0001012870-01-502188.txt : 20011010 0001012870-01-502188.hdr.sgml : 20011010 ACCESSION NUMBER: 0001012870-01-502188 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20010831 FILED AS OF DATE: 20011005 FILER: COMPANY DATA: COMPANY CONFORMED NAME: TIBCO SOFTWARE INC CENTRAL INDEX KEY: 0001085280 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMPUTER INTEGRATED SYSTEMS DESIGN [7373] IRS NUMBER: 770449727 STATE OF INCORPORATION: DE FISCAL YEAR END: 1130 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-26579 FILM NUMBER: 1753179 BUSINESS ADDRESS: STREET 1: 3165 PORTER DRIVE CITY: PALO ALTO STATE: CA ZIP: 94304 BUSINESS PHONE: 6508465000 MAIL ADDRESS: STREET 1: 3165 PORTER DRIVE CITY: PALO ALTO STATE: CA ZIP: 94304 10-Q 1 d10q.txt FORM 10-Q FOR PERIOD ENDED AUGUST 31, 2001 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED AUGUST 31, 2001 OR [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission File Number: 000-26579 ----------------- TIBCO SOFTWARE INC. (Exact name of registrant as specified in its charter) Delaware 77-0449727 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 3165 Porter Drive, Palo Alto, CA 94304 (Address of principal executive offices) (zip code) Registrant's telephone number, including area code: (650) 846-1000 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [_] The number of shares outstanding of the registrant's Common Stock, $0.001 par value, as of October 1, 2001 was 198,758,727. TIBCO SOFTWARE INC. INDEX PART I - FINANCIAL INFORMATION
Item Page No. ---- -------- Item 1 Financial Statements: Condensed Consolidated Balance Sheets as of August 31, 2001 and November 30, 2000 (Unaudited)........................... 3 Condensed Consolidated Statements of Operations for the three- months and nine-months ended August 31, 2001 and August 31, 2000 (Unaudited)................................. 4 Condensed Consolidated Statements of Cash Flows for the nine- months ended August 31, 2001 and August 31, 2000 (Unaudited)................................................. 5 Notes to Condensed Consolidated Financial Statements (Unaudited)................................................. 6 Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations................................... 11 Item 3 Quantitative and Qualitative Disclosures about Market Risk.... 20 PART II - OTHER INFORMATION Item 1 Legal Proceedings............................................. 22 Item 2 Changes in Securities and Use of Proceeds..................... 22 Item 3 Defaults Upon Senior Securities............................... 22 Item 4 Submission of Matters to a Vote of Security Holders........... 22 Item 5 Other Information............................................. 22 Item 6 Exhibits and Reports on Form 8-K.............................. 22 Signatures.................................................... 23
2 PART I -- FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS TIBCO SOFTWARE INC. Condensed Consolidated Balance Sheets (in thousands)
August 31, November 30, 2001 2000 ---------- ------------ (Unaudited) ASSETS Current Assets: Cash and cash equivalents................................................ $154,936 $171,658 Short-term investments................................................... 486,549 411,242 Accounts receivable, net of allowances; $5,166 and $4,257, respectively.. 61,811 89,978 Amounts from related parties............................................. 2,261 3,411 Other current assets..................................................... 15,380 17,410 -------- -------- Total current assets................................................. 720,937 693,699 Property and equipment, net of accumulated depreciation; $15,124 and $7,152, respectively.............................................................. 35,600 27,593 Other assets................................................................ 23,148 19,673 Goodwill and acquired intangibles, net...................................... 70,587 88,250 -------- -------- $850,272 $829,215 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable......................................................... $ 10,150 $ 6,712 Amounts to related parties............................................... 1,132 2,144 Accrued liabilities...................................................... 40,370 54,905 Deferred revenue......................................................... 38,853 33,635 -------- -------- Total current liabilities............................................ 90,505 97,396 -------- -------- Deferred income taxes....................................................... 2,284 2,284 Stockholders' equity: Common stock............................................................. 198 195 Additional paid-in capital............................................... 827,778 817,077 Unearned stock-based compensation........................................ (7,315) (29,946) Accumulated other comprehensive income................................... 6,512 4,255 Accumulated deficit...................................................... (69,690) (62,046) -------- -------- Total stockholders' equity........................................... 757,483 729,535 -------- -------- $850,272 $829,215 ======== ========
See accompanying notes to condensed consolidated financial statements. 3 TIBCO SOFTWARE INC. Condensed Consolidated Statements of Operations (in thousands, except per share data)
Three Months Ended Nine Months Ended August 31, August 31, ------------------ ------------------ 2001 2000 2001 2000 -------- -------- -------- -------- (Unaudited) (Unaudited) License revenue: Non-related parties............................... $ 42,542 $ 42,365 $151,477 $ 97,149 Related parties................................... 5,049 6,147 14,706 16,406 -------- -------- -------- -------- Total license revenue......................... 47,591 48,512 166,183 113,555 -------- -------- -------- -------- Service and maintenance revenue: Non-related parties............................... 25,092 17,918 68,544 47,331 Related parties................................... 2,536 783 6,280 2,337 -------- -------- -------- -------- Total service and maintenance revenue......... 27,628 18,701 74,824 49,668 -------- -------- -------- -------- Total revenue.............................. 75,219 67,213 241,007 163,223 Cost of revenue: Stock based compensation.......................... 191 682 803 2,195 Other cost of revenue non-related parties......... 13,904 15,739 46,305 41,595 Other cost of revenue related parties............. 1,129 846 1,888 2,105 -------- -------- -------- -------- Gross profit......................................... 59,995 49,946 192,011 117,328 -------- -------- -------- -------- Operating expenses: Research and development: Stock-based compensation........................ 2,044 3,612 9,196 10,650 Other research and development.................. 19,111 14,879 59,838 38,840 Sales and marketing: Stock-based compensation........................ 741 3,305 9,195 13,438 Other sales and marketing....................... 32,247 25,437 102,931 61,550 General and administrative: Stock-based compensation........................ 204 381 3,637 1,260 Other general and administrative................ 4,833 4,557 18,343 11,390 Restructuring charges............................. -- -- 12,630 -- Amortization of goodwill and acquired intangibles. 5,854 1,562 17,663 4,686 -------- -------- -------- -------- Total operating expenses...................... 65,034 53,733 233,433 141,814 -------- -------- -------- -------- Loss from operations................................. (5,039) (3,787) (41,422) (24,486) Interest and other income, net....................... 10,074 10,648 26,180 18,341 -------- -------- -------- -------- Net income (loss) before benefit for income taxes.... 5,035 6,861 (15,242) (6,145) Benefit for income taxes............................. (5,492) -- (7,598) -- -------- -------- -------- -------- Net income (loss).................................... $ 10,527 $ 6,861 $ (7,644) $ (6,145) ======== ======== ======== ======== Net income (loss) per share: Basic............................................... $ 0.05 $ 0.04 $ (0.04) $ (0.03) ======== ======== ======== ======== Weighted average common shares outstanding.......... 196,087 187,088 194,268 182,136 ======== ======== ======== ======== Net income (loss) per share: Diluted............................................. $ 0.05 $ 0.03 $ (0.04) $ (0.03) ======== ======== ======== ======== Weighted average common shares outstanding.......... 211,595 222,558 194,268 182,136 ======== ======== ======== ========
See accompanying notes to condensed consolidated financial statements. 4 TIBCO SOFTWARE INC. Condensed Consolidated Statements of Cash Flows (in thousands)
Nine Months Ended -------------------- August 31, August 31, 2001 2000 ---------- ---------- (Unaudited) Cash flows from operating activities: Net loss....................................................................... $ (7,644) $ (6,145) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization................................................ 8,002 3,002 Amortization of goodwill and other intangibles............................... 17,663 4,729 Amortization of stock-based compensation..................................... 22,389 27,543 Impairment of private equity investments..................................... 2,500 -- Changes in assets and liabilities: Accounts receivable........................................................ 28,167 (28,108) Amounts from related parties............................................... 138 (957) Other assets............................................................... 4,232 (8,960) Accounts payable........................................................... 3,438 (1,843) Accrued liabilities........................................................ (14,534) 34,727 Deferred revenue........................................................... 5,218 13,408 --------- --------- Net cash provided by operating activities................................ 69,569 37,396 --------- --------- Cash flows from investing activities: Purchases of short-term investments............................................ (510,195) (364,341) Sales and maturities of short-term investments................................. 434,808 73,636 Purchases of property and equipment............................................ (16,009) (13,474) Purchases of private equity investments........................................ (4,177) (17,000) Short-term investments pledged as security..................................... (2,000) (5,000) --------- --------- Net cash used in investing activities.................................... (97,573) (326,179) --------- --------- Cash flows from financing activities: Proceeds from issuance of common stock......................................... -- 481,037 Proceeds from exercise of stock options........................................ 4,385 7,558 Proceeds from employee stock purchase plan..................................... 6,561 4,333 --------- --------- Net cash provided by financing activities................................ 10,946 492,928 --------- --------- Effect of exchange rate changes on cash......................................... 336 614 --------- --------- Net change in cash and cash equivalents......................................... (16,722) 204,759 Cash and cash equivalents at beginning of period................................ 171,658 13,681 --------- --------- Cash and cash equivalents at end of period...................................... $ 154,936 $ 218,440 ========= =========
See accompanying notes to condensed consolidated financial statements. 5 TIBCO SOFTWARE INC. Notes to Condensed Consolidated Financial Statements (Unaudited) 1. BASIS OF PRESENTATION The accompanying unaudited condensed consolidated financial statements have been prepared by TIBCO Software Inc. (the "Company" or "TIBCO") in accordance with the rules and regulations of the Securities and Exchange Commission ("SEC"). Certain information and footnote disclosures normally included in consolidated financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted in accordance with such rules and regulations. In the opinion of management, the accompanying unaudited financial statements reflect all adjustments, consisting only of normal recurring adjustments, necessary to present fairly the financial position of the Company, and its results of operations and cash flows. These financial statements should be read in conjunction with the annual audited consolidated financial statements and notes as of and for the year ended November 30, 2000 included in the Company's Form 10-K filed with the SEC on February 27, 2001. For purposes of presentation, the Company has indicated the third quarter of fiscal 2001 and 2000 as ending on August 31, 2001 and August 31, 2000, respectively; whereas, in fact the Company's third fiscal quarters ended on the Friday nearest to the end of August. The results of operations for the three months and nine months ended August 31, 2001 are not necessarily indicative of the results that may be expected for the year ending November 30, 2001 or any other future interim period, and the Company makes no representations related thereto. The consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. 2. RECENT ACCOUNTING PRONOUNCEMENTS In July 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 141, Business Combinations ("FAS 141") and No. 142, Goodwill and Other Intangible Assets ("FAS 142"). FAS 141 requires all business combinations initiated after June 30, 2001 to be accounted for using the purchase method. Under FAS 142, goodwill and intangible assets with indefinite lives are no longer amortized but are reviewed annually (or more frequently if impairment indicators arise) for impairment. Separable intangible assets that are not deemed to have indefinite lives will continue to be amortized over their useful lives (but with no maximum life). The amortization provisions of FAS 142 apply to goodwill and intangible assets acquired after June 30, 2001. With respect to goodwill and intangible assets acquired prior to July 1, 2001, the Company is required to adopt FAS 142 effective December 1, 2002. The Company is currently evaluating the effect that adoption of FAS 142 will have on its results of operations and financial position. 3. CASH, CASH EQUIVALENTS AND INVESTMENTS The Company considers all highly liquid investment securities with original maturities of three months or less to be cash equivalents. Management determines the appropriate classification of marketable securities at the time of purchase and evaluates such designation as of each balance sheet date. To date, all marketable securities have been classified as available-for-sale and are carried at fair value with unrealized gains and losses, if any, included as a component of accumulated other comprehensive income in stockholders' equity. Interest, dividends and realized gains and losses are included in interest and other income. Realized gains and losses are recognized based on the specific identification method. 6 The Company recognized a charge of $2.5 million for the nine-month period ended August 31, 2001 against certain of the Company's equity investments which is included in other income. 4. DERIVATIVE FINANCIAL INSTRUMENTS The Company enters into foreign currency forward exchange contracts ("forward contracts") to manage exposure related to accounts receivable denominated in foreign currencies. The Company does not enter into derivative financial instruments for trading purposes. The Company had outstanding forward contracts with amounts totaling approximately $1.1 million at August 31, 2001. The open contracts mature at various dates through December 2001 and are hedges of certain foreign currency transaction exposures in the Australian Dollar, British Pound, Singapore Dollar, European Euro, Japanese Yen, and Danish Kroner. The unrealized gains and losses on these forward contracts at August 31, 2001 were not material. In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard No. 133 "Accounting for Derivative Instruments and Hedging Activities." This statement establishes accounting and reporting standards for derivative instruments and requires recognition of all derivatives as assets or liabilities in the statement of financial position and measurement of those instruments at fair value. Derivatives that are not hedges must be adjusted to fair value through earnings. If the derivative is a hedge, depending on the nature of the hedge, changes in fair value will be either offset against the change in fair value of the hedged assets, liabilities, or firm commitments through earnings, or recognized in other comprehensive income until the hedged item is recognized in earnings. The Company adopted the standard on December 1, 2000, and the adoption did not materially impact the Company's consolidated financial statements. 5. REVENUE RECOGNITION In December 1999, the SEC issued Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements," ("SAB 101"). This bulletin summarizes certain of the SEC's views in applying generally accepted accounting principles related to revenue recognition. The Company implemented SAB 101 on December 1, 2000 and the adoption did not materially impact the Company's consolidated statements. License revenue consists principally of revenue earned under software license agreements. License revenue is generally recognized when a signed contract or other persuasive evidence of an arrangement exists, the software has been shipped or electronically delivered, the license fee is fixed or determinable, and collection of the resulting receivable is probable. When contracts contain multiple elements wherein vendor specific objective evidence exists for all undelivered elements, the Company accounts for the delivered elements in accordance with the "Residual Method" prescribed by Statement of Position 98-9. Revenue from subscription license agreements, which includes software and maintenance, is recognized ratably over the term of the subscription period. Revenue on shipments to resellers is recognized when the products are sold by the resellers to the end-user customer. Service revenue consists primarily of revenue received for implementation of system solutions, on-site support, consulting and training. Service revenue is generally recognized as the services are performed or on the percentage-of-completion method of accounting, depending on the nature of the project. Under the percentage-of-completion method, revenue recognized is that portion of the total contract price equal to the ratio of costs expended to date to the anticipated final total costs, based on current estimates of the costs to complete the project. To the extent that these arrangements include license fees which can be determined based on vendor specific evidence of fair value, such fees are recorded as license revenue based on the percentage-of-completion ratio. If the total estimated costs to complete a project exceed the total contract amount, indicating a loss, the entire anticipated loss would be recognized currently. Maintenance revenue consists of fees for providing software updates and technical support for software products. Maintenance revenue is recognized ratably over the term of the agreement. Payments received in advance of services performed are recorded as deferred revenue. Allowances for estimated future returns and discounts are provided for upon recognition of revenue. 7 6. COMPREHENSIVE INCOME (LOSS) A summary of comprehensive income (loss) is as follows:
Three Months Ended Nine Months Ended --------------------- -------------------- August 31, August 31, August 31, August 31, 2001 2000 2001 2000 ---------- ---------- ---------- ---------- Net income (loss)........................... $10,527 $ 6,861 $(7,644) $(6,145) Translation adjustment...................... (5) 591 337 614 Change in net unrealized gain on investments 793 12,338 1,920 11,747 ------- ------- ------- ------- Comprehensive income (loss).............. $11,315 $19,790 $(5,387) $ 6,216 ======= ======= ======= =======
7. BENEFIT FOR INCOME TAXES During third quarter of fiscal 2001, the Company changed its estimate of the annual effective tax rate as a result of revised expectations for operating income for the 2001 tax year. An estimated annual effective tax rate of 49.9% has been used to record the benefit for income taxes for the nine-month period ended August 31, 2001 compared with an effective tax rate of 0% used to record the provision for income taxes for the comparable period in 2000. The estimated annual effective tax rate differs from the U.S. statutory rate primarily due to the non-deductibility of certain amortization of acquired intangible assets, the non-deductibility of stock-based compensation charges, the utilization of research and development credits, and the release of valuation allowance. The Company's effective tax rate may change during the remainder of 2001 if operating results differ significantly from current projections. 8. NET INCOME (LOSS) PER SHARE Basic net income (loss) per share is computed by dividing the net income or loss available to common stockholders for the period by the weighted average number of common shares outstanding during the period. Diluted net income or loss per share is computed by dividing the net income or loss for the period by the weighted average number of common and potential common shares outstanding during the period if their effect is dilutive. Certain potential common shares were not included in computing net income or loss per share because they were anti-dilutive. The following table sets forth the computation of basic and diluted net income (loss) per share for the periods indicated (in thousands, except per share data):
Three Months Ended Nine Months Ended --------------------- -------------------- August 31, August 31, August 31, August 31, 2001 2000 2001 2000 ---------- ---------- ---------- ---------- Net income (loss)........................................... $ 10,527 $ 6,861 $ (7,644) $ (6,145) ======== ======== ======== ======== Weighted-average common shares used to compute basic net income (loss) per share................................ 196,087 187,088 194,268 182,136 Effect of dilutive securities: Common stock equivalents............................. 13,430 31,172 -- -- Common stock subject to repurchase................... 2,078 4,298 -- -- -------- -------- -------- -------- Weighted-average common shares used to compute diluted net income (loss) per share................................... 211,595 222,558 194,268 182,136 ======== ======== ======== ======== Net income (loss) per share - basic...................... $ 0.05 $ 0.04 $ (0.04) $ (0.03) ======== ======== ======== ======== Net income (loss) per share - diluted.................... $ 0.05 $ 0.03 $ (0.04) $ (0.03) ======== ======== ======== ========
8 The following table sets forth potential weighted average common shares that are not included in the diluted net income (loss) per share calculation above because to do so would be anti-dilutive for the periods indicated (in thousands):
Three Months Ended Nine Months Ended --------------------- --------------------- August 31, August 31, August 31, August 31, 2001 2000 2001 2000 ---------- ---------- ---------- ---------- Stock options 2,391 596 10,568 353 ===== === ====== ===
On January 24, 2001, TIBCO's Board of Directors approved a voluntary stock option exchange program for certain of the Company's employees. Under the program, employees had the opportunity to cancel certain outstanding stock options granted to them between September 9, 1999 and February 15, 2001 in exchange for a new option grant for an equal number of shares to be granted on October 8, 2001. The program terminated on April 5, 2001. A total of 13,483,903 options were cancelled in connection with the option exchange. The exercise price of the new options will be priced at the closing price on NASDAQ on October 8, 2001. Members of TIBCO's Board of Directors and executive officers were not eligible to participate in this program. 9. RELATED PARTY TRANSACTIONS Reuters The Company has entered into commercial transactions with Reuters Group PLC, including its wholly owned and partially owned subsidiaries (collectively, "Reuters"), a principal stockholder of the Company in fiscal 2001 and 2000. Reuters is a distributor of the Company's products to customers in the financial services segment. A license, maintenance, and distribution agreement exists between the Company and Reuters, which was amended in June 2001. Under the amended agreement, Reuters elected to continue its obligation to pay a minimum guaranteed distribution fee to the Company in the amount of $20 million per year through December 2002. This fee is recognized ratably over the corresponding period as related party revenue. If actual distribution fees due from Reuters' exceed the cumulative minimum year-to-date guarantee, incremental fees are due. Such incremental fees are recognized in the period when the year-to-date fees exceed the cumulative minimum level. The amended agreement also revises the terms under which the Company may sell to customers in the financial services segment. Royalty payments to Reuters for resale of Reuters products and services or for fees associated with sales to the financial services segment are classified as related party cost of sales. In addition, the amended terms also require the Company to provide Reuters with internal maintenance and support until December 31, 2011 for a fee of $1.2 million for the remainder of calendar year 2001 and $2.0 million per year thereafter. This amount is recognized ratably over the corresponding period as related party maintenance revenue. The Company recognized $6.9 million and $6.2 million in revenue from Reuters in the third fiscal quarter of 2001 and 2000, respectively and $19.1 million and $15.8 million for the nine-month periods ended August 31, 2001 and 2000, respectively. Revenue from Reuters consists primarily of product and maintenance fees on its sales of TIBCO products under the terms of our license agreement with Reuters. The Company incurred $0.7 million in royalty and commission expense to Reuters in the third quarter of 2001 and $1.6 million for the nine-month period ended August 31, 2001. Cisco Systems The Company has entered into commercial transactions with Cisco Systems, Inc., a principal stockholder of the Company. The Company recognized $0.7 million and $0.8 million in revenue from Cisco Systems, Inc. in the third fiscal quarter of 2001 and 2000, respectively and $1.9 million and $3.0 million for the nine-month periods ended August 31, 2001 and 2000, respectively. 9 10. STOCK-BASED COMPENSATION
Three Months Ended Nine Months Ended --------------------- --------------------- August 31, August 31, August 31, August 31, 2001 2000 2001 2000 ---------- ---------- ---------- ---------- Cost of sales............. $ 191 $ 682 $ 803 $ 2,195 Research and development.. 2,044 3,612 9,196 10,650 Sales and marketing....... 741 3,305 9,195 13,438 General and administrative 204 381 3,637 1,260 ------ ------ ------- ------- Total.................. $3,180 $7,980 $22,831 $27,543 ====== ====== ======= =======
In connection with certain stock option grants to employees and external directors, stock-based compensation expense is being recognized, using the multiple option method as prescribed by Financial Accounting Standards Board Interpretation No. 28, over the option vesting period of generally five years. Amortization of stock-based compensation for employees and external directors is expected to be $0.6 million for the remainder of 2001, $1.5 million in 2002, $0.7 million in 2003 and $0.1 million in 2004. Stock-based compensation expense related to stock options granted to consultants is recognized as earned, using the multiple option method as prescribed by Financial Accounting Standards Board Interpretation No. 28. At each reporting date, the Company re-values the stock-based compensation using the Black-Scholes option pricing model. As a result, the stock-based compensation expense will fluctuate as the fair market value of the Company's common stock fluctuates. As of August 31, 2001, the Company expects to amortize stock-based compensation expense for consultants of $0.1 million, $0.2 million and $0.1 million for the remainder of fiscal 2001, and in fiscal 2002 and 2003, respectively, assuming no change in the underlying value of the Company's common stock. The Company recorded aggregate unearned compensation of $34.9 million in connection with the acquisition of Extensibility Inc. related to unvested options that were assumed as well as stock that was issued as part of the consideration for the acquisition, which is being held in an escrow account. This amount is amortized over the vesting period of the options and the stock. The Company expects to amortize $1.5 million, $2.5 million, $0.4 million and $0.1 million of unearned stock compensation in connection with the Extensibility acquisition for the remainder of fiscal 2001, and in fiscal 2002, 2003 and 2004, respectively. 11. SEGMENT INFORMATION The Company operates primarily in one industry segment: the development and marketing of a suite of software products that enables businesses to link internal operations, business partners and customer channels through the real-time distribution of information. Assets of the Company are primarily located in North America. Revenue by geographic area is as follows (in thousands):
Three Months Ended Nine Months Ended --------------------- --------------------- August 31, August 31, August 31, August 31, 2001 2000 2001 2000 ---------- ---------- ---------- ---------- North America and Latin America $37,087 $43,171 $135,453 $113,028 Europe......................... 34,713 20,095 85,372 41,763 Pacific Rim.................... 3,419 3,947 20,182 8,432 ------- ------- -------- -------- Total Revenue............... $75,219 $67,213 $241,007 $163,223 ======= ======= ======== ========
Revenue from Reuters is included in the European geographic segment. One customer accounted for 11.2% of revenues in the third quarter of 2001. 10 12. RESTRUCTURING CHARGE For the nine months ended August 31, 2001, the Company recorded a restructuring charge of $12.6 million, consisting of $2.8 million for headcount reductions, $9.2 million for consolidation of facilities, and $0.6 million of other related restructuring charges. These restructuring charges were taken to align the Company cost structure with changing market conditions. The plan resulted in headcount reduction of approximately 170 employees, which was made up of 46% sales and marketing staff, 23% professional services staff, 16% general and administrative staff and 15% research and development staff. The plan also included the consolidation of facilities through closing excess field offices and moving corporate offices into one campus. Cash utilized during the third quarter of fiscal 2001 included $0.6 million for headcount reductions and $0.1 million of other restructuring costs. The provision of $9.7 million at August 31, 2001 consisted of $0.1 million for headcount reductions, $9.2 million for facility charges, and $0.4 million for other costs. An additional $0.5 million cash outlay is expected over the remaining quarter in fiscal 2001, and the remaining cash outlay of approximately $9.2 million, primarily related to real estate rental obligations, is expected to occur over the next six years. 13. LEGAL PROCEEDINGS Between July 6, 2001, and August 30, 2001, several purported class action complaints were filed against the Company, several of the Company's current and former officers and directors and the underwriters of the Company's initial public offering in July 1999 and follow on offering in March 2000 in the United States District Court for the Southern District of New York. The complaints generally allege that the named defendants violated federal securities laws because the prospectuses related to the Company's initial public offering and follow on offering failed to disclose, and contained false and misleading statements regarding, certain commissions purported to have been received by the underwriters in connection with their allocation of shares in the Company's offerings. The Company believes that the claims against it are without merit and intends to defend against the complaints vigorously. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. The following contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Words such as "anticipates," "expects," "intends," "plans," "believes," "seeks," "estimates" and similar expressions identify such forward-looking statements. These forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those indicated in the forward-looking statements. Factors which could cause actual results to differ materially include those set forth in the following discussion, and, in particular, the risks discussed below under the subheading "Factors that May Affect Operating Results" and in other documents we file with the Securities and Exchange Commission. Unless required by law, the Company undertakes no obligation to update publicly any forward-looking statements. We are a leading provider of e-business infrastructure software products that enable business-to-business, business-to-consumer and business-to-employee solutions. We are the successor to a portion of the business of Teknekron Software Systems, Inc. Teknekron developed software, known as the TIB technology, for the integration and delivery of market data, such as stock quotes, news and other financial information, in trading rooms of large banks and financial services institutions. In 1992, Teknekron expanded its development efforts to include solutions designed to enable complex and disparate manufacturing equipment and software applications--primarily in the semiconductor fabrication market--to communicate within the factory environment. Teknekron was acquired by Reuters Group PLC, the global news and information group, in 1994. Following the acquisition, continued development of the TIB technology was undertaken to expand its use in the financial services markets. 11 In January 1997, our company, TIBCO Software Inc., was established as an entity separate from Teknekron. We were formed to create and market software solutions for use in the integration of business information, processes and applications in diverse markets and industries outside the financial services sector. In connection with our establishment as a separate entity, Reuters transferred to us certain assets and liabilities related to our business and granted to us a royalty-free license to the intellectual property incorporated into some of our current software products. Reuters also assigned to us at that time license and service contracts primarily within the high-tech manufacturing and energy markets, including contracts with NEC, Motorola, Mobil and Chevron. Our revenue in the first three quarters of fiscal 2001 and 2000 consisted primarily of license and product fees from our customers and distributors, including fees from Reuters pursuant to our license agreement, all of which were primarily attributable to sales of our TIBCO ActiveEnterprise product line. In addition, we receive fees from our customers for providing project integration services. We also receive revenue from our TIBCO.net customers in the form of a combination of fixed service charges and a charge for each user visit to these web pages. We also receive revenues from our strategic relationships with business partners who embed our products in their hardware and networking systems as well as from systems integrators who resell our products. We recognize license revenue when a signed contract or other persuasive evidence of an arrangement exists, the software has been shipped or electronically delivered, the license fee is fixed or determinable, and collection of the resulting receivable is probable. When contracts contain multiple elements wherein vendor specific objective evidence exists for all undelivered elements, we account for the delivered elements in accordance with the "Residual Method" prescribed by Statement of Position 98-9. Any maintenance revenue included in these arrangements is recognized ratably over the term of the arrangement. Revenue from subscription license agreements, which include software, rights to future products and maintenance, is recognized ratably over the term of the subscription period. Revenue on shipments to resellers is recognized when the resellers sell the products to the end-user customer. We recognize service revenue as the services are performed or on the percentage-of-completion method of accounting, depending on the nature of the project. Under the percentage-of-completion method, revenue recognized is that portion of the total contract price equal to the ratio of costs expended to date to the anticipated final total costs, based on current estimates of the costs to complete the project. To the extent that these arrangements include license fees, such fees are recorded as license revenue based on the percentage-of-completion ratio. If the total estimated costs to complete a project exceed the total contract amount, indicating a loss, the entire anticipated loss would be recognized currently. Maintenance revenue consists of fees for providing software updates and technical support for software products. We recognize maintenance revenue ratably over the term of the agreement. Our distributors generally pay us negotiated royalties on their sales of our products. Reuters distributes our products to customers in the financial services market segment. Reuters must pay us distribution fees based on a percentage of the revenue it recognizes from the sale of licenses and maintenance for our products. Under our distribution agreement with Reuters, minimum guaranteed distribution fees are $20 million per year in calendar 2001 and 2002 and were $18 million in calendar 2000. We will recognize revenue in the amount of these guaranteed distribution fees ratably over the corresponding period. If actual distribution fees due from Reuters' exceed the cumulative minimum year to date guarantee, incremental fees are due. Such incremental fees are recognized in the period when the year-to-date fees exceed the cumulative minimum level. Beginning in June 2001, we will provide Reuters with internal maintenance and support through December 31, 2011 for a fee of $1.2 million for the remainder of calendar year 2001 and $2.0 million per year thereafter. 12 RESULTS OF OPERATIONS The following table sets forth, for the periods indicated, certain financial data as a percentage of total revenue:
Three Months Ended Nine Months Ended -------------------- -------------------- August 31, August 31, August 31, August 31, 2001 2000 2001 2000 ---------- ---------- ---------- ---------- Revenue: License........................................... 63.3% 72.2% 69.0% 69.6% Service and maintenance........................... 36.7 27.8 31.0 30.4 ----- ----- ----- ----- Total revenue................................. 100.0 100.0 100.0 100.0 Stock-based compensation............................. 0.3 1.0 0.3 1.3 Other cost of revenue................................ 20.0 24.7 20.0 26.8 ----- ----- ----- ----- Gross profit......................................... 79.7 74.3 79.7 71.9 ----- ----- ----- ----- Operating expenses: Research and development: Stock-based compensation...................... 2.7 5.4 3.8 6.5 Other research and development................ 25.4 22.1 24.8 23.8 Sales and marketing: Stock-based compensation...................... 1.0 4.9 3.8 8.3 Other sales and marketing..................... 42.8 37.8 42.9 37.7 General and administrative: Stock-based compensation...................... 0.3 0.6 1.5 0.8 Other general and administrative.............. 6.4 6.8 7.6 7.0 Restructuring charges............................. -- -- 5.2 -- Amortization of goodwill and acquired intangibles. 7.8 2.3 7.3 2.9 ----- ----- ----- ----- Total operating expenses...................... 86.4 79.9 96.9 87.0 ----- ----- ----- ----- Loss from operations................................. (6.7) (5.6) (17.2) (15.1) Interest and other income, net....................... 13.4 15.8 10.9 11.2 ----- ----- ----- ----- Net income (loss) before income taxes................ 6.7 10.2 (6.3) (3.9) Benefit for income taxes............................. 7.3 -- 3.1 -- ----- ----- ----- ----- Net income (loss).................................... 14.0 10.2 (3.2) (3.9) ===== ===== ===== =====
REVENUE Total Revenue. Total revenue increased 11.9% to $75.2 million for the three months ended August 31, 2001 from $67.2 million for the same period of the prior year. Total revenue increased 47.7% to $241.0 million for the nine-month period ended August 31, 2001 from $163.2 million in the same period of the prior year. Total revenue increased primarily due to an increase in sales of our products and services to both new and existing customers. Reuters accounted for approximately 9.2% and 9.0% of total revenue for the third fiscal quarters of 2001 and 2000, respectively and 7.9% and 9.7% of total revenue for the nine month periods ending August 31, 2001 and 2000, respectively. In the third quarter of fiscal 2001, one customer accounted for 11.2% of total revenue. License Revenue. License revenue decreased 1.9% to $47.6 million for the three months ended August 31, 2001 from $48.5 million for the same period of the prior year. License revenue increased 46.3% to $166.2 million for the nine months ended August 31, 2001 from $113.6 million for the same period of the prior year. License revenue was 63.3% and 72.2% of total revenue for the third fiscal quarters of 2001 and 2000, respectively and 69.0% and 69.6% of revenue for the nine-month periods ended August 31, 2001 and 2000, respectively. This decrease was due primarily to an economic slowdown and the significant decline in information technology spending in general. 13 Service and Maintenance Revenue. Service and maintenance revenue increased 47.7% to $27.6 million for the three months ended August 31, 2001 from $18.7 million for the same period of the prior year. Service and maintenance revenue increased 50.6% to $74.8 million for the nine months ended August 31, 2001 from $49.7 million for the same period of the prior year. Service and maintenance revenue was 36.7% and 27.8% of total revenue in the third quarters of fiscal 2001 and 2000, respectively and was 31.0% and 30.4% of total revenue for the nine month periods ended August 31, 2001 and 2000, respectively. The increase in service and maintenance revenue was primarily due to the additional maintenance revenue associated with the increase in our cumulative license revenue. COST OF REVENUE Cost of revenue consists primarily of salaries and third-party contractor and associated expenses principally related to providing project architecture, design and system integration services and, to a lesser extent, the costs of royalty payments and providing maintenance, training and customer support services. The majority of our cost of revenue is directly related to our service and maintenance revenue. Cost of revenue, excluding stock based compensation charges, decreased 9.4% to $15.0 million for the three months ended August 31, 2001 from $16.6 million for the same period of the prior year. Cost of revenue, excluding stock based compensation charges, increased 10.3% to $48.2 million for the nine months ended August 31, 2001 from $43.7 million for the same period of the prior year. Cost of revenue was 20.0% and 24.7% of total revenue in the third quarters of fiscal 2001 and 2000, respectively and was 20.0% and 26.8% of revenue for the nine-month periods ending August 31, 2001 and 2000, respectively. The increase in cost of revenue in absolute dollars was primarily due to the cost of the increased personnel and related costs associated with the delivery of professional services and maintenance as well as the additional technical staff to support our installed base of customers. The decrease in cost of revenue as a percentage of total revenue was due primarily to more efficient use of staff in delivering services. OPERATING EXPENSES Research and Development Expenses. Research and development expenses consist primarily of salaries and related costs associated with the development of our products. Research and development expenses, excluding stock based compensation charges, increased 28.4% to $19.1 million for the three months ended August 31, 2001 from $14.9 million for the same period of the prior year. Research and development expenses, excluding stock based compensation charges, increased 54.1% to $59.8 million for the nine months ended August 31, 2001 from $38.8 million for the same period of the prior year. These increases were due primarily to increases in our development staff as we continued to expand our product offerings and upgrade the performance of existing products. Research and development expenses were 25.4% and 22.1% of total revenue in the third quarters of fiscal 2001 and 2000, respectively and were 24.8% and 23.8% of total revenue for the nine month periods ended August 31, 2001 and 2000, respectively. The increase in research and development expenses as a percent of revenue was due to a combination of continued investment in research and development and a gradual slow down in our revenue growth. We believe that continued investment in research and development is critical to attaining our strategic objectives and, as a result, we expect that spending on research and development will remain relatively stable for the remainder of fiscal 2001. Sales and Marketing Expenses. Sales and marketing expenses consist primarily of personnel and related costs of our direct sales force and marketing staff and the cost of marketing programs, including advertising, trade shows, promotional materials and customer conferences. Sales and marketing expenses, excluding stock based compensation charges, increased 26.8% to $32.2 million for the three months ended August 31, 2001 from $25.4 million for the same period of the prior year. Sales and marketing expenses, excluding stock based compensation charges, increased 67.2% to $102.9 million for the nine months ended August 31, 2001 from $61.6 million for the same period of the prior year. Sales and marketing expenses were 42.8% and 37.8% of total revenue in the third quarters of fiscal 2001 and 2000, respectively and were 42.9% and 37.7% of revenue for the nine month periods ended August 31, 2001 and 2000, respectively. These increases, both in dollar terms and as a percentage of total revenue, resulted primarily from increased salaries, benefits, commissions, facilities and travel costs for sales personnel associated with the expansion of our domestic and international sales force 14 dedicated to selling our expanding family of products. We intend to selectively increase staff in our direct sales organization and to create select product marketing programs and, accordingly, expect that sales and marketing expenditures will remain relatively stable for the remainder of fiscal 2001. General and Administrative Expenses. General and administrative expenses consist primarily of personnel and related costs for general corporate functions, including executive, legal, finance, accounting, human resources and information systems as well as bad debt charges. General and administrative expenses, excluding stock based compensation charges, increased 6.1% to $4.8 million for the third quarter of fiscal 2001 from $4.6 million for the same period of the prior year. General and administrative expenses, excluding stock based compensation charges, increased 61.0% to $18.3 million for the nine months ended August 31, 2001 from $11.4 million for the same period of the prior year. General and administrative expenses were 6.4% and 6.8% of total revenue for the third quarters of fiscal 2001 and 2000, respectively and were 7.6% and 7.0% for the nine month periods ended August 31, 2001 and 2000, respectively. The increase in dollar terms was primarily a result of increased personnel and related costs and other outside services associated with building our general and administrative infrastructure. We believe that general and administrative expenses, exclusive of bad debt charges, will remain relatively stable for the remainder of fiscal 2001. Amortization of Stock-based Compensation. Amortization of stock-based compensation expense was $3.2 million and $8.0 million for the three-month periods ended August 31, 2001 and 2000, respectively. Amortization of stock-based compensation expense was $22.8 million and $27.5 million for the nine-month periods ended August 31, 2001 and 2000, respectively. The decrease in dollar terms was primarily a result of a decrease in charges associated with restricted stock options granted as a result of the Extensibility acquisition and in charges associated with stock options granted to consultants. In connection with the grant of stock options to employees and non-employee directors, we have recorded aggregate unearned compensation of $22.4 million, representing the difference between the deemed fair value of our common stock at the date of grant and the exercise price of such options. Such amount is presented as a reduction of stockholders' equity and amortized over the vesting period of the applicable option. We expect to amortize $0.6 million, $1.5 million, $0.7 million and $0.1 million of unearned stock-based compensation for the remainder of fiscal 2001 and in fiscal 2002, 2003 and 2004, respectively, in connection with stock options granted to employees and non-employee directors. Stock-based compensation expense related to stock options granted to consultants is recognized as earned, using the multiple option method as prescribed by Financial Accounting Standards Board Interpretation No. 28. At each reporting date, we re-value such stock-based compensation using the Black-Scholes option pricing model. As a result, the stock-based compensation expense will fluctuate as the fair market value of our common stock fluctuates. As of August 31, 2001, we expect to amortize stock-based compensation expense of $0.1 million, $0.2 million and $0.1 million for the remainder of fiscal 2001 and in fiscal 2002 and 2003, respectively, in connection with stock options granted to consultants, assuming no change in the underlying value of our common stock. We recorded aggregate unearned compensation of $34.9 million in connection with the acquisition of Extensibility Inc. related to unvested options that were assumed as well as stock that was issued as part of the consideration for the acquisition, which is being held in an escrow account. This amount will be amortized over the vesting period of the options and the stock, and is shown by expense category. We expect to amortize unearned stock compensation related to the Extensibility acquisition in the amounts of $1.5 million, $2.5 million, $0.4 million and $0.1 million for the remainder of fiscal 2001 and in fiscal 2002, 2003 and 2004, respectively. Stock-based compensation expense related to the unvested portion of options assumed and restricted stock granted in connection with the acquisition of Extensibility was $3.2 million in the third quarter fiscal 2001 and $17.9 million for the nine month period ended August 31, 2001. Restructuring charge. For the nine months ended August 31, 2001, we recorded a restructuring charge of $12.6 million, consisting of $2.8 million for headcount reductions, $9.2 million for consolidation of facilities, 15 and $0.6 million of other related restructuring charges. These restructuring charges were taken to align our cost structure with changing market conditions. The plan resulted in headcount reduction of approximately 170 employees, which was made up of 46% sales and marketing staff, 23% professional services staff, 16% general and administrative staff and 15% research and development staff. The plan also included the consolidation of facilities through closing excess field offices and moving corporate offices into one campus. Cash utilized during the third quarter of fiscal 2001 included $0.6 million for headcount reductions and $0.1 million of other related exit costs. The provision of $9.7 million at August 31, 2001 consisted of $0.1 million for headcount reductions, $9.2 million for facility charges, and $0.4 million for other costs. An additional $0.5 million cash outlay is expected over the remaining quarter in fiscal 2001, and the remaining cash outlay of approximately $9.2 million, primarily related to real estate rental obligations, is expected to occur over the next six years. Amortization of goodwill and acquired intangibles. Amortization of goodwill and acquired intangibles was $5.9 million and $1.6 million for the three-month periods ended August 31, 2001 and 2000, respectively. Amortization of goodwill and acquired intangibles was $17.7 million and $4.7 million for the nine-month periods ended August 31, 2001 and 2000, respectively. The increase in fiscal 2001 relates to the purchase of Extensilibilty Inc., which was consummated on September 5, 2000. Amortization of goodwill and other intangible assets acquired in purchase transactions are amortized on a straight-line method over the estimated useful life of the assets of between two and five years. In July 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets ("FAS 142"). Under FAS 142, goodwill and intangible assets with indefinite lives are no longer amortized but are reviewed annually (or more frequently if impairment indicators arise) for impairment. Separable intangible assets that are not deemed to have indefinite lives will continue to be amortized over their useful lives (but with no maximum life). The amortization provisions of FAS 142 apply to goodwill and intangible assets acquired after June 30, 2001. With respect to goodwill and intangible assets acquired prior to July 1, 2001, we are required to adopt FAS 142 effective December 1, 2002. We are currently evaluating the effect that adoption of FAS 142 will have on our results of operations and financial position. Interest and other income, net. Interest and other income (expense), net, includes interest, net realized gain in equity investments and other miscellaneous income and expense items. Interest and other income, net, was $10.1 million and $10.6 million for the three-month periods ended August 31, 2001 and 2000, respectively. Interest and other income, net, was $26.2 million and $18.3 million for the nine-month periods ended August 31, 2001 and 2000, respectively. The increase in fiscal 2001 was due primarily to interest income earned from our investments. The decrease in the third quarter of fiscal 2001 was primarily attributable to a $1.8 million book gain in the third quarter of fiscal 2000 resulting from a of a change in ownership in a company in which we have an equity investment, which did not recur in the third quarter of fiscal 2001. Benefit for income taxes. During third quarter of fiscal 2001, we changed our estimate of the annual effective tax rate as a result of revised expectations for operating income for the 2001 tax year. An estimated annual effective tax rate of 49.9% has been used to record the benefit for income taxes for the nine-month period ended August 31, 2001 compared with an effective tax rate of 0% used to record the provision for income taxes for the comparable period in 2000. The estimated annual effective tax rate differs from the U.S. statutory rate primarily due to the non-deductibility of certain amortization of acquired intangible assets, the non-deductibility of stock-based compensation charges, the utilization of research and development credits, and the release of valuation allowance. Our effective tax rate may change during the remainder of 2001 if operating results differ significantly from current projections. LIQUIDITY AND CAPITAL RESOURCES At August 31, 2001, we had cash, cash equivalents and investments of $641.5 million, representing an increase of $58.6 million from November 30, 2000. 16 Net cash provided by operations for the nine months ended August 31, 2001 was $69.6 million compared to net cash provided by operations of $37.4 million for the comparable period of the prior year. Cash provided by operating activities for the nine months ended August 31, 2001 resulted primarily from the decrease in accounts receivable and an increase in deferred revenue, depreciation and amortization, amortization of goodwill and unearned compensation, which was partially offset by a decrease in accrued liabilities. Net cash used by investing activities for the nine months ended August 31, 2001 was $97.6 million compared to cash used by investing activities of $326.2 million for the same period in 2000. Cash used by investing activities for the nine months ended August 31, 2001 resulted primarily from the net purchase of short-term investments of $75.4 million, capital expenditures of $16.0 million and private equity investments of $4.2 million. Capital expenditures were primarily related to the installation of computer hardware and software as well as capital expenditures related to office facilities. Cash flow from financing activities for the nine months ended August 31, 2001 of $10.9 million resulted from the exercise of stock options and stock purchases under our Employee Stock Purchase Plan. We believe that our current cash and investment balances and cash flow from operations will be sufficient to meet our working capital and capital expenditure requirements for at least the next twelve months. We may also utilize cash to acquire or invest in complementary businesses or to obtain the right to use complementary technologies. FACTORS THAT MAY AFFECT OPERATING RESULTS We have a history of losses and we expect future losses, and if we do not achieve and sustain profitability our business will suffer and our stock price may decline We may not be able to obtain sufficient revenue to achieve and sustain profitability. We incurred net losses of approximately $25.0 million and $19.5 million in fiscal 2000 and 1999, respectively. In addition, we incurred a net loss of $7.6 million for the nine months ended August 31, 2001. As of August 31, 2001, we had an accumulated deficit of approximately $69.7 million. We have invested significantly in our technology research and development and building our sales and marketing organization. We expect to continue to spend financial and other resources on developing and introducing enhancements to our existing products and new software products and our direct sales and marketing activities. As a result, we need to generate significant revenue to achieve and maintain profitability. Our future revenue is unpredictable, and we expect our quarterly operating results to fluctuate, which may cause our stock price to decline Period-to-period comparisons of our operating results may not be a good indication of our future performance. Moreover, our operating results in some quarters may not meet the expectations of stock market analysts and investors. In that event, our stock price would likely decline. As a result of our limited operating history and the evolving nature of the markets in which we compete, we may have difficulty accurately forecasting our revenue in any given period. In addition to the factors discussed elsewhere in this section, a number of factors may cause our revenue to fall short of our expectations or cause fluctuations in our operating results, including: . the announcement or introduction of new or enhanced products or services by our competitors; . the amount and timing of operating costs and capital expenditures relating to the expansion of our operations; and . the capital and expense budgeting decisions of our customers, especially with respect to large orders. In addition, our quarterly operating results have historically been subject to variations throughout the year due to a general slow-down in our sales in the summer months. Specifically, we generally experience relatively lower revenue in our third fiscal quarter. These seasonal variations in our operating results may lead to fluctuations in our results of operations from quarter to quarter throughout the year. 17 The market for e-business infrastructure software may not grow as quickly as we anticipate, which would cause our revenues to fall below expectations The market for e-business infrastructure software is relatively new and evolving. We earn a substantial portion of our revenue from sales of our e-business infrastructure software, including application integration software, and related services. We expect to earn substantially all of our revenue in the foreseeable future from sales of these products and services. Our future financial performance will depend on continued growth in the number of organizations demanding software and services for application integration, e-business and information delivery and seeking outside vendors to develop, manage and maintain this software for their critical applications. Many of our potential customers have made significant investments in internally developed systems and would incur significant costs in switching to third-party products, which may substantially inhibit the growth of the market for e-business infrastructure software. In addition, the current economic downturn has led, and may continue to lead our existing and potential customers to reduce their spending on information technology in general and e-business infrastructure solutions in particular. If this market fails to grow, or grows more slowly than we expect, our sales will be adversely affected. These trends may persist or accelerate as a result of the economic after-effects of the terrorist attacks on September 11, 2001. There can be no assurance that our current customers will continue to purchase our products We do not have long-term contracts with any of our customers. There can be no assurance that any of our customers will continue to purchase our products in the future. As a result, a customer that generates substantial revenue for us in one period may not be a source of revenue in subsequent periods. One customer accounted for 11.2% of our total revenue in the third quarter of fiscal 2001. Our licensing and distribution relationship with Reuters places limitations on our ability to conduct our business We have a significant relationship with Reuters for licensing and distribution. Our relationship with Reuters involves limitations and restrictions on our business, as well as other risks, described below. Reuters has access to the intellectual property used in our products, and could use the intellectual property to compete with us. We license the underlying TIB messaging technology incorporated into some of our important products from Reuters. We do not own this technology. Reuters is not restricted from using the TIB technology to produce products that compete with our products, and it can grant limited licenses to the TIB technology to others who may compete with us. In addition, we must license all of the intellectual property and products we create through December 2011 to Reuters. This will place Reuters in a position to more easily develop products that compete with our product offerings. We must rely on Reuters and other distributors to sell our products in the financial services market, and they may not be successful in doing so. Under our agreements with Reuters, we are restricted from selling our products and providing consulting services directly to companies in the financial services market and major competitors of Reuters, and from using the TIB technology we license from Reuters to develop products specifically for use by these companies. Accordingly, we must rely on Reuters and other third-party resellers and distributors to sell our products to these companies. A significant portion of our revenue from sales in the financial services market consists of product fees paid to us by Reuters. Although Reuters is the preferred distributor of our products in the financial services market and is required to pay us guaranteed minimum product fee payments until the end of 2002, Reuters has no contractual obligation to distribute our products to financial services customers. Reuters and other distributors may not be successful in selling our products into the financial services market, or they may elect to sell competitive third-party products into that market, either of which may adversely affect our revenue in that market. 18 Our relationship with Reuters restricts our ability to earn revenue from sales in the financial services market. Under the license agreement, Reuters is required to pay us product fees based on a percentage of its revenue from sales of our products in the financial services market, excluding products that are embedded in any Reuters' products. These product fees may be materially less than the product fees we could obtain from other distributors or resellers in the financial services market. In addition, when we sell our products into the financial services market through third-party distributors other than Reuters, Reuters receives a share of our license revenue. Our license agreement with Reuters imposes practical restrictions on our ability to acquire other companies. The license agreement places no specific restrictions on our ability to acquire companies with all or part of their business in the financial services market. However, under the terms of the license agreement, we are prohibited from bundling or combining our products that are based on licensed technology with an acquired company's products and services and then selling the bundled or combined products directly to financial services companies. This prohibition could prevent us from realizing potential synergies with companies we acquire. Our acquisition strategy could cause financial or operational problems Our success depends on our ability to continually enhance and broaden our product offerings in response to changing technologies, customer demands, and competitive pressures. To this end, we may acquire new and complementary businesses, products or technologies. For example, we completed the acquisition of substantially all of the assets of InConcert Inc. in November 1999 and the acquisition of Extensibility, Inc. in September 2000. We do not know if we will be able to complete any acquisitions or that we will be able to successfully integrate any acquired business, operate them profitably, or retain their key employees. Integrating any newly acquired business, product or technology could be expensive and time-consuming, could disrupt our ongoing business, and could distract our management. We may face competition for acquisition targets from larger and more established companies with greater financial resources. In addition, in order to finance any acquisitions, we might need to raise additional funds through public or private financings. In that event, we could be forced to obtain equity or debt financing on terms that are not favorable to us and, in the case of equity financing, that results in dilution to our stockholders. If we are unable to integrate newly acquired entity, product or technology effectively, our business, financial condition and operating results would suffer. In addition, any amortization of goodwill or other assets or other charges resulting from the costs of acquisitions could harm our operating results. Our investment strategy could cause financial or operational problems As of August 31, 2001 we had invested $27.2 million in companies with complementary technologies or products which provide us with access to additional vertical markets. The companies in which we invest are often at early stages of development, and no public market exists for their securities at the time of our investment. These investments may not result in any meaningful commercial benefit to us, and our investments could lose all or a significant part of their value. Currently, we have realized cumulative losses of $6.5 million on these investments. Moreover, in certain circumstances, these investments could subject us to restrictions imposed by the Investment Company Act of 1940. We might have to take actions, including buying, refraining from buying, selling or refraining from selling securities when we would otherwise not wish to, in order to avoid registration under the Investment Company Act of 1940. Our stock price may be volatile, which could cause investors to lose all or part of their investments in our stock The stock market in general, and the stock prices of technology companies in particular, have recently experienced volatility which has often been unrelated to the operating performance of any particular company or companies. If market or industry-based fluctuations continue, our stock price could decline regardless of our actual operating performance and investors could lose all or part of their investments. 19 The rapid growth of our operations could strain our resources and cause our business to suffer Our ability to successfully offer products and services and implement our business plan in a rapidly evolving market requires an effective planning and management process. We have increased the scope of our operations and we have increased our headcount substantially, both domestically and internationally. We must successfully integrate these new employees into our operations and generate sufficient revenues to justify the costs associated with these employees. If we fail to successfully integrate employees or to generate the revenue necessary to offset employee-related expenses, we could be forced to reduce our headcount, which would force us to incur significant expenses and would harm our business and operating results. For example, in response to changing market conditions, in the second quarter of fiscal 2001 we recorded a restructuring charge of $12.6 million, including $2.8 million related to a reduction of our headcount by approximately 170 employees. Our growth has placed and will continue to place a significant strain on our management systems, infrastructure and resources. We expect that we will need to continue to improve our financial and managerial controls, reporting systems and procedures. We will also need to continue to train and manage our workforce worldwide. Furthermore, we expect that we will be required to manage an increasing number of relationships with various customers and other third parties. Failure to expand any of the foregoing areas efficiently and effectively could interfere with the growth of our business as a whole. Pending litigation could harm our business Between July 6, 2001, and August 30, 2001, several purported class action complaints were filed in the United States District Court for the Southern District of New York against the Company, several of the Company's current and former officers and directors and the underwriters of the Company's initial public offering in July 1999 and follow on offering in March 2000. The complaints generally allege that the named defendants violated federal securities laws because the prospectuses related to the Company's initial public offering and follow on offering failed to disclose, and contained false and misleading statements regarding, certain commissions purported to have been received by the underwriters in connection with their allocation of shares in the Company's offerings. The Company believes that the claims against it are without merit and intends to defend against the complaints vigorously. The complaints do not specify the amount of damages that plaintiffs seek, and as a result, we are unable to estimate the possible range of damages that might be incurred as a result of the lawsuits. We have not set aside any financial reserves relating to potential damages associated with the lawsuits. The uncertainty associated with a substantial unresolved lawsuit could harm our business, financial condition and reputation. The defense of the lawsuits could result in the diversion of our management's time and attention away from business operations, which could harm our business. Negative developments with respect to the lawsuits could cause our stock price to decline. In addition, although we are unable to determine the amount, if any, that we may be required to pay in connection with the resolution of the lawsuits by settlement or otherwise, such a payment could seriously harm our financial condition, results of operations and liquidity. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We invest in marketable securities in accordance with our investment policy. The primary objectives of our investment policy is to preserve principal, maintain proper liquidity to meet operating needs and maximize yields. Our investment policy specifies credit quality standards for our investments and limits the amount of credit exposure to any single issue, issuer or type of investment. The maximum allowable duration of a single issue is 2.5 years and the maximum allowable duration of the portfolio is 1.3 years. At August 31, 2001 we had an investment portfolio of fixed income securities totaling $480.8 million, excluding those classified as cash and cash equivalents. Our investments consist primarily of bank and finance notes, various government obligations, asset-backed securities and equity investments in other public companies. These securities are classified as available-for-sale and are recorded on the balance sheet at fair market value with unrealized gains or losses reported as a separate component of stockholders' equity. Unrealized losses are charged against income when a decline in fair market value is determined to be other than temporary. The specific identification method is used to determine the cost of securities sold. 20 The investment portfolio is subject to interest rate risk and will fall in value in the event market interest rates increase. If market interest rates were to increase immediately and uniformly by 100 basis points (approximately 26% of current rates in the portfolio) from levels as of August 31, 2001, the fair market value of the portfolio would decline by approximately $3.9 million. We develop products in the United States and sell in North America, South America, Asia and Europe. As a result, our financial results could be affected by factors such as changes in foreign currency exchange rates or weak economic conditions in foreign markets. A majority of sales are currently made in U.S. dollars, however, a strengthening of the dollar could make our products less competitive in foreign markets. 21 PART II -- OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS Between July 6, 2001, and August 30, 2001, several purported class action complaints were filed against the Company, several of the Company's current and former officers and directors and the underwriters of the Company's initial public offering and follow on offering in the United States District Court for the Southern District of New York. The complaint generally alleges that the named defendants violated federal securities laws because the prospectuses related to the Company's initial public offering and follow on offering failed to disclose, and contained false and misleading statements regarding, certain commissions purported to have been received by the underwriters in connection with their allocation of shares in the Company's offerings. The Company believes that the claims against it are without merit and intends to defend against the complaints vigorously. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS None. ITEM 3. DEFAULTS UPON SENIOR SECURITIES None. ITEM 4. SUBMISSION OF MATTER TO A VOTE OF SECURITY HOLDERS None. ITEM 5. OTHER INFORMATION None. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) Exhibits: 10.15 Addendum effective as of June 2, 2001, to the First Amended and Restated License, Maintenance and Distribution Agreement by and among the registrant, Reuters Limited and TIBCO Finance Technology Inc. (b) Reports on Form 8-K: None. 22 SIGNATURES PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED THEREUNTO DULY AUTHORIZED. TIBCO SOFTWARE INC. By: /S/ CHRISTOPHER G. O'MEARA __________________________________ Christopher G. O'Meara Chief Financial Officer By: /S/ GINGER M. KELLY __________________________________ Ginger M. Kelly Corporate Controller and Chief Accounting Officer Date: October 5, 2001 23 EX-10.15 3 dex1015.txt ADDENDUM TO THE AMENDED & RESTATED LICENSE AGRMT EXHIBIT 10.15 ADDENDUM TO THE FIRST AMENDED AND RESTATED LICENSE, MAINTENANCE AND DISTRIBUTION AGREEMENT This ADDENDUM to the FIRST AMENDED AND RESTATED LICENSE, MAINTENANCE AND DISTRIBUTION AGREEMENT (the "Addendum"), effective as of June 2, 2001 (the -------- "Addendum Date") by and between Reuters Limited, a company organized under the ------------- laws of England and Wales, with offices at 85 Fleet Street, London EC4P 4AJ, United Kingdom ("Reuters") and TIBCO Finance Technology, Inc., a Delaware ------- corporation, with offices at 3375 Hillview Avenue, Palo Alto, California 94304 ("TFT"), on the one hand, and TIBCO Software, Inc., a Delaware corporation, with --- offices at 3165 Porter Drive, Palo Alto, CA 94304 ("TSI"), on the other, amends --- and modifies that certain FIRST AMENDED AND RESTATED LICENSE, MAINTENANCE AND DISTRIBUTION AGREEMENT dated as of May 28, 1999 by and between Reuters, TFT and TSI (the "Agreement") pursuant to Section 12.13 of the Agreement. --------- WHEREAS, Reuters, TFT and TSI desire to amend certain elements of the Agreement and create certain additional rights and obligations between the Parties, on the terms and conditions hereinafter set forth. NOW, THEREFORE, in consideration of the mutual covenants and promises contained herein, the Parties hereto agree as follows: 1. Construction. All capitalized terms, unless otherwise defined herein, shall ------------ have the meanings set forth in the Agreement. All rules of construction and other governing provisions set forth in the Agreement shall also apply to this Addendum, provided that the terms of this Addendum shall prevail over any conflicting terms of the Agreement. Except as set forth herein, all of the terms of the Agreement shall remain in full force and effect. 2. License Fees. The first sentence of Section 6.3(b) of the Agreement is hereby ------------ modified in part to read as follows: "...a license fee in respect of TSI Products equal to (i), in the case of license and maintenance revenues attributable to TSI Products that were sold or licensed by Reuters (or such Reuters Affiliate) prior to the Addendum Date, 40% (or such lower rate as is expressly provided in Section 6.6) or (ii), in the case of license and maintenance revenues attributable to TSI Products that were sold or licensed by Reuters (or such Reuters Affiliate) on or after the Addendum Date, 60% (or such lower rate as is expressly provided in Section 6.6) of the license and maintenance revenues...", thereby replacing the language that previously read: "...a license fee in respect of TSI Products equal to 40% (or such lower rate as is expressly provided in Section 6.3(a) or Section 6.6) of the license and maintenance revenues...". In addition, the second sentence of Section 6.3(b) of the Agreement, which begins "However, if either of the Reuters Parties or any of their Affiliates...", shall be deleted. In all 1 other respects, such license and maintenance fees shall be calculated on the terms set forth in Section 6.3(b) of the Agreement, the balance of which remains unchanged. 3. Guaranteed Annual Minimums. During the Addendum Term, Reuters shall pay TSI -------------------------- minimum annual license and maintenance fees in respect of license and maintenance revenue recognized by the Reuters Parties in respect of Revenue-Sharing Products of $20 million during each of year 2001 and year 2002 (and, if this Addendum is extended without modification, $20 million in 2003 and escalating thereafter to 110% of the prior year's minimum), such minimum annual license and maintenance fees to be calculated and paid according to the terms and subject to the conditions of Section 6.3(a) of the Agreement provided, however, that only during the Addendum Term, none of the terms and conditions set forth in the second paragraph of Section 6.3(a) of the Agreement, and subsections (1), (2) and (3) thereof, shall be applicable to the Parties, including Reuters option to elect not to pay the minimum annual license and maintenance fees after year 2001. 4. Dedicated TSI resources. The Parties acknowledge that Section 5.2(b) of the ----------------------- Agreement requires TSI to maintain, during any period in which minimum license fees are payable pursuant to Section 6.3 of the Agreement, at least ten (10) dedicated full-time employees around the world that are dedicated to providing Reuters and its Affiliates with technical, pre-sales, post-sales and administrative support in connection with their sales and support of the TSI Products. During any period in which minimum license fees are payable pursuant to Section 6.3 of the Agreement, TSI shall: (i) increase such staffing commitment to 11 dedicated full-time employees during year 2001 and thereafter continue to provide a minimum of 11 dedicated full-time employees during each year; provided that Reuters continues to pay minimum annual license fees pursuant to Section 6.3 of the Agreement, and (ii) increase its commitment, effective at the end of each calendar year, by one dedicated full-time employee for each $4 million in license and maintenance fees paid to TSI in excess of the applicable annual guaranteed minimum license and maintenance fees during such year (e.g., if Reuters pays $28 million in license and maintenance fees to TSI for 2001, TSI shall dedicate 13 full-time employees to Reuters in 2002). TSI and Reuters agree that, except as they otherwise may mutually agree hereafter, the geographic distribution of such 11 dedicated employees shall be as follows: --------------------------------------- RAM 3 --------------------------------------- CEMA 3 --------------------------------------- UKI 1 --------------------------------------- Asia/Pacific 1 --------------------------------------- Japan 1 --------------------------------------- Palo Alto 2 --------------------------------------- Total 11 --------------------------------------- The geographic distribution of any additional dedicated full-time employees beyond the minimum 11 dedicated full-time employees hereafter to be provided by TSI shall be as mutually agreed by Reuters and TSI. Except for individuals based in Palo Alto, the dedicated full-time employees shall be based in Reuters premises. 2 5. Internal Use and Associated Maintenance. Reuters has and hereafter shall have --------------------------------------- a perpetual, irrevocable, non-exclusive, non-transferable, royalty-free, worldwide license (which may be assigned or sublicensed by Reuters as provided in Section 2.9 or Section 12.6 of the Agreement), under all TSI Intellectual Property Rights arising prior to December 31, 2011, to use, for Reuters' internal use only, all of TSI's software products (i.e., all software titles that are or have been listed on TSI's standard price list during the period between the Original Effective Date and December 31, 2011) that are generally released prior to December 31, 2011; provided that, in the case of software products or other Technology that is incorporated in any such products, no license is granted to Reuters with respect thereto if a payment of royalties or other consideration to a third party is required in connection with any such license unless Reuters agrees in writing to be responsible for all such royalties and consideration. During the Addendum Term, TSI shall provide Reuters and its Affiliates with maintenance and support for Reuters' and Affiliates' internal use of all such TSI software products as permitted hereunder, including without limitation with respect to any such TSI software products Embedded in Reuters (or any of its Affiliates) products or services, in accordance with TSI's standard Silver support and maintenance terms and conditions (attached as Exhibit 1)(such maintenance and support so provided by TSI is referred to as the "TSI Support for Reuters Internal Use"); provided that Reuters shall pay TSI maintenance fees ("Reuters Internal Support Fees") of $1.17 million for the remainder of year 2001 and $2 million per annum thereafter for such maintenance and support. Payment of the Reuters Internal Support Fees for such maintenance and support for the remainder of 2001 shall be due and payable net 30 days from TSI's invoice therefor, and, thereafter, the Reuters Internal Support Fees shall be paid on a semi-annual basis (with each semi-annual maintenance period commencing on January 1 or July 1) and shall be due and payable 30 days in advance of such semi-annual period. Following expiration of the Addendum Term, until December 31, 2011, and subject to the payment by Reuters of an annual Reuters Internal Support Fee equal to $2 million multiplied by the ratio of the Consumer Price Index for the last complete calendar year divided by the Consumer Price Index for 2001, payable semi-annually as set forth above, TSI shall continue to provide Reuters with such maintenance and support on the foregoing terms and conditions for all such internal use by Reuters of all such TSI software products; provided that Reuters, in its sole discretion, may elect, effective upon six months' prior written notice to TSI, to terminate such maintenance and support to Reuters. After December 31, 2011, at the election of Reuters, TSI shall continue to provide Reuters with maintenance and support on the then current terms and conditions for the highest level of maintenance and support then generally offered by TSI for all such internal use by Reuters of all such TSI software products; provided that the Reuters Internal Support Fee that is payable by Reuters in consideration of such maintenance and support after December 31, 2011 shall be negotiated in good faith by TSI and Reuters, but in all events shall be no greater than the maintenance and support fee then charged by TSI to its most favored customers in connection with comparable deployments of TSI products based on enterprise-wide licenses. For purposes of this Addendum, "Consumer Price Index" shall mean the annual average Consumer Price Index computed by the United States Bureau of Labor Statistics for all urban consumers (CPI-U), U.S. city average, all items, index base period (1982-1984=100). Nothing in this Section 5 limits or otherwise changes or shall be deemed to limit or otherwise change, in any respect, the scope of the license granted by TSI to Reuters under TSI Intellectual Property Rights in Section 2.6(a) of the Agreement. 3 6. Systems Integrators. ------------------- 6.1 The Parties desire to work closely on sales of TSI Products and services that are made to Financial Services Companies through Third Party Resellers (including system integrators), and to cooperate to promote Reuters as the preferred channel for such sales. Accordingly, TSI shall use commercially reasonable efforts to assist Reuters in building relationships with systems integrators for the purpose of channeling future license and support business with Financial Services Companies through Reuters, including discussing potential opportunities and providing each other relevant information. For avoidance of doubt, while TSI will assist Reuters in establishing relationships with systems integrators for sales to Financial Service Companies in accordance with the above, TSI will not be required to notify Reuters on a transaction-by-transaction basis with respect to each contact TSI may make with a system integrator. All revenues generated by Reuters from sales of TSI Products and services to Financial Services Companies through Third Party Resellers shall be subject to the license fees set forth in Section 6.3(b) of the Agreement, as amended by Section 2 of this Addendum. 6.2 In all transactions between Reuters and a Third Party Reseller with whom TSI has an agreement that sets forth a finders fee or referral fee structure based upon sales of TSI Products and services generated by that Third Party Reseller, Reuters shall pay, in respect of any such sales of TSI Products that Reuters consummates, the finders or referral fee due to the relevant Third Party Reseller that would have otherwise have been owed by TSI had TSI made sales generated by such Third Party Reseller; provided that TSI has informed Reuters in writing, prior to such sales, as to the referral fee rates. For example, TSI has referral arrangements with systems integrators pursuant to which TSI pays a 10% (25% in the case of Accenture) finder's fee, which Reuters will honor. This Section 6.2 is conditional upon TSI providing Reuters with a complete list of all such agreements that TSI has with such Third Party Resellers and a summary of the provisions of each such agreement that could affect the obligations of TSI to which Reuters would be subject pursuant to this Section 6.2, including without limitation the duration of such agreement, the referral fee rates payable and the discount levels that may be granted. 6.3 Section 2.5(b) of the Agreement is hereby amended as follows: "TSI Products that are Licensed Products" shall be replaced by "Revenue-Sharing Products", and "shall be split equally between Reuters and TSI on a 50/50 basis" shall be replaced by "shall be split 40% to Reuters and 60% to TSI, after deduction of any finder or referral fee paid by TSI therefor". 6.4 Nothing in this Section 6 shall be deemed to restrict TSI's rights to provide TSI Products and services to Third Party Resellers servicing Financial Services Companies, but only to the extent permitted by the Agreement. 7. Insurance Industry. ------------------ 7.1 Notwithstanding anything set forth in the Agreement, TSI shall have certain rights to market, sell and distribute TSI Products and related services to Prospects in accordance with the methods of engagement set forth in this Section 7. For the purposes of this Addendum, a "Prospect" shall mean a -------- potential customer as to which TSI has good faith plans to actively pursue sales of TSI Products in a particular location and that is an insurance company that constitutes a Financial Services Company, and 4 a "Reuters Client" shall mean either a Prospect that, at the time in question, -------------- has an existing commercial relationship with Reuters, or a Prospect with whom Reuters has existing good faith plans to actively pursue sales of TSI Products. When TSI identifies a Prospect, TSI shall provide Reuters with the details of such lead, including the proposed location of that Prospect. Reuters and TSI shall then promptly mutually agree upon the method for engaging that Prospect as follows: (a) If a Prospect identified by TSI is a Reuters Client, Reuters may decline TSI's request to sell to such Reuters Client, and any revenues generated by the sale of TSI Products by Reuters (or any Reuters Affiliate) to such Reuters Client shall be subject to the license fees set forth in Section 6.3 of the Agreement, as amended by Section 2 of this Addendum. (b) If a Prospect identified by TSI is not a Reuters Client, Reuters may elect to actively participate in the sales process with the Prospect, in which case Reuters and TSI shall jointly market and sell the TSI Products to the Prospect in the applicable location. Reuters shall actively support TSI in the sales process for that Prospect. TSI shall be primarily responsible for closing any sales with the Prospect in the applicable location and shall be responsible for providing maintenance services, if any, to that Prospect. TSI shall pay to Reuters, on a quarterly basis, a license fee equal to 40% of the license revenues received from such Prospect and recognized by TSI in accordance with GAAP (less any discounts not already deducted from revenues and less any withholding taxes included in such revenue), for the licensing of TSI Products, provided that any revenues derived from such Prospect that are properly attributable to the provision of maintenance or other services shall be retained 100% by TSI with no accounting or payment to Reuters. Reuters will continue to receive 40% of future net license revenues (calculated and paid as set forth in the preceding sentence) received from such Prospect for additional licenses to the TSI Products over the 18 months immediately following the initial contract date with such Prospect. At TSI's request, Reuters shall actively support TSI in selling any such additional licenses. No revenue generated from the sale by TSI of TSI Products to Prospects as permitted by this Section 7.1(b) shall count against the annual guaranteed minimum license and maintenance fees due from Reuters to TSI. (c) If a TSI Prospect is not a Reuters Client, and Reuters does not elect to participate in the sales process with the Prospect as set forth in Section 7.1(b) above, then TSI may pursue the Prospect in the applicable location without Reuters participation. TSI will receive and retain any and all revenues it receives from such Prospect with no accounting or payment to Reuters. TSI will be responsible for providing support and maintenance to any such Prospect, and TSI may continue to sell to that Prospect in such location without requesting additional approval from Reuters. However, in no event will any revenue generated from the sale by TSI of TSI Products to Prospects as permitted by this Section 7.1(c) be credited toward the annual guaranteed minimum license and maintenance fees due from Reuters to TSI. For the avoidance of doubt, the right of TSI to pursue a Prospect without Reuters participation pursuant to this Section 7.1(c) shall not permit TSI to pursue sales of TSI Products that are intended to be used primarily in specific locations other than the location identified by TSI as the proposed location for that specific Prospect as set forth above. 5 (d) Notwithstanding the foregoing, if a Prospect that TSI is permitted to pursue in accordance with Sections 7.1(b) or (c) above is a member of a group of related or affiliated companies that include a Person (other than such Prospect) that is engaged in or that operates a financial services business (an "Affiliated FSC Entity"), TSI shall be permitted to sell to such Prospect in accordance with Sections 7.1(b) or (c) only if such Prospect shall have entered into a binding written agreement that provides that such Prospect shall not, directly or indirectly, provide access to any TSI Products licensed by TSI to such Prospect to any Affiliated FSC Entity. (e) The right granted to Reuters to engage its external auditor to audit the books and records of TSI pursuant to Section 12.3 of the Agreement for purposes of verifying the calculation of the amounts payable by TSI to Reuters Parties pursuant to Section 2.5 of the Agreement shall also apply to amounts payable by TSI to Reuters pursuant to Section 7.1(b) above. (f) Prior to the execution and delivery of this Addendum, TSI has disclosed in writing to Reuters all of TSI's Prospects as of the Addendum Date. TSI represents and warrants to Reuters that, to TSI's knowledge, such list is a true and correct list of all of TSI's Prospects as at the Addendum Date. 7.2 Nothing in this Section 7 shall be deemed to limit Reuters' right to pursue Prospects in the insurance industry in accordance with the Agreement other than those Prospects that Reuters and TSI agree TSI may pursue in accordance with Section 7.1 hereof. 8. Product Management and Support. In an effort to improve customer support for ------------------------------ TSI Products, the Parties will work together to implement a coordinated product management and support infrastructure. To accomplish this, the Parties will: (i) structure the customer support process to enable greater cooperation between TSI and Reuters regional offices allowing Reuters regional support centres to contact TSI support centres (both regional and Palo Alto) directly, as described in the Service Level Agreement in the form attached hereto as Exhibit 2 (the "SLA") and by this reference incorporated herein and made a part hereof, (ii) increase the number of Reuters product management personnel working directly with TSI's product management structure to up to six persons to better coordinate product plans and related knowledge and (iii) increase the number of Reuters personnel assigned to the TSI product support group to up to five persons to better increase Reuters internal product knowledge and to add more financial domain knowledge to the TSI product support group. These product management and support arrangements are further illustrated in the SLA. For avoidance of doubt, the individuals described in this Section 8 are additional to and separate from those described in Section 4. 9. Service Level Agreement. Concurrently herewith, the Parties are entering ----------------------- into the SLA to address such issues as customer support, maintenance, training, deliverables and product obsolescence, for the purpose of providing Reuters increased visibility into TSI's plans with respect to the evolution of new and existing products, as well as backwards compatibility and migration capabilities of TSI Products. 10. Pipeline Review. The Parties agree to adopt a pipeline review process --------------- whereby they will share information about current sales prospects and sales cycles at regional meetings to be held no less frequently than once every six weeks and global meetings to be held no less frequently than once each quarter. Each Party shall nominate the appropriate individuals to attend such meetings. 6 11. Joint Marketing. Reuters and TSI will work together and cooperate in --------------- pursuing mutual joint marketing and branding efforts in the financial service industry. Such marketing efforts and the funding will be agreed on a case-by-case basis and discussed at the quarterly relationship and strategic review meetings. 12. Joint Cultivation of IT Suppliers. TSI and Reuters will work together to --------------------------------- discuss opportunities for leveraging Reuters purchasing power from IT product and service providers to motivate them to embed and/or support TSI products in their own offerings, including, where appropriate, inviting Vivek Ranadive and/or senior TSI executives to participate in the relevant Reuters IT advisory board. 13. Term, Termination and Renewal. This Addendum shall be effective on the ----------------------------- Addendum Date and continue through the 31/st/ day of December 2002 unless earlier terminated or extended in accordance with this Section 13 (the "Addendum Term"). If either Reuters or TSI materially breaches this Addendum, and such material breach remains uncured for 30 days following notice to the breaching Party, the non-breaching Party may elect in writing to terminate this Addendum. Prior to the end of the Addendum Term, the Parties shall meet to determine the needs of the business relationship and to review progress under this Addendum, at which time the Parties may elect to renew this Addendum for an additional mutually agreed period or to enter into another addendum or amendment to the Agreement. Upon any termination or expiration of this Addendum, the relationship between the Parties shall revert to being governed by the pre-existing terms of the Agreement without giving any effect to this Addendum. Notwithstanding the foregoing, Sections 4 and 5 of this Addendum shall survive indefinitely the expiration or termination of this Addendum for any reason. At any time prior to 30 September 2002, Reuters may elect, upon notice to TSI, to not pay the minimum annual license fees set forth in Section 6.3(a) of the Agreement for calendar year 2003, in which case the provisions of subsections (1), (2) and (3) of Section 6.3(a) shall take effect as of 1 January 2003, and this Addendum shall terminate on 31 December 2002 without any right of renewal. 14. Ratification. Except as specifically modified and amended by this Addendum, ------------ the Agreement is ratified and affirmed by the Parties hereto. This Addendum is incorporated into and made a part of the Agreement. 7 IN WITNESS WHEREOF, the Parties hereto have caused this Addendum to be signed by their respective duly authorized officers or representatives as of the date first above written. REUTERS LIMITED TIBCO SOFTWARE, INC. By: _________________________________ By: _______________________________ Name: _______________________________ Name: _____________________________ Title: ______________________________ Title: ____________________________ TIBCO FINANCE TECHNOLOGY, INC. By: _________________________________ Name: _______________________________ Title: ______________________________ 8