GENERAL
SEEC, Inc. (the "Company" or "SEEC") provides software solutions that help insurance, manufacturing, financial services and other large companies rapidly create efficient new business processes by reusing and integrating their core administrative and transaction systems (i.e., "legacy" systems) in new Internet- or Web-based applications. Our solutions include software tools, industry-specific application components, and implementation services for creating flexible composite applications that seamlessly combine the capabilities of new and old applications and enable new modes of business-to-business (B2B) collaboration. We believe that our solutions can be implemented without materially disrupting current operations or replacing current administrative systems, providing a lower cost, shorter implementation time, and lower risk than software packages or traditional software development approaches. We also believe that our ability to reuse a broad range of older applications in more flexible, configurable applications based on Internet technologies -- including XML (eXtensible Markup Language), Web services and other emerging standards -- gives us one of the leading cost-effective enterprise solutions available in the market today. Our solutions are currently used by more than 30 large global companies.
The pervasive growth of the Web as a medium for business and the rapid development and adoption of Internet technologies like XML and Web services are allowing large enterprises to automate and extend their traditional business processes, such as financial, customer service, and industrial systems, to improve efficiency and competitiveness. Our solutions focus on preserving the competitive advantages inherent in existing business process systems by allowing companies to utilize the underlying value of these legacy systems in new Web- centric business processes. Our software products -- SEEC Mosaic(TM) and SEEC Asera(TM) -- support these efforts by externalizing the essential computational and decision-making logic within these existing systems -- commonly referred to as business rules -- and by providing means for quickly developing flexible new applications based on Web technologies that reuse and integrate with valuable older systems.
The SEEC Mosaic solutions include a suite of software tools, including SEEC Mosaic Studio and associated methodologies and services that are used in a wide range of industries for integrating computer applications written in COBOL (the COmmon Business Oriented Language) and other older software programming languages, with newer Web-based applications ("legacy integration"); for updating, restructuring or maintaining those older applications ("legacy modernization"); and for externalizing the essential computational and decision-making logic within existing systems in new applications (i.e., "legacy transformation").
The SEEC Asera solutions -- Value Chain for Manufacturing and Integrated Customer Service for Insurance -- include industry-specific application components (Asera Commerce, Asera Supply Chain, Asera Insurance), a suite of integrated software development tools (Asera Studio), cross-industry application components and a run-time software platform (Asera Server), and related services that are sold to large manufacturing and insurance companies. The Value Chain solution allows manufacturers to quickly automate sales, service and supply management processes across previously disconnected business units, product lines, customers, suppliers and geographies without replacing or disrupting current administrative systems. It reduces selling, inventory and service costs, while helping manufacturers deliver new value-added services, improve product delivery, and strengthen customer loyalty. The Integrated Customer Service solution allows insurance carriers to quickly automate their customer service, policy rating and other processes across multiple sales channels and product
lines. This solution is expected to reduce the carriers' costs and improve their relations with customers and the agents and brokers that account for the vast majority of insurance sales. We believe that the SEEC Asera solutions, along with SEEC Mosaic Studio, provide a faster, more cost-effective means for building these new composite applications compared to existing packaged software or custom-development efforts.
SEEC was founded in 1988 to develop tools and solutions for reengineering large computer applications written in COBOL and other older software programming languages, commonly referred to as legacy applications. Through 1999, organizations used our solutions extensively for year 2000 remediation and testing, legacy application modernization, and legacy transformation. Through a 1999 acquisition, we added Web-enablement and integration technology. In fiscal 2001, we introduced SEEC Mosaic Studio and in fiscal 2002 and fiscal 2003 we developed application components for insurance and healthcare. In January 2003 we acquired the Asera products and underlying technology for developing configurable, Web-centric composite applications that combine the capabilities of new and old applications.
Our customer base consists primarily of large and medium-sized organizations including corporations, third-party information technology ("IT") service providers, higher education institutions, non-profit entities and governmental agencies. We derive our revenues from software license and maintenance fees and professional services fees. Professional services are typically provided to customers in conjunction with the license of software products. Our enterprise solutions and software products and services are marketed through various distribution channels, including direct sales to end users, and to end users through our service provider partners.
INDUSTRY BACKGROUND
The pervasive growth of the Internet as a medium for business has created new opportunities for enterprises to improve efficiency and competitiveness by developing flexible Web-centric business processes based on immediate access to a broad range of internal and external information, efficient communication, and closer collaboration with customers and business partners. In most large organizations, however, the core information and data, proven decision-making logic, and established business policies that guide their operations today reside in existing administrative and transaction processing systems -- so-called legacy applications -- that are difficult to adapt to support the new Web-centric business processes, but which cannot be replaced economically. In order to capitalize on the opportunities created by Web-centric business processes, organizations are therefore attempting to create adaptable, cross-enterprise software applications ("composite applications") that combine powerful new Web-based functions with the proven advantages of their core legacy systems.
Leading information technology analyst and advisory firms view these composite applications as an emerging product category offering clear advantages compared to previous generations of software applications. According to Gartner Research:
"The new applications do not fit the traditional categories. The old business applications were specialized around particular functions, and the associated users and buyers. The new applications:
- Target end-to-end business processes that cross multiple business functions
- Integrate functions that were previously supported by independent generic applications (such as collaboration or business intelligence) within a unified process support
- Cross user domains, often including inter-enterprise boundaries
- May be delivered by a combination of systems internal to the enterprise and externally hosted."
(Gartner Research, "The New Applications -- Composite, Collaborative and Content-Centric," presentation by Simon Hayward, given at Gartner Symposium/ITXpo 2003, March 23-27, 2003.)
Similarly, Forrester Research defines composite applications as: "Applications that dynamically combine and connect functionality and data from heterogeneous applications to support cross-function or multi-organization business processes." (Charles Homs, Composite Apps Reshape Enterprise Software, Forrester Research, December 5, 2002.)
Many organizations are attempting to build these composite applications from the ground up using software development tools, integration technologies, and other products and technologies from numerous vendors. This custom development approach often results in applications that have a higher cost to deploy and maintain, as they require significant additional development time and effort to modify or reuse legacy systems to meet future business requirements. Consequently, we believe there is a market need for composite application products that can reduce the time and costs to implement these applications while providing greater long-term flexibility to meet changing business requirements.
SEEC'S STRATEGY
Our objective is to become a leading worldwide provider of composite application solutions that allow companies to rapidly create cross-enterprise Web-based business processes that leverage their existing legacy systems, and that can be adapted easily to changing business requirements. The key elements of our strategy to achieve this objective are the following:
Establish Leadership in Composite Applications in Selected Vertical Markets. We intend to enhance and expand our composite application offerings for insurance and specific manufacturing sectors. This includes the enhancement of our underlying composite application technology as well as new development of customizable components addressing specific business processes in different vertical industries.
Enhance and Expand Leadership in Legacy Transformation Solutions. We intend to continue to enhance our offerings of solutions for legacy integration, legacy modernization and legacy transformation. This includes the enhancement of our core technologies, solution methodologies, and software products to provide additional automation, functionality and cost savings to our customers.
Strategic Account Focus. We are focusing our sales and marketing activities to penetrate the insurance market and specific manufacturing markets. We intend to develop solutions that solve specific business problems within these accounts and build a close working relationship with these companies. We believe that these efforts will lead to additional opportunities to provide enterprise solutions to these customers. Also, our customer base may be expanded through the acquisition of other operating companies that have concentration in specific vertical markets.
Leverage Channel Partners. We currently have relationships with service provider partners, which include system integrators and specialized consulting companies that utilize our products in delivering services to their customers. These partners purchase our products and also provide us access to their customer base and sales infrastructure to market our products and solutions. We also are expanding our relationship with independent software vendors (ISVs), and plan to enter into reseller agreements and OEM (original equipment manufacturing) licensing agreements allowing OEM partners to incorporate our products in their solutions, to expand our distribution. We are also seeking distributors in territories where we do not have sales operations.
Provide Solutions with Broad Market Appeal. We developed our enterprise solutions to be cost effective, flexible and scalable. As a result, we believe that our enterprise solutions appeal to a wide range of large organizations with a variety of requirements, and to a broad range of third-party service providers and independent software vendors. Our vertical solutions address problems that are common to a broad range of companies within those sectors. These solutions are modular and can be introduced in a phased manner.
SEEC SOFTWARE SOLUTIONS
SEEC currently offers two related lines of software solutions based on our core technologies, established methodologies, and services. SEEC Mosaic Studio -- our primary product -- is the central element of our legacy transformation solutions for adapting mission-critical software applications written in COBOL and other older programming languages to function in a flexible composite application architecture. The Asera product line consists of composite application solutions that enable flexible, efficient new Web-based business capabilities by integrating with existing information systems using SEEC's core technologies.
SEEC Mosaic Studio Solutions focus on reusing existing applications and information systems in building composite applications that combine the best of Web technologies and legacy applications, including the business
rules that provide differentiation and competitive advantage to companies. The solutions address all aspects of legacy transformation and also improve the efficiency and effectiveness of the development and maintenance of mission-critical legacy applications. The three solutions we currently offer are:
- Legacy Modernization. Most large companies rely on mainframe-based legacy systems that provide continuing business value, but which are costly to maintain, and which cannot be easily adapted to support new Web-centric business processes. The root of the problem is that the essential decision-making and computation logic (i.e., "business rules") that govern key processes are buried in complex, redundant software code that is poorly understood, difficult to maintain, and costly to change. Also, the information technology ("IT") staffs that built many of the legacy applications are aging or retiring, taking their skills and system knowledge with them. SEEC's legacy modernization solution provides application understanding and business rule mining capabilities that we believe reduce the costs of managing, maintaining and updating legacy applications. Our solutions are designed to help information technology organizations make better use of scarce development resources and deliver new business capabilities faster and at lower cost. In customer projects, SEEC Mosaic Studio as:
- Reduced application analysis and rule mining time up to 90 percent.
- Reduced rewrite costs up to 60 percent.
- Improved IT productivity by 50 percent or more.
- Legacy Integration. As companies implement new Web-based business processes, they often need to access information that resides in their current legacy applications in new Web-based systems. In some cases, companies are making legacy applications directly available to customers or business users via the Web by replacing traditional text-based user interfaces with new Web user interfaces ("Web-enablement"). In other situations, companies need to integrate information or transaction capabilities of their legacy systems with new software packages or Web-based applications. Using SEEC's legacy integration solution, companies can quickly Web-enable legacy applications or generate integration components providing access to legacy databases, transactions and applications without significantly changing the back-end systems. The SEEC solution are intended to provide a range of integration and Web-enablement alternatives that can be delivered quickly, providing a faster return on investment for customers.
- Legacy Transformation. In many cases, companies need to automate key business processes by moving selected legacy applications to a more modern and flexible Web-based system. The traditional approach is to replace an entire legacy system by buying a new software package or re-writing the existing system, both of which are costly, time-consuming and risky. Using the SEEC solution for legacy transformation, companies can selectively transform parts of their legacy systems by identifying and extracting business rules and automating the development of new application components that incorporate these business rules. The resulting legacy software components can be used in new composite applications spanning Web front-ends, Web application servers and mainframe databases and applications. Because the SEEC solution permits the incremental transformation of systems, it provides a lower cost and risk than wholesale transformation.
SEEC Asera Solutions focus on rapidly creating composite application systems for insurance and manufacturing companies that enable flexible and efficient new Web-based business capabilities by integrating with existing information systems. The two solutions we currently offer are:
- Value Chain Solution for Manufacturing. Large manufacturing companies typically have complex organizational structures with independent business units that have overlapping customer bases, suppliers and distributors but separate processes for sales, service, purchasing and supply management. These redundant processes drive up business costs and prevent companies from maximizing sales and revenue opportunities with their customers. The Asera Value Chain solutions provide configurable composite applications that streamline operations and enable new Web-centric, cross-enterprise business processes. These streamlined operations and new processes are based on immediate, consolidated access to a broad range of internal and external information, efficient communication, and closer collaboration across the value chain of customers, previously disconnected business units, external business partners and suppliers. These new business processes improve efficiency, reduce costs, increase customer loyalty, and help drive increased sales.
- Integrated Customer Service for Insurance. Inefficient sales and service processes represent a huge cost for many insurance carriers. The primary difficulty lies in manual, time-consuming transaction processes and disconnected service channels (call centers, agents, Web sites) across different product lines. Asera Insurance automates and streamlines key sales and policyholder services across product lines and multiple service channels, including call centers, agents, distributors, and direct Web-to-consumer. We believe that, with Asera Insurance, carriers can consolidate and automate key processes and deliver self-service capabilities for agents and customers in less than six months without changing their existing policy, claims or other existing information systems.
SEEC SOFTWARE PRODUCTS
SEEC Mosaic Products. The SEEC Mosaic product line is based on our core technologies for analyzing, maintaining, integrating and transforming host-based computer systems. It supports front-end Web applications and middleware that integrates existing host-based systems with a component-based Web architecture. We believe that our middleware software is unique in that it can be applied to generate Web interfaces or provide the middleware between existing Web front-ends and a host application. Our products have been designed to be easy to use and learn, allowing customers to rapidly train technical personnel and reduce training costs. Our products operate in a PC-based environment and are available in versions for Windows 95(R), Windows 98(R), and Windows NT(R).
- SEEC Mosaic Studio is a suite of application analysis and development tools used to analyze and extract business rules from current business systems and to automate many of the procedures required for developing component-based applications that integrate with existing applications and databases. It is used to analyze and modify mainframe source code that is downloaded to a PC-based environment and stored in an application dictionary for the performance of development functions. The application dictionary contains all of the key design elements of a legacy application, including source code, database definitions, screen definitions and job control language. Our software utilizes proprietary parsing, data flow, and program slicing technology to create the relationships between databases and source code, which enables the documentation and understanding of a legacy COBOL system. Information about the flow of control among programs is also stored in the application dictionary, providing further system understanding by enabling users to group items by business function. Our software also utilizes proprietary text-scanning technology to identify data fields and the impacted lines of code for a wide variety of non-COBOL languages. The software products described below are the components of SEEC Mosaic Studio. These products are built on SEEC's core source code analysis technology, and were sold and distributed in various combinations and as stand-alone products prior to fiscal 2001.
- The Application Analyst module of SEEC Mosaic Studio facilitates understanding of the business intent of complex COBOL applications for the planning and implementation of legacy transformation projects. This is accomplished by mining business rules embedded in legacy applications, generating system documentation and graphical views illustrating the structure, function, and interrelationships among application elements, and segmenting applications into logical work units for project planning and transformation purposes. Application Analyst features an object-oriented interface that allows drill-down property dialogs and context menus, business rule mining, data model displays for database definitions, graphical CRUD (Create, Read, Update, Delete) display, and CICS (Customer Information Control System) control flow display. Other features include program source display and annotation facilities, structure chart and logic displays, selective views, code walkthroughs, cross-reference displays, and display screens.
- The SEEC RuleBase is a repository for business rules that have been extracted from legacy applications using the Application Analyst module of SEEC Mosaic Studio. Using a simple and intuitive interface, the SEEC RuleBase allows analysts to manage and manipulate the rules. It provides anchors to the relevant application components so that changes to the rules can be quickly translated into application changes. In addition to mined legacy business rules, the SEEC RuleBase can also be used to store domain rules created by business analysts. The SEEC RuleBase is integrated with the Application Analyst and Component Designer modules of SEEC Mosaic Studio in order to provide traceability from specification to implementation and to perform gap analysis between existing systems and new systems or industry models.
- SEEC Mosaic Studio's Component Designer module is used in conjunction with the Application Analyst to recover the data model of COBOL applications using standard Object Modeling Techniques (OMT). The data
model is populated with legacy entities, attributes, and methods linked to the physical definitions of the items in the Application Dictionary. Component Designer features object recovery from existing COBOL applications and model validation. Component Designer provides links between each method and the method implementation, and enables the addition of new properties for the attributes of a class and association, such as uniqueness and value constraints. It can generate DDL (Data Definition Language) for the object model and export data to Rational Rose(TM) or ERWin(TM).
- SEEC Mosaic Studio includes a Component Builder that automatically creates SEEC DataBeans(R) (EJB (Enterprise Java Beans) and also non-EJB components) that enable access and manipulation of existing databases (DB2, IMS, VSAM, Oracle, SQL Server). Each SEEC DataBean corresponds to an entity or a group of related entities as a composite DataBean in the legacy data model built with the Application Designer feature. SEEC DataBeans are deployed on a SEEC Mosaic Server on any J2EE (Java 2 Enterprise Edition) application server (such as BEA WebLogic(TM) or IBM WebSphere(TM)). The Component Builder enables interactive creation of database definitions through import from the Application Analyst and Application Designer, or by importing schema definitions from relational database systems. SEEC DataBeans are intended to allow for access and manipulation of the legacy database and provide a security framework to govern access and transaction control. The Component Builder is designed to be deployed on any J2EE-compliant application server, which provides component management and organization, and additional security.
- The Component Builder-Host module of SEEC Mosaic Studio is used to rapidly connect existing host applications to the Web and to new component-based systems. It includes an easy-to-use development environment for generating thin clients, Web services and integration components (programmatic components) corresponding to existing business processes/functions and mapping to legacy applications. The Web clients and integration components use TN3270, TN3270-E, TN5250 and Telnet protocols to provide access to screen-based legacy applications residing on mainframe, midrange and UNIX-based computer systems. The Component Builder -- Host is also used to generate thin-clients for Web-enabling legacy transactions and for providing active integration between a legacy transaction and Web applications, without changing the legacy applications. The integration components can be deployed in a Microsoft (COM/C++) or J2EE environment (JavaBean/EJB).
- SEEC Mosaic Server. SEEC Mosaic Server is the deployment architecture for thin clients and components developed using SEEC Mosaic Studio. SEEC Mosaic Server consists of enabling runtime software and the license to deploy SEEC Mosaic Clients or SEEC DataBeans developed with SEEC Mosaic Studio. SEEC Mosaic Server is available in three versions for deploying ASP/COM clients, which conform with the Microsoft COM standard, JSP clients, and EJB components. SEEC Mosaic Server runs in conjunction with popular Web or Java application server software on computers using Windows NT(TM), Sun Solaris(TM), and many other UNIX operating systems.
SEEC Asera Products. The Asera product line is based on technology for developing flexible Web-based composite applications supporting new cross-enterprise business processes that integrate with and reuse existing back-end information systems and applications. It includes configurable software components (business components) for specific functions in insurance and manufacturing, a visual development environment for rapidly designing and developing Web-based composite applications, and a software server for deploying the Asera applications on industry-standard Web application servers such as IBM WebSphere(TM) or BEA Weblogic(TM). Applications built using the Asera products are highly configurable and adaptable, and are constructed to connect with other software applications or systems using Java, XML (eXtensible Markup Language) or Web services standards that are widely in use today. Unlike traditional software applications in which each element of the application system is tightly integrated with the others based on specific software protocols, Asera applications are based on a services-based architecture in which the application elements are loosely integrated based on open Web services standards. The modular, flexible design is intended to allow customers to implement Asera applications quickly, providing faster time-to-value.
- Asera Commerce is a suite of business components for creating an automated Web-based order management system across business units, product lines and sales channels, commonly referred to as distributed order management. We believe it allows manufacturers to create a unified, streamlined order entry process that eliminates redundant order processes for different products, to rapidly consolidate product information in a
unified online product catalog, to deliver personalized product information and sales offers to customers, and to give customers immediate, real-time product availability, pricing, and other sales, delivery and product-related information. Asera Commerce is used with the other Asera products and third party software to deliver a complete value chain solution for manufacturing. Additional Asera Commerce components are under development and are expected to be introduced in fiscal 2004.
- Asera Supply Chain is a suite of business components for creating an automated Web-based supply management system across multiple internal business units and locations, and outside suppliers and trading partners. We believe it allows manufacturers to gain a more accurate view of inventory across their supply network, to immediately detect exceptions in parts or components availability that could affect production and delivery schedules, and to establish processes with suppliers for addressing exceptions as they occur. Asera Supply Chain is used with the other Asera products and third party software to deliver a complete distributed order management solution. Additional Asera Supply Chain components are under development and are expected to be introduced in fiscal 2004.
- Asera Insurance is a suite of business components for creating an automated Web-based customer service system across insurance product lines and sales and service channels (agents, Web, call centers). We believe it allows insurance carriers to automate time-consuming manual processes (e.g. name and address changes, policy changes, claims and billing status), to eliminate redundant processes for different products, to rapidly consolidate customer and policy information across product lines, and to deliver personalized information and sales offers to customers, agents and service representatives. Asera Insurance is used with other Asera products and third party software to deliver a complete integrated customer service solution for insurance. The Asera Insurance components are under development, and are scheduled for release in July 2003.
- Asera Studio is a visual software development environment for rapidly creating Web-based applications that combine new business components with existing legacy applications in a configurable, adaptable composite application system. Asera Studio is used to customize the Asera business components and to build new business components and applications. It is designed to reduce the amount of software coding that is required to build applications, and makes it easier to change the applications or extend them to new users. It includes tools for developing a Web portal framework that allows different groups of users to access information and business processes based on pre-defined rules (entitlement, personalization); tools for defining application workflows that combine functionality or data from new applications or external legacy systems; and tools for creating a business object model and integration framework that specifies how applications and data can be accessed within the system, making it easier to add new applications, or to change the legacy applications without impacting the Asera applications. Applications developed with Asera Studio are deployed on Asera Server, a deployment environment that runs on industry standard Web application servers from vendors such as IBM and BEA Systems.
- Asera Server is the deployment architecture for Asera business components and applications developed using Asera Studio. It consists of enabling runtime software and services for running the Asera applications on Web application servers that comply with the Java2 Enterprise Edition (J2EE) standard, such as BEA WebLogic and IBM WebSphere.
TRAINING AND SERVICES
We offer services and training as an integral part of our solutions. Services are typically provided in support of our product sales to help customers more effectively use our software products, or to deploy and customize our solutions and products at customer locations. Engagements may include end-to-end project services or project management services, delivered either at the customer location or off-site by project consultants based in our technical resource centers in Pittsburgh, PA; Redwood Shores, CA; London, England; and Hyderabad, India; depending upon the nature of the project and customer requirements. The service engagements may be offered on a fixed-price or on a time-and-materials basis.
We may, from time to time, use subcontractors to provide some services to our customers. The use of subcontractors depends on specific services engagement requirements and the availability or area of expertise of
our professional consultants. Subcontractors typically supplement our internal staff on services engagements and are supervised and paid by us.
The following services are provided in support of SEEC Mosaic Studio:
- Legacy Understanding and Business Rule Mining. Customers employ our legacy understanding and business rule mining capabilities to improve legacy application flexibility and reduce ongoing application maintenance costs, to harmonize and/or integrate multiple systems, and to assess current systems prior to replacement in order to identify gaps in functionality between existing systems and packages. In many cases, our consultants will help customers use SEEC Mosaic Studio to reverse-engineer the data and process models that underlie the customer's legacy code, identify and extract all relevant business rules associated with the applications, and generate comprehensive system documentation, including graphical views of data dependencies and interrelationships, and a record of current business logic traceable to specific lines of code in the system. This business rule documentation is designed to become a vital corporate asset in itself, and can be used in new system development, migration to ERP (Enterprise Resource Planning), CRM (Customer Relationship Management) or other products, or in revitalizing an existing system. The recovered data model and business rules are in a format that can be exported and reused in a number of different forward-engineering tools. This information can also be used with SEEC Mosaic Studio to more efficiently maintain and enhance current mainframe applications, before or while they are extended or transformed.
- Web-Enablement and Legacy Integration Using Integration Components and Web Services. Using SEEC Mosaic Studio, our services teams can Web-enable current screen-based applications or build integration components and Web services that reuse legacy business rules, transactions and data in new component or Web services-based applications or business processes. (1) Web-enablement -- When time is of the essence, our consultants can build a thin-client Web interface to legacy applications and reengineer the front-end workflow without touching the legacy code. The Web clients can access the legacy system via popular Web servers running on Windows NT or a variety of UNIX systems. (2) Legacy Integration -- Many organizations need to give users access to multiple back-end applications, databases and transactions as part of a larger Web portal, business process automation or integration project. Our consultants can plan, develop and deploy SEEC integration components that provide access to the legacy systems. These components can be delivered as Web services, providing a highly reusable interface between the legacy database or application and any new component-based application, software package, or EAI (Enterprise Application Integration) product.
- Legacy Software Components and Web Services Development. For customers that need to redeploy key business functions in a more flexible application architecture, our services teams can use SEEC Mosaic Studio to document the customer's existing system, including the data and process models, extract relevant business rules from the legacy code, and redevelop selected system elements in an EJB-based component architecture that integrates with remaining back-end applications and/or data using SEEC integration components. Rather than replacing the customer's existing system in whole, our approach focuses on building business components that re-implement valuable business and database logic in a more flexible and scalable system with less risk and at a fraction of the time and cost of a wholesale package replacement or custom redevelopment project. The process is applicable to migrating a single program or application or an entire legacy system, including databases, to a new Web-centric architecture.
Training Services. We offer a variety of courses to train customers in applying SEEC's software products and methodologies, whether the goal is to implement new value chain applications using the Asera products, or to quickly Web-enable a single legacy application using SEEC Mosaic products. Our training courses allow customers' application developers to achieve rapid component and thin-client application development and deployment using SEEC Mosaic Studio.
CUSTOMER SUPPORT AND MAINTENANCE
We offer customer support and maintenance for each of our products, which entitles the customer to receive technical support and advice, including problem resolution services, installation assistance, error corrections and
any product upgrades and enhancements released during the maintenance contract period. Our standard license agreement does not require us to provide maintenance for any period of time and does not provide express or implied warranties for our product software. Maintenance and support services are provided primarily by telephone or by e-mail from our offices in or near Pittsburgh, PA; Redwood Shores, CA; London, England; and Hyderabad, India.
CUSTOMERS
Our products and services are used by information systems departments of Fortune 1000 companies and similarly-sized business and governmental organizations, and by third-party service providers. Following is a partial list of current significant customers to SEEC, in terms of revenues:
Historically, a relatively small number of customers have accounted for a significant percentage of our revenues. In fiscal 2003, Bankers Life and Casualty Company and DSM N.V. accounted for 26% and 11% of revenues, respectively, and four customers represented approximately 50% of our revenues. In fiscal 2002, Ohio Casualty Group and Computer Sciences Corporation accounted for 12% and 11% of sales, respectively, and six customers represented approximately 50% of our revenues. In fiscal 2001, while no single customer accounted for more than 10% of our revenues, ten customers represented approximately 50% of our revenues. For a breakdown of our revenues on the basis of geographic markets, see Note 6 to the Consolidated Financial Statements.
ACQUISITIONS
On January 6, 2003, Asera, Inc., a Delaware corporation ("Asera"), transferred all of its assets to Sherwood Partners, Inc. ("Sherwood") in an assignment for the benefit of creditors transaction. Pursuant to an Asset Purchase Agreement dated January 8, 2003, we purchased from Sherwood the following assets it had acquired from Asera (the "Asset Acquisition"):
(i) All cash and accounts receivable in excess of $650,000 in the aggregate;
(ii) All equipment, machinery, computer hardware and software, materials, prototypes, tools, supplies, furniture and fixtures;
(iii) All raw materials, work-in-process and finished goods inventory;
(iv) All intellectual property;
(v) Certain customer lists;
(vi) Certain of Asera's contracts; and
(viii) All advertising, marketing and promotional materials.
In connection with the Asset Acquisition, we did not acquire from Sherwood certain of the assets of Asera including the capital stock or assets of Asera's wholly-owned subsidiaries, Asera Ltd. (UK), Asera GmbH (Germany) and Asera India (India), or any real property leases to which Asera or any of its subsidiaries is a party.
Prior to the assignment for the benefit of creditors, Asera had developed and marketed order management and supply chain management solutions and a software platform for building flexible, composite applications that leverage existing enterprise software systems including Enterprise Resource Planning ("ERP") and other back-end packages.
The Asera Asset Acquisition is intended to enhance our potential to realize improved long-term operating results and achieve a stronger financial position, primarily through increased revenue opportunities. In addition to expanding our customer base, thereby providing cross-selling opportunities with combined and comprehensive product offerings, the acquisition is intended to broaden our industry focus. The acquired product offerings have been marketed to resource industries (chemicals, energy, metals, etc.) and high technology manufacturing companies.
The aggregate purchase of the Asera Asset Acquisition was approximately $6,500,000, consisting primarily of the following $3,684,000 of assumed indebtedness:
(a) $1,065,000 of the secured indebtedness of Asera owing to Venture Lending & Leasing III, Inc., Third Coast Capital, Venture Banking Group, GATX Ventures, Inc. and Heller Financial Leasing, Inc.;
(b) $506,000 of the secured indebtedness of Asera owing to Comdisco Ventures, Inc.; and
(c) $2,113,000 of the secured indebtedness of Asera owing to KPCB Holdings, Inc., as representative and collateral agent ("KPCB"), and certain other lenders (the "Bridge Lenders").
The aggregate purchase also includes $1,379,000 of deferred maintenance obligations assumed by us and approximately $1,232,000 of transaction costs (audit, legal, appraisal, etc.). The deferred maintenance represents obligations to provide support and software enhancements to certain customers over the terms of individual maintenance contracts, for which the customers had paid Asera prior to the Asset Acquisition. We will recognize the deferred revenue ratably over the remaining terms of the contracts. We also agreed to deliver from time to time, and in its sole and absolute discretion, cash to Sherwood for the purpose of paying certain unsecured creditors of Asera. Under no circumstances would the amount to be paid by us under this agreement exceed $500,000. The actual amount paid under this provision during the year ended March 31, 2003 was $107,150.
As further consideration for the purchased assets, we agreed to issue to Sherwood, for the benefit of unsecured creditors of Asera, a warrant to purchase an aggregate of 20,000 shares of our common stock. The issuance of the warrant is subject to the satisfaction of certain specified conditions including, without limitation, the approval of our shareholders. We have agreed to use our best efforts to register the shares for resale under the Securities Act.
SALES, MARKETING AND DISTRIBUTION
We market and sell our products and services directly through our direct sales force and indirectly through our partners. To support our sales efforts, we utilize media advertising and direct mail campaigns supported by telemarketing and promotion through trade articles and trade shows. In addition, we enter into partnering arrangements with companies such as Satyam Computer Services, Ltd. and Infosys Technologies, Ltd. These partners utilize our solutions and software products in connection with their system transformation engagements. We have granted several organizations the non-exclusive right to market our products. In North and South 10
America, we sell and support our products and services from our Pittsburgh, PA headquarters, our Redwood Shores, CA facility, and regional sales offices. Sales and support services are provided in Europe through our wholly-owned subsidiary, SEEC Europe Limited ("SEEC Europe"), based in London, England. We sell and support our products and services in the Asian and Pacific Rim markets through our wholly-owned subsidiary, SEEC Technologies Asia Private Limited ("SEEC Asia"), based in Hyderabad, India.
As of March 31, 2003, we had 23 employees engaged in sales and marketing. Sales to customers outside of the United States represented 34%, 32%, and 32% of our total revenues in fiscal 2003, 2002, and 2001, respectively.
We intend to continue to expand our sales and marketing efforts by hiring additional sales and marketing personnel and by entering into additional arrangements with partners and distributors. We also intend to enter into additional distribution, license and/or marketing agreements for our software products, particularly with service providers, systems integrators, and e-business infrastructure vendors. We are focused on leveraging our existing customer base to cross-sell other enterprise solutions and software products.
COMPETITION
The market for our enterprise solutions and software products is intensely competitive and is characterized by rapid change in technology and user needs and by the frequent introduction of new products. Our principal competitors in the legacy evolution solutions market include IBM, Micro Focus International Ltd., Netron Inc. and Relativity Technologies, Inc. In the market for Asera Insurance and Value Chain solutions, competitors include SAP AG, DWL Incorporated, HAHT Commerce, Inc., and Click Commerce, Inc.
We believe that the principal factors affecting competition in our markets include product performance and reliability, product functionality, ease of use, training, ability to respond to changing customer needs, quality of support, and price. We believe that we compete favorably in this market based on these factors. However, in particular cases, our competitors may offer enterprise solutions with functionality that is sought by our prospective customers and which differs from that offered by us. Several of our customers have also in the past, and may in the future, distribute products in pilot programs at below-market prices or even at no cost.
Additionally, many of our competitors are more established, benefit from greater name recognition and have significantly greater financial, technical and marketing resources and larger installed customer bases than us. We may not be able to compete successfully against current and future competitors. In addition, our current and future competitors may develop products comparable or superior to those developed by us or adapt more quickly than us to new technologies, evolving industry standards or customer requirements. Increased competition could result in price reductions, reduced margins and loss of market share, any or all of which could have a material adverse effect on our business, financial condition, results of operations and prospects.
Other than technical expertise, there are no significant proprietary or other barriers to entry that could prevent potential competitors from developing or acquiring similar software products or providing competing solutions in the market.
RESEARCH AND DEVELOPMENT
We have historically developed our software solutions both independently, through our research and development team, and through the acquisition or licensing of technology such as our recent acquisition of certain assets of Asera.
We intend to continue to enhance our current products and to develop, acquire, or license new products or technology to keep pace with evolving industry standards and technological developments, and to provide additional functionality to address changing customer needs. This may require, among other things, that we build interfaces with third-party products.
As of March 31, 2003, we had 46 employees engaged in product development, including 23 employees of SEEC Asia. During fiscal 2003, 2002 and 2001, research and development expenditures were $1,824,000,
$1,633,000, and $1,799,000, respectively. We anticipate that we will continue to commit substantial resources to research and development in the future.
INTELLECTUAL PROPERTY
We rely on a combination of contractual provisions and copyright, trade secret and trademark laws to establish and protect our rights in our software products and proprietary technology. We protect the source code version of our products as a trade secret and as an unpublished copyrighted work. Despite these precautions, it may be possible for unauthorized parties to copy certain portions of our products, to reverse-engineer or otherwise obtain and use information that we regard as proprietary. We have no patents, and existing copyright and trade secret laws offer only limited protection. Certain provisions of our license and distribution agreements, including provisions protecting against unauthorized use, duplication, transfer and disclosure, may be unenforceable under the laws of certain jurisdictions, and we are sometimes required to negotiate limits on these provisions. In addition, the laws of some foreign countries do not protect our proprietary rights to the same extent as do the laws of the United States. We have been and may be required from time to time to enter into source code escrow agreements with certain customers and distributors, providing for release of source code in the event that we breach our support and maintenance obligations, file bankruptcy, or cease doing business.
Our competitive position may be affected by our ability to protect our proprietary information. However, because the software industry is characterized by rapid technological change, we believe that patent, trademark, copyright, trade secret and other legal protections are less significant to our success than other factors such as the knowledge, ability and experience of our personnel, new product and service development, frequent production enhancements, ongoing customer service, and product support.
While we have no knowledge that we are infringing the proprietary rights of any third party, there can be no assurance that such claims will not be asserted in the future with respect to existing or future products. Any such assertion by a third party could require us to pay royalties, to participate in costly litigation, and to defend licensees in any such suit pursuant to indemnification agreements, or to refrain from selling an alleged infringing product or service. See "Factors that May Affect Future Results -- Dependence on Proprietary Rights."
SEEC Application Analyst(R), SEEC Application Designer(R), SEEC DataBean(R) and SEEC's name and logo are registered marks of the Company. Applications for U.S. and certain foreign registrations of the marks SEEC Mosaic(TM), and Asera(TM) are pending.
EMPLOYEES
As of March 31, 2003, we had 122 employees worldwide, including 23 in sales and marketing, 46 in research and development, 12 in customer support, 25 in professional services and 16 in corporate operations and administration. Seventy-three employees are located in the United States, and 36 and 13 employees are located in India and the U.K., respectively. Our continued success will depend, in part, upon our ability to hire and retain key senior management and skilled technical, professional services and sales and marketing personnel. The market for qualified personnel has historically been, and we expect that it will continue to be, intensely competitive. None of our employees is represented by a labor union or is subject to a collective bargaining agreement. We have not experienced any work stoppages and consider our relations with our employees to be good.
WEB SITE POSTINGS
We make our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed with or furnished to the U.S. Securities and Exchange Commission available to the public free of charge through our website as soon as reasonably practicable after making such filings. Our website can be accessed at the following address: www.seec.com. The information found on our website or that may be accessed through our website is not a part of this report and is not incorporated herein by this reference.
FACTORS THAT MAY AFFECT FUTURE RESULTS
Set forth below and elsewhere in this annual report on Form 10-K and in other documents we file with the SEC are risks and uncertainties that could cause our actual results to differ materially from the results contemplated by the forward-looking statements contained in this annual report on Form 10-K.
OUR SUCCESS WILL DEPEND UPON OUR ABILITY TO SUCCESSFULLY MANAGE SIGNIFICANT CHANGES IN OUR BUSINESS.
Over the last two fiscal years, we have experienced significant changes in our business, including the development of new products and solutions, the targeting of new markets, significant fluctuation in our revenues and expenses and the contraction of our operations. In completing the Asera asset acquisition in January 2003, we have expanded our product and industry focus and, consequently, we expect these changes to be more pronounced. These changes have placed, and are expected to continue to place, significant demands on our management, operational and financial resources. If we fail to successfully manage these significant changes, or if such changes fail to result in increased sales of our products, our future revenue, net income and prospects for our business will be materially and adversely affected.
WE HAVE EXPERIENCED NET LOSSES IN THE PAST, AND WE MAY BE UNABLE TO ACHIEVE OR MAINTAIN PROFITABILITY IN THE FUTURE.
We incurred a net loss of $4.2 million for the year ended March 31, 2003, and we have incurred net losses in each of the past 17 quarters. In addition, since Asera began operations, it incurred substantial net losses. As a result of ongoing operating losses, Asera had an accumulated deficit of $206 million prior to the Asera asset acquisition. We expect to incur significant expenses in connection with the integration of Asera's assets into our business and the continued expansion of this business. As a result, the business will need to generate significant revenues to achieve and maintain profitability. We cannot predict whether our business will achieve or sustain profitability in any future period.
WE MAY EXPERIENCE A SHORTFALL IN REVENUE IN ANY GIVEN QUARTER, WHICH COULD CAUSE THE MARKET PRICE OF OUR SECURITIES TO DECLINE.
Our revenue is difficult to forecast and is likely to fluctuate from quarter to quarter due to many factors outside of our control. We also believe that period-to-period comparisons of our quarterly operating results are not necessarily meaningful and that, as a result, these comparisons should not be relied upon as indications of our future performance. Any significant revenue shortfall could cause the market price of our securities to decline. Factors that could affect our revenue include, but are not limited to:
- the budgeting and purchasing practices of our customers, which affect the volume and timing of product orders and solution engagements that we receive;
- the timing or the announcement and introduction of new products and product enhancements by us and our competitors;
- market acceptance of new products;
- the mix of direct and indirect sales;
- the mix of license fee and services revenues;
- the mix of training and consulting services within services revenues;
- the number and timing of new hires;
- the loss of any key sales, marketing or professional services personnel;
- the length of our sales cycles;
- competitive conditions in the industry; and
- general economic and political conditions.
WE DERIVE A SIGNIFICANT AMOUNT OF REVENUE FROM ONLY A FEW CUSTOMERS, AND THE LOSS OF OR REDUCTION IN THE SALES TO ANY OF THESE CUSTOMERS COULD MATERIALLY AND ADVERSELY AFFECT OUR RESULTS OF OPERATIONS.
In fiscal 2003, we had two customers accounting for 26% and 11% of revenues, and four customers representing nearly 50% of our revenues. If any of these customers were to reduce purchases of our products and services, our revenues would be adversely affected unless we were able to substantially increase sales to other customers. Some of these customers have recently announced that their own business is slowing, which could adversely affect their demand for our products and services. We do not have a contract with any of these customers that requires the customer to purchase any specified number of software licenses from us. Therefore, we cannot be sure that customers will continue to purchase our products or services at current levels. See Note 6 to the Consolidated Financial Statements.
OUR BUSINESS IS CHARACTERIZED BY RELATIVELY LARGE PROJECTS. THE FAILURE TO RECEIVE ANY LARGE ORDERS IN A GIVEN QUARTER COULD MATERIALLY AND ADVERSELY AFFECT OUR OPERATING RESULTS FOR THAT QUARTER, WHICH COULD CAUSE THE MARKET PRICE OF OUR SECURITIES TO DECLINE.
As is common for the software industry as a whole, we have typically recognized a significant portion of our license revenues in the last month of a quarter, with these revenues frequently concentrated in the last week of a quarter, due to historical trends in which software customers make purchases. As a result, license fee revenue in any quarter is substantially dependent on orders booked and delivered in the last month and last week of that quarter. Further, our business is characterized by significant customer concentration and relatively large projects. We have historically operated with little or no backlog and, as a result, our revenues for a particular quarter are generally dependent on orders received during that quarter, including large orders. The failure to receive a large order in a given quarter could materially and adversely affect our operating results for that quarter. Our expenses are largely based upon anticipated revenue levels and planned projects, and in the short term, it is unlikely that we would be able to adjust spending to compensate for any unexpected shortfall in revenues. Accordingly, the timing of product deliveries or delivery of services, or the level of progress on certain customer solution engagements, could cause variations in operating results from period to period and could result in quarterly losses if software deliveries are not made, if services delivery is delayed, or if sufficient progress is not achieved on customer solution engagements within the quarter anticipated. Due to the foregoing factors, our operating results in some future quarters could be below the expectations of investors. In the event that operating results are below expectations, operating results or financial condition, the price of our common stock would likely be materially and adversely affected.
CURRENT AND FUTURE DEMAND FOR OUR PRODUCTS AND SOLUTIONS IS UNCERTAIN, AND THE FAILURE TO ACHIEVE GROWTH IN SUCH DEMAND WILL HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS AND RESULTS OF OPERATIONS.
We have focused a significant portion of our business strategy on the development, marketing and sale of products and solutions to the insurance industry. Since the Asera asset acquisition, we have expanded these efforts to include the manufacturing and process industries. Although we believe that the markets for our products and solutions will grow, there can be no assurance that these markets will develop to the extent that we anticipate. The lack of increased demand for our products and solutions or an increase in competition in the market for our products and solutions would have a material adverse effect on our operating results and financial condition In order to achieve sustained growth, we must successfully market our new products and solutions. There can be no assurance that we will be successful in generating revenues sufficient to achieve profitable operations or sustained profitability.
WE MAY BE UNABLE TO ADDRESS TECHNOLOGICAL CHANGES AND CUSTOMER REQUIREMENTS OR DEVELOP NEW PRODUCTS AND SOLUTIONS, WHICH COULD ADVERSELY AFFECT OUR ABILITY TO SUCCESSFULLY COMPETE.
The markets for our enterprise solutions are susceptible to rapid changes due to technology innovation, evolving industry standards, changes in customer needs and frequent new product introductions. Our future success will depend, in large part, on our ability to enhance our current products and develop or acquire new products to keep pace with the constantly evolving standards and technological developments of the software industry, and on our ability to provide additional functionality to address changing customer needs. We will need 14
to use leading technologies effectively, continue to develop our technical expertise and enhance our existing products or introduce new products on a timely basis to compete successfully in these markets. We may not be successful in achieving these business requirements. In addition, we cannot assure you that such products or enhancements will meet the requirements of the marketplace or achieve market acceptance. Further, there can be no assurance that new technologies will not be developed by our competitors or other third parties that render our products and solutions obsolete.
TO BE SUCCESSFUL WE MUST EFFECTIVELY COMPETE IN AN INTENSELY COMPETITIVE MARKET.
The market for our software products and solutions, including the additional products and solutions acquired in the Asera asset acquisition, is intensely competitive and is characterized by rapid change in technology and user needs and the frequent introduction of new products and solutions. Many of our existing competitors are more established, benefit from greater name recognition, have a larger installed customer base and have substantially greater financial, technical and marketing resources than we do. In addition, the companies with whom we have strategic relationships may elect to develop products or services which compete with our products or services. We believe that the principal factors affecting competition in our markets include product performance and reliability, product functionality, ease of use, training, ability to respond to changing customer needs, quality of support, and price. Other than technical expertise, there are no significant proprietary or other barriers to entry that could keep potential competitors from developing or acquiring similar products or providing competing solutions in our market. Growing competition may result in reduced revenues and gross margins and loss of market share, any one of which could have a material adverse effect on our business, financial condition and results of operations.
IF WE ARE UNABLE TO SUCCESSFULLY INTEGRATE ASERA'S ASSETS WITH OUR BUSINESS, WE MAY NOT REALIZE THE FINANCIAL AND STRATEGIC GOALS THAT WERE CONTEMPLATED AT THE TIME OF THAT TRANSACTION.
We may not be successful in integrating the assets and operations of Asera that we acquired in the Asera asset acquisition with our operations. Integrating these operations and personnel with our own will be a complex process. We must successfully integrate services delivery, sales and marketing, research and development, administration, customer service, and management information systems. In addition, we must retain key employees, customers and business partners of both companies. The difficulties, costs and delays that could be encountered may include:
- unanticipated issues in integrating the information, communications and other systems;
- negative impacts on employee morale and performance as a result of job changes and reassignments;
- difficulties integrating personnel with disparate business backgrounds and corporate cultures;
- difficulties attracting and retaining key personnel;
- loss of customers, including Asera customers;
- difficulties in incorporating acquired technologies and rights into products and services offerings;
- disruption of customer service;
- longer sales cycles and product implementations;
- unanticipated incompatibility of systems, procedures and operating methods; and
- unanticipated costs of terminating or relocating facilities and operations.
In addition to these risks, the attention and effort devoted to the integration of the two companies significantly diverts management's attention from other important issues, and could cause the disruption of, or a loss of momentum in, the activities of our business or the impairment of relationships with customers and business partners. If we are unsuccessful in addressing these risks, we will not realize the benefits expected from the Asera asset acquisition, which could cause our revenue and operating income to fluctuate and fail to meet expectations.
WE MAY LOSE KEY PERSONNEL, CUSTOMERS AND BUSINESS PARTNERS ACQUIRED IN THE ASERA ASSET ACQUISITION, WHICH COULD ADVERSELY IMPACT OUR BUSINESS, FINANCIAL RESULTS AND PROSPECTS.
One of the principal benefits which we anticipated in the Asera asset acquisition was the expanded customer and partner base. However, customers and partners of Asera may elect not to maintain business relationships with us. If we are unable to maintain these business relationships, we will not receive many of the expected benefits from the Asera asset acquisition, which will materially and adversely affect our business.
For example, in April 2003, one of Asera's customers and partners, E2open LLC, sued us in the United States District Court, Northern District of California asserting claims of misappropriation of trade secrets, common law misappropriation, conversion, unfair competition and declaratory relief based upon the allegation that SEEC wrongfully came into possession of certain design specifications belonging to E2open when SEEC acquired the Asera assets. E2open sought a preliminary injunction to enjoin SEEC from disclosing any of E2open's alleged trade secrets and to enjoin the sale of SEEC's supply chain management products that had been derived from E2open's alleged trade secret. E2open further claimed that all contracts between Asera and E2open were otherwise terminated. On June 17, 2003, the district court denied in part and granted in part E2open's motion. The court held that SEEC could not possess or disclose E2open's alleged trade secrets. However, the court denied the remainder of E2open's motion, ruling that SEEC was entitled to continue distributing its supply chain management product. In a separate action, on May 19, 2003, SEEC brought a claim before the American Arbitration Association against E2open for payments owed under the Software License Agreement that SEEC assumed from Asera. SEEC believes that the allegations against it are without merit and intends to defend the litigation and prosecute the arbitration vigorously. However, we cannot predict the ultimate outcome of these actions, and an adverse outcome to the litigation could have a material adverse effect on our business, operating results and financial condition. Even if SEEC is entirely successful in defending this lawsuit or prosecuting this arbitration, SEEC may incur significant legal expenses, and SEEC's management may expend significant time in the defense.
Another principal benefit of the Asera asset acquisition was the expanded sales, marketing and technical personnel of Asera, particularly Asera's direct sales force. We may be unable to successfully retain those Asera employees that we have sought to employ. For example, we were unsuccessful in retaining most of Asera's former sales force in the United Kingdom and are attempting to recruit replacement sales personnel. If we are unsuccessful in our efforts to timely recruit suitable replacements, our ability to generate revenues in the United Kingdom and the other geographic areas previously served by that sales force may be impaired.
WE MAY HAVE LIMITED RECOURSE AGAINST ASERA AND/OR SHERWOOD PARTNERS IN THE EVENT THAT THE ASSETS WE ACQUIRED ARE IMPAIRED.
Because the asset purchase agreement for the Asera asset acquisition was with Sherwood Partners, as an assignee for the benefit of Asera's creditors, rather than with Asera, we did not receive many of the protections customarily afforded acquirers in more typical asset purchase transactions. For example, since Sherwood Partners served solely in a fiduciary capacity for the Asera creditors, it had no experience with the assets, properties and business of Asera. Therefore, we received few representations and warranties from Sherwood Partners, and the Asera assets were conveyed to us on an "as is" basis (in other words, without warranties). In addition, we do not have contractual privity with Asera and therefore have no direct contractual recourse against Asera. We would therefore have limited or no recourse if any of the assets purchased in the Asera asset acquisition are impaired.
WE MAY BE FORCED TO REPAY THE BRIDGE DEBT WE ASSUMED IN CONNECTION WITH THE ASERA ASSET ACQUISITION, WHICH COULD ADVERSELY AFFECT OUR CASH POSITION.
As partial consideration for the Asera asset acquisition, we assumed approximately $2.1 million (plus accrued interest) of senior secured debt of Asera owed to Asera's bridge lenders, including KPCB Holdings, Inc. ("KPCB"). KPCB holds approximately 95% of the bridge debt. Pursuant to a consent and agreement dated January 8, 2003, we agreed with the bridge lenders that, subject to certain conditions, including the approval of our shareholders, all of the bridge debt (including accrued interest) would convert into (i) 1,646,129 shares of our common stock and (ii) the right to receive, under certain circumstances, an aggregate of $301,782 in cash. If such
shareholder approval is not obtained by August 15, 2003, the bridge indebtedness (including accrued interest of approximately $126,000 to that date) would become due and payable. Payment of the bridge debt in full would adversely affect our cash position.
A SIGNIFICANT NUMBER OF SHARES OF OUR COMMON STOCK MAY BE SOLD INTO THE MARKET IN THE NEAR FUTURE, WHICH COULD CAUSE THE MARKET PRICE OF OUR COMMON STOCK TO DROP SIGNIFICANTLY.
The combination of our recent issuances and proposed issuances of common stock and rights to acquire common stock, together with various registration rights we have granted, may cause a significant number of shares to be sold into the open market, which could cause downward pressure on our stock price.
KPCB AND ITS AFFILIATES HAVE, AND WILL CONTINUE TO HAVE, SIGNIFICANT INFLUENCE OVER OUR COMPANY, WHICH COULD HAVE THE EFFECT OF DELAYING, PREVENTING OR CAUSING A CHANGE OF CONTROL.
KPCB, together with its affiliates, holds approximately 1,205,354 shares of our common stock and is our single largest shareholder. Vinod Khosla, a member of our board of directors, is a partner of Kleiner Perkins Caufield & Byers, an affiliate of KPCB. We are currently seeking shareholder approval for the issuance of additional shares of our common stock upon conversion of certain bridge debt owing to certain bridge lenders, including KPCB, as well as the issuance of certain consulting warrants to KPCB (see Note 13 to the Consolidated Financial Statements). If these matters are approved by our shareholders and other conditions to these issuances are satisfied, KPCB (and its affiliates) would beneficially own upon conversion of the bridge debt 2,763,802 shares of our common stock. Based on the 7,319,992 shares of our common stock outstanding as of June 26, 2003, plus the shares issued to KPCB upon conversion of the bridge debt, this would represent approximately 30.8% of our common stock then outstanding. In addition, if the revenue targets contained in the consulting warrants are attained and KPCB (and its affiliates) elected to exercise all of these consulting warrants, KPCB (and its affiliates) could beneficially own up to 5,263,802 shares of our common stock, representing approximately 45.9% of our common stock then outstanding (including the shares issued in the bridge conversion and upon the full exercise of the consulting warrants). This existing and potential concentration of voting power held by KCPB could have the effect of delaying, preventing or causing a change in control. The interests of KPCB and its affiliates may also conflict with the interests of the other holders of our common stock.
WE MAY MAKE ADDITIONAL ACQUISITIONS, WHICH MAY PRESENT US WITH NEW AND SPECIAL RISKS, INCLUDING THE ASSUMPTION OF UNDISCLOSED LIABILITIES OF ANY ACQUIRED COMPANIES, THE FAILURE TO ACHIEVE ANTICIPATED BENEFITS SUCH AS COST SAVINGS AND SYNERGIES, AS WELL AS THE DIVERSION OF MANAGEMENT'S ATTENTION DURING THE ACQUISITION AND INTEGRATION PROCESS.
In addition to the Asera asset acquisition, we may acquire other businesses, products, and technologies to enhance and expand our line of enterprise solutions and to expand our customer base. We may be unable to identify, acquire, or profitably manage additional businesses or successfully integrate any acquired businesses without substantial expenses, delays, or other operational or financial problems. Acquisitions involve a number of special risks and factors, including increased competition for attractive acquisition candidates in our markets, difficulties with the technological enhancement and incorporation of acquired products into existing product lines and services, problems assimilating the operations and personnel of the acquired companies, failure to retain key personnel, adverse short-term effects on reported operating results, the amortization of acquired intangible assets, the assumption of undisclosed liabilities of any acquired companies and the failure to achieve anticipated benefits such as cost savings and synergies. Some or all of these special risks and factors could disrupt our ongoing business, distract management and employees, increase expenses and adversely affect our results of operations. Furthermore, we may incur indebtedness or issue equity securities to pay for any future acquisitions. The issuance of equity securities could be dilutive to our existing stockholders. In addition, the accounting treatment for any acquisition transaction may result in significant goodwill, which, if impaired, will negatively affect our consolidated results of operations.
OUR BUSINESS CREATES THE POTENTIAL FOR PRODUCT LIABILITY, WHICH MAY ULTIMATELY LEAD TO PROTRACTED AND EXPENSIVE LEGAL PROCEEDINGS.
Our software products and solutions are often utilized to perform reengineering functions on mission-critical components of our customers' information systems. The programs and data contained in these systems are often necessary for the continuation of the customer's business and are critical to the operations and financial performance of the customer. Any failure of these systems could have a material adverse effect upon our customers and could result in a claim for substantial damages against us, regardless of our responsibility for such failure. In connection with the license of our products and the sale of our services, we attempt to contractually limit our liability for damages arising from negligent acts, errors, mistakes or omissions. Despite this precaution, these limitations of liability may not be enforceable or may not otherwise protect us from liability for damages. Additionally, we maintain general liability insurance coverage with limits of $1 million per occurrence and $1 million aggregate coverage, and excess liability insurance coverage with limits of $6 million per occurrence and $6 million aggregate coverage. However, we can provide no assurance that this coverage will continue to be available on acceptable terms, or at all, or will be sufficient to cover one or more large claims. Alternatively, our insurers might disclaim coverage as to any future claim. The successful assertion of one or more large claims against us that exceed available insurance coverages, or changes in our insurance policies, such as premium increases or the imposition of large deductible or co-insurance requirements, could materially and adversely effect our operating results and financial condition.
OUR SUCCESS DEPENDS ON OUR ABILITY TO EXPAND OUR DIRECT SALES FORCE.
Our ability to achieve significant revenue growth in the future will depend, in part, on our success in recruiting, training and managing sufficient direct sales personnel. Although we are currently investing, and plan to continue to invest, significant resources to develop and expand our direct sales force, we have at times experienced, and may continue to experience, difficulty in recruiting qualified personnel for our direct sales force. Any failure to expand our direct sales force or network of partners could have a material adverse effect on our business, operating results and financial condition.
OUR GROWTH MAY BE LIMITED IF WE FAIL TO BUILD OUR INDIRECT SALES CHANNEL.
Indirect sales channels accounted for approximately 17% of our total revenue in fiscal 2003. We have established relationships with a limited number of resellers and systems integrators and consultants. Our ability to achieve significant revenue growth in the future will depend, in part, on our success in expanding our network of partners that utilize or market our products. Even if we are able to expand our network of partners, our agreements with these partners are generally non-exclusive, and some may be terminated by either party without cause. Our partners are not within our control, are not obligated to purchase products from us, and may also offer their own product lines and solutions or represent or refer product lines or solutions offered by our competitors. These partners may not continue their current relationships with us, or may give higher priority to the sale or referral of other products or solutions, including products or solutions of our competitors. A reduction in sales efforts or discontinuance of sales or referrals of our products by partners could lead to reduced sales and could materially and adversely affect our business, operating results and financial condition.
Our strategy of marketing our products directly to end users and indirectly through partners may result in distribution channel conflicts. Our direct sales efforts may compete with those of our indirect sales channels and, to the extent that partners target the same customer, such partners may come into conflict with each other. These channel conflicts could materially and adversely affect our relationships with our customers or partners, or our ability to attract additional partners.
IF WE ARE UNABLE TO MAINTAIN OR EXPAND OUR STRATEGIC RELATIONSHIPS, WE MAY BE UNABLE TO GROW OUR BUSINESS.
We have, and prior to its assignment for the benefit of creditors, Asera had, established strategic relationships with a number of organizations that we believe are important to our worldwide sales, marketing and support activities. Our relationships with our partners such as Satyam Computer Services, Ltd., NIIT, Infosys
Technologies, Ltd. and Accenture expand the distribution of our products. There can be no assurance that our partners, many of which have significantly greater financial and marketing resources than we do, will not develop or market software products which compete with our products in the future, or will not otherwise discontinue their relationships with or support of us. Our failure to maintain our existing relationships or to establish new relationships in the future could have a material adverse effect on our business, operating results and financial condition.
In addition, our solutions depend, to a certain extent, on our ability to build interfaces with third-party software products, which are subject to the proprietary rights of such third parties. There can be no assurance that such third parties will continue to support or update such products, or that we will continue to have the access to such products necessary to offer the interfaces as a component of our solutions.
OUR DEPENDENCE ON OFFSHORE SOFTWARE DEVELOPMENT COULD CREATE PROBLEMS FOR US IF ADVERSE DEVELOPMENTS IN INDIA SHOULD OCCUR.
A significant element of our business strategy is to continue to leverage our investment in SEEC Asia, which is located in Hyderabad, India. We believe that the use of this offshore software development center will provide us with a potential cost advantage over some of our competitors. In the past, India has experienced significant inflation and other economic difficulties and has been subject to significant currency fluctuations. The Indian government has exercised, and continues to exercise, significant influence over many aspects of the Indian economy, and Indian government actions concerning the economy could have a material adverse effect on private sector entities. During the past several years, India's government has provided significant tax incentives and relaxed certain regulatory restrictions in order to encourage foreign investment in specified sectors of the economy, including the software development industry. Certain of those benefits which have directly affected us include, among others, tax holidays, liberalized import and export duties, and preferential rules concerning foreign investment and repatriation. Despite these benefits, however, India's central and state governments remain significantly involved in the Indian economy as regulators. The elimination of any of these benefits could have a material adverse effect on our business, operating results and financial condition. Further, we may be materially and adversely affected by future changes in inflation, interest rates, currency valuation, taxation, social stability or other political, economic or diplomatic developments in or affecting India.
INTERNATIONAL MARKETS POSE COMPLEX MANAGEMENT, FOREIGN CURRENCY, LEGAL, TAX AND ECONOMIC RISKS FOR OUR BUSINESS WHICH COULD ADVERSELY AFFECT OUR OPERATING RESULTS.
In fiscal 2003, 2002, and 2001, 34%, 32%, and 32%, respectively, of our revenues were from international customers. We expect to continue to derive a significant percentage of our revenues from international sources. We have operations in the United Kingdom and India, and may expand our operations in other international markets. As a result, we will be subject to a number of risks, including, among other things, difficulties in administering our business globally, managing foreign operations, currency fluctuation, restrictions against the repatriation of earnings, export requirements and restrictions, and multiple and possibly overlapping tax structures. In addition, we may from time to time experience a decrease in sales in certain foreign countries as a result of general economic conditions in such countries. The realization of any of these risks could materially and adversely affect our operating results and financial condition.
In addition, acceptance of our products in certain international markets may require extensive, time-consuming and costly modifications to our products to localize the products for use in particular markets. Any earnings generated in countries other than the United States may be permanently invested outside the United States, or may be subject to considerable taxation if repatriated to the United States. We may incur significant costs in foreign currencies to enhance our marketing, sales and distribution in other countries. Accordingly, as a result of currency fluctuations, the translation of foreign currencies into U.S. dollars for accounting purposes could adversely affect our operating results. Historically, our foreign currency translation adjustments have not been significant.
ACTS OF WAR OR TERRORISM COULD ADVERSELY AND MATERIALLY AFFECT OUR BUSINESS AND OPERATIONS BY DAMAGING OR DISRUPTING US, OUR SUPPLIERS, STRATEGIC PARTNERS OR CUSTOMERS, OR CREATING INSTABILITY.
The September 11, 2001 terrorist attacks on the United States created immediate significant economic and political uncertainty. The long-term effects of such attacks on the world economy and our business are unknown, but could be material to us. Further terrorist acts or acts of war, whether in the United States or abroad, including recent events in the Middle East, could cause damage or disruption to us, our suppliers, strategic partners or customers, or could create political or economic instability, any of which could have a material adverse effect on our business. Particularly, escalated tensions between India and Pakistan pose an increased risk to our software development and sales operations in India, which could be disrupted in the event of the outbreak of war between the two countries.
WE DEPEND ON KEY PERSONNEL AND OUR LOSS OF ONE OR MORE OF THEM COULD ADVERSELY AND MATERIALLY AFFECT OUR BUSINESS BY DISRUPTING OUR ONGOING OPERATIONS.
Our success will depend, in part, upon our ability to hire and retain key senior management. We hired other key personnel in connection with our Asera asset acquisition. The loss of key personnel can result in significant disruption to our ongoing operations, and new key personnel must spend a significant amount of time learning our business and our systems, in addition to performing their regular duties. We have employment agreements with certain key employees. However these agreements cannot prevent their departure. If we are unable to hire and retain qualified personnel, our business and prospects will be materially and adversely affected.
IF WE ARE UNABLE TO ATTRACT AND RETAIN HIGHLY SKILLED PERSONNEL, WE MAY BE UNABLE TO GROW OUR BUSINESS.
The market for qualified personnel has historically been, and we expect that it will continue to be, intensely competitive, and the process of locating and hiring qualified personnel can be difficult, time-consuming and expensive. Our strategic plan requires continued hiring of highly skilled technical, professional services and sales and marketing personnel. Failure to successfully attract, hire, assimilate and retain qualified personnel could limit the rate at which we develop new products and generate sales, which could have a material adverse effect on our business, prospects and results of operations.
Some of our information technology professionals in the U.S. are citizens of India, with most of them working in the U.S. under H-1B temporary visas. Under current law, there is a statutory limit on new H-1B visas that may be issued in a given year. If we are unable to obtain H-1B visas for our employees in sufficient quantities or at a sufficient rate for a significant period of time, our business, operating results, and financial condition could be materially and adversely affected. On October 17, 2000, the "American Competitiveness in the Twenty-First Century Act" (the "Act") was signed into law, and the annual H-1B visa quota for each of the years 2001, 2002 and 2003 was increased to 195,000. The annual quota reverts to 65,000 in fiscal year 2004. In addition, certain provisions of the Act make it likely that there will not be any H-1B "black out periods" as there have been in the past. However, the Act now permits permanent resident applicants to change employers under certain conditions, which could adversely impact employee retention rates among our non-citizen/non-permanent resident consultants.
OUR INTELLECTUAL PROPERTY MAY BE MISAPPROPRIATED OR SUBJECT TO CLAIMS OF INFRINGEMENT, WHICH COULD LEAD TO SIGNIFICANT LEGAL COSTS AND REQUIRE OUR MANAGEMENT TO DIVERT TIME FROM OUR BUSINESS OPERATIONS.
As is typical of the software industry, our success is heavily dependent upon our proprietary technology. We regard our enterprise solutions and software products as proprietary and attempt to protect them under a combination of copyright, trade secret and trademark laws, as well as by contractual restrictions on employees and third parties. Despite these precautions, it may be possible for unauthorized parties to copy our software or to reverse-engineer or otherwise obtain and use information we regard as proprietary. We have no patents, and existing trade secret and copyright laws provide only limited protection. Certain provisions of our license and distribution agreements, including "shrink-wrap" license agreements, which include provisions protecting against unauthorized use, duplication, transfer and disclosure, may be unenforceable under the laws of certain jurisdictions, and we are sometimes required to negotiate limits on these provisions. Policing unauthorized use of
our products is difficult, and while we are unable to determine the extent to which piracy of our software exists, software piracy is expected to be a persistent problem, particularly in international markets and as a result of the growing use of the Internet. Certain third parties may have the right to be provided with access to the source code for certain of our products under a source code escrow agreement with safeguards. Such access to source code may increase the possibility of misappropriation or misuse of our software. Our close relationship with certain third-party service providers increases the risk that such providers may attempt to use our proprietary products and methodologies to develop their own solutions that compete with ours. In addition, the laws of some foreign countries do not protect our proprietary rights to the same extent as do the laws of the United States. There can be no assurance that the steps that we have taken will be adequate to deter misappropriation of proprietary information, or that we will be able to detect unauthorized use and take appropriate steps to enforce our intellectual property rights.
SOME MAY CLAIM THAT WE INFRINGE THEIR INTELLECTUAL PROPERTY RIGHTS, WHICH COULD RESULT IN COSTLY LITIGATION OR REQUIRE US TO REENGINEER OR CEASE SALES OF OUR PRODUCTS.
We believe that our products do not infringe upon the intellectual property rights of others and that we have all rights necessary to use the intellectual property employed in our business. However, we have not performed patent searches for all of the technologies encompassed in our products. Third parties may in the future claim that our current or future products infringe their proprietary rights. For example, one of Asera's customers and partners whose contracts with Asera we assumed has informed us that it believes the Asera asset acquisition caused those contracts to terminate and that our license to use its intellectual property in one of the former Asera product offerings has terminated. This claim or any other claim of infringement, with or without merit, could result in costly litigation or require us to reengineer or cease sales of our products, any of which could have a material adverse effect on our business, financial condition, results of operations or prospects. Infringement claims could also require us to enter into royalty or licensing agreements. Licensing agreements, if required, may not be available on terms acceptable to us, or at all.
OUR STOCK PRICE IS VOLATILE, WHICH MAY RESULT IN SIGNIFICANT LOSSES TO OUR SHAREHOLDERS.
The market prices of technology companies, including SEEC, have been highly volatile and the value of any investment in our common stock may fluctuate. The market price of our common stock is likely to continue to be highly volatile and may increase or decrease significantly as a result of factors such as:
- actual or anticipated fluctuations in our operating results, and general conditions in the computer hardware and software industries;
- announcements of new products, technological innovations or new contracts by us or by our competitors;
- developments with respect to patents, copyrights or proprietary rights; and
- general economic, market or political conditions.
In addition, in recent years the stock market in general, and the shares of technology companies in particular, have experienced extreme price fluctuations. These broad market and industry fluctuations, over which we have no control, may materially and adversely affect the market price of our common stock.
SPECIAL NOTE ON FORWARD-LOOKING STATEMENTS
Except for historical information contained herein, this Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act, and we intend that such forward-looking statements be subject to the safe harbors created thereby. Such forward-looking statements involve risks and uncertainties and include, but are not limited to, statements regarding future events and our plans and expectations. Our actual results may differ materially from such statements. Factors that cause or contribute to such differences include, but are not limited to, those discussed above in "Factors That May Affect Future Results," as well as those discussed elsewhere in this Form 10-K and the documents incorporated herein by reference. Although we believe that the assumptions underlying our forward-looking statements are reasonable, any of the assumptions could prove to be inaccurate and, therefore, there can be no assurance that 21
the results contemplated in such forward-looking statements will be realized. In addition, as disclosed above under "Factors That May Affect Future Results," our business and operations are subject to substantial risks that increase the uncertainties inherent in the forward-looking statements included in this Form 10-K. The inclusion of such forward-looking information should not be regarded as a representation by us or by any other person that the future events, plans or expectations contemplated by us will be achieved.
