-----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, TSST/8OAJrqLzZjl4YXkl1NTRtZPgy1TJekZvvTVH8jRATxWJM78z9z9XI2M+bR1 xRRrmA1l4OBvuor18UD85Q== 0001012870-99-001553.txt : 19990517 0001012870-99-001553.hdr.sgml : 19990517 ACCESSION NUMBER: 0001012870-99-001553 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990514 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: 99622530 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 March 31, 1999 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 5, 1999, was 91,059,273. SIEBEL SYSTEMS, INC. FORM 10-Q For the Quarterly Period Ended March 31, 1999 Table of Contents
Part I. Financial Information Page ---- Item 1. Financial Statements a) Consolidated Balance Sheets as of March 31, 1999 and December 31, 1998 3 b) Consolidated Statements of Operations for the three months ended March 31, 1999 and 1998 4 c) Consolidated Statements of Cash Flows for the three months ended March 31, 1999 and 1998 5 d) Notes to Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and 12 Results of Operations Item 3. Quantitative and Qualitative Disclosures About Market Risk 24 Part II. Other Information Item 1. Legal Proceedings 25 Item 2. Changes in Securities and Use of Proceeds 25 Item 6. Exhibits and Reports on Form 8-K 25 Signatures 27
2 Part I. Financial Information Item 1. Financial Statements SIEBEL SYSTEMS, INC. Consolidated Balance Sheets (in thousands, except per share data)
March 31, December 31, 1999 1998 ---------------- --------------- (unaudited) Assets Current assets: Cash and cash equivalents................................................. $84,708 $79,961 Short-term investments.................................................... 145,756 151,888 Accounts receivable, net.................................................. 147,676 122,818 Deferred income taxes..................................................... 13,120 13,120 Prepaids and other........................................................ 14,076 13,908 ------------------- ------------------ Total current assets.................................................... 405,336 381,695 Property and equipment, net.................................................. 48,328 45,537 Other assets................................................................. 14,648 14,714 ------------------- ------------------ Total assets............................................................ $468,312 $441,946 =================== ================== Liabilities and Stockholders' Equity Current liabilities: Accounts payable.......................................................... $11,975 $3,899 Accrued expenses.......................................................... 66,573 84,917 Income taxes payable...................................................... 5,511 10,917 Deferred revenue.......................................................... 52,507 50,875 ------------------- ------------------ Total current liabilities............................................... 136,566 150,608 Deferred income taxes........................................................ 642 710 ------------------- ------------------ Total liabilities....................................................... 137,208 151,318 ------------------- ------------------ Stockholders' equity: Common stock; $0.001 par value; 300,000 shares authorized; 90,684 and 89,630 shares issued and outstanding, respectively........................ 91 90 Additional paid-in capital................................................. 254,471 235,302 Notes receivable from stockholders......................................... (406) (406) Deferred compensation...................................................... (317) (360) Accumulated other comprehensive losses..................................... (746) (669) Retained earnings.......................................................... 78,011 56,671 ------------------- ------------------ Total stockholders' equity.............................................. 331,104 290,628 ------------------- ------------------ Total liabilities and stockholders' equity.............................. $468,312 $441,946 =================== ==================
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, 1999 1998 ------------- ------------- Revenues: Software............................................. $93,432 $56,002 Professional services, maintenance and other......... 40,618 18,170 --------------- --------------- Total revenues............................. 134,050 74,172 --------------- --------------- Cost of revenues: Software............................................. 1,331 1,016 Professional services, maintenance and other......... 24,186 10,805 --------------- --------------- Total cost of revenues.................... 25,517 11,821 --------------- --------------- Gross margin............................... 108,533 62,351 --------------- --------------- Operating expenses: Product development.................................. 16,678 8,756 Sales and marketing.................................. 52,168 35,352 General and administrative........................... 8,210 4,567 --------------- --------------- Total operating expenses.................. 77,056 48,675 --------------- --------------- Operating income.......................... 31,477 13,676 Other income, net........................................... 2,395 1,592 --------------- --------------- Income before income taxes............... 33,872 15,268 Income taxes................................................ 12,532 5,520 --------------- --------------- Net income............................... $21,340 $9,748 =============== =============== Diluted net income per share................................ $0.20 $0.10 =============== =============== Shares used in diluted net income per share computation.......................................... 106,761 99,287 =============== =============== Basic net income per share.................................. $0.24 $0.11 =============== =============== Shares used in basic net income per share 90,214 86,285 computation.......................................... =============== =============== Comprehensive income: Net income...................................... $21,340 $9,748 Other comprehensive income (loss), net of tax: Foreign currency translation adjustments......... 40 (17) Unrealized losses on securities.................. (117) -- --------------- -------------- Other comprehensive loss................................. (77) (17) --------------- -------------- Total comprehensive income................ $21,263 $9,731 =============== ==============
See accompanying notes to consolidated financial statements. 4 SIEBEL SYSTEMS, INC. Consolidated Statements of Cash Flows (in thousands; unaudited)
Three Months Ended March 31, ----------------------------------- 1999 1998 ----------------- --------------- Cash flows from operating activities: Net income.................................................. $21,340 $9,748 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Compensation related to stock options............. 43 75 Depreciation and amortization..................... 4,574 2,572 Deferred income taxes............................. (68) (1,702) Loss on disposal of property and equipment........ -- 223 Provision for doubtful accounts and returns....... 1,331 754 Changes in operating assets and liabilities: Accounts receivable........................... (26,189) (7,328) Prepaids and other............................ (168) 896 Accounts payable.............................. 8,076 1,606 Accrued expenses.............................. (18,344) (1,287) Income taxes payable.......................... 2,467 4,636 Deferred revenue.............................. 1,632 4,157 -------------------- ------------------- Net cash provided by (used in) operating activities....................... (5,306) 14,350 -------------------- ------------------- Cash flows from investing activities: Purchases of property and equipment......................... (7,365) (4,932) Purchases of short-term investments......................... (32,153) (25,217) Sales and maturities of short-term investments.............. 38,285 29,273 Other assets................................................ 66 1,482 -------------------- ------------------- Net cash provided by (used in) investing activities....................... (1,167) 606 -------------------- ------------------- Cash flows from financing activities: Proceeds from issuance of common stock...................... 11,220 3,695 -------------- ------------------- Net cash provided by financing activities....................... 11,220 3,695 -------------------- ------------------- Change in cash and cash equivalents................................ 4,747 18,651 Adjustment to conform acquired company's year end.................. -- (4,140) Cash and cash equivalents, beginning of period..................... 79,961 70,202 -------------------- ------------------- Cash and cash equivalents, end of period........................... $84,708 $84,713 ==================== =================== Supplemental disclosures of cash flow information: Cash paid for income taxes........................................ $10,066 $971 ==================== =================== Tax benefit from exercise of stock options........................ $7,873 $2,520 ==================== ===================
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, 1999. 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 ("SOP") 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 SOP No. 97-2 "Software Revenue Recognition." Revenue is recognized under SOP No. 97-2 when persuasive evidence of an arrangement exists and delivery has occurred, provided the fee is fixed and determinable, collectibility is probable and the arrangement does not require significant customization of the software. Under SOP No. 97-2, revenue on multiple element arrangements is allocated to the various elements based on fair values specific to the Company. Professional services, maintenance and other revenues relate primarily to consulting services, maintenance and training. Maintenance revenues are recognized ratably over the term of the maintenance contract, typically 12 months. Consulting and training revenues are recognized as the services are performed and are usually 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. 6 Cost of Revenues Cost of software consists primarily of media, product packaging, documentation and other production costs, and third-party royalties. Cost of professional services, maintenance 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 a remaining maturity of 90 days or less at the date of purchase to be cash equivalents. Short-term investments generally consist of highly liquid municipal securities with remaining maturities in excess of 90 days. The Company has classified its short-term investments as "available for sale." Such investments are carried at fair value with unrealized gains and losses reported within accumulated other comprehensive income. Realized gains and losses on available for sale securities are computed using the specific identification method. 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 time period between the establishment of technological feasibility and completion of software development has been short, and no significant development costs have been incurred during that period. Accordingly, the Company has not capitalized any software development costs to date. Intangible Assets Included in other assets are various intangible assets, primarily goodwill related to acquisitions. These amounts are being amortized over a three-year period using the straight-line method. Gross intangible assets were $7,162,000 at March 31, 1999 and December 31, 1998 and the related accumulated amortization was $1,397,000 and $800,000 at March 31, 1999 and December 31, 1998, respectively Advertising Advertising costs are expensed as incurred. Advertising expense is included in sales and marketing expense and amounted to $7,570,000 and $2,304,000 for the three months ended March 31, 1999 and 1998, respectively. 7 Income Taxes The Company uses the asset and liability method of accounting for income taxes. 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, 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. 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, 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 on the date of grant if 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 reported within accumulated other comprehensive income. The Company utilizes foreign currency forward contracts to hedge its exchange risk on foreign currency receivable and intercompany balances. While these forward contracts are subject to fluctuations in value, which are recorded in current results of operations, such fluctuations are generally offset by the changes in value of the underlying exposures being hedged. The Company does not hold or issue financial instruments for speculative or trading purposes. 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 any particular industry or geographic area since the Company's business is not concentrated on any one particular customer or customer base. No single customer accounts for more than 10% of revenues; and the Company's largest customer base, telecommunications, which accounted for approximately 31% of revenues during the quarter ended March 31, 1999, is sufficiently broad that the Company does not consider itself significantly exposed to concentrations of credit risk. Fair Value of Financial Instruments The carrying amount of the Company's cash and cash equivalents, short-term investments, accounts receivable, and accounts payable approximate their respective fair values. Changes in the fair value of the Company's derivative financial instruments (foreign currency forward contracts) are generally offset by changes in the value of the underlying exposures being hedged. The fair value of the Company's derivative financial instruments at March 31, 1999 was a 8 loss of approximately $81,000. Impairment of Long-Lived Assets The Company evaluates long-lived assets, including goodwill, for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable based on expected undiscounted cash flows attributable to that asset. The amount of any impairment is measured as the difference between the carrying value and the fair value of the impaired asset. The Company does not have any long-lived assets it considers to be impaired. Comprehensive Income In 1998, the Company adopted Statement of Financial Accounting Standard ("SFAS") No. 130, "Reporting Comprehensive Income". This statement establishes rules for the reporting of comprehensive income and its components. The Company's comprehensive income includes net income, foreign currency translation adjustments and unrealized gains on short-term investments and is presented in the Consolidated Statement of Operations. The adoption of SFAS No. 130 had no impact on total stockholders' equity. Prior year financial statements have been reclassified to conform to the SFAS No. 130 requirements. Recent Accounting Pronouncements 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 Company's consolidated financial position or results of operations. In December 1998, the Accounting Standards Executive Committee (AcSEC) of the AICPA issued SOP 98-9, "Software Revenue Recognition with Respect to Certain Arrangements", which requires recognition of revenue using the "residual method" in a multiple element arrangement when fair value does not exist for one or more of the undelivered elements in the arrangement. Under the "residual method", the total fair value of the undelivered elements is deferred and subsequently recognized in accordance with SOP 97-2. Management does not believe the adoption of SOP 98-9 will have a material effect on the Company's consolidated financial position or results of operations. 2. Scopus Merger In May, 1998, the Company completed the acquisition of Scopus, 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 $13,500,000 consisting of direct transaction fees for investment bankers, attorneys, accountants and other professional fees of $9,100,000, integration charges related to duplicate facilities and equipment of $3,100,000 and other miscellaneous expenses of $1,300,000. The Company also incurred indirect merger-related expenses of approximately $1,800,000 for joint sales training and merger-related marketing costs, which 9 are included within sales and marketing expenses. At March 31, 1999, accrued liabilities included approximately $1,325,000 of unpaid merger-related 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 ended its fiscal year on March 31. The restated financial statements as of December 31, 1997, and for prior periods, include Siebel's results of operations for those periods and Scopus' results of operations for the fiscal period ending three months later. Beginning January 1, 1998, the reporting periods of Siebel and Scopus were conformed, and results of operations were combined for the calendar periods presented. The results of operations for the separate companies and the combined amounts presented in the consolidated financial statements follow: (in thousands, unaudited) Three months ended March 31, 1998 --------------- Total revenues: $47,100 Siebel 27,072 Scopus --------------- $74,172 =============== Net income: Siebel $8,284 Scopus 1,464 --------------- $9,748 =============== 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 March 31, ----------------------------- 1999 1998 -------------- ------------ Shares used in basic net income per share computation 90,214 86,285 Effect of dilutive potential common shares 16,547 13,002 -------------- ------------ Shares used in diluted net income per share computation 106,761 99,287 ============== ============ The Company excludes potentially dilutive securities from its diluted net income per share computation when either the exercise price of the securities exceeds the average fair value of the Company's common stock or the Company reported net losses because their effect would be anti-dilutive. For the three months ended March 31, 1999 and 1998, the Company excluded 16,380 and 847,980 employee stock options, respectively, with a weighted average exercise price of $51.50 and $26.88 per share, respectively, from the earnings per share computation as their exercise prices exceeded the fair value of the Company's common stock and, accordingly, their inclusion would have been anti-dilutive. 10 4. Segment and Geographic Information The Company and its subsidiaries are principally engaged in the design, development, marketing and support of Siebel Enterprise Applications, its family of proprietary software applications. Substantially all revenues result from the licensing of the Company's software products and related consulting and customer support (maintenance) services. The Company's chief operating decision maker reviews financial information presented on a consolidated basis, accompanied by disaggregated information about revenues by geographic region for purposes of making operating decisions and assessing financial performance. Accordingly, the Company considers itself to be in a single industry segment, specifically the license, implementation and support of its software applications. 11 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations The statements contained in this Quarterly Report on Form 10-Q (the "Report") that are not historical are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act") and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), including statements regarding the Company's expectations, beliefs, intentions or strategies regarding the future. Forward-looking statements include, without limitation, statements regarding the extent and timing of future revenues and expenses and customer demand, statements regarding the deployment of the Company's products, and statements regarding reliance on third parties. All forward-looking statements included in this document are based on information available to the Company as of the date hereof, and the Company assumes no obligation to update any such forward-looking statement. It is important to note that the Company's actual results could differ materially from those in such forward-looking statements. Overview Siebel Systems, Inc. ("Siebel" or the "Company") is the market leader in enterprise-class sales, marketing and customer service information systems for organizations focused on increasing sales, marketing and customer service effectiveness in field sales, customer service, telesales, telemarketing, call centers, and third-party resellers. The Company designs, develops, markets, and supports Siebel Enterprise Applications, a leading web-based 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. Results of Operations Revenues Software. License revenues increased to $93,432,000 for the three months ended March 31, 1999 from $56,002,000 for the three months ended March 31, 1998 and decreased as a percentage of total revenues to 70% in the first quarter 1999 from 76% in the first quarter 1998. License revenues increased in absolute dollars during this period as compared to the respective prior period due to an increase in the number of licenses of Siebel applications sold to new and existing customers and also due to licenses of new modules, released with the latest version of Siebel applications, sold 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 applications family both in the United States and internationally. The Company expects that license revenues will continue to grow in absolute dollars, but will remain the same or decrease as a percentage of total revenues as the Company's maintenance revenues continue to grow as a result of increases in the installed base of customers on maintenance. Professional Services, Maintenance and Other. Professional services, maintenance and other revenues increased to $40,618,000 for the three months ended March 31, 1999 from $18,170,000 for the three months ended March 31, 12 1998 and increased as a percentage of total revenues to 30% in the first quarter 1999 from 24% in the first quarter 1998. The increase in the absolute dollar amount was due to growth in the Company's consulting business and growth in the installed base of customers with a maintenance component and maintenance renewals from products licenses in prior periods. First-year maintenance is typically sold with the related software license. Revenue related to such maintenance is deferred based on vendor-specific objective evidence of fair value and amortized over the term of the maintenance contract, typically 12 months. The Company expects that professional services, maintenance and other revenues will remain the same or increase as a percentage of total revenues due to increased maintenance revenues derived from the Company's growing installed base and due to the Company's expansion of its consulting organization to meet anticipated customer demands in connection with product implementation. The Company markets its products in the United States through its direct sales force and internationally through its sales force and distributors primarily in Japan, Latin America, South Africa and Asia. International revenues accounted for 30% and 27% of license revenues for the three months ended March 31, 1999 and 1998, respectively. The Company is increasing its international sales force and is seeking to establish distribution relationships with appropriate strategic partners and expects international revenues will continue to account for a substantial portion of total revenues in the future. Cost of Revenues Software. Cost of software license revenues includes third party software royalties, product packaging, documentation and production. Cost of license revenues increased to $1,331,000 for the three months ended March 31, 1999 from $1,016,000 for the three months ended March 31, 1998 and as a percentage of total revenues was 1% for each of the three months ended March 31, 1999 and 1998. 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. Professional Services, Maintenance and Other. Cost of professional services, maintenance and other revenues consists primarily of personnel, facilities and systems costs incurred in providing customer support. Cost of professional services, maintenance and other revenues increased to $24,186,000 for the three months ended March 31, 1999 from $10,805,000 for the three months ended March 31, 1998 and increased as a percentage of total revenues to 18% in the first quarter 1999 from 15% in the first quarter 1998. The increase in the absolute dollar amount reflects the effect of fixed costs resulting from the Company's expansion of its maintenance and support organization and growth in the Company's consulting business. The Company expects that professional services, maintenance and other costs will continue to increase in absolute dollar amount as the Company expands both its customer support organization to support a growing installed base and its consulting 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 $16,678,000 for the three months ended March 31, 1999 from $8,756,000 for the three months ended March 31, 1998 and as a percentage of total revenues was 12% for each of the three months ended March 31, 1999 and 1998. The increase in the absolute dollar amount of product development expenses was 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 in the first three months of 1999. The Company considers technological feasibility of its software products to have been reached upon completion of a working model that has met certain performance criteria. The period between achievement of technological feasibility and general release of a software product is typically very short, and development costs incurred during that 13 period have not been material. Accordingly, the Company has not capitalized any software development costs to date. 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 $52,168,000 for the three months ended March 31, 1999 from $35,352,000 for the three months ended March 31, 1998 and decreased as a percentage of total revenues to 39% in the first quarter 1999 from 48% in the first quarter 1998. The increase in the dollar amount of sales and marketing expenses reflects primarily the hiring of additional sales and marketing personnel and costs associated with expanded promotional activities. The Company expects that sales and marketing expenses will continue to increase in absolute dollars 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 1999. 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 $8,210,000 for the three months ended March 31, 1999 from $4,567,000 for the three months ended March 31, 1998 and as a percentage of total revenues was 6% for each of the three months ended March 31, 1999 and 1998. The increase in the absolute dollar amount of general and administrative expenses was 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 dollars 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 in the first three months of 1999. Operating Income and Operating Margin Operating income increased to $31,477,000 for the three months ended March 31, 1999 from $13,676,000 for the three months ended March 31, 1998 and operating margin increased to 23% in the first quarter 1999 from 18% in the first quarter 1998. This increase in operating income and margin was due to increases in license revenues without a proportional increase in cost, particularly costs associated with the hiring of new personnel. 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 Income taxes are comprised primarily of federal and state taxes. The provision for income taxes was $12,532,000 and $5,520,000 for the three months ended March 31, 1999 and 1998, respectively. The provision for income taxes as a percentage of pretax income was 37% and 36%, respectively. The Company expects its effective tax rate for the remainder of 1999 to be approximately 37%. Net Income The Company had net income of $21,340,000 for the three months ended March 31, 1999 compared to net income of $9,748,000 for the three months ended March 31, 1998. Diluted net income per share increased to $0.20 per share in the first quarter of 1999 from $0.10 per share in the comparable period in 1998. Net income as a percentage of total revenues was 16% for the three months ended March 31, 1999, compared to 13% for the three months ended March 31, 1998. 14 Liquidity and Capital Resources The Company's cash, cash equivalents and short-term investments decreased to $230,464,000 as of March 31, 1999 from $231,849,000 as of December 31, 1998, representing approximately 49% and 52% of total assets, respectively. This decrease was primarily attributable to an increase in accounts receivable, a decrease in accrued expenses (attributable to payouts of final 1998 commissions and bonuses and final income tax payments for 1998) and purchases of property and equipment, partially offset by net income and increases in deferred revenue, accounts payable and issuances of common stock under the Company's stock option plans. The Company's days sales outstanding (DSO) in accounts receivable was 99 as of March 31, 1999, compared with 90 as of December 31, 1998. The Company expects DSO to 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. Capital expenditures of the nature described above are expected to increase during the remainder of 1999 and 2000. 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. Year 2000 Preparedness Many existing computer programs and systems use only two-digit fields to identify the year, e.g. 85=1985, and they are unable to process date and time information between the twentieth and twenty-first centuries. Accordingly, computer programs and software may need to be modified prior to the year 2000 in order to remain functional. Failure to complete the necessary modifications could cause a disruption or failure of such program and system. The Company's Y2K initiative is being managed by a team of internal staff and third-party consultants specializing in Y2K issues. The team's activities are designed to identify potential Y2K problems and to ensure that there is no adverse effect on our core business operations and that transactions with clients, suppliers and financial institutions are fully supported. The Company's efforts have focused on three areas: (i) the Company's products, (ii) internal operating systems and (iii) interfaces with third-party systems. . Products. The Company has put in place a certification program to verify the Y2K compliance of its products. Beginning with version 4.0 (Siebel 98), the Company's programs have been designed to be Y2K compliant. The Company has applied a number of test approaches and criteria to each of its products beginning with Siebel 98 and believes that all such products are Y2K compliant. While we believe that most of our currently developed and actively marketed products are Y2K compliant for significantly all functionality, our software products could contain errors or defects relating to Y2K. The Company has advised certain of its customers that internal testing of Y2K compliance should be conducted to ensure that the operations managed by Siebel products continue without disruption. If such modifications and conversions are not made, or are not completed in a timely manner, the Y2K issue could have a material adverse impact on our operations. The costs incurred to test the Company's products for Y2K compliance were incurred as normal product development expenses. Any additional expenses are expected to be minimal. . Internal Operating Systems. The Company has implemented a plan to test all internal operating systems, such as computer hardware and software, telephone/PBX systems, fax machines, facilities systems such as building access and other miscellaneous systems on a worldwide basis. The Company is approaching its Y2K internal readiness program in the following three phases: (i) assessment, (ii) planning and (iii) implementation. These 15 phases include such individual steps as taking an inventory of the Company's operating systems prioritized by risk, identifying failure dates, defining a solution strategy, estimating repair costs, identifying specific tasks necessary to ensure readiness, determining resource requirements and allocations, and finally, testing and fixing the operating systems as well as putting in place contingency plans for operating systems that have a high impact on the Company's business. The Company believes that, with modifications to existing software and conversions to new software, the Y2K issue will not pose significant operational problems to our internal operating systems. As of March 1999, the implementation phase is underway. However, if such modifications and conversions are not made, or are not completed in a timely manner, the Y2K issue could have a material adverse impact on our operations. Costs incurred to date and expected costs to complete this process are not expected to be material. . Third-Party Systems. The Company has developed a Y2K process for dealing with its key suppliers, distributors, vendors and system integrators and other partners. The Company has been in contact with its key third-party relationships regarding their Y2K compliance. The Company has received responses from its critical third-party relationships, most of whom have stated that they expect to address all of their significant Y2K issues in a timely manner. The Company is working to identify and analyze the most reasonably likely worst case scenarios for third party relationships affected by Y2K. These scenarios could include possible infrastructure collapse, the failure of water and power supplies, major transportation disruptions and failures of communications or financial systems any of which could have a material adverse effect on the Company's ability to deliver its products and services to its customers. While the Company has contingency plans in place to address most issues under its control, an infrastructure problem outside of its control could result in a delay in product shipments, depending on the nature and severity of the problems. As of February 1, 1999, the Company has initiated the process of analyzing its third-party systems and expects to complete the process by the fourth quarter. However, if such analyses and required modifications, if any, are not made, or are not completed in a timely manner, the Y2K issue could have a material adverse impact on our operations. Costs incurred to date and expected costs to complete this process are not expected to be material. Although the Company has spent a large amount of time and resource to address potential Y2K problems, there is no assurance that the Company will be successful in its efforts to identify and address all Y2K issues. Even if the Company acts in a timely manner to complete all of its assessments and planned solutions, some problems may not be identified or corrected in time to prevent material adverse consequences to the Company. The discussion above regarding estimated completion dates, costs, risks and other forward-looking statements regarding Y2K is based on the Company's best estimates given information that is currently available and is subject to change. As the Company continues to progress with its Y2K initiatives, it may discover that actual results will differ materially from these estimates. See "Factors Affecting Operating Results -- Year 2000 Problems may cause an Interruption in our Business". Factors Affecting Operating Results A Limited Operating History Upon Which to Evaluate our Business. We began operations in July 1993. We first shipped our Siebel Sales Enterprise product in April 1995 and our Siebel Service Enterprise product in December 1996. Subsequent versions of these products were first shipped in 1996 and 1997. Accordingly, we have a limited operating history upon which you may evaluate our business and prospects. You should evaluate our prospects in light of the risks, expenses and uncertainties that companies in their early stage of development frequently encounter. Net Revenue and Operating Results may Fluctuate. Our net revenue and operating results may fluctuate significantly because of a number of factors, many of which are outside of our control. These factors include: . Level of product and price competition; . Length of our sales cycle and customer purchasing patterns; . The size and timing of individual license transactions; 16 . Delay or deferral of customer implementations of our products; . Success in expanding our customer support organization, direct sales force and indirect distribution channels; . Timing of new product introductions and product enhancements; . Appropriate mix of products and services sold; . Levels of international sales; . Activities of and acquisitions by competitors; . Timing of new hires and the allocation of our resources; . Changes in the economy and foreign currency exchange rates; and . Our ability to develop and market new products and control costs. One or more of the foregoing factors may cause our operating expenses to be disproportionately high during any given period or may cause our net revenue and operating results to fluctuate significantly. Based on the preceding factors, we may experience a shortfall in revenue or earnings or otherwise fail to meet public market expectations, which could materially adversely affect our business, financial condition and the market price of our common stock. Quarterly Operating Results may Fluctuate. Our net revenue and operating results may vary drastically from quarter to quarter. The main factors, which may affect these fluctuations, are: . The discretionary nature of our customer's purchase and budget cycles; . The size and complexity of our license transactions; . The potential delays in recognizing revenue from license transactions; . The timing of new product releases; . Seasonal variations in operating results; and . Variations in the fiscal or quarterly cycles of our customers. Each customer's decision to implement our products and services is discretionary, involves a significant commitment of resources and is subject to their budget cycles. In addition, the timing of license revenue is difficult to predict because of the length of our sales cycle, which has ranged to date from two to eighteen months. We base our operating expenses on anticipated revenue trends. Because a high percentage of these expenses are relatively fixed, a delay in recognizing revenue from license transactions could cause significant variations in operating results from quarter to quarter and could result in operating losses. If these expenses precede, or are not subsequently followed by, increased revenues, our operating results could be materially and adversely affected. Although we have not experienced significant seasonal variations in operating results, such variations could develop in the future. As a result of these and other factors, revenues for any quarter are subject to significant variation, and we believe that period-to-period comparisons of our results of operations are not necessarily useful. You should not rely on these comparisons as indications of future performance. It is likely that our future quarterly operating results from time to time will not meet the expectations of market analysts or investors, which would likely have an adverse effect on the price of our common stock. 17 Reliance on Strategic Relationship with Systems Integrators. We have established strategic relationships with a number of organizations that we believe are important to our sales, marketing and support activities and the implementation of our products. We believe that our relationships with these organizations provide marketing and sales opportunities for our direct sales force and expand the distribution of our products. These relationships allow us to keep pace with the technological and marketing developments of major software vendors and provide us with technical assistance for our product development efforts. In particular, we have established a non-exclusive strategic relationship with Andersen Consulting, one of our principal stockholders. We have also entered into significant relationships with other third-party systems integrators such as PriceWaterhouseCoopers and Deloitte Consulting. A significant portion of our revenues have historically been derived from customers for whom Andersen Consulting, or another systems integrator with which we have a significant relationship, have been engaged to provide system integration services. Any deterioration of our relationship with these significant third-party systems integrators could have a material adverse effect on our business, financial condition and results of operations. We also have relationships with Microsoft Corporation, Compaq Computer Corporation, Itochu Corporation and Itochu Techno-Science Corporation, among others. Our failure to maintain existing relationships, or to establish new relationships in the future, could have a material adverse effect on our business, results of operations and financial condition. Our current and potential customers may also rely on third-party system integrators to develop, deploy and/or manage Siebel Enterprise Applications. If we do not adequately train a sufficient number of system integrators, or if these integrators do not have or devote the resources necessary to implement our products, our business, operating results and financial condition could be materially and adversely affected. The Internet Presents Unique Risks. The Siebel Enterprise Applications communicate through public and private networks over the Internet. The success of our products may depend, in part, on our ability to continue developing products which are compatible with the Internet. We cannot predict with any assurance whether the Internet will be a viable commercial marketplace or whether the demand for Internet-related products and services will increase or decrease in the future. The increased commercial use of the Internet could require substantial modification and customization of our products and the introduction of new products. We may not be able to effectively compete in the Internet-related products and services market. Critical issues concerning the commercial use of the Internet, including security, demand, reliability, cost, ease of use, accessibility, quality of service and potential tax or other government regulation, remain unresolved and may affect the use of the Internet as a medium to support the functionality of our products and distribution of our software. If these critical issues are not favorably resolved, our business, operating results and financial condition could be materially and adversely affected. A Competitive and Rapidly Changing Market. The market for client/server application software is relatively new, highly competitive and rapidly changing. We market our products only to customers who have migrated or are in the process of migrating their enterprise computing systems to client/server computing environments. Our future financial performance will partly depend on the continued growth of organizations successfully adopting client/server-computing environments. If the client/server market fails to grow or grows more slowly than we currently anticipate, our business, operating results and financial condition could be materially and adversely affected. The market for customer information software is also highly competitive and rapidly changing. Our future financial performance will largely depend on growth in the number of customer information applications developed for use in client/server environments. If the customer information software market fails to grow or grows more slowly than we currently anticipate, our business, operating results and financial condition would be materially and adversely affected. Customers may not Successfully Implement our Products. Many of our customers purchase and implement our 18 products in phases. Our customers frequently deploy our products to large numbers of sales, marketing and customer service personnel. These end-users may not accept our products. Our products are also being deployed on a variety of computer hardware platforms and used with a number of third-party software applications and programming tools. This use may present significant technical challenges, particularly as large numbers of personnel attempt to use our product concurrently. If existing customers have difficulty further deploying Siebel Enterprise Applications or for any other reason are not satisfied with Siebel Enterprise Applications, our business, operating results and financial condition could be materially and adversely affected. A Limited Number of Products for our License Revenues. In 1998 and the first three months of 1999, a substantial majority of our license revenues were attributable to sales of Siebel Sales Enterprise, Siebel Service Enterprise and related products. We expect that such products and related consulting, maintenance and training services will continue to account for a substantial majority of our future revenues. As a result, factors adversely affecting the pricing of or demand for such products, such as competition or technological change, could have a material adverse effect on our business, operating results and financial condition. The Length of Time Required to Engage a Client and to Implement Our Products may be Lengthy and Unpredictable. The timing of the sales and implementation of our products and services is lengthy and not predictable with any degree of accuracy. You should not rely on prior sales and implementation cycles as any indication of future cycles. The license of our software products is often an enterprise-wide decision by prospective customers and generally requires us to provide a significant level of education to prospective customers regarding the use and benefits of our products. In addition, the implementation of our products involves a significant commitment of resources by prospective customers and is commonly associated with substantial reengineering efforts that may be performed by the customer or third-party system integrators. The cost to the customer of our product is typically only a portion of the related hardware, software, development, training and integration costs of implementing a large-scale sales and marketing information system. For these and other reasons, the period between initial contact and the implementation of our products is often lengthy and is subject to a number of factors which may cause significant delays, many of which we have little or no control over. These factors include (i) the size and complexity of our license transactions and (ii) delays in our customers' implementation of client/server computing environments. A delay in the sale or implementation of even a limited number of license transactions could have a material adverse effect on our business and operations and cause our operating results to vary significantly from quarter to quarter. Expanding Distribution May Create Additional Risks. We have expanded the distribution of our products in recent years. This expansion has placed new and increased demands on our direct sales force and technical and sales support staff. Our ability to achieve revenue growth in the future will depend, in part, on our success in recruiting and training sufficient direct sales, technical and customer support personnel. Although we invest significant resources to expand our direct sales force and our technical and customer support staff, we have experienced difficulty in recruiting qualified personnel. We also may not be able to successfully expand our direct sales force or other distribution channels. In addition, such expansion may not result in increased revenues. Any failure to expand our direct sales force or technical and customer support staff or to expand our distribution channels could materially and adversely affect our business, operating results and financial condition. Revenue is Concentrated in a Relatively Small Number of Customers. Our success depends on maintaining relationships with our existing customers. A relatively small number of customers have accounted for a significant percentage of our revenues. For 1998 and the three months ended March 31, 1999, sales to our ten largest customers accounted for 22% and 34% of total revenues, respectively. We expect that sales of our products to a limited number of customers will continue to account for a significant percentage of revenue for the foreseeable future. The loss of a small number of customers or any reduction or delay in orders by any such customer, or failure to successfully market our products to new customers could have a material adverse effect on our business, financial condition and results of operations. Success Requires us to keep Pace with Technological Developments, Evolving Industry Standards and Changing 19 Customer Needs. The software market in which we compete is characterized by (i) rapid technological change, (ii) frequent introductions of new products, (iii) changing customer needs, and (iv) evolving industry standards. To keep pace with technological developments, evolving industry standards and changing customer needs, we must support existing products and develop new products. We may not be successful in developing, marketing and releasing new products or new versions of the Siebel Enterprise Applications that respond to technological developments, evolving industry standards or changing customer requirements. We may also experience difficulties that could delay or prevent the successful development, introduction and sale of these enhancements. In addition, these enhancements may not adequately meet the requirements of the marketplace and may not achieve any significant degree of market acceptance. If release dates of any future products or enhancements to the Siebel Enterprise Applications are delayed, or if these products or enhancements fail to achieve market acceptance when released, our business, operating results and financial condition could be materially and adversely affected. In addition, new products or enhancements by our competitors may cause customers to defer or forgo purchases of our products, which could have a material adverse effect on our business, financial condition and results of operations. Success Requires us to Effectively Compete in the Customer Information Systems Market. Our products target the customer information systems market. This market is highly competitive, rapidly changing and significantly affected by new product introductions. We face competition primarily from our 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 our customers and potential customers have attempted to develop customer information systems, in-house either alone or with the help of systems integrators. We may not be able to compete successfully against such internal development efforts. We rely on a number of systems consulting and systems integration firms for implementation and other customer support services, as well as for recommendations of our products during the evaluation stage of the purchase process. Although we seek to maintain close relationships with these service providers, many of them have similar, and often more established, relationships with our competitors. If we are unable to develop and retain effective, long- term relationships with these third parties, our competitive position could be materially and adversely affected. Further, many of these third parties have significantly greater resources than we do and may market software products that compete with us. The following table lists some of our current and potential competitors and their products. Company Name Product - ------------ ------- Acxiom................................. DirectMedia Baan N.V./Aurum Software, Inc.......... FrontOffice Borealis Corporation................... Arsenal Clarify, Inc........................... ClearSales, ClearSupport Dendrite International, Inc............ Force One; Dendrite Series 6 Early Cloud & Co....................... CallFlow Exchange Applications.................. ValEX IMA.................................... EDGE Marketrieve Company.................... Marketrieve PLUS Metrix, Inc............................ Field Service Dispatch Onyx................................... Customer Center Oracle Corporation..................... Oracle Sales and Marketing Pegasystems, Inc....................... PegaSURE; PegaWorks; PegaSales Pivotal Software, Inc.................. Relationship Prime Response......................... Prime Vantage Sales Vision........................... Jsales SAP A.G................................ Focus (not yet released) Saratoga Systems....................... Avenue Symantec............................... ACT! The Vantive Corporation................ Vantive Enterprise 20 Trilogy Development Group, Inc......... SC Config 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 we do. In addition, many competitors have well-established relationships with our current and potential customers. 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 we can. There are many factors that may increase competition in the customer information systems market, including (i) entry of new competitors, (ii) alliances among existing competitors and (iii) consolidation in the software industry. Increased competition may result in price reductions, reduced gross margins or loss of market share, any of which could materially adversely affect our business, operating results and financial condition. If we cannot compete successfully against current and future competitors or overcome competitive pressures, our business, operating results and financial condition may be adversely affected. If we do not Maintain our Relationship with Third-Party Vendors, Interruptions in the Supply of Our Products may result. Portions of our products incorporate software that was developed and is maintained by third-party software developers. Although we believe there are other sources for these products, any significant interruption in the supply of these products could adversely impact our sales unless and until we can secure another source. We depend in part on these third parties' abilities to enhance their current products, to develop new products on a timely and cost-effective basis and to respond to emerging industry standards and other technological changes. We may not be able to replace the functionality provided by the third-party software currently offered with our products if that software becomes obsolete or incompatible with future versions of our products or is not adequately maintained or updated. The absence of or any significant delay in the replacement of that functionality could materially adversely affect our sales. Software Errors or Defects Could reduce Revenues. Software products frequently contain errors or failures, especially when first introduced or when new versions are released. Although we conduct extensive product testing during product development, we have been forced to delay the commercial release of products until the correction of software problems. We could lose revenues as a result of software errors or defects. Our products are intended for use in sales applications that may be critical to a customer's business. As a result, we expect that our customers and potential customers will have a greater sensitivity to product defects than the market for software products generally. Testing errors may also be found in new products or releases after commencement of commercial shipments, resulting in loss of revenue or delay in market acceptance, damage to our reputation, or increased service and warranty costs, any of which could have a material adverse effect upon our business, operating results and financial condition. If we do not Successfully Manage Our Growth, our Business may be Negatively Impacted. Our business has grown rapidly in recent years. This growth has placed a significant strain on our management systems and resources. To manage future growth we must continue to (i) improve our financial and management controls, reporting systems and procedures on a timely basis and (ii) expand, train and manage our employee work force. If we fail to manage our growth effectively, our business, financial condition and results of operations could be materially and adversely affected. The Loss of our Key Personnel Could Negatively Affect our Performance. Our performance depends on the continued service of our key technical, sales and senior management personnel, particularly Thomas M. Siebel, our Chairman and Chief Executive Officer. None our key employees has entered into an employment agreement with us. The loss of the services of one or more of our executive officers could have a material adverse effect on our business, operating results and financial condition. The Protection of Our Proprietary Information is Limited. We rely primarily on a combination of patent, copyright, trade secret and trademark laws, confidentiality procedures and contractual provisions to protect our proprietary rights. We also believe that the technological and creative skills of our personnel, new product developments, frequent product enhancements, name recognition and reliable product maintenance are essential to establishing and maintaining a technology leadership position. We seek to protect our software, documentation and 21 other written materials under patent, trade secret and copyright laws, which afford only limited protection. Any patents issued to us may be invalidated, circumvented or challenged. Any of our pending or future patent applications, whether or not being currently challenged, may not be issued with the scope of the claims we seek, if at all. Furthermore, others may develop technologies that are similar or superior to our technology or design around our patents. Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy aspects of our products or to obtain and use information that we regard as proprietary. Policing unauthorized use of our products is difficult. In addition, the laws of some foreign countries do not protect our proprietary rights as fully as do the laws of the United States. Our means of protecting our proprietary rights in the United States or abroad may not be adequate. We have entered into agreements with substantially all of our customers that require us to place Siebel Enterprise Applications source code into escrow. Such agreements generally provide that such parties will have a limited, non-exclusive right to use such code if (i) there is a bankruptcy proceeding by or against us, (ii) we cease to do business, or (iii) we fail to meet our support obligations. Although we do not believe that we are infringing any proprietary rights of others, third parties may claim that we have infringed their intellectual property rights. Furthermore, former employers of our former, current or future employees may assert claims that such employees have improperly disclosed to us the confidential or proprietary information of such former employers. Any such claims, with or without merit, could (i) be time consuming to defend, (ii) result in costly litigation, (iii) divert management's attention and resources, (iv) cause product shipment delays, and (v) require us to pay money damages or enter into royalty or licensing agreements. A successful claim of product infringement against us and our failure or inability to license or create a workaround for such infringed or similar technology may materially and adversely affect our business, operating results and financial condition. We license certain software from third parties. These third-party software licenses may not continue to be available to us on acceptable terms. The loss of, or inability to maintain, any of these software licenses could result in shipment delays or reductions. This could materially adversely affect our business, operating results and financial condition. Year 2000 Problems may cause an Interruption in our Business. Many existing computer programs and systems use only two-digit fields to identify the year, e.g. 85=1985, and they are unable to process date and time information between the twentieth and twenty-first centuries. Accordingly, computer programs and software may need to be modified prior to the year 2000 in order to remain functional. Although the Company has spent a large amount of time and resource to address potential Y2K problems, there is no assurance that the Company will be successful in its efforts to identify and address all Y2K issues. Failure to complete the necessary modifications could cause a disruption or failure of such program and system. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Year 2000 Preparedness". International Operations involve Unique Risks. Our revenues are primarily derived from large multi-national companies. To service the needs of these companies, we must provide worldwide product support services. We have expanded, and intend to continue expanding, our international operations and enter additional international markets. This will require significant management attention and financial resources that could adversely affect our operating margins and earnings. We may not be able to maintain or increase international market demand for Siebel Enterprise Applications. If we do not, our international sales will be limited, and our business, operating results and financial condition could be materially and adversely affected. Our international operations are subject to a variety of risks, including (i) foreign currency fluctuations, (ii) economic or political instability, (iii) shipping delays and (iv) various trade restrictions. Any of these risks could have a significant impact on our ability to deliver products on a competitive and timely basis. Significant increases in the level of customs duties, export quotas or other trade restrictions could also have an adverse effect on our business, financial condition and results of operations. In situations where direct sales are denominated in foreign currency, any fluctuation in foreign currency or the exchange rate may adversely affect our business, financial condition and results of operations. Certain Stockholders may be able to Exercise Control over Matters Requiring Stockholders Approval. Our current officers, directors and entities affiliated with us together beneficially owned a significant portion of the 22 outstanding shares of common stock as of March 31, 1999. While these stockholders do not hold a majority of the Company's outstanding common stock, they will be able to exercise significant influence over matters requiring stockholder approval, including the election of directors and the approval of mergers, consolidations and sales of our assets. This may prevent or discourage tender offers for our common stock. Stock Price may Continue to be Volatile. Our stock price has fluctuated substantially since our initial public offering in June 1996. The trading price of our common stock is subject to significant fluctuations in response to variations in quarterly operating results, the gain or loss of significant orders, changes in earning estimates by analysts, announcements of technological innovations or new products by us or our competitors, general conditions in the software and computer industries and other events or factors. In addition, the stock market in general has experienced extreme price and volume fluctuations which have affected the market price for many companies in industries similar or related to ours and which have been unrelated to the operating performance of these companies. These market fluctuations have adversely affected and may continue to adversely affect the market price of our common stock. Certain Provisions in our Charter Documents may Prevent certain Corporate Actions. Our Board of Directors is authorized to issue up to 2,000,000 shares of Preferred Stock and to determine the price, rights, preferences, privileges and restrictions, including voting rights, of those shares without any further approval by our stockholders. The Preferred Stock could be issued with voting, liquidation, dividend and other rights superior to those of the common stock. The rights of the holders of common stock will be subject to, and may be adversely affected by, the rights of the holders of any Preferred Stock that may be issued in the future. The issuance of Preferred Stock, while providing desirable flexibility in connection with possible acquisitions and other corporate purposes, could make it more difficult for a third party to acquire a majority of our outstanding voting stock. We have instituted a classified Board of Directors in our Certificate of Incorporation. This and certain other provisions of our Certificate of Incorporation and certain provisions of our Bylaws and of Delaware law, could delay or make more difficult a merger, tender offer or proxy contest. 23 Item 3. Quantitative and Qualitative Disclosures About Market Risk The tables below provide information about the Company's derivative financial instruments and financial instruments that are subject to market risk. These include foreign currency forward contracts used to hedge foreign currency receivables and intercompany balances, which are subject to exchange rate risk, and available-for-sale short-term investments, which are subject to interest rate risk. The Company does not consider its cash equivalents to be subject to interest rate risk due to their short maturities. The Company manages its foreign currency exchange rate risk by entering into contracts to sell foreign currency at the time a foreign currency receivable is generated. When the foreign currency receivable is collected, the contract is liquidated, thereby converting the foreign currency to US dollars and mitigating the exchange rate risk. The Company manages its interest rate risk by maintaining an investment portfolio with debt instruments of high credit quality and relatively short average maturities. The Company also manages interest rate risk by maintaining sufficient cash and cash equivalent balances such that it is typically able to hold its investments to maturity. The following summarizes the Company's foreign currency forward contracts, all of which mature in 1999, by currency, as of March 31, 1999. Contract amounts are representative of the expected payments to be made under these instruments (unaudited, in thousands):
------------------------------------------------- Contract Amount Contract Fair Value (Local Amount at March 31, Currency) (US$) 1999 (US$) -------------- ------------- --------------- German marks (contracts to pay DM/receive US$).................. DM 1,200 $668 $8 British pounds (contracts to pay (Pounds)/receive US$)............ (Pounds) 491 $801 $11 Japanese yen (contracts to pay (Yen)/receive US$)............... (Yen) 2,455,500 $20,557 $(100)
The following summarizes the Company's available-for-sale investments, as of March 31, 1999 (unaudited, in thousands):
Expected maturity date ----------------------------------------------------------------------------------------- 1999 2000 2001 2002 2003 Thereafter ----------- ----------- ----------- ------------ ----------- ------------- U S treasury securities -- -- $1,999 $3,054 $4,060 $2,954 Municipal securities $35,478 $42,648 $30,707 $20,799 $1,990 $2,067
24 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. On May 15, 1998, a jury returned verdicts in favor of Mr. Siebel and against the company for an immaterial amount. Both the plaintiff and the Company have filed notices of appeal. The Company intends to pursue the appeal vigorously and believes that the ultimate outcome of the action 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, 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 defendants' demurrers to the complaint, with leave to amend. Defendants' demurrers to the amended complaint are pending. The Company believes the suit is completely without merit and intends to continue to defend itself vigorously, although there can be no assurance as to the outcome of 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 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) 27.1 Financial Data Schedule.(7) _____________________ (1) Incorporated by reference to the Registrant's Registration Statement on Form S-1 (No. 333-03751), as amended. 25 (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) Filed herewith. (b) Reports on Form 8-K None 26 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: May 14, 1999 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 27 EX-27.1 2 FINANCIAL DATA SCHEDULE
5 1,000 US DOLLAR 3-MOS 3-MOS DEC-31-1998 DEC-31-1999 JAN-01-1998 JAN-01-1999 MAR-31-1998 MAR-31-1999 1 1 84,713 84,708 91,081 145,756 67,934 147,676 0 0 0 0 255,080 405,336 24,679 48,328 0 0 286,488 468,312 62,912 136,566 0 0 0 0 0 0 87 91 223,327 331,013 286,488 468,312 56,002 93,432 74,672 134,050 11,821 25,517 48,675 77,056 1,592 2,395 0 0 0 0 15,268 33,872 5,520 12,532 0 0 0 0 0 0 0 0 9,748 21,340 0.11 0.24 0.10 0.20
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