 1,752
Other long-term assets (1,053) (27)
----------------- -------------------
Net cash provided by operating activities 6,572 5,594
----------------- -------------------
CASH FLOWS FROM INVESTMENT ACTIVITY:
Purchase of property and equipment (1,308) (466)
----------------- -------------------
Net Cash used for investing activities (1,308) (466)
----------------- -------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from the sale of common stock 43,034 --
Proceeds from the exercise of stock options 172 216
Proceeds from the sale of preferred stock 1,828 --
Distributions to S corporation stockholders -- (3,450)
Repayments on notes payable to stockholders (1,000) --
----------------- -------------------
Net cash provided by (used in) financing activities 44,034 (3,234)
----------------- -------------------
Net increase in cash and cash equivalents 49,298 1,894
Cash and cash equivalents at beginning of period 1,804 13
----------------- -------------------
Cash and cash equivalents at end of period $ 51,102 $ 1,907
================= =================
SUPPLEMENTAL NON-CASH INVESTING AND FINANCING ACTIVITIES:
Deferred stock-based compensation $ 6,759 $ 6,056
================ ===================
Exercise of common stock options for notes receivable $ 458 $ 216
================ ===================
Conversion of preferred stock to common stock $ 1,828 $ --
================ ===================
</TABLE>
5
The accompanying notes are an integral part of these condensed
financial statements.
<PAGE>
.
NOTE 1 - THE COMPANY AND BASIS OF PRESENTATION
Embarcadero Technologies, Inc. (the "Company" or "Embarcadero") a Delaware
corporation provides software products that enable organizations to build,
optimize, and manage e-business applications and their underlying databases.
The accompanying unaudited condensed financial statements reflect all
adjustments, which, in the opinion of the Company, are necessary for a fair
presentation of the results for the interim period, presented. All such
adjustments are normal recurring adjustments. These financial statements have
been prepared in accordance with generally accepted accounting principles and
the applicable rules of the Securities and Exchange Commission. Accordingly,
they do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. The balance
sheet at December 31, 1999 was derived from audited financial statements;
however it does not include all disclosures required by generally accepted
accounting principles.
The financial statements and related disclosures have been prepared with
the presumption that users of the interim financial information have read or
have access to the audited financial statements for the preceding fiscal year.
Accordingly, these financial statements should be read in conjunction with the
audited financial statements and the related notes thereto contained in the
Company's Registration Statement on Form S-1 and the Company's Prospectus dated
April 19, 2000.
Operating results for the three months and nine months ended September 30,
2000 are not necessarily indicative of the results that may be expected for the
full year ending December 31, 2000 or for any future period. Further, the
preparation of condensed, interim financial statements requires management to
make estimates and assumptions that affect the recorded amounts reported
therein. A change in facts and circumstances surrounding the estimates could
result in a change to the estimates and impact future operating results.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued Statement of Financial Accounting
Standards No. 133, or SFAS 133, Accounting for Derivative Instruments and
Hedging Activities. SFAS 133 establishes new standards of accounting and
reporting for derivative instruments and hedging activities and will be
adopted by the Company in 2001. SFAS 133 requires that all derivatives be
recognized at fair value in the statement of financial position, and that the
corresponding gains or losses be reported either in the statement of
operations or as a component of comprehensive income, depending on the type
of hedging relationship that exists. The Company does not currently hold
derivative instruments or engage in hedging activities. The Company is
currently evaluating the impact SFAS 133 will have on its financial position
and results of operations.
In December, 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin 101, or SAB 101, which summarizes the SEC's views in
applying generally accepted accounting principles to revenue recognition in
financial statements. SAB 101 is effective in the fourth quarter of 2000. The
Company does not expect SAB 101 to have a material effect on its financial
position, results of operations or cash flow.
In March 2000, the Financial Accounting Standards Board ("FASB") issued
FASB Interpretation No. 44 "Accounting for Certain Transactions Involving Stock
Compensation and interpretation of APB Opinion No. 25". This interpretation has
provisions that are effective on staggered dates, some of which began after
December 15, 1998 and others that become effective after September 30, 2000. The
adoption of this interpretation did not and will not have a material impact on
the financial statements.
NOTE 2 - RELATED-PARTY TRANSACTIONS
During the three-month and the nine months periods ended September 30,
2000 and 1999, the Company had software product and maintenance revenue from
Embarcadero Europe Limited (EEL) totaling $808,000 and $471,000 and $2.0 million
and $1.4 million respectively, and reimbursed EEL for marketing and
administrative expenses of $0 and $149,000 and $0 and $407,000 for the three and
nine month periods ended September 30, 2000 and 1999, respectively. The
related party accounts receivable represents advances made to EEL.
6
<PAGE>
The Company leases office space controlled by an individual who became a
stockholder and employee of the Company in 1999. Total payments for rent were
$90,000 and $20,000 during the nine months ended September 30, 2000 and 1999,
respectively.
NOTE 3 - NET INCOME (LOSS) PER SHARE
Basic net income (loss) per share are computed by dividing net income
(loss) available to common stockholders by the weighted average number of
common shares outstanding for the period. Diluted net income (loss) per share
reflects the potential dilution of securities by including stock options in
the weighted average number of common shares outstanding for a period, if
dilutive.
A reconciliation of the numerator and denominator used in the
calculation of historical basic and diluted net income (loss) per share
follows (in thousands, except per share data):
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
------------------------------- -------------------------------
2000 1999 2000 1999
----------- ----------- ----------- -----------
(unaudited) (unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C>
Historical net income (loss), basic and diluted:
Numerator for net income (loss), basic and diluted $ 677 $ 1,171 $ (3,245) $ 2,650
-------------- -------------- --------------- ---------------
Denominator for basic earnings per share:
Weighted average vested common shares outstanding 26,613 21,161 24,376 20,248
-------------- -------------- --------------- ---------------
Net income (loss) per share basic $ 0.03 $ 0.06 $(0.13) $ 0.13
============== ============== =============== ===============
Denominator for diluted net income (loss) per share:
Weighted average vested common shares outstanding 26,613 21,161 24,376 20,248
Effect of dilutive securities -
Common stock options 1,398 542 -- 1,217
-------------- -------------- --------------- ---------------
Weighted average common and common equivalent shares 28,011 21,703 24,376 21,465
-------------- -------------- --------------- ---------------
Net income (loss) per share diluted $ 0.02 $ 0.05 $ (0.13) $ 0.12
============== ============== =============== ===============
Anti dilutive securities not included in net income (loss)
per share Calculation-common stock options -- -- 3,463 --
============== ============== =============== ===============
</TABLE>
NOTE 4 - SEGMENT REPORTING
The Company operates in one industry segment. The Company's geographic
sales data based on customer destination is defined by region: North America,
United Kingdom (U.K.) and Other. Sales in the U.K. are transacted by the
Company's affiliated distributor, Embarcadero Europe Ltd. The affiliated
distributor as well as other distributors handle regions outside the U.K. and
North America.
Revenue by geographic region was as follows (in thousands):
<TABLE>
<CAPTION>
Nine Months Ended
GEOGRAPHIC REGION September 30,
--------------------------
2000 1999
------------ ------------
(unaudited) (unaudited)
<S> <C> <C>
North America $ 25,265 $ 10,803
U.K. 1,962 1,429
Other 587 274
------------ -----------
Total $ 27,814 $ 12,506
============ ===========
</TABLE>
NOTE 5 - SUBSEQUENT EVENTS
Acquisition of Advanced Software Technologies, Inc. ("AST")
In October 2000, the Company agreed to acquire all of the outstanding
stock of AST for approximately $13 million. AST develops and markets software
that helps customers to design, develop and re-engineer web-based, Java and
component-based applications. The acquisition will be accounted for using the
"purchase" method of accounting.
Acquisition of Embarcadero Europe, Ltd.
On October 2, 2000, we exercised our options to purchase the
remaining 56% of Embarcadero Europe's capital stock for approximately $3.2
million. The transaction will be accounted for using the "purchase" method of
accounting.
7
The accompanying notes are an integral part of these condensed
financial statements.
<PAGE>
EMBARCADERO TECHNOLOGIES INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and
results of operations should be read in conjunction with our financial
statements and related notes included in this Form 10-Q, and with our
management's discussion and analysis included in the Company's Registration
Statement on Form S-1 (Registration No. 333-30850) filed with the Securities and
Exchange Commission in connection with our initial public offering.
This report contains forward-looking statements within the meaning of
the federal securities laws that relate to future events or our future
financial performance. In some cases, you can identify forward-looking
statements by terminology such as "may," "will," "should," "expect," "plan,"
"anticipate," "believe," "estimate," "predict," "intend," "potential" or
"continue" or the negative of these terms or other comparable terminology.
Such statements are only predictions. Risks and uncertainties and the
occurrence of other events could cause actual results to differ materially
from these predictions, including the factors discussed below under "Factors
That May Affect Future Results" which should be considered carefully in
evaluating Embarcadero and its business. 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 these statements. We are
under no duty to update any of the forward-looking statements after the date
of this report or to conform these statements to actual results.
OVERVIEW
We provide software products that enable organizations to build, optimize,
and manage e-business applications and their underlying databases.
We derive all of our revenues from the sale of software licenses and
related annual maintenance fees. License revenues are derived from our direct
product sales to customers and sales through our distributors. Pricing of our
software licenses is on the number of users of our products and the number of
database platforms supported. Maintenance revenues are derived from the sales of
annual maintenance contracts related to the sale of our products, which include
technical support and product upgrades. Annual maintenance contracts may be
purchased separately by customers at their discretion.
We generally recognize software license revenues upon shipment, provided
that a signed contract exists, the fee is fixed and determinable and collection
of the resulting receivable is probable. Revenues from software licenses sold
through distributors are recognized under the same criteria because our
distributors only purchase products to fulfill specific customer orders and do
not hold any inventory of our products. We recognize maintenance revenues
ratably over the period of the maintenance contract, which is typically one
year. Payments for maintenance fees are generally made in advance and are
non-refundable.
We market our software and related maintenance services directly through
our telesales and field sales organizations in the United States and Canada, and
indirectly through our distribution partners worldwide, including Global
Business Solutions, Global Connections and Multisystems, S.A. and JGC
information Systems Co., Ltd. We intend to expand our international sales
activities in an effort to increase revenues from foreign sales. To date, our
primary international distributor has been our affiliate, Embarcadero Europe
Ltd., which has distribution rights in Europe, the Middle East and Africa.
All of our revenues are denominated in U.S. dollars, except those from
Embarcadero Europe, the revenues of which are denominated in pounds sterling.
Our business with Embarcadero Europe exposes us to currency fluctuations and
currency transaction losses or gains, which are outside of our control.
Historically, fluctuations in foreign currency exchange rates have not had a
material effect on our business. We have not conducted any hedging transaction
to reduce our risk to currency fluctuations, though we may do so as our revenues
from Embarcadero Europe increase.
8
<PAGE>
EMBARCADERO TECHNOLOGIES INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS
The following table sets forth, for the period indicated, the percentage
relationship of certain items from the Company's condensed statement of
operations to 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 70.4% 72.2% 70.3% 69.3%
Maintenance 29.6% 27.8% 29.7% 30.7%
-------------------- --------------- ------------- ----------------
Total revenues 100.0% 100.0% 100.0% 100.0%
Cost of revenues:
License 1.4% 2.8% 1.6% 2.8%
Maintenance 2.9% 3.5% 3.3% 3.5%
-------------------- --------------- ------------- ----------------
Total cost of revenues 4.3% 6.3% 4.9% 6.3%
-------------------- --------------- ------------- ----------------
Gross profit 95.7% 93.7% 95.1% 93.7%
Operating expenses:
Sales and Marketing 28.6% 25.4% 29.5% 29.5%
Research and development 25.7% 16.6% 23.8% 20.4%
General and administrative 8.0% 6.8% 8.8% 7.2%
Amortization of deferred stock-based compensation 18.6% 23.7% 29.4% 14.7%
-------------------- --------------- ------------- ----------------
Total operating expenses 80.9% 72.5% 91.5% 71.8%
-------------------- --------------- ------------- ----------------
Income from operations 14.8% 21.2% 3.6% 21.9%
Interest income 6.00% 0.4% 4.2% 0.4%
-------------------- --------------- ------------- ----------------
Income before income taxes 20.8% 21.6% 7.8% 22.3%
Provision for income taxes (14.0)% (0.5)% (14.3)% (0.6)%
-------------------- --------------- ------------- ----------------
Income (loss) before share in affiliated company loss 6.8% 21.1% (6.5)% 21.7%
Share in loss of affiliated company (0.6)% (0.4)% (0.8)% (0.5)%
-------------------- --------------- ------------- ----------------
Net Income (loss) 6.2% 20.7% (7.3)% 21.2%
Deemed preferred stock dividend -- -- (4.4)% --
-------------------- --------------- ------------- ----------------
Net income (loss) available to common stockholders 6.2% 20.7% (11.7)% 21.2%
==================== =============== ============= ================
</TABLE>
9
<PAGE>
EMBARCADERO TECHNOLOGIES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2000 AND SEPTEMBER 30, 1999
REVENUES
TOTAL REVENUES. Total revenues were $10.9 million and $27.8 million for the
third quarter and first nine months of 2000, respectively, which represented
increases of 90.8% and 122.4% when compared to corresponding periods of 1999.
LICENSE. License revenues were $7.6 million and $19.6 million for the third
quarter and first nine months of 2000, respectively, which represented increases
of 86.2% and 125.6 % when compared to corresponding periods of 1999. The
increase in license revenues was due to greater market acceptance of our
products and an increase in sales staff.
MAINTENANCE. Maintenance revenues were $3.2 million and $8.3 million for the
third quarter and first nine months of 2000, respectively, which represented
increase of 102.8% and 115.2% when compared to corresponding periods of 1999.
The increase in maintenance revenue was due to an increase in the number of
licenses sold and a corresponding increase in maintenance renewals.
COST OF REVENUES
LICENSE. Cost of license consists primarily of product media and packaging,
shipping fees, royalties and duplication services. Cost of license was
$150,000 and $445,000 for the third quarter and first nine months of 2000,
respectively, which represented a decrease of 7.4% and an increase of 26.1%
when compared to corresponding periods of 1999. The nine month increase in
cost of license was due to increases in licenses sold. Cost of license
represented 2.0% and 2.3% of license revenues in the three and nine months
period ended September 30, 2000, respectively. The decrease in cost of
license was due to the better purchasing economies of scale for media,
packaging and duplication services. The cost of license as a percentage of
license revenues may vary in the future depending on the mix of internally
developed versus externally developed or licensed products and product
components.
MAINTENANCE. Cost of maintenance consists of salaries and related costs for
customer support personnel. Cost of maintenance was $313,000 and $913,000 for
the third quarter and first nine months of 2000, respectively, which
represented increases of 58.9% and 110.4% when compared to corresponding
periods of 1999. The increase in cost of maintenance was due to an increase
in the number of customer support personnel hired to service our expanding
customer base. Cost of maintenance represented 9.7% and 11.1% of maintenance
revenues in the three and nine months period ended September 30, 2000,
respectively. We expect the cost of maintenance to increase in future periods
as we hire more support personnel.
OPERATING EXPENSES
SALES AND MARKETING. Sales and marketing expenses consist primarily of
salaries, commissions earned by sales personnel, recruiting costs, trade
shows, travel and other marketing communication costs, such as advertising
and promotion. Sales and marketing expenses were $ 3.1 million and $ 8.2
million for the third quarter and first nine months of 2000, respectively
which represented increases of 114.9% and 122.8% when compared to
corresponding periods of 1999. The increase in sales and marketing expenses
from 1999 to 2000 was primarily due to increases in salaries and related
expenses and in increased advertising, marketing and trade shows expenses. As
a percentage of total revenues, sales and marketing expenses rose from 25.4%
in the third quarter of 1999 to 28.6% for the third quarter of 2000 and was
29.5% for the first nine months of 1999 and 2000. We plan to invest
substantial resources to expand our selling efforts and to execute marketing
programs that build the awareness and brand equity of our products. As a
result, we expect sales and marketing expenses to increase in future periods.
10
<PAGE>
EMBARCADERO TECHNOLOGIES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
RESEARCH AND DEVELOPMENT. Research and development expenses consist primarily of
personnel and related expenses, including payroll, employee benefits, and
equipment and software required to develop, test and enhance products. Research
and development expenses were $2.8 million and $6.6 million for the third
quarter and first nine months of 2000, respectively, which represented increases
of 194.9% and 160.5% when compared to corresponding periods of 1999. The
increase in research and development expenses was due primarily to increases in
the number of employees hired as software developers in our research and
development organization and associated increase in overhead allocation. As a
percentage of total revenues, research and development expenses rose from 16.6%
in the third quarter of 1999 to 25.7% for the third quarter of 2000 and from
20.4% for the first nine months of 1999 to 23.8% for the first nine months of
2000. We expect research and development expenses to increase in future periods
as additional development personnel are hired and as we expand our product
development activities.
GENERAL AND ADMINISTRATIVE. General and administrative expenses consist
primarily of personnel and related expenses and costs related to our
infrastructure expansion. General and administrative expenses were $ 866,000 and
$ 2.4 million for the third quarter and first nine months of 2000, respectively,
which represented increases of 124.4% and 170.7% when compared to corresponding
periods of 1999. The increase in general and administrative expenses from 1999
to 2000 was due to an increase in salaries and related expenses. As a percentage
of total revenues, general and administrative expenses rose from 6.8% in the
third quarter of 1999 to 8.0% for the third quarter of 2000 and from 7.2% for
the nine months of 1999 to 8.8% for the first nine months of 2000. We expect
total general and administrative expenses to increase as we expand our
administrative staff and facilities to support larger operations.
AMORTIZATION OF DEFERRED STOCK COMPENSATION. As the deemed fair market value
of our stock exceeded the exercise price of certain options granted, we
recognized deferred compensation charges, which we are amortizing over the
vesting periods of the options. The total amount of deferred compensation
recorded from formation through September 30, 2000, net of cancellations, is
$21.2 million. The amortization expense was $2.0 million and $8.2 million for
the third quarter and first nine months of 2000, respectively.
PROVISION FOR INCOME TAXES. Provision for income taxes was $1.5 million and
$4.0 million for the third quarter and first nine months of 2000,
respectively. The effective income tax rate on income before amortization of
deferred stock-based compensation and other non-cash charges was 38.5 % and
1.5% for the nine months ended September 30, 2000 and September 30, 1999. The
increase is due to the Company's conversion to a C corporation from an S
corporation for income tax purposes effective January 1, 2000. Accordingly,
the company is now subject to regular federal and state income taxes.
SHARE IN LOSS OF AFFILIATED COMPANY. In September 1998, we acquired a 44%
interest in Embarcadero Europe Ltd., which became our affiliated distributor
in the United Kingdom and Europe. Our share in the loss of Embarcadero Europe
was $65,000 and $230,000 for the third quarter and first nine months of 2000,
respectively, which represented increase of $42,000 and $163,000 when
compared to corresponding periods of 1999.
LIQUIDITY AND CAPITAL RESOURCES
In April, 2000, we completed an initial public offering of common stock,
resulting in net proceeds to us of approximately $43.0 million. Through
September 30, 2000 we have funded our business from cash generated by our
operations. As of September 30, 2000, we had cash and cash equivalents of
$51.1 million.
Cash provided by operating activities was $6.6 million and $5.6 million for
the nine months ended September 30, 2000 and September 30, 1999. The increases
were primarily due to increases in amortization of deferred stock-based
compensation, deferred revenue resulting from additional maintenance contracts
and accrued expenses, offset by increases in accounts receivable resulting from
increased sales.
11
<PAGE>
EMBARCADERO TECHNOLOGIES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
Cash used in investing activities was $1.3 million and $466,000 for the
nine months ended September 30, 2000 and September 30, 1999. In both periods,
cash used in investing activities were related to purchases of computer
equipment and software, leasehold improvements and fixtures.
Net cash provided by financing activities was $44.0 million in the nine
months ended September 30, 2000. In the nine months ended September 30, 2000,
cash flow from financing activities came predominately from the company's
initial public offering of common stock resulting in net proceeds to the
company of $43.0 million, and to a lesser extent from the proceeds from the
sale of the company's Series A preferred stock and the exercise of stock
options under the company's stock option plan. Net cash used in financing
activities in the nine months ended September 30, 1999 of $3.2 million was
primarily due to the distribution of cash to the company stockholders.
We have a $2.0 million revolving credit facility with a bank that bears
interest at the prime rate and expires on May 31, 2001. Our credit facility
requires us to maintain various quarterly financial covenants including
covenants related to our tangible net worth, working capital and total
liabilities. We are in compliance with all of the financial covenants under
the facility.
We believe that our existing cash balances and cash equivalents and cash
from operations will be sufficient to finance our operations through at least
the next 12 months. If additional financing is needed, there can be no assurance
that such financing will be available to us on commercially reasonable terms, or
at all.
SUBSEQUENT EVENTS
Acquisition of Embarcadero Europe Ltd.
In October 2000, we exercised our options to purchase the remaining 56%
of Embarcadero Europe's capital stock at a cost of $3.2 million. The
transaction will be accounted for using the "purchase" method of accounting.
Acquisition of Advanced Software Technologies, Inc. ("AST")
In October 2000, we agreed to acquire all of the outstanding stock of
AST for approximately $13 million. AST develops and markets software that
helps customers to design, develop and re-engineer web-based, Java and
component-based application. The acquisition will be accounted for using the
"purchase" method of accounting.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the FASB issued Statement of Financial Accounting
Standards No. 133, or SFAS 133, Accounting for Derivative Instruments and
Hedging Activities. SFAS 133 establishes new standards of accounting and
reporting for derivative instruments and hedging activities and will be
adopted by the Company in 2001. SFAS 133 requires that all derivatives be
recognized at fair value in the statement of financial position, and that the
corresponding gains or losses be reported either in the statement of
operations or as a component of comprehensive income, depending on the type
of hedging relationship that exists. The Company does not currently hold
derivative instruments or engage in hedging activities. The Company is
currently evaluating the impact SFAS 133 will have on its financial position
and results of operations.
In December, 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin 101, or SAB 101, which summarizes the SEC's views in
applying generally accepted accounting principles to revenue recognition in
financial statements. SAB 101 is effective in the fourth quarter of 2000. The
Company does not expect SAB 101 to have a material effect on its financial
position, results of operations or cash flow.
In March 2000, the Financial Accounting Standards Board ("FASB") issued
FASB Interpretation No. 44 "Accounting for Certain Transactions Involving Stock
Compensation and interpretation of APB Opinion No. 25". This interpretation has
provisions that are effective on staggered dates, some of which began after
December 15, 1998 and others that become effective after September 30, 2000. The
adoption of this interpretation did not and will not have a material impact on
the financial statements.
FACTORS THAT MAY AFFECT FUTURE RESULTS
In addition to other information in this report, the following factors should be
considered carefully in evaluating the Company.
OUR QUARTERLY OPERATING RESULTS MAY FLUCTUATE IN FUTURE PERIODS, AND, AS A
RESULT, OUR STOCK PRICE MAY FLUCTUATE OR DECLINE.
12
<PAGE>
EMBARCADERO TECHNOLOGIES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
Our revenues and operating results may vary significantly from quarter
to quarter due to a number of factors, including the factors discussed below
under the captions "We expect to incur significant increases in our operating
expenses in the foreseeable future, which may affect our profitability,"
"Acquisitions of companies or technologies may result in disruptions to our
business", "We may lose market share and be required to reduce prices as a
result of competition from existing competitors, independent software vendors
and manufacturers of compatible software", "If we are not able to enhance our
products to adapt to rapid technological change, our business will suffer" and
also due to seasonal variations in orders for our products. Fluctuations in
operating results are likely to cause corresponding volatility in our stock
price, particularly if our operating results vary significantly from analysts'
expectations.
IF SALES OF DBARTISAN FALL, OUR BUSINESS WILL SUFFER.
A large portion of our revenues currently comes from sales of our
DBArtisan product. In 1997, 1998, 1999, and for the nine months ending September
30, 2000, DBArtisan accounted for approximately 60.4%, 58.8%, 50.1% and 45.3%,
respectively, of our license revenues. We expect that sales of DBArtisan will
continue to represent a substantial portion of our license revenues for the
foreseeable future. In addition, most of our customers initiate a relationship
with Embarcadero by purchasing DBArtisan and it is a major source of customer
loyalty and goodwill. If sales of DBArtisan fall significantly, our revenues and
income may decline.
IF WE CANNOT EXPAND OUR OPERATIONS, OUR BUSINESS WILL SUFFER.
We have recently experienced a period of significant expansion in
our operations, including the expansion of our California facilities, and the
acquisition of facilities in Littleton, Colorado and in Toronto, Canada,
where we now have research and development teams, and in England where our
affiliated distributor, Embarcadero Europe, Ltd, is located. This growth may
strain our management, administrative, operational and financial
infrastructure. To support our expanding operations, we have increased the
number of our full-time employees from 33 as of December 31, 1997 to 57 as of
December 31, 1998 to 105 as of December 31, 1999 and 165 as of September 30,
2000; we expect to hire additional employees in all areas to manage our
expanding operations. Our ability to manage growth requires that we continue
to improve our operational, financial and management controls and procedures.
If we are unable to manage this growth effectively, our rate of growth and
our income may decline.
WE EXPECT TO INCUR SIGNIFICANT INCREASES IN OUR OPERATING EXPENSES IN THE
FORESEEABLE FUTURE, WHICH MAY AFFECT OUR PROFITABILITY.
We intend to substantially increase our operating expenses for the
foreseeable future as we increase our sales and marketing, research and
development activities and customer support operations. In connection with these
expanded operations, we will need to significantly increase our revenues in
order to maintain profitability. However, these increased expenses will be
incurred before we realize increased revenues, if any, related to this spending.
If we do not significantly increase revenues from these efforts, our
profitability may decline.
ACQUISITIONS OF COMPANIES OR TECHNOLOGIES MAY RESULT IN DISRUPTIONS TO OUR
BUSINESS.
We have recently acquired the remaining 56% of our affiliate,
Embarcadero Europe's capital stock and all of the outstanding stock of
Advanced Software Technologies, Inc.
We plan to make additional strategic acquisitions of companies,
products or technologies as necessary in order to implement our business
strategy. If we are unable to fully integrate acquired businesses, products
or technologies with our existing operations, we may not receive the intended
benefits of such acquisitions. In addition, acquisitions may subject us to
unanticipated liabilities or risks. Any acquisition may temporarily disrupt
our operations and divert management's attention from day-to-day operations.
We may incur debt or issue equity securities to finance future
acquisitions. The issuance of equity securities for any acquisition could be
substantially dilutive to our stockholders. In addition, our profitability may
suffer due to acquisition-related expenses or amortization costs for acquired
goodwill and other intangible assets.
THE PLANNED EXPANSION OF OUR INTERNATIONAL OPERATIONS EXPOSES US TO RISKS.
One aspect of our growth strategy is to expand our international
operations. As a result, we could face a number of risks from our international
operations, including:
13
<PAGE>
EMBARCADERO TECHNOLOGIES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
- staffing and managing foreign operations;
- increased financial accounting and reporting complexities;
- potentially adverse tax consequences;
- the loss of revenues resulting from currency fluctuations;
- compliance with a wide variety of complex foreign laws and treaties;
- reduced protection for intellectual property rights in some countries; and
- licenses, tariffs and other trade barriers.
The expansion of our international operations may require significant
management attention and financial resources and may place burdens on our
management, administrative, operational and financial infrastructure. Our
possible investments in establishing facilities in other countries may not
produce desired levels of revenue or profitability.
OUR PROPRIETARY RIGHTS MAY BE INADEQUATELY PROTECTED AND INFRINGEMENT CLAIMS OR
INDEPENDENT DEVELOPMENT OF COMPETING TECHNOLOGIES COULD HARM OUR COMPETITIVE
POSITION.
We rely on copyright and trademark laws, trade secrets, confidentiality
procedures and contractual provisions to establish and protect our proprietary
rights. We also enter into confidentiality agreements with employees and
consultants and attempt to restrict access to proprietary information on a
need-to-know basis. Despite such precautions, unauthorized third parties may be
able to copy aspects of our products or obtain and use information that we
consider as proprietary.
We license our software products primarily under shrink-wrap licenses
included as part of product packaging. Shrink-wrap licenses are not negotiated
with or signed by individual licensees and purport to take effect upon the
opening of the product package or downloading of the product from the Internet.
These measures afford only limited protection. Policing unauthorized use of our
products is difficult and we are unable to determine the extent to which piracy
of our software exists. In addition, the laws of some foreign countries do not
protect our proprietary rights as well as United States laws.
We may have to enter into litigation to enforce our intellectual
property rights or to determine the validity and scope of the proprietary rights
of others with respect to our rights. Litigation is generally very expensive and
can divert the attention of management from daily operations. Accordingly, any
intellectual property litigation could disrupt our operations and materially
adversely affect our operating results.
We are not aware of any case in which we are infringing the proprietary
rights of others. However, third parties may bring infringement claims against
us. Any such claim is likely to be time consuming and costly to defend, could
cause product delays and could force us to enter into unfavorable royalty or
license agreements with third parties. A successful infringement claim against
us could require us to enter into a license or royalty agreement with the
claimant or develop alternative technology. However, we may not be able to
negotiate favorable license or royalty agreements, if any, in connection with
such claims and we may fail to develop alternative technology on a timely basis.
Accordingly, a successful product infringement claim against us could materially
adversely affect our business and operating results.
OUR BUSINESS WILL SUFFER IF OUR SOFTWARE CONTAINS UNDETECTED ERRORS.
14
<PAGE>
EMBARCADERO TECHNOLOGIES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
Errors may be found in current versions, new versions or enhancements
of our products after we make commercial shipments. We could face possible
claims and higher development costs if our software contains undetected errors
or if we otherwise fail to meet our customers' expectations. These risks may
result in:
- loss of revenues, market share or customers;
- reputational harm;
- diversion of resources;
- increased service and warranty costs;
- legal actions by customers against us; and
- increased insurance costs.
IF WE ARE NOT ABLE TO ENHANCE OUR PRODUCTS TO ADAPT TO RAPID TECHNOLOGICAL
CHANGE, OUR BUSINESS WILL SUFFER.
The market for our products is characterized by rapid technological
change, frequent product introductions and enhancements, uncertain product life
cycles and changes in customer demands and industry standards. Our success
depends on our ability to continue to enhance our current products and to
introduce new products that keep pace with technological developments and
satisfy increasingly complicated customer requirements. However, due to the
nature of computing environments and the performance demanded by customers for
database management software, new products and product enhancements could
require longer development and testing periods than anticipated.
The introduction of new technologies and the emergence of new industry
standards may render our existing products obsolete and unmarketable. Delays in
the general availability of new releases or problems in the installation or
implementation of new releases could materially adversely affect our business
and operating results. We may not be successful in developing and marketing, on
a timely and cost-effective basis, new products or new product enhancements that
respond to technological change, evolving industry standards or customer
requirements, or in achieving market acceptance for our products and product
enhancements.
IF WE ARE NOT ABLE TO ATTRACT AND RETAIN QUALIFIED PERSONNEL, OUR BUSINESS WILL
NOT BE ABLE TO GROW.
Our success depends on the continued service of our executive officers
and other key administrative, sales and marketing and support personnel, many of
whom, including our
15
<PAGE>
EMBARCADERO TECHNOLOGIES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
Vice President of Customer Care and Vice President of Marketing, have
recently joined our company. We intend to hire a significant number of
additional sales, marketing, administrative and research and development
personnel over the next several months. Our business will not be able to grow
if we cannot attract and retain qualified personnel. Competition for
qualified employees is intense and we may not be able to attract, assimilate
or retain highly qualified personnel in the future. There has in the past
been and there may in the future be a shortage of personnel that possess the
technical background necessary to sell, support and develop our products
effectively. Some of our current employees and those that we seek to hire may
be subject to non-competition or non-solicitation covenants that could
further limit our ability to attract or retain qualified personnel.
WE MAY LOSE MARKET SHARE AND BE REQUIRED TO REDUCE PRICES AS A RESULT OF
COMPETITION FROM OUR EXISTING COMPETITORS, INDEPENDENT SOFTWARE VENDORS AND
MANUFACTURERS OF COMPATIBLE SOFTWARE.
The market for our products is highly competitive, dynamic and subject
to rapidly changing technology. We compete primarily against other providers of
database management utilities, which include Computer Associates, Quest Software
and other independent software vendors.
Our products also compete with products offered by the manufacturers of
the database software with which they are compatible, including Oracle,
Microsoft and IBM. Some of these competing products are provided at no charge to
their customers. We expect that companies such as Oracle, Microsoft and IBM will
continue to develop and incorporate into their products applications which
compete with our products and may take advantage of their substantial technical,
financial, marketing and distribution resources in those efforts. We may not be
able to compete effectively with such products, which would materially adversely
affect our business and operating results.
We presently compete on numerous factors, including product
functionality and heterogeneity, reliability, ease-of-use, performance,
scalability, time to market, customer support and total cost of ownership. We
believe that we currently compete favorably overall. However, the market for our
products is dynamic and we may not compete successfully in the future with
respect to these factors.
Many of our competitors have longer operating histories,
substantially greater financial, technical, marketing and other resources,
and greater name recognition than we do. They also may be able to respond
more quickly than we can to changes in technology or customer requirements.
Competition could seriously impede our ability to sell additional products on
acceptable terms. Our competitors may:
- develop and market new technologies that render our products obsolete,
unmarketable or otherwise less competitive;
- make strategic acquisitions or establish cooperative relationships among
themselves or with other companies, thereby enhancing the functionality of
their products or increasing their operating margins; or
- establish or strengthen cooperative relationships with channel or
strategic partners which limit our ability to sell or to co-market products
through these channels.
Competitive pressures could reduce our market share or require us to reduce our
prices, either of which would materially adversely affect our business and
operating results.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
FOREIGN EXCHANGE RISK
Currently, the majority of our sales and expenses are denominated in
U.S. dollars and, as a result, we have not experienced significant foreign gains
or losses to date.
16
<PAGE>
EMBARCADERO TECHNOLOGIES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
As sales to our wholly-owned subsidiary Embarcadero Europe increase, we
will be exposed to volatility in fluctuations of the pound sterling and other
foreign currencies. To date, we have not used hedging contracts to hedge our
foreign-currency fluctuation risks. We will assess the need to utilize
financial instruments to hedge currency exposures on an ongoing basis. We
also do not use derivative financial instruments for speculative trading
purposes.
17
<PAGE>
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2: CHANGES IN SECURITIES AND USE OF PROCEEDS
(a) SALES OF UNREGISTERED SECURITIES. During the nine months ended September
30, 2000, following the exercise of options to purchase shares of Common
Stock that had been granted under the Company's 1993 Stock Option Plan, the
Company issued an aggregate of 91,032 shares of Common Stock for an aggregate
purchase price of $9,000. All sales of Common Stock made by the Company
pursuant to the exercise of stock options were made pursuant to the exemption
from the registration requirements of the Securities Act afforded by Rule 701
promulgated under the Securities Act.
(b) SERIES A CONVERTIBLE PREFERRED STOCK. In February 2000, the Company sold
253,893 shares of Series A convertible preferred stock for proceeds of
approximately $1.8 million. The holders of Series A convertible preferred stock
had certain rights and preferences including voting rights, dividends,
liquidation and conversion. Shares of Series A convertible preferred stock
automatically converted into common shares upon the closing of the initial
public offering of the Company's common stock on April 19, 2000. The conversion
ratio of the Series A convertible preferred stock was 1:1.
(c) USE OF PROCEEDS FROM SALES OF REGISTERED SECURITIES. On April 26, 2000,
the Company completed an initial public offering of its Common Stock, $.001
par value. The managing underwriters in the offering were Donaldson, Lufkin &
Jenrette, U.S. Bancorp Piper Jaffray, Wit Soundview and DLJ Direct, Inc (the
"Underwriters"). The shares of Common Stock sold in the offering were
registered under the Securities Act of 1933, as amended, on Registration
Statements on Form S-1 (collectively "Registration Statement") (Reg. No.
333-30850 and 333-35190) that was declared effective by the SEC on April 19,
2000. The offering commenced on April 19, 2000 and all 4,200,000 shares of
Common Stock registered under the Registration Statement were sold at a price
of $10.00 per share. The Underwriters also exercised an overallotment option
of 600,000 shares on May 2, 2000. All 600,000 overallotment shares were sold
at a price of $10.00 per share. The aggregate proceeds from the offering were
$48,000,000. In connection with the offering, the Company paid an aggregate
of $3,360,000 in underwriting discounts and commissions to the Underwriters
and approximately $1.6 million in offering expenses including legal,
accounting, printing, filing, and other fees.
After deducting the underwriting discounts and commissions and the estimated
offering expenses described above, the Company received net proceeds from the
offering of approximately $43.0 million. Through September 30, 2000, the
Company has used its existing cash balances and cash flows to fund the
general operations of the Company. As of September 30, 2000, none of the
Company's net proceeds of the offering has been used. The Company is
currently investing the net offering proceeds in short-term, state and local
municipal government money-market instruments. In the future, the proceeds
may be used to fund our corporate expansion, or to acquire or make strategic
investments in complementary businesses, technologies, product lines, or
products. None of the net proceeds has or will be paid directly or indirectly
to any director, officer, general partner of the Company or their associates,
persons owning 10% or more of any class of equity securities of the Company,
or an affiliate of the Company.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
18
<PAGE>
ITEM 5. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
None
(b) Reports on Form 8-K
None
19
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Embarcadero Technologies, Inc.
By: /s/ Raj Sabhlok
----------------------------
Raj Sabhlok
Senior Vice President of Finance
Date: October 14, 2000
20
