UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 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 0-26194
SEER TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
Delaware 13-3556562
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
8000 Regency Parkway
Cary, North Carolina
27511
(Address of principal executive offices)
(Zip Code)
(919) 380-5000
(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 for 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 ........
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at August 7, 1998
Common Stock, $0.01 par value 11,950,633 shares
1
SEER TECHNOLOGIES, INC.
Index
Page
PART I. Financial Information Number
Item 1. Consolidated Financial Statements:
Consolidated balance sheets as of June 30, 1998
(unaudited)and September 30, 1997 3
Consolidated statements of operations (unaudited)
for the three and nine months ended June 30, 1998
and 1997 4
Consolidated statements of cash flows (unaudited)
for the nine months ended June 30, 1998 and 1997 5
Notes to consolidated financial statements (unaudited) 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 9
PART II. Other Information 16
SIGNATURES 18
2
PART I. Financial Information
Item 1. Financial Statements
SEER TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share amounts)
(unaudited)
<TABLE>
<CAPTION>
June 30, September 30,
1998 1997
------------- -------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 1,225 $ 4,268
Trade accounts receivable, less allowance
for doubtful accounts of $4,664 and $1,360
at June 30, 1998 and September 30, 1997,
respectively 20,145 31,383
Prepaid expenses and other current assets 1,354 1,947
Deferred income taxes 1,152 1,152
----------- -----------
Total current assets 23,876 38,750
Trade accounts receivable, net 1,061 2,041
Property and equipment, net 1,936 4,528
Capitalized software costs, net 1,523 3,206
Deferred income taxes 17,599 17,599
Other assets 402 411
----------- -----------
Total assets $46,397 $66,535
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Notes payable, due on demand $36,952 $22,052
Accounts payable 2,448 4,279
Accrued expenses:
Compensation 936 1,964
Commissions 1,478 1,536
Restructuring 6,201 -
Other 4,929 5,241
Deferred revenue 7,210 7,813
Income taxes payable 1,890 1,826
---------- ----------
Total current liabilities 62,044 44,711
Deferred revenue 339 981
Stockholders' equity (deficiency):
Series A convertible preferred stock,
$.01 par value 21 21
Series B convertible preferred stock,
$.01 par value 18 -
Common stock, $0.01 par value 120 119
Additional paid-in-capital - preferred stock 17,232 12,281
Additional paid-in-capital - common stock 58,786 58,486
Cumulative translation adjustments (915) (644)
Accumulated deficit (91,248) (49,420)
---------- -----------
Total stockholders' equity (deficiency) (15,986) 20,843
---------- -----------
Total liabilities and stockholders' equity $46,397 $66,535
========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
3
SEER TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
June 30, June 30,
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenue:
Software products $ 1,585 $ 9,357 $ 5,724 $22,775
Maintenance 3,288 3,692 10,137 10,730
Services 10,758 13,880 34,086 40,662
-------- -------- -------- --------
Total operating revenue 15,631 26,929 49,947 74,167
Cost of revenue:
Software products 369 421 1,374 1,083
Maintenance 1,274 2,228 5,584 6,350
Services 9,702 9,863 31,563 30,505
-------- -------- -------- --------
Total cost of revenue 11,345 12,512 38,521 37,938
Gross profit 4,286 14,417 11,426 36,229
Operating expenses:
Sales and marketing 3,585 7,915 17,586 22,481
Research and product
development 3,232 2,949 10,701 9,554
General and administrative 2,418 2,884 8,270 12,320
Restructuring charges 4,200 - 13,200 500
-------- -------- -------- --------
Total operating expenses 13,435 13,748 49,757 44,855
-------- -------- -------- --------
Income(loss)from operations (9,149) 669 (38,331) (8,626)
Other income (expense):
Interest income 115 105 375 364
Interest expense (879) (643) (2,524) (1,465)
-------- -------- -------- --------
Other expense, net (764) (538) (2,149) (1,101)
-------- -------- -------- --------
Income(loss)before provision
for income taxes (9,913) 131 (40,480) (9,727)
Income tax provision 733 42 1,348 890
-------- -------- -------- --------
Net income(loss) $(10,646) $ 89 $(41,828) $(10,617)
======== ======== ======== ========
Basic and diluted earnings
(loss) per share $ (0.89) $ 0.01 $ (3.51) $(0.91)
======== ======== ======== ========
Weighted average common shares
outstanding-basic 11,949 11,703 11,925 11,671
======== ======== ======== ========
Weighted average common shares
outstanding-diluted 11,949 14,076 11,925 11,671
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
4
SEER TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
June 30,
1998 1997
------ ------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(41,828) $(10,617)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 3,302 3,554
Deferred income taxes - (413)
Provision for uncollectible accounts 644 4,268
Write-down of assets 4,701 -
Guaranty-related costs 93 -
Changes in assets and liabilities:
Trade accounts receivable 8,323 7,816
Prepaid expenses and other assets 449 2,056
Accounts payable, accrued expenses,
and income taxes payable 3,036 (7,888)
Deferred revenue (1,245) (2,393)
-------- --------
Net cash used in operating activities (22,525) (3,617)
Cash flows from investing activities:
Purchases of property and equipment (307) (765)
Capitalization of software development costs (128) (851)
-------- --------
Net cash used in investing activities (435) (1,616)
Cash flows from financing activities:
Issuance of common shares 208 355
Issuance of preferred shares 5,000 -
Preferred stock issuance costs (31) -
Repurchase of common shares - (100)
Net borrowings under lines of credit 14,760 7,248
-------- --------
Net cash provided by financing activities 19,937 7,503
Effect of exchange rate changes on cash (20) (40)
-------- --------
Net increase (decrease) in cash and
cash equivalents (3,043) 2,230
Cash and cash equivalents:
Beginning of period 4,268 377
-------- --------
End of period $ 1,225 $ 2,607
======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
5
SEER TECHNOLOGIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note 1. Interim Financial Statements
The accompanying unaudited financial statements should be read in
conjunction with the audited financial statements and notes thereto contained
in the Company's Annual Report on Form 10-K for fiscal year 1997. The
Company's fiscal year ends September 30. The results of operations for the
interim periods shown in this report are not necessarily indicative of results
to be expected for other interim periods or for the full fiscal year. In the
opinion of management, the information contained herein reflects all
adjustments necessary for a fair statement of the interim results of
operations. All such adjustments are of a normal, recurring nature, except
for the restructuring charges recorded in the second and third quarters of
fiscal year 1998 and the issuance of preferred stock during the third quarter
of fiscal year 1998. See Notes 6 and 7.
Note 2. Earnings (Loss) Per Share
During the first quarter of fiscal year 1998, the Company adopted the
provisions of Statement of Financial Accounting Standards ("SFAS") No. 128,
"Earnings per Share", which specifies the computation, presentation, and
disclosure requirements for earnings per share. All prior period earnings per
share data has been restated, as applicable, to conform with the provisions of
the statement.
Basic earnings (loss) per share is computed based upon the weighted
average number of common shares outstanding. Diluted earnings (loss) per
share is computed based upon the weighted average number of common shares
outstanding and any potentially dilutive securities. Potentially dilutive
securities are not included in the diluted earnings per share calculations if
their inclusion would be anti-dilutive to the basic earnings (loss) per share
calculations. Potentially dilutive securities outstanding during the quarter
and year-to-date periods of fiscal years 1997 and 1998 include stock options,
nonvested stock, and Series A convertible preferred stock. Series B
convertible preferred stock were also potentially dilutive securities
outstanding during the third quarter of fiscal year 1998.
Note 3. Income Taxes
The Company's effective tax rate differs from the statutory rate
primarily due to the fact that an income tax benefit was not recorded for the
net loss for the first three quarters of fiscal year 1998. Management
believes that it is more likely than not that the realization of the reported
deferred tax assets will occur in the future based on current earnings
forecasts, tax planning strategies and reversals of book-tax temporary
differences. The Company will continue to assess the realization of deferred
tax assets on an ongoing basis.
The income tax provision for the third quarter and year-to-date period of
fiscal year 1998 is primarily related to income taxes from profitable foreign
operations and foreign withholding taxes.
Note 4. Use of Accounting Estimates
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 amounts could differ from these estimates.
6
Note 5. Recent Accounting Pronouncements
In June, 1997, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 130, "Reporting Comprehensive Income", and SFAS No. 131, "Disclosures
About Segments of an Enterprise and Related Information". Both SFAS No. 130
and SFAS No. 131 are required to be adopted for fiscal years beginning after
December 15, 1997. Upon the effective date of each of the new statements, the
Company will make the necessary changes to comply with the provisions of each
statement and restate all prior periods presented. The Company does not
expect the adoption of these statements to have a material impact on the
Company's financial condition or results of operations.
The American Institute of Certified Public Accountants has issued
Statement of Position 97-2, "Software Revenue Recognition". SOP 97-2 is
effective for transactions entered into in fiscal years beginning after
December 15, 1997 and provides guidance on applying generally accepted
accounting principles in recognizing revenue on software transactions. The
Company does not expect the application of the SOP to have a material impact on
the Company's financial condition or results of operations.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 establishes accounting and
reporting standards requiring that every derivative instrument be recorded in
the balance sheet as either an asset or liability measured at its fair market
value. The statement also requires that changes in the derivative's fair
market value be recognized currently in earnings unless specific hedge
accounting criteria are met. SFAS No. 133 is effective for fiscal years
beginning June 15, 1999, with earlier adoption permitted. The Company is
currently assessing the impact of this new statement on its consolidated
financial position, liquidity, and results of operations.
Note 6. Restructuring Charges
During the second quarter of fiscal year 1998, the Company began work on a
revised business plan, necessitated by a decline in demand for the Company's
software products. As a result of this effort, at the end of the second
quarter of fiscal year 1998, the Company announced its plans to streamline
its sales and marketing organizations, as well as reorganize its technical
operations into one cohesive unit, providing improved product support and
more focused development of new products. The general and administrative
organization within the Company was also streamlined to support the newly-
restructured operating divisions. The restructuring included a staff
reduction of approximately 5%, the abandonment of leased facilities in the
US, Brazil, and Singapore, and the write-down to fair value of certain
assets or accrual of costs related to products, distribution
channels, and vendor-provided product support contracts which were being
discontinued. The Company recorded a restructuring charge of $9 million during
the second quarter of fiscal year 1998, which consisted of approximately $1.4
million in personnel-related charges, approximately $1.1 million of costs
associated with carrying vacated space until the lease expiration date,
approximately $2.7 million in write-down of assets, approximately $3.0 million
for contractually obligated product support services, and approximately $.7
million in professional fees related to the restructuring.
The Company completed its restructuring in the third quarter of fiscal
year 1998 and recorded an additional charge of $4.2 million. This
restructuring charge consisted of approximately $1.1 million in personnel
related charges, approximately $2.0 million in the write-down of assets for
discontinued distribution channels, and approximately $1.1 million in
professional fees related to the restructuring.
To date, the Company has paid approximately $2.3 million in cash related
to the restructuring. The Company believes the accrued restructuring cost of
$6.2 million at June 30, 1998 represents its remaining cash obligations.
Note 7. Preferred Stock
During April, 1998, the Company completed its agreement to sell 1,762,115
shares of its Series B Convertible Preferred Stock (the "Preferred Stock") to
its primary shareholder Welsh, Carson, Anderson, and Stowe VI L.P. ("WCAS") and
certain WCAS affiliates, resulting in gross proceeds to the Company of $5
million. The proceeds from the sale of the Preferred Stock will be used for
general corporate purposes. The sale of the Preferred Stock was made in a
private transaction exempt from the registration requirements of the federal
securities laws.
7
Each share of Preferred Stock may be converted at any time at the option
of the holder into shares of common stock of the Company at a conversion rate
of one common share for each share of Preferred Stock, subject to adjustment
upon the occurrence of certain events. The Preferred Stock is not entitled to
receive dividends in any fixed amount but will receive dividends on an as
converted basis in the event that a dividend is paid on the Company's common
stock. The Preferred Stock will rank senior in right of payment to the
Company's common stock. In the event of any liquidation, dissolution or
winding up of the Company, holders of Preferred Stock will be entitled to
receive a liquidation preference of $2.8375 per share before payment is made
or assets are distributed to holders of the Company's common stock. In
addition, the holders of Preferred Stock are entitled to vote together with
the holders of common stock and the Series A Convertible Preferred Stock on
all matters to be voted on by the stockholders of the Company. The Preferred
Stock ranks pari passu with the Series A Convertible Preferred Stock as to
liquidation and dividend payments.
The Company is subject to certain restrictions while shares of Preferred
Stock remain outstanding, including restrictions on the Company's ability to
declare dividends, purchase or redeem any outstanding shares of its common
stock, create or authorize the creation of additional classes of capital stock
of the Company, increase the authorized amount of Preferred Stock, create or
authorize the creation of any securities convertible into shares of Preferred
Stock or any other class of capital stock of the Company.
Note 8. Credit Facilities
The Company maintains two credit facilities (the "Revolving Facility" and
the "Guaranteed Facility") for working capital purposes and a line of credit to
enter foreign exchange contracts. During the third quarter of fiscal year
1998, the Company and its lenders completed several amendments to its existing
agreements. The Guaranteed Facility, which is guaranteed by WCAS, was amended
to increase the available borrowings under the facility from $12.5 million to
$17 million and to extend its expiration date to June 30, 1999. WCAS also
agreed to guarantee the Company's line of credit to enter foreign exchange
contracts, and the availability of this line was reduced from $3.5 million to
$.5 million. In connection with these amendments to WCAS' guarantees, the
Company issued 30,000 shares of its common stock to WCAS. The Company's
Revolving Facility was also amended to extend the expiration date to May 31,
1999; however, it is automatically renewed for successive terms of one year
unless terminated by either party.
8
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
General Information and Recent Developments
Seer Technologies, Inc. (the "Company" or "Seer") is one of the software
industry's earliest pioneers and a long-time leader in component-based software
application development. Historically, the Company has been a distributor of
application development tools and related services. During the second and
third quarters of fiscal year 1998, the Company developed a revised business
plan, necessitated by a decline in demand for the Company's application
development tools. The Company attributes the on-going slow-down in the
global market for application development tools primarily to the continued
and pervasive diversion of funds and resources into renovating applications
for the Year 2000. In response to this, Seer completed an in-depth market
assessment initiative to identify opportunities that might broaden its
market scope and decrease the negative impact of the Year 2000 drain on its
business. Based on this assessment, management is now in the process of
shifting the company from its traditional software tools orientation to an
updated solutions-focused approach that blends its consulting services and
enabling technologies into whole solutions that address identified market
opportunities. Some of these opportunities include helping companies
leverage the investment they are making in their Year 2000 renovation efforts
by offering a variety of application renewal solutions that include
modernizing applications through internet and electronic commerce enablement
and functional integration with other new and legacy applications.
As part of its revised business plan, the Company has been restructured to
centralize key functions and consolidate operations around areas of technical
focus to both improve productivity and reduce worldwide infrastructure costs in
line with future business prospects. The changes made to implement this plan
required the Company to record restructuring charges in the second and third
quarters of fiscal year 1998. Management believes that the changes will
ultimately lead to profitability, but there are no assurances it will be
successful or when profitability will be reached.
9
Risks
The Company's revenues vary from quarter to quarter, with the largest
portion of revenue typically recognized in the last month of each fiscal
quarter and the third and fourth quarters of each fiscal year. The Company
believes that these patterns are partly attributable to the Company's sales
commission policies, which compensate sales personnel for meeting or
exceeding quarterly and annual quotas, and to the budgeting and purchasing
cycles of customers. Furthermore, as the size of individual sales is
generally large, a single customer may have a significant impact on a
quarter. In addition, the substantial commitment of executive time and
financial resources historically required of a potential customer to make a
decision to purchase the Company's products increases the risk of quarter-to-
quarter fluctuations. The Company typically does not have any material
backlog of unfilled software orders, and product revenue in any quarter is
substantially dependent upon orders received in that quarter. Because the
Company's operating expenses are based on anticipated revenue levels and are
relatively fixed over the short term, variations in the timing of recognition
revenue can cause significant variations in operating results from quarter to
quarter. Fluctuations in operating results may result in volatility in the
price of the Company's common stock.
The Company is aware of the issues associated with the programming code
which exist in computer systems as the millennium (Year 2000) approaches. The
"Year 2000" problem is pervasive and complex as virtually every computer
operation will be affected in some way by the rollover of the two digit year
value to 00. The issue is whether computer systems will properly recognize
date sensitive information when the year changes to 2000. Systems that do not
properly recognize such information could generate erroneous data or cause a
system to fail. The Company is utilizing both internal and external resources
to identify, correct or reprogram, and test its internal systems for the Year
2000 compliance. It is anticipated that all reprogramming efforts will be
completed in time to allow for adequate testing. To date, confirmations have
been received from the Company's primary processing vendors that the Company's
existing systems are "Year 2000" compliant or plans are being developed to
address processing of transactions in the Year 2000. Management does not
expect that the Company's Year 2000 compliance expense will be material to
its results of operations. Management believes, however, that as other
companies allocate increasing portions of their information technology
budgets to Year 2000 compliance issues, they become less likely to purchase
new application development tools. Management believes this trend has
negatively affected, and is likely to continue to negatively affect, the
Company's software products revenue and results of operations while the
Company implements its new business plan. See "-General Information and
Recent Developments" and "-Results of Operations - Revenue and Gross Profit -
Software Products."
This report contains forward-looking statements relating to such matters
as anticipated financial performance, business prospects, technological
developments, new products, research and development activities and similar
matters. The Private Securities Litigation Reform Act of 1995 provides a safe
harbor for forward-looking statements. In order to comply with the terms of
the safe harbor, the Company notes that a variety of factors could cause its
actual results to differ materially from the anticipated results or other
expectations expressed in the Company's forward-looking statements. The
Company's performance, development and results of operations may be affected
by the risks presented by: (i) market acceptance of the Company's new
strategic direction; (ii) continued market acceptance of the Company's
existing technology and the Company's ability to develop new products and
provide additional services that will meet market demand; (iii) fluctuations
in quarterly operating results and volatility of the price of the Company's
common stock; (iv) the inability to attract and retain consultants and
development professionals; (v) the Company's ability to attract, retain and
train qualified sales professionals and the ability of those sales
professionals to perform to quota; (vi) the sufficiency of the Company's
liquidity and capital resources; (vii) competition; (viii) the Company's
reliance on its relationship with IBM; (ix) customer concentration; (x) the
potential failure to meet product delivery dates; (xi) matters relating to
international operations; and (xii) intellectual property and proprietary
rights. See the Company's Registration Statement on Form S-1 (Registration
No. 33-92050) and "-Liquidity and Capital Resources" for a more detailed
description of these and other risks presented by the Company's operations.
10
Results of Operations
The following table sets forth, for the periods indicated, the Company's
unaudited results of operations expressed as a percentage of revenue:
<TABLE>
<CAPTION>
Three months ended Nine months ended
June 30, June 30,
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenue:
Software products 10.1 % 34.7 % 11.4 % 30.7 %
Maintenance 21.0 % 13.7 % 20.3 % 14.5 %
Services 68.9 % 51.6 % 68.3 % 54.8 %
-------- -------- -------- --------
Total 100.0 % 100.0 % 100.0 % 100.0 %
Cost of revenue:
Software products 2.4 % 1.6 % 2.8 % 1.5 %
Maintenance 8.1 % 8.3 % 11.1 % 8.6 %
Services 62.1 % 36.6 % 63.2 % 41.1 %
-------- -------- -------- --------
Total 72.6 % 46.5 % 77.1 % 51.2 %
Gross profit 27.4 % 53.5 % 22.9 % 48.8 %
Operating expenses:
Sales and marketing 22.9 % 29.4 % 35.2 % 30.3 %
Research and product development 20.7 % 11.0 % 21.4 % 12.9 %
General and administrative 15.5 % 10.7 % 16.6 % 16.6 %
Restructuring charges 26.9 % - 26.4 % 0.8 %
-------- -------- -------- --------
Total 86.0 % 51.1 % 99.6 % 60.5 %
Other income (expense), net (4.9)% (2.0)% (4.3)% (1.5)%
-------- -------- -------- --------
Income (loss) before taxes (63.5)% (0.4)% (81.0)% (13.2)%
Income tax provision (benefit) 4.7 % 0.2 % 2.7 % 1.2 %
-------- -------- -------- --------
Net income(loss) (68.2)% 0.2 % (83.7)% (14.4)%
======== ======== ======== ========
</TABLE>
The following table sets forth unaudited data for total revenue by
country of origin as a percentage of total revenue for the periods indicated:
<TABLE>
<CAPTION>
Three months ended Nine months ended
June 30, June 30,
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
United States 24.5% 31.3% 28.5% 34.5%
Mexico/Canada 2.2% 2.1% 2.1% 2.3%
South America 0.6% 1.8% 1.0% 3.1%
Europe 62.9% 54.4% 59.0% 51.7%
Middle East/Africa 4.0% 0.9% 3.7% 1.6%
Asia Pacific 5.8% 9.5% 5.7% 6.8%
-------- -------- -------- --------
100.0% 100.0% 100.0% 100.0%
======== ======== ======== ========
</TABLE>
11
Revenue and Gross Profit. The Company's total revenue decreased 42% for
the third quarter and decreased 33% for the year-to-date period of fiscal year
1998 as compared to the same periods of fiscal year 1997. Gross profit
decreased to 27% as compared to 54% for the third quarter and declined to 23%
from 49% for the year-to-date period of fiscal year 1998 in relation to the
same periods of fiscal year 1997. These declines were primarily attributable
to a significant decrease in software products revenue, along with declines
in services revenue and maintenance revenue.
Software products. Software products revenue decreased 83% for the third
quarter and 75% for the year-to-date period of fiscal year 1998 as compared to
the same periods of fiscal year 1997. In comparing fiscal year 1998 to 1997,
software gross margins decreased from 96% to 77% in the third quarter and from
95% to 76% for the year-to-date period. As mentioned above, management
believes the primary cause of the decline in software revenue for the quarter
and year-to-date periods is the continued diversion of funds and resources by
Global 5000 corporations into renovations of existing applications for the
Year 2000, rather than investing in new applications and development tools.
Software revenue was also adversely impacted during the third quarter of
fiscal year 1998 by the restructuring of the Company, which caused a
significant diversion of internal resources. Additionally, potential sales
of software products to Asian prospects in fiscal year 1998 have been impeded
by the downturn in the Asian economy.
Software gross margin decreased in the quarter and year-to-date periods of
fiscal year 1998 in comparison to the same periods a year ago primarily because
of the decline in software products revenue and an increase in the amortization
of capitalized software costs. Amortization of capitalized software costs
increased in fiscal year 1998 due to several new products becoming generally
available in the second half of fiscal year 1997.
Maintenance. Maintenance revenue decreased 11% for the third quarter and
6% for the year-to-date periods of fiscal year 1998 as compared to the same
periods a year ago. The decrease in maintenance revenue over the prior year
periods is a result of losses to the installed customer base, a reduction in
maintenance usage, and lower software products revenue in the first nine months
of fiscal year 1998 as compared to the same period of fiscal year 1997. The
decline in software products revenue is expected to negatively impact
maintenance revenue in future quarters since the Company has added fewer
customers to its installed base in 1998 than in the previous year.
Maintenance gross margins increased to 61% in the third quarter and to 45%
in the year-to-date period as compared to 40% and 42%, respectively, in the
same periods of fiscal year 1997. The increase in gross margins is a result of
decreasing maintenance costs offset by a decline in maintenance revenue. The
large decrease in cost of maintenance in the third quarter and year-to-date
periods of fiscal year 1998 is primarily due to a decrease in vendor-provided
support fees. Additionally, in fiscal year 1997, the Company incurred
significant headcount and travel costs while assisting several customers with
an upgrade to a newer version of Seer*HPS. These costs have declined with
completion of this initiative.
Services. For the third quarter and year-to-date periods of fiscal year
1998, services revenue decreased 23% and 16%, respectively, as compared to the
same periods of fiscal year 1997. Services gross margins decreased to 10% from
29% in the third quarter and to 7% from 25% in the year-to-date period of
fiscal year 1998 in relation to the same periods of the prior fiscal year. The
decrease in revenue and services margin in the first nine months of fiscal year
1998 is primarily a result of a decrease in the utilization of billable
personnel and a reduction in demand for consulting and training services
because of lower than expected software sales during fiscal year 1998. The
Company believes it has taken steps that will better align its services
personnel, both quantitatively and qualitatively, with its revised business
plan. As part of its business plan revision, the Company plans to broaden
the scope of its consulting organization to services outside of its own
product line.
Operating Expenses. Operating expenses in both fiscal years 1998 and 1997
were significantly impacted by unusual charges. In the second and third
quarters of fiscal year 1998, the Company recorded restructuring charges of
$9 million and $4.2 million, respectively. In the first quarter of fiscal year
1997, the Company recorded a $3.8 million reserve for an account which was
determined to be uncollectable and a $.5 million dollar restructuring charge.
Excluding these unusual adjustments, in the third quarter and year-to-date
periods of fiscal year 1998 total operating expenses decreased 33% and 10% in
the year-to-date period in comparison to the same periods of fiscal year 1997.
12
Sales and marketing expenses decreased 55% in the third quarter and 22% in
the year-to-date period of fiscal year 1998 as compared to the same periods of
fiscal year 1997. Sales expenses significantly decreased in the third quarter
and year-to-date periods of fiscal year 1998 due to headcount reductions of 60%
and 40% from the prior year periods, respectively. Marketing expenses also
significantly decreased in the third quarter of fiscal year 1998 as compared to
the same period of fiscal year 1997 due to a 70% decrease in headcount. Both of
these decreases are a result of the Company's revision of its business plan to
compensate for the decline in demand for its software products as previously
discussed.
Sales and marketing expenses are expected to continue to be lower in the
near future due to the following actions the Company is taking as part of its
revised business plan. The Company halted its direct sales operation in Latin
America and is working to establish indirect channels of distribution in this
region. Also, the Company reevaluated its efforts with indirect distribution
channels in the United States and decided to pursue fewer new partnerships and
focus on further developing existing relationships. Finally, the worldwide
sales and marketing forces were streamlined in the third quarter of fiscal year
1998, so that the related expenses will more closely conform to the Company's
current license revenue prospects. Marketing and promotion expenses should
also decline as the Company focuses more on the tactical execution of its
plans and less on the design of new strategic initiatives.
Research and product development expenses increased 10% in the third
quarter and 12% for the year-to-date period of fiscal year 1998 as compared to
the same periods of fiscal year 1997. This increase is primarily a result of
an approximate 20% increase in average personnel costs for the first nine
months of fiscal year 1988 and an increase in the number and cost of contract
employees utilized. During the first quarter of fiscal year 1998, the
Company determined that a significant one-time overall increase in salaries
was necessary to ensure the Company's competitiveness in the recruiting and
retention of research and development personnel. As part of its revised
business plan, the Company has organized the product development, maintenance,
and product management groups into one technical operations group which is
expected to bring efficiency to the development and maintenance processes and
produce overall cost savings in the long term.
Total general and administrative expense, excluding the $3.8 million
reserve of accounts receivable mentioned above, decreased 16% for the third
quarter and 3% for the year-to-date period of fiscal year 1998 as compared to
the same periods a year ago. The decrease for the third quarter was caused
by a reduction in headcount to bring general and administrative expenses in
line with the Company's current forecasted business levels.
As previously mentioned, the Company recorded restructuring charges of
$9 million in the second quarter and $4.2 million in the third quarter of
fiscal year 1998. The restructuring included a staff reduction of
approximately 5%, the abandonment of leased facilities in the US, Brazil, and
Singapore, and the write-down to fair value of certain assets or accrual of
costs related to products, distribution channels, and vendor-provided product
support contracts which were being discontinued. The Company recorded a
restructuring charge of $9 million during the second quarter of fiscal year
1998, which consisted of approximately $1.4 million in personnel-related
charges, approximately $1.1 million of costs associated with carrying vacated
space until the lease expiration date, approximately $2.7 million in write-
down of assets, approximately $3.0 million for contractually obligated
product support services, and approximately $.7 million in professional fees
related to the restructuring.
The Company completed its restructuring in the third quarter of fiscal
year 1998 and recorded an additional charge of $4.2 million. This
restructuring charge consisted of approximately $1.1 million in personnel
related-charges, approximately $2.0 million in the write-down of assets for
discontinued distribution channels, and approximately $1.1 million in
professional fees related to the restructuring. To date, the Company has paid
approximately $2.3 million in cash related to the restructuring. The Company
believes the accrued restructuring cost of $6.2 million at June 30, 1998
represents its remaining cash obligations.
The $500,000 restructuring charge recorded in the first quarter of fiscal
year 1997 related primarily to severance benefits and the consolidation of
leased facilities.
Income Taxes. The increase in income taxes in the third quarter of fiscal
year 1998 over the same period of fiscal year 1997 is primarily due to an
increase in foreign withholding taxes and the fact that no United States income
tax benefits were recorded. Management believes that it is more likely than
not that the realization of the reported deferred tax assets will occur in the
future based on current earnings forecasts, tax planning strategies and
reversals of book-tax temporary differences. The Company will continue to
assess the realization of deferred tax assets on an ongoing basis.
13
Liquidity and Capital Resources
During the first nine months of fiscal year 1997, cash flow used by
operations and investing activities was $5.2 million, while in the first nine
months of fiscal year 1998 there was a net usage of $23 million in cash. The
decline in cash flow provided by operations and investing activities is
primarily due to a decrease in cash received from customers due to lower
revenues, $2.3 million in payments related to the restructuring charges, and an
increase in interest on credit facilities. As of June 30, 1998, the Company
did not have any material commitments for capital expenditures.
The Company financed its net cash outflow in the first half of fiscal year
1998 through credit facilities with commercial banks and the issuance of
additional preferred stock. At June 30, 1998, the Company maintained two
credit facilities (the "Revolving Facility" and the "Guaranteed Facility")
which provide for combined borrowings of up to $42 million. The Revolving
Facility allows for borrowings of up to $25 million, bears interest at the
London Interbank Offered Rate ("LIBOR") plus 5.0% and is collateralized by the
Company's accounts receivable, equipment and intangibles. The Guaranteed
Facility allows for borrowings of up to $17 million and bears interest at the
higher of LIBOR plus 1.25% or .5% plus the prime rate quoted by the Federal
Reserve. The Guaranteed Facility is guaranteed by WCAS, pursuant to an
agreement with the Company. Borrowings under the Revolving Facility must
always exceed borrowings under the Guaranteed Facility. There are no other
financial covenants for either credit facility. As of June 30, 1998, the
Company had outstanding borrowings of $21.5 million under the Revolving
Facility and $15.4 million under the Guaranteed Facility. The interest rates
for the Revolving Facility and the Guaranteed Facility were 10.7% and 8.5%
respectively, at June 30, 1998. See Note 8 of Notes to Consolidated
Financial Statements.
Additionally, at June 30, 1998, the Company had a line of credit of $.5
million available to enter foreign exchange contracts, which is also guaranteed
by WCAS. At June 30, 1998 the aggregate notional amount of foreign exchange
contracts outstanding was $5.5 million.
During April 1998, the Company completed its agreement to sell 1,762,115
shares of its Series B Convertible Preferred Stock (the "Preferred Stock") to
its primary shareholder Welsh, Carson, Anderson, and Stowe VI L.P. ("WCAS") and
certain WCAS affiliates, resulting in gross proceeds to the Company of $5
million. The proceeds from the sale of the Preferred Stock were used for
general corporate purposes. The sale of the Preferred Stock was made in a
private transaction exempt from the registration requirements of the federal
securities laws. The Company also issued 30,000 shares of Common Stock to WCAS
in connection with certain amendments to WCAS' guarantees on the Company's
credit facilities. See Notes 7 and 8 of Notes to Consolidated Financial
Statements.
Due to payment terms of certain software contracts, a portion of the
related receivables are classified as non-current assets. As of June 30, 1998,
the Company has evaluated the collectibility of the non-current receivables
based upon the customers' prior payment history and determined that the
receivables are collectible.
The Company believes that existing cash on hand, cash provided by future
operations, cash received through the issuance of its Series B Convertible
Preferred Stock as discussed above, and additional borrowings under its lines
of credit will be sufficient to finance its operations and expected working
capital and capital expenditure requirements for at least the next twelve
months, so long as the Company performs to its revised operating plan.
Thereafter, the Company's liquidity will depend upon the results of future
operations, as well as available sources of financing. Although the Company's
results of operations for the first half of fiscal year 1998 fell below
expectations for the reasons described in "-Results of Operations" above,
management is implementing changes in its business plan in an effort to
improve the Company's long-term prospects for profitability. In view of the
relatively long lead time necessary to realize profits as a result of these
activities, however, management does not expect a material short-term
improvement in the Company's results of operations as a result of these
activities alone. Rather, as is discussed above, the Company's short-term
results of operations are more likely to be affected by the timing of its
recognition of software revenue generated through its existing distribution
channels. Because sales of the Company's products typically involve a
substantial commitment of its potential customers' time and resources, the
Company's ability to influence the timing of such transactions is often
limited. Accordingly, management is unable to predict with certainty whether
the Company will ultimately perform in accordance with its operating plan.
14
Therefore, there can be no assurance that the Company will be able to continue
to meets its cash requirements through operations or, if needed, obtain
additional financing on acceptable terms, and the failure to do so may have a
materially adverse impact on the Company's business and operations.
Recent Accounting Pronouncements
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income", and SFAS No. 131, "Disclosures About Segments of an Enterprise and
Related Information". Both SFAS No. 130 and SFAS No. 131 are required to be
adopted for fiscal years beginning after December 15, 1997. Upon the effective
date of each of the new statements, the Company will make the necessary changes
to comply with the provisions of each statement and restate all prior periods
presented. The Company does not expect the adoption of these statements to
have a material impact on the Company's financial condition or results of
operations.
The American Institute of Certified Public Accountants has issued
Statement of Position ("SOP") 97-2, "Software Revenue Recognition". SOP 97-2
is effective for transactions entered into in fiscal years beginning after
December 15, 1997 and provides guidance on applying generally accepted
accounting principles in recognizing revenue on software transactions. The
Company does not expect the application of the SOP to have a material impact
on the Company's financial condition or results of operations.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 establishes accounting and
reporting standards requiring that every derivative instrument be recorded in
the balance sheet as either an asset or liability measured at its fair market
value. The statement also requires that changes in the derivative's fair
market value be recognized currently in earnings unless specific hedge
accounting criteria are met. SFAS No. 133 is effective for fiscal years
beginning June 15, 1999, with earlier adoption permitted. The Company is
currently assessing the impact of this new statement on its consolidated
financial position, liquidity, and results of operations.
15
PART II. Other Information
Item 1. Legal Proceedings
In December 1997, the Company filed a lawsuit against Saadi Abbas and
Cambridge Business Solutions (UK) Limited ("CBS") alleging that Mr. Abbas and
CBS had injured the Company by interfering with the Company's ability to
market and sublicense the LightSpeed Financial Model. Mr. Abbas
counterclaimed, alleging he was constructively dismissed by the Company. The
Company obtained a preliminary injunction against Mr. Abbas and CBS. The
trial of the case is expected to take place in October 1998. At the present
point in the litigation, it is impossible to calculate the chances of success
in this litigation. However, the Company intends to vigorously pursue this
matter and does not believe that the results of this litigation will have a
material effect on the financial position or results of operations of the
Company.
In September 1997, Galorath Associates, Inc. ("GA") filed a lawsuit
against the Company in the United States District Court for the Central
District of California claiming that the Company was infringing its common
law trademark rights in the mark "Seer". The complaint seeks an unspecified
sum in damages and injunctive relief. The two organizations began and
continued settlement discussions for some months. On March 26, 1998 the
Company filed its answer to the complaint and counterclaimed against GA for
trademark infringement, false designation of origin, unfair competition and
trade name dilution. The parties continued their settlement discussions, and
the Court has recently ordered a short discovery period and an early trial date
in October 1998. The Company intends to vigorously pursue the claims against
GA and to strenuously defend against GA's claims. Currently, it is impossible
to calculate the chances of success in this litigation. The Company does not
believe that the results of this litigation will have a material effect on the
financial position of the Company.
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
Pursuant to Rule 14a - 4(c)(l) promulgated under the Securities Exchange
Act of 1934, as amended, shareholders desiring to present a proposal for
consideration at the Company's 1999 Annual Meeting of Shareholders, must
notify the Company in writing at its principal office, 8000 Regency
Parkway, Cary, North Carolina 27511 (attn: Corporate Secretary) of the
contents of such proposal no later then December 12, 1998. Failure to
timely submit such a proposal will enable the proxies appointed by
management to exercise their discretionary voting authority if the
proposal is raised at the Annual Meeting.
16
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10.58 Addendum #1, dated July 6, 1998, to the Lease Agreement between
the Company and Regency Park Corporation (Cary, NC). (Original
Agreement filed as Exhibit 10.47 to the Quarterly Report on form
10-Q for the period ended March 31, 1997. No. 0-26194)
27.1 Financial Data Schedule
(b) Reports on Form 8-K
None
17
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.
SEER TECHNOLOGIES, INC.
/s/ Steven Dmiszewicki
Date: August 13, 1998 ..............................................
Steven Dmiszewicki
Co-President and Chief Financial Officer
18
ADDENDUM #1 EXHIBIT 10.58
AGREEMENT made this 6th day of July 1998, between REGENCY PARK
CORPORATION, A North Carolina corporation having its principal place of
business in Cary, North Carolina (the "Landlord")and SEER TECHNOLOGIES, INC.,
a Delaware corporation having its principle place of business in Cary, North
Carolina (the "Tenant").
WITNESSETH:
WHEREAS, the Landlord and Tenant entered into an Amended and Restated Lease
Agreement dated March 31, 1997 (herein collectively called the "Lease"),
whereby the Landlord leased to the Tenant premises in a building at 8000
Regency Parkway, Cary, North Carolina (herein called the "Building"); and
WHEREAS, the Tenant desires to reduce it's Premises in the Building.
NOW, THEREFORE, in consideration of the Premises and of the mutual
Agreements hereinafter set forth, it is hereby mutually agreed as follows:
1. Effective August 1, 1998, the Annual Rental due under Article 2.01 ANNUAL
RENTAL of the Lease Agreement shall be as follows:
Rental of Eight Hundred Eighty-Seven Thousand Six Hundred Fifty-Eight and
90/100 Dollars($887,658.90) per year ("Annual Rent"), payable in equal
monthly installments of Seventy-Three Thousand Four Hundred Seventy-One and
57/100 Dollars ($73,971.57), in advance, on or before the first day of each
calendar month for the period August 1, 1998, up to and including March 31,
1999;
Rental of Nine Hundred Forty-One Thousand Four Hundred Sixty-Five and 00/100
Dollars($941,465.00) per year ("Annual Rent"), payable in equal monthly
installments of Seventy-Eight Thousand Four Hundred Fifty-Five and 42/100
Dollars ($78,455.42), in advance, on or before the first day of each
calendar month for the period April 1, 1999, up to and including March 31,
2001;
Rental of Nine Hundred Ninety-Five Thousand Two Hundred Sixty-Three and
00/100 Dollars ($995,263.00) per year ("Annual Rent"), payable in equal
monthly installments of Eighty-Two Thousand Nine Hundred Thirty-Eight and
58/100 Dollars ($82,938.58), in advance, on or before the first day of each
calendar month for the period April 1, 2001, up to and including March 31,
2004;
2. The space as outlined on the floor plan which is attached to the Amended and
Restated Lease Agreement dated March 31, 1997 as Exhibit A and Exhibit A-1,
both for the first floor, shall be replaced by Exhibit G and Exhibit G-1.
3. Effective August 1, 1998, Article 2, Paragraph 2.02.01 OPERATING EXPENSES of
the Lease Agreement shall be amended to reflect that the Tenant's share of
Operating Expenses over the Base Operating Expenses shall now be thirty-
seven and thirteen one hundredths percent (37.13%) for the "Second Term"
as per Lease.
1
4. Effective August 1, 1998, Article 2, Paragraph 2.02.02 REAL ESTATE TAXES
shall be amended to reflect that the Tenant's share of Teal Estate Taxes
over the Base Real Estate Taxes shall now be thirty-seven and thirteen one
hundredths percent 37.13%) for the "Second Term" as per the Lease.
5. The reduction of Premises constitutes approximately four thousand eight
hundred nineteen (4,819)rentable square feet.
6. The "Occupied Premises" as defined in the Amended and Restated Lease
Agreement constitutes fifty-three thousand seven hundred ninety-eight
(53,798) rentable square feet.
7. The Tenant shall pay to the Landlord as a one-time payment to be made no
later than July 31, 1998, Twenty-Nine Thousand Three Hundred Fifty and
00/100 Dollars ($29,350.00).
8. Except as herein modified, the Amended and Restated Lease Agreement shall
continue in full force and effect.
2
IN WITNESS WHEREOF, this instrument has been duly executed by the parties
hereto as of the day and year first above written.
REGENCY PARK CORPORATION
Landlord
Corporate Seal
By:/s/ Eric Salomon
Eric Salomon
Vice President
ATTEST:
/s/ Patricia Messere
Patricia Messere
Assistant Secretary
Corporate Seal
SEER TECHNOLOGIES, INC.
Tenant
By: /s/Steven Dmiszewicki
Title: Co-President and Chief
Financial Officer
ATTEST:
/s/ Dennis M. KcKinnie
Secretary
Exhibit G - Floor Plans for Floors 1-5.
Exhibit G-1 - Floor Plans for Occupied Premises on Floors 1-4.
3
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