-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, TLaab04SaiM6iJu8YrHDk73t2tGKYwMdw6h9O3Wv4sQY33LWg2J29IClrFNPMiLA CbjMUDPNs2Nt6nRwXvaIzA== 0001012870-98-002893.txt : 19981116 0001012870-98-002893.hdr.sgml : 19981116 ACCESSION NUMBER: 0001012870-98-002893 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981113 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SIEBEL SYSTEMS INC CENTRAL INDEX KEY: 0001006835 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PREPACKAGED SOFTWARE [7372] IRS NUMBER: 943187233 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-20725 FILM NUMBER: 98748765 BUSINESS ADDRESS: STREET 1: 1885 SOUTH GRANT STREET CITY: SAN MATEO STATE: CA ZIP: 94402 BUSINESS PHONE: 6502955000 MAIL ADDRESS: STREET 1: 1885 SOUTH GRANT STREET CITY: SAN MATEO STATE: CA ZIP: 94402 10-Q 1 FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 _______________ FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 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: 0-20725 SIEBEL SYSTEMS, INC. (Exact name of registrant as specified in its charter) DELAWARE 94-3187233 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 1855 SOUTH GRANT STREET SAN MATEO, CA 94402 (Address of principal executive offices, including zip code) (650) 295-5000 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Sections 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 [_] The number of shares outstanding of the registrant's common stock, par value $.001 per share, as of November 2, 1998, was 88,738,630. SIEBEL SYSTEMS, INC. FORM 10-Q FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998 TABLE OF CONTENTS PART I. FINANCIAL INFORMATION PAGE ---- Item 1. Financial Statements a) Consolidated Balance Sheets as of September 30, 1998 and December 31, 1997 3 b) Consolidated Statements of Operations for the three and nine months ended September 30, 1998 and 1997 4 c) Consolidated Statements of Cash Flows for the nine months ended September 30, 1998 and 1997 5 d) Notes to Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 11 PART II. OTHER INFORMATION Item 1. Legal Proceedings 19 Item 2. Changes in Securities and Use of Proceeds 19 Item 5. Other Information 19 Item 6. Exhibits and Reports on Form 8-K 19 SIGNATURES 21 2 PART I. FINANCIAL INFORMATION Item 1. Financial Statements SIEBEL SYSTEMS, INC. CONSOLIDATED BALANCE SHEETS (In thousands, except per share data; unaudited)
September 30, December 31, 1998 1997 ------------- ------------ Assets ------ Current assets: Cash and cash equivalents $ 105,700 $ 70,202 Short-term investments 123,476 91,999 Accounts receivable, net 107,849 63,056 Deferred income taxes 4,778 4,778 Prepaids and other 8,033 6,701 -------------- -------------- Total current assets 349,836 236,736 Property and equipment, net 30,168 24,843 Other assets 5,697 6,585 -------------- -------------- Total assets $ 385,701 $ 268,164 ============== ============== Liabilities and Stockholders' Equity ------------------------------------ Current liabilities: Accounts payable $ 5,554 $ 5,684 Accrued expenses 71,565 28,362 Income taxes payable 8,401 2,345 Deferred revenue 43,958 22,243 -------------- -------------- Total current liabilities 129,478 58,634 Deferred income taxes 162 162 -------------- -------------- Total liabilities 129,640 58,796 -------------- -------------- Stockholders' equity: Common stock; $.001 par value; 300,000 shares authorized; 88,402 and 85,864 shares issued and outstanding, respectively 88 86 Additional paid-in capital 220,509 195,432 Notes receivable from stockholders (406) (406) Deferred compensation (426) (639) Accumulated other comprehensive losses (501) (365) Retained earnings 36,797 15,260 -------------- -------------- Total stockholders' equity 256,061 209,368 -------------- -------------- Total liabilities and stockholders' equity $ 385,701 $ 268,164 ============== ==============
See accompanying notes to consolidated financial statements. 3 SIEBEL SYSTEMS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share data; unaudited)
Three Months Ended Nine Months Ended September 30, September 30, ------------------------ -------------------------- 1998 1997 1998 1997 -------- -------- --------- --------- Revenues: Software $ 77,225 $ 41,486 $ 200,567 $ 104,435 Maintenance, consulting and other 26,969 13,750 67,815 33,962 -------- -------- --------- --------- Total revenues 104,194 55,236 268,382 138,397 -------- -------- --------- --------- Cost of revenues: Software 993 1,346 4,295 2,843 Maintenance, consulting and other 16,698 7,826 42,730 19,654 -------- -------- --------- --------- Total cost of revenues 17,691 9,172 47,025 22,497 -------- -------- --------- --------- Gross margin 86,503 46,064 221,357 115,900 -------- -------- --------- --------- Operating expenses: Product development 11,572 6,607 30,862 17,272 Sales and marketing 47,242 27,204 122,163 67,211 General and administrative 6,915 4,392 17,724 12,232 Merger related expenses - 3,298 13,500 3,298 -------- -------- --------- --------- Total operating expenses 65,729 41,501 184,249 100,013 -------- -------- --------- --------- Operating income 20,774 4,563 37,108 15,887 Other income, net 1,548 1,371 4,476 3,953 -------- -------- --------- --------- Income before income taxes 22,322 5,934 41,584 19,840 Income taxes 8,259 2,279 18,583 7,543 -------- -------- --------- --------- Net income $ 14,063 $ 3,655 $ 23,001 $ 12,297 ======== ======== ========= ========= Diluted net income per share $ 0.14 $ 0.04 $ 0.23 $ 0.13 ======== ======== ========= ========= Shares used in diluted net income per share computation 100,348 95,280 99,765 93,379 ======== ======== ========= ========= Basic net income per share $ 0.16 $ 0.04 $ 0.26 $ 0.15 ======== ======== ========= ========= Shares used in basic net income per share computation 88,048 83,873 87,075 83,304 ======== ======== ========= =========
See accompanying notes to consolidated financial statements. 4 SIEBEL SYSTEMS, INC CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands; unaudited)
Nine Months Ended September 30, --------------------------- 1998 1997 --------- --------- Cash flows from operating activities: Net income $ 23,001 $ 12,297 Adjustments to reconcile net income to net cash provided by operating activities: Compensation related to stock options 193 155 Depreciation and amortization 7,969 5,673 Tax benefit from exercise of stock options 8,061 775 Loss on disposal of property and equipment 242 487 Allowance for doubtful accounts and returns 3,964 953 Changes in operating assets and liabilities: Accounts receivable (50,454) (31,149) Prepaids and other (563) (2,836) Accounts payable 1,377 (1,228) Accrued expenses 41,930 12,714 Income taxes payable 5,010 (1,035) Deferred revenue 23,139 5,048 --------- --------- Net cash provided by operating activities 63,869 1,854 --------- --------- Cash flows from investing activities: Purchases of property and equipment (15,837) (12,917) Purchases and sales of short-term investments, net (28,339) (11,472) Other assets 2,514 (2,209) --------- --------- Net cash used in investing activities (41,662) (26,598) --------- --------- Cash flows from financing activities: Proceeds from issuance of common stock 17,431 4,583 Repayment of stockholder notes - 102 --------- --------- Net cash provided by financing activities 17,431 4,685 --------- --------- Change in cash and cash equivalents 39,638 (20,059) Adjustment to conform acquired company's year end (4,140) - Cash and cash equivalents, beginning of period 70,202 77,495 --------- --------- Cash and cash equivalents, end of period $ 105,700 $ 57,436 ========= ========= Supplemental disclosures of cash flows information: Cash paid for income taxes $ 3,154 $ 7,867 ========= =========
See accompanying notes to consolidated financial statements. 5 SIEBEL SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The accompanying unaudited consolidated financial statements have been prepared on substantially the same basis as the audited consolidated financial statements, and in the opinion of management include all adjustments, consisting only of normal recurring adjustments, necessary for their fair presentation. The interim results presented are not necessarily indicative of results for any subsequent quarter or for the year ending December 31, 1998. In May 1998, Siebel acquired Scopus Technology, Inc. ("Scopus") in a merger transaction accounted for as a pooling of interests. Accordingly, all financial information has been restated to reflect the combined operations of the two companies. See Note 2. PRINCIPLES OF CONSOLIDATION The accompanying consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All intercompany accounts and transactions have been eliminated. REVENUE RECOGNITION Prior to January 1, 1998, the Company recognized revenue in accordance with Statement of Position No. 91-1, "Software Revenue Recognition." Software license revenue was recognized when all of the following criteria had been met: there was an executed license agreement, software had been shipped to the customer, no significant vendor obligations remained, the license fee was fixed and payable within twelve months and collection was deemed probable. On January 1, 1998, the Company adopted the provisions of Statement of Position No. 97-2 "Software Revenue Recognition." Revenue is recognized under SOP 97-2 when all of the following criteria have been met: persuasive evidence of an arrangement exists, delivery has occurred, the vendor's fee is fixed or determinable, and collectibility is probable. Under SOP 97-2, revenue on multiple element arrangements is allocated to the various elements based on relative fair value. Maintenance, consulting and other revenues relate primarily to maintenance, consulting services and training. Maintenance revenues are recognized ratably over the term of the maintenance contract, typically 12 to 36 months. Consulting and training revenues are generally recognized as the services are performed and are usually performed on a time and materials basis. Such services primarily consist of implementation services related to the installation of the Company's products and do not include significant customization to, or development of, the underlying software code. The Company's customer base includes a number of its suppliers (e.g. AT&T, BankBoston Robertson Stephens, Bank of America, Cabletron Systems, The Charles Schwab Corporation, Cigna Corporation, Cisco Systems, Inc., Compaq Computer Corporation, Dell Computer Corporation, Lucent Technologies, MCI Telecommunications Corporation, Microsoft Corporation, NationsBank Montgomery Securities, PeopleSoft, Inc., Sequent Computer Systems, Inc., Siemens Medical and Sun Microsystems, Inc.). On occasion, the Company has purchased goods and/or services for company operations from these vendors at or about the same time Siebel has licensed its software to these organizations. These transactions are separately negotiated at terms the Company considers to be arm's-length. During the three months ended September 30, 1998, the Company recognized revenue of approximately $10.8 million in connection with such transactions. 6 COST OF REVENUES Cost of software consists primarily of media, product packaging, documentation and other production costs, and third-party royalties. Cost of maintenance, consulting and other consists primarily of salaries, benefits and allocated overhead costs related to consulting, training and customer support personnel, including cost of services provided by third party consultants engaged by the Company. USE OF ESTIMATES The preparation of consolidated 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 consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. CASH AND CASH EQUIVALENTS, AND SHORT-TERM INVESTMENTS The Company considers all highly liquid investments with an original maturity of 90 days or less to be cash equivalents. Short-term investments generally consist of highly liquid municipal securities with original maturities in excess of 90 days. The Company has classified its investments in certain debt and equity securities as "available for sale." Such investments are carried at fair value, with gross unrealized gains and losses, when material, reported as a separate component of stockholders' equity within accumulated other comprehensive other losses. PROPERTY AND EQUIPMENT Property and equipment are stated at cost less accumulated depreciation and amortization. Depreciation is calculated using the straight-line method over the estimated useful lives of the respective assets, generally three to five years. Leasehold improvements are amortized over the lesser of the lease term or the estimated useful lives of the improvements, generally seven years. SOFTWARE DEVELOPMENT COSTS Software development costs associated with new products and enhancements to existing software products are expensed as incurred until technological feasibility in the form of a working model has been established. To date, the Company's software development has been completed concurrent with the establishment of technological feasibility, and, accordingly, no costs have been capitalized. ADVERTISING Advertising costs are expensed as incurred. Advertising expense is included in sales and marketing expense and amounted to $7,245,000 in 1997 and $6,324,000 for the nine months ended September 30, 1998. INCOME TAXES The Company uses the asset and liability method of accounting for income taxes. Under the asset and liability method, deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the consolidated financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets are recognized for deductible temporary differences, net operating loss carryforwards and credit carryforwards if it is more likely than not that the tax benefits will be realized. To the extent a deferred tax asset cannot be recognized under the preceding criteria, available allowances must be established. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. 7 NET INCOME PER SHARE Basic earnings per share is computed using the weighted average number of shares of common stock outstanding. Diluted earnings per share is computed using the weighted average number of shares of common stock and, when dilutive, convertible preferred stock outstanding and common equivalent shares from options to purchase common stock and warrants outstanding using the treasury stock method. EMPLOYEE STOCK OPTION AND PURCHASE PLANS The Company accounts for its stock-based compensation plans using the intrinsic value method. As such, compensation expense is recorded if on the date of grant the current market price of the underlying stock exceeds the exercise price. FOREIGN CURRENCY TRANSLATION The Company considers the functional currency of its foreign subsidiaries to be the local currency, and accordingly, they are translated into U.S. dollars using exchange rates in effect at period end for assets and liabilities and average exchange rates during each reporting period for the results of operations. Adjustments resulting from translation of foreign subsidiary financial statements are shown as a separate component of stockholders' equity within accumulated other comprehensive losses. CONCENTRATIONS OF CREDIT RISK Financial instruments that potentially subject the Company to a concentration of credit risk principally consist of trade accounts receivable. The Company performs ongoing credit evaluations of its customers and generally does not require collateral on accounts receivable, as the majority of the Company's customers are large, well established companies. The Company maintains reserves for potential credit losses, but historically has not experienced any significant losses related to individual customers or groups of customers in any particular industry or geographic area. FAIR VALUE OF FINANCIAL INSTRUMENTS The fair value of the Company's cash and cash equivalents, accounts receivable, and accounts payable approximate their respective carrying amounts defined as the amount at which the instrument could be exchanged in a current transaction between willing parties. RECENT ACCOUNTING PRONOUNCEMENTS In June 1997, the Financial Accounting Standards Board issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." This new accounting standard is not expected to have a material effect on the Company's consolidated financial statements. In June 1998, the Financial Accounting Standards Board issued SFAS No. 133 "Accounting for Derivative Instruments and Hedging Activities". SFAS No. 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, (collectively referred to as derivatives) and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. If certain conditions are met, a derivative may be specifically designated and accounted for as (a) a hedge of the exposure to changes in the fair value of a recognized asset or liability or an unrecognized firm commitment, (b) a hedge of the exposure to variable cash flows of a forecasted transaction, or (c) a hedge of the foreign currency exposure of a net investment in a foreign operation, an unrecognized firm commitment, an available-for-sale security, or a foreign- currency-denominated forecasted transaction. For a derivative not designated as a hedging instrument, changes in the fair value of the derivative are recognized in earnings in the period of change. This statement will be effective for all annual and interim periods beginning after June 15, 1999. Management does not believe the adoption of SFAS No. 133 will have a material effect on the financial position of the Company. 8 2. SCOPUS MERGER On May 18, 1998, the Company completed the acquisition of Scopus of Emeryville, California, a leading provider of customer service, field service, and call center software solutions. Under the terms of the agreement, each outstanding share of Scopus common stock was exchanged for newly issued shares of common stock of the Company. This resulted in the issuance of approximately 15.1 million additional shares of the Company's Common Stock. In addition, all outstanding stock options of Scopus were converted into the right to acquire the Company's Common Stock at the same exchange ratio with a corresponding adjustment to the exercise price. In connection with the merger, the Company incurred direct merger-related expenses of approximately $13.5 million consisting of direct transaction fees for investment bankers, attorneys, accountants and other professional fees of $9.1 million, integration charges related to duplicate facilities and equipment of $3.1 million and other miscellaneous expenses of $1.3 million. As of September 30, 1998, the Company had $5.0 million remaining in accrued merger expenses, which the Company expects to pay in the fourth quarter of 1998. The Company also incurred indirect merger-related expenses of approximately $1.8 million for joint sales training and merger-related marketing costs, which are included within sales and marketing expenses. The transaction has been accounted for as a pooling of interests. Accordingly, the financial statements of Siebel have been restated to include the financial position and results of operations of Scopus for all periods presented. Prior to the merger with Siebel, Scopus used a fiscal year ending March 31. The restated financial statements for the three and nine month periods ended September 30, 1997 include Siebel's results of operations for those periods and Scopus' results of operations for the three and nine month periods ended December 31, 1997. Beginning on January 1, 1998, the restated financial statements combine the operating results of Siebel and Scopus for the calendar periods noted. As a result of conforming the reporting periods of Siebel and Scopus, as described above, the operating results of Scopus for the three month period ended March 31, 1998 are included in the restated financial statements for both 1997 and 1998. Net income for this period is reflected as a reduction of opening retained earnings in the restated 1998 financial statements. The results of operations for the separate companies and the combined amounts presented in the consolidated financial statements follow.
Three months ended Years ended (in thousands, unaudited) March 31, December 31, ------------------------ ------------------------ 1998 1997 1997 1996 ---------- ---------- ---------- --------- Total revenues: Siebel $47,100 $19,485 $118,775 $ 39,152 Scopus 27,072 19,562 88,853 62,210 ---------- ---------- ---------- --------- $74,172 $39,047 $207,628 $101,362 ========== ========== ========== ========= Net income (loss): Siebel $ 8,285 $ 2,758 $ (2,427) $ 5,025 Scopus 1,463 1,264 1,240 7,836 ---------- ---------- ---------- --------- $9,748 $ 4,022 $ (1,187) $ 12,861 ========== ========== ========== =========
In combining the financial statements of Siebel and Scopus, certain reclassifications, conforming changes and adjustments relating to revenue recognition were made to the historical financial statements of Scopus. These conforming changes and adjustments resulted in a reduction of previously reported net income of approximately $505,000 in fiscal 1995, $578,000 in fiscal 1996, and $2,931,000 in fiscal 1997. There were no conforming changes or adjustments for the period from April 1, 1998 through May 18, 1998. These changes and adjustments will not reverse in future periods. 9 3. NET INCOME PER SHARE The following is a reconciliation of the number of shares used in the basic and diluted earnings per share computations for the periods presented:
(in thousands, unaudited) Three months ended Nine months ended September 30, September 30, ---------------------------- -------------------------- 1998 1997 1998 1997 ------------ ------------ ----------- ----------- Shares used in basic net income per share computation 88,048 83,873 87,075 83,304 Effect of dilutive potential common shares 12,300 11,407 12,690 10,075 ------------ ------------ ----------- ----------- Shares used in diluted net income per share computation 100,348 95,280 99,765 93,379 ============ ============ ============ ============
4. COMPREHENSIVE INCOME Effective January 1, 1998, the Company adopted Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income." This Statement requires that all items recognized under accounting standards as components of comprehensive earnings be reported in an annual financial statement that is displayed with the same prominence as other annual financial statements. This Statement also requires that an entity classify items of other comprehensive earnings by their nature in an annual financial statement. For example, other comprehensive earnings may include foreign currency translation adjustments, minimum pension liability adjustments and unrealized gains and losses on marketable securities classified as available-for-sale. Annual financial statements for prior periods will be reclassified, as required. The Company's total comprehensive earnings were as follows:
(in thousands, unaudited) Three months ended Nine months ended September 30, September 30, -------------------------- ------------------------ 1998 1997 1998 1997 ---------- ---------- --------- --------- Net income $14,063 $3,655 $23,001 $12,297 Translation adjustment 224 (22) (136) (22) --------- --------- --------- --------- Total comprehensive income $14,287 $3,633 $22,865 $12,275 ========= ========= ========= =========
10 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS THIS FORM 10-Q CONTAINS FORWARD-LOOKING STATEMENTS WHICH INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS MAY DIFFER SIGNIFICANTLY FROM THE RESULTS DISCUSSED IN THE FORWARD-LOOKING STATEMENTS. FACTORS THAT MIGHT CAUSE SUCH A DIFFERENCE INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED HEREIN AND UNDER THE CAPTION "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--RISK FACTORS" IN THE COMPANY'S ANNUAL REPORT ON FORM 10-K. ANY SUCH FORWARD-LOOKING STATEMENTS SPEAK ONLY AS OF THE DATE SUCH STATEMENTS ARE MADE AND THE COMPANY UNDERTAKES NO OBLIGATION TO PUBLICLY RELEASE THE RESULTS OF ANY REVISION TO THESE FORWARD-LOOKING STATEMENTS. OVERVIEW Siebel Systems, Inc. ("Siebel" or the "Company") is the world's leading supplier of Enterprise Relationship Management systems for organizations focused on increasing sales, marketing and customer service effectiveness in field sales, service organizations, telesales, telemarketing, call centers and third-party resellers. The Company designs, develops, markets, and supports Siebel Enterprise Applications, a leading Internet-enabled, object oriented client/server application software product family designed to meet the sales, marketing and customer service information system requirements of even the largest multi-national organizations. In today's increasingly competitive global markets, businesses must continuously improve their operations. Having spent considerable effort and resources in previous years automating finance, manufacturing, distribution, human resources management, and general office operations, many businesses are now looking to apply the leverage of information technology to their sales, marketing and customer service processes. Unlike previous automation efforts, which have focused on decreasing expenses, sales, marketing and customer service information systems focus primarily on increasing revenues. The Siebel Enterprise Applications are comprised of a broad range of advanced client/server application products designed to allow corporations to deploy comprehensive customer information systems, product information systems, competitive information systems, and decision support systems on a global basis. The Company's products provide support for multiple languages and multiple currencies with support for a number of frequently interdependent distribution channels, including direct field sales, telesales, telemarketing, distribution, retail and Internet-based selling and support. RECENT DEVELOPMENTS On May 18, 1998, the Company completed the acquisition of Scopus of Emeryville, California, a leading provider of customer service, field service, and call center software solutions. Under the terms of the agreement, each outstanding share of Scopus common stock was exchanged for newly issued shares of common stock of the Company. This resulted in the issuance of approximately 15.1 million additional shares of the Company's Common Stock. In addition, all outstanding stock options of Scopus were converted into the right to acquire the Company's Common Stock at the same exchange ratio with a corresponding adjustment to the exercise price. In connection with the merger, the Company incurred direct merger-related expenses of approximately $13.5 million, consisting of direct transaction fees for investment bankers, attorneys, accountants and other professional fees of $9.1 million, integration charges related to duplicate facilities and equipment of $3.1 million and other miscellaneous expenses of $1.3 million. As of September 30, 1998, the Company had $5.0 million remaining in accrued merger expenses, which the Company expects to pay in 1998. The Company also incurred indirect merger-related expenses of approximately $1.8 million for joint sales training and merger-related marketing costs, which are included within sales and marketing expenses. The transaction has been accounted for as a pooling of interests. Accordingly, the financial statements of Siebel have been restated to include the financial position and results of operations of Scopus for all periods presented. Prior to the merger with Siebel, Scopus used a fiscal year ending March 31. The restated financial statements for the three and nine month periods ended September 30, 1997 include Siebel's results of 11 operations for those periods and Scopus' results of operations for the three and nine month periods ended December 31, 1997. Beginning on January 1, 1998, the restated financial statements combine the operating results of Siebel and Scopus for the calendar periods noted. RESULTS OF OPERATIONS REVENUES Software. License revenues increased to $77,225,000 for the three months ended September 30, 1998 from $41,486,000 for the three months ended September 30, 1997 and decreased as a percentage of total revenues to 74% in the third quarter 1998 from 75% in the third quarter 1997. For the nine months ended September 30, 1998, license revenue increased to $200,567,000 from $104,435,000 for the nine months ended September 30, 1997 and remained constant at 75% as a percentage of total revenues in the fiscal 1998 and fiscal 1997 periods. License revenues increased in absolute dollar amount during these periods due to an increase in the number of licensed Siebel Enterprise and Siebel Series 5 applications at new and existing customers and also due to licenses of new modules, released with the latest version of Siebel applications, to existing users of Siebel base applications. The increase in the number of licenses was primarily due to continued demand by new and existing customers for products in the Siebel Enterprise and Siebel Series 5 applications family both in the United States and internationally. The decrease in license revenues as a percentage of total revenues was primarily due to increased levels of maintenance, consulting and other revenues. The Company's customer base includes a number of its suppliers (e.g. AT&T, BankBoston Robertson Stephens, Bank of America, Cabletron Systems, The Charles Schwab Corporation, Cigna Corporation, Cisco Systems, Inc., Compaq Computer Corporation, Dell Computer Corporation, Lucent Technologies, MCI Telecommunications Corporation, Microsoft Corporation, NationsBank Montgomery Securities, PeopleSoft, Inc., Sequent Computer Systems, Inc., Siemens Medical and Sun Microsystems, Inc.). On occasion, the Company has purchased goods and/or services for company operations from these vendors at or about the same time Siebel has licensed its software to these organizations. These transactions are separately negotiated at terms the Company considers to be arm's-length. During the three months ended September 30, 1998, the Company recognized revenue of approximately $10.8 million in connection with such transactions. Maintenance, Consulting and Other. Maintenance, consulting and other revenues increased to $26,969,000 for the three months ended September 30, 1998 from $13,750,000 for the three months ended September 30, 1997 and increased as a percentage of total revenues to 26% in the third quarter 1998 from 25% in the third quarter 1997. For the nine months ended September 30, 1998, maintenance, consulting and other revenues increased to $67,815,000 from $33,962,000 for the nine months ended September 30, 1997 and as a percentage of total revenues was 25% for each of the nine month periods ended September 30, 1998 and 1997. The increase in absolute dollar amount was due to growth in the Company's consulting business and growth in the installed base of customers on maintenance, including maintenance renewal from products licensed in prior periods. The Company expects that maintenance, consulting and other revenues will remain the same or increase as a percentage of total revenues due to maintenance components of new and existing license agreements and due to the Company's expansion of its consulting organization to meet anticipated customer demands in connection with product implementation. COST OF REVENUES Software. Cost of software license revenues includes third party royalties, product packaging, documentation and production. Cost of license revenues decreased to $993,000 for the three months ended September 30, 1998 from $1,346,000 for the three months ended September 30, 1997 and decreased as a percentage of total revenues to 1% in the third quarter 1998 from 2% in the third quarter 1997. The decrease is primarily due to lower third-party royalty costs. For the nine months ended September 30, 1998, cost of software license revenues increased to $4,295,000 from $2,843,000 for the nine months ended September 30, 1997 and as a percentage of total revenues was 2% for each of the nine months ended September 30, 1998 and 1997. All costs incurred in the research and development of software products and enhancements to existing products have been expensed as incurred, and, as a result, cost of license revenues includes no amortization of capitalized software development costs. These costs are expected to remain the same or increase as a percentage of total revenues. 12 Maintenance, Consulting and Other. Cost of maintenance, consulting and other revenues consists primarily of personnel, facility and systems costs incurred in providing customer support. Cost of maintenance, consulting and other revenues increased to $16,698,000 for the three months ended September 30, 1998 from $7,826,000 for the three months ended September 30, 1997 and increased as a percentage of total revenues to 16% in the third quarter 1998 from 14% in the third quarter 1997. For the nine months ended September 30, 1998, cost of maintenance, consulting and other revenues increased to $42,730,000 from $19,654,000 for the nine months ended September 30, 1997 and increased as a percentage of total revenues to 16% in the fiscal 1998 period from 14% in the fiscal 1997 period. The increases in the absolute dollar amount reflect the effect of fixed costs resulting from the Company's expansion of its maintenance and support organization and the costs of certain customers obtaining implementation services through the Company. The increase as a percentage of total revenues reflects the use of third-party contractors to assist on certain consulting projects. The Company expects that maintenance, consulting and other costs will continue to increase in absolute dollar amount as the Company expands its customer support organization to meet anticipated customer demands in connection with product implementation. These costs are expected to remain the same or increase as a percentage of total revenues. OPERATING EXPENSES Product Development. Product development expenses include expenses associated with the development of new products, enhancements of existing products and quality assurance activities, and consist primarily of employee salaries, benefits, consulting costs and the cost of software development tools. Product development expenses increased to $11,572,000 for the three months ended September 30, 1998 from $6,607,000 for the three months ended September 30, 1997 and decreased as a percentage of total revenues to 11% in the third quarter 1998 from 12% in the third quarter 1997. For the nine months ended September 30, 1998, product development expenses increased to $30,862,000 from $17,272,000 for the nine months ended September 30, 1997 and decreased as a percentage of total revenues to 11% in the fiscal 1998 period from 12% in the fiscal 1997 period. The increases in the dollar amount of product development expenses were primarily attributable to costs of additional personnel in the Company's product development operations. The Company anticipates that it will continue to devote substantial resources to product development. The Company expects product development expenses to increase in absolute dollar amount but remain at a similar percentage of total revenues as the first nine months of 1998. The Company to date has not capitalized any software development costs. Sales and Marketing. Sales and marketing expenses consist primarily of salaries, commissions and bonuses earned by sales and marketing personnel, field office expenses, travel and entertainment and promotional expenses. Sales and marketing expenses increased to $47,242,000 for the three months ended September 30, 1998 from $27,204,000 for the three months ended September 30, 1997 and decreased as a percentage of total revenues to 45% in the third quarter 1998 from 49% in the third quarter 1997. For the nine months ended September 30, 1998, sales and marketing expenses increased to $122,163,000 from $67,211,000 for the nine months ended September 30, 1997 and decreased as a percentage of total revenues to 46% in the fiscal 1998 period from 49% in the fiscal 1997 period. The increases in the dollar amount of sales and marketing expenses reflect primarily the hiring of additional sales and marketing personnel, costs associated with expanded promotional activities, and indirect merger-related costs, such as corporate sales training and marketing programs. The Company expects that sales and marketing expenses will continue to increase in absolute dollar amount as the Company continues to expand its sales and marketing efforts, establishes additional sales offices in the United States and internationally and increases its promotional activities. These expenses are expected to remain at a similar percentage of total revenues as the first nine months of 1998. General and Administrative. General and administrative expenses consist primarily of salaries and occupancy costs for administrative, executive and finance personnel. General and administrative expenses increased to $6,915,000 for the three months ended September 30, 1998 from $4,392,000 for the three months ended September 30, 1997 and decreased as a percentage of total revenues to 7% in the third quarter 1998 from 8% in the third quarter 1997. For the nine months ended September 30, 1998, general and administrative expenses increased to $17,724,000 from $12,232,000 for the nine months ended September 30, 1997 and decreased as percentage of total revenues to 7% in the fiscal 1998 period from 9% in the fiscal 1997 period. The increases in the absolute dollar amount of general and administrative expenses were primarily due to increased staffing and associated expenses necessary to manage and support the Company's increased scale of operations. The Company believes that its general and administrative expenses will continue to increase in absolute dollar amount as a result of the continued expansion of the Company's administrative staff and 13 facilities to support growing operations. The Company anticipates that its general and administrative expenses as a percentage of total revenues should remain at a similar percentage as the first nine months of 1998. Merger related expenses. In connection with the merger with Scopus, the Company incurred direct merger-related expenses of approximately $13.5 million, comprised primarily of investment bankers, attorneys, accountants and other professional fees of $9.1 million and duplicate facilities and equipment of $3.1 million. As of September 30, 1998, the Company had $5.0 million remaining in accrued merger expenses, which the Company expects to pay in the fourth quarter of 1998. The Company also incurred indirect merger-related expenses of approximately $1.8 million for joint sales training and merger-related marketing costs, which are included within sales and marketing expenses. The Company incurred merger costs of approximately $3.3 million in the third quarter of 1997 in connection with its planned merger with Clear With Computers, Inc. The merger plan was terminated early in the fourth quarter of 1997. OPERATING INCOME AND OPERATING MARGIN Operating income increased to $20,774,000 for the three months ended September 30, 1998 from $4,563,000 for the three months ended September 30, 1997 and operating margin increased to 20% in the third quarter 1998 from 8% in the third quarter 1997. For the nine months ended September 30, 1998, operating income increased to $37,108,000 from $15,887,000 for the nine months ended September 30, 1997 and operating margin increased to 14% in the fiscal 1998 period from 11% in the fiscal 1997 period. These increases in operating income and margin were primarily due to increased license revenues without a proportionate increase in costs, particularly costs associated with the hiring of new personnel. Excluding merger related expenses and merger termination costs, operating income for the nine months ended September 30, 1998 increased to $50,608,000 from $19,185,000 for the nine months ended September 30, 1997 and operating margin increased to 19% in the fiscal 1998 period from 14% in the fiscal 1997 period. The Company expects operating margins, net of merger- related expenses, to decrease as compared to operating margin for the first nine months of 1998 as it continues to invest in sales, marketing, development and support activities globally. OTHER INCOME, NET Other income, net is primarily comprised of interest income earned on the Company's cash and cash equivalents and short-term investments and reflects earnings on increasing cash and cash equivalents and short-term investment balances. PROVISION FOR INCOME TAXES The provision for income taxes was $8,259,000 and $2,279,000 or 37% and 38% for the three months ended September 30, 1998 and 1997, respectively. The provision for income taxes was $18,583,000 and $7,543,000 or 45% and 38% for the nine months ended September 30, 1998 and 1997, respectively. The effective tax rate for the nine months ended September 30, 1998 was affected by the non- deductibility of certain merger-related expenses. The Company expects its effective tax rate for the remainder of 1998 to be approximately 38%. NET INCOME The Company had net income of $14,063,000 for the three months ended September 30, 1998 compared to net income of $3,655,000 for the three months ended September 30, 1997. Diluted net income per share increased to $0.14 per share in the third quarter of 1998 from net income of $0.04 per share in the comparable period in 1997. Net income was 13% as a percentage of total revenues for the three months ended September 30, 1998, compared to net income of 7% of total revenues for the three months ended September 30, 1997. The Company had net income of $23,001,000 for the nine months ended September 30, 1998 compared to net income of $12,297,000 for the nine months ended September 30, 1997. Diluted net income per share increased to $0.23 per share in the nine month period ended September 30, 1998 from net income of $0.13 per share in the comparable period in 1997. Net income was 9% as a percentage of total revenues for each of the nine month periods ended September 30, 1998 and 1997. 14 LIQUIDITY AND CAPITAL RESOURCES The Company's cash, cash equivalents and short-term investments increased to $229,176,000 as of September 30, 1998 from $162,201,000 as of December 31, 1997, representing approximately 59% and 60% of total assets, respectively. This increase was primarily attributable to net income and increases in deferred revenue, accrued expenses and issuances of common stock, partially offset by increases in accounts receivable and purchases of property and equipment. The Company's days sales outstanding (DSO) in accounts receivable was 93 as of September 30, 1998, compared with 82 as of December 31, 1997. The Company expects DSO will fluctuate significantly in future quarters. The Company has used fully serviced office suites on a month-to-month rental basis to establish its presence in new locations. As these locations expand, the Company expects to transition more of the office suites to leased space. This transition will involve build-out of tenant improvements, acquisition of furniture and fixtures, and other capital costs, which were not incurred in connection with the use of fully serviced office suites. The Company has already built-out leased facilities, both domestically and internationally, and expects this trend to continue. Accordingly, capital expenditures are expected to increase during the fourth quarter of 1998 and in 1999. The Company believes that the anticipated cash flows from operations, along with existing cash, cash equivalents and short-term investments will be adequate to meet its cash needs for working capital and capital expenditures for at least the next twelve months. FACTORS AFFECTING OPERATING RESULTS Limited Operating History. The Company has only a limited operating history and its prospects must be evaluated in light of the risks and uncertainties encountered by a company in its early stage of development. Limited Deployment. Many of the Company's customers are in the pilot phase of implementing the Company's software. There can be no assurance that enterprise- wide deployments by such customers will be successful. The Company's customers frequently contemplate the deployment of its products commercially to large numbers of sales, marketing and customer service personnel, many of whom have not previously used application software systems, and there can be no assurance of such end-users' acceptance of the product. If any of the Company's customers are not able to customize and deploy Siebel applications successfully and on a timely basis to the number of anticipated users, the Company's reputation could be significantly damaged, which could have a material adverse effect on the Company's business, operating results and financial condition. Product Concentration. Approximately 61% of the Company's license revenues in the nine months ended September 30, 1998 were attributable to sales of Siebel Sales Enterprise. The remaining license revenues were attributable to sales of Siebel Service Enterprise, Siebel Marketing Enterprise and Siebel Series 5. The Company currently expects Siebel Sales Enterprise and related consulting, maintenance and training services to continue to account for a substantial amount of the Company's future revenues. As a result, factors adversely affecting the pricing of or demand for Siebel Sales Enterprise, such as competition or technological change, could have a material adverse effect on the Company's business, operating results and financial condition. Competition. The market for the Company's products is intensely competitive, subject to rapid change and significantly affected by new product introductions and other market activities of industry participants. The Company's products are targeted at the emerging market for sales, marketing and customer service information systems, and the Company faces competition primarily from customers' internal information technology departments and systems integrators, as well as from other application software providers that offer a variety of products and services to address this market. Many of the Company's customers and potential customers have in the past attempted to develop sales, marketing and customer service information systems, in-house either alone or with the help of systems integrators and there can be no assurance that the Company will be able to compete successfully against such internal development efforts. The Company relies on a number of systems consulting and systems integration firms, particularly Andersen Consulting, for implementation and other customer support services, as well as recommendations of its products during the evaluation stage of the purchase process. Although the Company seeks to maintain close relationships with these service providers, many of them have similar, and often more established, relationships with the Company's 15 competitors. If the Company is unable to develop and retain effective, long- term relationships with these third parties, the Company's competitive position could be materially and adversely affected. Further, there can be no assurance that these third parties, many of which have significantly greater resources than the Company, will not market software products in competition with the Company in the future or will not otherwise reduce or discontinue their relationships with, or support of, the Company and its products. A large number of personal, departmental and other products exist in the sales automation market. Companies (Products) such as Symantec Corporation (ACT!), Borealis Corporation (Arsenal), Saratoga Systems (Avenue), Early Cloud & Co. (CallFlow), Epiphany (Clarity, Momentum, Relevance), Clarify Inc. (ClearSales, ClearSupport), Sales Technologies (Cornerstone), Onyx (Customer Center), IMA (EDGE), Applix (Enterprise), Dendrite International, Inc. (Force One), Marketrieve Company (Marketrieve PLUS), Firstwave Technologies, Inc. (Netgain), Broadvision, Inc. (One-To-One Application System), Oracle Corporation (Oracle Sales and Marketing, Oracle Service and Oracle Call, Front Office Application), Pivotal Software, Inc. (Relationship), SAP AG (Sales Force Automation Solution) Software Artistry (SA-Expert Sales), SalesKit Software Corporation (SalesKit), SalesLogix (SalesLogix), Kiefer & Veittinger GmbH (K&V) International (SALES Manager) (SAP AG owns an 80% equity interest in K&V), Aurum (SalesTrak) (recently acquired by Baan Company N.V.), MEI (UniverSell) and The Vantive Corporation (Vantive Enterprise) are among the many firms in this market segment. Some of these competitors have longer operating histories, significantly greater financial, technical, marketing and other resources, significantly greater name recognition and a larger installed base of customers than the Company. In addition, many competitors have well-established relationships with current and potential customers of the Company. As a result, these competitors may be able to respond more quickly to new or emerging technologies and changes in customer requirements, or to devote greater resources to the development, promotion and sale of their products, than can the Company. The Company believes it competes favorably in this marketplace based on the following competitive advantages: breadth and depth of functionality, configurable business objects, Internet and intranet enablement, strategic alignments with industry leaders, support for the global enterprise, scalability allowing support for large user communities and a modern and enduring product architecture. In general, the Company has priced its products at or above those of its competitors, which pricing the Company believes is justified by the scope of functionality delivered and the performance characteristics afforded by the Company's products. It is also possible that new competitors or alliances among competitors may emerge and rapidly acquire significant market share. The Company also expects that competition will increase as a result of consolidation in the software industry. Increased competition may result in price reductions, reduced gross margins and loss of market share, any of which could materially adversely affect the Company's business, operating results and financial condition. There can be no assurance that the Company will be able to compete successfully against current and future competitors or that competitive pressures faced by the Company will not materially and adversely affect its business, operating results and financial condition. Management of Growth; Dependence upon Key Personnel. In the event that the significant growth of the Company's revenues continues, such growth may place a significant strain upon the Company's management systems and resources. The Company's ability to compete effectively and to manage future growth, if any, will require the Company to continue to improve its financial and management controls, reporting systems and procedures on a timely basis and expand, train and manage its employee work force. There can be no assurance that the Company will be able to do so successfully. The Company's failure to do so could have a material adverse effect upon the Company's business, operating results and financial condition. The Company's future performance depends in significant part upon the continued service of its key technical, sales and senior management personnel, particularly Thomas M. Siebel, the Company's Chairman and Chief Executive Officer, none of whom has entered into an employment agreement with the Company. The loss of the services of one or more of the Company's executive officers could have a material adverse effect on the Company's business, operating results and financial condition. International Operations. The Company's sales are primarily due to large multi- national companies. To service the needs of such companies, both domestically and internationally, the Company must provide worldwide product support services. As a result, the Company has expanded and intends to continue to expand its international operations and enter additional international markets, which will require significant management attention and financial resources and could adversely affect the Company's operating margins and earnings, if any. Revenues from international sales accounted for approximately 27%, 26% and 29% of the Company's total license revenues in fiscal 1997 and the three and nine months ended September 30, 1998, respectively. 16 The growth in the Company's revenues from international sales is expected to continue to subject a portion of the Company's revenues to the risks associated with international sales, including foreign currency fluctuations, economic or political instability, shipping delays and various trade restrictions, any of which could have a significant impact on the Company's ability to deliver products on a competitive and timely basis. Future imposition of, or significant increases in the level of, customs duties, export quotas or other trade restrictions, could have an adverse effect on the Company's business, financial condition and results of operations. As the Company develops an international sales force, it expects to be more directly subject to foreign currency fluctuations. To the extent such direct sales are denominated in foreign currency, any such fluctuation may adversely affect the Company's business, financial condition and results of operations. Foreign currency transactions, when realized, are included as a component of other income. Finally, the laws of certain foreign countries do not protect the Company's intellectual property rights to the same extent, as do the laws of the United States. The Company has not been significantly affected by the recent unfavorable economic conditions in certain Asian and Pacific Rim countries. If the economic conditions in these markets do not improve, this may have an adverse impact on the Company's business, financial condition and results of operations. European Monetary Unit (EMU). Siebel Enterprise applications have the functionality to allow for dual currency reporting and information management, however, failure of the software to operate properly could require the Company to incur unanticipated expenses to address any problems. The Company is currently reviewing its internal systems for any potential problems that may arise in connection with the conversion to the EMU. In addition, the Company utilizes other third party systems and software products that may or may not be EMU compliant. Failure of third party products could have a material adverse effect on the Company's business, financial condition and results of operations. Furthermore, the Company's foreign exchange exposures to legacy sovereign currencies of the participating countries in the EMU will become foreign exchange exposures to the EMU upon conversion. Currently, the Company has no foreign exchange contracts denominated in legacy sovereign currencies with maturity of January 1, 1999 or later. To the extent hedging transactions are entered for exposures after January 1, 1999, they will be denominated in euros as applicable. Although the Company is not aware of any material financial risk arising from the conversion to EMU, the conversion may require the Company to incur unanticipated expenses to address any problems, which could have a material adverse effect on the Company's business, financial condition and results of operations. Risk Relating to Acquisitions. The Company has acquired in the past, and may acquire in the future, other products or businesses, which are complementary to the Company's business. The integration of products and personnel as a result of any such acquisitions has and will continue to divert the Company's management and other resources. There can be no assurance that difficulties will not arise in integrating such operations, products, personnel or businesses. The failure to successfully integrate such products or operations could have a material adverse effect on the Company's business, financial condition and results of operations. Risks Relating to the Merger with Scopus. Risks associated with the merger with Scopus, which was completed in May 1998, include but are not limited to uncertainties relating to integration, retention of employees by the combined company, and the effect of the merger on customers and existing agreements. The successful integration of the two companies will require significant effort from each company, including the coordination of their research and development, integration of the companies' product offerings, coordination of their sales and marketing efforts and business development efforts. The combined company will need to integrate and streamline overlapping functions successfully. The Company incurred approximately $1.8 million of such integration costs during the three months ended September 30, 1998 for joint sales training and merger related marketing activities. The integration of certain operations following the merger will require the dedication of management resources that may distract attention from the normal operations of the combined Company. The success of the combined Company will also be dependent in part on the retention and integration of management, technical, marketing, sales and customer support personnel. In addition, certain of Scopus' and Siebel's existing customers may view the merger as disadvantageous to them. As a consequence, the combined Company's relationship with these customers could be adversely affected. Failure to quickly and effectively complete the integration of the operations of Siebel and Scopus, failure to attract, hire, retain and integrate skilled employees, and uncertainty in the marketplace or customer concern regarding the impact of the merger and related transactions could have a material adverse effect on the combined Company's business, financial condition and results of operations. 17 Year 2000. The Company is reviewing its information systems for any potential problems that might arise as a result of the need for its installed computer systems and software to reference dates following December 31, 1999 ("Year 2000 Issues") and does not believe such systems will be adversely affected by the upcoming change in century. However, the Company utilizes third-party equipment and software that may not be Year 2000 compliant. Although the Company is currently taking steps to address the impact, the failure of such third-party equipment or software to operate properly with regard to Year 2000 Issues and thereafter could have a material adverse effect on the Company's business, financial condition and results of operations. Additionally, the purchasing patterns of customers or potential customers may be affected by Year 2000 Issues as companies use significant resources to assess its current systems for Year 2000 compliance. These assessments could result in expenditures which may reduce the funds available to purchase products and services, such as those offered by the Company, which could have a material adverse affect on the Company's business, financial condition and results of operations. Currently supported Siebel Enterprise applications have been designed to be Year 2000 compliant, however, failure of the software to operate properly with regard to Year 2000 and thereafter could require the Company to incur unanticipated expenses to address any problems, which could have a material adverse effect on the Company's business, financial condition and results of operations. The Company is aware of certain customer installations of earlier generation Scopus product which is not Year 2000 compliant. The Company has advised these customers that their installations are not Year 2000 compliant and are no longer supported by Siebel. Updates to current Year 2000 compliant versions of Siebel's software have been made available to all customers who are current on maintenance. 18 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS In June 1996, Debra Christoffers, a former sales person of the Company, filed a complaint for wrongful termination against the Company and Thomas Siebel, in the Superior Court of California, County of San Mateo. A jury verdict was returned on May 15, 1998 with a judgment for an immaterial amount. Post-trial proceedings are continuing in the matter. The Company believes it has adequate legal defenses and believes that the ultimate outcome of these actions will not have a material effect on the Company's financial position or results of operations, although there can be no assurance as to the outcome of such litigation. In March 1998, a purported class action complaint was filed against the Company, Scopus Technology, Inc. ("Scopus") and the members of the Scopus board of directors in the Superior Court of the State of California for the County of Alameda by a person claiming to be a Scopus stockholder. Scopus became a wholly owned subsidiary of the Company on May 18, 1998, upon the merger of a subsidiary of the Company with and into Scopus (the "Merger"). The complaint alleges that the Scopus board of directors breached its fiduciary duties to the shareholders of Scopus in connection with its approval of the Merger. The complaint further alleges that the Company aided and abetted the alleged breach of fiduciary duty. The complaint seeks monetary and other relief. On October 26, 1998, the court sustained a demurrer filed by the Company, with leave to amend. The Company believes the suit is completely without merit and intends to contest vigorously any future filings or amendments, although there can be no assurance as to the outcome of any such litigation. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS The effective date of the Company's first registration statement, filed on Form S-1 under the Securities Act of 1933 (No. 333-12061) relating to the Company's initial public offering of its Common Stock, was June 27, 1996. There has been no change to the disclosure contained in the Company's report on Form 10-Q for the quarter ended March 31, 1998 regarding the use of proceeds generated by the Company's initial public offering of its Common Stock. ITEM 5. OTHER INFORMATION Pursuant to the Company's bylaws, stockholders who wish to bring matters or propose nominees for director at the Company's 1999 annual meeting of stockholders must provide specified information to the Company between January 28, 1999 and February 28, 1999 (unless such matters are included in the Company's proxy statement pursuant to Rule 14a-8 under the Securities Exchange Act of 1934, as amended). ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits Exhibit Number Description of Document - -------------- ----------------------- 2.1 Agreement and Plan of Merger and Reorganization, dated March 1, 1998, among the Registrant, Syracuse Acquisition Sub, Inc. and Scopus Technology, Inc.(4) 3.1 Amended and Restated Certificate of Incorporation of the Registrant, as amended.(6) 3.2 Bylaws of the Registrant.(1) 4.1 Reference is made to Exhibits 3.1 and 3.2. 4.2 Specimen Stock Certificate.(1) 4.3 Restated Investor Rights Agreement, dated December 1, 1995, between the Registrant and certain investors, as amended April 30, 1996 and June 14, 1996.(1) 10.1 Registrant's 1996 Equity Incentive Plan, as amended.(3) 10.2 Registrant's Employee Stock Purchase Plan, as amended.(3) 10.3 Form of Indemnity Agreement entered into between the Registrant and its officers and directors.(1) 10.4 Registrant's Deferred Compensation Plan, dated January 10,1997.(5) 10.5 Master Alliance Agreement, dated March 17, 1995, between the Registrant and Andersen Consulting LLP.(1)(2) 10.6 Assignment Agreement, dated September 20, 1995, by and between the Registrant and Thomas M. Siebel.(1) 19 10.7 Lease Agreement, dated June 4, 1996, by and between the Registrant and Crossroad Associates and Clocktower Associates.(1) 10.8 Form of Voting Agreement dated as of March 1, 1998, a substantially similar version of which has been executed by and between the Registrant, Scopus Technology, Inc. and each of Thomas M. Siebel, Thomas M. Siebel as Trustee under the Siebel Living Trust u/a/d 7/29/93, the Thomas and Stacey Siebel Foundation and First Virtual Capital, Inc.(7) 10.9 Form of Affiliate Agreement, substantially similar versions of which are to be executed by the Registrant, Scopus Technology, Inc. and each of the affiliates of the Registrant.(8) 21.1 Subsidiaries of the Registrant.(6) 27.1 Financial Data Schedule.(9) _____________________ (1) Incorporated by reference to the Registrant's Registration Statement on Form S-1 (No. 333-03751), as amended. (2) Confidential treatment has been granted with respect to portions of this exhibit. (3) Incorporated by reference to the Registrant's Registration Statement on Form S-8 (No. 333-07983), as amended. (4) Incorporated by reference to exhibit 99.1 of the Registrant's Current Report on Form 8-K filed by the Registrant on March 16, 1998. (5) Incorporated by reference to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1996. (6) Incorporated by reference to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1997. (7) Incorporated by reference to exhibit 99.3 of the Registrant's Current Report on Form 8-K filed by the Registrant on March 16, 1998. (8) Incorporated by reference to exhibit 99.5 of the Registrant's Current Report on Form 8-K filed by the Registrant on March 16, 1998. (9) Filed herewith. (b) Reports on Form 8-K On May 19, 1998, the Company filed a report on Form 8-K relating to the closure of the Company's merger with Scopus Technology, Inc. on May 18, 1998. On May 29, 1998, the Company filed a report on Form 8-K relating to the Company's merger with Scopus Technology, Inc. 20 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. SIEBEL SYSTEMS, INC. Date: November 13, 1998 By: /s/ Howard H. Graham -------------------- Howard H. Graham Senior Vice President Finance and Administration and Chief Financial Officer By: /s/ Paul J. Gifford ------------------- Paul J. Gifford Corporate Controller 21 EX-27 2 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM SIEBEL SYSTEMS, INC. QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTERS ENDED SEPTEMBER 30, 1997 AND 1998 IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. THE SUMMARY FINANCIAL INFORMATION FOR THE QUARTER ENDED SEPTEMBER 30, 1997 HAS BEEN RESTATED TO REFLECT THE EFFECT OF THE POOLING OF INTERESTS BETWEEN SIEBEL SYSTEMS, INC. AND SCOPUS TECHNOLOGY, INC., WHICH OCCURRED ON MAY 18, 1998. 1,000 9-MOS 9-MOS DEC-31-1997 DEC-31-1998 JAN-01-1997 JAN-01-1998 SEP-30-1997 SEP-30-1998 57,436 105,700 85,605 123,476 59,443 107,849 0 0 0 0 211,743 349,836 22,114 30,168 0 0 240,415 385,701 48,453 129,478 0 0 0 0 0 0 164,045 220,597 27,712 35,464 240,415 385,701 104,435 200,567 138,397 268,382 2,843 4,295 22,497 47,025 100,013 184,249 0 0 0 0 19,840 41,584 7,543 18,583 12,297 23,001 0 0 0 0 0 0 12,297 23,001 0.15 0.26 0.13 0.23
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