-----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, RP6zVEVxb/TiCf2yyw4XA6P3lREfbXKxpRcTRRlqa52EBF3MYWou9gHChSqNboE9 u0tLp/NXmnLaZRwUFNMrlw== 0000758004-02-000012.txt : 20020923 0000758004-02-000012.hdr.sgml : 20020923 20020920173419 ACCESSION NUMBER: 0000758004-02-000012 CONFORMED SUBMISSION TYPE: 8-K/A PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20020920 ITEM INFORMATION: Financial statements and exhibits FILED AS OF DATE: 20020923 FILER: COMPANY DATA: COMPANY CONFORMED NAME: NOVELL INC CENTRAL INDEX KEY: 0000758004 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PREPACKAGED SOFTWARE [7372] IRS NUMBER: 870393339 STATE OF INCORPORATION: DE FISCAL YEAR END: 1031 FILING VALUES: FORM TYPE: 8-K/A SEC ACT: 1934 Act SEC FILE NUMBER: 000-13351 FILM NUMBER: 02769410 BUSINESS ADDRESS: STREET 1: 1800 SOUTH NOVELL PLACE CITY: PROVO STATE: UT ZIP: 84606 BUSINESS PHONE: 8018617000 MAIL ADDRESS: STREET 1: 1800 SOUTH NOVELL PLACE CITY: PROVO STATE: UT ZIP: 84606 8-K/A 1 sssw8k.txt HISTORICAL & PRO FORMA STATEMENTS FOR ACQUISITION SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 8-K/A CURRENT REPORT Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 September 23, 2002 Date of Report (Date of earliest event reported): NOVELL, INC. (Exact name of registrant as specified in its charter) Delaware 0-13351 87-0393339 (State or other jurisdiction (Commission (IRS Employer of incorporation) File Number) Identification Number) 1800 South Novell Place Provo, Utah 84606 (Address of principal executive offices) (801) 429-7000 Registrant's telephone number, including area code Not Applicable (Former name or former address, if changed since last report) - ------------------------------------------------------------------------ ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS (a) Financial Statements of Business Acquired. (i) The consolidated financial statements of SilverStream as of December 31, 2001 and 2000 and for the year ended December 31, 2001, 2000, and 1999, filed as exhibit 99.1 to this report. (ii) The unaudited consolidated financial statements of SilverStream as of March 31, 2002 and for the three months ended March 31, 2002, filed as exhibit 99.2 to this report. (b) Pro Forma Financial Information NOVELL UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS On July 19, 2002, Novell, Inc. acquired SilverStream, Inc. and SilverStream became a wholly owned subsidiary of Novell. Under the merger agreement Novell purchased each share of SilverStream common stock issued and outstanding immediately prior to the effective date at a price of $9.00 per share. Novell assumed all outstanding stock options and stock plans of SilverStream. As of July 19, 2002, there were 23,427,448 shares of SilverStream common stock issued and outstanding that were purchased by Novell and 15,005,466, converted, options assumed. The merger is being accounted for using the purchase method of accounting. The Unaudited Pro Forma Combined Condensed Financial Statements have been prepared on the basis of assumptions described herein. What these pro forma statements show The unaudited pro forma combined condensed financial statements give effect to the merger using the purchase method of accounting. The unaudited pro forma combined condensed statement of operations for the year ended October 31, 2001 and the nine months ended July 31, 2002 assume the merger took place on November 1, 2000. The unaudited pro forma combined condensed statement of operations for the year ended October 31, 2001 combine Novell's historical results of operations for the year ended October 31, 2001 with SilverStream's historical results of operations for the year ended December 31, 2001. Additionally, the combined condensed statement of operations for the year ended October 31, 2001 includes historical results of operations for Cambridge Technology Partners, Inc. ("Cambridge") for the nine months ended June 30, 2001. The Company acquired Cambridge on July 11, 2001 and has included Cambridge operating results in its statement of operations beginning July 11, 2001. Information regarding the Cambridge acquisition can be found in the Company's filing on Form 8-K dated July 24, 2001. The unaudited pro forma combined condensed statement of operations for the nine months ended July 31, 2002 combine Novell's historical results of operations for the nine months ended July 31, 2002 with SilverStream's historical results of operations for the nine months ended June 30, 2002. An unaudited pro forma combined condensed balance sheet has not been included as the actual unaudited combined balance sheet has been filed as part of Novell's third quarter 2002 report on Form 10-Q, filed on September 16, 2002. Basis of Presentation The unaudited pro forma combined condensed financial statements reflect the SilverStream merger accounted for using the purchase method of accounting and have been prepared on the basis of assumptions described in the notes thereto, including assumptions relating to the allocation of the amount of consideration paid to the assets and liabilities of SilverStream based upon preliminary estimates of their fair value. Purchased In-Process Research and Development In connection with the merger, the Company incurred a charge of approximately $3.0 million related to in-process research and development. The Unaudited Pro Forma Combined Condensed Financial Statements do not reflect this charge. The charge related to in-process research and development was reflected in Novell's consolidated financial statements filed as a part of its quarterly filing on Form 10Q on July 16, 2002 Merger Charges Novell expects to incur liabilities for the estimated costs to be incurred as a result of the merger, including costs resulting from vacating duplicate SilverStream facilities and reducing headcount. These liabilities are included as part of the allocation of the purchase price. The unaudited pro forma combined condensed statements of operations do not reflect these charges because they are non-recurring. These charges have been included in the third quarter fiscal 2002 financial statements filed on Form 10-Q on September 16, 2002, and will be reflected in Novell's fiscal 2002 consolidated financial statements. The third quarter fiscal 2002 financial statements filed on Form 10-Q also include costs of integration, which will affect future operations. These pro forma unaudited combined condensed statements of operations should be read with each company's financial statements The unaudited pro forma combined condensed financial statements of operations should be read in conjunction with the related notes included herein in this Current Report on Form 8-K and the consolidated audited and consolidated condensed unaudited financial statements of Novell previously filed with the Securities and Exchange Commission, and the consolidated audited and unaudited financial statements of SilverStream included in this Current Report on Form 8-K. The unaudited pro forma combined condensed statements of operations are not necessarily indicative of what the actual results of operations would have been had the SilverStream merger taken place on November 1, 2000 and are not indicative of future results of operations. UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS For the Nine Months Ended July 31, 2002 (in thousands, except per share amounts) Historical Pro Forma Pro Forma Novell SilverStream Adjustments Combined Net sales.......................................... $ 833,985 $ 27,855 $ -- $ 861,840 Cost of sales...................................... 340,219 16,532 841 (a) 576 (b) 656 (c) 8,059 (f) 366,883 ----------- ---------- --------------- ------- Gross profit....................................... 493,766 11,323 (10,132) 494,957 Operating expenses: Sales and marketing........................... 261,660 26,635 111 (a) 665 (b) 87 (c) 289,158 Product development........................... 122,976 14,163 1,338 (a) 517 (b) 1,044 (c) 140,038 General and administrative.................... 90,946 9,828 29 (a) (1,758) (b) 23 (c) 99,068 Goodwill amortization / impairment............ -- 37,908 (3,065) (e) 34,843 Stock options................................. -- 2,319 (2,319) (a) -- Restructuring charge.......................... 19,100 1,470 -- 20,570 ----------- ---------- ---------- ---------- Total operating expenses.................. 494,682 92,323 (3,328) 583,677 ----------- ---------- --------- ---------- Income (loss) from operations...................... (916) (81,000) (6,804) (88,720) Other income (expense), net........................ (698) 1,760 -- 1,062 ------------ ---------- ---------- ---------- Income (loss) before taxes......................... (1,614) (79,240) (6,804) (87,658) Income tax expense (benefit)....................... 6,835 -- (2,608)(g) 4,227 ----------- ---------- --------------- ---------- Income (loss) before cumulative effect of change in accounting principle............ $ (8,449) $ (79,240) $ (4,196) $ (91,885) ============ =========== =========== =========== Weighted average shares outstanding: Basic......................................... 363,131 363,131 Diluted....................................... 363,131 363,131 Income (loss) per share, before cumulative effect of change in accounting principle: Basic......................................... $ (0.02) $ (0.25) =========== =========== Diluted....................................... $ (0.02) $ (0.25) =========== ===========
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS For the Year Ended October 31, 2001 (in thousands, except per share amounts) Historical Pro Forma Pro Forma Novell Cambridge SilverStream Adjustments Combined Net sales.................................... $1,040,097 $ 345,538 $ 67,935 $ -- $1,453,570 Cost of sales....................................327,935 214,974 43,408 1,121 (a) 1,086 (b) 875 (c) 10,746 (f) 90,780 (h) 690,925 ----------- ---------- ---------- ------------- ---------- Gross profit.................................. 712,162 130,564 24,527 (104,608) 762,645 Operating expenses: Sales and marketing................... ..... 443,828 52,148 44,615 149 (a) 1,219 (b) 116 (c) . 750 (h) 542,825 Product development................... ..... 191,709 -- 19,431 1,784 (a) 861 (b) 1,392 (c) 215,177 General and administrative............ ..... 117,261 160,927 16,003 39 (a) (3,166) (b) 30 (c) (91,530) (h) 199,564 Goodwill amortization / impairment............ -- -- 53,002 (18,159) (e) 34,843 Stock options................................. -- -- 3,093 (3,093) (a) -- Restructuring charge.........................80,177 26,000 10,658 (2,100) (d) 114,735 ------ ---------- ---------- -------------- ---------- Total operating expenses.................832,975 239,075 146,802 (111,708) 1,107,144 -------- ----------- ---------- --------- ----------- Income (loss) from operations................... (120,813) (108,511) (122,275) 7,100 (344,499) Other income (expense)..................... (155,953) (3,555) 7,091 (2,100)(d) (154,517) --------- ---------- ---------- ------------- ---------- Income (loss) before taxes...................... (276,766) (112,066) (115,184) 5,000 (499,016) Income tax expense (benefit)..................... (14,944) (39,223) -- (3,477)(g) (57,644) -------- ------------ ----------- ------------- ----------- Income (loss) before cumulative effect of change in accounting principle............ $ (261,822) $ (72,843) $ (115,184) $ 8,477 $ (441,372) ============ =========== =========== ======== ============ Weighted average shares outstanding: Basic....................................... 332,582 28,293 (i) 360,875 Diluted..................................... 332,582 28,293 (i) 360,875 Net income (loss) per share before cumulative effect of change in accounting principle: Basic................................... $ (0.79) $ (1.22) =========== =========== Diluted...................................$ (0.79) $ (1.22) =========== ===========
1. Basis of Presentation The unaudited pro forma combined condensed statements of operations give effect to Novell's acquisition of SilverStream through a merger and purchase of outstanding SilverStream shares. The merger is being accounted for using the purchase method of accounting. The unaudited pro forma combined condensed financial statements have been prepared on the basis of assumptions described in the following notes and include assumptions relating to the allocation of the consideration paid for the assets and liabilities of SilverStream based on estimated fair value. The final allocation of the purchase price may differ from the preliminary allocations. In the opinion of management, all adjustments necessary for a fair presentation of such unaudited pro forma combined financial statements have been made based on the terms and structure of the merger. The unaudited pro forma combined condensed statement of operations for the nine month period ended July 31, 2002 includes the results for Novell for the nine month period ended July 31, 2002 and the results for SilverStream for the nine month period ended June 30, 2001. The unaudited pro forma combined condensed statement of operations for the year ended October 31, 2001 includes the results for Novell for the year ended October 31, 2001 and the results for SilverStream for the year ended December 31, 2001. Additionally, the combined condensed statement of operations for the year ended October 31, 2001 include historical results of operations for Cambridge Technology Partners, Inc. ("Cambridge") for the nine months ended June 30, 2001. The Company acquired Cambridge on July 11, 2001 and has included Cambridge operating results in its statement of operations beginning July 11, 2001. Information regarding the Cambridge acquisition can be found in the Company's filing on Form 8-K dated July 24, 2001. The pro forma combined condensed financial statements assume the acquisition of SilverStream occurred on November 1, 2000. For the year ended October 31, 2001 and for the nine months ended July 31, 2002, the pro forma net loss per share and loss per share before cumulative effect of accounting change, respectively, is based on the weighed average number of shares of Novell common stock outstanding during each period plus, for diluted earnings per share, the dilutive effect of SilverStream options assumed had the merger occurred on November 1, 2000. In connection with the merger, the Company has incurred a charge of approximately $3.0 million related to in-process research and development, which was not included in these unaudited pro forma combined condensed financial statements of operations. The charge related to in-process research and development was reflected in Novell's consolidated financial statements included in its third quarter fiscal 2002 filing on Form 10-Q filed on September 16, 2002. The consolidated financial statements filed as a part of its third quarter fiscal 2002 also included costs of integration, which will affect future operations. The pro forma adjustments are preliminary and based on management's estimates. Based on the finalization of the integration plans and other factors, final adjustments may differ materially from those presented in these pro forma statements of operations. These unaudited pro forma combined condensed consolidated statements of operations should be read in conjunction with the historical annual and interim financial statements of Novell previously filed with the Securities and Exchange Commission and annual and interim financial statements of SilverStream included in this Current Report on Form 8-K. An unaudited pro forma combined condensed balance sheet has not been included, as the actual unaudited combined balance sheet has been filed as part of Novell's third quarter 2002 report on Form 10-Q, filed on September 16, 2002. 2. Purchase Price Allocation Pursuant to the terms of an Agreement and Plan of Merger, dated as of June 9, 2002 by and among Novell, Delaware Planet, Inc., a wholly owned subsidiary of Novell, and SilverStream Software, Inc., a Delaware corporation ("SilverStream"), Delaware Planet commenced a cash tender offer on June 18, 2002 to acquire all of the outstanding shares of SilverStream common stock at a price of $9.00 per share. On July 17, 2002, Delaware Planet announced the completion of its cash tender offer, pursuant to which it purchased almost all outstanding shares of SilverStream common stock at a price of $9.00 per share. On July 19, 2002, Novell completed its acquisition of SilverStream by merging Delaware Planet into SilverStream on July 19, 2002. As a result of the merger, each share of SilverStream common stock that was not tendered in the tender offer now represents the right to receive $9.00 in cash, without interest. SilverStream provides software products and services that enable organizations to more effectively conduct business using the Web. SilverStream's products and services leverage the power of standards such as Java and XML to unify relevant information and services while enabling businesses to leverage prior technology investments. They also help customers rapidly deliver Web-based applications that are scalable, reliable and secure. The Company acquired SilverStream to enhance its current Web services product and service offerings, and further its development in this area. At the closing date of the merger, there were 23,427,448 shares of SilverStream outstanding resulting in a total cash acquisition price of $210.8 million. Direct transaction costs are estimated to be $4.0 million and SilverStream stock options assumed, both vested and unvested, totaled $28.6 million. With respect to stock options assumed as a part of the merger, all SilverStream options, vested and unvested, were exchanged for Novell options with the same terms and vesting characteristics. The fair value of these options was included in the acquisition purchase price. The portion of the intrinsic value of unvested options that will be earned over the remaining vesting period of those options has been deducted from the fair value of these unvested options. This deferred compensation will be amortized over that remaining vesting period of approximately two years, in accordance with Financial Accounting Standards Board Interpretation Number 44 ("FIN 44"). In total, options to purchase 4.9 million shares of SilverStream common stock were converted into options to purchase 15.0 million shares of Novell stock issued using a conversion ratio of 3.0518 per share. The fair value of the options was determined using the Black-Scholes model using the following assumptions: o Fair market value of the underlying shares was based on the average closing price of Novell's common stock on June 10, 2002 and the three days prior and subsequent to that date. o Expected life of 2-5 years o Expected volatility of 80% o Risk free interest rate of 5% o Expected dividend rate of 0% The value of the acquisition was preliminarily allocated as follows (in thousands): Estimated Acquisition Cost Asset Life (in years) Adjusted net tangible assets acquired $ 97,833 N/A Deferred compensation 4,826 2 years Purchased in-process research and development 3,000 expensed in the third quarter of fiscal 2002 Developed technology 19,800 3 years Trademarks / trade names 2,200 indefinite life Goodwill 115,771 N/A ----------- $ 243,430
The above purchase price allocation will be adjusted over the next twelve months as integration plans are finalized, as allowed by Statements of Financial Accounting Standards ("SFAS") No. 141, Business Combinations. There are no outstanding contingencies that could affect the allocation. Goodwill from the acquisition resulted from the Company's belief that the technology SilverStream had developed was valuable to its Web services strategy. The Company also believes it was more beneficial to acquire such technology rather than develop it in-house. The goodwill from the SilverStream acquisition has been allocated to the Company's product segment as the eXtend product suite will be included with the Net Directory Services group of products. In accordance with SFAS No. 142, "Goodwill and Other Intangible Assets," issued by the Financial Accounting Standards Board ("FASB") in June 2001, the Company will not amortize the goodwill or intangibles with indefinite lives associated with this acquisition. The Company will review these assets periodically for potential impairment issues. Goodwill is not deductible for tax purposes. Net tangible assets of SilverStream consisted mainly of cash and cash equivalents, accounts receivable, fixed assets, accounts payable, and other liabilities. The value of deferred compensation of approximately $4.8 million represents the intrinsic value of the unvested options assumed by Novell and was determined under the guidance of FIN 44. The $3.0 million of in-process research and development pertains to acquired research and development on the eXtend line of products that are not currently technologically feasible, meaning they have not reached the working model stage and do not contain all of the major functions planned for the product nor are they ready for initial customer testing. The estimated amount of the in-process research and development charge represents a preliminary estimate and represents technology related to replacement and enhancement to be included in the next versions of the SilverStream's eXtend product line. Shortly before the acquisition, SilverStream released its latest version of each of its products in the eXtend line: Application Server, Composer, Workbench, and Director. Therefore, there was minimal research and development in process. In-process research and development was valued based on discounting forecasted cash flows directly from the related products. Completion of development on the future upgrades of these products is dependant upon the Company delivering on its web services strategy and successfully integrating SilverStream. The in-process research and development does not have any alternative future use and did not otherwise qualify for capitalization. To determine the value of the developed technology, the expected future cash flow attributable to the existing product technology, the family of eXtend products which are currently shipping and can be combined with Novell products or services, was discounted, taking into account risks associated with these assets relative to the in-process research and development. The analysis resulted in a valuation of approximately $19.8 million for developed technology, which has reached technological feasibility. The value of trademarks and trade names was determined based on assigning a royalty rate to the revenue streams that were expected to leverage the eXtend trade names. The royalty rate was determined based on trade name recognition, marketing support and contribution of the trade name's value relative to the revenue drivers. The pre-tax royalty rates of 0.5 percent to the product revenues were then discounted to a present value, resulting in a valuation of approximately $2.2 million. 3. Pro Forma Adjustments Novell and SilverStream had certain accounting policies and procedures that differed. These differences primarily related to classification of assets, liabilities and certain line items in the liabilities and statement of operations line items. The following pro forma adjustments include entries to account for the acquisition and to conform the two companies' accounting policies: (a) To reflect the reclassification of deferred compensation amortization related to restricted stock to cost of sales, sales and marketing, product development, and general and administrative expenses to conform to Novell's presentation. (b) To reflect the reclassification of certain SilverStream operating costs from general and administrative costs to cost of sales, sales and marketing, and product development expenses to conform to Novell's presentation. (c) To record the amortization related to unearned stock compensation costs for unvested options assumed. (d) To reflect the reclassification of investment impairment from operating costs to other income (expense), net to conform to Novell's presentation. (e) To eliminate goodwill amortization based on adoption of Financial Accounting SFAS No. 142 effective November 1, 2001. (f) To record the amortization related to acquired developed technology. (g) To adjust income tax expense based on deductible pro forma adjustments. (h) To reflect the reclassification of certain Cambridge operating costs from general and administrative costs to cost of sales and sales and marketing expenses to conform to Novell's presentation. (i) To reflect the issuance Novell common stock for the acquisition of Cambridge as of November 1, 2000. (c) Exhibits Exhibit Number Description 2.1 Agreement and Plan of Reorganization, dated as of June 9, 2002, by and among Novell, Inc., SilverStream, Inc., incorporated by reference to Exhibit 2.1 of Novell's filing on Form 8-K dated June 10, 2002. 23.1 Consent of Ernst & Young LLP, Independent Accountants. 99.1 The consolidated financial statements of SilverStream as of December 31, 2001 and 2000 and for the years ended December 31, 2001, 2000 and 1999. 99.2 The unaudited consolidated financial statements of SilverStream as of March 31, 2002 and for the three months ended March 31, 2002. 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 hereunto duly authorized. Dated: September 23, 2002 NOVELL, INC. /s/ Joseph A. LaSala -------------------- Joseph A. LaSala General Counsel INDEX TO EXHIBITS Exhibit Number Description of Document 2.2 Agreement and Plan of Reorganization, dated as of June 9, 2002, by and among Novell, Inc., SilverStream, Inc., incorporated by reference to Exhibit 2.1 of Novell's filing on Form 8-K dated June 10, 2002. 23.1 Consent of Ernst & Young LLP, Independent Accountants. 99.1 The consolidated financial statements of SilverStream as of December 31, 2001 and 2000 and for the years ended December 31, 2001, 2000 and 1999. 99.2 The unaudited consolidated financial statements of SilverStream as of March 31, 2002 and for the three months ended March 31, 2002. Exhibit 23.1 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in the Registration Statements on Form S-8 (Nos. 33-14531, 33-54483, 33-64998, 33-65440, 33-68336, 333-04775, 333-04823, 333-62087, 333-62103, 333-95409, 333-41328, 333-71502, and 333-97713) and in the related Prospectuses of Novell, Inc. of our report dated February 12, 2002, with respect to the consolidated financial statements of SilverStream Software, Inc. for the years ended December 31, 2001, 2000, and 1999 included in this Current Report on Form 8-K of Novell, Inc. dated September 23, 2002. /s/ Ernst & Young Boston, Massachusetts September 16, 2002 EX-99 3 sep8kexh1.txt SILVERSTREAM HISTORICAL FINANCIAL STATEMENTS EXHIBIT 99.1 SILVERSTREAM SOFTWARE, INC. REPORT OF INDEPENDENT AUDITORS The Board of Directors and Stockholders SilverStream Software, Inc. We have audited the accompanying consolidated balance sheets of SilverStream Software, Inc. as of December 31, 2001 and 2000, and the related consolidated statements of operations, redeemable convertible preferred stock and stockholders' equity (deficit), and cash flows for each of the three years in the period ended December 31, 2001. Our audits also included the financial statement schedule listed in the Index at Item 14(a). These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of SilverStream Software, Inc. at December 31, 2001 and 2000, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. /s/ ERNST & YOUNG LLP Boston, Massachusetts February 12, 2002 SILVERSTREAM SOFTWARE, INC. CONSOLIDATED BALANCE SHEETS December 31, 2001 2000 ------------- --------- Assets Current assets: Cash and cash equivalents..................................................$87,931,955 $86,480,910 Marketable securities.......................................................45,789,557 104,848,077 Accounts receivable; net of allowances of $2,038,177 and $1,055,472 at December 31, 2001 and 2000, respectively................................. 9,513,441 25,652,513 Other receivables..............................................................453,650 1,614,832 Prepaid expenses.............................................................2,296,662 2,945,184 --------- ------------ Total current assets................................................145,985,265 221,541,516 Furniture, equipment and leasehold improvements, net..........................10,524,565 11,234,943 Other assets.................................................................. - 2,080,500 Intangible assets, net........................................................42,754,990 78,881,365 ---------- ----------- Total assets........................................................$199,264,820 $313,738,324 ============ ============ Liabilities and stockholders' equity Current liabilities: Accounts payable...........................................................$.4,106,373 $ 3,864,815 Accrued expenses............................................................11,110,440 16,168,727 Deferred revenue.............................................................5,737,387 11,337,795 Current portion of long-term debt and obligations under capital leases.........208,334 1,867,735 ------- ----------- Total current liabilities............................................21,162,534 33,239,072 Long-term debt and obligations under capital leases, less current portion... - 358,325 Common stock, $.001 par value - authorized 100,000,000 shares; issued and outstanding 22,351,524 at December 31, 2001 and 21,053,626 at December 31, 2000......................................................... 22,352 21,054 Additional paid-in capital...................................................374,543,087 364,067,512 Deferred compensation.........................................................(8,199,964) (11,292,604) Accumulated deficit.........................................................(187,710,487) (72,526,756) Accumulated other comprehensive loss............................................(521,202) (96,779) Notes receivable from stockholders ............................................ (31,500) (31,500) ----------- ----------- Total stockholders' equity..........................................178,102,286 280,140,927 ----------- ----------- Total liabilities and stockholders' equity..........................$199,264,820 $313,738,324 ============ ============
See accompanying notes. SILVERSTREAM SOFTWARE, INC. CONSOLIDATED STATEMENTS OF OPERATIONS Year ended December 31, 2001 2000 1999 ------------- ------------- --------- Revenue: Software license.................................... $31,743,619 $40,859,059 $13,825,676 Services............................................ 36,190,935 39,724,938 9,238,731 ----------- ----------- ----------- Total revenue............................... 67,934,554 80,583,997 23,064,407 Cost of revenue: Software license.................................... 508,219 2,500,859 1,412,175 Services............................................ 42,899,877 35,056,758 10,252,589 ----------- ----------- ----------- Total cost of revenue....................... 43,408,096 37,557,617 11,664,764 ----------- ----------- ----------- Gross profit.......................................... 24,526,458 43,026,380 11,399,643 Operating expenses: Sales and marketing................................. 44,615,602 44,071,348 20,419,430 Research and development............................ 19,430,635 14,576,892 7,090,691 General and administrative.......................... 16,002,735 11,231,198 4,300,713 Compensation charge for issuance of stock options... 3,092,640 2,329,018 438,594 Amortization of goodwill............................ 18,158,754 11,309,025 384,729 Impairment of goodwill.............................. 34,843,509 - - Special charges..................................... 10,657,681 - - In-process research and development charge.......... - - 1,986,659 ----------- ----------- ----------- Total operating expenses.................... 146,801,556 83,517,481 34,620,816 ----------- ----------- ----------- Loss from operations.................................. (122,275,098) (40,491,101) (23,221,173) Other income, net..................................... 7,091,367 12,125,364 1,231,880 ------------ ------------ ------------ Net loss.............................................. $(115,183,731) $(28,365,737) $(21,989,293) Beneficial conversion feature in Series D preferred stock................................................. - - (263,158) ------------ ----------- ------------ Net loss applicable to common stockholders............ $(115,183,731) $(28,365,737) $(22,252,451) ============= ============ ============ Basic and diluted net loss per share applicable to common stockholders.................................. $ (5.27) $ (1.44) $ (2.64) ============ ============= ============= Weighted-average common shares used in computing basic and diluted net loss per share applicable to common stockholders.......................................... 21,859,723 19,697,498 8,419,116
See accompanying notes. SILVERSTREAM SOFTWARE, INC. CONSOLIDATED STATEMENTS OF REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS EQUITY (DEFICIT) Redeemable Convertible Convertible Preferred Stock Preferred Stock Common Stock Shares Amount Shares Amount Shares Amount Balance at December 31, 1998.............. 5,183,988 $11,638,005 1,922,588 $16,856,323 5,206,779 $ 5,207 Issuance of Series D preferred stock in March, April and May 1999 (net of issuance costs of $22,000)......................... 1,552,632 14,727,997 Repurchase and retirement of common stock in March 1999............................ (10,754) (11) Exercise of stock options................. 130,181 129 Issuance of common stock in June, July, August and December 1999.................. 3,704,456 3,705 Conversion of redeemable convertible preferred stock in August 1999............ (5,183,988) (11,638,050)(3,475,220) (31,584,320) 8,659,208 8,659 Deferred compensation on grant of stock options................................. Amortization of deferred compensation..... Net Loss Currency translation adjustment........... Comprehensive loss........................ ------- -------- ------- -------- -------- -------- Balance at December 31, 1999.............. - - - - 17,689,870 17,689 Issuance of common stock in secondary offering................................ 1,775,851 1,776 Issuance of common stock and stock options in acquisitions of subsidiaries......... 1,233,398 1,234 Issuance of common stock in connection with employee stock purchase plan ............ 75,945 76 Exercise of stock options ................. 278,562 279 Deferred compensation on grant of stock options ................................. Amortization of deferred compensation..... Receipt of amounts due from stockholdere . Net loss.................................. Currency translation adjustment........... Comprehensive loss........................ ------- -------- ------- -------- -------- -------- Balance at December 31, 2000.............. - - - - 21,053,626 21,054 Issuance of common stock and stock options in acquisitions of subsidiaries ........ 797,314 797 Issuance of commons stock in connection with employee stock purchase plan ...... 164,676 165 Exercise of stock options ................ 335,908 336 Amortization of deferred compensation..... Net loss.................................. Currency translation and investment valuation adjustment.................... Comprehensive loss........................ --------- --------- --------- ---------- --------- ------ Balance at December 31, 2001.............. - $ - - $ -- 22,351,524 $22,352 ========= ========= ========= =========== ========== =======
See accompanying notes. SILVERSTREAM SOFTWARE, INC. CONSOLIDATED STATEMENTS OF REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS EQUITY (DEFICIT), continued Accumulated Other Notes Total Additional Comprehensive Receivable Stockholdes' Paid-in Deferred Accumulated Income from Equity Capital Compensation (Loss)t Stockholders (Deficit) Balance at December 31, 1998.............. $ 365,985 $(22,171,726) $(103,500) $(5,047,711) Issuance of Series D preferred stock in March, April and May 1999 (net of issuance costs of $22,000)...................... 14,727,997 Repurchase and retirement of common stock in March 1999............................. (11) Exercise of stock options................. 269,852 269,981 Issuance of common stock in June, July, August and December 1999.....................63,683,752 63,687,457 Conversion of redeemable convertible preferred stock in August 1999............. 43,213,711 11,638,050 Deferred compensation on grant of stock options................................... 7,651,953 $(7,651,953) - Amortization of deferred compensation..... 438,594 438,594 Net Loss (21,989,293) (21,989,293) Currency translation adjustment........... $ (140,320) (140,320) ---------- ----------- Comprehensive loss........................ (22,129,613) -------- ---------- --------- ---------- ------- ------------ Balance at December 31, 1999.............. 115,185,253 (7,213,359) (44,161,019) (140,320) (103,500) 63,584,744 Issuance of common stock in secondary offering................................ 191,594,826 191,596,602 Issuance of common stock and stock options in acquisitions of subsidiaries............ 48,663,254 48,664,488 Issuance of common stock in connection with employee stock purchase plan ............... 1,327,427 1,327,503 Exercise of stock options .................. 888,489 888,768 Deferred compensation on grant of stock options .................................. 6,408,263 (6,408,263) - Amortization of deferred compensation..... 2,329,018 2,329,018 Receipt of amounts due from stockholdere . 72,000 72,000 Net loss.................................. (28,365,737) (28,365,737) Currency translation adjustment........... 43,541 43,541 ------- -------- Comprehensive loss........................ (28,322,196) -------- ---------- --------- --------- ------- ------------ Balance at December 31, 2000.............. 364,067,512 (11,292,604) (72,526,756) (96,779) (31,500) 280,140,927 Issuance of common stock and stock options in acquisitions of subsidiaries .......... 8,835,388 8,836,185 Issuance of commons stock in connection with employee stock purchase plan ...... 1,180,434 1,180,599 Exercise of stock options ................ 459,753 460,089 Amortization of deferred compensation..... 3,092,640 3,092,640 Net loss.................................. (115,183,731) (115,183,731) Currency translation and investment valuation adjustment.................... (424,423) (424,423) --------- ------ --------- Comprehensive loss........................ (102,038,641) ------------------------------------------------------------------------------------ Balance at December 31, 2001.............. $ 374,543,087 $(8,199,964) $(187,710,487) $(521,202) $(31,500) $178,102,286 ============= ========+===== ============== ========== ========= ============
See accompanying notes. SILVERSTREAM SOFTWARE, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS Year Ended December 31, -------------------- 2001 2000 1999 ---------- ---------- --------- Operating activities Net loss..............................................................$(115,183,731). $(28,365,737) $(21,989,293) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization.........................................22,715,424... 13,874,422 1,673,163 Provision for allowances on accounts receivable..........................982,705... 292,227 287,252 In-process research and development charge.....................................-... - 1,986,659 Compensation charge for issuance of stock options......................3,092,640... 2,329,018 438,594 Impairment of goodwill................................................34,853,509... - - Non-cash special charges...............................................3,326,013... - - Changes in operating assets and liabilities: Accounts receivable.................................................14,883,947... (17,296,990) (3,328,390) Other receivables....................................................1,172,874... 447,399 (1,832,327) Prepaid expenses.......................................................213,294... (1,675,542) (722,227) Other assets.................................................................-... (2,080,500) - Accounts payable and accrued expenses...............................(2,685,025).. (800,042) 3,556,812 Deferred revenue....................................................(5,784,731).. 6,162,530 2,731,856 ----------- ------------ ------------ Net cash used in operating activities..................................(42,413,081).. (27,113,215) (17,197,901) Investing activities Purchase of businesses, net of cash acquired...........................(10,200,576).. (11,303,844) (2,834,288) Purchase of property, plant and equipment...............................(4,192,357).. (10,126,453) (2,208,906) Sale (purchase) of available-for-sale securities........................59,058,520... (104,601,388) 3,083,913 ---------- ------------- ------------ Net cash provided by (used in) investing activities................... 44,665,587 (126,031,685) (1,959,281) Financing activities Net proceeds from issuance of preferred stock....................................-... - 14,727,997 Net proceeds from issuance of common stock...............................1,640,688... 193,812,236 50,006,058 Repurchase and retirement of common stock........................................-... - (11) Payment of note receivable from stockholders.....................................-... 72,000 - Proceeds from line of credit............................................ - - 750,000 Payments on long-term debt..............................................(2,017,726).. (1,100,773) (551,309) ----------- ------------- ------------- Net cash (used in) provided by financing activities.......................(377,038).. 192,783,463 64,932,735 Effects of exchange rate on cash and cash equivalents.....................(424,423).. 43,541 (175,331) --------- ------------ ------------- Net increase in cash and cash equivalents................................1,451,045... 39,682,104 45,600,222 Cash and cash equivalents at beginning of year..........................86,480,910... 46,798,806 1,198,584 ---------- ------------ ------------ Cash and cash equivalents at end of year..............................$.87,931,955... $ 86,480,910 $ 46,798,806 = ========== ============ ============ Supplemental Information Cash paid during the period for: Income taxes......................................................$....270,532... $ 172,341 $ 21,110 = ======= ============ ============ Interest..........................................................$.....49,556... $ 66,867 $ 78,891 = ====== ============ ============
See accompanying notes. SILVERSTREAM SOFTWARE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Nature of Business SilverStream Software, Inc. (the Company) was incorporated on May 8, 1996. The Company provides software and services for building, deploying and managing Web-based applications that are scalable, reliable and secure. The Company markets its software worldwide and has sales offices in the United States, Canada, United Kingdom, The Netherlands, Belgium, Germany, Norway, The Czech Republic, France, Luxembourg, Switzerland, Italy, China, Hong Kong, Singapore, Taiwan and Australia. 2. Summary of Significant Accounting Policies Principles of Consolidation The consolidated financial statements include the accounts of the Company and its U.S. and international subsidiaries, all of which are wholly owned, located in North America, Europe, Asia and Australia. All intercompany accounts and transactions have been eliminated in consolidation. The accompanying consolidated financial statements reflect the application of certain significant accounting policies as described in this note and elsewhere in the accompanying consolidated financial statements and notes. Reclassifications Certain amounts from 1999 and 2000 have been reclassified to conform to the 2001 presentation. Such reclassifications did not have a material impact on the consolidated financial statements. Use of Estimates The preparation of the consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates. Cash Equivalents and Marketable Securities The Company accounts for cash equivalents and marketable securities in accordance with Statement of Financial Accounting Standards (SFAS) No. 115, "Accounting for Certain Investments in Debt and Equity Securities." Cash equivalents are short-term, highly liquid investments with original maturity dates of three months or less. Cash equivalents are carried at cost, which approximates fair market value. The Company's marketable securities, which, as of December 31, 2001, consisted of U.S. Government and Federal Agency obligations, tax-exempt municipal obligations, and investment-grade corporate bonds, are classified as available-for-sale and are recorded at fair market value with any unrealized gain or loss recorded in comprehensive loss. As of December 31, 2001, the Company had a $2,150,000 restriction on its cash balance, as a result of six secured letters of credit. These letters of credit were issued by the Company's primary bank to certain landlords as part of lease negotiations. Concentration of Credit Risk Financial instruments that potentially subject the Company to significant concentrations of credit risk consist of cash and cash equivalents, marketable securities, accounts receivable and other receivables. Concentration of credit risk with respect to cash equivalents and marketable securities is limited as these assets are primarily U.S. Government and Federal Agency obligations, tax-exempt municipal obligations and investment-grade corporate bonds with high-credit, quality financial institutions. There is no significant concentration of credit risk with respect to accounts receivable due to the large number of companies comprising the Company's customer base. On-going credit evaluations of customers' financial condition are performed and collateral is generally not required. The Company maintains reserves for potential credit losses and such losses, in the aggregate, have not Concentration of Credit Risk (continued) exceeded management's expectations. Furniture and Equipment Furniture and equipment is stated at cost. Depreciation is computed by use of the straight-line method over the following estimated useful lives: Leasehold improvements........................ Lesser of remaining lease-term or useful life Furniture and fixtures........................ 5 years Computer equipment and software............... 3 years Telephone equipment........................... 3 years Advertising Costs The Company expenses advertising costs as incurred. Advertising costs were $2,166,000, $2,521,000 and $805,000 for the years ended December 31, 2001, 2000 and 1999, respectively. Capitalized Software Capitalization of software development costs under SFAS No. 86 begins upon the establishment of technological feasibility. Technological feasibility is established upon the completion of a working model. The establishment of technological feasibility and the ongoing assessment of recoverability of capitalized software development costs require considerable judgment by management with respect to certain external factors, including, but not limited to, technological feasibility, anticipated future gross revenues, estimated economic life, and changes in software and hardware technologies. Costs incurred by the Company between completion of a working model and the point at which the product is ready for general release have been insignificant. Therefore, through December 31, 2001, all software research and development costs have been expensed as incurred. Revenue Recognition Revenue recognition from software license fees and from sales of software products is recognized when persuasive evidence of an arrangement exists, delivery of the product has occurred, no significant Company obligations with regard to implementation remain, the fee is fixed or determinable and collectibility is probable. The Company's software arrangements may contain multiple elements such as software products, services and post-contract customer support (PCS). Revenue earned on software arrangements involving multiple elements which qualify for separate element treatment is allocated to each element based on the relative fair values of those elements based on vendor specific objective evidence. For the year ended December 31, 2001, vendor specific objective evidence is limited to the price charged when the element is sold separately or, for an element not being sold separately, the price established by management having the relevant authority. Accordingly, revenue from software products is recognized when the product is shipped. Revenue from services is recognized as the services are provided to the customer. Revenue for PCS is recognized ratably over the term of the agreement. Customer advances and billed amounts due from customers in excess of revenue recognized are recorded as deferred revenue and recognized as the services are delivered. Revenue derived from arrangements with resellers of the Company's products is not recognized until the software is shipped to the customer. Sales to independent software vendors (ISVs) under the Company's former ISV program were deferred and recognized as product revenue ratably over the anticipated period of performance for services under the agreement, which was generally 12 months. During the third quarter of 2001, the Company instituted a new ISV program (SilverNet Partner Program). The SilverNet Partner Program is a multiple element arrangement which qualifies for separate element treatment and accordingly, revenue earned under the SilverNet Revenue Recognition (continued) Partner Program is allocated to each element based on the relative fair values of those elements based on vendor specific objective evidence. Revenue from software products is recognized when the product is delivered, revenue from services is recognized as the services are provided to the customer, and revenue for post-contract customer support is recognized ratably over the term of the agreement. Customer returns are estimated and accrued for as a percentage of net product revenues based upon historical trends. The Company adopted SOP 97-2, "Software Revenue Recognition" as of January 1, 1998, and SOP 98-9, "Modification of SOP 97-2, Software Revenue Recognition, with Respect to Certain Transactions," as of January 1, 2000. SOP 97-2 and SOP 98-9 provide guidance for recognizing revenue on software transactions and supersede SOP 91-1. The Company adopted Staff Accounting Bulletin (SAB) No. 101 "Revenue Recognition in Financial Statements", as of October 1, 2000. SAB 101 provides guidance on the recognition, presentation and disclosure of revenue in financial statements. The adoption of SOP 97-2, SOP 98-9 and SAB 101 did not have a material impact on the Company's financial results. Licensing Agreements The Company has entered into various licensing agreements with third-party software and technology companies, primarily for encryption technology, full-text searching technology and the use of J2EE elements. Royalty payments under such licensing agreements are based on either a percentage of product revenue or per unit sales. Royalty expenses, which are charged to cost of revenue under these license agreements, totaled $225,000, $1,059,000 and $310,000 for the years ended December 31, 2001, 2000 and 1999, respectively. Prepaid royalties related to these licensing agreements were $469,000 and $838,000 at December 31, 2001 and 2000, respectively. Earnings per Share The Company computes earnings per share in accordance with SFAS No. 128, "Earnings per Share". SFAS 128 requires calculation and presentation of basic and diluted earnings per share. Basic earnings per share is calculated based on the weighted average number of common shares outstanding and excludes any dilutive effects of warrants, stock options, common stock subject to repurchase or other type securities. Diluted earnings per share is calculated based on the weighted average number of common shares outstanding and the dilutive effect of warrants, stock options, and related securities. Dilutive securities are excluded from the diluted earnings per share calculation if their effect is anti-dilutive. Income Taxes The Company provides for income taxes under SFAS No. 109, "Accounting for Income Taxes." Under SFAS 109, the liability method is used in accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on differences between the financial reporting and tax basis of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. Financial Instruments The fair value of the Company's financial instruments, which include cash and cash equivalents, marketable securities, accounts receivable, other receivables, accounts payable and long term debt, are based on assumptions concerning the amount and timing of estimated future cash flows and assumed discount rates reflecting varying degrees of perceived risk. The carrying value of these financial instruments approximated their fair value at December 31, 2001 and 2000 due to the short term nature of these instruments and the variable interest rate on the long term debt. Foreign Currency Translations Financial statements of foreign subsidiaries are translated into U.S. dollars at the exchange rate as of the balance sheet dates, with the exception of revenues, costs and expenses. All revenues, costs and expenses are translated at a weighted-average of exchange rates in effect during the year. Net exchange gains or losses resulting from the translation of the foreign financial statements are recorded as a separate component of comprehensive income. Transaction adjustments for all foreign subsidiaries are included in income. Accounting for the Impairment of Long-Lived Assets The carrying value of long-lived assets used in operations, such as goodwill and furniture, fixtures and leasehold improvements, is periodically reviewed by the Company based on the expected future undiscounted operating cash flows of the related asset. If an impairment is indicated, the Company will adjust the carrying value of the long-lived assets to fair value. During fiscal 2001, the Company recorded an impairment loss related to goodwill in the amount of $34.8 million. Stock Compensation Arrangements The Company adopted the disclosure-only provisions of SFAS No. 123, "Accounting for Stock-Based Compensation." As permitted by SFAS No. 123, the Company has continued to account for employee stock options in accordance with Accounting Principles Board Opinion (APB) No. 25, "Accounting for Stock Issued to Employees," and related interpretations, and has included the pro forma disclosures required by SFAS No. 123 for all periods presented. Comprehensive Income As of January 1, 1998, the Company adopted SFAS No. 130, "Reporting Comprehensive Income," which establishes new rules for the reporting and display of comprehensive income and its components. SFAS 130 requires unrealized gains and losses on the Company's available-for-sale securities and the foreign currency translation adjustments, which prior to adoption were reported separately in shareholders' equity, to be included in other comprehensive income. Segment Reporting The Company reports segments in accordance with SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." SFAS 131 establishes standards for the way that public business enterprises report information about operating segments in interim financial reports. The Company views its operations and manages its business as one segment: the development and delivery of Web-based applications, which includes software and related products and services. Factors used to identify the Company's single operating segment include the organizational structure of the Company and the financial information available for evaluation by the chief operating decision maker in making decisions about how to allocate resources and assess performance. Disclosure of geographical segment information is included in Note 12. Recently Issued Accounting Pronouncements In the first quarter of 2001, the Company adopted SFAS No. 133, "Accounting for Derivatives and Hedging Activities" as amended by SFAS No. 137 and SFAS No. 138, which establishes accounting and reporting standards for derivative instruments, including derivative instruments imbedded in other contracts (collectively referred to as derivatives), and for hedging activities. The adoption of SFAS No. 133 did not have a material impact on the Company's financial position or results of operations. In July 2001, the FASB issued SFAS No. 141, "Business Combinations" and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 eliminates the pooling-of-interests method of accounting for business combinations, except for qualifying business combinations, and further clarifies the criteria to recognize intangible assets separately from goodwill. SFAS No. 142 eliminates the amortization of goodwill and indefinite lived intangible assets and requires periodic review for impairment. The adoption of SFAS No. 141 in July of 2001 did not have a material impact on the Company's financial position or results of operations. The Company is currently in the process of evaluating the impact SFAS No. 142 will have on its financial position and results of operations. In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS No. 144 supersedes SFAS No. 121, "Accounting for the Impairment of Long-lived Assets and for Long-lived Assets to be Disposed of" and provides a single accounting model for long-lived assets to be disposed of. The Company is currently in the process of evaluating the impact SFAS No. 144 will have on its financial position and results of operations. 3. Special Charges During the second and third quarters of 2001, the Company recorded aggregate special charges of $11.8 million. Of these charges, approximately $9.7 million related to the restructuring of the Company's operations; specifically, $3.6 million related to a workforce reduction of approximately 255 employees (primarily consulting employees), $4.9 million related to office closures (of which $687,000 represented costs in connection with exiting leased office space in the United States and Europe, such as costs to refit such space for sublease tenants and real estate broker fees for the identification of sublease tenants) net of estimated sublease income and $1.2 million related to the write-down of assets which became impaired as a result of the restructurings. In addition, the Company wrote-off a $2.1 million equity investment which the Company considered to be permanently impaired. During the fourth quarter of 2001, the Company determined that the costs to close certain non-profitable offices would be lower than original estimates, resulting in a change in estimate of $1.1 million. A summary of the special charges is as follows: Office Closures and Costs to Exit Termination Leased Office Asset Benefits Space Write-Downs Total 2001 Charges $ 3,577 $ 4,867 $ 3,326 $ 11,770 Cash Expenditures (3,512) (804) - (4,316) Non Cash Charges - - (3,326) (3,326) Change in Estimate - (1,112) - (1,112) Balance at December 31, 2001 $ 65 $ 2,951 $ - $ 3,016
Future cash outlays for termination benefits are anticipated to be completed by the end of the first quarter of fiscal 2002, while future cash outlays for office closures will continue through June 2006. Subsequent to December 31, 2001, the Company implemented an additional cost reduction plan which will result in a special charge of approximately $1.3 to $2.1 million to be recorded in the first quarter of fiscal 2002. The Company expects to realize annual cost savings of approximately $37.0 million to $40.0 million as a result of these restructurings. 4. Impairment of Goodwill As the result of the restructuring actions management took during 2001, the operating results of the Company's services business through the third quarter of 2001, and a change in the fourth quarter in the scale and scope of the Company's services business, SilverStream undertook an evaluation of the carrying value of our goodwill to determine if impairment existed. The assessment in that period was also performed in light of significant negative industry and economic trends impacting the Company's current operations and expected future growth rates. Such factors, management concluded, would result in an other than temporary decline in services revenues as a percentage of total revenues. As a result, during the fourth quarter of 2001, SilverStream recorded a $34.8 million charge for the impairment of goodwill, based on the amount by which the carrying amount of the goodwill exceeded the fair value. The writedown related to all of the goodwill associated with the Company's consulting and distributorship acquisitions: Power 2000 Inc., Excelnet Systems Limited, Bondi Software, Inc., E-Party Software, Inc., and Beijing SilverSolutions, Inc. Fair value was determined based on discounted future cash flows after disaggregating the assets by grouping them at the lowest level for which there were identifiable cash flows that were largely independent of the cash flows of other groups of assets. The assumptions supporting the estimated future cash flows, including the discount rate and estimated terminal values, reflect management's best estimates based upon an independent third-party valuation of the Company's intangible assets. The discount rate was based upon SilverStream's weighted average cost of capital as adjusted for the risks associated with our operations. 5. Furniture, Equipment and Leasehold Improvements Furniture, equipment and leasehold improvements consists of the following: December 31, 2001 2000 Furniture and fixtures................. $3,761,460 $3,506,487 Computer equipment and software........ 13,943,350 10,936,616 Telephone equipment.................... 466,484 416,696 Leasehold improvements................. 2,244,469 1,688,564 ---------- ---------- 20,415,763 16,548,363 Less accumulated depreciation.......... (9,891,198) (5,313,420) ---------- ---------- $11,234,943 $10,524,565 6. Accrued Expenses Accrued expenses include the following: December 31, 2001 2000 ------------- --------- Fringe benefits.................................... $1,980,275 $3,680,864 Occupancy.......................................... 8,814 241,725 Professional fees.................................. 575,226 317,860 Bonuses............................................ 175,000 563,996 Commissions........................................ 378,911 1,403,551 Sales and VAT taxes payable........................ 676,305 1,257,517 Deferred tax liability............................. - 853,000 Amounts due to owners of acquired businesses....... 3,662,500 7,206,397 Restructuring...................................... 3,016,477 - Other.............................................. 636,932 643,817 --------- --------- $11,110,440 $16,168,727
7. Debt Long-Term Debt Under terms of a credit facility, negotiated in 1999 and expiring October 1, 2002, borrowings of approximately $750,000 converted fully into a term loan on October 31, 1999. Such borrowings are secured by substantially all of the Company's tangible assets. Principal repayments began November 1, 1999 in 36 equal monthly payments. Interest on the loan accrues at prime rate plus 0.5% (4.75% at December 31, 2001) and is payable monthly in arrears. The outstanding balance under the facility at December 31, 2001 and 2000 was $208,000 and $458,000, respectively. 8. Leases The Company leases office space and certain equipment under non-cancelable operating leases expiring through February 2006. Some of these leases contain renewal options. Rent expense charged to operations for the years ended December 31, 2001, 2000 and 1999 was $5,439,000, $3,051,000 and $1,506,000, respectively. Future minimum payments under non-cancelable operating leases, excluding amounts related to accrued restructurings, as of December 31, 2001 are as follows: Operating Leases --------------- --------------- 2002...................................... 4,582,270 2003...................................... 4,022,811 2004...................................... 3,889,443 2005...................................... 3,737,187 2006...................................... 3,627,156 2007 and thereafter....................... 848,027 ------------- Total minimum lease payments.............. $ 20,706,894 =============
9. Employee Benefits 1996 Founders Stock Incentive Plan The Company issued and sold an aggregate of 300,000 shares of common stock under our Founders' 1996 Stock Incentive Plan pursuant to stock restriction agreements at the fair value of the stock at the date of issuance. The shares are issued in the name of the employee, who has all rights of a stockholder, subject to certain repurchase and transfer provisions. If the employee ceases to be employed by the Company, the Company shall have the option to repurchase from the employee a portion of shares based upon a predetermined formula. There were no shares subject to repurchase at December 31, 2001. An aggregate of 17,875 shares of common stock were subject to repurchase at December 31, 2000. 1997 Stock Incentive Plan The Company adopted the 1997 Stock Incentive Plan, which was amended and restated on June 9, 1999, and further amended on May 1, 2001 (as amended and restated, the 1997 Plan), and which covers all eligible employees, officers, directors, consultants and advisors. As of December 31, 2001 the Company has reserved 7,000,000 shares of common stock for issuance under the 1997 Plan. Under the 1997 Plan, the Company may grant stock options to purchase shares of the Company's common stock, restricted common stock awards and other stock-based awards having terms and conditions at the discretion of the Company's Board of Directors. The prices, terms and vesting periods of stock awards under the 1997 Plan are determined by the Board of Directors at the date of the grant. The 1997 Plan also contains provisions which stipulate that upon an acquisition event the Board of Directors is authorized to determine that any stock option, restricted stock or other stock-based award granted under the 1997 Plan may become immediately exercisable in full or in part. The Company recorded deferred compensation of $0 and $6,408,000 relating to option grants during December 31, 2001 and 2000, respectively. Deferred compensation is being charged ratably to operations over the vesting period of the options. The Company incurred a charge to operations of $3,093,000, $2,329,000 and $438,000 for the years ended December 31, 2001, 2000 and 1999, respectively. For the year ended December 31, 2001, $1,121,000 of this charge relates to services, $149,000 to sales and marketing, $1,784,000 to research and development and $39,000 to general and administrative expenses. For the year ended December 31, 2000, $579,000 of this charge relates to services, $119,000 to sales and marketing, $1,586,000 to research and development and $45,000 to general and administrative expenses. For the year ended December 31, 1999, $125,000 of this charge relates to services, $145,000 to sales and marketing, $130,000 to research and development and $38,000 to general and administrative expenses. Assumed Stock Incentive Plans In connection with the acquisition of certain businesses during the year ended December 31, 2000 (See Note 14), the Company assumed two stock incentive plans. Under these plans, the Company has reserved 640,120 shares of common stock for issuance upon exercise of previously granted options under such plans. Upon the assumption of these plans, the Company has been prohibited from granting further awards under such plans. 9. Employee Benefits (continued) 1999 Employee Stock Purchase Plan In accordance with the 1999 Employee Stock Purchase Plan, eligible employees may authorize payroll deductions of up to 10% of their compensation (not to exceed $12,500 in a six-month period) to purchase shares at the lower of 85% of the fair market value of the Company's common stock at the beginning or end of the six-month option period. Shares issued to employees under the plan totaled 164,676 during 2001. A total of 300,000 shares of common stock have been reserved for issuance under the plan. At December 31, 2001, 60,486 shares remained available for future purchase under the plan and at March 6, 2001, 1,371 shares remained available for future purchase under the plan. 2001 Stock Incentive Plan The Company adopted the 2001 Stock Incentive Plan, (the 2001 Plan), which covers all eligible employees and consultants of the Company. Officers and directors of the Company are not eligible to be granted options under the 2001 Plan. As of December 31, 2001 the Company has reserved 1,000,000 shares of common stock for issuance under the 2001 Plan. Under the 2001 Plan, the Company may grant only non-qualified stock options to purchase shares of the Company's common stock. The prices, terms and vesting periods of stock awards under the 2001 Plan are determined by the Board of Directors at the date of the grant. The 2001 Plan also contains provisions which stipulate that upon an acquisition event the Board of Directors is authorized to determine that any stock option granted under the 2001 Plan may become immediately exercisable in full or in part. 401(k) Plan The Company has a 401(k) plan (the Plan), whereby eligible employees may contribute up to 15% of their annual compensation, subject to limitations established by the Internal Revenue Code of 1986, as amended. The Company may also contribute a discretionary matching contribution, to each such participant's deferred compensation equal to a discretionary percentage determined by the Company. During fiscal 2001, the Company made $300,000 in discretionary matching contributions. The Company did not make any discretionary matching contributions during fiscal 2000. Stock Option Disclosures The Company has adopted the disclosure provisions only of SFAS 123. The fair values for these options were estimated at the date of grant using the Black-Scholes option-pricing model in 2001 and 2000 and the minimum value method in 1999 with the following assumptions: Year Ended December 31, 2001 2000 1999 ---- ---- ---- Expected life (years)..................................... 5.63 8.28 8.94 Risk free interest rate................................... 5.00% 5.50% 6.34% Volatility................................................ 79.08% 505.00% -- Dividend yield............................................ -- -- --
For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. The Company's pro forma information is as follows: Year Ended December 31, 2001 2000 1999 ------------- ------------- ------------- Pro forma net loss................... $(118,620,553) $(62,334,652) $(26,713,375) Pro forma net loss per share......... $ (5.43) $ (3.16) $ (3.17)
Compensation expense under SFAS 123 for 2001, 2000 and 1999 is not representative of future expense, because it includes three, two and one years of expense, respectively. In future years, the effect of determining compensation cost using the fair value method will include additional vesting and associated expense. Stock Option Disclosures (continued) Option activity under the 2001 Plan, 1997 Plan and assumed plans is summarized below: Year Ended December 31, 2001 2000 1999 -------------------- -------------------- --------------------- Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Options Price Options Price Options Price Outstanding, beginning of Year..................... 5,079,820 $27.99 1,796,969 $14.61 895,175 $ 1.15 Granted.................... 2,774,434 7.01 4,074,666 34.70 1,095,300 23.63 Expired or canceled........ (2,063,974) 23.66 (516,254) 40.60 (63,325) 6.25 Exercised.................. (336,089) 1.30 (275,561) 3.26 (130,181) 2.03 --------- -------- -------- Outstanding, end of year... 5,454,191 20.10 5,079,820 27.99 1,796,969 14.61 ========= ========= ========= Exercisable at end of year. 1,744,129 637,568 272,599 Available for future grants 1,092,128 799,032 1,217,325 Weighted-average fair value of options granted during year $ 7.01 $ 35.80 $ 23.63
The following table presents weighted-average price and life information about significant option groups outstanding at December 31, 2001: Options Outstanding Options Exercisable Weighted- Average Weighted- Weighted- Remaining Average Average Range of Number Contractual Exercise Number Exercise Exercise Prices Outstanding Life Price Exercisable Price $ 0.00 - $ 5.00 715,804 6.7 Years $ 2.70 317,666 $ 1.96 $ 5.01 - $ 10.00 2,128,952 8.4 Years 6.38 526,098 6.44 $ 10.01 - $ 25.00 989,442 7.0 Years 18.14 265,205 18.19 $ 25.01 - $ 50.00 1,351,045 7.6 Years 39.01 505,579 39.44 $ 50.01 - $ 90.00 139,305 7.3 Years 69.58 64,631 69.73 $ 90.01 - $ 130.00 129,643 6.9 Years 106.15 64,950 106.35 --------------- -------------- $ 0.00 - $130.00 5,454,191 7.7 Years $ 20.10 1,744,129 $ 23.04
10. Preferred Stock On August 20, 1999, the Company completed an initial public offering in which the Company sold 3,000,000 shares of its common stock for net proceeds to the Company of $44,640,000. On August 26, 1999, the Company's underwriters exercised their over-allotment option, which resulted in the sale of an additional 450,000 shares of the Company's stock which generated additional proceeds of $6,696,000, net of issuance costs. Upon closing of the initial public offering, each outstanding share of the Company's Redeemable Convertible Preferred Stock and Convertible Preferred Stock was automatically converted into one share of common stock of the Company resulting in the issuance of 8,659,208 shares of common stock. 11. Income Taxes Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting and income tax purposes. A valuation allowance has been established to reflect the uncertainty of future taxable income to utilize available tax loss carryforwards and other deferred tax assets. Significant components of the Company's deferred tax assets and liabilities are as follows: Year Ended December 31, 2001 2000 ------------ -------- Deferred tax assets: Net operating loss carryforward........................ $45,166,000 $19,978,000 Research and development credit carryforward........... 2,191,000 1,451,000 Deferred revenue....................................... 862,000 2,456,000 Restructuring charge................................... 2,512,000 - Other.................................................. 1,298,000 1,302,000 Deferred tax liabilities: Depreciation........................................... (26,000) (210,000) Amortization........................................... - - ----------- ----------- 52,003,000 24,977,000 Less valuation allowance for deferred tax assets....... (52,003,000) (24,977,000) ------------ ------------ Total.................................................... $ -- $ -- =========== ===========
As of December 31, 2001, the Company has net operating loss carryforwards and research and development tax carryforwards of approximately $112.9 million and $2.2 million, respectively, available to offset future Federal taxable income. These carryforwards begin to expire in 2012 and may be subject to certain limitations. The valuation allowance increased by $27.0 million during the twelve months ended December 31, 2001, due primarily to the additional allowance for the Net Operating Losses incurred. The Company believes that, based upon a number of factors, the available objective evidence creates sufficient uncertainty regarding the realization of the deferred tax assets such that a full valuation allowance has been recorded. The Company will continue to assess the realization of the deferred tax assets based on actual and forecasted operating results. 12. Segment and Geographic Information As discussed in Note 2, the Company operates in one business segment: the development and delivery of Web-based applications that include software and related products and services. In making this determination, the Company considered the information which management uses to oversee the Company's operations as well as the manner in which the business is managed. Foreign operations in 1999 were conducted in seven countries in Europe and three countries in the Asia Pacific region. During 2000 and 2001, foreign operations were expanded. Operations are currently conducted in twelve countries in Europe, four countries in the Asia Pacific region and in Australia. Revenues by geographic region are as follows: Year Ended December 31, 2001 2000 1999 -------------- ----------------------- United States............... $38,467,273 $54,117,423 $14,984,459 Europe...................... 23,393,088 22,642,893 5,700,391 Other....................... 6,074,193 3,823,681 2,379,557 ---------- ---------- ---------- Total....................... $67,934,554 $80,583,997 $23,064,407 =========== =========== ===========
Total long lived assets by geographic region are as follows: December 31, 2001 2000 1999 ------------- ------------- --------- United States............... $51,255,463 $88,643,023 $22,907,826 Europe...................... 1,530,130 1,176,196 529,440 Other....................... 493,962 297,089 107,393 ------------ ------------ ------------- Total....................... $53,279,555 $90,116,308 $23,544,659 =========== =========== ===========
12. Segment and Geographic Information (continued) Net income (loss) by geographic region are as follows: Year Ended December 31, 2001 2000 1999 ------------- ------------- --------- United States............... $(27,534,929) $(21,840,977) $(104,742,044) Foreign subsidiaries........ (10,441,687) (830,808) (148,316) ---------------- ----------- ------------ Total....................... $(115,183,731) $(28,365,737) $(21,989,293) ============== ============= =============
13. Loss Per Share The following table sets forth the computation of basic and diluted loss per share: Year Ended December 31, 2001 2000 1999 -------------- -------------- --------- Numerator: Net loss....................... $(115,183,731) $(28,365,737) $(21,989,293) Beneficial conversion feature in series D preferred stock.............. - - (263,158) ------------ ----------- ------------ Net loss applicable to common stockholders.......... (115,183,731) (28,365,737) (22,252,451) ============ ============ =========== Denominator: Weighted average common shares outstanding........... 21,904,251 20,159,868 9,943,728 Weighted average common shares subject to repurchase................... (44,528) (462,370) (1,524,612) ------------ ----------- ----------- Denominator for basic and diluted loss per share applicable to common stockholders................... 21,859,723 19,697,498 8,419,116 ============ =========== =========== Basic and diluted net loss per share applicable to common stockholders................. $ (5.27) $ (1.44) $ (2.64) ============ ============ ============
The Company has excluded all preferred stock, outstanding stock options and shares subject to repurchase by the Company from the calculation of loss per share because all such securities are antidilutive for all periods presented. Shares subject to repurchase by the Company will be included in the computation of earnings per share when the Company's option to repurchase these shares expires. Weighted-average options outstanding to purchase 2,668,183, 3,370,090 and 1,332,992 shares of common stock for the years ended December 31, 2001, 2000 and 1999, were not included in the computation of net loss per share because the effect would be antidilutive. Such securities, had they been dilutive, would have been included in the computation of diluted net loss per share using the treasury stock method. 14. Acquisitions During 2001, 2000 and 1999, SilverStream completed several acquisitions of businesses then complementary to the Company's business strategy. These acquisitions have been accounted for using the purchase method and the results of operations have been included in the Company's consolidated statement of operations from the date of acquisition. A summary of each acquisition is as follows: Beijing SilverSolutions, Inc. On April 12, 2001, the Company acquired Beijing SilverSolutions, Inc., a software distributor located in China. The consideration for the acquisition was approximately $460,000 in cash and transaction costs. In addition, the Company is obligated to pay further consideration of up to approximately $150,000 if certain operational objectives are achieved. The contingent consideration will be recorded as compensation expense. 14. Acquisitions (continued) The Wireless Application Software Division of Waptop Holding A/S. On March 1, 2001, the Company acquired the wireless application software division of Waptop Holding A/S, a Danish holding company. The consideration for the acquisition was approximately $5.3 million, which consisted of 341,507 shares of the Company's common stock and $1.3 million in cash and transaction costs. In addition, the Company is obligated to pay further consideration of up to approximately $4.0 million if certain operational objectives are achieved. Through December 31, 2001, SilverStream has paid $2.0 million in cash for such additional consideration, all of which was accounted for as goodwill. E-Party Software Inc. On January 26, 2001, the Company acquired E-Party Software Inc., a software distributor located in Spain. The consideration for the acquisition was approximately $1.5 million in cash and transaction costs. Bondi Software, Inc. On December 6, 2000, the Company acquired Bondi Software, Inc., an e-business services provider. The consideration for the acquisition was approximately $17.0 million and was completed through the issuance of 418,198 shares of the Company's common stock and $6.8 million in cash and transaction costs. Excelnet Systems Limited. On August 11, 2000, the Company acquired Excelnet Systems Limited, an e-business services provider. The consideration for the acquisition was approximately $5.2 million and was completed through the issuance of 32,620 shares of the Company's common stock and $3.7 million in cash and transaction costs. In addition, the Company is obligated to pay further consideration of up to approximately $2.0 million if certain operational objectives are achieved. Through December 31, 2001, the Company has paid $225,000 in cash consideration, issued 50,000 shares of common stock at $14.06 per share and recorded a $1.0 million liability for such additional consideration, all of which was accounted for as goodwill. eObject, Inc. On April 5, 2000, the Company acquired eObject, Inc., the developer of "enTellect", a java based framework for the access control, personalization and metering of corporate resources. The consideration for the acquisition was approximately $23.2 million, which consisted of 473,581 shares of the Company's common stock and the payment of transaction costs. In addition, the Company is obligated to pay further consideration of up to approximately $5.5 million if certain operational objectives are achieved. Through December 31, 2001, SilverStream has issued 175,000 shares of common stock at $25.38 per share and paid $1.0 million in cash for such additional consideration, all of which was accounted for as goodwill. Power 2000, Inc. On March 31, 2000, the Company acquired Power 2000, Inc., an e-business services provider. The consideration for the acquisition was approximately $15.8 million, which consisted of 134,000 shares of the Company's common stock along with approximately $5.4 million in cash and transaction costs. Gemlogic, Inc. On December 13, 1999, the Company acquired GemLogic, Inc., a provider of XML software. The consideration for the acquisition was approximately $12.1 million, which consisted of 114,456 shares of the Company's common stock and the payment of transaction costs. In addition, the Company is obligated to pay further consideration of up to approximately $3.5 million if certain operational objectives are achieved. Through December 31, 2001, SilverStream has issued 253,940 shares of common stock at prices ranging from $6.80 to $14.06 per share and recorded a $1.2 million liability for such additional consideration, all of which was accounted for as goodwill. The Company recorded a $1.9 million charge for in-process research and development, representing the value of numerous projects that were in various stages of development that had not reached technological feasibility. No alternative future uses were identified prior to reaching technological feasibility. The purchased research and development was independently valued using the income approach. ObjectEra, Inc. On December 13, 1999, the Company acquired ObjectEra, Inc., a developer and distributor of a software program known as Object Request Broker (ORB), for $8.3 million in cash and transaction costs and up to $4.0 million in additional consideration contingent upon the achievement of certain operational objectives. Through December 31, 2001, the Company has paid $1.0 million in cash consideration, issued 151,867 shares of common stock at prices ranging from $6.49 to $18.12 per share and recorded a $1.4 million liability for such additional consideration, all of which was accounted for as goodwill. 15. Quarterly Information (unaudited) A summary of operating results and net loss per share for the quarterly periods in the two years ended December 31, 2001 is set forth below: Quarter Ended March 31 June 30 September 30 December 31 ---------------------------- -------------- ------------- Year ended December 31, 2001 Total revenues.............. $22,948,936 $ 20,644,301 $14,632,320 $9,708,997 Gross profit................ 7,109,241 8,227,200 5,387,963 3,802,054 Goodwill impairment......... - - - 34,843,509 Net loss applicable to common Stockholders......... (19,016,163) (25,364,596) (19,273,600) (51,529,372) Net loss per share applicable to common stockholders - basic and diluted............ (.89) (1.16) (.87) (2.32) Year ended December 31, 2000 Total revenues.............. $13,003,345 $18,028,859 $23,500,891 $26,050,902 Gross profit................ 7,148,436 8,375,493 12,482,172 14,054,562 Net loss applicable to common Stockholders......... (6,609,286) (7,482,001) (6,681,467) (7,592,983) Net loss per share applicable to common stockholders - basic and diluted.............. (.36) (.38) (.33) (.37)
EX-99 4 sep8kexh2.txt SILVERSTREAM FIRST QTR 2002 FINANCIAL STATEMENTS EXHIBIT 99.2 SILVERSTREAM SOFTWARE, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands) MARCH 31, DECEMBER 31, 2002 2001 ----------- ------------ (Unaudited) (Audited) ASSETS Current assets: Cash and cash equivalents ......................... $ 111,235 $ 87,932 Marketable securities ............................. 7,016 45,790 Accounts receivable; net of allowances of $1,881 at March 31, 2002 and $2,038 at December 31, 2001 10,231 9,513 Other receivables ................................. 665 454 Prepaid expenses .................................. 2,884 2,296 --------- --------- Total current assets ........................... 132,031 145,985 Furniture, equipment and leasehold improvements, net 9,252 10,525 Intangibles, net .................................... 43,770 42,755 --------- --------- Total assets ................................... $ 185,053 $ 199,265 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable .................................. $ 7,470 $ 4,106 Accrued expenses .................................. 7,784 11,111 Deferred revenue .................................. 5,414 5,737 Current portion of long-term debt and obligations under capital leases ............................ 146 208 --------- --------- Total current liabilities ...................... 20,814 21,162 Stockholders' equity: Common stock ...................................... 22 22 Additional paid-in capital ........................ 374,845 374,543 Deferred compensation ............................. (7,427) (8,200) Accumulated deficit ............................... (202,201) (187,710) Other accumulated comprehensive loss .............. (969) (521) Notes receivable from stockholders ................ (31) (31) --------- --------- Total stockholders' equity ..................... 164,239 178,103 --------- --------- Total liabilities and stockholders' equity ..... $ 185,053 $ 199,265 ========= =========
The accompanying notes are an integral part of these condensed consolidated financial statements. SILVERSTREAM SOFTWARE, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share data) (Unaudited) THREE MONTHS ENDED MARCH 31, ----------------------- 2002 2001 -------- -------- Revenue: Software license ..................................... $ 6,110 $ 9,616 Services ............................................. 4,042 13,333 -------- -------- Total revenue ................................ 10,152 22,949 Cost of revenue: Software license ..................................... 107 142 Services (excluding compensation charges of $280 in the three months ended March 31, 2002 and 2001, respectively) ..................................... 5,154 15,698 -------- -------- Total cost of revenue ........................ 5,261 15,840 -------- -------- Gross profit ........................................... 4,891 7,109 Operating expenses: Sales and marketing (excluding compensation charges $37 in the three months ended March 31, 2002 and 2001, respectively) ............. 8,932 13,902 Research and development (excluding compensation charges of $446 in the three months ended March 31, 4,799 4,945 2002 and 2001, respectively) General and administrative (excluding compensation charges $10 in the three months ended March 31, 2002 2,895 4,306 and 2001, respectively) Compensation charge for issuance of stock options .... 773 773 Special charges ..................................... 2,437 -- Amortization of goodwill ............................. -- 4,731 -------- -------- Total operating expenses ..................... 19,836 28,657 -------- -------- Loss from operations ................................... (14,945) (21,548) Other income, net ...................................... 454 2,532 -------- -------- Net loss ............................................... $(14,491) $(19,016) ======== ======== Basic and diluted net loss per share ................... $ (0.65) $ (0.89) ======== ======== Weighted-average common shares used in computing basic and diluted net loss per share ....................... 22,375 21,309 ======== ========
The accompanying notes are an integral part of these condensed consolidated financial statements. SILVERSTREAM SOFTWARE, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) (Unaudited) THREE MONTHS ENDED MARCH 31, ------------------------- 2002 2001 --------- -------- OPERATING ACTIVITIES Net loss ............................................ $ (14,491) $(19,016) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization ..................... 1,306 5,804 Provision for allowances on accounts receivable ... (157) 556 Compensation charge for issuance of stock options . 773 773 Non-cash special charges .......................... 74 -- Changes in operating assets and liabilities: Accounts receivable ............................. (561) (1,742) Other receivables ............................... (211) (813) Prepaid expenses ................................ (588) (720) Other assets .................................... -- 9 Accounts payable and accrued expenses ........... 37 (3,004) Deferred revenue ................................ (323) 199 --------- -------- Net cash used in operating activities ............... (14,141) (17,954) --------- -------- INVESTING ACTIVITIES Purchase of businesses, net of cash acquired ........ (1,015) (4,015) Purchase of furniture and equipment ................. (107) (1,632) Sale of available-for-sale securities ............... 38,774 21,635 --------- -------- Net cash provided by investing activities ........... 37,652 15,988 --------- -------- FINANCING ACTIVITIES Net proceeds from issuance of common stock .......... 302 980 Repayment of long-term debt ......................... (62) (113) --------- -------- Net cash provided by financing activities ........... 240 867 --------- -------- Effects of exchange rate on cash and cash equivalents (448) (56) Net increase (decrease) in cash and cash equivalents 23,303 (1,155) Cash and cash equivalents at beginning of period .... 87,932 86,481 --------- -------- Cash and cash equivalents at end of period .......... $ 111,235 $ 85,326 ========= ========
The accompanying notes are an integral part of these condensed consolidated financial statements. SILVERSTREAM SOFTWARE, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 1. NATURE OF BUSINESS The unaudited condensed consolidated financial statements include the accounts of SilverStream Software, Inc. and its subsidiaries located in North America, Europe and Asia, all of which are directly or indirectly owned except for SilverStream Software GmbH, which, pursuant to the requirements of Swiss law, has issued 1,000 shares out of the 20,000 shares issued and outstanding to a Swiss attorney in trust for the benefit of SilverStream Software, Inc. All intercompany accounts and transactions have been eliminated in consolidation. SilverStream Software, Inc. and its subsidiaries are collectively referred to as the "Company" or "SilverStream." The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and accordingly, they do not include all financial information and disclosures required for complete financial statements pursuant to accounting principles generally accepted in the United States. In the opinion of management, these financial statements include all adjustments necessary for a fair presentation of the results of operations for the interim periods reported and of the financial condition of the Company as of the date of the interim balance sheet. The results of operations for the interim periods are not necessarily indicative of the results to be expected for the full year. SilverStream provides software products and services that enable organizations to more effectively conduct business using the Web. By providing software products and services for building, deploying and managing Web-based applications, SilverStream allows companies to deliver applications that have the breadth, depth and richness customers and trading partners expect. The Company's software products and services leverage the power of standards such as Java and XML to unify relevant information and services for its customers, partners and employees while enabling businesses to leverage prior technology investments. EARNINGS PER SHARE The Company computes earnings per share in accordance with Statement of Financial Accounting Standard (SFAS) No. 128, "Earnings per Share." SFAS 128 requires calculation and presentation of basic and diluted earnings per share. Basic earnings per share is calculated based on the weighted average number of common shares outstanding and excludes any dilutive effects of warrants, stock options, common stock subject to repurchase or other types of securities. Diluted earnings per share is calculated based on the weighted average number of common shares outstanding and the dilutive effect of warrants, stock options, and related securities calculated using the treasury stock method. Dilutive securities are excluded from the diluted earnings per share calculation if their effect is anti-dilutive. The following table sets forth the computation of basic and diluted loss per share: THREE MONTHS ENDED MARCH 31, ----------------------- 2002 2001 -------- -------- Numerator: Net Loss .................... $(14,491) $(19,016) ======== ======== Denominator: Weighted average common shares outstanding .......... 22,398 21,375 Weighted average common shares subject to repurchase (23) (66) -------- -------- Denominator for basic and diluted loss per share ........ 22,375 21,309 ======== ======== Basic and diluted net loss per share .............. $ (0.65) $ (0.89) ======== ======== The Company has excluded all outstanding stock options and shares subject to repurchase by the Company from the calculation of loss per share because all such securities are anti-dilutive for all periods presented. Shares subject to repurchase by the Company will be included in the computation of earnings per share when the Company's option to repurchase these shares expires. COMPREHENSIVE LOSS Total comprehensive loss was $14.9 million for the three months ended March 31, 2002 compared with $19.1 million for the three months ended March 31, 2001. Accumulated other comprehensive loss consisted of adjustments for foreign currency translation losses in the amount of $448,000 for the three months ended March 31, 2002 compared with $56,000 for the three months ended March 31, 2001. SPECIAL CHARGES During the first quarter of 2002, the Company recorded a special charge of $2.4 million in connection with the restructuring of its operations; specifically, $1.7 million related to a workforce reduction of approximately 115 employees, $626,000 related to office closures (of which $130,000 represented costs in connection with exiting leased office space in Australia and Europe, such as costs to refit such space for sublease tenants and real estate broker fees for the identification of sublease tenants) net of estimated sublease income and $74,000 related to the write-down of assets which became impaired as a result of the restructuring. During the second and third quarters of 2001, the Company recorded aggregate special charges of $11.8 million. Of these charges, approximately $9.7 million related to the restructuring of the Company's operations; specifically, $3.6 million related to a workforce reduction of approximately 255 employees (primarily consulting employees), $4.9 million related to office closures (of which $687,000 represented costs in connection with exiting leased office space in the United States and Europe, such as costs to refit such space for sublease tenants and real estate broker fees for the identification of sublease tenants) net of estimated sublease income and $1.2 million related to the write-down of assets which became impaired as a result of the restructurings. In addition, the Company wrote-off a $2.1 million equity investment which the Company considered to be permanently impaired. OFFICE CLOSURES AND COSTS TO EXIT TERMINATION LEASED OFFICE ASSET BENEFITS SPACE WRITE-DOWNS TOTAL ----------- ------------- ----------- -------- 2002 charge ............. $ 1,792 $ 571 $ 74 $ 2,437 2001 charges ............ $ 3,577 $ 4,867 $ 3,326 $ 11,770 Cash expenditures ....... (4,374) (1,089) -- (5,463) Non cash charges ........ -- -- (3,400) (3,400) Change in estimate ...... -- (1,112) -- (1,112) ------- ------- ------- -------- Balance at March 31, 2002 $ 995 $ 3,237 $ -- $ 4,232 ------- ------- ------- --------
Future cash outlays for termination benefits are anticipated to be completed by the second quarter of fiscal 2002, while future cash outlays for office closures will continue through June 2006. During the fourth quarter of 2001, the Company determined that the costs to close certain non-profitable offices would be lower than original estimates, resulting in a change in estimate of $1.1 million. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS In the first quarter of 2001, the Company adopted SFAS No. 133, "Accounting for Derivatives and Hedging Activities" as amended by SFAS No. 137 and SFAS No. 138, which establishes accounting and reporting standards for derivative instruments, including derivative instruments imbedded in other contracts (collectively referred to as derivatives), and for hedging activities. The adoption of SFAS No. 133 did not have a material impact on the Company's financial position or results of operations. In July 2001, the FASB issued SFAS No. 141, "Business Combinations" and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 eliminates the pooling-of-interests method of accounting for business combinations, except for qualifying business combinations, and further clarifies the criteria to recognize intangible assets separately from goodwill. SFAS No. 142 eliminates the amortization of goodwill and indefinite lived intangible assets and requires periodic review for impairment. The adoption of SFAS No. 141 in July of 2001 and SFAS No. 142 in January of 2002 did not have a material impact on the Company's financial position or results of operations. The following table sets forth a reconciliation of reported net loss to adjusted net loss: THREE MONTHS ENDED MARCH 31, ----------------------- 2002 2001 -------- -------- Reported net loss ............... $(14,491) $(19,016) Add back: goodwill amortization . -- 4,731 -------- -------- Adjusted net loss ............... $(14,491) $(14,285) ======== ======== The following table sets forth a reconciliation of reported net loss per share to adjusted net loss per share: THREE MONTHS ENDED MARCH 31, -------------------- 2002 2001 -------- -------- Reported net loss per share ..... $ (0.65) $ (0.89) Add back: goodwill amortization . -- 0.22 -------- -------- Adjusted net loss per share ..... $ (0.67) $ (0.65) ======== ======== The change in the carrying amount of goodwill during the first quarter of 2002 is as follows: GOODWILL -------- Balance at December 31, 2001 ..... $42,755 Contingent consideration paid to owner's of acquired businesses ... 1,015 ------- Balance at March 31, 2002 ........ $43,770 ======= In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS No. 144 supersedes SFAS No. 121, "Accounting for the Impairment of Long-lived Assets and for Long-lived Assets to be Disposed of" and provides a single accounting model for long-lived assets to be disposed of. The adoption of SFAS No. 144 did not have a material impact on the Company's financial position or results of operations. -----END PRIVACY-ENHANCED MESSAGE-----