-----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, B4hFyVwp4Chil5XHpk+H+iTDUZjZSQ3ryWZj1FrqHoDvX/j/s4qMrQX1QAv4mXPc LMdhlowIizlt6Uk071kgTw== 0001012870-98-001354.txt : 19980518 0001012870-98-001354.hdr.sgml : 19980518 ACCESSION NUMBER: 0001012870-98-001354 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980331 FILED AS OF DATE: 19980515 SROS: NASD 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: 98624294 BUSINESS ADDRESS: STREET 1: 1885 SOUTH GRANT STREET CITY: SAN MATEO STATE: CA ZIP: 94402 BUSINESS PHONE: 4152955000 MAIL ADDRESS: STREET 1: 1885 SOUTH GRANT STREET CITY: SAN MATEO STATE: CA ZIP: 94402 10-Q 1 FORM 10-Q FOR PERIOD ENDED MARCH 31, 1998 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 MARCH 31, 1998 OR [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _____________ TO _____________ COMMISSION FILE NUMBER: 0-20725 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 May 6, 1998, was 71,695,276. 1 SIEBEL SYSTEMS, INC. FORM 10-Q FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1998 TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION PAGE ---- Item 1. Financial Statements a) Consolidated Balance Sheets as of March 31, 1998 and December 31, 1997 3 b) Consolidated Statements of Operations for the three months ended March 31, 1998 and 1997 4 c) Consolidated Statements of Cash Flows for the three months ended March 31, 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 8 PART II. OTHER INFORMATION Item 1. Legal Proceedings 14 Item 2. Changes in Securities and Use of Proceeds 14 Item 6. Exhibits and Reports on Form 8-K 15 SIGNATURE 16
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PART I. FINANCIAL INFORMATION Item 1. Financial Statements SIEBEL SYSTEMS, INC. CONSOLIDATED BALANCE SHEETS (In thousands, except per share data) March 31, December 31, 1998 1997 ---- ---- Assets ------ (unaudited) Current assets: Cash and cash equivalents $ 45,768 $ 31,257 Short term investments 61,976 62,894 Accounts receivable, net 38,124 33,246 Deferred income taxes 3,076 3,076 Prepaids and other 4,827 4,954 --------------- --------------- Total current assets 153,771 135,427 Property and equipment, net 10,965 11,129 Other assets 2,900 2,756 --------------- --------------- Total assets $ 167,636 $ 149,312 =============== =============== Liabilities and Stockholders' Equity ------------------------------------ Current liabilities: Accounts payable $ 1,801 $ 1,702 Accrued expenses 20,788 20,802 Income taxes payable 2,639 1,178 Deferred revenue 15,635 12,903 --------------- --------------- Total current liabilities 40,863 36,585 Deferred income taxes 162 162 --------------- --------------- Total liabilities 41,025 36,747 --------------- --------------- Stockholders' equity: Common stock; $.001 par value; 300,000 shares authorized; 71,470 and 70,894 shares issued and outstanding, respectively 71 71 Additional paid in capital 116,649 110,927 Notes receivable from stockholders (406) (406) Deferred compensation (522) (578) Retained earnings 11,199 2,914 Cumulative translation adjustment (380) (363) --------------- --------------- Total stockholders' equity 126,611 112,565 --------------- --------------- Total liabilities and stockholders' equity $ 167,636 $ 149,312 =============== ===============
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 March 31, --------- 1998 1997 ---- ---- Revenues: Software $38,802 $16,561 Maintenance, consulting and other 8,298 2,924 ------- ------- Total revenues 47,100 19,485 Cost of revenues: Software 572 113 Maintenance, consulting and other 4,412 1,601 ------- ------- Total cost of revenues 4,984 1,714 ------- ------- Gross margin 42,116 17,771 Operating expenses: Product development 4,500 2,580 Sales and marketing 23,018 9,367 General and administrative 2,613 1,983 ------- ------- Total operating expenses 30,131 13,930 ------- ------- Operating income 11,985 3,841 Other income, net 960 607 ------- ------- Income before income taxes 12,945 4,448 Income taxes 4,660 1,690 ------- ------- Net income $ 8,285 $ 2,758 ======= ======= Diluted net income per share $ 0.10 $ 0.03 ======= ======= Shares used in diluted net income per share computation 84,789 79,063 ======= ======= Basic net income per share $ 0.12 $ 0.04 ======= ======= Shares used in basic net income per share computation 71,254 67,962 ======= =======
See accompanying notes to consolidated financial statements. 4
SIEBEL SYSTEMS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) (unaudited) Three Months Ended March 31, --------- 1998 1997 ---- ---- Cash flows from operating activities: Net income $ 8,285 $ 2,758 Adjustments to reconcile net income to net cash provided by operating activities: Compensation related to stock options 46 61 Depreciation and amortization 1,212 652 Tax benefit from exercise of stock options 2,450 60 Loss on disposal of property and equipment 200 299 Allowance for doubtful accounts and returns 435 97 Changes in operating assets and liabilities: Accounts receivable (5,313) (728) Prepaids and other 127 68 Accounts payable 99 (2,506) Accrued expenses (14) 2,177 Income taxes payable 1,461 (436) Deferred revenue 2,732 (1,480) ------- ------- Net cash provided by operating activities 11,720 1,022 ------- ------- Cash flows from investing activities: Purchases of property and equipment (1,248) (734) Purchases and sales of short term investments 918 (841) Other assets (144) (11) ------- ------- Net cash used in investing activities (474) (1,586) ------- ------- Cash flows from financing activities: Proceeds from issuance of common stock 3,265 98 ------- ------- Net cash provided by financing activities 3,265 98 ------- ------- Change in cash and cash equivalents 14,511 (466) Cash and cash equivalents, beginning of period 31,257 22,671 ------- ------- Cash and cash equivalents, end of period $45,768 $22,205 ======= ======= Supplemental disclosures of cash flows information: Cash paid for income taxes $ 602 $ 1,251 ======= =======
See accompanying notes to consolidated financial statements. 5 SIEBEL SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. BASIS OF PRESENTATION 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. For information as to the significant accounting policies followed by the Company and other financial and operating information, see the Company's Annual Report on Form 10-K, filed with the Securities and Exchange Commission on March 17, 1998 (the "Annual Report"). These consolidated financial statements should be read in conjunction with the consolidated financial statements included in that Annual Report. 2. 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, outstanding common equivalent shares from options to purchase common stock using the treasury stock method. The following is a reconciliation of the numerators and denominators of the basic and diluted earnings per share computations for the periods presented:
(in thousands) Income Shares Per Share Amount (Numerator) (Denominator) For the three months ended March 31, 1997: Basic EPS: Net income $2,758 67,962 $0.04 Effect of dilutive potential common shares - 11,101 $0.01 ------------------------------------------------------------------- Diluted EPS: Net income $2,758 79,063 $0.03 =================================================================== For the three months ended March 31, 1998: Basic EPS: Net income $8,285 71,254 $0.12 Effect of dilutive potential common shares - 13,535 $0.02 ------------------------------------------------------------------- Diluted EPS: Net income $8,285 84,789 $0.10 ===================================================================
Note: All share and per share amounts for the periods ended March 31, 1997 have been restated to reflect a two-for-one stock split (effected in the form of a stock dividend) which was effective March 20, 1998. 3. 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 6 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:
Three Months Ended March 31, --------- (in thousands, unaudited) 1998 1997 - ---------------------------------------------------- Net income $8,285 $2,758 Cumulative translation adjustment (17) 0 - ---------------------------------------------------- Total comprehensive income $8,268 $2,758 - ----------------------------------------------------
4. STOCK SPLIT All share and per share amounts for all periods presented have been restated to reflect a two-for-one stock split (effected in the form of a stock dividend) which was effective March 20, 1998. 5. RECENT ACCOUNTING PRONOUNCEMENTS In October, 1997, the American Institute of Certified Public Accountants issued Statement of Position (SOP) 97-2 Software Revenue Recognition, which superseded SOP 91-1. SOP 97-2 is effective for transactions entered into after December 31, 1997. SOP No. 97-2 generally requires revenue earned on software arrangements involving multiple elements to be allocated to each element based on the relative fair values of the elements. The fair value of an element must be based on evidence that is specific to the vendor. If a vendor does not have evidence of the fair value for all elements in a multiple-element arrangement, all revenue from the arrangement is deferred until such evidence exists or until all elements are delivered. The effect of adopting SOP 97-2 did not have a material impact on the Company's consolidated results of operations or financial position. 6. RECENT DEVELOPMENTS In March 1998, the Company entered into a definitive agreement to acquire Scopus Technology, Inc. ("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 will be exchanged, at a fixed exchange ratio of .7281 (adjusted for any stock split, stock dividends, reverse stock split, reclassification, recapitalization or similar transaction), for newly issued shares of common stock of the Company. This will result in the issuance of approximately 15.0 million additional shares of the Company's Common Stock, valued at approximately $350 million, based upon the Company's Common Stock closing price as reported on the Nasdaq National Market on Wednesday, May 6, 1998. In addition, all outstanding stock options of Scopus will convert into the right to acquire the Company's Common Stock at the same exchange ratio with an appropriate adjustment to the exercise price. The Company anticipates that the transaction will be accounted for as a pooling of interests and will qualify as a tax-free reorganization. The acquisition of Scopus is subject to a number of closing conditions, including the approval of the acquisition by the Scopus shareholders and approval of the issuance of the Company's Common Stock in connection with the merger by the Company's stockholders. There can be no assurance that the merger will be consummated. The Company has received notice from the Federal Trade Commission that early termination of the Hart-Scott-Rodino Act waiting period has been granted with respect to the Company's proposed merger with Scopus. The Company and Scopus have scheduled special meetings of their respective shareholders for May 18, 1998 to approve the merger and related matters, and expect to consummate the merger agreement immediately thereafter. 7 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 global market leader in enterprise-class sales, marketing and customer service information systems for global organizations focused on increasing sales and 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 In March 1998, the Company entered into a definitive agreement to acquire Scopus Technology, Inc. ("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 will be exchanged, at a fixed exchange ratio of .7281 (adjusted for any stock split, stock dividends, reverse stock split, reclassification, recapitalization or similar transaction), for newly issued shares of common stock of the Company. This will result in the issuance of approximately 15.0 million additional shares of the Company's Common Stock, valued at approximately $350 million, based upon the Company's Common Stock closing price as reported on the Nasdaq National Market on Wednesday, May 6, 1998. In addition, all outstanding stock options of Scopus will convert into the right to acquire the Company's Common Stock at the same exchange ratio with an appropiate adjustment to the exercise price. The Company anticipates that the transaction will be accounted for as a pooling of interests and will qualify as a tax-free reorganization. The acquisition of Scopus is subject to a number of closing conditions, including the approval of the acquisition by the Scopus shareholders and approval of the issuance of the Company's Common Stock in connection with the merger by the Company's stockholders. There can be no assurance that the merger will be consummated. The Company has received notice from the Federal Trade Commission that early termination of the Hart-Scott-Rodino Act waiting period has been granted with respect to the Company's proposed merger with Scopus. The Company and Scopus have scheduled special meetings of their respective shareholders for May 18, 1998 to approve the merger and related matters, and expect to consummate the merger agreement immediately thereafter. 8 RESULTS OF OPERATIONS REVENUES Software. License revenues increased to $38,802,000 for the three months ended March 31, 1998 from $16,561,000 for the three months ended March 31, 1997 and decreased as a percentage of total revenues to 82% in the first quarter 1998 from 85% in the first quarter 1997. License revenues increased in absolute dollar amount during these periods from the prior year period due to an increase in the number of licenses of Siebel Enterprise Applications to new and existing customers. This increase in the number of licenses was primarily due to continued demand by new and existing customers for products in the Siebel Enterprise Applications family both in the United States and internationally. In December 1996, the Company introduced Siebel Service Enterprise, its customer service applications suite. Increases in revenues from the prior year period was due in part to new and existing customers licensing Siebel Service Enterprise to manage their customer service functions. Siebel Service Enterprise license revenues increased to approximately $13,100,000 for the three months ended March 31, 1998 from approximately $1,700,000 for the three months ended March 31, 1997. The decrease in license revenues as a percentage of total revenues was primarily due to increased levels of maintenance, consulting and other revenues. Maintenance, Consulting and Other. Maintenance, consulting and other revenues increased to $8,298,000 for the three months ended March 31, 1998 from $2,924,000 for the three months ended March 31, 1997 and increased as a percentage of total revenues to 18% in the first quarter 1998 from 15% in the first quarter 1997. These increases in absolute dollar amount and as a percentage of total revenues were due to the widespread licensing of products to customers pursuant to agreements with a maintenance component, maintenance renewals from products licensed in prior periods and certain customers obtaining implementation services for the Siebel Enterprise Applications through the Company. 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 customer support organization to meet anticipated customer demands in connection with product implementation. COST OF REVENUES Software. Cost of software license revenues includes product packaging, documentation and production. Cost of license revenues through March 31, 1998 have averaged less than 2% of software license revenues. 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. 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 $4,412,000 for the three months ended March 31, 1998 from $1,601,000 for the three months ended March 31, 1997 and increased as a percentage of total revenues to 9% in the first quarter 1998 from 8% in the first quarter 1997. 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 for the Siebel Enterprise Application through the Company. 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 $4,500,000 for the three months ended March 31, 1998 from $2,580,000 for the three months ended March 31, 1997 and decreased as a percentage of total revenues to 10% in the first quarter 1998 from 13% in the first quarter 1997. 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 9 expenses to increase in absolute dollar amount but remain at a similar percentage of total revenues as the first three 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 $23,018,000 for the three months ended March 31, 1998 from $9,367,000 for the three months ended March 31, 1997 and increased slightly as a percentage of total revenues to 49% in the first quarter 1998 from 48% in the first quarter 1997. The increases in the dollar amount of sales and marketing expenses reflect primarily the hiring of additional sales and marketing personnel and, to a lesser degree, costs associated with expanded promotional activities. 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 three 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 $2,613,000 for the three months ended March 31, 1998 from $1,983,000 for the three months ended March 31, 1997 and decreased as a percentage of total revenues to 6% in the first quarter 1998 from 10% in the first quarter 1997. 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 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 three months of 1998. 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. The Company has not made an assessment as to whether any of its customers, suppliers or service providers will be adversely affected by Year 2000 Issues. The failure of the Company's software or the software of its customers, suppliers or service providers as a result of Year 2000 Issues could have a material adverse effect on the Company's business, financial condition and results of operations. OPERATING INCOME AND OPERATING MARGIN Operating income increased to $11,985,000 for the three months ended March 31, 1998 from $3,841,000 for the three months ended March 31, 1997 and operating margin increased to 25% in the first quarter 1998 from 20% in the first quarter 1997. These increases in operating income and margin were due to increases in license revenues without a proportionate increase in cost, particularly costs associated with the hiring of new personnel. The Company expects operating margins to decline as compared to operating margin for the first three months of 1998 as it continues to invest heavily 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. 10 PROVISION FOR INCOME TAXES The provision for income taxes was $4,660,000 and $1,690,000 and approximately 36% and 38% for the three months ended March 31, 1998 and 1997, respectively. The tax rate for the three months ended March 31, 1998 decreased primarily due to an anticipated increase in the amount of U.S. federal and California state research tax credits and the expectation of certain benefits attributable to international sales. NET INCOME The Company had net income (after provision for income taxes) of $8,285,000 for the three months ended March 31, 1998 compared to net income of $2,758,000 for the three months ended March 31, 1997. Diluted net income per share increased to $0.10 per share in the first quarter of 1998 from $0.03 in the comparable period in 1997. Net income increased as a percentage of total revenues to 18% for the three months ended March 31, 1998 from 14% for the three months ended March 31, 1997. LIQUIDITY AND CAPITAL RESOURCES The Company's cash, cash equivalents and short-term investments increased to $107,744,000 as of March 31, 1998 from $94,151,000 as of December 31, 1997, representing approximately 64% of total assets. This increase was primarily attributable to net income and increases in the tax benefit received from exercises of stock options, deferred revenue 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 73 as of March 31, 1998 compared with 71 as of December 31, 1997. The Company expects DSO will fluctuate significantly in future quarters and that future levels of DSO will likely be higher than those experienced in the current and prior periods. The Company believes that the anticipated cash flows from operations, 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 commenced operations in July 1993 and shipped the first version of Siebel Sales Enterprise in April 1995 and the first version of Siebel Service Enterprise in December 1996. 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. Reliance on Andersen Consulting and Other Relationships; Dependence on System Integrators. The Company has established strategic relationships with a number of organizations that it believes are important to its worldwide sales, marketing and support activities and the implementation of its products. The Company believes that its relationships with such organizations provide marketing and sales opportunities for the Company's direct sales force and expand the distribution of its products. These relationships also assist the Company in keeping pace with the technological and marketing developments of major software vendors, and, in certain instances, provide it with technical assistance for its product development efforts. In particular, the Company has established a non-exclusive strategic relationship with Andersen Consulting, a principal stockholder of the Company. For the year ended December 31, 1997 and the three months ended March 31, 1998, approximately 35% and 7%, respectively, of the Company's license revenues were derived from customers for which Andersen Consulting had been engaged to provide system integration services. Any deterioration of the Company's relationship with Andersen Consulting could have a material adverse effect on the Company's business, financial condition and results of operations. 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 Enterprise 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 11 effect on the Company's business, operating results and financial condition. Reliance on Single Product Family. Approximately 66% of the Company's license revenues in the three months ended March 31, 1998 were attributable to sales of Siebel Sales Enterprise. The remaining revenues were attributable to sales of Siebel Service Enterprise. The Company currently expects Siebel Sales Enterprise and related maintenance and training services to continue to account for a substantial majority 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 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 (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 has recently announced its intention to acquire a 50% equity interest in K&V), Scopus Technology, Inc. (SalesTEAM, ServiceTEAM, Voyager), 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 12 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 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 30% and 31% of the Company's total license revenues in fiscal 1997 and the three months ended March 31, 1998, respectively. 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. 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. 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 Company is currently in the process of acquiring Scopus Technology, Inc. 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. 13 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS The Company is engaged in certain legal proceedings as disclosed in the Company's Annual Report on Form 10-K filed March 17, 1998. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS The effective date of the Company's first registration statement, filed on Form S-1 filed under the Securities Act of 1933 (No. 333-12061), was June 27, 1996 (the "Registration Statement"). The class of securities registered was Common Stock. The offering commenced on June 27, 1996 and all securities were sold in the offering. The managing underwriters for the offering were Hambrecht & Quist LLC, Montgomery Securities and Robertson, Stephens, & Company LLC. Pursuant to the Registration Statement, the Company sold 2,094,450 shares of its Common Stock for its own account, for an aggregate offering price of $33,113,000, and 163,000 shares of its Common Stock for the account of certain selling stockholders, for an aggregate offering price of $2,577,030. The Company incurred expenses of approximately $1,125,000. All such expenses were direct or indirect payments to others. The net offering proceeds to the issuer after total expenses was $31,988,000. The Company has not used any of the net proceeds from the offering. All net proceeds have been invested in U.S. Government obligations and certificates of deposit. The use of the proceeds from the offering does not represent a material change in the use of the proceeds described in the prospectus. 14 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) 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 March 3, 1998, the Company filed a report on Form 8-K relating to the Company's two-for-one stock split effected on March 20, 1998. On March 16, 1998, the Company filed a report on Form 8-K relating to the Company's proposed merger with Scopus Technology, Inc. 15 SIGNATURE 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: May 15, 1998 By: /s/ Howard H. Graham ------------------------------------- Howard H. Graham Senior Vice President Finance and Administration and Chief Financial Officer 16 EX-27.1 2 FINANCIAL DATA SCHEDULE
5 1,000 3-MOS 3-MOS DEC-31-1998 DEC-31-1997 JAN-01-1998 JAN-01-1997 MAR-31-1998 MAR-31-1997 45,768 31,257 61,976 62,894 39,676 34,363 1,552 1,117 0 0 153,771 135,427 10,965 11,129 0 0 167,636 149,312 40,863 36,585 0 0 0 0 0 0 71 71 126,540 112,494 167,636 149,312 38,802 16,561 47,100 19,485 4,984 1,714 30,131 13,930 (960) (607) 0 0 0 0 12,945 4,448 4,660 1,690 0 0 0 0 0 0 0 0 8,285 2,758 0.12 0.04 0.10 0.03
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