<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 June 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 July 31,
2000 was 26,343,742.
<PAGE>
EMBARCADERO TECHNOLOGIES, INC.
INDEX
PART I. FINANCIAL INFORMATION
<TABLE>
<S> <C>
ITEM 1. FINANCIAL STATEMENTS
Condensed balance sheets as of June 30, 2000 (unaudited) and
December 31, 1999 3
Condensed statements of operations for the three months and
six months ended June 30, 2000 and June 30, 1999 (unaudited) 4
Condensed statements of cash flows for the six months ended
June 30, 2000 and June 30, 1999 (unaudited) 5
Notes to condensed financial statements 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 8
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK 16
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 17
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS 17
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 17
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 17
ITEM 5. OTHER INFORMATION 18
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 18
SIGNATURE 19
</TABLE>
2
<PAGE>
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
EMBARCADERO TECHNOLOGIES, INC.
CONDENSED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
------------ ------------
(UNAUDITED)
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 50,739 $ 1,804
Trade accounts receivable, net 3,278 2,834
Related party accounts receivable 1,433 696
Prepaid and other current assets 487 310
Deferred tax assets 244 --
------------ ------------
Total current assets 56,181 5,644
Property and equipment, net 1,596 958
Other assets 1,074 46
------------ ------------
Total assets $ 58,851 $ 6,648
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued liabilities $ 2,854 $ 806
Deferred revenue 5,892 4,094
Notes payable to stockholders -- 1,000
Deferred tax liabilities 518 --
------------ ------------
Total current liabilities 9,264 5,900
STOCKHOLDERS' EQUITY:
Common stock 26 21
Additional paid-in capital 62,932 14,642
Deferred stock-based compensation (10,667) (10,049)
Accumulated deficit (2,704) (3,866)
------------ ------------
Total stockholders' equity 49,587 748
------------ ------------
Total liabilities and stockholders' equity $ 58,851 $ 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 Six Months Ended
June 30, June 30,
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
REVENUES:
License $ 6,336 $ 3,163 $ 11,922 $ 4,569
Maintenance 2,744 1,219 5,041 2,251
-------- -------- -------- --------
Total Revenues 9,080 4,382 16,963 6,820
COST OF REVENUES:
License 186 102 295 191
Maintenance (exclusive of non-cash compensation expense of $2 and $10 for 287 129 600 237
the three months ended June 30, 1999 and 2000, respectively and $4 and $22
for the six months ended June 30, 1999 and 2000, respectively)
-------- -------- -------- --------
Total cost of revenues 473 231 895 428
-------- -------- -------- --------
Gross profit 8,607 4,151 16,068 6,392
OPERATING EXPENSES:
Sales and marketing (exclusive of non-cash compensation expense of $7 and 2,856 1,207 5,110 2,242
$914 for the three months ended June 30, 1999 and 2000, respectively and $16
and $2,105 for the six months ended June 30, 1999 and 2000, respectively)
Research and development (exclusive of non-cash compensation expense of 2,128 936 3,850 1,603
$65 and $94 for the three months ended June 30, 1999 and 2000,
respectively and $82 and $203 for the six months ended June 30, 1999 and
2000, respectively)
General and administrative (exclusive of non-cash compensation expense of 717 277 1,573 515
$390 and $1,013 for the three months ended June 30, 1999 and 2000,
respectively and $391 and $3,819 for the six months ended June 30, 1999
and 2000, respectively)
Amortization of deferred stock-based compensation 2,031 464 6,149 493
-------- -------- -------- --------
Total operating expenses 7,732 2,884 16,682 4,853
-------- -------- -------- --------
Income (loss) from operations 875 1,267 (614) 1,539
Interest income 498 16 530 32
-------- -------- -------- --------
Income (loss) before income taxes 1,373 1,283 (84) 1,571
Provision for income taxes (1,278) (24) (2,455) (48)
-------- -------- -------- --------
Income (loss) before share in affiliated company loss 95 1,259 (2,539) 1,523
Share in loss of affiliated company (115) (23) (165) (44)
-------- -------- -------- --------
Net income (loss) (20) 1,236 (2,704) 1,479
Deemed preferred stock dividend -- -- (1,218) --
-------- -------- -------- --------
Net income (loss) available to common stockholders $ (20) $ 1,236 $ (3,922) $ 1,479
======== ======== ======== ========
BASIC AND DILUTED NET INCOME (LOSS) PER SHARE AVAILABLE
TO COMMON STOCKHOLDERS: $ 0.00 $ 0.06 ($ 0.17) $ 0.07
======== ======== ======== ========
WEIGHTED AVERAGE SHARES USED IN COMPUTATION OF NET INCOME (LOSS) PER SHARE
AVAILABLE TO COMMON STOCKHOLDERS:
Basic 25,181 21,161 23,200 19,743
======== ======== ======== ========
Diluted 25,181 21,302 23,200 21,262
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these condensed financial
statements.
4
<PAGE>
EMBARCADERO TECHNOLOGIES, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
2000 1999
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (2,704) $ 1,479
Adjustments to reconcile net income (loss) to net cash provided
by operating activities:
Depreciation and amortization 256 32
Amortization of deferred stock-based compensation 6,149 493
Loss on disposal of property and equipment 19 16
Share in loss of affiliated company 165 44
Deferred tax asset 274 --
Changes in assets and liabilities:
Trade accounts receivable (1,181) (570)
Prepaid and other current expenses (177) 207
Accounts payable and accrued liabilities 1,883 401
Deferred revenue 1,798 1,711
Other long-term assets (1,028) (27)
------------ ------------
Net cash provided by operating activities 5,454 3,786
------------ ------------
CASH FLOWS FROM INVESTMENT ACTIVITY:
------------ ------------
Purchase of property and equipment (913) (62)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from the sale of common stock 43,557 --
Proceeds from the exercise of stock options 9 216
Proceeds from the sale of preferred stock 1,828 --
Distributions to stockholders -- (2,200)
Repayments on notes payable to stockholders (1,000) --
------------ ------------
Net cash from financing activities 44,394 (1,984)
------------ ------------
Net increase in cash and cash equivalents 48,935 1,740
Cash and cash equivalents at beginning of period 1,804 13
------------ ------------
Cash and cash equivalents at end of period 50,739 $ 1,753
============ ============
SUPPLEMENTAL NON-CASH INVESTING AND FINANCING ACTIVITIES:
Deferred stock-based compensation $ 6,767 $ 6,056
============ ============
Exercise of common stock options for notes receivable $ -- $ 216
============ ============
Conversion of preferred stock to common stock $ 1,828 $ --
============ ============
</TABLE>
The accompanying notes are an integral part of these condensed financial
statements.
5
<PAGE>
EMBARCADERO TECHNOLOGIES INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
NOTE 1 - THE COMPANY AND BASIS OF PRESENTATION
Embarcadero Technologies, Inc., a Delaware corporation, (the "Company"
or "Embarcadero") 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 six months ended June 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 is currently evaluating the impact SAB 101 will have 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 June 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 six-month periods ended June 30, 2000
and 1999, the Company had software product and maintenance revenue from
Embarcadero Europe Limited (EEL) totaling $707,000 and $517,000, and $1.2
million and $958,000 respectively, and reimbursed EEL for marketing and
administrative expenses of $0 and $129,000 and $0 and $258,000 for the three
and six month periods ended June 30, 2000 and 1999, respectively.
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
$60,000 and $0 during the six months ended June 30, 2000 and 1999, respectively.
NOTE 3 - EARNINGS PER SHARE
Basic earnings per share are computed by dividing net income available to
common stockholders by the weighted average number of common shares outstanding
for the period. Diluted earnings 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 Six months ended
June 30, June 30,
2000 1999 2000 1999
---- ---- ---- ----
(unaudited) (unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C>
Historical net income (loss) per share available to
common stockholders, basic and diluted:
Numerator for net income (loss), basic and diluted $ (20) $ 1,236 $ (3,922) $ 1,479
-------------------------------------------------------------------
Denominator for basic earnings per share:
Weighted average vested common shares outstanding 25,181 21,161 23,200 19,743
-------------------------------------------------------------------
Net income (loss) per share available to common
stockholders, basic $ 0.00 $ 0.06 $ (0.17) $ 0.07
===================================================================
Denominator for diluted earnings per share:
Weighted average vested common shares outstanding 25,181 21,161 23,200 19,743
Effect of dilutive securities -
common stock options - 141 - 1,518
-------------------------------------------------------------------
Weighted average common and common equivalent shares 25,181 21,302 23,200 21,262
-------------------------------------------------------------------
Net income (loss) per share available to common
stockholders, diluted $ 0.00 $ 0.06 $ (0.17) $ 0.07
===================================================================
Anti dilutive securities not included in net income
(loss) per share calculation-common stock options 3,660 -- 3,660 --
===================================================================
</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>
GEOGRAPHIC REGION Six Months Ended
------------------ June 30,
2000 1999
-------------- -------------
(unaudited) (unaudited)
<S> <C> <C>
North America $ 15,437 $ 5,756
U.K. 1,153 890
Other 373 174
-------------- -------------
Total $ 16,963 $ 6,820
============== =============
</TABLE>
7
<PAGE>
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. The
factors discussed below under "Factors That May Affect Future Results" 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>
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 Six Months Ended
June 30, June 30,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues:
License 69.78% 72.18% 70.28% 66.99%
Maintenance 30.22% 27.82% 29.72% 33.01%
------------ ------------ ------------ ------------
Total revenues 100.0% 100.0% 100.0% 100.0%
Cost of revenues
License 2.05% 2.33% 1.74% 2.80%
Maintenance 3.16% 2.94% 3.54% 3.48%
------------ ------------ ------------ ------------
Total cost of revenues 5.21% 5.27% 5.28% 6.28%
------------ ------------ ------------ ------------
Gross profit 94.79% 94.73% 94.72% 93.72%
Operating expenses:
Sales and Marketing 31.45% 27.54% 30.12% 32.87%
Research and development 23.44% 21.36% 22.70% 23.50%
General and administrative 7.90% 6.32% 9.27% 7.55%
Amortization of deferred stock-based compensation 22.37% 10.59% 36.25% 7.23%
------------ ------------ ------------ ------------
Total operating expenses 85.16% 65.81% 98.34% 71.15%
------------ ------------ ------------ ------------
Income (loss) from operations 9.63% 28.91% (3.62)% 22.57%
Interest income 5.48% 0.37% 3.12% 0.47%
------------ ------------ ------------ ------------
Income (loss) before income taxes 15.11% 29.28% (0.50)% 23.04%
Provision for income taxes (14.07)% (0.55)% (14.47)% (0.70)%
------------ ------------ ------------ ------------
Income (loss) before share in affiliated company loss 1.04% 28.73% (14.97%) 22.34%
Share in loss of affiliated company (1.27)% (0.52)% (0.97)% (0.65)%
------------ ------------ ------------ ------------
Net Income (loss) (0.23)% 28.21% (15.94)% 21.69%
Deemed preferred stock dividend -- -- (7.18)% --
------------ ------------ ------------ ------------
Net income (loss) available to common stockholders (0.23)% 28.21% (23.12)% 21.69%
============ ============ ============ ============
</TABLE>
9
<PAGE>
EMBARCADERO TECHNOLOGIES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
THREE AND SIX MONTHS ENDED JUNE 30, 2000 AND JUNE 30, 1999
REVENUES
TOTAL REVENUES. Total revenues were $9.1 million and $17.0 million for the
second quarter and first six months of 2000, respectively, which represented
increases of 107.2% and 148.7% when compared to corresponding periods of 1999.
LICENSE. License revenues were $6.3 million and $11.9 million for the second
quarter and first six months of 2000, respectively, which represented increases
of 100.3% and 160.9% 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 overall sales staff.
MAINTENANCE. Maintenance revenues were $2.7 million and $5.0 million for the
second quarter and first six months of 2000, respectively, which represented
increases of 125.1% and 123.9% when compared to corresponding periods of 1999.
The increase in maintenance revenues was due to an increase in the number
licenses sold and increased 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 $186,000
and $295,000 for the second quarter and first six months of 2000, respectively,
which represented increases of 82.4% and 54.3% when compared to corresponding
periods of 1999. The increase in cost of license was due to increases in
licenses sold. Cost of license represented 2.9% and 2.4% of license revenues in
the respective periods. 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 licensed products
and product components.
MAINTENANCE. Cost of maintenance consists of salaries and related costs for
customer support personnel. Cost of maintenance was $287,000 and $600,000 for
the second quarter and first six months of 2000, respectively, which represented
increases of 122.5% and 153.2% 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 10.5% and 11.9% of maintenance revenues in the
respective periods. 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 $2.9 million and $5.1 million for the second quarter
and first six months of 2000, respectively, which represented increases of
136.6% and 127.9% 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 27.5% in the second quarter of 1999 to 31.5% for the second
quarter of 2000 and decreased slightly from 32.8% for the first six months of
1999 to 30.1% for the first six months of 2000 due to an increase in total
revenue. 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.
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 $2.1 million and $3.8 million for the second
quarter and first six months of 2000, respectively, which represented increases
of 127.4% and 140.2% 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
10
<PAGE>
allocation. As a percentage of total revenues, research and development
expenses rose from 21.4% in the second quarter of 1999 to 23.4% for the
second quarter of 2000 and decreased slightly from 23.5% for the first six
months of 1999 to 22.7% for the first six months of 2000 due to increased
revenue. 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 $ 717,000 and
$1.6 million for the second quarter and first six months of 2000, respectively,
which represented increases of 158.8% and 205.4% 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 6.3% in the
second quarter of 1999 to 7.9% for the second quarter of 2000 and from 7.6% for
the first six months of 1999 to 9.3% for the first six 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 June 30, 2000 is $21.2 million. The amortization expense was
$2.0 million and $6.2 million for the second quarter and first six months of
2000, respectively, which represented increases of 337.7% and 1,147.3% when
compared to corresponding periods of 1999.
PROVISION FOR INCOME TAXES. Provision for income taxes was $1.3 million and
$2.5 million for the second quarter and first six months of 2000, respectively,
which represented increases of 5,225% and 5,015% when compared to corresponding
periods of 1999. The effective income tax rate on income before amortization of
deferred stock-based compensation was 43.6 % and 1.5% for the three months and
six months ended June 30, 2000 and June 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, we are 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
$115,000 and $165,000 for the second quarter and first six months of 2000,
respectively, which represented increases of 400.0% and 275.0% 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 $43.6 million. We have funded
our business to date from cash generated by our operations. As of June 30, 2000,
we had cash and cash equivalents of $50.7 million.
Cash provided by operating activities was $5.5 million and $3.8 million
for the six months ended June 30, 2000 and June 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.
Cash used in investing activities was $913,000 and $62,000 for the six
months ended June 30, 2000 and June 30, 1999. In both quarters, cash used in
investing activities were related to purchases of computer equipment and
software as well as furniture.
Net cash provided by financing activities was $44.4 million in the six
months ended June 30, 2000. In the six months ended June 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 $43.6
million, and to a lesser extent from the proceeds from the sale of the company's
Series A preferred stock and from the exercise of stock options under the
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company's stock option plan. Net cash used in financing activities in the six
months ended June 30, 1999 came predominately from the distribution of cash to
the company's stockholders.
We have options to acquire the remaining 56% of Embarcadero Europe's
capital stock. If we had exercised our options on June 30, 2000, the
acquisition would have cost approximately $3.5 million. The other holders of
the capital stock of Embarcadero Europe have options to sell us their 56% of
Embarcadero Europe's capital stock. If they had exercised their options on
June 30, 2000, the cost to us would have been approximately $1.75 million.
The options expire in October 2001.
We have a $2 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 have not drawn any amounts under the revolving credit 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.
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 is currently evaluating the impact SAB 101 will have 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 June 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.
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 DECREASE, OUR BUSINESS WILL SUFFER.
The accompanying notes are an integral part of these condensed financial
statements.
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A large portion of our revenues currently comes from sales of our
DBArtisan product. In 1997, 1998, 1999, and for the six months ending June 30,
2000, DBArtisan accounted for approximately 66.5%, 56.3%, 48.3% and 46.6%,
respectively, of our license revenues in North America. 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 THE MEMBERS OF OUR MANAGEMENT TEAM ARE UNABLE TO WORK TOGETHER EFFECTIVELY,
OUR BUSINESS WILL SUFFER.
The members of our management team have not previously worked
together, and we cannot be sure that they will be able to work together
effectively as we expand our operations. Our management team has changed
significantly in the past six months. Ellen Taylor served as our president
and chief executive officer from October 1999 to May 2000. Stephen Wong, our
chairman, has replaced Ms. Taylor as our president and chief executive
officer as of June 2000. Raj Sabhlok joined us in January 2000 as Senior Vice
President of Finance and Corporate Development. Walter Scott joined us in
January 2000 as Vice President of Sales. Susan Fleck joined us as our Vice
President of Customer Care in February 2000 and Robin Schumacher was promoted
to Vice President of Product Management in July 2000. We intend to hire other
executive officers in the near future. If these employees cannot work
together effectively, our ability to manage and expand our business will
suffer.
IF WE CANNOT EXPAND OUR OPERATIONS, OUR BUSINESS WILL SUFFER.
We have recently experienced a period of significant expansion in our
operations. 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 149 as of June
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.
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:
/ / 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;
The accompanying notes are an integral part of these condensed financial
statements.
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<PAGE>
/ / 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.
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;
The accompanying notes are an integral part of these condensed financial
statements.
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/ / increased service and warranty costs;
/ / legal actions by customers against us; and
/ / increased insurance costs.
ACQUISITIONS OF COMPANIES OR TECHNOLOGIES MAY RESULT IN DISRUPTIONS TO OUR
BUSINESS.
We plan to make 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.
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 Senior Vice President of Finance and Corporate Development,
Vice President of Sales, and Vice President of Customer Care 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 accompanying notes are an integral part of these condensed financial
statements.
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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.
As sales to our affiliated distributor, Embarcadero Europe, Ltd.,
increase, we will be exposed to greater volatility in fluctuations of the pound
sterling. In the event we acquire the remaining interest in Embarcadero Europe,
we will be exposed to volatility in fluctuations of other currencies as well. 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.
The accompanying notes are an integral part of these condensed financial
statements.
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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 six months ended June 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 by nine individuals, the
Company issued an aggregate of 106,362 shares of Common Stock for an aggregate
purchase price of $9,318. 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 $1,828,030. The holders of Series A convertible preferred stock
have 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 after 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 price of the offering amount registered was $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
$1.5 million was paid by the company in connection with 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 $43,551,000. Currently, the Company has used its
existing cash balances to fund the general operations of the Company. None of
the Company's net proceeds of the offering has been used. The company is
currently investing the net offering proceeds for future use such as strategic
investments or acquisitions that complement Embarcadero's products, technologies
or distribution channels. 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
The accompanying notes are an integral part of these condensed financial
statements.
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ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
None
(b) Reports on Form 8-K
None
The accompanying notes are an integral part of these condensed financial
statements.
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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: August 14, 2000
19
