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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED March 31, 2000
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO .
----------------------------------------------
Commission file number: 0-27794
SEGUE SOFTWARE, INC.
(Exact name of registrant as specified in its charter)
Delaware 95-4188982
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
201 Spring Street, Lexington, MA 02421
(Address of principal executive offices)
Registrant's telephone number, including area code: (781) 402-1000
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such a shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES [X] NO [ ]
The number of shares of Registrant's Common Stock outstanding as of May 5, 2000
was 9,383,288.
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SEGUE SOFTWARE, INC.
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2000
INDEX
Page No.
--------
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements:
Consolidated Balance Sheets (unaudited)
March 31, 2000 and December 31, 1999 3
Consolidated Statements of Operations (unaudited)
Three months ended March 31, 2000 and 1999 4
Consolidated Statements of Cash Flows (unaudited)
Three months ended March 31, 2000 and 1999 5
Notes to Consolidated Financial Statements (unaudited) 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 7
Item 3 Quantitative and Qualitative Disclosures about Market Risk 14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 14
Item 2. Changes in Securities and Use of Proceeds 14
Item 6. Exhibits and Reports on Form 8-K 15
Signatures 16
Exhibits Index 17
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PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
SEGUE SOFTWARE, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
--------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 6,757 $ 7,429
Short-term investment 13,250 13,287
Accounts receivable, net of allowances
of $600 and $600 11,679 12,014
Other current assets 1,607 1,320
--------- ------------
Total current assets 33,293 34,050
Property and equipment, net 5,853 5,734
Completed technology, net 742 989
Goodwill, net 4,140 4,516
Other assets 215 277
--------- ------------
Total assets $ 44,243 $ 45,566
========= ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable--current portion $ 883 $ 883
Accounts payable 1,476 1,896
Accrued compensation and benefits 2,944 2,881
Accrued royalties 222 147
Accrued expenses 1,928 2,007
Deferred revenue 9,060 8,407
--------- ------------
Total current liabilities 16,513 16,221
Stockholders' equity:
Preferred stock, par value $.01 per share;
9,000 shares authorized; no shares issued
and outstanding - -
Common stock, par value $.01 per share;
30,000 shares authorized; 9,371 and 9,290
shares issued and outstanding 94 93
Additional paid-in capital 57,028 56,426
Accumulated deficit (29,392) (27,174)
--------- ------------
Total stockholders' equity 27,730 29,345
--------- ------------
Total liabilities and stockholders' equity $ 44,243 $ 45,566
========= ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
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SEGUE SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
Three months ended
------------------
March 31,
---------
2000 1999
---------- ----------
Revenue:
Software $ 9,227 $ 4,986
Services 4,916 3,985
---------- ----------
Total revenue 14,143 8,971
Cost of revenue:
Cost of software 680 667
Cost of services 2,406 2,295
---------- ----------
Total cost of revenue 3,086 2,962
Gross margin 11,057 6,009
Operating expenses:
Sales and marketing 7,903 7,272
Research and development 2,517 2,837
General and administrative 2,702 1,698
Amortization of goodwill 376 376
Non-recurring charges - 1,023
---------- ----------
Total operating expenses 13,498 13,206
---------- ----------
Loss from operations (2,441) (7,197)
Other income, net 274 274
---------- ----------
Loss before provision for income taxes (2,167) (6,923)
Provision for income taxes 51 30
---------- ----------
Net loss $ (2,218) $ (6,953)
========== ==========
Net loss per common share--
basic and diluted $ (0.24) $ (0.78)
Weighted average common shares
outstanding--basic and diluted 9,315 8,949
The accompanying notes are an integral part of
the consolidated financial statements.
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SEGUE SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Three months ended
March 31,
------------------
2000 1999
-------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (2,218) $ (6,953)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 1,241 1,101
Noncash compensation charges - 4
Changes in operating assets and liabilities:
Accounts receivable 335 1,093
Other current assets (287) 162
Other assets 62 64
Accounts payable (420) (172)
Accrued expenses, royalties, compensation
and benefits 61 187
Deferred revenue 653 368
-------- ---------
Net cash used in operating activities (573) (4,146)
-------- ---------
Cash flows from investing activities:
Additions to property and equipment (738) (1,094)
Maturities of short-term investments 14,218 17,335
Purchases of short-term investments (14,181) -
--------- ---------
Net cash provided (used in) by investing activities (701) 16,241
--------- ---------
Cash flows from financing activities:
Proceeds from exercise of stock options and
stock purchase plan 602 582
Payments of notes payable - (303)
--------- ---------
Net cash provided by financing activities 602 279
--------- ---------
Effect of exchange rate changes on cash and
cash equivalents - (45)
--------- ---------
Net increase (decrease) in cash and cash equivalents (672) 12,329
Cash and cash equivalents, beginning of period 7,429 16,096
--------- ---------
Cash and cash equivalents, end of period $ 6,757 $ 28,425
========= =========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
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SEGUE SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The consolidated financial statements included herein have been prepared by
Segue, without audit, pursuant to the rules and regulations of the Securities
and Exchange Commission. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules and
regulations. We believe that the disclosures are adequate to make the
information presented not misleading. However, it is suggested that these
financial statements be read in conjunction with Segue's audited financial
statements for the year ended December 31, 1999, included in its 1999 Annual
Report on Form 10-K.
This financial information reflects, in the opinion of management, all
adjustments of a normal recurring nature necessary to present fairly the results
for the interim periods. Results of interim periods may not be indicative of
results for the full year.
2. NET LOSS PER COMMON SHARE
The following table sets forth the computation of basic and diluted loss
per share (in thousands, except per share data):
Three months ended
March 31,
------------------------
2000 1999
-------- ---------
Net loss $ (2,218) $ (6,953)
Weighted average shares used in
net loss per share--basic and diluted 9,315 8,949
Net loss per common share--basic and diluted $ (0.24) $ (0.78)
Options and warrants to purchase 2,803,812 and 2,415,553 shares of common
stock outstanding were excluded from the calculation of diluted earnings per
share for the three months ended March 31, 2000 and 1999, respectively, because
their inclusion would be anti-dilutive.
3. PROVISION FOR INCOME TAXES
Segue recorded provisions for foreign and state income taxes of $51,000 for
the first quarter of 2000 and $30,000 for the first quarter of 1999.
There was no tax benefit recorded for losses generated in the U.S. in
either period due to the uncertainty of realizing such benefits.
4. COMPREHENSIVE LOSS
Effective January 1, 1998, Segue adopted Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130"). SFAS 130
requires the reporting of comprehensive income in addition to net income from
operations. Comprehensive income is a more inclusive reporting methodology that
includes disclosure of certain financial information that historically has not
been recognized in the calculation of net income. To date Segue's comprehensive
income items have consisted exclusively of foreign translation adjustments. For
each of the two quarters ended March 31, 2000 and 1999, comprehensive loss
substantially equaled net loss.
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5. SEGMENT REPORTING
Segue believes it has the following four reportable operating segments
based on differences in products and services. Operating segments are defined as
components of the enterprise about which separate financial information is
available that is reviewed regularly by the chief operating decision maker, or
decision-making group, in deciding how to allocate resources and in assessing
their performance.
<TABLE>
<CAPTION>
March 31, 2000 March 31, 1999
------------------------ ------------------------
Gross Gross
Revenue Margin Revenue Margin
------- ------------ ------- -------------
<S> <C> <C> <C> <C>
Operating Segments:
eBusiness product licenses $ 9,153 $ 4,549
Client/server testing product licenses 74 437
-------- --------
Total software $ 9,227 $ 8,547 $ 4,986 $ 4,319
-------- ----------- -------- ------------
Training and consulting $ 2,144 $ 1,458 $ 2,040 $ 1,461
Maintenance 2,772 1,052 1,945 229
--------- ----------- -------- ------------
Total services $ 4,916 $ 2,510 $ 3,985 $ 1,690
--------- ----------- -------- ------------
Total revenue $ 14,143 $ 11,057 $ 8,971 $ 6,009
========= =========== ======== ============
</TABLE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
The following table sets forth certain unaudited quarterly results of
operations expressed as a percentage of total revenue for the periods indicated:
Percentage of Revenue for
Three Months Ended March 31,
----------------------------
2000 1999
-------- --------
Revenue:
Software 65.2% 55.6%
Services 34.8 44.4
-------- --------
Total revenue 100.0 100.0
Cost of revenue:
Cost of software 4.8 7.4
Cost of services 17.0 25.6
-------- --------
Total cost of revenue 21.8 33.0
Gross margin 78.2 67.0
Operating expenses:
Sales and marketing 55.9 81.1
Research and development 17.8 31.6
General and administrative 19.1 18.9
Amortization of goodwill 2.7 4.2
Non-recurring charges - 11.4
-------- --------
Total operating expenses 95.5 147.2
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Loss from operations (17.3) (80.2)
Other income, net 1.9 3.0
-------- --------
Loss before provision for income
taxes (15.4) (77.2)
Provision for income taxes 0.4 0.3
-------- --------
Net loss (15.8)% (77.5)%
======== ========
SOFTWARE REVENUE
Software revenue increased 85% to $9.2 million during the first quarter of
2000 from $5.0 million in the first quarter of 1999. The increase in software
revenue is primarily the result of increased unit shipments due to orders from
new customers and increased market penetration of our products. Our increased
market penetration is a result of more sales representatives as well as
increased market recognition of our eBusiness products which represented 99% of
the total software revenue as of March 31, 2000 compared to 91% for the same
period of 1999. International revenue accounted for 8.1% of total software
revenue for the three months ended March 31, 2000, and 10.2% of total software
revenue for the three months ended March 31, 1999.
SERVICES REVENUE
Service revenue increased 23% to $4.9 million during the first quarter of
2000 from $4.0 million in the first quarter of 1999. As compared to the three
months ended March 31, 1999, training and consulting revenue increased 5.1% and
maintenance revenue increased 42.5% for the three months ended March 31, 2000.
The increase in maintenance revenue was driven largely by incremental software
licenses sold during the preceding 12 months that are amortized from deferred
revenue to revenue over a 12 months basis.
COST OF SOFTWARE
Cost of software increased 2% to $680,000 during the first quarter of 2000
from $667,000 in the first quarter of 1999. As a percentage of software revenue,
cost of software in the current quarter decreased to 7.4% from 13.4% in the
corresponding prior year period. The percentage decrease in cost of software is
partly due to our continuing effort to eliminate sales of royalty bearing
products and a fixed element of cost of software that does not vary with volume.
COST OF SERVICES
Cost of services increased 4.8% to $2.4 million during the first quarter of
2000 from $2.3 million in the first quarter of 1999. As a percentage of service
revenue, costs in the first quarter of 2000 decreased to 48.9% from 57.6% in the
corresponding prior year period. The percentage decrease is partly due to our
effort to control costs by shifting most of the technical support work to our
Northern Ireland Technical Support Center. The average operating cost in
Northern Ireland is generally lower than the United States.
SALES AND MARKETING
Sales and marketing expenses increased 8.7% to $7.9 million during the
first quarter of 2000 from $7.3 million in the first quarter of 1999. The
increase is primarily due to increased headcount in the sales group and
increased commissions as a result of higher revenue levels.
RESEARCH AND DEVELOPMENT
Research and development expenses decreased 11.3% to $2.5 million during
the first quarter of 2000 from $2.8 million in the first quarter of 1999. The
decrease is primarily due to the decrease in headcount in the research and
development group.
GENERAL AND ADMINISTRATIVE
General and administrative expenses increased 59.1% to $2.7 million during
the first quarter of 2000 from $1.7 million in the
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first quarter of 1999. The increase is largely due to increased headcount and
increased legal and audit/accounting expense due to the amendments of our prior
years Form 10-Qs and Form 10-Ks for the restatements from December 1997 through
September 1999 related to acquired in-process research and development.
Additionally, there was a one time severance charge of approximately $200,000.
AMORTIZATION OF GOODWILL
Amortization of goodwill was $376,000 in each of the first quarters of 2000
and 1999.
NON-RECURRING CHARGES
During the first quarter of 1999, we executed a restructuring plan to
consolidate our marketing, product development and administrative operations in
order to achieve cost efficiencies through the elimination of redundant
functions. We realigned our marketing and product development operations to
redirect focus on our strongest product lines and better integrate the efforts
of certain product development teams. As a result, we recognized a non-recurring
pre-tax charge of approximately $1.0 million. The restructuring charge included
approximately $830,000 for severance and other employee-related costs for the
termination of 10 employees and approximately $190,000 for facility-related
costs, including the accrual of estimated lease obligations associated with the
closure of excess office facilities. As of March 31, 2000, we had made payments
of approximately $904,000 related to these costs and the related restructuring
accrual balance was approximately $96,000.
OTHER INCOME, NET
Other income remained consistent at $274,000 in each of the first quarters
of 2000 and 1999. This is mostly due to interest income on cash equivalent and
short-term investments. While the balance invested was lower in the first
quarter of 2000 than in the first quarter of 1999, this was offset by higher
interest rates in 2000.
PROVISION FOR INCOME TAXES
Segue recorded provisions for foreign and state income taxes of $51,000 for
the first quarter of 2000 and $30,000 for the first quarter of 1999. There was
no tax benefit for losses generated in the United States in either period due to
the uncertainty of realizing such benefits.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 2000, our principal sources of liquidity included cash,
cash equivalents and short-term investments totaling $20.0 million compared to
$20.7 million as of December 31, 1999.
In the first three months of 2000, we used $573,000 for operating
activities as a result of decreased accounts payable and other current assets
offset by decreased accounts receivable and increased deferred revenue.
We used $701,000 in investing activities in the first three months of
2000 mainly for investments in property and equipment.
We generated funds from financing activities of $602,000 in the first three
months of 2000, as a result of the exercise of stock options and issuance of
stock pursuant to the employee stock purchase plan.
Our corporate headquarter in Lexington, Massachusetts is currently under a
lease, which expires in October 2007. The annual rental rate is approximately
$2.2 million. Segue has the right to terminate the lease on September 30, 2004
for a fee of approximately $2.2 million.
During the first quarter of 2000, we paid approximately $195,000 and
$81,000 related to the 1999 first and second quarter restructuring charges
respectively. As of March 31, 2000 the remaining balance for these two
restructuring charges were $96,000 and $50,000 respectively. In addition, we
paid approximately $160,000 out of the remaining $300,000 related to the 1999
implementation of a new management information system.
We expanded our Northern Ireland technical support center during the first
quarter of 2000 by adding eleven technical support engineers. Other than the
increased head count, we also paid approximately $40,000 for computer equipment.
Long-term cash requirements, other than for normal operating expenses, are
anticipated for the development of new software products and enhancements of
existing products, the enhanced presentation of our web site, the possible
opening of additional
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international offices, and the possible acquisition of software products or
technologies complementary to Segue's business.
Assuming there is no significant change in our business, we believe that
cash, cash equivalents and short-term investments as well as cash flows from
operations will be sufficient to meet our working capital and debt requirements
through the end of 2000. In the event Segue requires additional financing, we
believe we would be able to obtain such financing; however, there can be no
assurance that we would be successful in doing so, or that we could do so on
terms favorable to Segue.
CERTAIN FACTORS AFFECTING FUTURE OPERATING RESULTS
Statements made or incorporated into this Form 10-Q include a number of
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-
looking statements include, without limitation, statements containing the words
"anticipates," "believes," "expects," "intends," "future" and words of similar
import which express management's belief, expectations or intentions regarding
our future performance. Segue's actual results could differ materially from
those set forth in the forward-looking statements. Certain factors that might
cause such a difference are discussed below and elsewhere in this Form 10-Q.
Our quarterly results may fluctuate. Segue's quarterly revenue and operating
results are difficult to predict and may fluctuate significantly from quarter to
quarter. If our quarterly revenue or operating results fall below the
expectations of investors or public market analysts, the price of our common
stock could fall substantially. Our quarterly revenue may fluctuate
significantly for several reasons, including: the timing of introductions of our
new products or product enhancements by those of our competitors; personnel
changes; the size and timing of individual orders; software bugs or other
product quality problems; competition and pricing; customer order deferrals in
anticipation of new products or product enhancements; difficulty in predicting
the size and timing of customer orders and the demand for Segue products
generally; changes in operating expenses; whether we are able to successfully
expand our sales and marketing program mix of our product and services sold; and
general economic conditions. Substantial portions of our operating expenses are
related to personnel, facilities and marketing programs. The level of spending
for such expenses cannot be adjusted quickly and is based, in significant part,
on expectations of future revenues. If actual revenue levels are below
management's expectations, results of operations are likely to be adversely
affected. In addition, Segue does not typically experience order backlog.
Furthermore, Segue has often recognized a substantial portion of its revenues in
the last month of a quarter, with these revenues frequently concentrated in the
last weeks or days of a quarter. As a result, product revenues in any quarter
are substantially dependent on orders booked and shipped in the latter part of
that quarter and revenues for any future quarter are not predictable with any
significant degree of accuracy. For these reasons, we believe that period-to-
period comparisons of our results of operations are not necessarily meaningful
and should not be relied upon as indications of future performance.
We may not be profitable in the future. Since Segue began operations, it has
generally experienced losses. Losses have resulted in an accumulated deficit of
approximately $29.4 million as of March 31, 2000. Segue had a net loss of $2.5
million in 1997, which includes a charge of $117,000 for purchased research and
development in process and $718,000 for severance charges; a net loss of $5.1
million in 1998, which includes a charge of $1.5 million related to the Eventus
and B&W acquisitions, a charge of $667,000 related to the write-offs of an NRE
fee and guaranteed royalties and $2.5 million for the amortization of goodwill
and completed technology related to the SQLBench acquisition; and a net loss of
$15.9 million in 1999 which includes $2.0 million for restructuring costs,
$481,000 for severance of senior executives, and $2.5 million for the
amortization goodwill and completed technology related to the SQLBench
acquisition. While we have experienced revenue growth in recent periods,
continued growth at the same rate may not be sustainable and is not necessarily
indicative of future operating results. Failure to sustain or increase
profitability may adversely affect the market price of Common Stock.
The development of a market for Segue products is uncertain. The market for
automated software testing products is relatively new and undeveloped. Marketing
and sales techniques in the automated software testing marketplace, as well as
the bases for competition, are not well established. There can be no assurance
as to the extent that a significant market for automated software testing
products will develop or the extent to which Segue products will be accepted in
that market. Although we believe that the current trend toward increased use of
automated software testing will continue, a majority of software testing is
still carried out manually, and there can be no assurance that the automated
software testing market will enjoy continued growth.
The success of Segue products focused on e-commerce and Internet applications
will depend on our ability to stay current and continue to enhance our products
to work with all of the prevalent technologies driving Internet applications.
There can be no assurance that we will be able to effectively adapt our products
to the prevalent technologies used on e-commerce applications or to successfully
compete in the market for Internet-related products and services. As is typical
for new and rapidly evolving industries, demand for recently introduced products
is highly uncertain.
We may have difficulty managing recent changes. Segue has been experiencing a
period of rapid growth, including increases in the number of orders and changes
in customers and personnel. This rapid growth has placed, and may continue to
place, strains on our
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management, product offerings, services, operations and systems. To manage
future growth effectively, we must expand, improve and effectively utilize our
operational, management, marketing, sales and financial systems as necessitated
by changes in our business. We have completed the implementation of a new
management information system and opened a Technical Support Center in Northern
Ireland in 1999, both of which could be disruptive. Additionally, we expanded
our sales force in the first quarter of 2000. Also, as part of the restructuring
plan of the first and second quarter of 1999, we have significantly changed our
sales management team and consolidated the position of Senior Vice President of
Research and Development with the position of Senior Vice President and General
Manager of the executive management team. In conjunction with these management
changes, we have also changed the structure of our internal organization by
adding product divisions that relate to our eBusiness testing products. We have
also refocused our sales and marketing approach to focus on e-commerce
applications. There can be no assurance that we will be able to effectively
manage such changes and such changes are likely to be disruptive.
We may be subject to risks associated with our past acquisitions and future
acquisitions. In the fourth quarter of 1998, Segue acquired Eventus Software,
Inc. and Black & White Software, Inc. in two separate transactions. Our product
range and customer base has increased in the recent past due in part to these
acquisitions. These acquisitions provided us with technologies to expand our
current line of eBusiness testing products. There can be no assurance that the
integration of all of the acquired technologies will be successful or will not
result in unforeseen difficulties, which may absorb significant management
attention.
In the future, Segue may acquire additional businesses or product lines. The
past completed acquisitions, or any future acquisition, may not produce the
revenue, earnings or business synergies that we had anticipated, and an acquired
product, service or technology might not perform as expected. Prior to
completing an acquisition, however, it is difficult to determine if such
benefits can actually be realized. The process of integrating acquired companies
into our existing business may also result in unforeseen difficulties.
Unforeseen operating difficulties may absorb significant management attention,
which we might otherwise devote to our existing business. Also, the process may
require significant financial resources that we might otherwise allocate to
other activities, including the ongoing development or expansion of our existing
operations. If Segue pursues a future acquisition, our management could spend a
significant amount of time and effort in identifying and completing the
acquisition. To pay for a future acquisition, we might use capital stock or
cash. Alternatively, we might borrow money from a bank or other lender. If we
use capital stock as we did with our past acquisitions, our stockholders would
experience dilution of their ownership interests. If we use cash or debt
financing, our financial liquidity will be reduced.
We may not be able to continue expansion of our sales force. We distribute our
product and services primarily through our direct sales force. Our ability to
continue to increase revenues in future periods will depend in large part on our
ability to expand our direct sales force and provide a high level of technical
consulting, training and customer support. In the past quarter, we hired
additional sales and support personnel to broaden our direct selling and
distribution capabilities and we are planning to hire more sales personnel in
the future. We can not assure that we can build and train our sales force to
satisfactorily meet increased revenue goals.
Segue faces significant competition from other software companies. The market
for software quality management tools is new, intensely competitive and subject
to rapid technological change. We expect competition to intensify in the future.
Segue currently encounters competition from a number of public and private
companies, including Mercury Interactive Corporation, Rational Software
Corporation and Compuware Corporation. Many of our current and potential
competitors have longer operating histories, greater name recognition, larger
installed customer bases, and significantly greater financial, technical and
marketing resources than we do and, therefore, may be able to respond more
quickly to new or changing opportunities, technologies, standards or customer
requirements or may be able to devote greater resources to the promotion and
sale of their products than we can. An increase in competition could result in
price reductions and loss of market share. We may not be able to respond quickly
enough to competitive product offerings to be able to compete successfully in
the future. Such competition and any resulting reduction in profitability could
have a material adverse effect on our business, operating results and financial
condition.
Segue's business could be adversely affected if its products contain errors.
Software products as complex as ours may contain undetected errors or "bugs"
which result in product failures. The occurrence of errors could result in loss
of or delay in revenue, loss of market share, failure to achieve market
acceptance, diversion of development resources, injury to our reputation, or
damage to our efforts to build brand awareness, any of which could have a
material adverse effect on our business, operating results and financial
condition.
Segue's future success will depend on our ability to respond rapidly and
effectively to technological and other changes. The nature of the automated
software testing and eBusiness testing markets in which we compete is
characterized by rapidly changing technology, rapidly evolving customer needs
and desires, changes in industry standards and practices and frequent releases
of new product or enhancements by competitors. To be competitive, Segue must
develop and introduce product enhancements and new products that address the
increasingly sophisticated and varied needs of our existing and potential
customers. Failure to develop and introduce new products and enhancements
successfully and on a timely basis, could have a material adverse effect on our
business, operating results and financial condition. The emerging nature of the
automated software testing and e-commerce testing markets requires that Segue
continually improve the performance, features and reliability of its products,
particularly in response to competitive offerings and
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evolving customer needs. We must also introduce enhancements to existing
products as quickly as possible and prior to the introduction of competing
products. The development of technologies that result in new products or
enhancements requires significant expenditures and utilization of resources. We
may not be successful in developing such technologies or may not be able to keep
pace with technological developments. We have acquired, and may in the future
acquire, technologies to provide us with the tools to introduce new products or
to enhance current products. The success of such acquisitions will depend in
part on our ability to effectively integrate the technologies.
Certain lawsuits have been filed against Segue which, if determined or
settled in a manner adverse to Segue, could adversely affect Segue's financial
condition. On or about April 27, 1999, a putative class action complaint was
filed in the United States District Court for the District of Massachusetts
against Segue, its Chief Executive Officer and a former Chief Financial Officer
of Segue, captioned Nathan Rice v. Segue Software, Inc., et al., Civil No. 99-
------------------------------------------
CV-10891-RGS. The class action complaint alleged the defendants violated the
federal securities laws by making material misrepresentations and omissions in
certain public disclosures during the period beginning on October 13, 1998
through April 9, 1999, inclusive. The public disclosures relate to, among other
things, Segue's past and future financial performance and results. On or about
May 3, 1999, another similar putative class action complaint was filed against
Segue, its Chief Executive Officer and a former Chief Financial Officer of Segue
in the United States District Court for the District of Massachusetts, captioned
Anthony Moumouris v. Segue Software, Inc., et al., Civil No. 99-CV-10933RGS.
- -------------------------------------------------
These cases were consolidated under the caption In Re Segue Software, Inc.
--------------------------
Securities Litigation, Civil No. 99-CV-10891-RGS and the plaintiffs filed a
- ---------------------
consolidated amended complaint on September 27, 1999 alleging a putative class
period of July 14, 1998 through April 9, 1999, inclusive. The complaints sought
an unspecified amount of damages. Segue intends to defend the claims vigorously.
On November 8, 1999 each of the defendants filed a motion to dismiss the amended
complaint for failure to state a cause of action. The plaintiffs have opposed
the motions to dismiss on various grounds. The court heard arguments on the
motions on March 15, 2000, but has not yet rendered a decision on the motions.
It is not possible to predict when the court will rule on the motions or whether
they will be granted in whole or in part. In addition, on April 7, 2000, a
complaint for fraud in the inducement and breach of contract in connection with
the December 31, 1998 acquisition by Segue of Black & White Software, Inc. was
filed in the Delaware Chancery Court against Segue, its Chief Executive Officer
and a former Chief Financial Officer by Charles White, Julia Miller and the
Charles White and Julia Miller 1995 Trust, the former shareholders of Black &
White Software, Inc. Segue intends to defend the claims vigorously. Segue
believes the defense of the claims in these two actions could involve
significant litigation-related expenses. The outcome of these matters is
uncertain and, as a result, at this time Segue is not able to quantify any
related financial exposure. In the event that any of the claims set forth in the
class action complaints or the Black & White Software, Inc. complaint are
determined or settled in a manner adverse to Segue, then such determination or
settlements could adversely affect Segue's financial position or results of
operations in the period in which the litigation is resolved.
Various other claims, charges and litigation have been asserted or
commenced against Segue arising from or related to contractual or employee
relations. Management does not believe these claims will have a material adverse
effect on the financial position or results of operations of Segue.
Segue must hire and retain skilled personnel in a tight labor market. Qualified
personnel are in great demand throughout the software industry. Our success
depends in large part upon our ability to attract, train, motivate and retain
highly skilled employees, particularly sales and marketing personnel, software
engineers and other senior personnel. There is intense competition for sales
personnel and software engineers in our business, and there can be no assurance
that Segue will be successful in attracting, integrating, motivating and
retaining new sales personnel and software engineers. The failure to attract and
retain the highly skilled personnel that are integral to our direct sales,
product development, service and support teams may limit the rate at which we
can generate sales and develop new products or product enhancements. This could
have a material adverse effect on our business, operating results and financial
condition.
We have completed the shift in our focus from general software testing to
eBusiness testing. In 1997, we began to develop and acquire technology to
provide automated software testing for Web-enabled software applications,
including the acquisition of SQLBench in December 1997. These developments
allowed us to extend our testing capabilities beyond distributed client/server
applications with GUI front ends. In the second quarter of 1998, Segue
introduced "LiveQuality," an eBusiness scenario testing solution. In the fourth
quarter of 1998, we acquired Eventus Software, Inc. and Black & White Software,
Inc. We anticipated that these acquisitions would provide us with other
technologies to expand our current line of eBusiness testing products. Segue
continued to develop and introduce other eBusiness products in 1999, including
our eConfidence Solution packages called eConfidence Functionality, eConfidence
Performance and eConfidence Production. Our shift from a general software
testing company to an eBusiness testing company has resulted in significant
changes in our (i) organizational structure, (ii) management personnel, (iii)
product mix, and (iv) sales approach. These changes have required and continue
to require significant management attention and have been and may continue to be
disruptive. We are reviewing the changes made in the past year and may make
additional changes to affect our shift. If we fail to effectively manage these
changes, or make other changes that may be needed in connection with our shift
to an eBusiness testing company, business, operating results and financial
condition may be materially adversely affected.
We face many risks associated with international business activities. Segue
derived approximately 8.1% of its total product sales from international
customers in the first quarter of 2000. The international market for software
products is highly competitive and we expect
12
<PAGE>
to face substantial competition in this market from established and emerging
companies. Segue faces many risks associated with international business
activities including currency fluctuations, imposition of government controls,
export license requirements, restrictions on the export of critical technology,
political and economic instability, tailoring of products to local requirements,
trade restrictions, changes in tariffs and taxes, difficulties in staffing and
managing international operations, longer accounts receivable payment cycles and
the burdens of complying with a wide variety of foreign laws and regulations. To
the extent we are unable to expand international sales in a timely and cost-
effective manner, our business could be materially adversely affected.
Our business operations may be affected by unexpected year 2000 problems.
Although to date we have not experienced any material problems attributable to
the year 2000 problem with respect to our software products and internal
systems, it is possible that our current products could contain undetected
errors or defects associated with year 2000 date functions that may result in
material costs or liabilities to us in the future. Moreover, our software
directly and indirectly interacts with a large number of third party hardware
and software systems, each of which may contain or introduce undetected errors
or defects. We are unable to predict to what extent our business may be affected
if our software or the systems that operate in conjunction with our software
experience a material year 2000 related failure. Any year 2000 defect in our
products or the software and hardware systems with which our products operate,
as well as any year 2000 errors caused by older non-current products that were
not upgraded by our customers, could expose us to litigation that could require
us to incur significant costs in defending the litigation or expose us to the
risk of significant damages. The risks of this litigation may be particularly
acute due to the mission-critical applications for which our products are used.
Segue may be subject to risks associated with its business partner program.
Although Segue has not historically sold significant amounts of its products
through indirect channels, we intend to continue to develop system integrator
sales as part of our business strategy. There can be no assurance that our
efforts will result in an increase in revenues. Furthermore, we may be subject
to certain distinct risks associated with system integrator sales. Our current
business partners may not be able to effectively sell or continue to effectively
sell our products or new products. We may not be able recruit additional or
replacement business partners if any of our current business partners terminate
their relationship with us. Segue licenses its products to business partners at
a discount and such partners re-license the products to end-users. Our
agreements with our business partners are non-exclusive and provide the business
partners with 60-day price protection. Because our business partners generally
order products after they have received purchase orders, there is no requirement
that we repurchase any product. We typically do not grant our business partners
a contractual right to return software products. When approved by management,
however, we have accepted returns of certain software products and have provided
an allowance for the specified products. Segue selects its business partners
based on the partner's financial viability, product expertise and market focus.
In order for our strategy to broaden market penetration through our business
partner program to be successful, we must increase our unit sales to offset the
discount we are providing to our business partners. There can be no assurance
that we will succeed in the development of these programs. Moreover, selling
through indirect channels may limit our contact with the end users of our
products. As a result, our ability to accurately forecast sales, evaluate
customer satisfaction and recognize emerging customer requirements may be
hindered and our ability to develop and maintain customer goodwill may be
limited. Furthermore, our existing or future business partners may choose to
devote greater resources to marketing and supporting the products of other
companies. In addition, Segue will need to resolve potential conflicts among its
sales force and business partners.
Segue could be subject to product liability claims. In selling its products,
Segue relies primarily on "shrink wrap" licenses that contain, among other
things, provisions protecting against the unauthorized use, copying and transfer
of the licensed program and limiting Segue's exposure to potential product
liability claims. However, these licenses are not signed by the licensees and
the provisions of these licenses, including the provisions limiting Segue's
exposure to product liability claims, may therefore be unenforceable under the
laws of certain jurisdictions. Segue products may be used on applications that
are critical to the operations of its customers' businesses. Any failure in a
customer's application could result in a claim against Segue for substantial
damages, regardless of our responsibility for such failure. Although we maintain
general liability insurance, including coverage for errors and omissions, there
can be no assurance that such coverage will continue to be available on
reasonable terms or will be available in amounts sufficient to cover one or more
large claims, or that the insurer will not disclaim coverage as to any future
claim.
Segue's success depends on our ability to protect our proprietary technology.
Segue's success depends to a significant degree upon the protection of our
software and other proprietary technology. The unauthorized reproduction or
other misappropriation of our proprietary technology could enable third parties
to benefit from Segue's technology without paying us for it. This could have a
material adverse effect on our business, operating results and financial
condition. Although we have taken steps to protect our proprietary technology,
these efforts may be inadequate. We currently rely on a combination of
trademark, copyright and trade secret laws and contractual provisions to protect
our proprietary rights in our products. Currently, we have three issued patents.
There can be no assurance that these patents would be upheld if challenged.
Moreover, the laws of other countries in which we market our products may afford
little or no effective protection of our intellectual property. There can be no
assurance that our competitors will not independently develop technologies that
are substantially equivalent or superior to our technology. If we resort to
legal proceedings to enforce our intellectual property rights, the proceedings
could be burdensome and expensive and could involve a high degree of risk. There
can be no assurance that third parties will not assert intellectual property
infringement claims against Segue. If we were to discover that any of Segue
products violated third party proprietary rights, there can be no assurance that
we would be able to obtain licenses on commercially reasonable terms to continue
offering the product without substantial reengineering or that any effort to
undertake such reengineering would be successful.
13
<PAGE>
Any claim of infringement could cause Segue to incur substantial costs defending
against the claim, even if the claim is invalid, and could distract management
resources from our business. Furthermore, a party making such a claim could
secure a judgment that requires us to pay substantial damages. A judgment could
also include an injunction or other court order that could prevent us from
selling our products. Any of these events could have a material adverse effect
on our business, operating results and financial condition.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes in Segue's assessment of its
sensitivity to market risk since its assessment of such risk in Segue's Form 10-
K for the year ended December 31, 1999 filed with the SEC.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On or about April 27, 1999, a putative class action complaint was filed in
the United States District Court for the District of Massachusetts against
Segue, its Chief Executive Officer and a former Chief Financial Officer of
Segue, captioned Nathan Rice v. Segue Software, Inc., et al., Civil No. 99-CV-
-------------------------------------------
10891-RGS. The class action complaint alleged the defendants violated the
federal securities laws by making material misrepresentations and omissions in
certain public disclosures during the period beginning on October 13, 1998
through April 9, 1999, inclusive. The public disclosures relate to, among other
things, Segue's past and future financial performance and results. On or about
May 3, 1999, another similar putative class action complaint was filed against
Segue, its Chief Executive Officer and a former Chief Financial Officer of Segue
in the United States District Court for the District of Massachusetts, captioned
Anthony Moumouris v. Segue Software, Inc., et al., Civil No. 99-CV-10933RGS.
- -------------------------------------------------
These cases were consolidated under the caption In Re Segue Software, Inc.
--------------------------
Securities Litigation, Civil No. 99-CV-10891-RGS and the plaintiffs filed a
- ---------------------
consolidated amended complaint on September 27, 1999 alleging a putative class
period of July 14, 1998 through April 9, 1999, inclusive. The complaints sought
an unspecified amount of damages. Segue intends to defend the claims vigorously.
On November 8, 1999 each of the defendants filed a motion to dismiss the amended
complaint for failure to state a cause of action. The plaintiffs have opposed
the motions to dismiss on various grounds. The court heard arguments on the
motions on March 15, 2000, but has not yet rendered a decision on the motions.
It is not possible to predict when the court will rule on the motions or whether
they will be granted in whole or in part. In addition, on April 7, 2000, a
complaint for fraud in the inducement and breach of contract in connection with
the December 31, 1998 acquisition by Segue of Black & White Software, Inc. was
filed in the Delaware Chancery Court against Segue, its Chief Executive Officer
and a former Chief Financial Officer by Charles White, Julia Miller and the
Charles White and Julia Miller 1995 Trust, the former shareholders of Black &
White Software, Inc. Segue intends to defend the claims vigorously. Segue
believes the defense of the claims in these two actions could involve
significant litigation-related expenses. The outcome of these matters is
uncertain and, as a result, at this time Segue is not able to quantify any
related financial exposure. In the event that any of the claims set forth in the
class action complaints or the Black & White Software, Inc. complaint are
determined or settled in a manner adverse to Segue, then such determination or
settlements could adversely affect Segue's financial position or results of
operations in the period in which the litigation is resolved.
Various other claims, charges and litigation have been asserted or
commenced against Segue arising from or related to contractual or employee
relations. Management does not believe these claims will have a material adverse
effect on the financial position or results of operations of Segue.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
We completed our initial public offering ("IPO") of Segue Common Stock in
April 1996. The IPO was made pursuant to a Registration Statement on Form S-1,
filed with the Securities and Exchange Commission pursuant to Rule 462(b) under
the Securities Act of 1933 (Commission File No. 333-1488), which was declared
effective as of March 28, 1996. The IPO commenced on April 2, 1996 and
terminated shortly thereafter after the sale into the public market of all of
the registered shares of Common Stock.
The 3,162,500 shares of Common Stock sold by Segue and selling security
holders in our IPO were offered for sale in the United States by a syndicate of
underwriters represented by Alex. Brown & Sons Incorporated; Adams, Harkness &
Hill, Inc. and Soundview Financial Group, Inc.
We registered an aggregate of 2,412,500 shares of Common Stock (including
412,500 shares issued upon the exercise of the underwriters' overallotment
options) for sale in the IPO at a per share price of $18.00 for an aggregate
offering price of approximately $43.4 million. All of such shares were
registered for Segue's account. Selling security holders registered an aggregate
of 750,000 shares of Common Stock for sale in the IPO at a per share price of
$18.00 for an aggregate offering price of $13.5 million. All of such
14
<PAGE>
shares were registered for the selling security holders' accounts. As stated
above, all of such shares were sold shortly after the commencement of the
offering.
In connection with the IPO, we incurred the following expenses:
Underwriting discounts and commissions $3,039,750
Expenses paid to underwriters 10,999
Other direct expenses 847,281
----------
Total expenses $3,898,030
----------
After deducting the expenses of $3.9 million, we received approximately
$39.5 million in net proceeds of the IPO.
Through the period ended March 31, 2000, we used approximately $7.9 million
for the purchase of property and equipment, approximately $4.75 million for
repayment of indebtedness including interest ($3.4 million and $645,000, for
principal and interest, respectively, on the SQLBench notes and approximately
$395,000 and $334,000 on Eventus and B&W debt, respectively), $950,000 for
guaranteed royalties, $480,000 for a non-recurring engineering and initial
license fee, approximately $1.6 million for employee severance payments, and
approximately $15.8 million for working capital. The remaining $8.0 million was
invested in temporary investments, mainly consisting of government agency paper
and commercial paper.
No payments from the net offering proceeds of the IPO were made to
directors, officers, or persons owning 10 percent or more of the Common Stock of
the Company.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
27.1 Financial Data Schedule
(b) Reports on Form 8-K: For the fiscal quarter ended March 31, 2000, the
Company filed a Current Report on Form 8-K on February 8, 2000.
15
<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.
Date: May 15, 2000
SEGUE SOFTWARE, INC.
By: /s/ STEPHEN B. BUTLER
---------------------
Name: Stephen B. Butler
Title: Chief Executive Officer
By: /s/ DOUGLAS ZACCARO
-------------------
Name: Douglas Zaccaro
Title: Chief Financial Officer
16
<PAGE>
INDEX TO EXHIBITS
Exhibit
No. Description
- --- -----------
27.1 Financial Data Schedule
17
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<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 6,757
<SECURITIES> 0
<RECEIVABLES> 12,279
<ALLOWANCES> 600
<INVENTORY> 0
<CURRENT-ASSETS> 33,293
<PP&E> 11,695
<DEPRECIATION> 5,842
<TOTAL-ASSETS> 44,243
<CURRENT-LIABILITIES> 16,513
<BONDS> 0
0
0
<COMMON> 94
<OTHER-SE> 27,636
<TOTAL-LIABILITY-AND-EQUITY> 44,243
<SALES> 9,227
<TOTAL-REVENUES> 14,143
<CGS> 680
<TOTAL-COSTS> 3,086
<OTHER-EXPENSES> 13,498
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 20
<INCOME-PRETAX> (2,167)
<INCOME-TAX> 51
<INCOME-CONTINUING> (2,218)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,218)
<EPS-BASIC> (0.24)
<EPS-DILUTED> (0.24)
</TABLE>
