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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 DECEMBER 31, 1998
OR
[ ] 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 0-21985
SEEC, INC.
(Exact name of registrant as specified in its charter)
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<S> <C>
PENNSYLVANIA 55-0686906
(State or other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
</TABLE>
PARK WEST ONE, SUITE 200, CLIFF MINE ROAD, PITTSBURGH, PENNSYLVANIA 15275
(Address of Principal Executive Offices) (Zip Code)
(412) 893-0300
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
As of January 29, 1999, there were 5,883,659 outstanding shares of Common
Stock, par value $.01 per share, of SEEC, Inc.
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SEEC, INC.
FORM 10-Q
TABLE OF CONTENTS
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PAGE
NUMBER
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PART I--FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Income for the three months
and nine months ended December 31, 1998 and 1997...... 2
Condensed Consolidated Balance Sheets as of December
31, 1998 and March 31, 1998........................... 3
Condensed Consolidated Statements of Cash Flows for the
nine months ended December 31, 1998 and 1997.......... 4
Notes to Unaudited Consolidated Financial Statements... 5-7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations....................... 8-13
PART II--OTHER INFORMATION.................................. 14
Item 1. Legal Proceedings................................... 14
Item 2. Changes in Securities............................... 14
Item 3. Defaults Upon Senior Securities..................... 14
Item 4. Submission of Matters to a Vote of Security
Holders........................................... 14
Item 5. Other Information................................... 14
Item 6. Exhibits and Reports on Form 8-K.................... 14
SIGNATURES.................................................. 15
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PART I--FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SEEC, INC.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
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THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31 DECEMBER 31
----------------------- -----------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
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REVENUES:
Software license and maintenance fees...... $1,827,122 $2,824,166 $5,987,287 $6,836,303
Professional services--product related..... 633,615 592,017 2,487,540 1,251,356
Professional services--other............... 2,599 37,448 63,469 155,536
---------- ---------- ---------- ----------
Total revenues........................ 2,463,336 3,453,631 8,538,296 8,243,195
---------- ---------- ---------- ----------
OPERATING EXPENSES:
Cost of revenues:
Software license and maintenance fees... 155,992 411,459 629,943 1,025,678
Professional services--product
related............................... 497,961 477,503 1,640,782 1,061,583
Professional services--other............ 4,063 29,916 64,390 145,676
---------- ---------- ---------- ----------
Total cost of revenues................ 658,016 918,878 2,335,115 2,232,937
General and administrative................. 578,841 417,370 1,930,554 1,200,886
Sales and marketing........................ 1,159,218 1,285,215 3,835,508 3,004,530
Research and development................... 299,955 246,314 939,844 689,358
---------- ---------- ---------- ----------
Total operating expenses.............. 2,696,030 2,867,777 9,041,021 7,127,711
---------- ---------- ---------- ----------
INCOME (LOSS) FROM OPERATIONS................ (232,694) 585,854 (502,725) 1,115,484
NET INTEREST INCOME.......................... 375,038 148,289 1,223,142 494,428
---------- ---------- ---------- ----------
INCOME BEFORE INCOME TAXES................... 142,344 734,143 720,417 1,609,912
PROVISION FOR INCOME TAXES................... 47,000 62,000 267,000 62,000
---------- ---------- ---------- ----------
NET INCOME................................... $ 95,344 $ 672,143 $ 453,417 $1,547,912
========== ========== ========== ==========
Net income per common share:
Basic................................... $ 0.02 $ 0.13 $ 0.08 $ 0.31
========== ========== ========== ==========
Diluted................................. $ 0.02 $ 0.13 $ 0.07 $ 0.29
========== ========== ========== ==========
Weighted average number of common and common
equivalent shares outstanding:
Basic................................... 5,862,242 5,010,574 5,988,483 5,005,129
========== ========== ========== ==========
Diluted................................. 5,933,107 5,336,421 6,127,113 5,312,228
========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
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SEEC, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
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DECEMBER 31, MARCH 31,
1998 1998
------------ -----------
(UNAUDITED) (AUDITED*)
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ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $22,808,873 $23,795,965
Short-term investments.................................... 7,721,396 7,032,550
Accounts receivable:
Trade, net............................................. 3,754,667 5,774,495
Affiliate.............................................. -- 189,097
Prepaid expenses and other current assets................. 238,449 545,980
----------- -----------
Total current assets................................... 34,523,385 37,338,087
PROPERTY AND EQUIPMENT, NET................................. 1,311,732 1,291,659
GOODWILL AND OTHER INTANGIBLE ASSETS, NET................... 568,749 625,000
----------- -----------
$36,403,866 $39,254,746
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable:
Trade.................................................. $ 591,745 $ 1,142,253
Affiliate.............................................. -- 230,085
Obligation in connection with acquisition................. -- 1,042,000
Accrued compensation...................................... 322,547 799,072
Deferred maintenance revenue.............................. 847,556 867,339
Deferred income taxes..................................... 648,330 372,330
Other current liabilities................................. 538,088 778,131
----------- -----------
Total current liabilities.............................. 2,948,266 5,231,210
----------- -----------
SHAREHOLDERS' EQUITY:
Preferred stock--no par value; 10,000,000 shares
authorized; none outstanding
Common stock--$.01 par value; 20,000,000 shares
authorized; 6,082,619 and 6,076,546 shares issued at
December 31, 1998 and March 31, 1998, respectively..... 60,826 60,765
Additional paid-in capital................................ 33,576,139 33,566,408
Retained earnings......................................... 835,464 382,047
Less treasury stock, at cost--221,900 shares.............. (1,048,781) --
Unrealized gain on investments, net of taxes.............. 31,952 14,316
----------- -----------
Total shareholders' equity............................. 33,455,600 34,023,536
----------- -----------
$36,403,866 $39,254,746
=========== ===========
</TABLE>
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* Condensed from audited financial statements
The accompanying notes are an integral part of these financial statements.
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SEEC, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
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NINE MONTHS ENDED
DECEMBER 31
--------------------------
1998 1997
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CASH FLOWS PROVIDED (USED) BY OPERATING ACTIVITIES.......... $ 1,995,034 $ (680,652)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment....................... (212,664) (229,122)
Expenditures for patents and trademarks................... (39,582) --
Purchases of short-term investments....................... (1,754,891) (847,234)
Sales of short-term investments........................... 1,100,000 --
Payment of obligation in connection with acquisition of
affiliate.............................................. (1,036,000) --
----------- -----------
Net cash used by investing activities.................. (1,943,137) (1,076,356)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of long-term debt............................... -- (240,000)
Purchases of treasury stock............................... (1,048,781) --
Proceeds from exercise of stock options................... 9,792 17,268
----------- -----------
Net cash used by financing activities.................. (1,038,989) (222,732)
----------- -----------
NET DECREASE IN CASH AND CASH EQUIVALENTS................... (987,092) (1,979,740)
Cash and cash equivalents, beginning of period.............. 23,795,965 3,811,401
----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD.................... $22,808,873 $ 1,831,661
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
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SEEC, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements include the
accounts of SEEC, Inc. and its wholly-owned subsidiaries--SEEC Holdings, Inc.,
SEEC Europe Limited ("SEEC Europe"), organized in April 1997; SEEC Technologies
Asia Private Limited ("SEEC Asia"), organized in March 1998; and SEEC Germany
GmbH ("SEEC Germany"), organized in August 1998. Also included are the accounts
of the unincorporated branch operations located in Seoul, South Korea.
(Collectively the "Company").
Management believes that all adjustments, consisting only of normal
recurring adjustments, considered necessary for a fair statement of results have
been included in the consolidated financial statements for the interim periods
presented. All significant intercompany accounts and transactions have been
eliminated. The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. Operating
results for interim periods are not necessarily indicative of results that may
be expected for an entire fiscal year. Accordingly, these interim period
consolidated financial statements should be read in conjunction with the
consolidated financial statements contained in the Company's Annual Report on
Form 10-K for the fiscal year ended March 31, 1998.
2. REVENUE RECOGNITION
The Company recognizes revenue in accordance with Statement of Position
97-2, "Software Revenue Recognition." Software license fees are recognized upon
receipt of a noncancelable order from the customer, shipment of the software to
the customer and the completion of any significant remaining obligations under
the license agreement. Revenues from software maintenance are deferred and
recognized on a straight-line basis over the contract support period, which is
typically one year. Revenues from professional services fees are recognized as
the reengineering, consulting, training or other services are provided, or on
achievement of performance milestones, depending on the nature of the services
or contract.
3. STOCK REPURCHASE PROGRAM
In July 1998, the Company announced its plan to begin a stock repurchase
program, utilizing up to $3 million to buy shares of the Company's Common Stock
from time to time on the open market, subject to market conditions and other
relevant factors. Through December 31, 1998, the Company had repurchased 221,900
shares, which have been recorded as treasury shares. The Company may use
repurchased shares to cover stock option exercises, employee stock purchase plan
transactions, and for other corporate purposes.
4. EMPLOYEE STOCK PURCHASE PLAN
In August 1998, the Company's shareholders approved the adoption of the
SEEC, Inc. 1998 Employee Stock Purchase Plan (the "Plan"). The Plan allows
eligible employees of the Company to purchase shares of the Company's Common
Stock by facilitating those purchases through periodic sales of Company shares,
financed by payroll deductions, or by other cash payments. Purchases are made
twice per year at a price equal to the lesser of 85% of the market value of the
Company's Common Stock on either the first day of an offering period or on a
designated purchase date. The maximum number of shares that may be purchased by
a participating employee in a calendar year is equal to the quantity determined
by dividing $25,000 by the market value of a share of Common Stock as of the
first day of an offering period. The aggregate number of shares that may be
issued and sold under the Plan is 300,000 shares of Common Stock, subject to
proportionate adjustment in the event of stock splits and similar events.
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5. EARNINGS PER SHARE
Earnings per share ("EPS") for all periods presented is computed in
accordance with the provisions of Statement of Financial Accounting Standards
No. 128, "Earnings Per Share" ("SFAS No. 128"). The provisions and disclosure
requirements of SFAS No. 128 were required to be adopted for interim and annual
periods ended after December 15, 1997, with restatement of EPS for prior
periods.
The following is a reconciliation of the denominators (the number of
shares) of the basic and diluted EPS computations. The numerator (earnings or
net income) is the same for the basic and the diluted EPS computations for the
periods presented.
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THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31 DECEMBER 31
--------------------- ---------------------
1998 1997 1998 1997
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Basic shares..................................... 5,862,242 5,010,574 5,988,483 5,005,129
Effect of dilutive securities--options and
warrants....................................... 70,865 325,847 138,630 307,099
--------- --------- --------- ---------
Diluted shares................................... 5,933,107 5,336,421 6,127,113 5,312,228
========= ========= ========= =========
</TABLE>
For the three-month periods ended December 31, 1998 and 1997, options and
warrants to purchase 561,475 shares and 7,500 shares, respectively, were
excluded from the computation of diluted EPS. For the nine-month periods ended
December 31, 1998 and 1997, options and warrants to purchase 332,675 shares and
12,500 shares, respectively, were excluded from the computation of diluted EPS.
Excluded options and warrants have exercise prices greater than the average
market price of the common shares for the periods presented.
6. ACQUISITION
On February 27, 1998, the Company entered into an agreement with ERA
Software Systems Private Limited ("ERA"), whereby ERA transferred its
distribution rights for Company products, plus certain fixed assets and
approximately 30 former ERA employees engaged in Company-related research and
development, sales and administration. With the acquisition, the Company assumed
control of ERA's research and development and distribution functions. SEEC Asia
was formed to effect the acquisition and to subsequently control and manage the
acquired rights, assets and product development projects previously owned or
managed by ERA, as well as to expand the Company's sales and marketing efforts
in the Asian and Pacific Rim regions.
The acquisition was accounted for as a purchase, and accordingly, the
results of operations of the acquired business are included in the Company's
consolidated financial statements since the effective date, the close of
business on February 28, 1998. The aggregate purchase price has been allocated
to the net assets acquired based upon their respective fair market values. The
excess of the purchase price over the fair values of the net assets acquired of
$635,000 was allocated to goodwill and is being amortized on a straight-line
basis over five years. Under terms of the agreement, the Product Purchase
Agreement and the Marketing Agreement between the Company and ERA were
terminated as of February 28, 1998.
At March 31, 1998, the net consideration required to complete the
acquisition was estimated at $1,042,000. The final closing occurred on August
10, 1998, at which time the Company remitted an actual net consideration of
$1,036,000 to ERA. Including the Company's investment in ERA, which was
relinquished to ERA under the terms of the acquisition, the Company's total
purchase price for the acquisition was $1,041,000.
A final appraisal of certain assets included in the acquisition has not
been completed. Pending the results of the appraisal, the allocation among the
various components of the purchase price may change; however, any such
reallocation will not materially affect the overall financial position or
results of operations of the Company.
7. ADVANCE ROYALTY
Effective December 1, 1993, the Company entered into a five-year license
agreement (the "License Agreement") with Viasoft, Inc. ("Viasoft") which
generally granted to Viasoft a worldwide license to use and market certain of
the Company's products on a private-label basis. The License Agreement provided,
among other things, for royalties of up to 30% of any license or maintenance
fees related to licensed products and for
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minimum advance royalty payments totaling $900,000 during the 18-month
exclusivity period, which expired on May 31, 1995. The advance royalty of
$900,000 was being recognized as income as copies of the licensed products were
delivered to Viasoft for resale, and, to a lesser extent, as royalties on the
related maintenance revenues were reported to the Company by Viasoft.
The Company gave notice to Viasoft on December 3, 1996 of its intention to
terminate the License Agreement as a result of Viasoft's not making additional
minimum royalty payments of at least $1,000,000 during the preceding twelve
months, as required by the License Agreement. The Company received notice from
Viasoft that it did not intend to extend the Agreement by making such minimum
payments and acknowledging that the Agreement would terminate effective June 4,
1997.
The License Agreement had provided that, upon termination, the Company
would be obligated to deliver to Viasoft that number of copies of the licensed
products equal to the balance of the advance royalty divided by the applicable
licensed product royalty amounts. At such time as these copies were delivered to
Viasoft, the Company would recognize as income the balance of the advance
royalty. On June 30, 1997, the Company received formal notice from Viasoft that
no further copies of the licensed products were to be delivered to Viasoft, and
that the Company was relieved of such obligation under the terms of the License
Agreement. Accordingly, the $780,522 balance of the advance royalty was
recognized as software license revenue during the first quarter of fiscal 1998,
and thus is included in revenue in the nine-month period ended December 31,
1997.
8. COMPREHENSIVE INCOME
Effective April 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income," ("SFAS No.
130"). SFAS No. 130 establishes standards for the reporting and display of
comprehensive income and its components. Comprehensive income includes all
changes in equity during a period except those resulting from investments by
owners and distributions to owners. SFAS No. 130 requires that an enterprise
display the components of comprehensive income for each period presented.
The components of the Company's comprehensive income were as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31 DECEMBER 31
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1998 1997 1998 1997
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Net income........................................ $ 95,344 $672,143 $453,417 $1,542,912
Unrealized gain (loss) on investments, net of
taxes........................................... (39,499) (4,943) 17,636 90,655
-------- -------- -------- ----------
Total comprehensive income................... $ 55,845 $667,200 $471,053 $1,633,567
======== ======== ======== ==========
</TABLE>
The adoption of SFAS No. 130 had no impact on the Company's results of
operations or shareholders' equity.
9. INCOME TAXES
The Company's effective tax rates for the three months and nine months
ended December 31, 1998 were 33% and 37%, respectively. This compares to
effective tax rates of 8% and 4% for the same periods in the prior year. Prior
to the three-month period ended December 31, 1997, the Company had calculated a
net deferred tax asset, which was fully offset by a valuation allowance. The
valuation allowance was reduced in the three-month period ended December 31,
1997 and subsequently eliminated in the three-month period ended March 31, 1998.
Accordingly, the Company has recorded income tax provisions since the
three-month period ended December 31, 1997, starting with a reduced provision
for that period, when a portion of the valuation allowance was eliminated.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Part I, Item 2 of this report should be read in conjunction with Part II,
Item 7 of the Company's Annual Report on Form 10-K for the year ended March 31,
1998. The information contained herein is not a comprehensive management
overview and analysis of the financial condition and results of operations of
the Company, but rather an update of disclosures made in the aforementioned
filing. Certain information contained
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herein should be considered "forward-looking information," which is subject to a
number of risks and uncertainties. The preparation of forward-looking
information requires the use of estimates of future revenues, expenses, activity
levels and economic and market conditions, many of which are outside the
Company's control. Other factors and assumptions are involved in the preparation
of forward-looking information, and the failure of any such factors and
assumptions to be realized may cause actual results to differ materially from
those discussed. The Company assumes no obligation to update such estimates to
reflect actual results, changes in assumptions or changes in other factors
affecting such estimates.
OVERVIEW
Founded in 1988, the Company develops, markets and provides integrated and
comprehensive enterprise solutions that enable large organizations and
third-party service providers to efficiently and effectively reengineer legacy
system applications and databases. The Company introduced its core source code
analysis technology and the first PC-based reengineering software product in
1992. The Company's enterprise solutions combine a suite of software products
with well-defined, repeatable methodologies designed to automate various
functions and improve the quality, productivity and effectiveness of the
reengineering process, including solutions to address the year 2000 problem and
ongoing testing requirements. Solutions have been developed or are being
developed to address the European Monetary Unit currency conversion problem and
the integration of legacy systems with Internet and client/server-based
applications.
The Company's software products, including those based on the Company's
core source code analysis technology, automate many of the procedures required
for reengineering mainframe-based legacy software systems, including year 2000
conversion. The Company's products analyze and modify source code, which is
downloaded from the mainframe to a PC-based environment, where it is stored in
application dictionaries for performance of reengineering functions. The Company
has also developed software products that enable customers to extract business
rules and functions from legacy applications for reuse in object-oriented
client/server environments. The Company believes that its core technology and
methodologies are adaptable for use in developing enterprise solutions for
integration of mainframe-based legacy systems with Internet, Enterprise Resource
Planning (ERP), and data warehousing applications. The Company markets and sells
its enterprise solutions and products primarily to Fortune 1000 companies and
similarly-sized business and governmental organizations. The Company also
licenses its products to third-party service providers.
The Company derives its revenue from software license and maintenance fees
and to a lesser extent, professional services fees. Product-related services,
typically provided to customers in conjunction with the sale of software
licenses, include consulting and training services. Product-related services
also include reengineering services, which the Company provides under
time-and-materials and fixed-price contracts. Other professional services
consist of programming services provided on a contract basis.
COMPARISON OF QUARTERS AND NINE MONTHS ENDED DECEMBER 31, 1998 AND DECEMBER 31,
1997
The following section includes information related to changes in the
Company's consolidated statements of income. References to the third quarter of
fiscal 1999 and the third quarter of fiscal 1998 refer to the three months ended
December 31, 1998 and December 31, 1997, respectively.
REVENUES. Total revenues for the third quarter of fiscal 1999 were
$2,463,000 compared to $3,454,000 for the third quarter of fiscal 1998, a
decrease of $991,000 or 29%. For the nine months ended December 31, 1998, total
revenues were $8,538,000 compared to $8,243,000 for the nine months ended
December 30, 1997, an increase of $295,000 or 4%. The decrease in revenues from
the third quarter of fiscal 1998 to the third quarter of fiscal 1999 resulted
from a decrease in the demand for year 2000 tools and solutions. The increase in
revenue from the nine-month period ended December 31, 1997 to the nine-month
period ended December 31, 1998 resulted primarily from the Company's expansion
of its domestic and international sales and marketing infrastructure, including
expansion in international markets such as Latin America, Europe and Korea.
Software license and maintenance fees decreased in both the third quarter and
nine-month periods, while professional fees--product related increased for both
periods. The Company has de-emphasized professional services--other.
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Accordingly, revenues from this source have decreased significantly from the
fiscal 1998 periods to the fiscal 1999 periods.
Software license and maintenance fees were $1,827,000 for the third quarter
of fiscal 1999 compared to $2,824,000 for the third quarter of fiscal 1998, a
decrease of $997,000 or 35%. For the nine months ended December 31, 1998,
software license and maintenance fees were $5,987,000 compared to $6,836,000 for
the nine months ended December 31, 1997, a decrease of $849,000 or 12%. The
decrease in software license and maintenance fees between the third quarter
periods is primarily the result of a decrease in demand for year 2000 tools and
solutions. During the nine months ended December 31, 1997, the Company
recognized approximately $781,000 of advance royalty revenue in conjunction with
the termination of the Viasoft License Agreement described in Note 7 to the
financial statements. This one-time revenue recognition of $781,000 in fiscal
1998 and the decrease in demand for year 2000 tools and solutions in the third
quarter of fiscal 1999 are the primary reasons for the 12% decrease in software
license and maintenance fees revenue from the nine months ended December 31,
1997 to the nine months ended December 31, 1998.
Professional services--product related revenues were $634,000 for the third
quarter of fiscal 1999 compared to $592,000 for the third quarter of fiscal
1998, an increase of $42,000 or 7%. For the nine months ended December 31, 1998,
professional services--product related revenues were $2,488,000 compared to
$1,251,000 for the nine months ended December 30, 1997, a increase of $1,237,000
or 99%. These services revenues comprised 26% and 29% of total revenues for the
third quarter and first nine months of fiscal 1999, respectively, compared to
17% and 15% of total revenues for the third quarter and first nine months of
fiscal 1998, respectively. The increases are attributable to (1) customers'
increased demand for on-site assistance with their year 2000 renovation
projects, (2) additional training and consulting services, typically provided in
conjunction with software license sales, and (3) additional in-house assessment
and renovation services performed at the Company's offices. In fiscal 1999, more
so than in fiscal 1998, the Company has been providing extended term, on-site
services to customers on a time-and-materials basis. Either Company employees or
subcontracted professionals may deliver the on-site services, depending on the
nature of the engagements and staffing requirements. The Company's in-house
factory services revenues comprised a larger percentage of total revenues in the
third quarter and first nine months of fiscal 1999 than in prior periods. These
proportions of in-house factory services revenues to total revenues are not
necessarily representative of the results that can be expected in future
periods. The Company expects that training, consulting and on-site services will
be the primary components of product-related professional services revenues for
the foreseeable future.
Revenues from professional services--other were $3,000 for the third
quarter of fiscal 1999 compared to $37,000 for the third quarter of fiscal 1998,
a decrease of $34,000 or 92%. For the nine months ended December 31, 1998,
revenues from professional services--other were $63,000 compared to $156,000 for
the nine months ended December 31, 1997, a decrease of $93,000 or 60%. The
Company chose to direct its resources away from contract programming services,
and thus these revenues have declined steadily since the second quarter of
fiscal 1997. Contract programming services were discontinued in October 1998.
Currently, management has no plans to continue to provide services of this type.
COST OF REVENUES. Cost of revenues includes cost of software license and
maintenance fees, cost of professional services--product related, and cost of
professional services--other. The Company's total cost of revenues was $658,000
for the third quarter of fiscal 1999 compared to $919,000 for the third quarter
of fiscal 1998, a decrease of $261,000 or 28%. For the nine months ended
December 31, 1998, total cost of revenues was $2,335,000 compared to $2,233,000
for the nine months ended December 31, 1997, an increase of $102,000 or 5%. Cost
of revenues consists primarily of personnel costs of employees or subcontracted
personnel required to provide consulting, training, on-site or in-house factory
services, and customer support services. The overall changes in cost of revenues
for the quarterly and nine-month periods correspond to the changes in revenues
for both periods.
Cost of software license and maintenance fees includes royalty expenses,
the costs of providing customer support and the costs of media, manuals,
duplication and shipping related to the sales of the Company's software
products. Customer support is primarily telephone support for customers who have
purchased maintenance in conjunction with software license purchases. Cost of
software license and maintenance fees was $156,000 for the
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third quarter of fiscal 1999 compared to $411,000 for the third quarter of
fiscal 1998, a decrease of $255,000 or 62%. For the nine months ended December
31, 1998, cost of software license and maintenance fees was $630,000 compared to
$1,026,000 for the nine months ended December 31, 1997, a decrease of $396,000
or 39%. These decreases were primarily attributable to royalties payable to the
Industrial Credit and Investment Corporation of India, Ltd. ("ICICI"), which
were included in the expenses for the third quarter and first nine months of
fiscal 1998. The Company's royalty obligation was fulfilled in January 1998,
during the fourth quarter of fiscal 1998. The decrease in costs resulting from
the elimination of ICICI royalties was offset, to a limited extent, by the
increase in costs for customer support related to additional maintenance
contracts entered into during fiscal 1998 and 1999.
Professional services--product related costs were $498,000 for the third
quarter of fiscal 1999 compared to $478,000 for the third quarter of fiscal
1998, an increase of $20,000 or 4%. For the nine months ended December 31, 1998,
professional services--product related costs were $1,641,000 compared to
$1,062,000 for the nine months ended December 31, 1997, an increase of $579,000
or 55%. These increases in professional services--product related costs
correspond with the increases in revenues in this category. The increases were
primarily attributable to increased consulting, training, and factory services
performed during fiscal 1999. The Company has expanded its professional services
infrastructure to meet the demand for its solutions and services.
Professional services--other costs were $4,000 for the third quarter of
fiscal 1999 compared to $30,000 for the third quarter of fiscal 1998, a decrease
of $26,000 or 87%. For the nine months ended December 31, 1998, professional
services--other costs were $64,000 compared to $146,000 for the nine months
ended December 31, 1997, a decrease of $82,000 or 56%. These decreases
correspond to the continued decline in contract programming services, which
ceased in October 1998.
GROSS MARGINS. The Company's total gross margin (total revenues less total
cost of revenues) as a percentage of revenues was 73% for the all periods
presented. The gross margin for software license and maintenance fees was
positively impacted by the elimination of the ICICI royalty expense in the
fiscal 1999 periods. However, the effect was offset by a higher proportion of
professional services revenues. Professional services have lower gross margins
than software license and maintenance fees. Professional services revenues
comprised 26% and 30% of total revenues for the three- and nine-month periods
ended December 31, 1998, respectively, compared to 18% and 17% for the three-
and nine-month periods ended December 31, 1997, respectively.
Gross margin percentages were 91% and 85% for software license and
maintenance fees, 21% and 19% for professional services--product related, and
(56)% and 20% for professional services--other for the third quarter of fiscal
1999 and 1998, respectively. For the nine months ended December 31, 1998 and
1997, gross margin percentages were 89% and 85% for software license and
maintenance fees, 34% and 15% for professional services--product related, and
(1)% and 6% for professional services--other, respectively.
The gross margin percentages for software license and maintenance fees
fluctuate depending on the mix of software products and the varying royalty
expenses associated with those products. The gross margin percentages for
software license and maintenance fees and professional services--product related
were favorably impacted by the discontinuation after January 1998 of the
royalties payable to ICICI. The gross margin percentages for professional
services--product related vary depending on the type of services provided and
the timing and amount of costs incurred to build up the professional services
infrastructure. Services that are relatively highly automated, such as year 2000
assessments and independent verification, typically require fewer professional
hours to perform than services involving planning, source code remediation or
testing. Furthermore, the Company's pricing for product-related services varies
based on the complexity and scope of the engagement and competitive
considerations. The professional services--product related gross margin
percentages in the fiscal 1999 periods reflect the benefits of having a
professional staff in place and in a revenue-producing mode. In the first nine
months of fiscal 1998, additional costs were incurred for recruiting, hiring,
training and purchasing equipment for new professionals. The Company has been
building its professional services infrastructure to meet the continuing demand
for year 2000 services. This divergence of costs and revenues in a particular
period is likely to recur, therefore continuing to have a varying impact on
gross margin percentages.
10
<PAGE> 12
The professional services--product related gross margin percentages in the
fiscal 1999 periods were favorably impacted by the increased in-house factory
services revenues, discussed above. These high-margin services, which were
performed at the Company's headquarters, comprised a larger percentage of total
revenues than in the fiscal 1998 periods. Those percentages of total revenues
are not necessarily representative of the results that can be expected in future
periods from in-house factory services. The Company expects that professional
services--product related gross margin percentages will average approximately
25% over the longer term.
The gross margin percentages for professional services--other fluctuate
based on the prices of the individual service contracts, the payroll and other
costs of professional staff providing the services, and the proportionate
contribution of each contract to the total revenue for this category during the
respective periods. As of December 31, 1998, the Company had discontinued these
services.
SALES AND MARKETING. Sales and marketing expenses consist primarily of
salaries, incentive compensation and related benefits of the Company's sales,
sales support, and marketing personnel, plus the costs of travel, advertising,
and other promotional activities. Sales and marketing expenses were $1,159,000
for the third quarter of fiscal 1999 compared to $1,285,000 for the third
quarter of fiscal 1998, a decrease of $126,000 or 10%. For the nine months ended
December 31, 1998, sales and marketing expenses were $3,836,000 compared to
$3,005,000 for the nine months ended December 31, 1997, an increase of $831,000
or 28%. The decrease from the third quarter of 1998 to the third quarter of 1999
was primarily due to a decrease in variable compensation costs. The increase
between nine-month periods was primarily due to the Company's continued efforts
to increase the direct sales and marketing of its products and solutions to
customers. The Company established its United Kingdom subsidiary and sales
office during the first nine months of fiscal 1998, and has since added
operations in India, Germany, and Korea. The Company continues to recruit and
hire personnel for its domestic and international sales offices, while also
increasing market awareness of the Company's products and solutions through
expanded advertising and other promotional activities.
GENERAL AND ADMINISTRATIVE. General and administrative expenses include the
costs of general management, finance, legal, accounting, investor relations,
office facilities and other administrative functions. General and administrative
expenses were $579,000 for the third quarter of fiscal 1999 compared to $417,000
for the third quarter of fiscal 1998, an increase of $162,000 or 39%. For the
nine months ended December 31, 1998, general and administrative expenses were
$1,931,000 compared to $1,201,000 for the nine months ended December 31, 1997,
an increase of $730,000 or 61%. These increases were primarily due to the
continued investment in the Company's infrastructure and international expansion
to the United Kingdom, Germany, India, and Korea. The additional payroll,
payroll-related costs, rent, insurance and professional service costs reflect
the Company's expansion of operations and addition of staff.
RESEARCH AND DEVELOPMENT. Total expenditures for research and development
were $300,000 for the third quarter of fiscal 1999 compared to $246,000 for the
third quarter of fiscal 1998, an increase of $54,000 or 22%. For the nine months
ended December 31, 1998, research and development expenditures were $940,000
compared to $689,000 for the nine months ended December 31, 1997, an increase of
$251,000 or 36%. These increases were due to additional research and development
personnel costs and related facilities, computer equipment, and benefits costs,
including the additional costs attributable to the acquisition described in Note
6 to the financial statements. During the third quarter and first nine months of
fiscal 1998, research and development expenses included fees paid on a
work-for-hire basis to ERA for certain projects performed offshore. The research
and development services formerly provided to the Company by ERA are now
performed by SEEC Asia. Expenditures for research and development will vary
depending upon the number of projects underway at any time, the size of the
projects and their stage of development.
NET INTEREST INCOME. Net interest income includes interest expense and
interest income. Net interest income was $375,000 for the third quarter of
fiscal 1999 compared to $148,000 for the third quarter of fiscal 1998, an
increase of $227,000 or 153%. For the nine months ended December 31, 1998, net
interest income was $1,223,000 compared to $494,000 for the nine months ended
December 31, 1997, an increase of $729,000 or 148%. The increase in net interest
income in the fiscal 1999 periods was due to interest earned on the net
11
<PAGE> 13
proceeds from the Company's secondary public offering in February 1998. The net
proceeds were invested in money market funds and high-grade bonds and bond funds
with average maturities of less than two years.
The Company incurred interest expense of $8,000 and $25,000 in the third
quarter and first nine months of fiscal 1998, respectively, consisting primarily
of interest on the Company's loan payable to ICICI, and also interest on accrued
but unpaid royalties to ICICI. The ICICI loan was paid in full on June 30, 1997,
and all royalty-related obligations to ICICI were fulfilled during fiscal 1998.
INCOME TAXES. No provisions for income taxes were recorded prior to the
third quarter of fiscal 1998 due to the Company's significant net operating loss
carryforwards. The Company had calculated a net deferred tax asset, which was
offset by a valuation allowance. The valuation allowance was reduced in the
third quarter and subsequently eliminated in the fourth quarter of fiscal 1998
based on actual and projected profitable operations. As a result, the Company
has recorded provisions for income taxes beginning with the third quarter of
fiscal 1998. As of March 31, 1998, the Company had unused Federal and state net
operating loss carryforwards that may be applied to reduce future taxable income
of approximately $2,034,000 and $1,358,000, respectively. The carryforwards
expire at various times from March 31, 2000 to March 31, 2013.
LIQUIDITY AND CAPITAL RESOURCES
The Company has funded its operations primarily through sales of equity
securities and positive cash flow from operations. As of December 31, 1998, the
Company had $30.5 million in cash and short-term investments and $31.6 million
in working capital. Net cash provided by operating activities was $1,995,000 for
the nine months ended December 31, 1998 compared to $681,000 used by operating
activities for the nine months ended December 31, 1997. The Company used
$213,000 and $229,000 to purchase property and equipment, and $655,000 (net of
sales) and $847,000 to purchase short-term investments in the nine months ended
December 31, 1998 and 1997, respectively. The purchases of property and
equipment are related to the Company's continued growth and expansion. The
Company used $1,049,000 to repurchase 221,900 shares of its Common Stock during
the nine months ended December 31, 1998, as discussed in Note 3 to the financial
statements. As discussed in Note 6 to the financial statements, $1,036,000 was
used in August 1998 to fund an acquisition. Excess cash has been invested, and
the Company expects that it will continue to be invested, in interest-bearing
investment grade securities.
In February 1998, the Company sold 1,030,000 shares of Common Stock in a
secondary public offering, the net proceeds of which were $19.1 million to the
Company. The Company expects that the proceeds of this offering and existing
working capital, together with cash from operations, will be sufficient to meet
its capital and liquidity needs for the foreseeable future. The Company's cash
balances may be used to expand domestic and international sales and marketing
efforts, establish additional facilities, increase research and development for
adapting the Company's core technology and methodologies for use in developing
enterprise solutions for integration of mainframe-based legacy systems with
Internet, Enterprise Resource Planning (ERP), and data warehousing applications,
repurchase shares of the Company's Common Stock, and for other corporate
purposes. The Company may also utilize cash to develop or acquire other
businesses, products or technologies complementary to its current business. The
amounts actually expended for each such purpose are subject to management's
discretion, depending upon various factors, including economic or industry
conditions, changes in the competitive environment and strategic opportunities
that may arise. In the longer term, the Company may require additional sources
of liquidity to fund future growth. Such sources of liquidity may include
additional equity offerings or debt financings.
SEASONALITY
The Company's operations are not affected by seasonal fluctuations.
FOREIGN CURRENCY
The overall effects of foreign currency exchange rates on the Company's
business during the periods discussed have not been material. Movements in
foreign currency exchange rates create a degree of risk to the Company's
operations if those movements affect the dollar value of costs incurred in
foreign currencies.
12
<PAGE> 14
Substantially all of the Company's billings to date have been denominated in
U.S. dollars. Changing currency exchange rates may affect the Company's
competitive position if exchange rate changes impact profitability and business
and/or pricing strategies of foreign competitors. Specific currencies that
impact the Company are the British Pound Sterling, Indian Rupee, German
Deutschmark, and Korean Won.
The functional currency of the Company's subsidiaries and branch operations
is the U.S. dollar. Monetary assets and liabilities of these subsidiaries and
branches are remeasured at the current exchange rate at the balance sheet date,
and non-monetary items are translated at historical rates. Revenues and expenses
are translated using the average exchange rate during the period.
YEAR 2000 CONSIDERATIONS
The year 2000 problem refers to the inability of many existing computer
systems to process completely or accurately information or logic involving the
year 2000 and beyond. The problem results from the use of two-digit date fields
to perform computations and decision-making functions in many computer systems.
For example, a program using a two-digit date field may misinterpret "00" as the
year 1900 rather than 2000. Date-dependent programs are ubiquitous in computer
systems used in many critical business operations. Unless these programs are
remediated to address the year 2000 problem, many mission-critical programs may
fail or produce erroneous data or results.
The Company has established a formal program to address any potential year
2000 compliance issues relating to its internal operating systems, products,
distributors, resellers and vendors. The Company has reviewed all of its major
internal operating systems and is continuing to monitor any new additions to its
internal operating systems for year 2000 compliance. Substantially all of the
Company's internally-developed products have been designed and tested to satisfy
the Company's year 2000 specifications. The Company is currently reviewing the
status of its distributors, resellers and vendors regarding year 2000
compliance. The Company believes that the risk of disruption of the Company's
operations due to the year 2000 problem is minimal. However the Company relies
upon various third-party organizations for basic services such as electrical
power, telecommunications, postage and delivery, banking, and other services. In
a worst-case scenario, the Company could suffer adverse consequences as a result
of interruption of some or all of these services. These third-party dependencies
are not unique to the Company or to companies in its industry or geographical
location. Disruptions in these infrastructure services would likely have a
negative impact on most business enterprises. The Company is currently
developing specific contingency plans to operate during such disruptions in
infrastructure services.
The cost of the Company's year 2000 compliance program is not expected to
have a material effect on the Company's results of operations or liquidity.
However, there can be no assurance that the Company will not experience material
adverse consequences in the event that the Company's year 2000 compliance
program is not successful, or its distributors, resellers or vendors are unable
to resolve their year 2000 compliance issues in a timely manner.
13
<PAGE> 15
PART II--OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS--NOT APPLICABLE
ITEM 2. CHANGES IN SECURITIES--NOT APPLICABLE
ITEM 3. DEFAULTS UPON SENIOR SECURITIES--NOT APPLICABLE
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS--NOT APPLICABLE
ITEM 5. OTHER INFORMATION--NOT APPLICABLE
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
(27) Financial Data Schedule
(b) Reports on Form 8-K:
No reports on Form 8K were filed during the quarter ended December 31,
1998.
14
<PAGE> 16
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused the report to be signed on its behalf by the
undersigned thereunto duly authorized.
SEEC, Inc.
--------------------------------------
(Registrant)
Date: February 12, 1999
By: /s/ RAVINDRA KOKA
------------------------------------
Ravindra Koka
President, Chief Executive Officer
and Director
By: /s/ RICHARD J. GOLDBACH
------------------------------------
Richard J. Goldbach
Treasurer and Chief Financial
Officer
15
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM SEEC, INC.
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS FOR THE NINE MONTHS ENDED DECEMBER
31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-START> APR-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 22,808,873
<SECURITIES> 7,721,396
<RECEIVABLES> 3,927,118
<ALLOWANCES> (172,451)
<INVENTORY> 0
<CURRENT-ASSETS> 34,523,385
<PP&E> 1,641,986
<DEPRECIATION> (330,254)
<TOTAL-ASSETS> 36,403,866
<CURRENT-LIABILITIES> 2,948,266
<BONDS> 0
0
0
<COMMON> 60,826
<OTHER-SE> 33,394,774
<TOTAL-LIABILITY-AND-EQUITY> 36,403,866
<SALES> 4,653,942
<TOTAL-REVENUES> 8,538,296
<CGS> 241,241
<TOTAL-COSTS> 2,335,115
<OTHER-EXPENSES> 6,705,906
<LOSS-PROVISION> 137,814
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 720,417
<INCOME-TAX> 267,000
<INCOME-CONTINUING> 453,417
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 453,417
<EPS-PRIMARY> .08
<EPS-DILUTED> .07
</TABLE>
