<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED June 30, 1999
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 August
8, 1999 was 9,032,359.
<PAGE>
SEGUE SOFTWARE, INC.
FORM 10-Q/A
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1999
INDEX
Page No.
--------
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements:
Consolidated Balance Sheets (unaudited)
June 30, 1999 and December 31, 1998 2
Consolidated Statements of Operations (unaudited)
Three and six months ended June 30, 1999 and 1998 3
Consolidated Statements of Cash Flows (unaudited)
Six months ended June 30, 1999 and 1998 4
Notes to Consolidated Financial Statements (unaudited) 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
Item 3. Quantitative and Qualitative Disclosures about Market Risk 22
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 22
Item 2. Changes in Securities and Use of Proceeds 23
Item 4. Submission of Matters to a Vote of Security Holders 24
Item 6. Exhibits and Reports on Form 8-K 25
Signatures 26
Exhibits Index 27
1
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
SEGUE SOFTWARE, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
---------- ------------
(restated)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 15,916 $ 16,096
Short-term investments 5,871 17,335
Accounts receivable, net of allowances of $735 and $608 at June 30, 1999
and December 31, 1998, respectively 10,673 8,823
Other current assets 1,595 1,505
-------- --------
Total current assets 34,055 43,759
Property and equipment, net 5,355 3,560
Completed technology, net 1,482 1,976
Goodwill, net 5,269 6,022
Other assets 548 962
-------- --------
Total assets $ 46,709 $ 56,279
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable - current portion $ 2,649 $ 2,983
Accounts payable 1,185 2,464
Accrued compensation and benefits 2,442 1,389
Accrued royalties 207 377
Accrued expenses 3,276 1,346
Deferred revenue 5,373 4,296
-------- --------
Total current liabilities 15,132 12,855
Notes payable 883 883
Commitments and Contingencies
Stockholders' equity:
Preferred stock, par value $.01 per share; 5,000 shares authorized; no
shares issued and outstanding - -
Common stock, par value $.01 per share; 30,000 shares authorized; 9,007
shares and 8,912 shares issued and outstanding at June 30, 1999 and
December 31, 1998, respectively 90 89
Additional paid-in capital 54,406 53,698
Accumulated deficit (23,799) (11,226)
Unearned compensation (2) (20)
Cumulative translation adjustment (1) -
-------- --------
Total stockholders' equity 30,694 42,541
-------- --------
Total liabilities and stockholders' equity $ 46,709 $ 56,279
======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
2
<PAGE>
SEGUE SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
Three months ended Six months ended
------------------ ----------------
June 30, June 30,
------- -------
1999 1998 1999 1998
------- ------ ------ -------
(restated) (restated)
<S> <C> <C> <C> <C>
Revenue:
Software $ 7,427 $6,633 $ 12,413 $12,942
Services 4,284 3,089 8,269 5,370
------- ------ -------- -------
Total revenue 11,711 9,722 20,682 18,312
Cost of revenue:
Cost of software 848 896 1,515 1,736
Cost of services 2,456 1,296 4,751 2,050
------- ------ -------- -------
Total cost of revenue 3,304 2,192 6,266 3,786
Gross margin 8,407 7,530 14,416 14,526
Operating expenses:
Sales and marketing 7,724 4,731 14,996 9,257
Research and development 2,623 2,219 5,460 4,385
General and administrative 2,057 1,151 3,755 2,225
Amortization of goodwill 377 377 753 753
Non-recurring and other charges 1,476 - 2,499 -
------- ------ -------- -------
Total operating expenses 14,257 8,478 27,463 16,620
------- ------ -------- -------
Loss from operations (5,850) (948) (13,047) (2,094)
Other income, net 273 397 547 796
------- ------ -------- -------
Loss before provision for income taxes (5,577) (551) (12,500) (1,298)
Provision for income taxes 43 30 73 56
------- ------ -------- -------
Net loss $(5,620) $ (581) $(12,573) $(1,354)
======= ====== ======== =======
Net loss per common share-basic and diluted $ (0.62) $(0.07) $ (1.40) $ (0.16)
Weighted average common shares outstanding-
basic and diluted 9,001 8,570 8,975 8,419
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
3
<PAGE>
SEGUE SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Six months ended
June 30,
--------
1999 1998
-------- -------
(restated)
<S> <C> <C>
Cash flows from operating activities:
Net loss $(12,573) $(1,354)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization 2,230 2,231
Noncash compensation charges 123 19
Changes in operating assets and liabilities:
Accounts receivable (1,895) (2,221)
Other current assets (95) (1,052)
Other assets 414 -
Accounts payable (1,271) (138)
Accrued expenses, royalties, compensation and benefits 2,826 (67)
Deferred revenue 1,088 288
-------- -------
Net cash used in operating activities (9,153) (2,294)
-------- -------
Cash flows from investing activities:
Additions to property and equipment (2,779) (317)
Increase in other assets - (512)
Maturity of short-term investments 17,335 16,200
Purchases of short-term investments (5,871) (1,815)
-------- -------
Net cash provided by investing activities 8,685 13,556
-------- -------
Cash flows from financing activities:
Proceeds from exercise of stock options and stock purchase plan 604 1,389
Proceeds from common stock issuance - 995
Return of capital to shareholders - (8)
Proceeds from notes payable issuance - 113
Payments of notes payable (334) (50)
-------- -------
Net cash provided by financing activities 270 2,439
-------- -------
Effect of exchange rate changes on cash and cash equivalents 18 -
-------- -------
Net increase (decrease) in cash and cash equivalents (180) 13,701
-------- -------
Cash and cash equivalents, beginning of period 16,096 23,393
-------- -------
Cash and cash equivalents, end of period $ 15,916 $37,094
======== =======
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
4
<PAGE>
SEGUE SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The financial statements included herein have been prepared by the Company,
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. The Company believes 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 the Company's audited financial
statements for the year ended December 31, 1998, included in its 1998 Annual
Report on Form 10-K/A.
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.
In December 1998, the Company acquired Eventus Software, Inc. and Black and
White Software, Inc. Both acquisitions were accounted for using the pooling-of-
interest method and, accordingly, the historical consolidated financial
statements of the Company prior to the acquisitions presented herein have been
restated to include their financial position, results of operations and cash
flows.
2. RESTATEMENT RELATED TO ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENT
The accompanying consolidated financial statements as of and for three- and
six-month periods ended June 30, 1999 have been restated to reflect a change in
the origional accounting for the amount and allocation of the purchase price
related to the Company's acquisition of SQLBench in December 1997 as described
further in the Company's 1997 Annual Report on Form 10-K/A filed with the
Securities and Exchange Commission on March 27, 2000.
Under the revised accounting, the value ascribed to the acquired IPR&D was
reduced from $9.1 million to $0.1 million, the value assigned to acquired
completed technology was increased from $1.0 million to $3.0 million, and
goodwill of $7.5 million was recorded. The principal effects of this restatement
on previously reported consolidated financial statements as of June 30, 1999 and
for three- and six-month periods ended June 30, 1999 are set forth below (in
thousands, except per share data). The restatement does not affect previously
reported net cash flows for any period.
<TABLE>
<CAPTION>
For the three months For the six months
ended June 30, 1999 ended June 30, 1999
------------------------------ -------------------------------
As As
Previously As Previously As
Reported Restated Reported Restated
----------- ----------------- -------------- --------------
<S> <C> <C> <C> <C>
Cost of software $ 685 $ 848 $ 1,189 $ 1,515
Total cost of revenue 3,141 3,304 5,940 6,266
Gross margin 8,570 8,407 14,742 14,416
Amortization of goodwill - 377 - 753
Total operating expenses 13,880 14,257 26,710 27,463
Loss from operations (5,310) (5,850) (11,968) (13,047)
Loss before provision for
income taxes (5,037) (5,577) (11,421) (12,500)
Net loss (5,080) (5,620) (11,494) (12,573)
Net loss per common share -
basic and diluted (0.56) (0.62) (1.28) (1.40)
<CAPTION>
As of June 30, 1999
----------------------------
As
Previously As
Reported Reported
------------ --------------
<S> <C> <C>
Completed technology, net $ - $ 1,482
Goodwill, net - 5,269
Other assets 1,050 548
Total assets 40,460 46,709
Additional paid-in capital 53,898 54,406
Accumulated deficit (29,540) (23,799)
Total stockholders' equity 24,445 30,694
Total liabilities and
stockholders' equity 40,460 46,709
</TABLE>
3. NET LOSS PER COMMON SHARE
Options and warrants to purchase approximately 2,643,000 and 1,866,000
shares of common stock outstanding were excluded from the calculation of diluted
earnings per share for the three and six months ended June 30, 1999 and 1998,
respectively, because their inclusion would be anti-dilutive.
4. NON-RECURRING AND OTHER CHARGES
During the second quarter of 1999, the Company restructured its product
development operations and delayed the introduction of the Eventus product,
SilkControl. These activities were aimed at reducing the Company's costs
associated with the development of that product and enhancing the Company's
sales force's ability to focus on other products. The restructuring resulted in
the consolidation of four development labs into three and included the
termination of 15 employees associated with the development of the Eventus
product. Additionally, during the second quarter of 1999, the Company shifted
its sales strategy away from creating and managing a large network of resellers
towards building deeper relationships with a few large system integrators. This
revised strategy resulted in the termination of seven of the Company's employees
who focused sales efforts on these channel resellers. The reduced headcount
associated with
5
<PAGE>
the shift in sales strategy is expected to result in reduced operating costs.
The Company also terminated the employment of two senior vice presidents during
the second quarter of 1999, each of whom has subsequently been replaced.
Associated with all the events noted above, the Company recorded during the
second quarter of 1999 non-recurring and other charges of approximately $1.5
million, which related exclusively to severance and other employee-related
costs, including a noncash compensation charge of approximately $118,000. As of
June 30, 1999, the Company had made payments of approximately $440,000 related
to these costs, and the related restructuring accrual balance was approximately
$950,000.
During the first quarter of 1999, the Company executed a restructuring plan
to consolidate its marketing, product development and administrative operations
in order to achieve cost efficiencies through the elimination of redundant
functions. The Company realigned its marketing and product development
operations to redirect focus on its strongest product lines and better integrate
the efforts of certain product development teams. As a result, the Company
recognized a non-recurring charge of approximately $1.0 million during the first
quarter of 1999. 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 June 30, 1999, the Company had made payments of approximately
$330,000 related to these costs, and the related restructuring accrual balance
was approximately $690,000.
5. COMMITMENTS AND CONTINGENCIES
In March 1999, the Company committed to spend approximately $1.8 million
for a management information system, which is currently being implemented. This
amount consists of approximately $800,000 for hardware, software and related
maintenance and approximately $1.0 million for consulting and implementation
services. As of June 30, 1999, the Company had paid approximately $1.1 million
for this project and currently expects to make additional cash payments of $0.7
million during the third and fourth quarter of 1999.
On April 27, 1999, a putative class action complaint was filed in the
United States District Court for the District of Massachusetts against the
Company, its Chief Executive Officer and a former Chief Financial Officer of the
Company, captioned Nathan Rice v. Segue Software, Inc., et al., Civil No 99-CV-
----------- ---------------------------
10891RGS. The class action complaint alleges that the Company and a certain
officer and a former officer 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, the Company's past and future
financial performance and results. On May 3, 1999, another similar putative
class action complaint was filed against the Company, its Chief Executive
Officer and a former Chief Financial Officer of the Company in the United States
District Court for the District
6
<PAGE>
of Massachusetts, captioned Anthony Moumouris v. Segue Software, Inc., et al.,
----------------- ---------------------------
Civil No. 99-CV-10933RGS. These cases have been consolidated under the caption
In Re Segue Software, Inc. Securities Litigation, Civil No. 99-CV-10891-RGS. The
- ------------------------------------------------
Company is currently reviewing the allegations made in these lawsuits and
intends to defend the claims vigorously. The Company believes the defense of the
claims could involve significant litigation-related expenses. The outcome of
these matters is uncertain and, as a result, at this time, the Company is not
able to quantify any related financial exposure. In the event that any of the
claims set forth in the class action complaints are determined or settled in a
manner adverse to the Company, such determination or settlements could adversely
affect the Company's financial position or results of operations in the period
in which the litigation is resolved. No costs have been accrued for this
possible loss contingency.
6. PROVISION FOR INCOME TAXES
The Company recorded a provision for foreign and state income taxes of
$43,000 and $73,000 for the three and six months ended June 30, 1999,
respectively, and $30,000 and $56,000 for the three and six months ended June
30, 1998, respectively. There was no tax benefit recorded for losses generated
in the U.S. in any period due to the uncertainty of realizing such benefits.
7. COMPREHENSIVE INCOME (LOSS)
Total comprehensive loss for the three and six months ended June 30, 1999
was $5,563,000 and $12,574,000, respectively, and for the three and six months
ended June 30, 1998 was $589,000 and $1,357,000, respectively. Total
comprehensive loss consists of net loss and the net changes in foreign currency
translation adjustment. This calculation is in accordance with the requirements
of Statement of Accounting Standard No. 130, "Reporting Comprehensive Income",
and had no impact on the Company's net loss or stockholders' equity.
7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESTATEMENT RELATED TO ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENT
The accompanying consolidated financial statements as of and for the three-
and six-month periods ended June 30, 1999 have been restated to reflect a change
in the original accounting for the amount and allocation of the purchase price
related to the Company's acquisition of SQLBench in December 1997 as described
further in the Company's 1997 Annual Report on Form 10-K/A filed with the
Securities and Exchange Commission on March 27, 2000. Under the revised
accounting recorded as of December 31, 1997, the value ascribed to the acquired
IPR&D was reduced from $9.1 million to $0.1 million, the value assigned to
acquired completed technology was increased from $1.0 million to $3.0 million,
and goodwill of $7.5 million was recorded.
The principal effects of this restatement on previously reported results of
operations for the three-month period ended June 30, 1999 were an increase in
total operating expenses from $13.9 million to $14.3 million for the impact of
amortization of acquired intangible assets, a corresponding increase in net loss
from $5.1 million to $5.6 million, and an increase in net loss per share from
$0.56 to $0.62. The principal effects of this restatement on previously
reported results of operations for the six-month period ended June 30, 1999 were
an increase in total operating expenses from $26.7 million to $27.5 million for
the impact of amortization of acquired intangible assets, a corresponding
increase in net loss from $11.5 million to $12.6 million, and an increase in net
loss per share from $1.28 to $1.40.
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:
<TABLE>
<CAPTION>
Percentage of Revenue for Percentage of Revenue for
Three Months Ended June 30, Six Months Ended June 30,
------------------------- ------------------------
1999 1998 1999 1998
------ ----- ------ -----
(restated) (restated)
<S> <C> <C> <C> <C>
Revenue:
Software 63.4% 68.2% 60.0% 70.7%
Services 36.6 31.8 40.0 29.3
------ ----- ------ -----
Total revenue 100.0 100.0 100.0 100.0
Cost of revenue:
Cost of software 7.2 9.2 7.3 9.5
Cost of services 21.0 13.3 23.0 11.2
------ ----- ------ -----
Total cost of revenue 28.2 22.5 30.3 20.7
Gross margin 71.8 77.5 69.7 79.3
Operating expenses:
Sales and marketing 66.0 48.7 72.5 50.6
Research and development 22.4 22.8 26.4 23.9
General and administrative 17.5 11.8 18.1 12.1
Amortization of goodwill 3.2 4.0 3.6 4.1
Non-recurring and other charges 12.6 - 12.1 -
------ ----- ------ -----
Total operating expenses 121.7 87.3 132.7 90.7
Loss from operations (49.9) (9.8) (63.0) (11.4)
Other income, net 2.3 4.1 2.6 4.3
------ ----- ------ -----
Loss before provision for income
taxes (47.6) (5.7) (60.4) (7.1)
Provision for income taxes 0.4 0.3 0.4 0.3
------ ----- ------ -----
Net loss (48.0)% (6.0)% (60.8)% (7.4)%
====== ===== ====== =====
</TABLE>
REVENUE
Revenue from Software. Software revenue increased 12% to $7.4 million
during the second quarter of 1999 from $6.6 million in the second quarter of
1998. For the six months ended June 30, 1999, software revenue decreased 4% to
$12.4 million as compared to $12.9 million for the six months ended June 30,
1998. The increase during
8
<PAGE>
the second quarter of 1999 is primarily the result of increased unit shipments
and greater market penetration into the "e-business" marketplace. The decrease
during the first six months of 1999 as compared to the same period in 1998 is
primarily the result of lower unit shipments during the first three months of
1999 as compared to the same period in the prior year.
International revenue accounted for 15% and 13% of total software revenue
for the three and six months ended June 30, 1999, respectively, and 12% of total
software revenue for each of the three and six months ended June 30, 1998.
Revenue from Services. Service revenue increased 39% to $4.3 million
during the second quarter of 1999 from $3.1 million in the second quarter of
1998. For the six months ended June 30, 1999, service revenue increased 54% to
$8.3 million as compared to $5.4 million for the six months ended June 30, 1998.
As compared to the three and six months ended June 30, 1998, training and
consulting revenue increased 41% and 83%, respectively, and recognized
maintenance revenue increased 37% and 32%, respectively, for the three and six
months ended June 30, 1999. The increase in recognized maintenance revenue was
driven largely by incremental additional software licenses sold over the past 12
months. The increase in training and consulting revenue is primarily due to the
introduction in the second quarter of 1998 of product offerings, which consisted
of a combination of product and consulting services.
COST OF REVENUE
Cost of Software. Cost of software decreased 5% to $848,000 during the
second quarter of 1999 from $896,000 in the second quarter of 1998. For the six
months ended June 30, 1999, cost of software decreased 13% to $1.5 million as
compared to $1.7 million for the six months ended June 30, 1998. As a percentage
of software revenue, costs of software in the current quarter decreased to 11%
from 14% in the corresponding prior-year period and, for the six months ended
June 30, 1999, decreased to 12% from 13% in the six months ended June 30, 1998.
The decreases are mainly due to a reduction in royalty expense as related to
third parties.
Cost of Services. Cost of services increased 90% to $2.5 million during
the second quarter of 1999 from $1.3 million in the second quarter of 1998. For
the six months ended June 30, 1999, cost of services increased 132% to $4.8
million from $2.1 million during the same period in 1998. As a percentage of
service revenue, costs in the second quarter of 1999 increased to 57% from 42%
in the corresponding prior year period. For the six months ended June 30, 1999,
costs of services as a percentage of service revenue increased to 58% from 38%
during the corresponding period in 1998. The percent increases are largely due
to the fact that the Company utilized third party consultants to assist in
testing solution implementations for the entire three months ended June 30,
1999, as compared to using third party consultants only for a portion of the
second quarter of 1998. The comparable cost of third party consultants is
generally higher than the cost of internal resources. The increases are also
due to the pre-opening
9
<PAGE>
costs incurred in 1999 associated with the staffing and training for the
Company's Northern Ireland technical support center, which began operations in
July 1999.
OPERATING EXPENSES
Sales and Marketing. Sales and marketing expenses increased 63% to $7.7
million during the second quarter of 1999 from $4.7 million in the second
quarter of 1998. For the six months ended June 30, 1999, sales and marketing
expenses increased 62% to $15.0 million as compared to $9.3 million for the six
months ended June 30, 1998. The increases are primarily due to increases in
headcount, higher commissions as a result of changes in commission plans and
increased sales on which commissions are calculated, higher costs associated
with marketing programs such as advertising and seminars, travel costs and
increased recruiting fees as a result of the increase in headcount.
Research and Development. Research and development expenses increased 18%
to $2.6 million during the second quarter of 1999 from $2.2 million in the
second quarter of 1998. For the six months ended June 30, 1999, research and
development expenses increased 25% to $5.5 million as compared to $4.4 million
during the same period in 1998. The increases are due to increased facility
lease costs and higher compensation costs for both the Lexington and West Coast
development operations as well as increased operating expenses for the Company's
Austria research and development facility.
General and Administrative. General and administrative expenses increased
79% to $2.1 million during the second quarter of 1999 from $1.2 million in the
second quarter of 1998. For the six months ended June 30, 1999, general and
administrative costs increased 69% to $3.8 million as compared to $2.2 million
in the same period in the prior year. The increases are largely due to
increased headcount, increased facility lease costs, increased consulting, legal
and accounting expenses and other administrative costs.
Amortization of Goodwill. Amortization of goodwill was $377,000 for each
of the second quarters of 1999 and 1998. For each of the six-month periods ended
June 30, 1999 and June 30, 1998, amortization of goodwill was $753,000.
Non-Recurring and Other Charges. During the second quarter of 1999, the
Company restructured its product development operations and delayed the
introduction of the Eventus product, SilkControl. These activities were aimed
at reducing the Company's costs associated with the development of that product
and enhancing the Company's sales force's ability to focus on other products.
The restructuring resulted in the consolidation of four development labs into
three and included the termination of 15 employees associated with the
development of the Eventus product. Additionally, during the second quarter of
1999, the Company shifted its sales strategy away from creating and managing a
large network of resellers towards building deeper relationships with a few
large system integrators. This revised strategy resulted in the termination of
seven of the Company's employees who focused sales efforts on these channel
resellers. The reduced headcount associated with the shift in sales strategy is
expected to result in reduced operating costs. The Company also terminated the
employment of two senior vice presidents during the second quarter of 1999, each
of whom has subsequently been replaced. Associated with all the events noted
above, the Company recorded during the second quarter of 1999 non-recurring and
other charges of approximately $1.5 million, which related exclusively to
severance and other employee-related costs, including a
10
<PAGE>
noncash compensation charge of approximately $118,000. As of June 30, 1999, the
Company had made payments of approximately $440,000 related to these costs, and
the related restructuring accrual balance was approximately $950,000.
During the first quarter of 1999, the Company executed a restructuring plan
to consolidate its marketing, product development and administrative operations
in order to achieve cost efficiencies through the elimination of redundant
functions. The Company realigned its marketing and product development
operations to redirect focus on its strongest product lines and better integrate
the efforts of certain product development teams. As a result, the Company
recognized a non-recurring charge of approximately $1.0 million during the first
quarter of 1999. 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 June 30, 1999, the Company had made payments of approximately
$330,000 related to these costs, and the related restructuring accrual balance
was approximately $690,000.
OTHER INCOME, NET
Other income, net decreased 31% to $273,000 during the second quarter of
1999 from $397,000 in the second quarter of 1998. For the six months ended June
30, 1999, other income, net decreased 31% to $547,000 from $796,000 during the
first six months of 1998. The decreases are largely due to decreased interest
income on lower balances of cash and short-term investments as a result of the
utilization of cash to fund operations.
PROVISION FOR INCOME TAXES
The Company recorded a provision for foreign and state income taxes of
$43,000 and $73,000 for the three and six months ended June 30, 1999,
respectively, and $30,000 and $56,000 for the three and six months ended June
30, 1998, respectively. There was no tax benefit recorded for losses generated
in the U. S. in any period due to the uncertainty of realizing such benefits.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 1999, the Company had cash, cash equivalents and short-term
investments totaling $21.8 million as compared to cash, cash equivalents and
short-term investments of $33.4 million as of December 31, 1998.
In the first six months of 1999, the Company used $9.2 million for
operating activities, resulting from the net loss, increases in accounts
receivable and decreases in accounts payable, partially offset by increases in
accrued expenses and deferred revenue.
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The Company generated $8.7 million from investing activities in the first
six months of 1999, mainly as a result of net maturities of short-term
investments, partially offset by acquisitions of property and equipment.
The Company generated funds from financing activities of $270,000 in the
first six months of 1999 related to the exercise of stock options and the
issuance of stock under the employee stock purchase plan, partially offset by
payments of notes payable.
The Company recognized non-recurring and other charges of approximately
$1.0 million during the first quarter of 1999 related to a restructuring plan.
The restructuring charge included approximately $830,000 for severance and other
employee-related costs of the terminated staff and approximately $190,000 for
facility-related costs. As of June 30, 1999, the Company has utilized available
cash, cash equivalents and investments to pay approximately $330,000 of these
amounts and currently expects to make future cash payments of approximately
$440,000 in the remainder of 1999 and $250,000 in 2000. At the time of the
restructuring action, the Company expected to realize a reduction in recurring
costs of approximately $1.5 million annually as a result of the restructuring
action. However, there can be no assurance that these benefits will be realized.
The Company recognized non-recurring and other charges of approximately
$1.5 million during the second quarter of 1999 related to a restructuring plan
and the termination of two executive officers. This restructuring and other
charges includes approximately $0.2 million of noncash charges and $1.3 million
of cash payments for severance and other employee-related costs of terminated
staff. As of June 30, 1999, the Company has utilized available cash, cash
equivalents and investments to pay approximately $440,000 of this amount and
currently expects to make future cash payments of $720,000 in the remainder of
1999 and $140,000 in 2000. The Company currently expects to realize a reduction
in recurring costs of approximately $2.0 million annually as a result of the
restructuring action. However, there can be no assurance that these benefits
will be realized.
The Company expects to incur approximately $1.8 million in 1999 for a
management information system, which is currently being implemented. This
amount consists of approximately $800,000 for hardware, software and related
maintenance and approximately $1.0 million for consulting and implementation
services. As of June 30, 1999, the Company had paid approximately $1.1 million
for this project and currently expects to make additional cash payments of $0.7
million during the third and fourth quarter of 1999.
The Company opened a technical support center in Northern Ireland during
July 1999, and expects to incur total infrastructure costs related to this
location of approximately $1.2 million. This expenditure will be partially
funded by a grant of approximately $175,000 awarded by the Northern Ireland
Industrial Development Board. As of June 30, 1999, the Company had incurred
approximately $0.5 million of these total costs and currently expects to make
additional cash payments of $0.7 million for this project during the third and
fourth quarter of 1999.
In December 1999, approximately $2.6 million becomes due under the SQLBench
notes. These notes were issued in connection with the acquisition of SQLBench
in December 1997.
Additional long-term cash requirements, other than normal operating
expenses, are anticipated for the development of new software products and
enhancements of existing products, the potential opening of additional
international offices, and the
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possible acquisition of software products or technologies complementary to the
Company's business.
Assuming there is no significant change in the Company's business, the
Company believes that the existing cash, cash equivalents and short term
investments as well as cash flows from operations will be sufficient to meet its
working capital requirements for at least the next twelve months.
YEAR 2000 COMPLIANCE
The year 2000 presents potential concerns for business and consumer
computing. The consequences of this issue may include systems failures and
business process interruption. It may also include additional business and
competitive differentiation. If the Company, its significant customers, or
suppliers fail to make necessary modifications and conversions on a timely
basis, the year 2000 issue could have a material adverse effect on the Company's
operations. There are two other related issues which could also lead to
incorrect calculations or failures: i) some systems' programming assigns special
meaning to certain dates, such as 9/9/99, and ii) the year 2000 is a leap year.
To address these year 2000 issues with its internal systems, including
information technology (IT) and non-IT systems, the Company initiated a program
designed to deal with the most critical systems, packaged software applications,
first. As of June 30, 1999, the Company had completed its year 2000 compliance
testing for its internal software systems. All of the Company's core business
hardware and software systems have been tested and are year 2000 compliant. The
Company's internal desktop hardware systems have been tested for year 2000
compliance and have been found to be compliant. Additionally, the internal
desktop software applications have been tested and the Company has determined
that these systems will need appropriate "patches" applied as they are not
currently year 2000 compliant. The Company expects these upgrades to be
completed during the third quarter of 1999. In addition, the Company began work
on various types of contingency planning to address potential problem areas with
internal systems, including a computer disaster recovery module which will allow
the Company to recover any of its backups in the case of a disaster. Although
the assessment is still underway, management currently believes that all
material systems will be compliant by the year 2000 and that the cost to address
the issues will not be more than $100,000 in total. However, this estimate does
not include potential costs related to any customer or other claims or the cost
of internal software and hardware replaced in the normal course of business. The
total cost estimate is based on the current assessment of the projects and is
subject to change as the projects progress. The costs incurred to date related
to these programs are minimal.
The Company has also initiated formal communications with its significant
vendors, mainly of IT packaged applications, to determine the extent to which
the Company is vulnerable to those third parties' failure to remedy their own
year 2000 issues. The Company has received written assurances of year 2000
compliance from all significant vendors. Most of the vendors under existing
contracts with the Company are under no contractual obligation to provide such
information to the Company. The Company is taking steps with respect to new
vendor agreements to ensure that the
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vendors' products and internal systems are year 2000 compliant. The Company does
not believe it has any mission-critical suppliers of products or services.
The Company also assesses the capability of its products to handle the year
2000. To assist customers in evaluating their year 2000 issues, the Company has
a description on its website which indicates the capability of Segue's products
to handle the year 2000. All Segue products are year 2000 compliant. However,
the assessment of whether a complete system will operate correctly depends on
the BIOS capability and software design and integration, and for many end-users
this will include BIOS and software provided by companies other than Segue.
The Company anticipates that substantial litigation may be brought against
vendors, including the Company, of all component products of systems that are
unable to properly manage data related to year 2000. The Company's agreements
with customers typically contain provisions designed to limit the Company's
liability for such claims. It is possible, however, that these measures will not
provide protection from liability claims, as a result of existing or future
federal, state or local laws or ordinances or unfavorable judicial decisions.
Any such claims, with or without merit, could result in a material adverse
effect on the Company's business, financial condition and results of operations,
including increased warranty costs, customer satisfaction issues and potential
lawsuits.
Based on currently available information, management does not believe that
the year 2000 matters discussed above related to internal systems or products
sold to customers will have a material adverse impact on the Company's financial
condition or overall trends in results of operations; however, it is uncertain
to what extent the Company may be affected by such matters. In addition, there
can be no assurance that the failure to ensure year 2000 capability by a
supplier or another third party would not have a material adverse effect on the
Company.
IMPORTANT FACTORS RELATED TO FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISKS
Statements made in this Quarterly Report on Form 10-Q/A 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
the future performance of Segue. Segue's actual results could differ materially
from those set forth in the forward-looking statements. Certain factors that
might cause such differences are discussed in this Quarterly Report on
Form 10-Q/A including, without limitation, those discussed below.
Segue's quarterly results may fluctuate. Segue's quarterly revenue and
operating results are difficult to predict and may fluctuate significantly from
quarter to quarter. If Segue's quarterly revenue or operating results fall below
the expectations of investors or public market analysts, the price of its common
stock could fall substantially. Segue's
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quarterly revenue may fluctuate significantly for several reasons, including:
the timing of introductions of new products or product enhancements by Segue or
its 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; demand for Segue's products is difficult to predict for reasons
discussed below; changes in operating expenses; product mix; and general
economic conditions. A substantial portion of Segue's 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 Segue's 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, Segue believes that
period-to-period comparisons of its results of operations are not necessarily
meaningful and should not be relied upon as indications of future performance.
Segue 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 $23.8 million as of June 30, 1999. Segue had net income of
$144,000 in 1996; 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 Segue's acquisitions of Eventus Software and Black &
White Software, and a charge of $667,000 related to write-offs of an NRE fee and
guaranteed royalties; and a net loss of $12.6 million for the six months ended
June 30, 1999, which includes non-recurring and other charges of approximately
$2.5 million related to employee severance costs. While Segue has experienced
revenue growth in recent periods, continued growth at the same rate is not
sustainable and is not necessarily indicative of future operating results.
Failure to sustain or increase profitability may adversely affect the market
price of Segue's common stock.
Segue has recently shifted its focus from general software testing to
e-business testing. In 1997, Segue began to develop and acquire technology to
provide automated software testing for Web-enabled software applications,
including its acquisition of SQLBench in December 1997. These developments
allowed Segue to extend its testing capabilities beyond distributed
client/server applications with GUI front ends. In the second quarter of 1998,
Segue introduced "LiveQuality," an e-business scenario testing product. In the
fourth quarter of 1998, Segue acquired Eventus Software and Black & White
Software to acquire certain other technologies which Segue believed would help
expand its then current line of e-business testing products. Segue's shift from
a general software testing company to an e-business testing company during the
past year has
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resulted in significant changes in Segue's (i) organizational structure, (ii)
management personnel, (iii) product mix, and (iv) sales approach. In addition,
because e-business scenario testing is more complicated than general software
testing, Segue may experience issues with its product quality. If Segue fails to
effectively manage these changes, or make other changes which may be needed in
connection with its shift to an e-business testing company, Segue's business,
operating results and financial condition may be materially adversely affected.
The development of a market for Segue's 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 our products will be
accepted in that market. Although Segue believes 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 commercial market for products and services designed for use on the
Internet, Intranet and Extranet has only recently begun to develop. The success
of Segue's products focused on e-commerce and Internet applications will depend
on the growth of the market and on Segue's ability to continue to enhance its
products to work with all of the prevalent technologies driving Internet
applications. There can be no assurance that Segue will be able to effectively
adapt its products to the prevalent technologies being 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.
Segue may have difficulty managing its growth. Segue has been experiencing
a period of rapid growth, including increases in the number of orders, customers
and employees. Segue's rapid growth has placed, and may continue to place,
strains on its management, operations and systems. To manage future growth
effectively, Segue must expand, improve and effectively utilize its operational,
management, marketing, sales and financial systems as necessitated by changes in
Segue's business. Segue is currently implementing a new management information
system and anticipates that such system will be completed by December 1999.
There can be no assurance that this system will be successfully and timely
implemented. Segue also opened its global technical support center in Northern
Ireland in July 1999 which will support its LiveQuality E-Business Management
Solutions software. There can be no assurance that the Northern Ireland support
center will be able to effectively support Segue's software products or that
Segue will not have to increase training or incur other additional costs with
respect to the Northern Ireland support center. Furthermore, the management
information system and the Northern Ireland support center have required, and
will continue to require, significant management attention and/or financial
resources of Segue that Segue might otherwise
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allocate to other activities. There can be no assurance that Segue will be able
to effectively manage such changes.
Segue has also significantly changed its executive management and the sales
management teams, and has changed the structure of its internal organization by
adding product divisions which relate to its e-business testing products. Segue
consolidated the positions of Senior Vice President of Research and Development
and Senior Vice President and General Manager of the executive management team
and in the quarter ended June 30, 1999 filled the newly created position of
Senior Vice President and General Manager of Product Development. Also during
the second quarter of 1999, Segue appointed a new Chief Financial Officer. There
can be no assurance that Segue will be able to effectively manage such changes.
Segue may be subject to risks associated with its recent acquisitions and
future acquisitions. In the fourth quarter of 1998, Segue acquired Eventus
Software and Black & White Software in two separate transactions. Segue's
product range and customer base have increased in the recent past due in part to
these acquisitions. These acquisitions provided Segue with technologies which it
believed would help expand its then current line of e-business testing products.
There can be no assurance that the integration of any or all of the acquired
technologies will be successful or will not result in difficulties which may
absorb significant management attention.
In the future, Segue may acquire additional businesses or product lines.
The recently completed acquisitions, or any future acquisition, may not produce
the revenue, earnings or business synergies that Segue anticipated, and an
acquired product, service or technology might not perform as expected. Prior
to completing an acquisition, it is difficult to determine if such benefits can
actually be realized. There can be no assurance that the integration of an
acquired company will be successful. The process of integrating acquired
companies into Segue's business may also result in unforeseen difficulties.
Unforeseen operating difficulties may require significant management attention,
which Segue might otherwise devote to its existing business. Also, the process
may require significant financial resources that Segue might otherwise allocate
to other activities, including the ongoing development or expansion of its
existing operations.
If Segue pursues a future acquisition, its management could spend a
significant amount of time and effort in identifying and completing the
acquisition. To pay for a future acquisition, Segue might use capital stock or
cash. Alternatively, Segue might borrow money from a bank or other lender. If
Segue uses capital stock as it has with its recent acquisitions, its
stockholders would experience dilution of their ownership interests. If Segue
uses cash or debt financing, its financial liquidity will be reduced.
Segue has recently changed its sales approach and restructured its sales
teams. As part of the shift in its business to e-business testing, Segue focuses
its marketing and sales efforts with a solution sales approach. Segue's direct
sales force focuses on large enterprise-wide and strategic sales in an effort to
provide as many solutions as a particular
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client needs. To facilitate the solution sales approach, Segue restructured its
direct sales force into teams of one strategic sales representative and one
technical support engineer. There can be no assurance that this sales approach
will result in greater revenues. Because its sales force focuses on making
larger sales, Segue's sales cycle may increase. Larger purchases will take
longer than smaller sales because customers will generally take more time to
decide on whether to make larger purchases. A longer sales cycle reduces Segue's
ability to forecast revenue levels. Any delay or loss in sales of its products
could have a material adverse effect on Segue's business, operating results and
financial condition, and could cause its operating results to vary significantly
from quarter to quarter.
Segue's performance will depend in part on the growth and commercial
acceptance of the Internet. Segue's future success will depend substantially
upon the widespread adoption of the Internet as a primary medium for commerce
and business applications. If the Internet does not become a viable and
substantial commercial medium, Segue's business, operating results and financial
condition will be materially adversely affected. The Internet has experienced,
and is expected to continue to experience, significant user and traffic growth,
which has, at times, caused user frustration with slow access and download
times. The Internet infrastructure may not be able to support the demands placed
on it by continued growth. Moreover, critical issues concerning the commercial
use of the Internet, such as security, reliability, cost, accessibility and
quality of service, remain unresolved and may negatively affect the growth of
Internet use or the attractiveness of commerce and business communication on the
Internet. In addition, the Internet could lose its viability due to delays in
the development or adoption of new standards and protocols to handle increased
activity or due to increased government regulation and taxation of Internet
commerce.
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. Segue expects 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 Segue's current and potential
competitors have longer operating histories, greater name recognition, larger
installed customer bases, and significantly greater financial, technical and
marketing resources than Segue does. Therefore, these competitors may be able to
respond more quickly than Segue to new or changing opportunities, technologies,
standards and customer requirements or to devote greater resources to the
promotion and sale of their products than Segue. Segue may also face increased
competition from the recent consolidation of several companies in the automated
software quality market. An increase in competition could result in price
reductions and loss of market share. Such competition and any resulting
reduction in profitability could have a material adverse effect on Segue's
business, operating results and financial condition.
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Segue's business could be adversely affected if its products contain
errors. Software products as complex as Segue's products 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 Segue's
reputation, or damage to its efforts to build brand awareness, any of which
could have a material adverse effect on Segue's business, operating results and
financial condition.
Segue's future success will depend on its ability to enhance existing
products and develop new products. To be competitive, Segue must develop and
introduce product enhancements and new products which increase its customers'
ability to test their systems. If Segue fails to develop and introduce new
products and enhancements successfully and on a timely basis, it could have a
material adverse effect on its business, operating results and financial
condition. The emerging nature of the automated software testing and e-commerce
testing markets requires that Segue continually improves the performance,
features and reliability of its products, particularly in response to
competitive offerings and evolving customer needs. Segue must also introduce
enhancements to existing products as quickly as possible and prior to the
introduction of competing products. Segue has acquired, and may in the future
acquire, technologies to provide it with the tools to introduce new products or
enhance current products. The success of such acquisitions will depend in part
on Segue's ability to effectively integrate the technologies.
Segue must hire and retain skilled personnel in a tight labor market.
Qualified personnel are in great demand throughout the software industry.
Segue's success depends in large part upon its 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 in our business, and there can be no assurance
that Segue will be successful in attracting, integrating, motivating and
retaining new sales personnel. The failure of Segue to attract and retain the
highly skilled personnel that are integral to its direct sales, product
development, service and support teams may limit the rate at which Segue can
generate sales and develop new products or product enhancements. This could have
a material adverse effect on Segue's business, operating results and financial
condition.
Class action 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-
------------------------------------------
10891RGS. The class action complaint alleges that Segue and a certain officer
and a former officer 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.
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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 have been consolidated under the caption
In Re Segue Software, Inc. Securities Litigation, Civil No. 99-CV-10891-RGS.
- ------------------------------------------------
Segue is currently reviewing the allegations made in these lawsuits. Segue
intends to defend the claims vigorously. Segue believes the defense of the
claims 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 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.
Segue faces many risks associated with international business activities.
Segue derived approximately 16% of its total product sales from international
customers in fiscal year 1998 and 13% for the first six months of 1999. The
international market for software products is highly competitive and Segue
expects 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 that Segue is unable to expand international
sales in a timely and cost-effective manner, its business could be materially
adversely affected.
Segue may be affected by unexpected Year 2000 problems. Many existing
computer systems and software products do not properly recognize dates after
December 31, 1999. This "Year 2000" problem could result in miscalculations,
data corruption, system failures or disruptions of operations. Segue is subject
to potential Year 2000 problems affecting its products, its internal systems and
the systems of its vendors and distributors, any of which could have a material
adverse effect on Segue's business, operating results and financial condition.
In addition, there can be no assurance that Year 2000 errors or defects
will not be discovered in Segue's internal software systems and, if such errors
or defects are discovered, there can be no assurance that the costs of making
such systems Year 2000 compliant will not be material.
Year 2000 errors or defects in the internal systems maintained by Segue's
vendors or distributors could require Segue to incur significant unanticipated
expenses to remedy any problems or replace affected vendors and could reduce its
revenue from its indirect distribution channel.
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Segue's new strategy of selling its products through a few large system
integrators may result in fewer sales and may adversely affect Segue's results
of operations. During the second quarter of 1999, Segue shifted its sales
strategy away from creating and managing a large network of resellers and
towards building deeper relationships with a few large system integrators. There
can be no assurance that this sales strategy will result in greater revenues. In
general, these system integrators may discontinue marketing and selling Segue's
products with little or no notice. In addition, because Segue will be dependent
on a smaller number of integrators, the affect that any single integrator may
have on Segue will be greater than any single reseller under Segue's former
strategy. Accordingly, Segue is highly dependent on the services of the system
integrators and the loss of, or a significant reduction in sales volume through,
any single system integrator could have a material adverse effect on Segue.
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 its 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's products may be used on applications
which are critical to the operations of its customers' businesses. Any failure
in a customer's applications could result in a claim for substantial damages
against Segue, regardless of its responsibility for such failure. Although Segue
maintains 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 its ability to protect its proprietary
technology. Segue's success depends to a significant degree upon the protection
of its software and other proprietary technology. The unauthorized reproduction
or other misappropriation of its proprietary technology could enable third
parties to benefit from its technology without paying Segue for it. This could
have a material adverse effect on Segue's business, operating results and
financial condition. Although Segue has taken steps to protect its proprietary
technology, they may be inadequate. Segue currently relies on a combination of
trademark, copyright and trade secret laws and contractual provisions to protect
its proprietary rights in its products. Segue presently has no registered
copyrights. Segue has a patent but there can be no assurance that the patent
would be upheld if challenged. Moreover, the laws of other countries in which
Segue markets its products may afford little or no effective protection of its
intellectual property. There can be no assurance that Segue's competitors will
not independently develop technologies that are substantially equivalent or
superior to its technology. If Segue resorts to legal proceedings to enforce its
intellectual property rights, the proceedings could be
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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 Segue were to discover that any of its
products violated third party proprietary rights, there can be no assurance that
it 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.
Any claim of infringement could cause Segue to incur substantial costs
defending against the claim, even if the claim is invalid, and could distract
its management from its business. Furthermore, a party making such a claim could
secure a judgment that requires Segue to pay substantial damages. A judgment
could also include an injunction or other court order that could prevent Segue
from selling its products. Any of these events could have a material adverse
effect on Segue's business, operating results and financial condition.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The following discussion about the Company's market risk disclosures
involves forward-looking statements. Actual results could differ materially from
those discussed in the forward-looking statements. The Company is exposed to
market risk related to changes in interest rates and foreign currency exchange
rates. The Company does not use derivative financial instruments for speculative
or trading purposes.
Interest Rate Risk. The Company is exposed to market risk from changes in
interest rates primarily through its investing and borrowing activities. In
addition, the Company's ability to finance future acquisition transactions may
be impacted if the Company is unable to obtain appropriate financing at
acceptable rates. The Company's investing strategy to manage interest rate
exposure, is to invest in short-term, highly liquid investments. The Company
maintains a portfolio of highly liquid cash equivalents and short-term
investments (primarily in high-grade corporate commercial paper). At June 30,
1999, the fair value of the Company's short-term investments approximated market
value.
Foreign Currency Risk. The Company faces exposure to movements in foreign
currency exchange rates. These exposures may change over time as business
practices evolve and could have a material adverse effect on the Company's
business, financial condition and results of operations. The Company does not
use derivative financial instruments or other financial instruments to hedge
economic exposures or for trading. Historically, the Company's primary exposures
have been related to the operations of its foreign subsidiaries. In 1998, the
net impact of foreign currency changes was not material. The introduction of the
Euro as a common currency for most members of the european monetary union has
taken place in the Company's fiscal year 1999. The Company has not determined
the impact, if any, that the Euro will have on foreign currency and business
exposure.
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-
----------- ---------------------------
10891RGS. The class action complaint alleges that Segue and a certain officer
and a former officer 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 have been consolidated under
- -----------
the caption In Re Segue Software, Inc. Securities Litigation, Civil No. 99-CV-
------------------------------------------------
10891-RGS. Segue is currently reviewing the allegations made in these lawsuits.
Segue intends to defend the claims vigorously. Segue believes the defense of the
claims 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 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.
22
<PAGE>
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
The Company completed the initial public offering (IPO) of its 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 the Company and selling
security holders in the 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.
The Company 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 the Company'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
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, the Company incurred the following expenses:
<TABLE>
<S> <C>
Underwriting discounts and commissions $3,039,750
Expenses paid to underwriters 10,999
Other direct expenses 847,281
----------
Total expenses $3,898,030
</TABLE>
After deducting the expenses set forth above, the Company received
approximately $39.5 million in net proceeds of the IPO. As of June 30, 1999,
the Company had used $5.4 million for the purchase of property and equipment,
approximately $2.0 million for the repayment of indebtedness including interest
($883,000 and $385,000 for principal and interest, respectively, on the SQL
Bench notes and approximately $395,000 and $303,000 on Eventus and Black & White
debts, respectively), $950,000 for guaranteed royalties, $480,000 for a non-
recurring engineering and initial license fee, approximately $965,000 for
employee severance payments, and approximately $14.8 million for working
capital. The remaining $14.9 million was invested in temporary investments,
mainly consisting of government agency paper and commercial paper.
23
<PAGE>
The expenses of the IPO do not include any payments made to directors,
officers, or persons owning 10 percent or more of the Common Stock of the
Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The 1999 Annual Meeting of Stockholders of Segue Software, Inc. (the
"Annual Meeting") was held on June 4, 1999.
(b) At the Annual Meeting, the following individuals were elected to Segue's
Board of Directors, constituting all members of Segue's Board of
Directors:
24
<PAGE>
<TABLE>
<CAPTION>
Votes For Votes Withheld
--------- --------------
<S> <C> <C>
James H. Simons 6,034,189 92,442
Stephen B. Butler 6,034,189 92,442
Leonard E. Baum 6,034,189 92,442
Ronald D. Fisher 6,034,189 92,442
John R. Levine 6,034,189 92,442
Howard L. Morgan 6,034,189 92,442
</TABLE>
(c) The following additional proposal was considered at the Annual Meeting:
<TABLE>
<CAPTION>
Votes Votes Votes
For Against Withheld
--------- ------- --------
<S> <C> <C> <C>
Ratification of the appointment 6,060,534 63,277 2,820
of PricewaterhouseCoopers LLP as
independent public accountants for
the fiscal year ending December 31,
1999
</TABLE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
27.1 Restated Financial Data Schedule
(b) Reports on Form 8-K:
No reports on Form 8-K were filed during the quarter ended
June 30, 1999.
25
<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: March 27, 2000
SEGUE SOFTWARE, INC.
/s/ Stephen B. Butler
_______________________
Stephen B. Butler
Chief Executive Officer
/s/ Douglas Zaccaro
_______________________
Douglas Zaccaro
Chief Financial Officer
26
<PAGE>
INDEX TO EXHIBITS
Exhibit
No. Description
- --- -----------
27.1 Restated Financial Data Schedule
27
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1998
<PERIOD-START> APR-01-1999 JAN-01-1999
<PERIOD-END> JUN-30-1999 JUN-30-1999
<CASH> 15,916 0
<SECURITIES> 5,871 0
<RECEIVABLES> 11,408 0
<ALLOWANCES> 735 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 34,055 0
<PP&E> 9,597 0
<DEPRECIATION> 4,242 0
<TOTAL-ASSETS> 46,709 0
<CURRENT-LIABILITIES> 15,132 0
<BONDS> 0 0
0 0
0 0
<COMMON> 90 0
<OTHER-SE> 30,604 0
<TOTAL-LIABILITY-AND-EQUITY> 46,709 0
<SALES> 7,427 12,413
<TOTAL-REVENUES> 11,711 20,682
<CGS> 848 1,515
<TOTAL-COSTS> 3,304 6,266
<OTHER-EXPENSES> 14,257 27,463
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 53 140
<INCOME-PRETAX> (5,577) (12,500)
<INCOME-TAX> 43 73
<INCOME-CONTINUING> (5,620) (12,573)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (5,620) (12,573)
<EPS-BASIC> (0.62) (1.40)
<EPS-DILUTED> (0.62) (1.40)
</TABLE>
