SIEBEL 2001

SYSTEMS,

ANNUAL

INC.

REPORT

i6F C i

100

Letter to Stockholders, Customers, Partners, and Employees

The year 2001 was extraordinarily challenging in the information technology industry. Early in the year, economic conditions started to deteriorate, led by a pronounced slowdown in IT spending. The health of the market continued to diminish through the second and third quarters, and the tragic events of September 11 precipitated a geopolitical dislocation that accelerated the economy’s freefall. The rate of IT spending contracted dramatically. The macroeconomic environment in 2001 may have been the worst we have seen in the history of the information technology industry. In the first calendar quarter, as the recession loomed, we modified our operating plan and reduced our growth plans to focus on four primary objectives for 2001: 1) Maintain and improve our customer satisfaction levels. 2) Maintain our product leadership in eBusiness. 3) Continue to operate a healthy, cash-positive, profitable business. 4) Maintain and improve our market leadership. I am pleased to report that—under extremely adverse market conditions—Siebel Systems executed its plan with remarkable agility. As the market experienced increasing turmoil, we refocused our resources to ensure that all of our customers succeeded with their Siebel eBusiness implementations. We redoubled our support offerings. We channeled key resources into problem deployments. The results speak for themselves. Ninety-four percent of our customers report that they are pleased to act as references. Ninety-seven percent plan to continue purchasing their customer relationship management (CRM) and employee relationship management (ERM) software from Siebel Systems. Our customers’ satisfaction with our products, our service offerings, and our business practices has reached new heights. We have attained the highest levels of customer satisfaction in the information technology industry. I consider this the most significant accomplishment of this company and the most significant leading indicator of our success. In the fourth quarter of 2001, we successfully shipped Siebel 7, an integrated family of nearly 400 CRM and ERM application software products. The result of more than two years of sustained software engineering, Siebel 7, we believe, redefines technology leadership in CRM and ERM solutions. The high-performance, zero-footprint Web architecture of Siebel 7 sets the standard across the enterprise application software industry for architectural excellence, performance, scalability, and utility. The Siebel 7 product line is the culmination of more than 5,000 person-years of software engineering, design, and quality assurance. Siebel 7 distinguishes us in the marketplace and offers a primary source of continued competitive advantage. In light of the general market maelstrom in 2001, our financial results were extraordinary. In the course of the year we expanded our market presence by adding approximately 700 new customers, while 650 of our existing customers significantly expanded their purchases of our products. Revenue increased by 14 percent to $2.048 billion. Days sales outstanding improved to 72 days. Deferred revenue increased. Net income generated was $255 million,

1

an increase of 15 percent. Earnings per share was $0.49. Stockholders’ equity increased to $1.836 billion. Cash and short-term investments increased by more than $500 million, and we ended the year with more than $1.6 billion in cash and short-term investments. In this era of increased and justifiable concern for financial integrity and accounting transparency, net cash generated from operations returns as the gold standard of financial metrics. And by that standard, we concluded the year with a solid balance sheet and excellent operating results. During the course of 2001, we made significant capital investments in our internal information systems and our software engineering and quality assurance facilities. We added more than 1,500 computer servers and 102 terabytes in storage capacity, and we increased our network communication capacity by 350 percent, representing an overall capital investment exceeding $100 million. This proved to be one of the most important investments that the company has ever made. Fully deployed in 2001, this infrastructure allowed us to complete, performance test, and quality assure one of the most extensive enterprise application software product families on the market today. The result of those efforts—the Siebel 7 product family—is the highest-quality, highest-performance, and by far the most functional application suite that we have ever shipped. This investment also enabled us to globally deploy mySiebel—our own internal implementation of Siebel Employee Relationship Management (ERM)—to the entire Siebel employee base. This system allows us to apply state-of-the-art information and communication technology to the day-to-day management of employees and business units. It is difficult to overestimate the importance of Siebel ERM to the successful implementation of our operational and budgetary controls as well as personnel and organizational performance management. This was a critical success factor in 2001 and will continue to be so in 2002 and beyond. In 2002, we plan to make a similarly large investment in hardening our data communications and customer service infrastructure. In light of the terrorist events of September 11, it became apparent that we had a number of potential single points of failure in our IT infrastructure. In the event of a significant geopolitical dislocation in the San Francisco Bay Area, these vulnerabilities could have caused sustained disruption of our business operations and customer service capacity globally. Clearly, this is not an acceptable situation. Our customers have invested literally billions of dollars in their Siebel CRM and ERM infrastructures, and the reliable operation of these systems has become critical to our customers’ business operations. It is imperative that we maintain continuity of business operations under any and all circumstances to support these customers. In the course of 2002, we will be relocating our data operations to four facilities around the world. We will also establish redundant hardened data facilities. We are confident that by mid-year 2002, we will be in a position to continue providing the highest-quality 24x7 customer service globally given a significant and sustained system outage at any of our facilities. In 2001, we also significantly increased our investment in eGovernment and public affairs. An important milestone was the formation of the Siebel Systems European Board of Directors to assist the company in accessing the growing market for eGovernment applications within local, national, and pan-European government departments. The board comprises Giuliano Amato, former Prime Minister of Italy; Jacques Attali, former Advisor to French President

2

François Mitterrand; the Right Honorable John Major, former British Prime Minister; and Dr. h.c. Horst Teltschik, Chairman of the Board of the BMW Herbert Quandt Foundation. In mid-year we launched a significant government affairs practice in Washington, D.C., and formed the Siebel eGovernment Political Action Committee, initially funded with more than $2 million from Siebel employees, to assist candidates and causes in support of eGovernment and eBusiness policies and legislation. This is now the second-largest corporate political action committee in the United States. We believe that these focused efforts will allow us to significantly increase our dialogue with the public sector. Immediately following the terrorist attacks of September 11, we mobilized substantial resources to develop and launch Siebel Homeland Security, a version of our application software that enables government agencies to track, manage, analyze, and share terrorist-related information in the effort to detect, prevent, and respond to terrorist attacks. The application of information technology and best practices in information management can significantly enhance our nation’s ability to defend itself against terrorist threats, and we are concentrating considerable efforts and resources to develop awareness of the Siebel Homeland Security solution throughout the public sector. It is also important to recognize the leadership and the dedication of our management team and employees, who made significant sacrifices during the course of the year. We reduced spending. We reduced headcount. We implemented comprehensive cost controls. We eliminated nonprofitable business operations and product lines. As a demonstration of leadership, the Siebel executive team reduced their salaries by 20 percent and set their bonuses to zero for the year. The CEO’s combined salary and bonus was set to $1 for the year. More importantly, thousands of dedicated, committed employees went without bonuses and merit salary increases for the good of the company. In 2001, the company took the necessary steps to weather what may have been the most significant economic decline in the history of the information technology industry. Such abrupt and sustained economic downturns, however, do offer significant opportunity for market leaders. An examination of the competitive dynamics of application software sectors reveals that in expansive markets, many companies can appear to be successful. But as the economic cycle enters a downturn, it is generally true that only the market leaders in any given sector can continue to operate a cash-positive, profitable business. The purgative effect of technology recession is dramatic market consolidation, with second- and third-tier companies discontinuing operations or withdrawing market offerings. As a result of these factors, our market leadership was substantially enhanced in the course of the year. As we enter 2002, Siebel Systems has become recognized as one of the most important and successful information technology companies in the world. Our leadership in CRM and ERM is renowned and undisputed. Our management practices are sound. Our executive team is tried, tested, and proven. Our products have never been stronger. Our market leadership has never been greater. Our financial position has never been more solid. As the macroeconomic environment returns to an expansive mode, we are poised to take full advantage of the many market opportunities that lie ahead.

Thomas M. Siebel, Chairman and CEO

3

FINANCIAL

4

INTEGRITY

OUR

BUSINESS

IT

IS

IT

GENERATES

IS

SIMPLE.

S T R A I G H T F O RWA R D . CASH.

In this era of increased and justifiable concern for financial integrity and accounting transparency, net cash generated from operations returns as the gold standard of financial metrics. And by that standard, we concluded the year with a solid balance sheet and excellent operating results.

5

IN

2001,

WE

COLLECTED

$2.18

BILLION

IN

FROM

SELLING

S O F T WA R E

SERVICES AROUND

TO THE

LEADING

AND

COMPANIES

WORLD.

Collections by Type

Services $1.05 Billion

Software . . . . . . . . . . . . . . . .

$1.13 Billion

Services . . . . . . . . . . . . . . . . .

$1.05 Billion

Total . . . . . . . . . . . . . . . . . . . . .

$2.18 Billion

Collections by Region

Software $1.13 Billion

Europe $0.64 Billion

North America . . . . . . . . . .

$1.36 Billion

Europe . . . . . . . . . . . . . . . . . .

$0.64 Billion

Asia Pacific . . . . . . . . . . . . .

$0.12 Billion

Other . . . . . . . . . . . . . . . . . . . .

$0.06 Billion

Total . . . . . . . . . . . . . . . . . . . . .

$2.18 Billion

6

CASH

Asia Pacific $0.12 Billion Other $0.06 Billion

North America $1.36 Billion

WE

SPENT

$1.87

BILLION

IN

CASH

TO BUILD, OUR

SELL,

AND

SERVICE

S O F T WA R E .

Expenditures by Activity

Sell $0.64 Billion

Build . . . . . . . . . . . . . . . . . . . . .

$0.48 Billion

Sell . . . . . . . . . . . . . . . . . . . . . .

$0.64 Billion

Service . . . . . . . . . . . . . . . . . .

$0.75 Billion Build $0.48 Billion

Total . . . . . . . . . . . . . . . . . . . . .

$1.87 Billion

Expenditures by Category

Service $0.75 Billion

Buildings and

Employees . . . . . . . . . . . . . . .

$1.07 Billion

Buildings and Equipment

$0.46 Billion

Operations . . . . . . . . . . . . . .

$0.34 Billion

Total . . . . . . . . . . . . . . . . . . . . .

$1.87 Billion

Equipment $0.46 Billion Employees $1.07 Billion

Operations $0.34 Billion

7

WE

GENERATED

INCREASE AND

IN

AN

CASH

CONTINUE

TO

OF

$0.5

BILLION

RUN

CASH-POSITIVE,

A

PROFITABLE

BUSINESS.

Cash Generated Collections . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . .

$2.18 Billion

Expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ..

($1.87 Billion)

Other (Includes Option Exercise Receipts, Interest Received, and Taxes Paid) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$0.19 Billion

Net Cash Increase . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$0.5

Accumulated Cash

Billion

Accumulated Cash:

(in Billions)

Five-Year Annual Growth $1.66

Rate = 217%

$1.15

2000 to 2001 Cash Increase:

$0.69

$0.04 95

8

$ 0.1 4

$ 0.1 6

$0.24

96

97

98

$0.5 Billion 99

00

01

WE

ARE

FINANCIALLY

SECURE.

Profitability is not enough. A company needs cash to give it security in tough economic times and the flexibility to make investments.

2000

2001

Cash . . . . . . . . . . . . . . . . . . .

$1.153 Billion

$1.657 Billion

Cash Increased

All Other Assets . . . . . . .

$1.009 Billion

$1.088 Billion

$0.5 Billion

Total . . . . . . . . . . . . . . . . . . .

$2.162 Billion

$2.745 Billion

$0.882 Billion

$0.909 Billion

Assets

Liabilities All Liabilities . . . . . . . . . . .

9

WE

ARE

STRONGLY

POSITIONED

FOR CONTINUED

SUCCESS.

Customer Satisfaction (Satisfaction %) 100%

97%

96%

97%

97%

96%

96

97

98

99

00

01

We maintain the highest levels of customer satisfaction in the information technology industry.

CRM Market Share (Market Share %)* 66%

We have achieved greater 52%

than 50 percent market share

72%

58%

32%

in CRM software.

23% 13 %

95

96

97

98

99

00

01

* Percentages are calculated based on the CRM software license revenue of the top five vendors of CRM software for each year listed. Data sources include companies’ SEC filings, analyst estimates, and Siebel estimates.

10

Product Leadership (Number of Products) 392

We have more than 300 products,

270

in 20 languages, and 20 industryspecific versions. Our technology is patented, and it is proven by customer success.

147 100 17

21

31

95

96

97

98

99

00

01

CRM Domain Expertise (Production Users) 1,000,000+

We have more than 1 million users of Siebel software

590,000

in production. 199,000 500 95

11

57,000 3,857 20,857 96

97

98

99

00

01

WE

H AV E

THE

MANAGERIAL TO

DISCIPLINE

PROFIT

FROM

OUR

POSITION.

We have built a company that has emerged as one of the strongest in the information technology industry. We have the processes, the discipline, and the leadership in place to maintain and extend our market position. We will continue to do whatever it takes to make our customers satisfied. We will continue to comport ourselves with the highest levels of integrity and professionalism.

The preceding contains a simple cash-based report of our 2001 results. Siebel Systems’ 2001 consolidated financial statements, in accordance with generally accepted accounting principles, are shown on pages 80 through 108 of this annual report and in the company’s Annual Report on Form 10-K, as filed with the Securities and Exchange Commission.

12

“ w e r e m a i n c o m m i t t e d t o o p e r a t i n g a c a s h - p o s i t i v e , p r o f i t a b l e b u s i n e s s.”

Thomas M. Siebel, Chairman and CEO

13

2001

MARKET

LEADERSHIP

Siebel Systems 73% Communications . . . . . . . . . . . . . . . . . . .

Siebel Systems 71% Finance . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Siebel Systems 68% Insurance . . . . . . . . . . . . . . . . . . . . . . . . . .

Siebel Systems 67% Life Sciences . . . . . . . . . . . . . . . . . . . . . . .

Siebel Systems 61% Energy . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Siebel Systems 57% Consumer Goods . . . . . . . . . . . . . . . . . .

Market share percentages for the year 2001 are based on CRM software license revenue of the top five or six vendors in each category. Sources: SEC filings, analyst estimates, and Siebel estimates.

14

UNFAIR

A D VA N TA G E

We use our own software to drive operational excellence throughout the company. Our software gives us a clear competitive advantage in predicting and managing revenue; in maintaining intimate relationships with our customers; and in guiding, managing, and inspiring our employees. By enabling us to continuously maintain our finger on the pulse of customer behavior, our software provides an early warning system to detect shifts in market demand. Information from every function, division, and geographic location provides a consolidated view of our customers, partners, and employees. Through the use of Siebel e Business Applications—the same software that our customers use to achieve dramatic increases in revenue, productivity, and customer satisfaction and retention—we have precise gauges to monitor the market conditions affecting our company, enabling us to adjust our business accordingly. Our software also enables us to execute our strategy throughout the entire company—rapidly translating strategic objectives into action. In 2001, our ability to anticipate and rapidly respond to a sudden deterioration in market conditions was the key to posting exceptional results in what may have been the worst IT market in recent memory. We manage every relationship with our key constituents—our customers, partners, and employees—with the use of Siebel 7 applications, enabling us to apply consistent best business practices globally. Through the powerful analytics built into Siebel 7, we measure and monitor key performance indicators for every aspect of our operations, from finance and administration to marketing, sales, and customer care.

15

VISIBILITY

through

CRM

Using Siebel 7 applications for customer relationship management (CRM), we can track every interaction with every customer and prospect across every channel, everywhere in the world. We know the precise status of every lead, every sales opportunity, and every customer in real time. Applying best practices in sales methodology, opportunity management, and sales forecasting, we monitor each transaction in our pipeline and know exactly where it is in the sales cycle—whether it is in the process of contract negotiations, is awaiting signature, or is closing. We know the competitors, the decision issues, the decision maker, and the decision time frame. We have up-to-the-minute information about what happened on the last sales call, and we have a detailed action plan, specifying each step required to close the sale. This system of record across the entire organization gives us real-time, fine-grained market intelligence. Through weekly executive forecasts and flash reports generated by our eBusiness system, we have exceptionally clear visibility into our revenue pipeline. Our visibility extends not only to our direct interactions with our customers, but also to our interactions through partner channels. Using Siebel Partner Relationship Management (PRM) technology, we monitor and manage our partner pipelines, enabling us to plan and drive joint business efficiently and effectively. In early 2001, when our indicators revealed a sudden contraction in IT spending, we anticipated the downturn, and we responded vigorously. Using our employee relationship management (ERM) software to plan and execute the revised business plan, we immediately adjusted our operations, shifting from a $4 billion to a $2 billion annual operating plan—all within 30 days.

16

Customer Visibility

X 9-1-

2001 Web

Oppo

rtunit

new

X

A.K.

Nam

9-1-

X

9-1-

X

Four -for-o

9-1-

X

9-19-19-1-

Sout

300 Proc es

2001

Pent Inve

e Di strib

hern

Upgr ade

2001

2001

2001

Cabl

2001

2001

ntor

ium

Lapt

yM an

utio

n $20,

05-B

uildi

ng

000.

00

utio

Acco Gold

n Sy st

berg

Visio

North

em

Lan

Sout

ers

r fo r

oard

ent

Natio roas

Mac

ting

s

Sout Mac

Syst

em

Valia

nal

h Sy st

h Ba y,

h Sy st

nt Sy st

30% Halac

Wes t

h Ba y,

hern

Real

Expr ess

ems

Man

Reve ufac

Inc. Esta

Fina

Sales $20,

000.

02-P

00

000.

$20, $20, $20, $20,

000.

06-S

00

000.

04-O

00

000.

000.

06-S

00

05-B

00

05-B

00

000.

05-B

00

05-B

Stag

ng

uildi

ng

Visio

Visio

Prob ab tial

Show

03

Selec Nego Clos

ing

Pote ntial Lead ficat ion rtunit y Visio n

t Lis t

ted

tiatio

ed/L

Quot

Halac

30%

Halac

30%

n

Halac Halac

Oppo

on

ies

on

on

on

on

on

on

:

Sales Opportunities By:

Sales 62%

Met hod

– St anda

Char

rd

ts

Acco

68%

Fund unts

Requ

> $1 M

est edit

98%

n

sear ch

103%

ost Met

rtunit

on

a

%

07

nue

cting

of Re ve nu eQ uo ta

Oppo Build Shor

08 09

% of Reve

Quali

04 05 06

:

Halac

30%

Halac

Pros pe

Halac

30%

n

30%

Show

Halac

30%

n

Team

10% 50%

y

n

ility

Lead

List

tunit

List

Visio

Visio

oten

hort

ppor

hort

uildi

uildi ng

uildi ng

01

e

00

000.

$20,

ncial

Inc.

Inc.

on

nue

g

te

ems

ems,

turin

$20,

$20,

02

n

unt

er

Sout

rolle

herb

agem

Offic e

Serv

ne / Jeff

ops

s co nt

mot

er Di strib

e

2001

9-12001

X

Park

d

X 9-1-

er

edit close

X

X

Serv

ies

new

93% or Ex ce

01 eded

242%

02

Quot

a

Sales

258%

03

Pipe

04 With

in 30 %

line

Analy

05

Sales Stag e of Qu ota

sis

06 07 08

09

Sta

Show

Cus

tom

Serv

Show

ice R Show: Sh eqow ue Ne Shwow : sts

:

Acco unts Show :

ities

Cont acts

Mor Need e Info to diffe New rent perform CS Ac quer N Save tivities ies onmultip le Activ 1a ca 14ll02 Verif ity Pl 940 y Acco ans unt: Atta Arbe chm lla In ents su Site ra : Audi nce Last Grou t Trai Nam San p e l Open Jose Man , Ca ning Sum mar First

Calen

Jam Name es

*Sta tus:

der

Cha

nge

Req

Area

uest

Inst

Unas signe d

s D ec

Adm inistra Prior tion ity High

New

*

*

Serv ice Re ques New ts

Activ ities

Cate gory

Save

New Stat us

Empl oyee

ision

Issu

es

Invo

ices

Mes

sage

Cust omer Open ed Cust Cont omer acts Com mitt Corre ed spon denc e

Acco unt Need to pe rform Insta mult llatio iple n Prob differ Acco Integ ent qu lem unt ratin eries g Lo Unite tus No d Pa tes wi cific th Si Activ Bell ebel ities Cana da Valen Cale t nd Sy stem ar CSN s Reve Char nue Quot ts a Cu Open

Decis ion Iss ues

Open

D&B

s M et

Actio n Pl

ans Reve nue Quot a

Empl oyee

19%

stom er Su rvey Mor e Info

Custo

m er

10%

Satis

Empl oyee

New Reve nue Reve nue Reve nue

Repo rts

on

Litera ture Favo rites :

Fund Requ est Show :

Sieb el Ve RICH ARDS ON SMITH

TAM /CAM 100

JOHN SON

100

93

Peop leSof t

Soft

92

100

Invo ices

facti

Empl oy

rics

Open

CSN

Activ ities

Cale Favo nder rites : Cust 07/0 omer’s Go To 2/2001 12 Date an Last Time :18:27 d Tim : e Man ning Wor k Ph Abra Web Show one m Serv : (408 er Head Abra ) 555m Owne 9090 Atlan quarters Wha r len ta, GA CCHE HQ McD ougla CCHE NG (206 Martin s ) 555NG (850 CCHE Carls ) 234- 5033 on (707 CCHE NG 0985 ) (408 878-9033 CCHE NG ) 477CCHE NG 2006 CCHE NG NG

*Age nt

2-Hi gh

Show :

Empl oyee

Open 07/0 ed 4/20 Agen 01 10 t Co :25:57 mmitt 07/1 AM ed 3/20 Agen 01 10 t Clos :38:22 ed AM

Seve rity

Owne r CCHE Ac counNG ts Show :

D&B

Show Show : Show : Show : :

Site

allat ion Suba rea

*Sub status

Deci sion Issu es

Acco unt

Web Serv r M er onst er.co Erick m Marrio son Retir emen tt Inte rnation t al

Sales Pipeline

2-Go ld Pa rtner 3 Silve r Partn Prem er ier

Corre spon denc e

Show Show : Show : Show : :

Sum mar y 3Com 1-14 3Com 0441 1-14 0452 5 Open Web 1-65 Serv Open 6014 er Cust omer Open Did no is ha Integr t receive ving tro uble ating set-u us Lotu s No p material ing field subs tes wi titution th Si for Beta ebel pr s in Sales ogram email

*

s

Cont acts

Cate gory

Stat us

*

y

ces

Activ

: Save

SR

Purchase History

sP ro

Corre Show spon : All denc e Decis ion Iss Sant a Clar ues Acco a, CA D&B unt 5540 Empl 3Com 1 oy Site ee 3Com Corp Corp JJAC 3DRe Serie QUES Quot CSH es 3M (M ality Ne Mt Pr t Com ospe Com 3M Ch innesot mun Birm mun a,) Quer icatio ingha ct, IL icatio Acco 3M Fr ile ies: ns St Pa 3765 m, M ns unt Te Smar ul, M 01 I 3M LI ance JJAC Sant am tScr N 6070 K Pic QUES iago ipts Sieb Cerg 1262 1 MAE el Ve 04 NTRS Aust y-Pontois rti 60 RA ca THCO 70 U in, TX l WAN e Prim G 1276 3 TFRA NWAY Mini ar 82 y ng & Sale 4440 1085 AGUI NZ Foun s Re 7 dry q TA DESC GNAR Cons MAE M/C HENE umer NTRS AM JPM Good TH U ORGA s TF CONW Peop N AY RA leSo ft AGUI NZ DESC GNAR 1085 HERN 2-Go HENE ld Pa JPM ANDT 9999 ORGA rtner 3 Silve N r Partn 2571 Prem er 9999 ier Partn 2750 er Stra 2926 tegic

Quer y

New

Cate gory

rd S ale

3Com Corp

Refe renc e

**

*

*

Activ ities

Quer y

New

Service Requests

Acco unts Show :

:

ers

nda

100

Mor e Info

Mor e Info

Reve nue Quot a

No 1999v

17

Febru 2000 ary

Ma 2000 y

Aug 2000ust

No 2000 v

Febru 2001 ary

Customer Satisfaction Ma 2001 y

Aug 2001ust

Dashboard

FRONTLINE through

ACTION

ERM

Our internal deployment of Siebel Employee Relationship Management (ERM) was absolutely critical in our ability to rapidly respond to the dynamic market conditions of 2001. Using Siebel ERM, we rebudgeted the entire company— every area, every department. We reset company objectives, departmental objectives, and individual objectives for 7,500 employees. We tightened expense controls. We curtailed travel budgets. Compliance was instantaneous and universal, resulting in a 50 percent reduction in travel and entertainment expenses. We slowed hiring and reduced headcount. We removed two layers of management from our sales organization. We cut discretionary spending. We eliminated unprofitable products and operations. We reduced executive salaries, and we froze bonuses and merit increases. We initiated all of these actions in late February. By April 1, we were executing a new plan. Siebel ERM enabled us to instantaneously communicate our new priorities throughout the entire company—through direct, daily communication with every employee around the globe—and to fully align all individual employee objectives with the new corporate and departmental imperatives. We refocused the company on four key objectives: operate a cashpositive, profitable business; maintain and increase customer satisfaction levels; maintain and increase market share; and maintain technology leadership. Every employee in the company was immediately aware of the new initiatives and understood their urgency. The result ? In just four weeks, we turned a global business—a business of more than 7,500 employees operating in more than 32 countries—on a dime, and we managed through the downturn with excellence.

18

Frontline Action

Fron t Page

Welco m

Toda

y is:

e to m

Wed ne

myP age Allianc es

Engi neer ing

ySie

sday bel New , 21 N ovem s Zach Man ery Pe ber, 20 rkins Year- datory 01 , click Actio End 40 here ns 1(k Em If you

are no t

F&A HR

IT

Marke ting Prod Sear ucts ch: Sales Serv ices Help Desk Traini Onlin ng e ature Empl oyee Loca tor

Chai rman ’s Fo rum

) Retir ploye emen es M Wind t Savin ust Cl ows ear Th gs Pl XP No U.S. an Ad eir Br t Appr Open owse visor oved Enro y for Partn r Cach llmen for Si U.S. ers M e t for ebel Emplo ust Co Bene Syste yees mple fits Be ms Ne te Pa Spot gins twork rtner light Nov Use Profile 1 on M s for arke Free ting Web-B Em pl ased Traini For Si oy ee s an ng eb d Fa el sc

Top Fe

Go

Logo ut

Perfo rman My C ce M alenda anag emen r t

Tues day 3:2 6:200 2 8:00 Owne AM r: Ex myS 9:00 iebel ecNe AM utiw m ili es reening Syste ReDa ve De -dte ms’s Team es:ignMa prov Ch mo 10 of ee :00 em Harry ided Tim Meeetin Mreetin Mar r Ha ploye AM an ex a Zogne 26 rry Po g 26 es , th citing unique op Potter an 2002 11 : (G tte :00 co e d the No lleag r enterta MT-0 AM po Spot ues. 8:00) 2002 inmen rtunity to Sorcerer v. 16-17 pr On No light 12:00 Four Pacif sh ’s t iva v. on M Toda expe thou PM ic Tim Ston are qu 20, Si prov te Go y sand rie Conf e ider e (US arke 1:00 eren emp. nce with ality tim Week of eB ebel Syste Sieb & Ca tin ce PM el 7, e and .. ly g usine Si eb family nada call wi ms eBus Pres th Month 2:00 and th Do enta iness e sevent ss applica , the world M an el Fo re ca ly PM co tio n ag h ma Ap mp ’s Tyler tions n Sieb st in g em en Sieb jor softw leading 3:00 custo rehensive plications el 7.5 7 De t el Fo PM are, . Si release liv er Navig recasti suite emplo mer relat Meetin s Ro ation of pa ebel 7 pr of Siebel shipp ng is 4:0ed bu st 0 PM g: m ckag lowes yee relat ionship ovide an es Pi pe y Sieb ma ed s ion t tota sential Call: lin e el Gu l cost ship ma nagement applicatio the mo5:0 Sieb 0 sales idelin el ER na of ow ns fo st PM (CRM tool Rec es M r nersh gement for to (ERM ) and 6:00 PM ip (TC day’s Fron ent Feat O). Re ), with t Page ures flecting the mGlyP ... obag aleEmAl The fo lianc pl oy Syste urth cycle ee es Su rv En Toda ms Gl ey Be gineer y is 26 obal of the Si gi ns in eb Emplo g F& March yee Su el A HR Group , 2002 rvey s IT

eBiz

Sie Cust bel Syste ome r Satims Incre sfacti ases on

Marke HR Ho Be low ting me Chai are th Prod Perfo rman Th e Sear e ob ucts rman ’s Fo ac co jec tiv ch: mp lis ce M rum Sales es th grow Hom hm en anag at ea as an e Serv emen t of th ch em Be low ind us ices Help Corp t es e ob plo ye try lea are th Desk orate Traini e wi ll jec tiv Th e de r an e ob Onlin Objec KEY es len ac co ne ed ng All Em jec tiv d a Gr e mp tiv to ds es gr es ployee lis hm ac co ow as ea t Pl direc th at + = mp lis en t of tly to ea ch ac e to Objec an ind Empl Quar M an h fo r Si em plo th es ag er terly tives W eb oy us try or k. th is e ob el Sy ee Lo ye e wi - Cl ic lea de qu ar jec tiv Perfo ste ms If cato ll ne ed k on te r in r es len M anre co rd ing su cc r Dash rmance th e pl an d a Gr orde to ac ag er ds dir es sfu ea board r to be Manag lat ion us si co mp - Cl re ec tly lly ac sh ips gn to t Pl ac e to ic k on = in lis emen to hie h ali gn Si eb In di vid vin g fo r th Wor k. sh ow th e mne ed to t me nt el Sy its is ua l Co nt rib

C lic

Search By

in us

ut or

Nam e

k on an em pl

Go

Global Communications

Logo ut

Perfo rman ce M qu ar wi th anag te rly th e Co emen ob jec rp or at t tiv

qu ar th e lis ste ms be te r in si gn up da te t of su cc orde em pl to hi d, ple es sfu r to be de th as e oy ee es an lly ac e ob s wh e lis co mp in ali d co hie vin jec tiv t of gn me let e o re nt inu es . g its em pl a po rt ing to nt wi qu ar oy eePA F an d in to th th te rly a m an s wh se nd e Co ob jec rp or at o re to ag er tiv es po rt th e HR e ob . an d in to jec tiv Fo rm co nt a m an es . s. inu ing ag er to .

eBiz

oy ee Ch ris Sm ith ’s na + Ch - FA m e to CO RP ris Pi vi ew ve ro + Je - OF ne s FI CE ff Ru hi s/ he M K SV OF TH ss ell Sa ra r ob - FA P EX E M ye rs OP EX EC UTFron CE O je ct iv - FA IV E t Pa EC es . RE CR CO RP ge UI T - OF myP FI CE age OF TH Allianc E CE es O To day is

Group

Performance Management

26 M

s

arch , 20

Engi neer ing

02

HR Ho me Qua Perfo rt e rl rman ce M y Hom anag e emen Corp t orate Em Objec Objec All Em tives Po si pl oy ee : ployee tive tio n: Objec Quar 1 terly tives Weigh Perfo LOCK ing 75 ED Dash rmance board Manag % Ob jec emen D e si g tiv es n, D mt

yS ie

b e l S e liv e r, P

Su mm

O b je

F&A HR

Chai rman ’s Fo rum

c ti v

es Q12

Objectives Management IT

Marke ting Prod Sear ucts ch: Sales Serv ices Help Desk Traini Onlin ng e

002

ro Resul y it e C ts o n te d u c e , a Prod Ra tin nd U nt g (M 9/30 uce grap p d a te an ag 4 (10 er ) hics 0% +) /M a in Prod for 40 = Ex ta in ce ed requ uce grap micro ed Ob sites, Prod ested, on hics for Re su jec tiv lts Ac as re e over Metab uce all gr going hi ev ques Za ch 3000 ed ap ox by ted, by Web (M an su cc is a ta len 7/31 hic supp ag er Reque te d gr do ing es sfu lly ) ort fo ap hic me st, as wh at r the ev er t ev er y ob s de sig Extend ne wa Hi s ta r an d s ne ed jec tiv e ed N a grea an d ed fo lau nc len t is sh ews re r sp h. th e te on de t te am pla He als ow ca se lim ite Fron t Page

Tr ai ni

ng To M y Tr ol s ai ni ng M y Tr an sc rip t Step

ws

Total

Weigh in

ct ive

g = 10

s

eBiz

0% Expo

rt

am ’s d d in o as su su cc to ev er y ye r wh o ov es s. re qu s, a me d prod er 79 mi cr es t in sit ua uc tio os ite Q3 , tio n n re s an d th at th is no sp on sib ilit ies e ne ws me t lik ely Allianc to ta to ch es an ge he lp co mp ph or Engi in th e ne en sa te fo neer ar fu ing r tu re . Chai F& d re so

myP age

Logo ut

Perfo Perfo rman rman ce M Qu ic ce M anag ks ta anag emen rt: Qu Prog emen t ra m ar te rly t Help Ov er FA Qs Ob je vie

urce

A HR rman ’s Fo Sie IT Curri bel rum Marke culum 2: Car s ting Stee Traini Help epr 1: ng Ho Prod & Pe Desk Sear Catal ng Fast ucts me Brow rfor ch: og Onlin Trm Sales se Tr acan Traini e k ce ai ni ng Se ar Serv Sche ng R equire ch fo ices Empl dule Go r Tr ai oyee m Traini Prof es 7 en R H ni Logo Loca eq ab t N re ng ng si on al ut tor C ar ee its ofFaHstig uiam meen Di re ct Ce rti Step 4: C t hl om r Tr yacEf Nam fic at D ev el SE AR Ac co io ns an Perfo Pe rfo k fe io n Comm CH Exct iv pleet-eC3 m m od op m st d rman rm an Fa unicat om e Pe Req Ad va enkt at am ac ce M at io n cestM Tr Fa plet Co nt uire op le nc ed G uiSide ion Sk anag e 3mR anac ac t In Tr eb el ag Se en em ill k/ em eq ar t fo rm s R ent Sy st Step Saen He lp ch uirem lets Sy at io n em s equire 3: Man Tr ai en st em t ni eBuy m yS ng: Q m ager Fu nd 1 ua ie be l (Srt ial C am en ent Nam T-er Form Ho m 1)ly an M ee ours e d An tin g es ta l Pr es e - Com In st ru at Fo nu al Ad va R en ta W rit pl rmat ct or-L in g Ad Re vi nt equi tio n Sk ete 2 R Web O ned ew s re e equire va nt Cag C ou ag e oa ch in ment Nill s rsDeoc Li ne Ex am Web men ame C ou g fo r t Ef fe ct rsInest um en t C Re om iv su lts e M an ru ct or plet N ew @ Si ag em -L ed M an eb el e 4 Req ag er Si tu at en t @ Form uirem O io na Si eb ent In st ru at l Le ad rie nt at io Step el n 5: Pr er sh In st ru ct or-L ed ip oduc t Trai In st ru ct or-L ed Form ning ct or-L ed In st ru at Requi In st ru ct or-L ed N av ig rement In st ru ct or-L ed Nam at in g Se lli e Si eb ng Si In st ru ct or-L ed el 7 Ap - Compl Se lli ct or-L ete 7 pl ic at ng Si eb el 7 C ed Requi al l C io ns eb el Se lli en te remen ng Si 7 ER r an d M eb t D at a Fron el 7 In te t Page Q ua ra ct lit y (S myP iv e Se lli ie be age Form ng l 7) Allianc Su ite at Web es C ou Toda Engi rs e Web y is 26 neer C ou ing rs e Web March F&A C ou Group , 2002 rs e HR Web Chai s IT C rman Marke ou rs e Financ ’s Fo ting es an rum d Ad Financ Prod Sear minist ucts Al lia e Ad ch: Help nc es ration minist Sales Corp Desk Hom ration orate Onlin Serv e Deve Sectio e ices Facil lopm Go n Map ities Traini ent Empl Logo ng Financ oyee ut e Loca En gi Financ to r ne er ial Pl in g anning Invest Perfo or Re & An rman alysis lations ce M Lega anag l Prod emen Orde uc t M t r Man ar ke agem tin g MBA eBuy M ar ke ent/M Topics Recr tin g fgOp uiting Purc s eBiz FP&A hasin g/eB Hom Flas Stoc uy e F&A k Adm Quar h report inistra Travel Depa terly Even tion rtm Inte enta ts Treasu ry Proc rnational l Reporti FP&A ess Lead Reporting ng er Orga nizatio ship n

Q ui ck

Tr ai ni

Employee Training

ar

Go

Empl oyee Loca tor

P ic s

eBi

Chart Sa le

s

2-Gold Partn 3 Silv er er Pa rtner Premie r

Partn er Strate gic Best

Budgeting

19

REAL-TIME through

INTELLIGENCE

ANALYTICS

Information is worth little unless it can be translated into actionable insight. This is especially critical when market conditions change abruptly. We were able to respond rapidly to the sudden market shift in 2001 by closely monitoring the analytic dashboards available in our software, enabling us to turn an abundance of detailed information— sales data, field reports, pipeline activity, and so on—into insight. For example, in mid- February of last year, the analytics built into our sales software revealed a significant trend in stalled or delayed transactions in the pipeline. Based on analysis of historical sales data, we understood the implications of this trend on the probability of closing business. Our software pinpointed precisely those deals that had the highest likelihood of succeeding, and we were able to adjust our resources to focus on those transactions. In translating our revised operating plan into action, we relied on the analytical capabilities of Siebel ERM to monitor actual versus planned performance. Using executive dashboards available in Siebel ERM, senior management could track progress against the new corporate objectives across every part of the company. And, through department-level dashboards, managers were able to monitor key performance indicators for their individual departments. Our marketing managers tracked lead-generation activities, cost metrics associated with those activities, and conversion ratios—enabling them to rapidly adjust plans and concentrate resources on the most successful programs. Our engineering managers monitored detailed progress against development objectives to keep product shipment plans on track. Our financial managers monitored real-time expense activities across every department, enabling them to set appropriate cost controls.

20

Insight and Intelligence

Hom e Show Oppo : Exec rtuni utive ties Dem Exec Acco o utive unts Over Histor view y To da Febr “On te yo uary 12, 20 4,84 Time Deu have ac 02 “Total 3,506 in livery Pe hieved Edit 30 “O Deliv rc eries n Time entage.” % of your ” of 15 Deliv Th an ,981,5 eries” ag is repres nual en 06. ainst your ts

Cont acts

Activ ities

Cale nder

360° Cust omer View

Quot es

Insu fficien Acco t Inve unt ntory Prod Sum Be Roya uct mary Oppo l Hote Inv g In rtuni Acct l CD-R Edit ty An Qty Sh v Nam Tra OM Sh 32 al ortage nstech ysis x e Riskortage Oppo 16 CD-R Berk rtu Leve Re W ele nity De OM v 32 as Man l -184 Unive hington M x agemy Asset Rejelivery 16 rs en S ity t $5,373 A.K. Histor ction Wind -784 ,500 Oreg ows Distr Parker y NT ibutio Stan on 60 dard n Pe $5,373 First -240 36 ntium Bank ,500 CA Kelly Desk6 of top Indus 76 Pe $5,373 tries Colum -224 43 ntium ,500 bia Ba Desk3 Ro top nk $5 yal Ho 30 ,373,5 tel 50Pentium -330 00 Was Desk0 top Unive hington 12 Pe rsity 50 ntium -108 Ca Desk0 top Knowpital 12 Pe ledge -678 500 ntium Roya Desk l Hote top 26 l Print Lase er -104 r 100 8 -102

Show

Fore cast s

Reve nues

Com pens ation

Edit

Regio

Empl oyee s

Prod ucts

Info Cer Quer ies

n Pe

rform

ance Edit

Sales Analytics

Hom e Oppo : Exec rtuni utive ties Dem Acco o utive unts Over Histor view y

Exec Use

this

prom pt

Cont

acts

Activ

360°

ities

Cust to gl omer obal View ly up date Sele cont ct ent on (All ch a Campa this ign oices page ) Go

Serv 8000

ices

1st Tim $42,55 e $ Repe at $ 4 $9 Total $9,302 ,187 Cost $51,74 $ Re $3,070 $280 turn 1 $ Gr $9,582 $363 oss Pr of $3,432 $26,55 it 5 $5,069 $1,947

nder

6000 4000

250

Edit

utive

es

Fore

Over

cast

s

Reve

nues

Com

view

pens

ation

Empl

Prod uc

ts

Quer

Info

Cer

ies

Edit 150

at $

150

nt

50

ou

Repe

s

200

100 2000

oyee

New Custo mer Anal ysis

ters

are

Quot

Exec Edit

Reven ue Tr end Prod Anal uct Li ysis Com ne pu

Softw

Cale

1s

tT

im e

C

100

M

av

g

2000 11 2000 Hom 12 e 50 Show Opp 2001 : Exec ortu Re 01 nitie utive Co peat Custo Year 2001 s Dem Exec and mer Account 02 o Mo utive unts 2001 1st tim nth Overv 03 Histor Cont e coun iew y acts 2001 t 04 Activ Mavg ities 1s 360° Cale Count t Time Chann nder Cust Chan omer el Ef Quo nel fectiv View tes Ya Web enes Fore Rev go Closed s cast Tele s Sales Clos Reve $5,3 Rev ed nues Direct 31,5 00 % Sa $450 Com $4,9 Edit Rev Chg YAGO ,000 Catales pens 00,4 log 04 $8,7 ation Clos $167 Gr 18,8 ed ,000 00 Empl Totaand Ch $6 $2 l oyee ,132 ,540 -8.09% Rev g YAGO ,500 s ,000 Clos Prod $20, $1 ed -6 ,221 632, 2.89 ucts ,599 700 Real-T % Web Info -$43 $8,8 -7 im 0.87 1,09 Cer 36,0 e To % 6 05 -$28 Que p 10 #2 Si Tele 3.00 ries -80.09 eb Pr Sales 0 el 7 M oduc -$6,17 % idMar t Line 8,70 67.1 Direct 0 ke 7% s t Appl -$4,91 Sales icatio 0,90 1 ns YT -$11 New ,796 D Re Cata ,615 Custo venu log Mov Ed e it ing Av $ 83 m 3,42 erag er Anal 0 Ch e of 1500 ange 1st Ti ysis 0 : 100. me Co YAGO 00 unt Clos ed Re v 1000 0 Clos ed Re Edit v

Channel Analytics

Reven Reve nue $4 ue At tainm 9,86 6,52 ent 5

5000

Marketing Analytics

5000

Edit

4000

M

av

g

1s

tT

im

e

C

ou

nt

Hom 1999 e 3000 Show 1 12 Oppo 0000 : Serv rtuni ice De ties 199912 12 1 200000 mo 3 20 00 Ac 2000 0005 Repecounts002 2000 Alerts 2000 at Cu 00 ! HiCo unt stomeCont 4 200006 07 2000 stor Fore 09 20 y acts r 2000 cast 1000 is les Here 1st TimActiv 08 2000 0011 20 0101 s than are yo 10 20 e Co ities Serv unt Cale 0012 20 200103 20 ice Ca ur new lea Quota 0102 0105 Here ll Ce ds Ma nder 20 nters is the Counvg 1st TimQuot 0104 with lates es t e Unsa t SR Fore tis Analy cast sis by factory Re s Chan solut Reve nel ion tim nues Ope es (> Status n Se Com 30 da rv pens Equa ys) ice R ation ls Op eque en Empl sts by Acco oyee Acco unt Re s NA unt R Prod gion Real ucts egio # of Time EMEA NA SRs n Edit Info Serv Cer ice R Unsp 22 Acco EMEA Quer ecifie eq unt: uest ies d LACA 98 Activ s Unsp eWav ec ified AP e Pr 62 98 iority: 222 M 11 ed LACA 62 ium Ope Seve Edit n Se 11 2 rit y: rvice 2-High 395 AP Reque SR’s: 2 sts by 1 Mod Acco ify Re unt R 50 ques Selec t Pr egio 100 inter n # of t the 150 Frien SRs Regio dly 200 Edit Refre n 250 sh Aban Down done load d

Service Analytics

Call

Add

Anot

her Va

Analy

sis Edit

lue EMEA

Acco unts Show :

Show :

* CSN

Stat

Acco Perfo

Open

Actio n Plan s Empl Satis

Cont acts

Corre spon denc e

us

Open

oyee

Cate gory

Save

New

*

*

Activ ities

Serv ice R eq New uests

New

Reco

Open

Man

Activ

factio

ager

ities

n

rman

mmen is op

venu

e Qu

ce fe

d as

en an

Calen dar CSN Re

19%

Deci sion

unt

ota

edba

a plac d ho

ck is

e to

timely

Acco

work

nest

Cha rts

Perfo Refe Perfo

rman

ce M

anag

Empl oyee

Empl oyee

emen

t

New Q1

Regi

ce M

anag Cus Q1 emen tom t er Su Q1 rvey Mor e Info Rep orts

Custo mer Satis facti on

10%

D&B

unt

rman

rability

Issu es

21

Febru 2000 ary

Ma 2000 y

Aug 2000ust

No 2000 v

Febru 2001 ary

Fund Requ est Show :

on

NA Bus

NA

Unit

Scor e

Sales

NA

Invo ices

9.59

Mor e Info nue

1.03

8.08

HR

Mor e Info

GAP

7.35

Mktg

Reve

No 1999v

Litera ture Favo rites :

Quot

0.09 1.25

a

Employee Analytics Ma 2001 y

Aug 2001ust

CORE

VA L U E S

The conventional measures of business success—market share, revenue, and profits—are secondary effects of doing other things exceptionally well. Satisfying customers. Building products that address real needs. Creating value through hard work and innovation. The robust management systems and sophisticated technologies that we have put in place would be of little value if people in the organization were not focused on these fundamental objectives. At Siebel Systems, we have deliberately engineered and consciously nurtured a corporate culture that guides our people to concentrate their energy and attention on these objectives, day in and day out. Our culture is the foundation of our success as a company. It is based on four core values: Customer Satisfaction. Professional Courtesy. Professionalism. Goal and Action Orientation. These are basic principles that have withstood the test of time—principles that have proven effective under every market condition, principles that enable a group of individuals to achieve a singularity of purpose and common goals. Our values represent fundamental truths about the higher purpose of business. Markets constantly change. Our strategies and tactics and our products and services change, as well. But our core values endure. These values define who we are, what we do, and how we do it. Each and every employee at Siebel Systems is fully committed to these values. The result is a focus and discipline that drives each employee to make the success of our customers the first priority.

22

Customer Satisfaction

We regard it as a privilege to serve our customers. We make 100 percent customer satisfaction our overriding priority. “We’ll do absolutely anything that’s required to ensure the customer is successful.” Karen Riley, Senior Vice President, Global Services

Professional Courtesy

We comport ourselves with the highest levels of business ethics and professional courtesy. “Professional courtesy is about treating people with respect and with dignity and honesty— treating people the way you would expect them to treat you.” Chris Stauber, Senior Director, Product Marketing

Professionalism

We demonstrate the highest levels of professionalism and quality in everything we do. “By professionalism, we mean adhering to the highest levels of professional standards in everything we do. We mean delivering on whatever it is we say we will do, regardless of what it takes to get the job done. No excuses, no delays. Professionalism—doing exactly what it is we said we would do, 100 percent of the time.” Pat House, Vice Chairman and Vice President, Strategic Planning

Goal and Action Orientation

In pursuing our objectives, we have a bias for action. “When you set an aggressive goal, the concept is that good is just not good enough. We strive to do better. We strive to be the best.” Kevin Nix, Vice President and General Manager, Product Marketing

23

GREAT

PLACE

to

WORK

The people who work at Siebel Systems are our greatest asset. We remain committed to building a great place to work. We monitor our employee satisfaction levels very carefully, using an independent auditor to survey the entire employee base twice a year. Despite the market downturn of 2001, employee satisfaction remained at exceptionally high levels, demonstrating the commitment of a workforce that regards market challenges not as problems but as opportunities. Ninety-six percent of our employees report that they are proud to work at Siebel Systems. Ninety percent recommend Siebel Systems as a place to work. We use our employee survey data to identify opportunities to make improvements in our work environment. Each survey measures employees’ satisfaction with dozens of key factors. Where satisfaction is below world-class levels, we immediately take action to address the issue. For example, early in 2001 our survey data told us that employees wanted a clearer understanding of how they are evaluated against their objectives, and they wanted reviews to occur in a more timely manner. We responded by establishing a robust online company-wide performance management system. Employee response was overwhelmingly positive: On the subsequent survey, employees reported exceptionally high levels of satisfaction with the new system. We rigorously apply this approach to create new programs, new resources, and new opportunities to drive employee satisfaction to the highest levels in the IT industry.

24

Employee Satisfaction

Satisfied Employees 95% Marketing Department . . . . . . . . .

Satisfied Employees 94% Services Department .. . . . . . . . . .

Satisfied Employees 92% Sales Department .. . . . . . . . . . . . .

Satisfied Employees 92% Product Development Department . . . . . . . . . . . . . . . . . . . .

Satisfied Employees 94% Finance and Administration Department . . . . . . . . . . . . . . . . . . . .

Source: Satmetrix Systems survey of Siebel employees, December 2001.

25

B E S T-O F-C L A S S TECHNOLOGY

PRODUCTS

and

LEADERSHIP

The Siebel 7 Smart Web Architecture reset the standard for enterprise software—the industry’s first and only highly interactive, zero-footprint, zero-install Web applications. Siebel 7 applications are tailored to the requirements of specific industry segments. Recognized by industry analysts as the world’s most functionally complete eBusiness applications, Siebel 7 applications reflect Siebel Systems’ unparalleled customer relationship management (CRM) domain and industry expertise, embedding industry best practices for sales, marketing, service, and partner and employee relationship management. Siebel 7 Industry Applications include specific versions for 20 different industry segments: retail finance, institutional finance, insurance, healthcare, wireline communications, wireless communications, media, energy, oil and gas, chemicals, pharmaceuticals, clinical, medical products, retail, consumer goods, apparel and footwear, high technology, automotive, travel and hospitality, and public sector. We have organized our company around these industry segments — with separate product development, engineering, and sales divisions dedicated to each—and we work with leading companies to develop functionality that supports the specific business processes and best practices for each segment. Recognizing that today’s IT environments are composed of hundreds to thousands of disparate applications, Siebel Systems designed Siebel 7 from the ground up to provide the most extensive support available for integration with third-party and custom applications. Siebel 7 supports integration via Universal Application Network, the industry’s first standards-based, vendor-independent solution for multiapplication integration. Through the combination of prebuilt segment-specific functionality and integration via Universal Application Network, Siebel 7 applications minimize customization requirements and accelerate deployment, resulting in a rapid return on investment and low total cost of ownership.

26

Universal Application Network

Integration Server

Siebel eBusiness Applications

SAP

Business Process Controller

Common Object Model

Transformation

Adapter

Adapter

PeopleSoft

Legacy

i2

SAP Data Model

Adapter

Adapter

Adapter

Transport Layer

Adapter

Siebel Data Model

Transformation

Portal

Universal Application Network is a next-generation solution that will cost- effectively solve the complex problem of integrating multiple applications across and beyond the enterprise to support key business processes. It will be built upon open industry standards—Extensible Markup Language (XML) and Web Services—enabling enterprises to deploy prepackaged, industry-specific business processes across their choice of best-in-class applications and integration technologies. Siebel Systems is playing a leadership role in bringing together a coalition of leading integration server vendors and systems integrators to ensure rapid and broad adoption of these standards.

27

FISCAL

DISCIPLINE

In a year when hundreds of technology companies posted significant losses, withdrew from the CRM market, or went out of business altogether, Siebel Systems achieved exceptional financial results while applying the highest standards of financial integrity and fiscal discipline. We generated more than $250 million in net income. We trimmed costs from our operations and put robust expense controls in place. We improved and strengthened our balance sheet, increasing our cash and short-term investments by 44 percent—more than $500 million. Our financials are solid. Our balance sheet is transparent. It is appropriately stated. It is liquid. Today, Siebel Systems is better positioned than ever before. Our fundamentals are impeccable: unimpeachable integrity in our revenue, debt, and financial reporting. Crystalline transparency in our balance sheet and risk. Sterling consistency in the quality of our operating ratios. With $1.66 billion in cash and short-term investments, our financial resources have never been greater. And our market opportunities are expanding. The CRM market is strong and growing. CRM remains a leading IT priority for senior executives around the world. When we recently surveyed our contacts at 16,000 companies globally, the response was overwhelmingly positive: Eighty- two percent of respondents said they are planning CRM projects for 2002. Seventy-one percent anticipate new CRM implementations during the year. And 57 percent specifically expect to use Siebel eBusiness Applications. For an increasing number of CEOs globally, CRM is a business imperative, not an option. And, as we look forward to the emerging employee relationship management (ERM) category, the potential market, we believe, is larger than the CRM market. We have the financial and managerial systems and processes in place to capitalize on these market opportunities with the highest levels of operational excellence.

28

Cash and Short-Term Investments (in Millions)

$ 1, 8 0 0

$ 1, 6 0 0

$ 1, 4 0 0

$ 1, 2 0 0

$ 1, 0 0 0

$800

$600

$400

$200

$0 97

29

98

99

00

01

EXCEPTIONAL

PARTNER

ECOSYSTEM

Since the inception of Siebel Systems, we have recognized the value of partnerships to make our customers successful. No single company can provide the complete range of best-of-class products and services that today’s global organizations need and demand. To ensure our customers’ success, therefore, we virtually invented and refined best practices in strategic partnering in the IT industry. And we continue to extend the breadth and depth of our partnerships, creating an exceptionally robust partner ecosystem that drives customer satisfaction and success. Recognized by Forbes magazine in May 2001 as the best partner program in the computer applications and hardware industry, the Siebel Alliance Program is a key source of competitive advantage. We partner with leading technology companies to provide our customers with maximum freedom and flexibility to choose best-of-class validated solutions. Our eight Global Strategic Partners represent the best of the best in technology: Accenture, Avaya, Cap Gemini Ernst & Young, Compaq, Deloitte Consulting, IBM, PwC Consulting, and Sun Microsystems. Each brings a broad and unique set of offerings to our joint customers. We go to market with each of our partners according to a thoroughly disciplined business model, based on a detailed business plan that is backed by a full range of dedicated resources. And we use our own technology, Siebel Partner Relationship Management (PRM), to track, monitor, and measure every aspect of the partnership. As a result of this highly disciplined and customer-focused approach, we bring our joint customers the best eBusiness solutions available on the market today, and we work together to ensure the highest levels of customer satisfaction.

30

Siebel Alliance Partners

Global Strategic

Platform

Software

Accenture

Strategic

Strategic

Avaya

Cingular Wireless

Acxiom Corporation

Cap Gemini Ernst & Young

Fujitsu Siemens Computers B.V.

Alcatel

Compaq Computer Corporation

Hewlett - Packard Company

AT&T Wireless Services, Inc.

Deloitte Consulting

Microsoft Corporation

BEA Systems Inc.

IBM Corporation

Nokia Corporation

BMC Software, Inc.

PwC Consulting

Palm, Inc.

BT plc

Sun Microsystems, Inc.

Pitney Bowes, Inc.

Cisco Systems, Inc.

Sprint PCS Group

Convergys Corporation

Consulting

Xerox Corporation

Experian

Strategic

Premier

Hummingbird Ltd.

American Management Systems, Inc.

Bell Mobility

Hyperion Solutions Corporation

Andersen

Infonet Services Corporation

Jacada, Inc.

KPMG Consulting, Inc.

Kyocera Wireless Corporation

Parametric Technology Corporation

Siemens Business Services GmbH &

Research In Motion (RIM)

Portal Software, Inc.

Surebridge

Quest Software, Inc.

Co. OHG SYNAVANT, Inc.

SPSS Inc.

Unisys Corporation

Portfolio

VERITAS Software Corporation

Premier

Alerts, Inc.

Premier

Akibia Consulting

Aptilon Health

Actuate Corporation

Aspective

ATX Technologies, Inc.

Business Objects

Aston CRM Solutions A/S

Auto Town

COGNOS

C3i, Inc.

Berkeley Enterprise Partners

Concerto Software

Electronic Data Systems Corporation

BizProLink Corporation

Customer Dialogue Systems

eLoyalty

ClearCube Technology, Inc.

Documentum

Escador

comScore Networks, Inc.

Financial Profiles Inc.

Extraprise Group, Inc.

Everdream Corporation

Group 1 Software

Headstrong

Lathian Systems, Inc.

LightBridge, Inc.

Inforte

Mutuals.com, Inc.

NetIQ

TeleAp, S.p.A.

NextLeft, Inc.

NextiraOne, LLC

Xansa plc

PartMiner, Inc.

Quadstone, Inc.

PeopleSupport

SPL Worldgroup, Inc.

Content

Satmetrix Systems

WRQ, Inc.

Strategic

SeeCommerce

D&B, Inc.

Systemcorp

Universal Application Network

Premier

Vital Link Business Systems

Accenture

SmartForce plc

Cap Gemini Ernst & Young Deloitte Consulting IBM Corporation KPMG Consulting, Inc. PwC Consulting SeeBeyond TIBCO Software, Inc. Vitria Technology, Inc.

Siebel Alliance Partners as of May 2002.

31 31

webMethods, Inc.

Accenture is a leading global management consulting and technology services organization, with more than 75,000 people in 46 countries. Through its network-of-businesses approach—in which the company enhances its consulting and outsourcing expertise through alliances, affiliated companies, and other capabilities—Accenture delivers innovation that helps clients across all industries quickly realize their visions and gain value from business and technology change. Accenture and Siebel Systems have been working together since 1994 to help companies build profitable, lasting customer relationships. A Global Strategic Alliance Partner, Accenture has more than 350 joint clients and more than 700 successful joint projects. The systems implemented by Accenture and Siebel Systems seamlessly integrate customer relationship management processes into networks of applications, providing organizations with consistent, up-to-date information about customers, products, services, and competitors across multiple channels and business processes. Sample joint customers include BT, Dresdner Bank, GloboCabo, TotalGaz, and Winterthur. With more than 2,200 Siebel-skilled professionals, Accenture delivers Siebel eBusiness solutions that complement and extend clients’ existing channel strategies and processes to offer companies innovative ways of attracting and retaining their most valuable customers. Recipient of the 2001 Siebel Partner Award of Excellence for both North America and Europe, Accenture has consistently earned Gold Star status in the Siebel Alliance Program for maintaining high levels of customer satisfaction.

ACCENTURE

Industry Focus

Select Joint Customers

Worldwide Solution Centers

Automotive

BT

Bangkok, Thailand

Chemicals

Deutsche Telekom AG

Denver, Colorado

Communications

Dresdner Bank AG

Dublin, Ireland

Consumer Goods

GloboCabo S.A.

London, United Kingdom

Energy

Takeda Pharmaceuticals America, Inc.

Malaga, Spain

Financial Services

TotalGaz

Melbourne, Australia

Government

Winterthur Life UK Ltd.

Minneapolis, Minnesota

High Technology

Murray Hill, New Jersey

Insurance

Reston, Virginia

Life Sciences

St. Petersburg, Florida

Media and Entertainment

San Ramon, California

Travel and Transportation

Tokyo, Japan

Utilities

32

Avaya is a global leader and innovator in enterprise communications. More than 18,000 organizations—including 90 percent of the Fortune 500—rely on Avaya for secure network infrastructures and reliable voice and data applications that power faster decisions; profitable transactions; and closer relationships between customers, employees, and suppliers. Since becoming a Global Strategic Alliance Partner in August 2000, Avaya has worked closely with Siebel Systems to develop, deliver, and market integrated eBusiness solutions around the world. Avaya and Siebel Systems are establishing new standards for intelligent, customer-centered eBusiness solutions by integrating best-ofclass Siebel eBusiness Applications with Avaya’s leading-edge communications technology. In 2001, the Siebel –Avaya alliance developed six validated solutions. The joint solutions provide out-of-the-box, industry-specific functionality and support for key business processes, resulting in accelerated deployments that enable businesses to transform their call centers into next-generation, multichannel contact centers. As evidenced by more than 90 joint enterprise customers around the world—including Compaq and SingTel—the Siebel –Avaya alliance has been highly successful. Using its solutions, companies can seamlessly interact and develop relationships with customers over any media, including the Web, email, telephone, or fax, using any device. This allows companies the flexibility to optimize the customer experience, while implementing their customer-facing eBusiness strategies. Moving forward, the alliance is expanding its product focus beyond the contact center arena to include innovative voice technologies.

AVAYA

Select Joint Customers

Worldwide Solution Centers

Compaq Computer Corporation

Basking Ridge, New Jersey

Mitsubishi Electronics America, Inc.

Denver, Colorado

Nexstar Financial Corporation

Egham, United Kingdom

Samsung SDS Co. Ltd.

San Mateo, California

Singapore Telecommunications Ltd. State of Wisconsin

33

With more than 56,500 people worldwide, the Cap Gemini Ernst & Young Group is one of the largest management and information technology consulting organizations, enabling its clients to leverage technology and implement growth strategies. A Siebel Alliance Partner since 1998, Cap Gemini Ernst & Young elevated its commitment to Global Strategic Alliance Partner in June 2001. In the past three years, Cap Gemini Ernst & Young has implemented more than 200 Siebel eBusiness projects across the globe, focusing on global vertical markets such as life sciences, telecommunications, financial services, and insurance. Cap Gemini Ernst & Young and Siebel Systems have developed a variety of strategic customer offerings—such as the Agent Portal for insurance agent environments—to help clients realize higher levels of return on investment and lower total cost of ownership through solutions that support end-to-end business processes, integrating customer relationship management with industry-specific applications. The firm applies its own customer satisfaction methodology to all Siebel projects—OTACE (On Time and Above Customer Expectation)—and has also received a Gold Star rating, based on clients’ evaluations, for superior customer satisfaction. Cap Gemini Ernst & Young’s Siebel eBusiness practice includes more than 1,000 implementation consultants and 500 business consultants. More than 330 consultants are now certified, with the remainder undergoing an accelerated program in 2002.

CAP

GEMINI

ERNST

&

YOUNG

Industry Focus

Select Joint Customers

Worldwide Solution Centers

Consumer Products, Retail and Distribution

Abbey National plc

Chicago, Illinois

Financial Services

Agefiph

Dallas, Texas

High Technology and Automotive

Alcatel Internetworking, Inc.

London, United Kingdom

Life Sciences

Baxter Healthcare Corporation

Madrid, Spain

Telecommunications and Media Networks

CCAMA GROUPAMA

New York, New York

Essent N.V.

Paris, France

ING Service Center Claims

Singapore

Utilities, Energy, and Chemicals

Lansforsakringar Wasa

Sydney, Australia

London Electricity Group plc

Utrecht, The Netherlands

Malaysia National Insurance Berhad

Woking, United Kingdom

MCI WorldCom Network Services, Inc. Nuon ICT B.V. OnBanca Sky Point S.A. Telstra Corporation Williams Network Services

34

Compaq Computer Corporation is a leading global provider of enterprise technology and solutions. A unifying force bringing the Internet to customers, Compaq delivers end-to-end eBusiness solutions that enable the real-time enterprise. Compaq joined the Siebel Alliance Program as its first Strategic Platform Partner in 1997 and became a Global Strategic Partner in March 2000. A Siebel customer since 1996, Compaq has standardized on Siebel eBusiness Applications to manage customer interactions across its global enterprise, providing its sales representatives, call center agents, and channel partners with real-time access to critical business information. Leveraging this extensive experience and expertise, Compaq works closely with Siebel Systems to jointly market, sell, and deploy Siebel eBusiness Applications on the full range of Compaq products, including ProLiant ™ servers and AlphaServer™ platforms. Siebel eBusiness Applications have also been optimized to run on the Compaq iPAQ™ Pocket PC, enabling mobile professionals to effectively manage customer relationships regardless of their location. Through a dedicated professional services organization, Compaq and Siebel Systems offer implementation, systems integration, and outsourcing services, with a proven record of deploying call centers, help desks, and eBusiness solutions for enterprises worldwide. By combining best-of-class eBusiness software, hardware, and services, Siebel Systems and Compaq deliver affordable, reliable solutions that simplify the installation, operation, and maintenance of eBusiness systems for organizations of all sizes across a broad range of industries.

COMPAQ

Industry Focus

Select Joint Customers

Worldwide Solution Centers

Financial Services

BT

Four geographically

Government

Cisco Systems, Inc.

focused centers to serve

Pharmaceuticals

Corio, Inc.

its global customers,

Retail

DIRECTV Operations, Inc.

including Compaq’s

Telecommunications

FleetBoston Financial Corporation

International Solutions

Novo Nordisk

Center at Siebel Systems’

ProBusiness Services, Inc.

headquarters in

Unilever PLC

San Mateo, California

Yahoo! Inc.

35

Deloitte Consulting is one of the world’s leading consulting firms, helping its clients to translate leading ideas and technologies into sustainable competitive and strategic advantage. Deloitte Consulting works collaboratively with clients to marry strategy to technology, driving complex change initiatives that deliver real value. Deloitte Consulting has 15,000 professionals in 34 countries and serves more than a third of the companies in the Global Fortune 500. As a Siebel Global Strategic Partner, Deloitte Consulting assists clients in realizing superior business results quickly. Its approach emphasizes velocity and milestone attainment, including the realization of measurable business results within 100 days of project inception. This approach builds momentum while giving organizations the flexibility to shift their plans when the business climate requires it. Deloitte Consulting is defined by its straight-talking, collaborative approach to working with clients. Rather than taking a “one size fits all” approach, Deloitte Consulting develops solutions to meet the unique needs of each client. With more than 900 dedicated Siebel consultants, Deloitte Consulting leverages Siebel eBusiness Applications to provide Web-based, enterprise-wide support for sales, marketing, field service, call center, and eCommerce—the cornerstones of customer relationship management. Experienced in more than 200 successful Siebel eBusiness implementations across North America, Europe, Asia, and Latin America, Deloitte Consulting has demonstrated a consistent track record of success and an unwavering commitment to the highest levels of customer satisfaction.

DELOITTE

CONSULTING

Industry Focus

Select Joint Customers

Worldwide Solution Centers

Communications

Bayer AG

Bath, United Kingdom

Consumer Business

Cable & Wireless plc

Mexico City, Mexico

Energy

Consignia plc

Minneapolis, Minnesota

Financial Services

DIRECTV Operations, Inc.

San Francisco, California

Healthcare

Nestlé USA, Inc.

Sydney, Australia

Manufacturing

Philip Morris International

Tokyo, Japan

Public Sector

Telecom Italia S.p.A.

Toronto, Canada

Telstra Corporation Ltd.

36

A recipient of five Siebel Systems Partner Excellence Awards, IBM is a global leader in the development and implementation of eBusiness solutions, with more than 300,000 employees worldwide and revenue of $85.9 billion in 2001. IBM became Siebel Systems’ first Global Strategic Partner in 1999. Since then, Siebel Systems and IBM have worked together closely on software and hardware development, establishing a worldwide network of solution partnership centers, conducting comprehensive co-marketing, and collaborating on more than $1 billion in joint sales. IBM and Siebel Systems leverage each other’s strengths to significantly improve their own business operations. IBM is currently rolling out the largest global deployment of Siebel eBusiness Applications in history. The deployment will provide more than 80,000 users with a single view of the customer across all channels and integrate more than 30,000 business partners into the IBM ecosystem via a Web-based partner portal. IBM brings a compelling value proposition to Siebel Systems’ customers, offering a high-performance database, scalable and reliable hardware platforms, and an extensive IT services organization, with more than 700 Siebel Certified Consultants. IBM’s extensive industry knowledge, hardware, software, and services dramatically reduce risk, accelerate deployment, and increase returns for our joint customers. Together, IBM and Siebel Systems have more than 500 joint customers, including American Century, Dresdner Bank, and Universal Studios.

IBM

Industry Focus

Select Joint Customers

Partnership Solution Centers

Distribution

American Century Investments, Inc.

Bangalore, India

Financial Services

Dresdner Bank AG

Budapest, Hungary

Government

LexisNexis

Chicago, Illinois

Industrial and Manufacturing

Northwestern Mutual Life Insurance Company

Paris, France

Life Sciences

Universal Studios, Inc.

San Mateo, California

Telecommunications

Virgin Mobile USA

São Paulo, Brazil Stuttgart, Germany Sydney, Australia Tokyo, Japan Toronto, Canada

37

PwC Consulting, a business of PricewaterhouseCoopers, is a global provider of services that transform the businesses of established and emerging enterprises. Through its strategic alliance with Siebel Systems; industry-specific knowledge; and capabilities in strategy consulting, process improvement, and technology integration, PwC Consulting helps its clients realize a strategic vision and enhance enterprise value. A Siebel partner since 1997 and a Global Strategic Partner since January 2000, PwC Consulting has a proven track record of successful Siebel eBusiness implementations, more than 400 implementations to date. With more than 2,100 consultants around the world trained in Siebel eBusiness Applications, PwC Consulting has consistently earned Siebel Systems’ Gold Star distinction for superior customer satisfaction and has received the Siebel Partner Award of Excellence. The two companies are also bringing together Siebel Employee Relationship Management (ERM) applications and PwC Consulting’s new B2E (Business to Extended Enterprise) initiative—a collection of applications and services enabling global enterprises to unleash the potential of their business, employees, and assets.

PwC

CONSULTING

Industry Focus

Select Joint Customers

Worldwide Solution Centers

Automotive

AGF Informatique

London, United Kingdom

Communications

BMW Financial Services NA, LLC

Philadelphia, Pennsylvania

Consumer Sector

The Clorox Services Company

Rosemont, Illinois

Energy

Documentum, Inc.

Tokyo, Japan

Entertainment and Media

FirstGov

Financial Institutions

Fleetwood Enterprises, Inc.

High Technology

The Hartford Financial Services Group, Inc.

Insurance

Lufthansa Systems GmbH

Life Sciences

Novo Nordisk

Public Sector

Qualcomm, Inc.

Travel and Transportation

Société Générale Investment Banking Sprint Spectrum L.P. Sun Microsystems, Inc. Telesp Celular S.A. Thomson Learning

38

With offices in 170 countries, Sun Microsystems, Inc. is a global leader in network computing solutions. Sun™ Open Net Environment—Sun ONE—is an open architecture that supports Web services and provides a unique, open software platform to create, assemble, and deploy smart, context-aware Web services. The combination of Siebel eBusiness Applications with Sun ONE enables the world’s largest enterprise organizations to improve customer satisfaction and increase revenue by delivering personalized service through multiple channels. Siebel Systems and Sun have delivered proven solutions that have yielded measurable results for innovative, customer-driven market leaders such as Thomas Cook and BT and for key vertical industries including financial services, telecommunications, and energy. To capitalize on this initial success, Siebel Systems and Sun expanded their relationship in 2001, as Sun became a Siebel Global Strategic Partner. With this elevation of the alliance, both Siebel Systems and Sun are dedicating substantial resources to developing comprehensive eBusiness solutions for our joint customers. Siebel Systems and Sun share a common vision of the future of business, recognizing that customers increasingly wish to interact with businesses through multiple channels, including new Web and wireless devices. Combined with Sun’s systems, including storage products, Siebel eBusiness Applications will enable companies to more effectively interact with customers through multiple channels and devices, enhancing the customer experience.

SUN

MICROSYSTEMS,

INC.

Industry Focus

Select Joint Customers

Worldwide Solution Centers

Energy

BT

Menlo Park, California

Financial Services

Cox Communications, Inc.

Paris, France

Public Sector

Gemplus, France

Tokyo, Japan

Telecommunications

Hydro-Québec Quick & Reilly, Inc. Singapore Telecommunications Ltd. Telstra Corporation Ltd. The Thomas Cook Group Ltd.

39

PROVEN

CUSTOMER

ENGAGEMENT

MODEL

Siebel Systems’ proven customer engagement model is designed to achieve one overriding goal—our customers’ success. Based on experience in more than 3,000 implementations, our end-to-end customer care begins before the sale is made and continues throughout the implementation and deployment, until the customer has achieved measurable business value from the use of Siebel eBusiness Applications. Proactive advisors, executive sponsorship, and rigorous measurement of customer satisfaction are key elements of our customer care process. The job is not done when the software is sold. Instead, we tightly couple the salesperson and service team to drive the implementation forward, from understanding the customer’s business needs to ensuring business success in realized return on investment. Based on expert knowledge of industry-specific business processes and thorough understanding of Siebel technology, our Global Competency Practices are dedicated organizations focused on customer satisfaction by applying implementation best practices—including a proven methodology and road map for success, backed by a set of comprehensive customizable services. And our 24 x 7 global support organization provides world-class customer support. We take a proactive approach to customer care: Using our own technology, we closely monitor the status of the implementation through detailed weekly reports and monthly assessments. We monitor all issues that might affect the success of the implementation—not just those directly related to Siebel software—so we can “red flag” potentially critical problems even before the customer may be aware of them, escalate them to Siebel executive management, and establish a recovery plan. A team of Siebel executives regularly reviews progress against the plan. This process enables Siebel customers to realize a significant return on their investment.

40

Automotive

BMW Financial Services NA, LLC + Bridgestone/Firestone Europe S.A. + Case Corporation + Caterpillar, Inc. +

DaimlerChrysler + Fleetwood Enterprises, Inc. + Ford Motor Company + General Motors Corporation + Mitsubishi Motor Sales of America, Inc. + Renault S.A. + Volvo Information Technology AB

Consumer Goods

British American Tobacco Company Ltd. + The

Clorox Services Company + Fujifilm + Hershey Foods Corporation + Kellogg Company + Maytag Corporation + Nestlé USA, Inc. + Pernod S.A. + Philip Morris International + Playtex Products, Inc. + Reckitt Benckiser plc + Schering-Plough HealthCare Products, Inc. + Thomson Multimedia S.A. + Unilever PLC

Energy

American Electric Power Service Corporation + Centrica plc + Electricité

de France + Endesa Servicios, S.L. + e.On AG + EPCOR Utilities, Inc. + Essent N.V. + Exelon Infrastructure Services + Gas Natural Informatica S.A. + Hydro-Québec + Iberdrola S.A. + Italgas Spa + KeySpan Energy Corporation + London Electricity Group plc + Louisville Gas and Electric Company + Npower Limited + Nuon ICT B.V. + Origin Energy Services Ltd. + Reliant Energy, Inc. + Ruhrgas Direkt GmbH + RWE Systems AG + TotalGaz + TXU Energy Services Company + VECTOR Limited

Entertainment and Hospitality

Carnival Cruise Lines + Princess Cruises + Starwood Hotels & Resorts Worldwide, Inc. + Universal Studios, Inc.

Healthcare

CSS

Versicherungs AG + Delta Dental Plan of Massachusetts + Group Health, Inc. (GHI) + Health Care Service Corporation (HCSC) + Health Dialog, Inc. + Southern Cross Medical Care Society Pty Ltd. + United Healthcare Services, Inc.

High Technology

3Com Corporation

+ Accenture + The Acer Group + Advertising.com + AGF Informatique + Avaya + BMC Software, Inc. + Cap Gemini Ernst & Young + Ceridian Canada Ltd. + Cisco Systems, Inc. + Compaq Computer Corporation + Corio, Inc. + Deloitte Consulting + Documentum, Inc. + EMC Corporation + Fujitsu Siemens Computers + Gemplus, France + Hewlett-Packard Company + Hitachi Computer Products + Hyperion + IBM Corporation + Mitsubishi Electronics America, Inc. + PricewaterhouseCoopers + ProBusiness Services, Inc. + Samsung SDS Co. Ltd. + Sun Microsystems, Inc. + Toshiba Corporation + Unisys Corporation

Institutional Finance

American Century

Investments, Inc. + CCAMA GROUPAMA + Charles Schwab & Co., Inc. + Crédit Lyonnais Asset Management + Credit Suisse Asset Management + Dain Rauscher Investment Banking + Dresdner Bank AG + FleetBoston Financial Corporation + HSBC Investment Bank plc + Neuberger Berman, LLC + Putnam Investments, Inc. + Quick & Reilly, Inc.

Insurance

AIU North America, Inc. + Allianz First

Life Insurance Co. Ltd. + Amica Mutual Insurance Company + AXA + Canada Life Assurance Company + Cooperative Insurance Society Limited + Eureko B.V. + Farmers Group, Inc. + The Hartford Financial Services Group, Inc. + ING Service Center Claims + Lansforsakringar Wasa + Malaysia National Insurance Berhad + The Manufacturers Life Insurance Company + Northwestern Mutual Life Insurance Company + Tryg-Baltica Forsikring A/S + Winterthur Life UK Ltd. + Zürich Financial Services

Manufacturing

The Boeing

Corporation + Bombardier Inc. + Euromaster Services and Management + FMC Corporation + Lockheed Martin Corporation + Marvin Windows and Doors + Neopost S.A. + Otis Elevator Company + Southwire Company + Whirlpool Corporation Media BusinessWeek + CSC Holdings, Inc. + DIRECTV Operations, Inc. + GloboCabo S.A. + LexisNexis + Reed Elsevier, Inc. + Reuters Ltd. + Thomson Learning + Universal Studios, Inc. + Wolters Kluwer N.V. + Yahoo! Inc. Medical Baxter Healthcare Corporation + Cordis Corporation + Medtronic, Inc. + Philips Medical Systems B.V. +

Equilon Enterprises LLC

+

FMC Corporation

Oil, Gas, and Chemicals +

BASF AG + Bayer AG + The Dow Chemical Company

Halliburton Energy Services, Inc.

+

Schlumberger Technology Corporation

Pharmaceuticals/Biotech American Home Products Corporation + AstraZeneca UK Limited + Aventis Pharma + Bayer AG + Boehringer Ingelheim International GmbH + Élan Pharmaceuticals + Eli Lilly and Company + GlaxoSmithKline Pharmaceuticals S.A. + Novartis Farmaceutica, S.A. + Novo Nordisk + Pfizer B.V. + Roche Laboratories, Inc. + Takeda Pharmaceuticals America, Inc.

Public Sector

City of Tucson, Arizona + Commonwealth of Pennsylvania, House of Representatives Democratic Caucus + Consignia plc + District of Columbia, Tax and Revenue Department + FirstGov + Leeds City Council + State of Kentucky + State of Michigan, Department of Management and Budget + State of Michigan, Department of Treasury + State of Wisconsin + United States Army, Military Traffic Management Command + United States Census Bureau + United States Federal Aviation Administration + United States General Services Administration + United States Postal Service

Retail

Franklin Covey Co. + H.E. Butt Grocery Company + Maintenance Warehouse,

Inc. + Marks & Spencer plc + Signet Trading Limited + Staples, Inc. + United Stationers Supply Company + Waitrose Ltd.

Retail

Finance Abbey National plc + ABN AMRO Bank N.V. + Alberta Treasury Branches + American Express Company + Bank of Montreal + Commerzbank AG + FleetBoston Financial Corporation + Ford Motor Company + National Australia Bank Ltd. + Nexstar Financial Corporation + Nykredit A/S + Seguros Comerciales Bolívar, S.A. + Société Générale Investment Banking + U.S. Bancorp Information Services, Inc. + Westpac Banking Corporation

Travel and Transportation

Amadeus SAS + Burlington Northern Santa Fe Corporation

+ Canadian National Railway Company + Carnival Cruise Lines + Cendant Operations, Inc. + Delmas + Deutsche Bahn Rail + Eimskip Ltd. + Finnair + Galileo International LLC + Lufthansa Systems GmbH + Princess Cruises + Sabre, Inc. + Sol Meliá, S.A. + Starwood Hotels & Resorts Worldwide, Inc. + The Thomas Cook Group Ltd. + Union Pacific Railroad Company + VVF Vacances + Worldspan LP Wireless Bouygues Telecom + Cable & Wireless plc + Kyocera Wireless Corporation + Nextira LLC + NTT DoCoMo, Inc. + Telecom Italia S.p.A. + Telesp Celular S.A. + Virgin Mobile USA + Vodafone Telecel + Williams Network Services

Wireline

Alcatel Internetworking, Inc. + BT + Cable & Wireless plc + Cox Communications, Inc. + Deutsche Telekom AG + Embratel + MCI WorldCom Network Services, Inc. + Qualcomm, Inc. + Singapore Telecommunications Ltd. + Sky Point S.A. + Sprint Spectrum L.P. + Telstra Corporation Ltd. + Telus Communications, Inc. + Verizon Global Solutions, Inc.

41

CUSTOMER

SUCCESS

We measure our success by the success and satisfaction of our customers. There is no higher priority. Despite the market turbulence of 2001, Siebel Systems continued to achieve the highest customer satisfaction levels in the IT industry. Twice each year, an independent auditor surveys our entire customer base. Customers rate our company and our technology on a broad range of factors—from ease of doing business with us and usability of our products to return on their investment. We tie employees’ compensation to the results of these surveys, and we continuously work to improve any areas where customer satisfaction does not reach world-class levels. This relentless focus on customer satisfaction and success is a defining characteristic of Siebel Systems. Ninety-seven percent of our customers continue to use or purchase additional Siebel eBusiness Applications software, and 95 percent report that our technology development is consistent with the direction in which they want to go. Siebel Systems’ customers are achieving what may be the greatest economic returns ever demonstrated through the use of IT. According to a recent independent survey, our customers report, on average, an 8 percent increase in revenue, an 18 percent increase in customer retention, a 23 percent increase in employee productivity, and an 18 percent increase in customer satisfaction as a result of using Siebel eBusiness Applications. And, they report an average payback period of 12 months. We are honored that many of the world’s best-known and most respected organizations have entrusted Siebel Systems to solve their most strategic IT needs. We are proud to share some of their stories in the pages that follow.

42

44

General Motors

Automotive

46

Telecom Italia S.p.A.

Telecommunications

48

Aventis Pharma

Pharmaceuticals

50

Abbey National

Retail Finance

52

Nestlé USA

Consumer Goods

54

The Hartford Financial Services Group, Inc.

Insurance

56

Sol Meliá

Travel and Transportation

58

FirstGov

Homeland Security

60

TXU Energy

Energy

43

Automotive

GENERAL

MOTORS

As the world’s largest vehicle manufacturer, General Motors designs, builds, and markets cars and trucks worldwide. GM has been the world’s automotive sales leader since 1931. GM is investing aggressively in high technology and eBusiness applications to help digitize its business operations. Making a major investment in its eBusiness infrastructure, GM is standardizing on Siebel e Automotive 7 applications, which are designed specifically to meet the unique and demanding sales, marketing, call center, and service requirements of the automotive industry. Built upon many of the core Siebel components—such as Account Management, Opportunity Management, Activity Management, and Contact Management—Siebel eAutomotive 7 is a comprehensive suite of eBusiness applications that allows organizations to manage, synchronize, and coordinate all customer touchpoints. Multiple GM automotive and financial divisions around the world will use Siebel eAutomotive 7 to improve collaboration throughout the company, enhance customer satisfaction, and maximize organizational efficiencies. GM’s investment in world-class customer relationship management capabilities represents another step forward in its commitment to becoming more integrated and customer-focused across all divisions and geographies.

44

45

Telecommunications

TELECOM

ITALIA

S.p.A.

Telecom Italia S.p.A., a leading global telecommunications group and Italy’s premier communications provider, is responding to market challenges through a customer-focused strategy to increase customer loyalty. To help drive this strategy, Telecom Italia Group has selected Siebel eBusiness Applications as its standard platform for multichannel customer relationship management across all of its business units worldwide. This business-wide CRM strategy is making it significantly easier for Telecom Italia Mobile (TIM) and for Telecom Italia Domestic Wireline to increase revenues, maximize the customer experience, and sustain long-term customer loyalty. TIM—Europe’s largest single wireless network carrier, with 23.95 million subscribers—is rolling out Siebel eCommunications for Mobile Carriers to 7,000 sales and customer service personnel. Seamlessly integrated with specialized applications such as billing and provisioning systems, Siebel eCommunications for Mobile Carriers gives TIM a unified view of its customers across all channels. Providing fine-grained customer information, Siebel eCommunications for Mobile Carriers supports TIM’s key business processes, resulting in improved service and increased revenue through more precise customer segmentation and targeted offers. Telecom Italia Domestic Wireline selected Siebel eCommunications to support the sale and service of Internet, voice, and data services to 1 million business customers. When fully deployed, Siebel eCommunications will enable up to 4,200 contact center agents, sales representatives, and channel partners to access consistent, up-to-date customer information.

46

47

Pharmaceuticals

AV E N T I S

PHARMA

Through innovative medications, Aventis Pharma brings relief and improves health for millions of people worldwide who suffer from allergies, cardiovascular disease, cancer, diabetes, and other serious illness. Aventis Pharma is the prescription drug unit of Aventis SA, one of the world’s leading research-oriented pharmaceutical companies, with headquarters in Strasbourg, France. Aventis achieved blockbuster status for three products in 2001, with annual ® ® sales exceeding 1 billion euro each for the antiallergy drug Allegra /Telfast (fexofenadine); the antithrombosis ® ® ® agent Lovenox /Clexane (enoxaparin sodium); and Taxotere (docetaxel), a treatment for advanced breast cancer

and nonsmall-cell lung cancer. In 2001, Aventis Pharma selected Siebel ePharma 7 as its global standard for managing its worldwide field sales force and medical affairs service center. Siebel ePharma 7 will consolidate legacy systems and align Aventis Pharma’s customer relationship management processes, facilitating consistent methodology and standards for new business initiatives, return on investment analysis, and business planning. The system offers prebuilt functionality and support of key pharmaceutical business processes, including samples management, physician promotions, formulary management, and prescription sales analysis. By providing this industry-specific solution, Siebel ePharma 7 reduces the need for customization and accelerates deployment. For Aventis Pharma, Siebel ePharma 7 is a central component of the company’s efforts to increase operational efficiency, improve customer relationships, streamline business processes, and maximize the commercial value of its products.

48

49

Retail Finance

ABBEY

NATIONAL

With more than 15 million customers, Abbey National Retail Bank—a division of the Abbey National Group—has a relationship with one in three households in the United Kingdom. Gaining competitive advantage through superior customer service, developing synergies across product portfolios, and at the same time remaining a low-cost operator are key strategic objectives for Abbey National. To support those goals, Abbey National will utilize Siebel eFinance, a version of Siebel eBusiness Applications specifically designed to support key business processes for retail banks. The new system will consolidate customer data from all touchpoints in a centralized customer information file, enabling Abbey National to maintain an ongoing dialogue with its customers and provide an exceptional customer experience, even as customers move from channel to channel while interacting with the bank. Abbey National is rolling out Siebel eFinance to 12,000 sales and service professionals in its customer service centers and more than 700 branch offices. With real-time access to comprehensive customer information, Abbey National’s representatives will be able to more effectively cross- sell and up-sell offerings tailored to the customer’s individual profile, while simultaneously increasing customer retention through improved service. Higher levels of productivity will also help to drive down the cost of sales and service, enabling Abbey National to compete on both low cost and superior service.

50

51

Consumer Goods

NESTLÉ

USA

With more than 16,000 employees, 26 manufacturing facilities, and $8.1 billion in sales in 2001, Nestlé USA is the largest market of its parent company, Nestlé S.A.— the world’s largest food company. Nestlé’s well-known brands such as Nestea®, Nescafé®, Buitoni®, Nestlé® Carnation® Coffee-mate®, Milo®, Nestlé® Crunch®, and Maggi® are household names to consumers worldwide; and brands such as Stouffer’s®, Nestlé® Nesquik™, Ortega®, and Libby’s® Juicy Juice® are favorites throughout the United States. To uphold its consumer- and customer-focused mission and grow its market share in the highly competitive consumer packaged goods business, Nestlé USA conducts promotions to the retail trade. Nestlé USA selected Siebel eConsumer Goods, a version of Siebel eBusiness Applications, to maximize, plan, and manage its trade promotion activities and expenditures. Siebel eConsumer Goods is specifically designed to support key business processes for the consumer goods industry. Rolled out to more than 650 users, the system provides Nestlé USA with prebuilt functionality to rapidly create account plans, plan and analyze trade promotions and events, manage trade funds, and plan sales volume targets. With Siebel eConsumer Goods, Nestlé USA is able to access accurate, up-to-date customer information, enabling the company to target its sales activities based on detailed customer profiles. Sales managers can carefully track and analyze the effectiveness of trade funds and promotions and maximize the return on these investments.

52

53

Insurance

THE

HARTFORD

FINANCIAL

SERVICES

G R O U P,

INC.

Always Thinking Ahead. That’s more than just a tagline for The Hartford, one of the most respected investment and insurance companies in the United States, with some $200 billion in assets. The slogan applies as much to The Hartford’s business vision as to the company’s focus on its customers’ financial well-being. The Hartford was thinking ahead when it decided to implement Siebel eInsurance—a version of Siebel eBusiness Applications tailored specifically to incorporate best practices and business processes for the insurance industry—in support of a strategic field automation initiative across the United States. Using Siebel eInsurance, The Hartford now has highly configurable packaged applications that are seamlessly integrated with the company’s numerous legacy applications. Siebel eInsurance provides The Hartford with the flexibility to support the company’s unique workflows and specific business processes in managing its customer relationships. The solution delivers key functionality—such as improved sales opportunity management, centralized customer information, and better reporting capabilities—that contributes to higher levels of productivity and operating efficiency in The Hartford’s sales and service operations. Siebel eInsurance has been rolled out to additional business units and will eventually support more than 5,000 users, enabling them to electronically access customer information across geographic areas, thus maximizing customer value through improved service and customer satisfaction.

54

55

Travel and Transportation

SOL

M E L I A´

When Sol Meliá, the leading Spanish hotel group with more than 350 hotels and resorts located across 30 countries and 4 continents, wanted to establish a new travel services subsidiary, it chose Siebel eBusiness Applications for its customer relationship management system. Sol Meliá offers a service called Sol Meliá Travel, S.A.—branded as Meliaviajes.com—which provides business, leisure, and travel agent customers with comprehensive search tools, information, and booking services for Sol Meliá and competing hotels, flights, car hire, and packaged holidays. Customers can interact with Meliá Travel through any communications channel they choose—including the Web, email, telephone, fax, or postal mail. Siebel eBusiness Applications capture data from all interactions at any touchpoint, enabling Meliá Travel to develop and maintain detailed profiles of each customer, including areas of interest and preferred means of travel. With real-time access to comprehensive customer data, Meliá Travel’s representatives at its call center are able to provide highly personalized service, including offers that are tailored to each customer’s interests and preferences, resulting in increased customer satisfaction, revenue, and profitability. Incorporating best practices in travel management, the system supports Meliá Travel’s complex business processes—such as configuration of bundled services and multiple itineraries—while enforcing business rules and policies across all transactions.

56

57

Homeland Security

FIRSTGOV

FirstGov, the official Internet gateway to the U.S. government, was conceived of to facilitate communication with American citizens and to connect the world to all U.S. government information and services. Launched in an unprecedented 90 days, the portal enables hundreds of millions of citizens to conduct business with the government online and to contact agencies directly via email. FirstGov was already receiving a rising level of communications—approximately 1 million a month—when the terrorist attacks of September 11 triggered an exponential increase in the volume of inbound messages. To ensure prompt, accurate, and knowledgeable responses to each inquiry, FirstGov is deploying a prototype system based on Siebel e Mail Response, an essential component of the Siebel Homeland Security product line. Siebel e Mail Response enables FirstGov to receive emails, automatically analyze their content, and intelligently route them to the appropriate agencies. The system tracks the subject of the messages and monitors the time it takes agencies to respond to the messages. FirstGov has substantially increased the government’s ability to provide citizens with up-to-the-minute information and world-class customer service.

58

59

Energy

TXU

ENERGY

Dallas-based TXU Corporation is a multinational leader in electric and natural gas services, merchant trading, energy marketing, telecommunications, and other energy-related services. Its TXU Energy unit—one of the world’s largest competitive energy companies—provides electricity, natural gas, and energy-related solutions to some 11 million customers worldwide. To thrive in today’s deregulated markets, TXU Energy is focusing on customer relationship management as a key source of competitive advantage. It is deploying Siebel eEnergy—a version of Siebel eBusiness Applications specifically designed to support key processes for energy retailers—to users in the United States, Australia, and the United Kingdom. Siebel eEnergy enables the company’s sales and service representatives to price complex commodity, product, and service bundles. The Siebel eEnergy system allows TXU Energy to price more requests per week, leading to a higher rate of closed business. The software also provides out-of-the-box support for complex utility processes, a key requirement for a competitive energy company.

60

61

BOARD

of

DIRECTORS

from left: A. Michael Spence, Ph.D. George T. Shaheen Eric E. Schmidt, Ph.D. Patricia A. House Marc F. Racicot Thomas M. Siebel James C. Gaither, Esq. Charles R. Schwab

62

FINANCIAL

REPORT

64

Road Map

67

Financial Trend Data

6 8 – 79

Management’s Discussion and Analysis of Financial Condition and Results of Operations

68

Overview of the Company’s Operations

69

Overview of 2001 Results

70

Use of Estimates and Critical Accounting Policies

72

Results of Operations

78

Liquidity and Capital Resources

79

Risk Factors

79

Forward-Looking Statements

80 – 87

Consolidated Financial Statements

80

Consolidated Balance Sheets

81

Consolidated Statements of Operations and Comprehensive Income

82

Consolidated Statements of Stockholders’ Equity

86

Consolidated Statements of Cash Flows

8 8 –10 6

Notes to Consolidated Financial Statements

88

Summary of Significant Accounting Policies

93

Financial Statement Details

94

Convertible Subordinated Debentures

95

Commitments and Contingencies

95

Stockholders’ Equity

99

Convertible Preferred Stock and Mandatorily Redeemable Convertible Preferred Stock

63

10 0

Income Taxes

101

Related Party Transactions

101

Segment and Geographic Information

10 2

Business Combinations

10 4

Acquisitions

10 7

Report of Management

108

Independent Auditors’ Report

109

Selected Quarterly Financial Data (Unaudited)

109

Market Price of Common Stock

ROAD

MAP

The financial section of the Siebel 2001 Annual Report consists of

implementation and training services, and maintenance services

the Company’s Financial Trend Data, Management’s Discussion of

related to product updates and technical support. All of the

the Company’s Operating Results and Financial Condition, the

Company’s expenses stem from the design, development, market-

Company’s Consolidated Financial Statements, the Notes to

ing, selling, and support of Siebel eBusiness Applications. For a

Consolidated Financial Statements, and reports from the Company’s

further description of Siebel’s business model, refer to Overview of

management and the Company’s independent auditors. The volume

the Company’s Operations beginning on page 68.

and technical nature of the information contained in each of these sections can make the process of reviewing the financial section of

How Siebel Reports Its Financial Results

the annual report quite complicated. Therefore, this Road Map is designed to provide readers with some perspective regarding the

Siebel reports its financial statements in accordance with generally

information contained in the financial section and a few helpful

accepted accounting principles (“GAAP”) in the United States of

hints for reading the pages herein.

America. Given current economic uncertainties and concerns

This annual report contains forward-looking statements

regarding the accounting practices of publicly traded companies,

that involve risks and uncertainties. See page 79.

Siebel believes that three specific factors will become increasingly

Where to Find Financial Trend Schedules

(i) positive cash flows from operations; (ii) positive earnings that are

important measures of a company’s overall performance and value: reported in accordance with both the form and intent of GAAP; and Siebel has provided a schedule of key financial metrics for the past

(iii) a strong balance sheet, as measured by the company’s cash

five years in the Financial Trend Data schedule. This schedule,

balance, working capital and capital structure. Since shipment of

which is located on page 67, provides a summary of key financial

Siebel’s first product in the fourth quarter of 1994, the Company’s

data from the Company’s Statements of Operations, Balance Sheet,

operations have consistently produced positive cash flows and

and Statements of Cash Flows. The Company has also provided

earnings. Moreover, both cash flow and net earnings have

Selected Quarterly Financial Data for each of the quarters in the

increased in each of the past five years. The Company’s balance

past two years on page 109. These schedules will help readers

sheet is also strong and has continued to strengthen despite

identify trends in the Company’s financial performance.

weakening economic conditions. Within Management’s Discussion and Analysis of Financial Condition and Results of Operations on pages 68 – 79, the

Siebel’s Business Model

Company has provided a summary of its critical accounting policies Siebel sells software applications (“Siebel eBusiness Applications”)

and estimates that affect its reported results. The Company believes

that enable organizations to deploy sales, marketing, and customer

that these accounting policies are prudent and provide a clear view

service systems across all channels—including the Web, call cen-

of its financial performance.

ters, field, resellers, and dealer networks. All of the Company’s

In order to ensure that the Company provides a clear view

revenue is derived from the license of Siebel eBusiness Applications,

of its financial performance, the Company has avoided some of the

64

accounting practices currently in question, such as disclosing oper-

analysis of the Company’s financial results. In addition to the

ating results on a “pro forma” basis that excludes the amortization

required comparison of operating results for the past three years,

of intangibles and/or stock-based compensation from reported

the Company has provided a summary of the business conditions

results. In addition, the Company has not entered into any

the Company faced during 2001, the actions management took to

significant transactions with related parties. The Company has cho-

address these conditions, and the specific results of these actions.

sen not to use off-balance-sheet arrangements with unconsolidated

This summary can be found under Overview of 2001 Results on

related parties, nor to use other forms of off-balance-sheet arrange-

pages 69– 70. The Company believes this section will help readers

ments such as research and development arrangements.

evaluate management’s decision-making process and assess the Company’s overall performance in 2001.

Helpful Guidance for the Major Financial Sections

The Consolidated Financial Statements on pages 80 – 87

of the Annual Report

include details of the Company’s financial position (i.e., Siebel’s

Management’s Discussion and Analysis of Financial Condition and

(i.e., revenues, expenses, net income, and earnings per share) and

Results of Operations on pages 68 –79 provides management’s

cash flows (i.e., sources and uses of cash) for the past three years.

assets and liabilities) for the past two years and operating results

The Notes to Consolidated Financial Statements on pages 88 –106 provide a detailed description of Siebel’s accounting policies; detailed information on the balances within the financial statements, including geographic results; the Company’s financial commitments; and a discussion of recent acquisition activity. Items that may be of interest can be found according to the following index: Subject

Location

Page Number

Accounting Policies ……………………………………………………………………….………

Note 1

Business Combinations and Acquisitions ………………………………………………………

Notes 10 and 11

Details of Amounts in the Financials ……………………………………………………………

Note 2

93

Earnings per Share Details ………………………………………………………………………

Note 5

98

88 102

Financial Commitments …………………………………………………………………………..

Notes 3 and 4

Income Taxes ………………………………………………………………………………………

Note 7

100

Related Party Transactions and Relationships …………………………………………………

Note 8

101

Segment and Geographic Results ………………………………………………………………

Note 9

101

Stockholders’ Equity and Preferred Stock ………………………………………………………

Notes 5 and 6

95

Stock Option Activity and Related Data ……………………………………………………….

Note 5

95

The Company hopes this information facilitates readers’ evaluation of Siebel’s financial performance in 2001.

65

94

Total Revenues

$ 2,0 4 8 $ 1,7 9 5

(Dollars in Millions)

$ 813 $226

97

$ 418

98

99

Net Income, Excluding Merger-Related Expenses(2)(3)

00

01

$258

$255

00

01

(Dollars in Millions)

$110 $56 $27

97

98

99

Cash and Short-Term Investments

$ 1,6 5 7

(Dollars in Millions) $ 1,15 3 $685 $164

97

$242

98

99

00

01

$593

Cash Flows from Operations $439

(Dollars in Millions)

$86

$90

98

99

$ 21 97

Employee Growth

00

01

7,389

7,403

00

01

(Number of Employees) 3,604

1,0 3 0

97

66

1,6 5 5

98

99

FINANCIAL

TREND

DATA

The following financial trend data should be read in conjunction with

December 31, 1997, 1998 and 1999, and the years ended Decem-

our Consolidated Financial Statements and Notes thereto and “Man-

ber 31, 1997 and 1998, is derived from consolidated financial state-

agement’s Discussion and Analysis of Financial Condition and Results

ments that have not been included in this annual report.

of Operations” included elsewhere in this annual report. The finan-

For each of the periods presented our financial trend data has

cial trend data for each of the years in the three-year period ended

been restated to reflect the acquisitions of Scopus Technology, Inc. in

December 31, 2001, and as of December 31, 2000 and 2001, is

1998; OnTarget, Inc. in 1999; and OpenSite Technologies, Inc.,

derived from our consolidated financial statements that have

OnLink Technologies, Inc. and Janna Systems Inc. in 2000; all of

been included in this annual report. The financial trend data as of

which have been accounted for as poolings-of-interests. Year Ended December 31,

(in thousands, except per share data and employees)

1997

1998

Total revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$226,221

$417,861

Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$

8,394

$ 64,469

$ 34,432 $

560

Operating Data

1999

2000

2001

$

813,461

$1,795,384

$2,048,401

$

161,187

$

322,535

$

357,882

$ 79,753

$

161,187

$

359,039

$

357,882

$ 42,290

$

110,025

$

221,899

$

254,575

$ 26,539

$ 55,713

$

110,025

$

257,852

$

254,575

$

—

$

0.10

$

0.12

$

0.24

$

0.49

$

0.07

$

(1)

Adjusted operating income

(2)

.......................................

Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Adjusted net income

(2)(3)

............................................

Diluted net income per common share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Adjusted diluted net income per share

(2)(3)(4)

.......................

0.13

$

0.23

$

0.49

$

0.49

Cash flows from operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 20,674

$ 86,430

$

89,746

$

438,568

$

593,002

Cash and short-term investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$163,542

$242,350

$

685,199

$1,152,584

$1,656,655

Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$275,592

$464,063

$1,275,601

$2,161,741

$2,744,844

Convertible subordinated debentures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$

—

$

—

$

300,000

$

300,000

$

300,000

Mandatorily redeemable convertible preferred stock . . . . . . . . . . . . . .

$

—

$

4,818

$

80,459

$

—

$

—

Total stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$213,532

$299,068

$

644,670

$1,279,946

$1,836,102

Employees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1,030

1,655

3,604

7,389

7,403

(in thousands) (1) Certain prior year amounts have been conformed to the current year presentation. (2) Excludes merger-related expenses of $26,038, $15,284 and $36,504 in the years ended December 31, 1997, 1998 and 2000, respectively. There were no merger-related expenses during the years ended December 31, 1999 and 2001. (3) Excludes the tax benefit of certain merger-related expenses. Amounts excluded were $59, $1,861 and $551 in the years ended December 31, 1997, 1998 and 2000, respectively. There were no merger-related expenses or resulting tax benefit during the years ended December 31, 1999 and 2001. (4) Excludes the effects of accretion of OpenSite’s mandatorily redeemable preferred stock (the “Preferred Stock”), as the holders of the Preferred Stock converted their shares pursuant to their existing terms on a one-for-one basis into shares of OpenSite’s common stock on May 17, 2000. Amounts excluded were $364, $53,164 and $98,755 in the years ended December 31, 1998, 1999 and 2000, respectively. The Preferred Stock was not outstanding during the years ended December 31, 1997 and 2001, and, accordingly, there was no accretion during these years.

67

MANAGEMENT’S OF

FINANCIAL

RESULTS

OF

DISCUSSION

CONDITION

AND

ANALYSIS

AND

OPERATIONS

OVERVIEW OF THE COMPANY’S OPERATIONS

multiple industries, including financial services, communications, travel and transportation, energy, the consumer sector, life sciences,

Siebel is the world’s leading provider of eBusiness applications soft-

the industrial sector and the public sector. Providing best-of-class

ware. Siebel eBusiness Applications are a family of leading Web

eBusiness functionality, Siebel eBusiness Applications enable organ-

applications software that enable an organization to better manage

izations to create a single source of customer information that sales,

its most important relationships: its customer, partner and employee

service and marketing professionals can use to tailor product and

relationships. Siebel eBusiness Applications are designed to meet the

service offerings to meet each of their customers’ unique needs. By

information system requirements needed to manage these relation-

using Siebel eBusiness Applications, organizations can develop new

ships for organizations of all sizes, from small businesses to the

customer relationships, profitably serve existing customers and inte-

largest multinational organizations and government agencies. Our

grate their systems with those of their partners, suppliers and customers,

customer relationship management applications enable an organi-

regardless of location.

zation to sell to, market to, and service its customers across multiple

The Company and its subsidiaries are principally engaged in

channels, including the Web, call centers, field, resellers, retail and

the design, development, marketing and support of the above family

dealer networks. Our partner relationship management applications

of Siebel eBusiness Applications. Substantially all of the Company’s

seamlessly unite the organization’s partners, resellers and customers

revenues are derived from a perpetual license of these software

in one global information system to facilitate greater collaboration

products and the related professional services and customer support

and increased revenues, productivity and customer satisfaction. Our

(maintenance) services. The Company licenses its software in multiple

employee relationship management applications enable an organi-

element arrangements in which the customer purchases a combination

zation to drive employee and organizational performance and

of software, maintenance and/or professional services (i.e., training,

increase employee satisfaction through the support of each stage of

implementation services, etc.). First-year maintenance, which includes

the employee life cycle. By deploying the comprehensive functional-

technical support and product updates, is typically sold with the

ity of Siebel eBusiness Applications to better manage their customer,

related software license and is renewable at the option of the cus-

partner and employee relationships, our customers achieve high

tomer on an annual basis thereafter. The Company’s Global Services

levels of satisfaction from these constituencies and continue to be

Organization provides professional services, which include a broad

competitive in their markets.

range of implementation services, training and technical support, to

Siebel recognizes that each industry has different business

the Company’s customers and implementation partners. The Company’s

processes, competitive challenges and information systems require-

Global Services Organization has significant product and imple-

ments, which cannot be addressed with a “one size fits all” eBusiness

mentation expertise and is committed to supporting customers and

approach. Accordingly, Siebel eBusiness Applications are available

partners through every phase of the eBusiness transformation cycle.

in 20 industry applications designed for specific segments within

Substantially all of the Company’s professional service arrangements

68

are on a time and materials basis. Payment terms for the above

in the customer relationship management market, including releasing

arrangements are negotiated with the Company’s customers and

the Company’s latest version of its products, Siebel 7.

determined based on a variety of factors, including the customer’s credit standing and the Company’s history with the customer.

With these broad objectives as a guide, the Company revised its revenue forecast and adjusted the Company’s operating structure to match its revised revenue projections. Throughout the year, the

OVERVIEW OF 2001 RESULTS

Company updated its revenue forecast using its software and then adjusted its planned operating expenses to maintain a cash positive,

The Company believes that its financial performance in 2001 was

profitable business. Some of the actions the Company took were

strong, especially in light of the then-current economic conditions,

as follows:

having improved many of its key operating metrics and strengthened its financial position compared to 2000. The Company solidified its

•

The Company assessed the revenue pipeline by industry and

ongoing technological leadership through increased investment in

determined that certain industries, such as high technology,

product development and the release of Siebel 7 in the fourth quarter

financial services and telecommunications, were beginning to

of 2001. From a financial perspective, the Company continued its

delay, reduce or cancel information technology investments.

history of revenue growth and cash positive, profitable operation. As

As a result of this analysis, the Company was able to focus

discussed further below, the Company was able to achieve strong

its efforts on the transactions within these industries with the

financial results during challenging economic times by identifying

highest probability of success and identify other industries,

the impending weakness in the overall economy early in the year

such as the pharmaceutical industry, which were showing

and taking quick, decisive action. As a result of management’s

signs of strengthening. As a result, the Company was able to

actions in 2001, the Company enters 2002 in a strong financial and

limit the decrease in software license revenues to 4% com-

product position.

pared to 2000.

During 2001 the Company faced significant challenges to its

•

The Company continued to grow its professional services,

continued growth of revenues and net income, most significantly from

maintenance and other revenues over the prior years by:

the progressive weakening of the global economy, particularly that

(i) increasing the number of new customers receiving mainte-

of the United States, throughout the year. Specifically, according to

nance; and (ii) ensuring that the Company maintained high

industry reports, estimated worldwide spending on information tech-

renewal rates of maintenance agreements from existing cus-

nology remained flat in 2001, compared to 16% growth in 2000.

tomers. The Company’s professional services revenues were

Economic conditions deteriorated further following the terrorist

impacted by the downturn in the economy to a lesser extent

attacks on the United States late in the third quarter of 2001 and sub-

than software license revenues, as these services generally lag software license revenues by three to six months.

sequent hostilities involving the United States. The Company’s revenue growth and profitability depends on overall global economic and

•

The Company implemented cost controls by making virtually

business conditions, particularly in markets where the Company offers

all costs variable with revenue, with the exception of depre-

industry-specific versions of its products. The majority of the Com-

ciation, amortization and facilities expenditures. Specifically,

pany’s revenues are from major corporate customers in the high tech-

management reduced advertising expenditures, reduced chief

nology, telecommunications, financial services (including insurance),

executive officer compensation to zero, decreased senior

pharmaceutical, utilities and consumer packaged goods industries.

executive compensation by 20%, reduced or eliminated incen-

As a result, the Company’s business depends on the economic and

tive compensation, deferred merit compensation increases,

business conditions of these industries.

and reduced other discretionary expenditures, such as travel and recruiting.

In early 2001, through the use of the Company’s software, management determined that the Company’s customers and poten-

•

The Company reduced headcount and closed offices in cer-

tial customers were reducing their capital expenditure budgets and

tain geographic regions that were not producing adequate

thus delaying, reducing or canceling information technology invest-

revenues per employee. However, as compared to historical

ments. When management identified the slowdown in the economy

levels the Company retained a higher ratio of employees to

midway through the first quarter of 2001, the Company set four

revenues, resulting in lower revenue per employee. The Com-

broad objectives, which guided management’s decisions during

pany allowed revenue per employee to decrease in order to:

2001: (i) operate a cash positive, profitable business; (ii) maintain

(i) maintain its technological leadership through continued

and increase customer satisfaction levels; (iii) maintain and increase

investment in product development, resulting in the release of

the Company’s market share in the various product categories in which

Siebel 7 in the fourth quarter; and (ii) prepare for a return to

it operates; and (iv) maintain the Company’s technology leadership

positive software license growth in 2002.

69

The Company enhanced its cost controls by requiring com-

from operations; (ii) positive earnings that are reported in accor-

petitive bids, where appropriate, and by requiring chief exec-

dance with both the form and the intent of generally accepted

utive officer approval for all significant purchases and all hiring.

accounting principles; and (iii) a strong balance sheet. Since ship-

As a result of these actions, the Company was able to operate a cash

operations have produced positive cash flows and earnings, both of

positive, profitable business in challenging economic times; maintain

which have increased in each of the last five years. The Company

the Company’s customer satisfaction levels; maintain or increase the

believes that its financial position is strong, with total assets of

Company’s market share in the various product categories in which

$2,744.8 million, cash and short-term investments of $1,656.7 mil-

it operates; and continue its technology leadership in the customer

lion, working capital of $1,581.4 million, and deferred revenue

•

ment of its first product in the fourth quarter of 1994, the Company’s

relationship management market. In addition, the Company achieved

of $241.0 million. The Company’s capital structure of $2,136.1 mil-

the following financial results:

lion is simple and transparent, comprised of convertible debt of $300.0 million and stockholders’ equity of $1,836.1 million.

•

•

•

•

•

Total revenues increased by 14% from $1,795.4 million in

The Company believes that the application of accounting stan-

2000 to $2,048.4 million in 2001. Professional services,

dards are as important as the reported financial position, results of

maintenance and other revenue increased by 44% from

operations and cash flows. The Company believes that its account-

$680.6 million in 2000 to $982.8 million in 2001, and soft-

ing policies are prudent and provide a clear view of the Company’s

ware license revenue decreased by 4% from $1,114.8 mil-

financial performance. The Company utilizes its internal audit depart-

lion in 2000 to $1,065.6 million in 2001.

ment to help ensure that it follows these accounting policies and

Quarterly operating expenses decreased during 2001 by

maintains its internal controls. The Company reviews its annual and

20%, from $481.3 million in the first quarter to $386.8 mil-

quarterly results, along with key accounting policies, with its audit

lion in the fourth quarter.

committee prior to the release of financial results. In order to ensure

Operating margins were approximately 18% during 2001

that the Company provides a clear view of its financial performance,

and operating income remained comparable to levels in 2000,

the Company has avoided some of the accounting practices currently

with operating income, excluding merger-related expenses,

in question, such as disclosing operating results on a “pro forma”

of $359.0 million in 2000 compared to operating income of

basis that excludes amortization of intangibles and/or stock-based

$357.9 million in 2001.

compensation. In addition, the Company has not entered into any sig-

Net income increased by 15%, from $221.9 million in 2000

nificant transactions with related parties. The Company does not use

to $254.6 million in 2001.

off-balance-sheet arrangements with unconsolidated related parties,

Cash and short-term investments increased by $504.1 million,

nor does it use other forms of off-balance-sheet arrangements such as

or 44%, from $1,152.6 million as of December 31, 2000,

research and development arrangements.

to $1,656.7 million as of December 31, 2001, representing approximately 53% and 61% of total assets, respec-

USE OF ESTIMATES AND CRITICAL ACCOUNTING POLICIES

tively. Since December 31, 1999, the Company has increased

•

•

•

cash and short-term investments by $971.5 million, primarily

The accompanying discussion and analysis of the Company’s finan-

through operations.

cial condition and results of operations are based upon the Com-

Cash flows from operations increased by 35%, from

pany’s consolidated financial statements, which have been prepared

$438.6 million in 2000 to $593.0 million in 2001.

in accordance with accounting principles generally accepted in the

Days sales outstanding decreased from 81 days as of Decem-

United States. The preparation of these financial statements requires

ber 31, 2000, to 72 days as of December 31, 2001.

that the Company make estimates and judgments that affect the

Deferred revenue, which consists primarily of deferred main-

reported amounts of assets, liabilities, revenues and expenses, and

tenance revenue, increased by 19%, from $202.5 million as

related disclosure of contingent assets and liabilities. On an ongoing

of December 31, 2000, to $241.0 million as of Decem-

basis, the Company evaluates its estimates, including those related to

ber 31, 2001.

revenue recognition, provision for doubtful accounts and returns, fair value of investments, fair value of acquired intangible assets, useful

As a result of current economic uncertainties and concerns regarding

lives of intangible assets and property and equipment, income taxes,

the accounting practices of publicly traded companies, the Company

and contingencies and litigation, among others. The Company bases

believes that three specific factors will become important measures

its estimates on historical experience and on various other assump-

of a company’s overall performance and value: (i) positive cash flows

tions that are believed to be reasonable under the circumstances, the

70

results of which form the basis for making judgments about the carry-

of operations. In addition, please refer to Note 1 to the accompa-

ing values of assets and liabilities that are not readily apparent from

nying financial statements for further discussion of the Company’s

other sources. Actual results could differ from the estimates made by

accounting policies.

management with respect to these and other items that require management’s estimates.

The Company’s software arrangements typically include: (i) an end user license that provides for an initial fee in exchange for a

In addition to these estimates and assumptions that are utilized

customer’s use of the Company’s products in perpetuity based on

in preparation of historical financial statements, the inability to prop-

a specified number of users; (ii) a maintenance arrangement that

erly estimate the timing and amount of future revenues could signifi-

provides for technical support and product updates over a period of

cantly impact the Company’s future operations. While the Company’s

12 months; and (iii) a professional service arrangement on a time

proprietary software allows the Company to track its potential reve-

and materials basis.

nues with a high degree of visibility and aids in its ability to manage

The Company recognizes software revenue using the resid-

the size of its operations, management must make assumptions and

ual method pursuant to the requirements of Statement of Position

estimates as to the timing and amount of future revenue. Specifically,

No. 97-2 “Software Revenue Recognition” (“SOP 97-2”), as amended

the Company’s sales personnel monitor the status of all proposals,

by Statement of Position No. 98-9, “Software Revenue Recognition

such as the date when they estimate that a transaction will close and

with Respect to Certain Arrangements.” Under the residual method,

the potential dollar amount of such transaction. The Company aggre-

revenue is recognized when Company-specific objective evidence of

gates these estimates periodically in order to generate a sales

fair value exists for all of the undelivered elements in the arrangement

pipeline and then evaluates the pipeline at various times to look for

(i.e., professional services and maintenance), but does not exist for

trends in the Company’s business. This pipeline analysis and the

one or more of the delivered elements in the arrangement (i.e., the

related estimates of revenue may not consistently correlate to reve-

software product). The Company allocates revenue to each unde-

nues in a particular reporting period as the estimates and assump-

livered element based on its respective fair value, with the fair value

tions made by management were made using the best available data

determined by the price charged when that element is sold sepa-

at the time, but that data is subject to change. Specifically, the slow-

rately. The Company determines the fair value of the maintenance

down in the global economy, along with the recent terrorist attacks,

portion of the arrangement based on the ultimate renewal price of

has caused and may continue to cause customer purchasing deci-

the maintenance charged to the customer based on full deployment

sions to be delayed, reduced in amount or canceled, all of which

of the licensed software products and the fair value of the profes-

have reduced and could continue to reduce the rate of conversion of

sional services portion of the arrangement based on the hourly rates

the pipeline into contracts. A variation in the pipeline or in the con-

that the Company charges for these services when sold independently

version rate of the pipeline into contracts could cause the Company

from a software license. If evidence of fair value cannot be estab-

to plan or budget improperly and thereby could adversely affect the

lished for the undelivered elements of a license agreement, the entire

Company’s business, financial condition or results of operations. In

amount of revenue from the arrangement is deferred and recognized

addition, because a substantial portion of the Company’s license

over the period that these elements are delivered.

revenue contracts close in the latter part of a quarter, management

A customer typically prepays maintenance for the first

may not be able to adjust the Company’s cost structure to respond to

12 months and the related revenue is deferred and recognized over

a variation in the conversion of the pipeline in a timely manner, and

the term of the initial maintenance contract. Maintenance is renew-

thereby the delays may adversely affect the Company’s business,

able by the customer on an annual basis thereafter. Rates for

financial condition or results of operations.

maintenance, including subsequent renewal rates, are typically estab-

The Company believes that there are several accounting poli-

lished based upon a specified percentage of net license fees as set

cies that are critical to understanding the Company’s historical and

forth in the arrangement. Professional services revenue primarily con-

future performance, as these policies affect the reported amounts

sists of implementation services related to the installation of the

of revenue and the more significant areas involving management’s

Company’s products and training revenues. The Company’s software

judgments and estimates. These significant accounting policies relate

is ready to use by the customer upon receipt. While many of the

to revenue recognition, the provision for doubtful accounts, other-

Company’s customers may choose to alter the software to fit their indi-

than-temporary declines in the market value of investments, impair-

vidual needs, the Company’s implementation services do not involve

ments of long-lived assets and the provision for income taxes. These

significant customization to or development of the underlying soft-

policies, and the Company’s procedures related to these policies, are

ware code. Substantially all of the Company’s professional service

described in detail below and under specific areas within the dis-

arrangements are on a time and materials basis and, accordingly,

cussion and analysis of the Company’s financial condition and results

are recognized as the services are performed, which is typically

71

over a three- to six-month period subsequent to licensing of the Com-

RESULTS OF OPERATIONS

pany’s software. For substantially all of the Company’s software arrangements,

The following table sets forth the consolidated statement of operations

the Company defers revenue for the fair value of the maintenance

data for each of the years in the three-year period ended Decem-

and professional services to be provided to the customer and recog-

ber 31, 2001, expressed as a percentage of total revenues:

nizes revenue for the software license when persuasive evidence of an arrangement exists and delivery has occurred, provided the fee

Year Ended December 31,

is fixed or determinable, and collection is deemed probable. The Company evaluates each of these criteria as follows:

1999

Evidence of an arrangement: The Company considers a non-cancelable agreement signed by the Company and the

62.8%

62.1%

52.0%

maintenance and other . . . . . . . . . . . .

37.2

37.9

48.0

Total revenues . . . . . . . . . . . . . . . . .

100.0

100.0

100.0

1.0

1.0

0.5

Professional services,

customer to be evidence of an arrangement. •

Delivery: Delivery is considered to occur when media contain-

Cost of revenues:

ing the licensed programs is provided to a common carrier

Software . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

or, in the case of electronic delivery, the customer is given

Professional services,

access to the licensed programs. The Company’s typical

maintenance and other . . . . . . . . . . . .

21.9

23.7

27.9

end user license agreement does not include customer accept-

Total cost of revenues . . . . . . . . . .

22.9

24.7

28.4

Gross margin . . . . . . . . . . . . . . . . . .

77.1

75.3

71.6

ance provisions. •

•

2001

Revenues: Software . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

•

2000

Fixed or determinable fee: The Company considers the fee

Operating expenses:

to be fixed or determinable if the fee is not subject to refund

Product development . . . . . . . . . . . . . . . . . .

10.0

8.1

9.7

or adjustment. If the arrangement fee is not fixed or deter-

Sales and marketing . . . . . . . . . . . . . . . . . . .

38.2

38.4

35.8

minable, the Company recognizes the revenue as amounts

General and administrative . . . . . . . . . . .

9.1

8.8

8.6

become due and payable.

Merger-related expenses . . . . . . . . . . . . . .

—

2.0

—

Collection is deemed probable: The Company conducts a

Total operating expenses . . . . . . . . . .

57.3

57.3

54.1

credit review for all significant transactions at the time of the

Operating income . . . . . . . . . . . . . . . . .

19.8

18.0

17.5

arrangement to determine the credit worthiness of the cus-

Other income, net . . . . . . . . . . . . . . . . . . . . . . . . .

1.8

3.4

2.2

tomer. Collection is deemed probable if the Company expects

Income before income taxes . . . . . . .

21.6

21.4

19.7

that the customer will be able to pay amounts under the

Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

arrangement as payments become due. If the Company deter-

Net income . . . . . . . . . . . . . . . . . . . . . . . .

8.1

9.1

7.3

13.5%

12.3%

12.4%

mines that collection is not probable, the Company defers the revenue and recognizes the revenue upon cash collection. For Each of the Years Ended December 31, 1999, 2000 and 2001 Please see Note 1 to the accompanying financial statements under “Revenue Recognition” for a detailed description of the Company’s

Revenues

revenue recognition policies. Software: License revenues increased by 118% from $510.9 million for the year ended December 31, 1999, to $1,114.8 million for the year ended December 31, 2000, and decreased by 4% to $1,065.6 million for the year ended December 31, 2001. The increase in software license revenues from 1999 to 2000 was primarily due to an increase in the number of licenses of Siebel applications sold to new and existing customers, along with licenses of new modules, released with the latest version of Siebel applications, to existing users of Siebel base applications. The decrease in software license revenues from 2000 to 2001 was primarily due to the progressive weakening of the global economy throughout 2001. This caused many of the Company’s customers, especially in industries such as high technology, telecommunications and financial services,

72

to reduce their capital expenditure budgets, which in turn led to the

license revenues coupled with the renewals of maintenance agree-

Company’s customers delaying their purchasing decisions. Despite

ments by the Company’s existing customer base. Professional services,

the weaker economic conditions during 2001, the Company’s cus-

maintenance and other revenues increased by 44% over 2000 due

tomers have continued to express a strong interest in the Company’s

to the significant growth in software license revenues in 2000 and

products, thus limiting the decrease in software license revenues.

early 2001 and the continued high renewal rate by the Company’s

Software license revenues as a percentage of total revenues

customers of their maintenance agreements. Professional services and

were 63% in 1999 and 62% in 2000 as compared to 52% in

other revenues declined sequentially each quarter in the second half

2001. Software license revenues as a percentage of total revenues

of 2001 due to sequential declines in software license revenues in

decreased from the percentages in 1999 and 2000 primarily due

each of the first three quarters of 2001; however, maintenance reve-

to the growth of the Company’s professional services business to meet

nues continued to increase as a result of the Company’s expanding

the demand for the implementation of the Company’s products

customer base. The Company expects that professional services,

and the decrease in the Company’s software license revenues as

maintenance and other revenues will return to positive sequential

described above. The Company’s customers have continued to express

growth by the second half of 2002 due to the return of the growth

a strong interest in its products; therefore, the Company anticipates

of software license revenue in the fourth quarter of 2001 and the

that the Company’s software license revenues will return to posi-

anticipated stabilization of the global economy. The Company

tive growth in the second half of 2002. Accordingly, the Company

expects to manage this growth to ensure that the Company’s pro-

currently believes that software license revenues, both in terms of

fessional services organization does not compete with its imple-

absolute dollars and as a percentage of total revenues, will increase

mentation partners. Accordingly, the Company expects that 2002

from the levels achieved in 2001.

professional services, maintenance and other revenues, in terms of

The Company markets its products in the United States through

absolute dollars, will remain comparable to the levels obtained during

its direct sales force and internationally through its direct sales force

2001. With the expected growth of the Company’s software license

and to a limited extent through distributors, primarily in Europe, Asia

revenues in 2002, the Company expects professional services, main-

Pacific, Japan and Latin America. International license revenues

tenance and other revenues as a percentage of total revenues to

accounted for 31%, 40% and 45% of license revenues in 1999,

decrease from the levels of 2001.

2000 and 2001, respectively. The Company expects international software license revenues will continue to account for a significant

Cost of Revenues

portion of total software license revenues in the future. Software: Cost of software license revenues includes third-party softProfessional Services, Maintenance and Other: Professional services

ware royalties, product packaging, production and documentation.

are typically provided over a period of three to six months subse-

All costs incurred in the research and development of software prod-

quent to a software license arrangement. Professional services, main-

ucts and enhancements to existing products have been expensed

tenance and other revenues increased from $302.6 million and

as incurred. Cost of software license revenues was $8.2 million,

$680.6 million for the years ended December 31, 1999 and 2000,

$17.3 million and $9.9 million in 1999, 2000 and 2001, respec-

respectively, to $982.8 million for the year ended December 31,

tively. As a percentage of software license revenues, cost of software

2001. As a percentage of total revenues, professional services, main-

license revenues decreased from 2% in the years ended December 31,

tenance and other revenues were 37% in 1999 and 38% in 2000

1999 and 2000, to 1% for the year ended December 31, 2001. Cost

as compared to 48% in 2001. The increases in the absolute dollar

of software license revenues decreased in absolute dollars and as a

amount of revenues in each of the years were primarily due to growth

percentage of software license revenue primarily due to a shift from

in the Company’s installed base of customers receiving maintenance

products subject to third-party software royalties and the Company

and the growth of the Company’s consulting and training services.

renegotiating more favorable terms for certain third-party royalty

The increase in professional services, maintenance and other rev-

agreements. These costs as a percentage of software license revenues

enues as a percentage of total revenues was due to the growth in the

are expected to increase from the percentage in 2001 due to increases

Company’s consulting and training services, the growth in the num-

in amortization of acquired technology obtained in the acquisition of

ber of customers receiving maintenance and the decrease in the

nQuire Software, Inc., as discussed in Note 11 to the accompany-

Company’s software license revenues.

ing consolidated financial statements.

The continued growth of the Company’s professional services revenues depends in large part on the growth of the Company’s soft-

Professional Services, Maintenance and Other: Cost of professional

ware license revenues, while the growth of the Company’s mainte-

services, maintenance and other revenues consist primarily of per-

nance revenues depends on the growth of the Company’s software

sonnel, facilities and systems costs incurred to provide training,

73

consulting and other global services. Cost of professional services,

The increase in product development expense was primarily

maintenance and other revenues increased from $178.1 million and

attributable to costs of additional personnel in the Company’s product

$426.5 million for the years ended December 31, 1999 and 2000,

development operations, including additional personnel to support

respectively, to $570.9 million for the year ended December 31,

the development and testing of the Company’s latest software release,

2001. As a percentage of professional services, maintenance and

Siebel 7. Due in part to efficiencies achieved related to the Com-

other revenues, these costs were 59% in 1999 and 63% in 2000 as

pany’s acquisitions (see Notes 10 and 11 to the consolidated finan-

compared to 58% in 2001. The increase in the absolute dollar

cial statements) and the significant growth of the Company’s total

amount reflects increased costs from the Company’s expansion of its

revenues in 2000, product development expenses as a percentage

Global Services Organization in order to meet the demand for the

of total revenues decreased in 2000 from the levels in 1999. Prod-

Company’s consulting and training services. The increase as a per-

uct development as a percentage of total revenues increased during

centage of professional services, maintenance and other revenues

2001 from 2000 as a result of the Company’s increased investment

from 1999 to 2000 reflects an increase in the proportion of this

in new product development. The Company anticipates that it will

revenue derived from implementation services that are at lower mar-

continue to devote substantial resources to product development as

gins versus maintenance services, which are at higher margins. The

it develops new products, new versions of its existing products and

decrease as a percentage of professional services, maintenance and

additional modules for its existing products. Accordingly, the Com-

other revenues from 2000 to 2001 reflects: (i) the continued growth

pany expects product development expenses to continue to increase

of the Company’s higher-margin maintenance revenues; (ii) a higher

in absolute dollar amount, but remain comparable to the percentage

utilization of the Company’s global services personnel; (iii) a reduc-

of total revenues obtained in 2001.

tion in the use of third-party contractors; and (iv) an acceleration of the Company’s cost control initiatives initiated in early 2001, includ-

Sales and Marketing: Sales and marketing expenses consist primarily

ing reductions of headcount in geographic regions with low person-

of salaries, commissions and bonuses earned by sales and marketing

nel utilization, along with reductions of discretionary expenditures,

personnel, field office expenses, travel and entertainment, and pro-

including incentive compensation. The Company expects that profes-

motional and advertising expenses. Sales and marketing expenses

sional services, maintenance and other costs, in terms of both absolute

increased from $311.3 million and $688.6 million for the years

dollars and as a percentage of professional services, maintenance

ended December 31, 1999 and 2000, respectively, to $734.9 mil-

and other revenues, will remain comparable to or increase from the

lion for the year ended December 31, 2001, and as a percentage

levels obtained in 2001.

of total revenues, sales and marketing expenses were 38% in both 1999 and 2000 as compared to 36% in 2001. The increases in the absolute dollar amount of sales and marketing expenses reflect the

Operating Expenses

hiring of additional sales and marketing personnel and costs associProduct Development: Product development expenses include expenses

ated with expanded promotional activities, primarily in the first half

associated with the development of new products, enhancements of

of 2001, partially offset by the Company’s cost control initiatives and

existing products and quality assurance activities and consist pri-

operating efficiencies obtained from integrating OpenSite, OnLink

marily of employee salaries, benefits, consulting costs and the cost

and Janna with the Company.

of software development tools. The Company considers technologi-

In response to the weakening global economy, the Company

cal feasibility of its software products to have been reached upon

reduced its expenditures during 2001, thus limiting the increase in

completion of a working model that has met certain performance

sales and marketing expense and resulting in a decrease in sales

criteria. The period between achievement of technological feasibility

and marketing expense as a percentage of total revenues. These cost

and general release of a software product is typically very short, and

controls included: (i) decreased or eliminated incentive compensation

development costs incurred during that period have not been mate-

and reduced executive compensation; (ii) deferral of merit compen-

rial. Accordingly, the Company has not capitalized any software

sation increases; (iii) reduced advertising, travel and other discre-

development costs to date. Product development expenses increased

tionary expenditures; (iv) reduced headcount in the second half of

from $81.1 million and $145.5 million for the years ended Decem-

2001; and (v) operating efficiencies obtained from combining the

ber 31, 1999 and 2000, respectively, to $198.6 million for the year

operations of OpenSite, OnLink and Janna with the Company. While

ended December 31, 2001, and as a percentage of total revenues,

the Company expects to continue to closely monitor discretionary

product development expense was 10%, 8% and 10% in 1999,

expenditures and to continue its cost control initiatives, the Company

2000 and 2001, respectively.

expects that sales and marketing expenses, in terms of absolute dollars and as a percentage of total revenues, will increase in 2002 compared to 2001.

74

General and Administrative: General and administrative expenses

Merger-Related Expenses: The Company did not incur any significant

consist primarily of salaries and occupancy costs for administrative,

merger-related costs during 1999 or 2001. During 2000, the Com-

executive and finance personnel. In addition, general and administra-

pany expensed an aggregate of $36.5 million of direct merger-

tive expenses also include amortization of goodwill and intangibles,

related expenses, of which $10.0 million related to OpenSite,

along with bad debt expense. General and administrative expenses

$9.0 million related to OnLink and $17.5 million related to Janna.

increased from $73.6 million and $158.5 million for the years ended

These costs primarily consisted of investment banker fees; compen-

December 31, 1999 and 2000, respectively, to $176.2 million for

sation expense associated with the acceleration of stock options in

the year ended December 31, 2001, and as a percentage of total

accordance with their existing terms; integration charges related

revenues were 9% in each of the years in the three-year period ended

to duplicate facilities and equipment; legal, accounting and other

December 31, 2001. The increases in the absolute dollar amount of

professional fees; and other miscellaneous expenses. As of Decem-

general and administrative expenses were primarily due to increased

ber 31, 2001, the Company had $0.6 million of merger-related costs

staffing and associated expenses necessary to manage and support

remaining to be paid and has reflected the remaining liability in

the Company’s increased size of its operations, partially offset by

accrued liabilities. The remaining liabilities consist primarily of legal

management’s cost control initiatives and reductions in incentive com-

and lease termination fees. The Company expects to settle the remain-

pensation and the provision for doubtful accounts.

ing liabilities in 2002.

For each of the years in the three-year period ended Decem-

In addition to reviewing assets obtained through acquisition

ber 31, 2001, the Company’s provision for doubtful accounts in the

for impairment, the Company evaluates all of its long-lived assets,

accompanying consolidated financial statements has ranged between

including intangible assets, for impairment whenever events or

approximately 1% and 2% of total revenues. The Company initially

changes in circumstances indicate that the carrying value of an asset

records its provision for doubtful accounts based on its historical

may not be recoverable based on expected undiscounted cash flows

experience of write-offs and then adjusts this provision at the end of

attributable to that asset. Should events indicate that any of the Com-

each reporting period based on a detailed assessment of its accounts

pany’s assets are impaired, the amount of such impairment will be

receivable and allowance for doubtful accounts. In estimating the

measured as the difference between the carrying value and the fair

provision for doubtful accounts, management considers the age of

value of the impaired asset and recorded in earnings during the

the accounts receivable, the Company’s historical write-offs, the credit

period of such impairment.

worthiness of the customer, the economic conditions of the customer’s industry, and general economic conditions, among other factors.

Operating Income and Operating Margin

Should any of these factors change, the estimates made by management will also change, which could impact the level of the Company’s

Operating income increased from $161.2 million for the year ended

future provision for doubtful accounts. Specifically, if the financial

December 31, 1999, and $322.5 million for the year ended Decem-

condition of the Company’s customers were to deteriorate, affecting

ber 31, 2000, to $357.9 million for the year ended December 31,

their ability to make payments, additional provision for doubtful

2001, and operating margin was 20% in 1999 as compared to 18%

accounts may be required.

in both 2000 and 2001. Excluding merger-related expenses, oper-

As more fully described below under “Recent Accounting

ating income was $161.2 million and $359.0 million for the years

Standards,” new accounting pronouncements were issued in July

ended December 31, 1999 and 2000, respectively, compared to

2001 that eliminate the requirement that the Company amortize its

$357.9 million for the year ended December 31, 2001, and operat-

goodwill as of January 1, 2002. However, identifiable intangible

ing margin was 20% in both 1999 and 2000, as compared to 18%

assets will continue to be amortized. The Company expects that the

in 2001. Operating margins, excluding merger-related expenses,

elimination of goodwill amortization will result in a reduction in

decreased in 2001 primarily due to: (i) the decrease in software license

general and administrative expense of approximately $20.0 million

revenues on a year-over-year basis as a result of the weakening global

during 2002 compared to 2001. However, this decrease will be par-

economy and the recent terrorist attacks upon the United States;

tially offset by increases of other general and administrative expenses

(ii) the increase as a percentage of total revenues of professional

as a result of the continued expansion of the Company’s administra-

services, maintenance and other revenues, which are at lower mar-

tive staff and facilities to support growing operations. As a result of

gins than software license revenues; and (iii) the increase in the

the elimination of the requirement to amortize goodwill, the Company

Company’s investment in product development to support the release

currently anticipates that general and administrative expenses, in

of Siebel 7. Management’s cost control initiatives and efficiencies

terms of absolute dollars and as a percentage of total revenues, will

obtained from integrating OpenSite, OnLink and Janna partially off-

decrease from the levels experienced in 2001.

set these factors that contributed to the decline in operating margins.

75

Other Income, Net

charge when it determines an investment has experienced a decline in value that is other-than-temporary. In order to make this determi-

For 1999, 2000 and 2001, other income, net was comprised of the

nation, the Company reviews the carrying value of its short-term

following (in thousands):

investments and marketable equity securities, along with investments accounted for under the cost method, at the end of each reporting

Interest income . . . . . . . . . . . . . . . . . . . Interest expense . . . . . . . . . . . . . . . . . .

1999

2000

2001

$18,086

$ 56,766

$ 67,332

(6,100)

(17,909)

(18,326)

period to determine if any investments are impaired. This review includes an evaluation of historical and projected financial performance, expected cash needs and recent funding events. Other-thantemporary impairments are recognized in earnings if the market value

Losses from equity method investee (Sales.com) . . . . . . . . . Charitable contributions . . . . . . . . .

— (6,000)

(7,481) (30,705)

— (1,404)

of the investment is below its current carrying value for an extended period or the issuer has experienced significant financial declines or difficulties in raising capital to continue operations. Future adverse

Net gains on investments and

changes in market conditions or poor operating results of underlying

marketable equity securities . . . . . . . . . . . . . . . . . . . . .

12,343

60,901

3,399

investments could result in an inability to recover the carrying value of the investments, thereby possibly requiring an impairment charge

Write-down of cost-method investments to fair value . . . . . Other, net . . . . . . . . . . . . . . . . . . . . . . . .

— (3,239) $15,090

—

(3,073)

303

(1,726)

$ 61,875

$ 46,202

in the future. Charitable contributions during 1999 were to various charitable organizations, while 2000 contributions were primarily comprised of the Company’s contribution of a portion of the investment in USinternetworking, Inc. to various educational foundations. Chari-

Interest income represents earnings on the Company’s cash, cash

table contributions during 2001 primarily relate to cash contributions

equivalents and short-term investments and has continued to increase

made to charities assisting with the September 11, 2001 disaster relief

due to the increased balances of cash, cash equivalents and short-

efforts. Other, net for all periods presented is primarily comprised of

term investments, partially offset by a decline in interest rates. Interest

banking fees and foreign currency transaction gains or losses.

expense for all periods presented primarily represents interest on the Company’s $300.0 million of convertible subordinated debentures

Provision for Income Taxes

issued in September 1999. In December 1999, the Company sold a controlling interest in Sales.com and therefore accounted for this

Income taxes totaled $66.3 million, $162.5 million and $149.5 mil-

investment under the equity method during 2000. In January 2001,

lion for the years ended December 31, 1999, 2000 and 2001,

the Company reacquired the outstanding interest in Sales.com and,

respectively. Income taxes as a percentage of pretax income

accordingly, the Company consolidated the activities of Sales.com

decreased from 38% and 42% in 1999 and 2000, respectively, to

subsequent to its acquisition.

37% in 2001. The Company’s effective tax rate for 2000 was higher

Net gains on investments and marketable equity securities were

than the rates in 1999 and 2001 primarily due to non-deductible

primarily the result of gains from sales of the Company’s short-term

items related to acquisitions. The Company anticipates that its effec-

investments during 1999 and gains from sales of the Company’s invest-

tive tax rate will continue to decrease as the Company anticipates

ment in USinternetworking, Inc. during 2000. During 2001, net gains

deriving a higher percentage of its taxable income from more favor-

on investments and marketable equity securities resulted primarily

able tax jurisdictions in 2002. The Company currently expects its

from sales of certain short-term investments, partially offset by a net

effective tax rate to be approximately 36% in 2002.

write-down of $2.4 million of one of the Company’s marketable equity

As of December 31, 2001, the Company’s valuation allowance

securities to fair value, as the decline was determined to be other-

on its deferred tax assets pertains to certain tax credits and net

than-temporary. During 2001 the Company also wrote down certain

operating loss carryforwards resulting from the exercise of certain

investments accounted for under the cost method to fair value as the

employee stock options. The valuation allowance will be reduced in

decline in these investments was deemed to be other-than-temporary.

the period in which the Company realizes a benefit on its tax return

Total other-than-temporary impairments were $5.5 million for the year

from a reduction of income taxes payable from the utilization of these

ended December 31, 2001. There were no other-than-temporary

credits and losses. When realized, the tax benefit of these credits and

impairments during the years ended December 31, 1999 and 2000.

losses will be accounted for as a credit to shareholders’ equity rather

The Company holds several minority interests, included in other

than as a reduction of income tax expense. While the Company has

assets, in companies having operations or technology in areas within

considered future taxable income and the existence of prudent and

its strategic focus. The Company records an investment impairment

feasible tax planning strategies in assessing the need for an additional

76

valuation allowance on its remaining deferred tax assets, in the event

No. 142 “Goodwill and Other Intangible Assets” (“SFAS 142”), as

the Company were to determine that it would not be able to realize

permitted. There was not a cumulative transition adjustment upon

all or part of its net deferred tax assets in the future, an adjustment

adoption of these provisions. As further described under “Recent

to the deferred tax assets would be charged to income in the period

Accounting Standards” in Note 1 to the accompanying consolidated

such determination was made.

financial statements, SFAS 141 and 142 prescribe new accounting guidance for business combinations and acquired intangible assets,

Net Income and Net Income Available to Common Stockholders

including goodwill. SFAS 141 is effective for all purchase business combinations completed after June 30, 2001, and for all business

The Company had net income of $110.0 million, $221.9 million

combinations “initiated” after June 30, 2001, as defined. For good-

and $254.6 million for the years ended December 31, 1999, 2000

will and intangible assets acquired in business combinations com-

and 2001, respectively. Net income available to common stock-

pleted after June 30, 2001, the Company follows the amortization

holders was $56.9 million, $123.1 million and $254.6 million for

and impairment provisions of SFAS 142.

the years ended December 31, 1999, 2000 and 2001, respectively. Diluted net income available per common share was $0.12, $0.24

Recent Accounting Standards

and $0.49 in 1999, 2000 and 2001, respectively. For the years ended December 31, 1999 and 2000, net income has been reduced

As described above, the Financial Accounting Standards Board

by accretion on OpenSite’s mandatorily redeemable convertible pre-

(“FASB”) issued SFAS 141 and SFAS 142 in July 2001 and the Com-

ferred stock to determine net income available to common stockhold-

pany adopted all permitted provisions of these pronouncements as

ers. The accounting for OpenSite’s mandatorily redeemable convertible

of July 1, 2001. The Company adopted the remaining provisions of

preferred stock required non-cash accretion to the then-current fair value

SFAS 141 and SFAS 142 as of January 1, 2002. In accordance with

of the common stock into which the mandatorily redeemable convert-

SFAS 142, the Company will perform an evaluation of the Com-

ible preferred stock was convertible. This resulted in a non-cash charge

pany’s identifiable intangible assets and goodwill as of January 1,

to accretion and offsetting credit to mandatorily redeemable convert-

2002, to reassess the lives of identifiable intangible assets and to

ible preferred stock. The amount of accretion for an income statement

determine whether any of the Company’s goodwill is impaired. If the

period was dependent upon how much the fair value of OpenSite’s

Company determines that a portion of the goodwill is impaired as

common stock fluctuated during that period. In connection with the

of the date of adoption, the impairment will be recorded as a “cumu-

Company’s acquisition of OpenSite, the mandatorily redeemable con-

lative effect of a change in accounting principle” on January 1,

vertible preferred stock was converted into shares of OpenSite’s com-

2002. Upon full adoption of SFAS 142, the Company will no longer

mon stock, pursuant to their existing terms, on a one-for-one basis.

amortize goodwill related to acquisitions completed prior to July 1,

Accordingly, the Company ceased recording accretion on the manda-

2001, and, accordingly, the Company will not incur any future amor-

torily redeemable convertible preferred stock on May 17, 2000.

tization expense related to goodwill. Goodwill will be subject to periodic tests for impairment in accordance with SFAS 142. Goodwill

Adoption of Accounting Standards

amortization expense totaled approximately $20.0 million during the year ended December 31, 2001.

On January 1, 2001, the Company adopted Statement of Financial

In October 2001, the FASB issued SFAS No. 144 “Accounting

Accounting Standards No. 133, “Accounting for Derivative Instru-

for the Impairment or Disposal of Long-Lived Assets” (“SFAS 144”),

ments and Hedging Activities” (“SFAS 133”). There was not a cumu-

which is effective for fiscal years beginning after December 15, 2001.

lative transition adjustment upon adoption. SFAS 133 establishes

SFAS 144 supersedes certain provisions of APB Opinion No. 30

accounting and reporting standards for derivative instruments and

“Reporting the Results of Operations—Reporting the Effects of

hedging activities. SFAS 133 requires that all derivatives be recog-

Disposal of a Segment of a Business, and Extraordinary, Unusual

nized as either assets or liabilities at fair value. Derivatives or portions

and Infrequently Occurring Events and Transactions” and supersedes

of derivatives that are not designated as hedging instruments are

SFAS No. 121 “Accounting for the Impairment of Long-Lived Assets

adjusted to fair value through earnings and are recognized in the

and for Long-Lived Assets to Be Disposed Of.” The Company does

period of change in their fair value. The Company does not believe

not expect the adoption of SFAS 144 to have a material effect on its

that the application of SFAS 133 will significantly alter the Company’s

consolidated financial position, results of operations or cash flows.

hedging strategies. However, its application may increase the volatil-

In December 2001, the FASB staff issued Topic No. D-103

ity of other income and expense and other comprehensive income.

“Income Statement Characterization of Reimbursements Received for

On July 1, 2001, the Company adopted certain provisions

“Out-of-Pocket” Expenses Incurred” (“Topic D-103”), which is effec-

of SFAS No. 141 “Business Combinations” (“SFAS 141”) and SFAS

tive for fiscal years beginning after December 15, 2001. Topic D-103

77

requires that certain out-of-pocket expenses rebilled to customers be

made on or after September 15, 2006, will be at $300.0 million.

recorded as revenue versus an offset to the related expense. Com-

The Company will pay accrued interest to the redemption date.

parative financial statements for prior periods must be conformed to

Cash provided by operating activities was $89.7 million,

this presentation. The Company currently records rebilled out-of-

$438.6 million and $593.0 million for 1999, 2000 and 2001,

pocket expenses as an offset to the related expense and, accordingly,

respectively. The Company’s cash provided from operations in each

effective January 1, 2002, the Company will change its presentation

of the years in the three-year period ended December 31, 2001, was

to reflect rebilled expenses as revenue and conform the presentation

primarily derived from the Company’s earnings prior to non-cash

for prior periods. This change will have no effect on operating income

expenses such as depreciation, amortization and bad debt. Also

or net income for any period presented.

contributing to cash flows from operations is the tax benefit related to the exercise of employee stock options, which reduces the Com-

L I Q U I D I T Y A N D C A P I TA L R E S O U R C E S

pany’s cash outlay for income tax expense, and changes in the Company’s working capital. The Company’s cash provided by oper-

The Company derives its liquidity and capital resources primarily

ating activities has continued to increase each year primarily as the

from the Company’s cash flows from operations and from working

result of the increases in revenues and operating income.

capital, which was $1,581.4 million as of December 31, 2001. The

Cash used in investing activities was $90.5 million, $384.3 mil-

Company’s cash, cash equivalents and short-term investments increased

lion and $699.4 million for 1999, 2000 and 2001, respectively. Dur-

from $1,152.6 million as of December 31, 2000, to $1,656.7 million

ing each of the years in the three-year period ended December 31,

as of December 31, 2001, representing approximately 53% and 61%

2001, the Company’s investment activities primarily related to the

of total assets, respectively. The Company’s days sales outstanding

purchase of additional property and equipment and the reinvest-

in accounts receivable was 81 days as of December 31, 2000, com-

ment of the Company’s cash into short-term investments. For 1999,

pared with 72 days as of December 31, 2001. The Company’s

2000 and 2001, the Company reinvested its cash flows from oper-

liquidity could be negatively impacted by a decrease in demand for

ations into short-term investments in net amounts of $35.5 million,

the Company’s products, which are subject to rapid technological

$197.8 million and $445.0 million, respectively, and had net pur-

changes, or a reduction of capital expenditures by the Company’s

chases of property and equipment, including leasehold improvements,

customers as a result of a downturn in the global economy, among

of $32.3 million, $162.2 million and $251.3 million, respectively.

other factors. The Company does not have any off-balance-sheet

The Company’s investing activities in each of the years in the three-year

arrangements with unconsolidated entities or related parties and,

period ended December 31, 2001, also included purchases of non-

accordingly, the Company’s liquidity and capital resources are not

operating assets and acquired businesses, partially offset by proceeds

subject to off-balance-sheet risks from unconsolidated entities.

from the sale of marketable equity securities and changes in advances

As of December 31, 2001, the Company’s future fixed com-

to an affiliate. These net expenditures were $22.8 million, $24.3 mil-

mitments for cash payments primarily related to obligations under

lion and $3.1 million during 1999, 2000 and 2001, respectively.

non-cancelable operating leases and the Company’s convertible

During 2001, the Company increased its capital expenditures

subordinated debentures. The Company leases facilities under non-

primarily as a result of: (i) expansion of the Company’s infrastructure

cancelable operating leases expiring between 2002 and 2022.

to support the development and testing of Siebel 7; (ii) purchases of

Future minimum lease payments under operating leases as of Decem-

tenant improvements and furniture and fixtures for leased space as cer-

ber 31, 2001, consisted of $110.9 million due within one year,

tain facilities were converted from month-to-month leases of full-serviced

$471.4 million due between one and five years and $1,315.1 mil-

office suites; and (iii) purchases of tenant improvements and furniture

lion due after five years. In addition, as of December 31, 2001, the

and fixtures for new leased facilities. This transition to leased space

Company had $300.0 million of convertible subordinated deben-

has involved build-out of tenant improvements, acquisition of furniture

tures outstanding. These debentures mature on September 15, 2006;

and fixtures and other capital costs, which were not incurred in con-

bear interest at a rate of 5.50%; and are convertible at the option

nection with the use of fully serviced office suites. The Company may

of the holder into 12.9 million shares of the Company’s common

purchase land and buildings in the future to meet its facilities’ needs.

stock at any time prior to maturity, at a conversion price of $23.32

Cash provided by financing activities was $396.5 million,

per share, subject to adjustment under certain conditions. The Com-

$208.9 million and $157.4 million for 1999, 2000 and 2001, respec-

pany may redeem the notes, in whole or in part, at any time on or

tively. For 1999, 2000 and 2001, the Company’s financing activities

after September 15, 2002. The redemption price will range from

consisted primarily of net proceeds of $76.2 million, $189.2 million

$309.4 million to $302.4 million if the notes are redeemed between

and $156.2 million, respectively, from the issuance of common stock

September 15, 2002, and September 14, 2006. Any redemption

pursuant to the exercise of stock options and the Company’s employee stock purchase plan. During 1999, the Company also received net

78

proceeds of $291.3 million from the issuance of the subordinated

•

Software errors or defects in our products could reduce revenues.

convertible debentures, offset by net repayments of debt of $2.1 mil-

•

If we do not successfully manage our growth, our business may be negatively impacted.

lion and subchapter S distributions by OnTarget of $2.1 million prior to its acquisition. The Company’s remaining financing activities dur-

•

preferred stock by OpenSite and OnLink prior to their acquisition in

•

the amounts of $33.1 million and $20.0 million, respectively. While the Company believes that the anticipated cash flows

Integration of personnel and operations relating to our previous or future acquisitions may disrupt our business and management.

ing 1999 and 2000 consisted of proceeds from the issuance of

If we acquire additional companies, products or technologies, we may face risks similar to those faced in our other acquisitions.

•

from operations, along with cash, cash equivalents and short-term

Rising energy costs and power system shortages in California may result in increased operating expenses and reduced net

investments, will be adequate to meet its cash needs for daily oper-

income and harm to our operations due to power loss.

ations and capital expenditures for at least the next 12 months, the

•

The loss of key personnel could negatively affect our performance.

Company may elect to raise additional capital through a public

•

Catastrophic events could negatively affect our information technology infrastructure.

offering in the future, depending upon market conditions. •

Leverage and debt service obligations may adversely affect our cash flow.

RISK FACTORS

•

We may not be able to protect our proprietary information.

This annual report contains forward-looking statements that involve

•

Our international operations involve unique risks.

known and unknown risks, uncertainties and other factors, which may

•

Some of our stockholders may be able to exercise control over matters requiring stockholder approval.

cause our actual results, performance or achievements, or industry results to be materially different from any future results, performance

•

Our stock price may continue to be volatile.

or achievements expressed or implied by such forward-looking state-

•

Provisions in our charter documents may prevent certain corpo-

ments. Some of these factors are as follows:

rate actions.

•

Our total revenue and operating results may fluctuate.

Please refer to “Risk Factors” in the Company’s Securities and

•

Our quarterly operating results may fluctuate.

Exchange Commission (“SEC”) filings, including filings on Forms 10-K

•

Economic conditions could adversely affect our revenue growth

and 10-Q, for a more thorough discussion of these risk factors.

and ability to forecast revenue. •

We need to successfully integrate acquisitions and manage growth.

•

We rely on strategic relationships with systems integrators, dis-

•

F O R WA R D - LO O K I N G S TAT E M E N T S

tributors, resellers and technology vendors.

The statements contained in this annual report that are not historical

We may not be able to compete effectively in the Internet-related

are forward-looking statements within the meaning of Section 27A of

products and services market.

the Securities Act of 1933 and Section 21E of the Securities Exchange

•

We operate in a competitive and rapidly changing market.

Act of 1934. Forward-looking statements include, without limitation,

•

Our customers may not successfully implement our products.

statements regarding the extent and timing of future revenues and

•

A limited number of products provide a substantial part of our

expenses and customer demand, statements regarding the deployment

license revenues.

of our products, and statements regarding reliance on third parties. All

The length of time required to engage a client and to implement

forward-looking statements included in this annual report are based

our products may be lengthy and unpredictable.

on information available to us as of the date of this annual report. We

Our success will require us to manage the size of our employee

assume no obligation to update or revise any forward-looking state-

•

•

base, particularly our direct sales force and global support staff.

ments, whether as a result of new information, future events or other-

•

Our expanding distribution channels may create additional risks.

wise, unless we are required to do so by law. We have based these

•

Our revenue is concentrated in a relatively small number of customers.

forward-looking statements on our current expectations and projections

•

Our continued success will require us to keep pace with techno-

about future events. These forward-looking statements are not guaran-

logical developments, evolving industry standards and changing

tees of future performance and are subject to risks, uncertainties and

customer needs.

assumptions, including those in the section entitled “Risk Factors” in the

To be successful, we must effectively compete in the eBusiness

Company’s SEC filings. While some of these factors are discussed in

systems market.

this annual report, please refer to “Risk Factors” in the preceding sec-

If we do not maintain our relationships with third-party vendors,

tion and the Company’s SEC filings, including filings on Forms 10-K

interruptions in the supply of our products may result.

and 10-Q, for a more thorough discussion of these risk factors.

•

•

79

CONSOLIDATED BALANCE

SHEETS

December 31, (in thousands, except per share data)

2000

2001

Assets Current assets: Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$

751,384

$

799,090

Short-term investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

401,200

857,565

Marketable equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

14,285

8,254

Accounts receivable, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

521,358

386,569

Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

61,825

58,131

Prepaids and other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

92,825

80,494

Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1,842,877

2,190,103

Property and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

189,610

353,242

Goodwill, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

42,809

72,869

Intangible assets, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2,008

19,000

Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

52,729

56,905

Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

31,708

52,725

Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$2,161,741

$2,744,844

$

$

Liabilities and Stockholders’ Equity Current liabilities: Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

24,113

14,395

Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

355,159

353,330

Deferred revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

202,523

241,017

Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

581,795

608,742

Convertible subordinated debentures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

300,000

300,000

Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

881,795

908,742

442,392 and 466,950 shares issued and outstanding, respectively . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

442

467

Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1,062,599

1,357,422

Commitments and contingencies Stockholders’ equity: Common stock; $0.001 par value; 800,000 and 2,000,000 shares authorized, respectively;

Notes receivable from stockholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(1,623)

(422)

Deferred compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(15,199)

(8,362)

Accumulated other comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

7,479

6,174

Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

226,248

480,823

Total stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1,279,946

1,836,102

Total liabilities and stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$2,161,741

$2,744,844

See accompanying notes to consolidated financial statements.

80

CONSOLIDATED OPERATIONS

STATEMENTS

AND

OF

COMPREHENSIVE

INCOME

Year Ended December 31, (in thousands, except per share data)

1999

2000

2001

Software . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$510,874

$1,114,753

$1,065,618

Professional services, maintenance and other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

302,587

680,631

982,783

Total revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

813,461

1,795,384

2,048,401

Revenues:

Cost of Revenues: Software

.......................................................................................

8,150

17,311

9,895

Professional services, maintenance and other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

178,113

426,458

570,899

Total cost of revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

186,263

443,769

580,794

Gross margin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

627,198

1,351,615

1,467,607

Operating Expenses: Product development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

81,053

145,514

198,629

Sales and marketing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

311,337

688,612

734,908

General and administrative . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

73,621

158,450

176,188

Merger-related expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

—

36,504

—

Total operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

466,011

1,029,080

1,109,725

Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

161,187

322,535

357,882

Other income, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

15,090

61,875

46,202

Income before income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

176,277

384,410

404,084

Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

66,252

162,511

149,509

Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

110,025

221,899

254,575

Accretion of preferred stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net income available to common stockholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(53,164)

(98,755)

—

$ 56,861

$

123,144

$

254,575

Diluted net income per common share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$

0.12

$

0.24

$

0.49

Basic net income per common share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$

0.15

$

0.29

$

0.56

Shares used in diluted share computation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

467,907

522,321

522,970

Shares used in basic share computation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

387,867

423,067

457,031

Comprehensive Income: Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$110,025

$

221,899

$

254,575

Other comprehensive income (loss), net of tax: Foreign currency translation adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1,365

1,836

(3,238)

Realized (gain) loss previously recognized in other comprehensive income . . . . . . . . . . . . . . . . .

(12,343)

(60,901)

(3,399)

Unrealized gains (loss) on investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

96,009

(17,444)

5,332

Other comprehensive income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

85,031

Total comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$195,056

See accompanying notes to consolidated financial statements.

81

(76,509) $

145,390

(1,305) $

253,270

CONSOLIDATED STOCKHOLDERS’

STATEMENTS

OF

EQUITY

Preferred Stock (in thousands)

Shares

Amount

Balances, December 31, 1998 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1,786

$ 2

Issuance of common stock under Employee Stock Option Plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

—

—

Issuance of common stock under Employee Stock Purchase Plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

—

—

Issuance of common stock, other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

—

—

Repurchase of common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

—

—

Termination of put provision of redeemable common stock warrants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

—

—

Issuance of Series A and B convertible preferred stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1,033

1

Issuance of warrants in connection with license agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

—

—

Tax benefit from stock options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

—

—

Deferred compensation related to stock options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

—

—

Amortization of deferred compensation related to stock options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

—

—

Change in net unrealized gain on short-term investments, net of taxes of $51,279 . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

—

—

Currency translation adjustment, net of taxes of $837 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

—

—

Subchapter S distributions by OnTarget . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

—

—

Conversion of convertible notes to common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

—

—

Issuance of common stock related to acquisitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

—

—

Accretion of mandatorily redeemable convertible preferred stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

—

—

Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

—

—

Balances, December 31, 1999 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2,819

3

Issuance of common stock under Employee Stock Option Plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

—

—

Issuance of common stock under Employee Stock Purchase Plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

—

—

Issuance of common stock, other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

—

—

Issuance of common stock for services rendered . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

—

—

Repurchase of common stock which was subject to vesting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

—

—

Issuance of Series C convertible preferred stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

697

1

Issuance of warrants in connection with license agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

—

—

Tax benefit from stock options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

—

—

Deferred compensation related to stock options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

—

—

Forfeiture of stock options issued below fair value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

—

—

Amortization of deferred compensation related to stock options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

—

—

Change in net unrealized gain on short-term investments, net of taxes of ($47,938) . . . . . . . . . . . . . . . . . . . . . . . . . . . .

—

—

Currency translation adjustment, net of taxes of $1,125 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

—

—

Repayments of stockholder notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

—

—

Conversion of mandatorily redeemable convertible preferred stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

—

—

Conversion of Series A, Series B, and Series C convertible preferred stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(3,516)

(4)

Accretion of mandatorily redeemable convertible preferred stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

—

Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

—

—

Balances, December 31, 2000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

—

$—

(continued)

82

—

Notes Common Stock

Accumulated

Additional

Receivable

Paid-in

from

Deferred

Comprehensive

Other Retained

Total

Capital

Stockholders

Compensation

Income (Loss)

Earnings

Stockholders’

Shares

Amount

375,227

$375

21,505

22

59,341

(60)

—

—

—

59,303

1,666

2

15,735

—

—

—

—

15,737

448

—

4,202

—

—

—

—

4,202

(569)

—

(2,822)

—

—

—

—

(2,822)

—

—

—

—

323

—

$

252,355

$

(488)

$

(456)

$ (1,043)

$ 48,323

Equity

$

299,068

—

323

—

—

10,661

—

—

—

—

10,662

—

—

4

—

—

—

—

4

—

—

91,679

—

—

—

4,274

—

(4,274)

—

—

91,679

—

—

—

—

—

—

—

—

—

—

—

1,180

—

—

1,180

—

83,666

—

83,666

—

—

—

—

—

—

—

—

1,365

—

—

—

1,290

1

3,212

3

6,918

—

—

—

—

6,919

18,600

—

—

—

—

18,603

—

—

—

—

—

—

—

—

—

—

—

—

110,025

110,025

402,779

403

461,270

(548)

29,498

29

147,382

(1,153)

885

1

40,088

379

—

2,842

35

—

1,921

(24)

—

(16)

—

(3,550)

— (2,080)

(53,164)

1,365 (2,080)

(53,164)

83,988

103,104

644,670

—

—

—

146,258

—

—

—

—

40,089

—

—

—

—

2,842

—

—

—

—

1,921

—

—

—

—

(16)

—

—

19,974

—

—

—

—

19,975

—

—

1,176

—

—

—

—

1,176

—

—

185,613

—

—

—

—

185,613

—

—

24,307

—

—

—

—

—

—

—

1,167

—

—

—

—

—

—

—

11,491

—

—

11,491

—

—

—

—

—

—

(78,345)

—

—

—

—

—

1,836

—

—

—

—

78

—

—

—

78

5,324

5

179,209

—

—

—

—

179,214

3,516

4

—

—

—

—

—

—

—

—

—

—

(1,167)

—

—

—

442,392

$442

$1,062,599

83

— $(1,623)

(24,307)

— $(15,199)

(78,345)

— (98,755)

1,836

— (98,755)

—

221,899

221,899

$ 7,479

$226,248

$1,279,946

CONSOLIDATED STOCKHOLDERS’

STATEMENTS EQUITY

OF

(CONTINUED)

Preferred Stock (in thousands)

Shares

Amount

Balances, December 31, 2000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

—

$—

Issuance of common stock under Employee Stock Option Plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

—

—

Issuance of common stock under Employee Stock Purchase Plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

—

—

Repurchase of common stock which was subject to vesting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

—

—

Tax benefit from stock options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

—

—

Forfeiture of stock options issued below fair value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

—

—

amortization related to forfeitures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

—

—

Change in net unrealized gain on short-term investments, net of taxes of $1,185 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

—

—

Currency translation adjustment, net of taxes of ($1,985) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

—

—

Issuance of common stock related to the Sales.com acquisition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

—

—

Exchange of the Company’s options for Sales.com options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

—

—

Issuance of common stock related to the nQuire acquisition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

—

—

Exchange of the Company’s options for nQuire options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

—

—

the nQuire acquisition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

—

—

Repayments of stockholder notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

—

—

Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

—

—

Balances, December 31, 2001 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

—

$—

Amortization of deferred compensation related to stock options, net of reversal of

Deferred compensation related to restricted stock and stock options issued in connection with

See accompanying notes to consolidated financial statements.

84

Notes Common Stock

Receivable

Paid-in

from

Deferred

Comprehensive

Retained

Stockholders

Compensation

Income (Loss)

Earnings

Equity

$ 7,479

$226,248

$1,279,946

—

—

108,110 48,283

Shares

Amount

Capital

442,392

$442

$1,062,599

20,597

21

108,089

1

48,282

1,470 (143)

—

Accumulated

Additional

$(1,623) —

(237)

$(15,199) —

Total

—

—

—

—

—

—

—

—

Stockholders’

(237)

—

—

—

—

—

—

53,800

—

—

(2,953)

—

2,953

—

—

—

—

—

(112)

—

5,281

—

—

5,169

—

—

—

—

—

1,933

—

1,933

—

—

—

—

—

(3,238)

—

(3,238)

374

1

26,899

—

—

—

—

26,900

—

—

1,335

—

—

—

—

1,335

2,260

2

58,414

—

—

—

—

58,416

—

—

1,306

—

—

—

—

1,306

—

—

—

—

—

—

(1,397)

—

—

—

1,201

—

—

—

1,201

—

—

—

—

—

—

254,575

254,575

466,950

$467

$1,357,422

$ 6,174

$480,823

$1,836,102

85

53,800

Other

$

(422)

(1,397)

$ (8,362)

CONSOLIDATED CASH

STATEMENTS

OF

FLOWS

Year Ended December 31, (in thousands)

1999

2000

2001

$ 110,025

$ 221,899

Compensation related to stock options, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1,180

11,491

5,169

Compensation related to stock warrants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

269

—

—

Depreciation and other amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

19,334

35,352

93,179

Amortization of goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

4,529

14,713

20,041

Amortization of identifiable intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

292

1,326

6,518

Exchange of software for cost-method investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

—

Cash Flows from Operating Activities: Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$

254,575

Adjustments to reconcile net income to net cash provided by operating activities:

Loss from equity method investee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

—

(13,068) 7,481

(971) —

Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(18,217)

Tax benefit from exercise of stock options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

91,679

185,613

53,800

Loss on disposal of property and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

737

13

—

Write-down of acquired companies’ assets to be disposed of . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

—

2,298

—

Write-down of cost-method investments to fair value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

—

—

3,073

Net gains on short-term investments and marketable equity securities . . . . . . . . . . . . . . . . . . . . . . . .

(12,343)

(62,059)

(60,901)

(11,636)

(3,399)

Charitable contribution of marketable equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

—

28,700

—

Provision for doubtful accounts and returns . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

8,111

39,385

26,403

Changes in operating assets and liabilities: Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(175,842)

(258,882)

109,368

Prepaids and other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(16,705)

(58,464)

13,695

Accounts payable and accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

40,745

230,807

(14,815)

Deferred revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

35,952

112,864

38,002

Net cash provided by operating activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

89,746

438,568

593,002

Cash Flows from Investing Activities: Proceeds from sale of marketable equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Purchases of property and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Proceeds from disposal of property and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Purchases of short-term investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Sales and maturities of short-term investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

— (45,604) 13,284 (126,171) 90,713

Purchase consideration paid related to acquired businesses, net of cash received . . . . . . . . . . . . . .

(250)

Other non-operating assets and non-marketable securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(22,519)

Repayments from (advances to) affiliate, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net cash used in investing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (continued)

86

— (90,547)

35,351 (162,186) 25 (487,888) 290,088 (29,212)

821 (251,326) — (1,113,004) 668,028 8,555

(18,084)

(23,068)

(12,362)

10,579

(384,268)

(699,415)

CONSOLIDATED CASH

FLOWS

STATEMENTS

OF

(CONTINUED)

Year Ended December 31, (in thousands)

1999

2000

2001

Proceeds from issuance of common stock, net of repurchases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

76,233

189,173

156,156

Proceeds from issuance of preferred stock, net of repurchases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

33,139

19,975

—

Proceeds from issuance of convertible debt, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

291,316

—

—

Cash Flows from Financing Activities:

Repayments on line of credit, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(2,063)

Subchapter S distributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(2,080)

(299)

—

—

—

Repayments of stockholder notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

—

78

1,201 157,357

Net cash provided by financing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

396,545

208,927

Effect of exchange rate fluctuations on cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

115

1,836

Change in cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

395,859

265,063

47,706

Cash and cash equivalents, beginning of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

90,462

486,321

751,384

Cash and cash equivalents, end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 486,321

$ 751,384

$

799,090

(3,238)

Supplemental Disclosures of Cash Flows Information: Cash paid for interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$

7

$ 16,324

$

17,029

Cash paid for income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 14,545

$ 15,434

$

18,837

Purchase price payable to acquired companies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$

—

$

3,000

$

—

Conversion of preferred stock into common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$

—

$ 179,214

$

—

Convertible notes issued for acquisitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$

6,918

$

—

$

—

Common stock and stock options issued for acquisitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 18,603

$

—

$

87,957

Supplemental Disclosures of Non-Cash Activities:

See accompanying notes to consolidated financial statements.

87

NOTES

TO

CONSOLIDATED

FINANCIAL

STATEMENTS

NOTE 1:

Principles of Consolidation: The accompanying consolidated finan-

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

cial statements include the accounts of the Company and its wholly owned subsidiaries. All intercompany accounts and transactions have

The Company: Siebel Systems, Inc. (“Siebel” or the “Company”) is the

been eliminated.

world’s leading provider of eBusiness applications software. Siebel eBusiness Applications are a family of leading Web applications soft-

Use of Estimates: The Company’s consolidated financial statements

ware that enable an organization to better manage its most impor-

have been prepared in accordance with accounting principles gener-

tant relationships: its customer, partner and employee relationships.

ally accepted in the United States. The preparation of these financial

Siebel eBusiness Applications are designed to meet the information

statements requires that the Company make estimates and judgments

system requirements needed to manage these relationships for organ-

that affect the reported amounts of assets, liabilities, revenues and

izations of all sizes, from small businesses to the largest multinational

expenses, and related disclosure of contingent assets and liabilities.

organizations and government agencies. Our customer relationship

On an ongoing basis, the Company evaluates its estimates, including

management applications enable an organization to sell to, market

those related to revenue recognition, provision for doubtful accounts

to, and service its customers across multiple channels, including the

and returns, fair value of investments, fair value of acquired intangi-

Web, call centers, field, resellers, retail and dealer networks. Our

ble assets, useful lives of intangible assets and property and equip-

partner relationship management applications seamlessly unite

ment, income taxes, and contingencies and litigation, among others.

the organization’s partners, resellers and customers in one global

The Company bases its estimates on historical experience and on

information system to facilitate greater collaboration and increased

various other assumptions that are believed to be reasonable under

revenues, productivity, and customer satisfaction. Our employee rela-

the circumstances, the results of which form the basis for making judg-

tionship management applications enable an organization to drive

ments about the carrying values of assets and liabilities that are not

employee and organizational performance and increase employee

readily apparent from other sources. Actual results could differ from

satisfaction through the support of each stage of the employee life

the estimates made by management with respect to these items and

cycle. By deploying the comprehensive functionality of Siebel eBusiness

other items that require management’s estimates.

Applications to better manage their customer, partner and employee relationships, our customers achieve high levels of satisfaction from

Foreign Currency Translation: The Company considers the functional

these constituencies and continue to be competitive in their markets.

currency of its foreign subsidiaries to be the local currency, and

88

accordingly, the foreign currency is translated into U.S. dollars using

Concentrations of Credit Risk: Financial instruments that potentially

exchange rates in effect at period end for assets and liabilities and

subject the Company to a concentration of credit risk principally con-

average exchange rates during each reporting period for the results

sist of trade accounts receivable. The Company performs ongoing

of operations. Adjustments resulting from translation of foreign

credit evaluations of its customers and generally does not require

subsidiary financial statements are reported in accumulated other

collateral on accounts receivable, as the majority of the Company’s

comprehensive income (loss). Gains or losses on foreign currency trans-

customers are large, well-established companies. The Company main-

actions are recognized in current operations and have not been sig-

tains reserves for potential credit losses, but historically has not expe-

nificant to the Company’s operating results in any period presented.

rienced any significant losses related to any particular industry or geographic area since the Company’s business is not concentrated

Fair Value of Financial Instruments: The fair value of the Company’s

on any one particular customer or customer base. No single customer

cash, cash equivalents, short-term investments, accounts receivable

accounts for more than 10% of revenues, and the Company’s cus-

and accounts payable approximate their respective carrying amounts.

tomers, which are primarily in the high technology, telecommunica-

Based on the quoted market price of the convertible subordinated

tions, financial services (including insurance), pharmaceutical, utilities

debentures, the fair value of the convertible subordinated debentures

and consumer packaged goods industries, are sufficiently diverse

was $421,230,000 as of December 31, 2001. The fair value of the

that the Company does not consider itself significantly exposed to

Company’s derivative financial instruments was $9,000 as of Decem-

concentrations of credit risk.

ber 31, 2001. Property and Equipment: Property and equipment are stated at cost Cash, Cash Equivalents, Short-Term Investments and Marketable Equity

less accumulated depreciation and amortization. Depreciation is

Securities: The Company considers all highly liquid investments with

calculated using the straight-line method over the estimated useful

an original maturity of 90 days or less at the date of purchase to be

lives of the respective assets, generally three to five years. Leasehold

cash equivalents. Short-term investments generally consist of highly

improvements are amortized over the lesser of the lease term or the

liquid securities with original maturities in excess of 90 days. Mar-

estimated useful lives of the improvements, generally seven years.

ketable equity securities include the Company’s investment in publicly

Expenditures for maintenance and repairs are charged to expense as

traded companies in the high technology industry. The Company has

incurred. Cost and accumulated depreciation of assets sold or retired

classified its short-term investments and marketable equity securities

are removed from the respective property accounts, and the gain or

as “available for sale.” Such investments are carried at fair value with

loss is reflected in the statement of operations.

unrealized gains and losses, net of related tax effects, reported within accumulated other comprehensive income (loss). Realized gains and

Intangible Assets: As described further under “Recent Accounting

losses on available-for-sale securities are computed using the specific

Standards,” the Financial Accounting Standards Board (“FASB”)

identification method.

issued SFAS No. 141 “Business Combinations” (“SFAS 141”) and

The Company reviews the carrying value of its short-term

SFAS No. 142 “Goodwill and Other Intangible Assets” (“SFAS 142”)

investments and marketable equity securities, along with investments

in July 2001. In accordance with SFAS 142, the Company has con-

accounted for under the cost method, at the end of each reporting

tinued to amortize goodwill related to acquisitions completed prior

period to determine if any investments are impaired. This review

to July 1, 2001, with amortization ceasing on January 1, 2002 (the

includes an evaluation of historical and projected financial perform-

date the Company fully adopts SFAS 142). The goodwill balances

ance, expected cash needs and recent funding events. Other-than-

associated with acquisitions completed prior to July 1, 2001, were

temporary impairments are recognized in earnings if the market

amortized over three to five years using the straight-line method.

value of the investment is below its current carrying value for an

Consistent with SFAS 142, the Company has not amortized goodwill

extended period or the issuer has experienced significant financial

related to acquisitions completed subsequent to June 30, 2001, but

declines or difficulties in raising capital to continue operations. Other-

instead tests the balance for impairment. Identifiable intangibles

than-temporary impairments recognized in other income, net totaled

(acquired technology), regardless of acquisition date, are currently

$5,512,000 for the year ended December 31, 2001. There were no

amortized over three years using the straight-line method.

other-than-temporary impairments during the years ended December 31, 1999 and 2000.

89

Impairment of Long-Lived Assets: The Company evaluates long-lived

exchange rate movements on the Company’s operating results. These

assets, including goodwill and intangible assets, for impairment

contracts require the Company to exchange currencies at rates

whenever events or changes in circumstances indicate that the carry-

agreed upon at the contract’s inception. These contracts reduce the

ing value of an asset may not be recoverable based on expected

exposure to fluctuations in exchange rate movements because the

undiscounted cash flows attributable to that asset. The amount of any

gains and losses associated with foreign currency balances and

impairment is measured as the difference between the carrying value

transactions are generally offset with the gains and losses of the for-

and the fair value of the impaired asset. In connection with the acqui-

eign exchange contracts. Because the impact of movements in cur-

sitions of OpenSite, OnLink and Janna, the Company reviewed the

rency exchange rates on forward contracts offsets the related impact

carrying value of these companies’ fixed assets and certain long-term

on the underlying items being hedged, these financial instruments

assets and as a result recorded a charge to earnings of $2,298,000

help alleviate the risk that might otherwise result from certain changes

for assets that the Company planned on abandoning or disposing of

in currency exchange rates. The Company does not designate its

at less than their carrying value. This provision has been reflected in

foreign exchange forward contracts as hedges and, accordingly, the

merger-related expenses in the year ended December 31, 2000. The

Company adjusts these instruments to fair value through earnings.

Company does not have any additional long-lived assets it considers

The Company does not hold or issue financial instruments for specu-

to be impaired.

lative or trading purposes.

Employee Stock Option and Purchase Plans: The Company accounts

Revenue Recognition: Substantially all of the Company’s revenues

for its employee stock-based compensation plans using the intrinsic

are derived from the license of the Company’s software products and

value method. As such, deferred compensation is recorded on the

the related professional services and customer support (maintenance)

date of grant if the current market price of the underlying stock

services. The Company’s standard end user license agreement pro-

exceeds the exercise price. The Company records and measures

vides for an initial fee for use of the Company’s products in perpe-

deferred compensation for options granted to non-employees at their

tuity based on the number of named users. The Company licenses its

fair value. Deferred compensation is expensed on a straight-line basis

software in multiple element arrangements in which the customer pur-

over the vesting period of the stock option.

chases a combination of software, maintenance and/or professional services (i.e., training, implementation services, etc.).

Derivative Instruments and Hedging Activities: On January 1, 2001,

The Company recognizes revenue using the residual method

the Company adopted Statement of Financial Accounting Standards

pursuant to the requirements of Statement of Position No. 97-2 “Soft-

No. 133, “Accounting for Derivative Instruments and Hedging

ware Revenue Recognition” (“SOP 97-2”), as amended by Statement

Activities” (“SFAS 133”). There was not a cumulative transition adjust-

of Position No. 98-9, “Software Revenue Recognition with Respect to

ment upon adoption on January 1, 2001. SFAS 133 establishes

Certain Arrangements.” Under the residual method, revenue is rec-

accounting and reporting standards for derivative instruments and

ognized in a multiple element arrangement when Company-specific

hedging activities and requires that all derivatives be recognized as

objective evidence of fair value exists for all of the undelivered ele-

either assets or liabilities at fair value. If certain conditions are met,

ments in the arrangement, but does not exist for one of the delivered

a derivative may be specifically designated and accounted for as

elements in the arrangement. The Company allocates revenue to each

(a) a hedge of the exposure to changes in the fair value of a recog-

element in a multiple element arrangement based on its respective fair

nized asset or liability or an unrecognized firm commitment; (b) a

value, with the fair value determined by the price charged when that

hedge of the exposure to variable cash flows of a forecasted trans-

element is sold separately. The Company defers revenue for the fair

action; or (c) a hedge of the foreign currency exposure of a net invest-

value of its undelivered elements (e.g., professional services and

ment in a foreign operation, an unrecognized firm commitment, an

maintenance) and recognizes revenue for the remainder of the

available-for-sale security, or a foreign-currency-denominated fore-

arrangement fee attributable to the delivered elements (i.e., software

casted transaction. Derivatives or portions of derivatives that are not

product) when the basic criteria in SOP 97-2 have been met.

designated as hedging instruments are adjusted to fair value through earnings in the period of change in their fair value.

Under SOP 97-2, revenue attributable to an element in a customer arrangement is recognized when persuasive evidence of an

The Company operates internationally and thus is exposed to

arrangement exists and delivery has occurred, provided the fee is

potential adverse changes in currency exchange rates. The Company

fixed or determinable, collectibility is probable and the arrangement

has entered into foreign exchange contracts to reduce its exposure

does not require significant customization of the software. If at the

to foreign currency rate changes on receivables, payables and inter-

outset of the customer arrangement, the Company determines that

company balances denominated in a non-functional currency. The

the arrangement fee is not fixed or determinable or that collectibility

objective of these contracts is to neutralize the impact of currency

is not probable, the Company defers the revenue and recognizes

90

the revenue when the arrangement fee becomes due and payable.

Software Development Costs: Software development costs associated

The Company recognizes revenue from resellers upon sell-through

with new products and enhancements to existing software products

to the end customer.

are expensed as incurred until technological feasibility in the form of

Professional services, maintenance and other revenues relate

a working model has been established. To date, the time period

primarily to consulting services, maintenance and training. Mainte-

between the establishment of technological feasibility and completion

nance revenues are recognized ratably over the term of the main-

of software development has been short, and no significant devel-

tenance contract, typically 12 months. Consulting and training revenues

opment costs have been incurred during that period. Accordingly, the

are recognized as the services are performed and are usually on a

Company has not capitalized any software development costs to date.

time and materials basis. Such services primarily consist of implementation services related to the installation of the Company’s products

Advertising: Advertising costs are expensed as incurred. Advertising

and do not include significant customization to or development of the

expense is included in sales and marketing expense and amounted

underlying software code.

to $29,828,000, $44,472,000 and $31,800,000 in 1999, 2000

The Company’s customers include a number of its suppliers

and 2001, respectively.

and on occasion, the Company has purchased goods or services for the Company’s operations from these vendors at or about the same

Income Taxes: The Company uses the asset and liability method of

time the Company has licensed its software to these organizations.

accounting for income taxes. Deferred tax assets and liabilities are

These transactions are separately negotiated and recorded at terms

recognized for the estimated future tax consequences attributable

the Company considers to be arm’s-length. During the years ended

to differences between the consolidated financial statement carrying

December 31, 2000 and 2001, the Company recognized approxi-

amounts of existing assets and liabilities and their respective tax

mately $11,600,000 and $76,400,000, respectively, of software

bases. Deferred tax assets are recognized for deductible temporary

license revenues from transactions with vendors where the Company

differences, along with net operating loss carryforwards and credit

purchased goods or services from those vendors at or about the same

carryforwards, if it is more likely than not that the tax benefits will be

time as the software license transactions. The Company generally

realized. To the extent a deferred tax asset cannot be recognized

defines “at or about the same time” as “within six months.”

under the preceding criteria, allowances must be established.

During 2000, the Company established a program whereby

Deferred tax assets and liabilities are measured using enacted tax

qualified startup companies could obtain Siebel eBusiness software

rates in effect for the year in which those temporary differences are

in exchange for shares of their equity securities. Qualified startup

expected to be recovered or settled.

companies are generally companies that have received and are

Prior to the Company’s acquisition of OnTarget in 1999,

expected to continue to receive funding and guidance from top-tier

OnTarget had elected subchapter S status for Federal income tax pur-

venture capital firms, have passed a credit review consistent with

poses. Accordingly, no income tax was presented in the historical

other Siebel customers, and have a sound business model and expe-

financial statements of OnTarget for this period, as the income was

rienced management team. The Company recognized approximately

taxable personally to the stockholders. Pro forma income tax expense

$13,100,000 and $1,000,000 of software license revenues related

would not have been materially different from income tax as presented

to this program during the years ended December 31, 2000 and

if OnTarget had been a subchapter C corporation during 1999.

2001, respectively. During the year ended December 31, 2001, the Company also recognized approximately $2,900,000 of software

Net Income Available Per Common Share: Basic net income per

license revenues from a publicly traded company with which it

share is computed using the weighted average number of shares of

negotiated a strategic investment. The software license was sepa-

common stock outstanding. Diluted net income per share is computed

rately negotiated and recorded at terms the Company considers to

using the weighted average number of shares of common stock and,

be arm’s-length.

when dilutive, potential common shares from options to purchase common stock, restricted common stock subject to repurchase by the

Cost of Revenues: Cost of software consists primarily of media, prod-

Company, and warrants outstanding, using the treasury stock method.

uct packaging and shipping, documentation and other production

Dilutive net income per share also gives effect, when dilutive, to the

costs, and third-party royalties. Cost of professional services, main-

conversion of the convertible subordinated debentures, preferred

tenance and other consists primarily of salaries, benefits and allo-

stock and mandatorily redeemable convertible preferred stock, using

cated overhead costs related to consulting, training and other global

the if-converted method.

services personnel, including cost of services provided by third-party consultants engaged by the Company.

91

For basic and diluted net income per share, the Company has reduced net income by the accretion of mandatorily redeemable

convertible preferred stock to arrive at the net income available to common stockholders. See Note 6.

In October 2001, the FASB issued SFAS 144, which is effective for fiscal years beginning after December 15, 2001. SFAS 144 supersedes certain provisions of APB Opinion No. 30 “Reporting the

Recent Accounting Standards: In July 2001, the FASB issued

Results of Operations—Reporting the Effects of Disposal of a Segment

SFAS 141 and SFAS 142. The Company adopted certain provisions

of a Business, and Extraordinary, Unusual and Infrequently Occurring

of these pronouncements effective July 1, 2001, as required for

Events and Transactions” (“APB 30”) and supersedes SFAS No. 121

goodwill and intangible assets acquired in purchase business com-

“Accounting for the Impairment of Long-Lived Assets and for Long-

binations consummated after June 30, 2001. There was not a cumu-

Lived Assets to Be Disposed Of” (“SFAS 121”). The Company does

lative transition adjustment upon adoption. The Company adopted

not expect the adoption of SFAS 144 to have a material effect on its

the remaining provisions of SFAS 141 and SFAS 142 as of Jan-

consolidated financial position, results of operations or cash flows.

uary 1, 2002.

In December 2001, the FASB staff issued Topic No. D-103

SFAS 141 requires that all business combinations be accounted

“Income Statement Characterization of Reimbursements Received

for using the purchase method; therefore, the pooling-of-interests

for “Out-of-Pocket” Expenses Incurred” (“Topic D-103”), which is

method is prohibited. SFAS 141 also specifies criteria for recogniz-

effective for fiscal years beginning after December 15, 2001. Topic

ing and reporting intangible assets apart from goodwill; however,

D-103 requires that certain out-of-pocket expenses rebilled to cus-

assembled workforce must be recognized and reported in goodwill.

tomers be recorded as revenue versus an offset to the related

For purchase business combinations completed prior to July 1, 2001,

expense. Comparative financial statements for prior periods must be

SFAS 141 provides that the Company must evaluate its intangible

conformed to this presentation. The Company currently records

assets and amounts recorded in goodwill and reclassify amounts in

rebilled out-of-pocket expenses as an offset to the related expense

accordance with this pronouncement effective as of January 1, 2002.

and, accordingly, effective January 1, 2002, the Company will

SFAS 142 requires that intangible assets with an indefinite life should

change its presentation to reflect rebilled expenses as revenue and

not be amortized until their life is determined to be finite and all

conform the presentation for prior periods. This change will have no

other intangible assets must be amortized over their useful life. Intan-

effect on operating income or net income for any period presented.

gible assets must be reviewed for impairment in accordance with SFAS No. 144 “Accounting for the Impairment or Disposal of Long-

Reclassifications: Certain prior year amounts have been reclassified

Lived Assets” (“SFAS 144”). SFAS 142 also requires that goodwill not

to conform to the current year presentation.

be amortized but instead tested for impairment in accordance with the provisions of SFAS 142 at least annually and more frequently upon the occurrence of certain events. In accordance with SFAS 142, the Company will perform an evaluation of the Company’s identifiable intangible assets and goodwill effective as of January 1, 2002, to reassess the lives of identifiable intangible assets and to determine whether any of the Company’s goodwill is impaired. If the Company determines that a portion of the goodwill is impaired as of the date of adoption, the impairment will be recorded as a “cumulative effect of a change in accounting principle.” The Company has reviewed the balances of goodwill and identifiable intangibles for acquisitions completed prior to June 30, 2001, and determined that the Company does not have any amounts that are required to be reclassed from goodwill to identifiable intangibles, or vice versa. Upon full adoption of SFAS 142 on January 1, 2002, the Company will no longer amortize goodwill related to acquisitions completed prior to July 1, 2001, and, accordingly, the Company will not incur any future goodwill amortization expense related to these acquisitions. Goodwill amortization expense totaled approximately $20,000,000 during the year ended December 31, 2001.

92

NOTE 2: F I N A N C I A L S TAT E M E N T D E TA I L S

Cash, Cash Equivalents, Short-Term Investments and Marketable Equity Securities: Cash equivalents consist of securities with remaining maturities of 90 days or less at the date of purchase. Cash and cash equivalents, short-term investments, and marketable securities consisted of the following as of December 31, 2000 and 2001 (in thousands): Unrealized Cost

Loss

Gain

Market

December 31, 2000: Cash and cash equivalents: Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$179,478

—

$179,478

Certificates of deposit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

608

—

—

608

Money market funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

467,848

—

—

467,848

US treasury and agency securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

18,737

(5)

5

18,737

Corporate notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$

84,728

—

$

1

84,713

$751,399

$

(21)

(16) $

6

$751,384

US treasury securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$143,172

$

(17)

$ 1,294

$144,449

Corporate notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

189,970

(37)

1,489

191,422

Municipal securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

65,491

(203)

41

65,329

Short-term investments:

Marketable equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$398,633

$

(257)

$ 2,824

$401,200

$

$(3,413)

$ 9,768

$ 14,285

$

$

$ 35,006

7,930

December 31, 2001: Cash and cash equivalents: Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 35,006

—

—

Certificates of deposit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

250

—

—

250

Money market funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

708,755

—

—

708,755

US treasury and agency securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

3,730

Corporate notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

51,362 $799,103

$

US treasury securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$241,355

$

Corporate notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

412,405

—

—

3,730

(13)

—

51,349

—

$799,090

(169)

$ 3,475

$244,661

(445)

7,214

419,174

(13)

$

Short-term investments:

Asset-backed securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Marketable equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

191,997 $845,757

$

$

$

7,902

(311)

2,044

193,730

(925)

$12,733

$857,565

$

$

—

352

8,254

Short-term investments as of December 31, 2000, consisted of $159,026,000 of securities that mature in less than one year, $242,174,000 of securities that mature in one to five years and no securities that mature in over five years. Short-term investments as of December 31, 2001, consisted of $249,126,000 of securities that mature in less than one year, $608,439,000 of securities that mature in one to five years and no securities that mature in over five years.

93

Accounts Receivable, Net: Accounts receivable, net consisted of the

Accrued Expenses: Accrued expenses consisted of the following

following (in thousands):

(in thousands):

December 31,

Trade accounts receivable . . . . . . . . . . . . . . . . . . .

2000

2001

$565,007

$433,240

Less: allowance for doubtful accounts and returns . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

43,649

46,671

$521,358

$386,569

December 31,

2000

2001

Accrued compensation . . . . . . . . . . . . . . . . . . . . . .

$134,437

$ 75,147

Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

73,919

155,647

Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

146,803

122,536

$355,159

$353,330

Property and Equipment, Net: Property and equipment, net consisted

Accumulated Other Comprehensive Income: Accumulated other com-

of the following (in thousands):

prehensive income consisted of the following (in thousands):

December 31,

2000

2001

Computers and equipment . . . . . . . . . . . . . . . . . . .

$ 78,295

$205,898

Furniture and fixtures . . . . . . . . . . . . . . . . . . . . . . . .

51,599

91,000

Computer software . . . . . . . . . . . . . . . . . . . . . . . . . .

28,597

52,179

Corporate aircraft . . . . . . . . . . . . . . . . . . . . . . . . . . .

6,713

6,713

Buildings and land . . . . . . . . . . . . . . . . . . . . . . . . . . .

418

393

Leasehold improvements . . . . . . . . . . . . . . . . . . . . .

91,923

138,259

257,545

494,442

67,935

141,200

$189,610

$353,242

Less: accumulated depreciation . . . . . . . . . . . . . .

December 31,

2000

2001

Foreign currency translation adjustments, net of taxes of $1,199 and ($785), respectively . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$1,957

$(1,281)

Unrealized gains on securities, net of taxes of $3,385 and $4,692, respectively . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

5,522

7,455

$7,479

$ 6,174

Other Income, Net: Other income, net consisted of the following (in thousands): Goodwill, Net: Goodwill, net consisted of the following (in thousands): December 31, December 31,

2000

2001

$62,847

$ 65,078

—

47,016

Goodwill—amortizable through December 31, 2001 . . . . . . . . . . . . . . . . . . . . . .

Interest expense . . . . . . . . . . . . . . . . . .

Goodwill—nonamortizable from the nQuire acquisition (see Note 11) . . . . . . . . .

Interest income . . . . . . . . . . . . . . . . . . .

Total goodwill . . . . . . . . . . . . . . . . . . . . . . . . .

62,847

112,094

20,038

39,225

Goodwill, net . . . . . . . . . . . . . . . . . . . . . . . . .

$42,809

$ 72,869

2000

2001

$18,086

$ 56,766

$ 67,332

(6,100)

(17,909)

(18,326)

Losses from equity method investee (Sales.com) . . . . . . . . .

Less: accumulated amortization . . . . . . . . . . . . . . .

1999

Charitable contributions . . . . . . . . .

— (6,000)

(7,481)

—

(30,705)

(1,404)

60,901

3,399

Net gains on investments and marketable equity securities . . . . . . . . . . . . . . . . . . . . .

12,343

Write-down of cost-method investments to fair value . . . . .

Intangible Assets, Net: Intangibles, net consisted of the following

Other, net . . . . . . . . . . . . . . . . . . . . . . . .

(in thousands):

— (3,239) $15,090

December 31,

2000

2001

Acquired technology . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$3,443

$26,747

Less: accumulated amortization . . . . . . . . . . . . . . . . . .

1,435

7,747

Acquired technology, net . . . . . . . . . . . . . . . .

$2,008

$19,000

—

(3,073)

303

(1,726)

$ 61,875

$ 46,202

NOTE 3: CONVERTIBLE SUBORDINATED DEBENTURES

The Company completed a private placement of $300,000,000 of convertible subordinated debentures in September 1999. In connection with the issuance of these convertible subordinated debentures

94

the Company incurred $8,684,000 of issuance costs, which prima-

2001, was $16,896,000, $51,247,000 and $91,661,000, respec-

rily consisted of investment banker fees, legal and other professional

tively. Future minimum lease payments under operating leases as of

fees. The seven-year term notes mature September 15, 2006; bear

December 31, 2001, is as follows (in thousands):

interest at a rate of 5.50% per annum; and are convertible at the option of the holder into an aggregate of approximately 12,867,000

Year ending December 31,

shares of the Company’s common stock at any time prior to maturity,

2002 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

at a conversion price of approximately $23.32 per share, subject

2003 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

to adjustment under certain conditions. The Company may redeem

2004 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

124,036

the notes, in whole or in part, at any time on or after September 15,

2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

118,845

2002. The redemption amount will range from $309,420,000 to

2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

101,930

$302,370,000, if the notes are redeemed between September 15,

Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1,315,141

2002, and September 14, 2006. Redemptions after September 14,

Total minimum lease payments . . . . . . . . . . . . . . . . . . .

$1,897,427

$

110,850 126,625

2006, will be at $300,000,000. The Company will pay accrued interest through the redemption date. The Company is not subject to any restrictive covenants related to the convertible subordi-

NOTE 5:

nated debentures.

STOCKHOLDERS’ EQUITY

NOTE 4:

Amended and Restated Certificate of Incorporation: On June 6, 2001,

COMMITMENTS AND CONTINGENCIES

the Company’s stockholders approved an amendment to the Company’s Amended and Restated Certificate of Incorporation to increase

Letters of Credit: As of December 31, 2001, the Company had secured

the authorized number of shares of common stock from 800,000,000

letters of credit with banks totaling approximately $13,500,000.

shares to 2,000,000,000 shares.

These letters of credit, which expire between May 2002 and November 2015, collateralize the Company’s lease obligations to various

Employee Stock Option and Purchase Plans: The 1996 Equity Incen-

third parties.

tive Plan, which amended and restated the Company’s 1994 Stock Option Plan, the 1996 Supplemental Stock Option Plan and the 1998

Employee Benefit Plan: The Company has a 401(k) plan that allows

Equity Incentive Plan (collectively, the “Plan”), provide for the issuance

eligible employees to contribute up to 20% of their compensation,

of up to an aggregate of 460,000,000 shares of common stock to

limited to $10,500 in 2001. Employee contributions and earnings

employees, directors and consultants. The Plan provides for the

thereon vest immediately. Although the Company may make discre-

issuance of incentive and nonstatutory stock options, restricted stock

tionary contributions to the 401(k) plan, none have been made to

purchase awards, stock bonuses and stock appreciation rights.

date. Prior to their acquisition by the Company, certain acquired com-

Under the Plan, the exercise price for incentive stock options

panies made discretionary contributions of $91,000 and $85,000 to

must be at least 100% of the fair market value on the date of the

their 401(k) and profit-sharing plans in 1999 and 2000, respectively.

grant. Options generally expire in ten years; however, incentive stock options expire in five years if the optionee owns stock representing

Legal Actions: The Company is subject to legal proceedings and

more than 10% of the voting power of all classes of stock. Vesting

claims, either asserted or unasserted, which arise in the ordinary

periods are determined by the Board of Directors and generally pro-

course of business. While the outcome of these proceedings and

vide for shares to vest ratably over five years.

claims cannot be predicted with certainty, management does not

The Company has assumed certain options granted to former

believe that the outcome of any of these legal matters will have a

employees of acquired companies (the “Acquired Options”). The

material adverse effect on the Company’s consolidated financial

Acquired Options were assumed by the Company outside of the

position, results of operations or cash flows.

Plan, but all are administered as if issued under the Plan. All of the Acquired Options have been adjusted to give effect to the conver-

Lease Obligations: As of December 31, 2001, the Company leased

sion under the terms of the Agreements and Plans of Reorganization

facilities and certain equipment under non-cancelable operating

between the Company and the companies acquired. The Acquired

leases expiring between 2002 and 2022. Rent expense under oper-

Options generally become exercisable over a four-year period and

ating leases for the years ended December 31, 1999, 2000 and

expire ten years from the date of grant. No additional options will be granted under any of the acquired companies’ plans.

95

The Company’s stock option plan and certain acquired companies’ plans allow for the exercise of unvested options. Shares of common stock issued to employees upon exercise of unvested options are subject to repurchase by the Company at the original exercise price. The Company’s ability to repurchase these shares expires at a rate equivalent to the current vesting schedule of each option. As of December 31, 2000 and 2001, a total of 679,000 shares of common stock and 271,000 shares of common stock, respectively, were outstanding that remain subject to repurchase by the Company. No compensation expense has resulted from repurchases of restricted shares since the amount of cash paid by the Company did not differ from the proceeds received from the employee from the original sale of the restricted shares and also did not exceed the market value of the restricted shares at the time of repurchase. The Company has not issued any other restricted stock purchase awards, stock bonuses or stock appreciation rights. Combined plan activity for the years ended December 31, 1999, 2000 and 2001, is summarized as follows: Weighted average Shares

exercise

available

Number

price

for grant

of shares

per share

Balances, December 31, 1998 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

55,171,341

151,091,591

$ 3.47

Additional shares authorized . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

108,647,643

—

Options granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Options exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(55,148,445) —

Options canceled . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

11,189,824

Balances, December 31, 1999 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

119,860,363

Additional shares authorized . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

43,600,971

Options granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(46,764,515)

55,148,445

$16.94

(21,505,230)

$ 2.85

(11,189,824) 173,544,982

$ 6.75 $ 7.61

— 46,764,515

$60.49

Options exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

—

(29,497,843)

$ 4.98

Options canceled . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

15,028,952

(15,028,952)

$13.87

Balances, December 31, 2000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

131,725,771

175,782,702

Additional shares authorized . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

77,998,826

—

Options granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Options exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(110,836,370) —

Options canceled . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

18,290,320

Balances, December 31, 2001 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

117,178,547

96

110,836,370 (20,597,487) (18,817,823) 247,203,762

$21.59

$26.24 $ 5.25 $36.90 $23.81

The following table summarizes information about fixed stock options outstanding as of December 31, 2001: Options outstanding

Range of exercise prices

Options exercisable

Weighted

Weighted

average

average

Number

remaining

exercise

Number

exercise

of shares

life (in years)

price

of shares

price

219,000

3.1

0.01

219,000

$

Weighted average

$

0.01–

0.01

$

0.01

$

0.03–

0.03

8,000

3.8

$

0.03

8,000

$

0.03

$

0.11–

0.11

1,625,454

4.1

$

0.11

1,622,104

$

0.11

$

0.16–

0.19

4,346,651

4.2

$

0.18

2,831,789

$

0.18

$

0.31–

0.41

10,850,524

4.3

$

0.35

9,513,471

$

0.35

$

0.46–

0.58

1,016

6.7

$

0.57

128

$

0.55

$

0.72–

1.06

2,337,514

4.3

$

0.76

2,106,852

$

0.76

$

1.23–

1.68

244,855

4.5

$

1.43

242,051

$

1.44

$

1.91–

2.86

1,434,445

4.4

$

2.37

1,178,380

$

2.43

$

2.91–

4.28

13,411,396

5.1

$

3.00

9,276,508

$

3.02

$

4.38–

6.53

36,974,714

6.5

$

5.31

20,470,064

$

5.34

$

6.59–

9.61

11,654,774

7.0

$

8.60

5,057,210

$

8.41

$ 10.08– 15.08

9,680,017

7.6

$ 12.95

3,254,285

$ 12.62

$ 15.86– 23.51

68,205,154

9.7

$ 17.85

1,015,418

$ 17.40

$ 23.88– 35.49

26,705,782

9.1

$ 27.79

1,793,907

$ 32.28

$ 38.25– 56.69

30,130,804

8.2

$ 43.89

8,555,218

$ 43.06

$ 58.31– 86.56

25,040,105

8.7

$ 67.79

4,764,711

$ 71.10

$ 94.13–109.05

4,333,258

8.6

$100.22

979,397

$ 99.92

$142.61–142.61

299

8.3

$142.61

299

$142.61

247,203,762

7.9

$ 23.81

72,888,792

$ 15.23

$

0.01–142.61

In May 1996, the Company adopted the 1996 Employee Stock

ranging from $0.03 to $0.41 per share. Based in part on an inde-

Purchase Plan (the “Purchase Plan”) and reserved 5,600,000 shares

pendent appraisal obtained by the Company’s Board of Directors,

for issuance thereunder. The Purchase Plan became effective upon the

and other factors, the Company recorded $748,000 of deferred

completion of the Company’s initial public offering. In January 1997,

compensation expense in 1995 and an additional $893,000 of

the Board of Directors of the Company adopted an amendment to

deferred compensation expense in 1996 relating to these options.

the Purchase Plan to increase the number of shares authorized for

During the years ended December 31, 1999 and 2000, OpenSite,

issuance under the Purchase Plan to 13,600,000 shares. The Pur-

OnLink and Janna granted an aggregate of 941,000 and

chase Plan permits eligible employees to purchase common stock,

1,787,000 options, respectively, to employees with exercise prices

through payroll deductions of up to 15% of the employee’s compen-

that were below the fair market value of their common stock at

sation, at a price equal to 85% of the fair market value of the com-

the date of grant. These grants were at weighted average exercise

mon stock at either the beginning or the end of each offering period,

prices of $1.28 and $15.17 per share, respectively. Accordingly,

whichever is lower. For the years ended December 31, 1999, 2000

the Company recorded deferred compensation of $2,776,000 and

and 2001, 1,666,000, 885,000 and 1,470,000 shares, respec-

$23,776,000 during the years ended December 31, 1999 and 2000,

tively, were purchased under the Purchase Plan with weighted aver-

respectively, related to these options. The above grants are being

age prices of $9.45, $45.30 and $32.85 per share, respectively.

amortized on a straight-line basis over the vesting period of the individual options, which range from three to five years. During the year

Stock-Based Compensation: During the period from October 1995

ended December 31, 2001, there were no grants at exercise prices

through April 1996, the Company granted options to purchase an

below the fair market value of the Company’s common stock on the

aggregate of 65,220,000 shares of common stock at exercise prices

date of grant.

97

During 1999, the Company granted options to purchase an

The weighted average estimated fair value of employee stock options

aggregate of 40,000 shares of the Company’s common stock to non-

granted at exercise prices equal to market price at the grant date

employees. The Company records and measures deferred compen-

during 1999, 2000 and 2001 was $8.91, $34.37 and $16.15 per

sation cost for options granted to non-employees at their fair value

share, respectively. The weighted average estimated fair value of

pursuant to the requirements of SFAS No. 123 “Accounting for

employee stock options granted at exercise prices below market price

Stock-Based Compensation” and EITF 96-18. In February 2000 these

at the grant date during 1999 and 2000 was $3.33 and $20.13

individuals became employees of the Company and, accordingly,

per share, respectively. There were no grants in 2001 at exercise

adjustments to deferred compensation related to these individuals were

prices below market price at the date of grant.

no longer required to be recorded. Prior to these individuals becom-

The fair value of employees’ stock purchase rights under the

ing employees, the Company recorded deferred compensation related

Purchase Plan was estimated using the Black-Scholes model with

to these options of $1,498,000 and $531,000 during the years

the following weighted average assumptions used for purchases:

ended December 31, 1999 and 2000, respectively. This amount is being amortized over the vesting period of five years.

1999

2000

2001

4.66%

5.96%

4.72%

Summarized below are the pro forma effects on net income

Risk-free interest rate . . . . . . . . . . . . . . . . . . . . . .

and net income per share data, if the Company had elected to use

Expected life (in years) . . . . . . . . . . . . . . . . . . . .

0.5

0.5

0.5

the fair value approach to account for its employee stock-based com-

Expected volatility . . . . . . . . . . . . . . . . . . . . . . . . .

69.0%

77.0%

89.3%

pensation plans (in thousands, except per share data): 1999

2000

2001

The weighted average estimated fair value of the common stock purchase rights granted under the Purchase Plan during 1999, 2000

Net income (loss) available

and 2001 was $3.66, $20.25 and $22.60 per share, respectively,

to common stockholders: As reported . . . . . . . . . .

$ 56,861

$ 123,144

$ 254,575

including the 15% discount from the quoted market price. The Company determined the assumptions to be used in com-

Pro forma giving

puting the fair value of stock options or stock purchase rights as

effect to SFAS No 123 . . . .

$(21,355)

$(122,514)

$(467,224)

follows. The risk-free rate is the U.S. Treasury bill rate for the relevant expected life. The expected useful lives were estimated giving consid-

Diluted net income (loss)

eration to vesting and purchase periods, contractual lives, expected

per share: As reported . . . . . . . . . .

$

0.12

$

0.24

$

0.49

employee turnover and underlying stock volatility.

Pro forma giving

Net Income Per Share: The following is a reconciliation of the num-

effect to SFAS No 123 . . . .

$

(0.06)

$

(0.29)

$

(1.02)

ber of shares used in the basic and diluted net income per share computations for the periods presented (in thousands):

Basic net income (loss) per share: As reported . . . . . . . . . .

$

0.15

$

0.29

$

0.56

Pro forma giving

Year ended December 31,

1999

2000

2001

387,867

423,067

457,031

76,190

95,886

65,690

1,339

829

249

2,511

2,539

—

467,907

522,321

522,970

Shares used in basic net income

effect to

per share computation . . . . . . . .

SFAS No 123 . . . .

$

(0.06)

$

(0.29)

$

(1.02)

Effect of dilutive potential common shares resulting from stock options and common

The fair value of options was estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions used for option grants:

stock warrants . . . . . . . . . . . . . . . . . Effect of dilutive potential common shares resulting from common stock subject

1999

2000

2001

Risk-free interest rate . . . . . . . . . . . . . . . . . . . . . .

5.33%

6.12%

3.83%

Expected life (in years) . . . . . . . . . . . . . . . . . . . .

3.4

3.4

3.4

Expected volatility . . . . . . . . . . . . . . . . . . . . . . . . .

69.0%

77.0%

89.3%

to repurchase . . . . . . . . . . . . . . . . . . Effect of dilutive convertible preferred stock . . . . . . . . . . . . . . . . Shares used in diluted net income per share computation . . . . . . . .

98

The Company excludes potentially dilutive securities from its diluted

and 2000, respectively, based on the Black-Scholes valuation model,

net income per share computation when their effect would be anti-

using a risk-free interest rate of 4.85%, a contract life of three years,

dilutive. The following common stock equivalents were excluded from

and a volatility factor of 71.0%. The value of these warrants was

the earnings per share computation, as their inclusion would have

amortized as a reduction to revenues earned on the contract during

been anti-dilutive (in thousands):

the period of contract services and had been fully amortized as of December 31, 2001.

Year ended December 31,

1999

2000

2001

During 1999, OpenSite issued warrants to purchase 58,128

Options excluded due to the exercise

shares of Siebel equivalent common stock at an exercise price per

price exceeding the average fair

share of $0.15 (weighted average fair value on date of grant of

value of the Company’s common

$0.04 per warrant). During the period the warrants were outstand-

stock during the period . . . . . . . . . . . .

13,433

11,599

59,504

standing warrants back to OpenSite. Accordingly, during the year

Weighted average shares issuable

ended December 31, 1999, OpenSite recognized consulting expense

upon conversion of the convertible subordinated debentures . . . . . . . . . . .

ing, the holder of the warrants could have elected to put the out-

3,217

12,867

12,867

of approximately $269,000 to reflect the increase in value of the put feature of these warrants. The redemption provision expired on

Weighted average shares issuable upon conversion of the

March 31, 1999, and, accordingly, the carrying amount of the

mandatorily redeemable

remaining outstanding warrants was transferred to additional paid-in

convertible preferred stock . . . . . . . .

4,610

2,012

—

capital as of that date.

Total common stock equivalents NOTE 6:

excluded from diluted net income per share computation . . . . . . . . . . . . .

21,260

26,478

72,371

C O N V E R T I B L E P R E F E R R E D S TO C K A N D M A N DATO R I LY REDEEMABLE CONVERTIBLE PREFERRED STOCK

During the years ended December 31, 1999, 2000 and 2001, the

Prior to the Company’s acquisition of OnLink, OnLink had issued an

options excluded from the earnings per share computation due to

aggregate of 3,516,000 shares of its Series A, B and C convertible

the exercise prices exceeding the average fair value of the Company’s

preferred stock in private placement transactions. In connection with

common stock had weighted average exercise prices of $36.47,

the Company’s acquisition of OnLink, the holders of the preferred stock

$89.82 and $58.05 per share, respectively.

converted their shares pursuant to their existing terms on a one-forone basis into shares of OnLink’s common stock on October 2, 2000.

Stock Issued for Services: In March 1999, OpenSite entered into an

Prior to the Company’s acquisition of OpenSite, OpenSite

agreement with Protégé Software Limited (“Protégé”), pursuant to

had issued an aggregate of 5,324,000 shares of its mandatorily

which Protégé managed a subsidiary of OpenSite. At the option of

redeemable convertible preferred stock (the “Preferred Stock”), net

Protégé, the management fee for the period ended March 30, 2000,

of repurchases, in private placement transactions. In connection with

could be converted into shares of common stock at a price of approx-

the Company’s acquisition of OpenSite, the holders of the Preferred

imately $8.00 per share. During 2000, OpenSite issued 34,690

Stock converted their shares pursuant to their existing terms on a one-

shares of equivalent Siebel common stock valued at $1,921,000 to

for-one basis into shares of OpenSite’s common stock on May 17,

Protégé as full satisfaction of this fee. Neither OpenSite nor the

2000. Prior to the conversion of the Preferred Stock, the holders

Company is obligated to issue Protégé any additional shares of its

of the Preferred Stock had certain preferences over the holders of

common stock.

OpenSite’s common stock, including liquidation preferences, dividend rights and redemption rights. In accordance with the redemp-

Warrants for Common Stock: In December 1999 and May 2000,

tion rights of the Preferred Stock, the holders of the Preferred Stock

OnLink issued approximately 34,700 and 109,200 warrants for

could require OpenSite to repurchase the Preferred Stock at the

shares of common stock, respectively, at an exercise price of $21.52

then-current fair value of OpenSite’s common stock, subject to cer-

per share in connection with license agreements entered into with a

tain restrictions as defined in the purchase agreements regarding

customer. The warrants were fully vested and exercisable at the time

the Preferred Stock. Accordingly, the Company recorded non-cash

of issuance. OnLink recorded the fair value of these warrants of

charges to stockholders’ equity of $53,164,000 and $98,755,000

$4,200 and $1,176,000 in the years ended December 31, 1999

during the years ended December 31, 1999 and 2000, respectively,

99

to reflect the Preferred Stock at its then-current redemption value. This

The tax effects of temporary differences that give rise to significant

charge to equity has been deducted from the Company’s net income

portions of deferred tax assets and liabilities as of December 31,

in calculating both basic and diluted earnings per share. As a result

2000 and 2001, are as follows (in thousands):

of the conversion of the Preferred Stock, the Company stopped recording the accretion on the Preferred Stock on May 17, 2000.

2000

2001

$ 13,088

$ 15,747

9,761

11,179

Deferred tax assets: NOTE 7:

Allowance for doubtful accounts

I N C O M E TA X E S

and returns . . . . . . . . . . . . . . . . . . . . . . . . . Accruals and reserves, not currently

Income before taxes includes income from foreign operations of approximately $7,388,000, $24,040,000 and $145,469,000 for

deducted for tax purposes . . . . . . . . . Credits and charitable contribution

the years ended December 31, 1999, 2000 and 2001, respectively.

carryforwards . . . . . . . . . . . . . . . . . . . . . .

34,659

86,433

The components of income tax expense (benefit) for the years ended

Net operating loss carryforward . . . . . . .

377,337

506,781

December 31, 1999, 2000 and 2001, are as follows (in thousands):

Depreciation and amortization . . . . . . . . .

31,711

52,725

1999

2000

2001

9,168

$ 48,626

Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

7,677

13,231

Deferred assets . . . . . . . . . . . . . . . . . . . . .

474,233

686,096

Deferred tax liabilities:

Current: Federal . . . . . . . . . . . . . . . . . . . .

$ (8,796)

$

Unrealized gain on investments . . . . . . . .

(3,385)

(4,692)

State . . . . . . . . . . . . . . . . . . . . . . .

—

5,384

19,047

Deferred liabilities . . . . . . . . . . . . . . . . .

(3,385)

(4,692)

Foreign . . . . . . . . . . . . . . . . . . . .

1,586

24,405

39,672

Valuation allowance . . . . . . . . . . . . . . . . . . . . . . .

(377,315)

(570,548)

(7,210)

38,957

107,345

Net deferred tax assets . . . . . . . .

Total current . . . . . . . . . . .

$ 93,533

$ 110,856

Deferred: Federal . . . . . . . . . . . . . . . . . . . .

(12,787)

(50,734)

13,493

State . . . . . . . . . . . . . . . . . . . . . . .

(5,430)

(13,571)

(20,602)

Deferred tax assets of approximately $571,000,000 at Decem-

(4,527)

ber 31, 2001, pertain to certain tax credits and net operating loss

(11,636)

carryforwards resulting from the exercise of employee stock options.

Foreign . . . . . . . . . . . . . . . . . . . . Total deferred . . . . . . . . . .

— (18,217)

2,246 (62,059)

The Company has provided a valuation allowance on these deferred

Charge in lieu of taxes

tax assets. The valuation allowance on these deferred tax assets will

attributable to employer’s stock option plans . . . . . . . . .

91,679

185,613

53,800

be reduced in the period in which the Company realizes a benefit

Total income taxes . . . . .

$ 66,252

$162,511

$149,509

on its tax return from a reduction of income taxes payable stemming from the utilization of these credits and losses. When realized, the tax benefit of these credits and losses will be accounted for as a credit to

The differences between the income tax expense computed at the

shareholders’ equity rather than as a reduction of income tax expense.

federal statutory rate of 35% and the Company’s actual income tax

As of December 31, 2001, the Company had federal and state

expense for the years ended December 31, 1999, 2000 and 2001,

net operating loss carryforwards of approximately $1,312,300,000

are as follows:

and $944,700,000, respectively, available to offset future taxable income. In addition, the Company had federal and state research 1999

Expected income tax expense . . . . . . . . . . . . . . . . .

2000

2001

35.0% 35.0% 35.0%

and development credit carr yfor wards of $34,407,000 and $29,434,000, respectively, available to offset future tax liabilities. The Company’s federal net operating loss (“NOL”) carryforwards

State income taxes, net of federal tax benefit . . . . . . . . . . . . . . . . . .

4.6%

Foreign rate differential . . . . . . . . . . . . . . . . . . . . . . . .

—%

Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total income taxes . . . . . . . . . . . . . . . . . . . . .

will begin to expire in 2018, if not utilized. The Company’s state

4.7% 4.4% (2.3)% (3.0)% NOL carryforwards will begin to expire in 2003, if not utilized. The 0.6%

Company’s federal research and development credit carryforward

37.6% 42.3% 37.0%

will begin to expire in 2018, if not utilized. The state research and

(2.0)%

4.9%

development credit can be carried forward indefinitely.

100

The Company’s U.S. Federal income tax returns for 1998,

The Company evaluates the performance of its geographic

1999 and 2000 are currently under examination by the Internal

regions based on revenues and gross margin only. The Company

Revenue Service (“IRS”). To date, the IRS has not proposed any adjust-

does not assess the performance of its geographic regions on other

ments to these returns. Should the IRS propose adjustments to these

measures of income or expense, such as depreciation and amorti-

returns as a result of its examination, the Company believes that it

zation, operating income or net income. In addition, the Company’s

has made adequate provision in the financial statements for such

assets are primarily located in its corporate office in the United States

adjustments, if any.

and not allocated to any specific region. The Company does not pro-

The Company provides United States income taxes on the

duce reports for, or measure the performance of, its geographic

earnings of foreign subsidiaries unless the subsidiaries’ earnings are

regions on any asset-based metrics. Therefore, geographic informa-

considered permanently reinvested outside the United States. As of

tion is presented only for revenues and gross margin.

December 31, 2001, the Company has unrecognized deferred tax liabilities of approximately $70,000,000 related to approximately $200,000,000 of cumulative net undistributed earnings of foreign subsidiaries. These earnings are considered permanently invested in operations outside the United States.

NOTE 8: RELATED PARTY TRANSACTIONS

Certain members of the Company’s Board of Directors serve as officers for the Company’s customers. In 1999, software license revenues from these customers were $1,382,000. There were no significant accounts receivable or software license revenues from related parties as of and for the years ended December 31, 2000 and 2001.

NOTE 9: SEGMENT AND GEOGRAPHIC INFORMATION

The Company and its subsidiaries are principally engaged in the design, development, marketing and support of Siebel eBusiness Applications, its family of proprietary software applications. Substantially all revenues result from the licensing of the Company’s software products and related consulting and customer support (maintenance) services. The Company’s chief operating decision maker reviews financial information presented on a consolidated basis, accompanied by disaggregated information about revenues by geographic region for purposes of making operating decisions and assessing financial performance. Accordingly, the Company considers itself to be in a single industry segment, specifically the license, implementation and support of its software applications. The Company does not prepare reports for, or measure the performance of, its individual software applications and, accordingly, the Company has not presented revenues or any other related financial information by individual software product.

101

During each of the years ended December 31, 1999, 2000 and 2001, the Company’s revenues within the United States totaled $605,919,000, $1,162,428,000 and $1,223,003,000, respectively. Total international revenues for the years ended December 31, 1999, 2000 and 2001 were $207,542,000, $632,956,000 and $825,398,000, respectively. While a majority of the Company’s software license revenues are derived from the United States, the Company’s international software license revenues have been increasing as a percentage of total software license revenues. International software license revenues for the years ended December 31, 1999, 2000 and 2001, were $157,653,000, $447,854,000 and $479,334,000, respectively. This represented 31%, 40% and 45% of total software license revenues, respectively. The Company’s international software license revenues are principally in Europe and Asia Pacific. The following geographic information is presented for the years ended December 31, 1999, 2000 and 2001 (in thousands): North

Asia

America

Europe

Pacific

Other

Totals

Revenues: 1999 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

618,396

$160,106

$ 29,314

$ 5,645

2000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$

1,196,874

460,989

95,187

42,334

$

1,795,384

813,461

2001 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1,274,181

617,559

119,086

37,575

2,048,401

Gross margin: 1999 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

445,280

$148,793

$ 28,077

$ 5,048

2000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$

868,698

374,325

76,122

32,470

$

1,351,615

627,198

2001 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

869,424

484,147

89,150

24,886

1,467,607

No single customer has accounted for 10% or more of total revenues

Janna stockholders (which number assumes that all of the Exchange-

in 1999, 2000 or 2001.

able Shares have been exchanged for the Company’s common stock). In addition, all outstanding stock options of Janna were

NOTE 10:

converted into the right to acquire the Company’s common stock

BUSINESS COMBINATIONS

at the same exchange ratio with a corresponding adjustment to the exercise price. Until November 30, 2005 (or earlier under certain

During the three years ended December 31, 2001, the Company

circumstances), the Exchangeable Shares are exchangeable for the

completed the following transactions, each of which has been

Company’s common stock on a one-for-one basis at any time at

accounted for as a pooling of interests:

the option of the holder. On November 30, 2005, any remaining outstanding Exchangeable Shares must convert on a one-for-one basis

Janna Systems Inc.: On November 15, 2000, the Company acquired

into the Company’s common stock. All share data in the Company’s

Janna Systems Inc. (“Janna”), a leading provider of eBusiness solu-

financial statements reflects the Exchangeable Shares as having been

tions for the financial services industry. Janna’s technology enables

exchanged for shares of the Company’s common stock as of the

enterprises to synchronize customer interactions across multiple chan-

earliest date presented.

nels, including the Internet, and to offer personalized Web “self-

In connection with the acquisition of Janna, the Company also

service” eBusiness solutions to their customers. Under the terms of the

issued one share of Series A1 Preferred Stock to Montreal Trust

agreement, each outstanding Janna common share was exchanged

Company of Canada (the “Trustee”), as trustee on behalf of the hold-

for 0.4970 newly issued shares of the Company’s common stock or,

ers of the Exchangeable Shares. The Series A1 Preferred Stock gives

at the election of Janna stockholders resident in Canada, 0.4970 of

the holders of Exchangeable Shares the ability to vote on the same

newly issued exchangeable shares (the “Exchangeable Shares”) of a

basis as the holders of the Company’s common stock. The Trustee, as

Canadian subsidiary of the Company that are currently exchange-

the holder of the Series A1 Preferred Stock, is entitled to a number

able for the Company’s common stock. This resulted in the issuance

of votes equal to the number of Exchangeable Shares outstanding.

of 9,385,000 shares of the Company’s common stock to the former

102

OnLink Technologies, Inc.: On October 2, 2000, the Company

equipment; legal, accounting and other professional fees; and other

acquired OnLink Technologies, Inc. (“OnLink”), a provider of

miscellaneous expenses. As of December 31, 2001, the Company

eCommerce software. OnLink’s technology is designed to provide

had settled $35,849,000 of these merger-related costs and has

companies with guided, interactive online communication with their

reflected the remaining $655,000 of these merger-related costs in

customers to determine what they need and automatically match

accrued liabilities. The remaining liabilities consist primarily of legal

them to product and service configurations. Under the terms of the

and lease termination fees. The Company expects to settle these

agreement, each outstanding share of OnLink common stock was

liabilities in 2002. The Company did not incur any significant merger-

exchanged for 0.3308 newly issued shares of common stock of the

related costs in connection with the acquisition of OnTarget.

Company. This resulted in the issuance of 7,400,000 additional

Each of the above transactions was accounted for as a pool-

shares of the Company’s common stock. In addition, all outstanding

ing-of-interests and, accordingly, the financial position, results of oper-

stock options of OnLink were converted into the right to acquire the

ations and cash flows of each of the above companies have been

Company’s common stock at the same exchange ratio with a corre-

combined with those of the Company for the same dates and peri-

sponding adjustment to the exercise price.

ods as if the entities had been combined from the earliest date presented. The following table presents the results of operations of each

OpenSite Technologies, Inc.: On May 17, 2000, the Company

of the separate companies prior to their acquisition and the com-

acquired OpenSite Technologies, Inc. (“OpenSite”). OpenSite’s tech-

bined amounts for the period subsequent to acquisition, as presented

nology enables companies to create branded, interactive, real-time

in the accompanying consolidated financial statements of the

Internet auctions and automates the process of installing, running

Company (in thousands):

and maintaining a company’s dynamic commerce applications. Under the terms of the agreement, each outstanding share of OpenSite

Year Ended December 31,

common stock was exchanged for 0.2630 newly issued shares of common stock of the Company. This resulted in the issuance of

1999

2000

Total revenues:

7,400,000 additional shares of the Company’s common stock. In

Siebel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$761,768

$1,755,383

addition, all outstanding stock options of OpenSite were converted

OnTarget . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

29,152

—

into the right to acquire the Company’s common stock at the same

OpenSite . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

7,878

3,709

exchange ratio with a corresponding adjustment to the exercise price.

OnLink . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2,186

8,183

Janna . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

OnTarget, Inc.: On December 1, 1999, the Company acquired OnTarget, Inc. (“OnTarget”). OnTarget develops and implements advanced sales and marketing training and consulting programs for sales organizations competing in complex, multilevel sales campaigns. Under the terms of the agreement, each outstanding share of OnTarget common stock was exchanged for approximately 0.6155 newly issued shares of common stock of the Company. This resulted in the issuance of approximately 7,400,000 additional shares of the

12,477

28,109

$813,461

$1,795,384

$122,172

$

Net income (loss): Siebel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

243,051

OnTarget . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(80)

OpenSite . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(7,567)

(6,310)

OnLink . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(6,414)

(13,450)

Janna . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1,914 $110,025

Company’s common stock. In addition, all outstanding stock options

—

(1,392) $

221,899

of OnTarget were converted into the right to acquire the Company’s common stock at the same exchange ratio with a corresponding

The results of operations of Siebel in the above schedule include the

adjustment to the exercise price.

operations of the acquired companies from the date of acquisition

In connection with the Company’s acquisitions of Janna,

for all periods presented. For the year ended December 31, 2000,

OnLink and OpenSite, the Company expensed approximately

the Company’s net income has been reduced by $36,504,000 of

$36,504,000 of direct merger-related expenses. These costs con-

merger-related expenses in connection with the Company’s acquisi-

sisted of investment banker fees; compensation expense associated

tions of OpenSite, OnLink and Janna. There were no adjustments

with the acceleration of stock options in accordance with their exist-

to conform accounting methods or to eliminate intercompany trans-

ing terms; integration charges related to duplicate facilities and

actions for the periods presented above.

103

NOTE 11:

recorded $5,480,000 of this additional consideration as goodwill

ACQUISITIONS

and $210,000 as compensation expense. In the event that nQuire meets certain post-closing revenue and product delivery targets for

During the three years ended December 31, 2001, the Company

the years ended December 31, 2002 and 2003, as defined in the

completed the following transactions, each of which has been

merger agreement, the Company could issue the shareholders

accounted for as a purchase:

of nQuire an aggregate of an additional 1,151,400 shares of the Company’s common stock (the “nQuire Earnout”). The ultimate

nQuire Software, Inc.: On November 19, 2001, the Company

value of the nQuire Earnout depends upon the market value of the

acquired all of the outstanding securities of nQuire Software, Inc.

Company’s common stock when paid. The Company will record

(“nQuire”), a provider of Internet-based business analytics software.

approximately 96% of the nQuire Earnout, if paid, as goodwill and

The Company acquired nQuire in order to capitalize on the expert-

the remaining 4% of the nQuire Earnout, if paid, as compensation

ise of the nQuire management team in the analytics market and their

expense. The Company will record the compensation portion of

ability to develop new products using the Company’s existing tech-

the payments when the Company determines that it is probable

nology and technology acquired in the acquisition. As a result of this

that the Company will be obligated to pay such amounts and the

acquisition, the Company expects to become a leading provider of

goodwill portion will be recorded when actually paid.

business intelligence and analytics application software. The Company acquired nQuire for total consideration of

Sales.com, Inc.: In December 1999, the Company sold a controlling

$59,722,000, consisting of 2,259,810 shares of the Company’s

interest in the voting equity of Sales.com, Inc. (“Sales.com”) to vari-

common stock valued at $58,416,000 and options to existing

ous outside investors. During 1999, the Company had non-cash

employees of nQuire to purchase 56,108 shares of the Company’s

reductions in accounts receivable, prepaids and other, property and

common stock valued at $1,306,000. The number of shares to be

equipment, other assets, accounts payable, accrued expenses and

issued was not determined until November 19, 2001, and, accord-

deferred revenue of $116,000, $602,000, $35,000, $505,000,

ingly, the common stock was valued based on the closing market

$4,398,000, $5,275,000 and $149,000, respectively, attributable

price of the Company’s common stock on that date. The Company

to the deconsolidation of Sales.com. As a result of the sale of the

valued the stock options issued to the employees of nQuire based

controlling interest in Sales.com, the Company accounted for the

on the Black-Scholes valuation model, using a risk-free interest rate

investment in Sales.com using the equity method during the year

of 5.0%, the expected remaining life of the option, and a volatility

ended December 31, 2000. Through recording the Company’s por-

factor of 90.0%. The purchase price was allocated to tangible net

tion of Sales.com’s losses, the carrying value of the Company’s invest-

assets, including net deferred tax assets of $5,318,000, other cur-

ment in Sales.com had been reduced to zero as of December 31,

rent assets of $1,258,000, property and equipment of $105,000,

2000. On January 12, 2001, the Company re-acquired all of the

assumed current liabilities of $2,872,000 and deferred compensa-

outstanding securities of Sales.com for total consideration of

tion related to unvested stock options and restricted common stock

$28,235,000, consisting of the issuance of 373,618 shares of the

of $1,397,000. Based in part on an independent valuation study

Company’s common stock valued at $26,900,000, and the issuance

of nQuire, the Company determined that there was no purchased

of options to purchase 49,895 shares of the Company’s common

in-process research and development and that the only identifiable

stock to existing employees of Sales.com valued at $1,335,000.

intangible asset not subsumed into goodwill (i.e., assembled work-

The Company valued the stock options issued to the employees

force) was “acquired technology” valued at $7,500,000. The acquired

of Sales.com based on the Black-Scholes valuation model, using a

technology is currently being amortized over its useful life of three

risk-free interest rate of 5.0%, the expected remaining life of the

years using the straight-line method. The excess of the purchase price

option, and a volatility factor of 77.0%. The purchase price was allo-

over the fair value of the identifiable tangible and intangible net

cated to tangible net assets, including cash of $11,550,000, other

assets acquired of $47,016,000 was recorded as goodwill. This

current assets of $1,178,000, property and equipment of $385,000,

amount is not expected to be deductible for tax purposes.

and assumed current liabilities of $888,000. The excess of the pur-

As a result of nQuire meeting certain revenue and product

chase price over the fair value of the tangible net assets acquired

delivery targets for the fourth quarter of 2001, as defined in the

of $16,010,000 was allocated to acquired technology. This amount

merger agreement, the Company issued an additional 163,500

is currently being amortized over three years using the straight-

shares valued at $5,690,000 in January 2002. The Company

line method.

104

Wind S.r.l.: On September 27, 2000 (the “Initial Purchase”), and

$1,372,000 to MOHR’s stockholders during the first quarter of

September 28, 2001 (the “Final Purchase”), the Company acquired

2001. The Company recorded $310,000 of this additional consid-

81% and 19%, respectively, of the outstanding shares of Wind S.r.l.

eration as goodwill and $1,062,000 as compensation expense.

(“Wind”) for net cash consideration of $3,257,000 and $928,500,

In the event that certain individuals meet certain post closing

respectively. Wind, an Italian consulting company and a Siebel part-

requirements, as defined in the merger agreement, the Company

ner since 1999, specialized in eBusiness, ERP and business intel-

could pay additional cash consideration of $2,500,000. The Com-

ligence systems implementation. The Initial Purchase price was

pany will record $1,000,000 of the additional consideration, if paid,

allocated to tangible net assets, including current assets of $654,000,

as goodwill and $1,500,000 of the additional consideration, if

assumed current liabilities of $430,000 and property and equipment

paid, as compensation expense. The Company will record the

of $103,000. The excess of the Initial Purchase price over the fair

goodwill portion when paid and the compensation portion when

value of the tangible net assets acquired of $2,930,000 was allo-

the Company determines that it is probable that the Company will

cated to goodwill, which is being amortized using a three-year life,

be obligated to pay such amounts.

with amortization ceasing on January 1, 2002, the date the Company fully adopted SFAS 142. The Final Purchase price of $928,500

Paragren Technologies, Inc.: On January 14, 2000, the Company

was recorded as goodwill and is being amortized over the remain-

acquired all of the outstanding securities of Paragren Technologies,

ing life of the goodwill, with amortization also ceasing on January 1,

Inc. (“Paragren”), a leading provider of high-performance marketing

2002. During the first quarters of 2001 and 2002, the Company

automation software based in Reston, Virginia. Paragren was previ-

paid additional consideration to Wind’s stockholders of approximately

ously a wholly owned subsidiary of APAC Customer Services, Inc. The

$814,000 and $780,000, respectively, based on Wind meeting

Company acquired Paragren for cash consideration of $18,050,000.

certain revenue targets, as defined in the merger agreement. The

The purchase price was allocated to tangible net assets, including cur-

Company recorded this additional consideration as compensation

rent assets of $942,000, assumed current liabilities of $1,442,000

expense. In the event that Wind meets certain revenue targets for the

and property and equipment of $976,000. A valuation study was

year ended December 31, 2002, as defined in the merger agree-

performed on Paragren, and it was determined that there was no pur-

ment, the Company must pay the stockholders of Wind additional

chased in-process research and development. As a result, the excess

cash consideration of $1,500,000. This additional consideration will

of the purchase price over the fair value of the tangible net assets

be recorded as compensation expense when the Company deter-

acquired of $17,574,000 was allocated to goodwill and is being

mines that it is probable that the Company will be obligated to pay

amortized over a three-year life, with amortization ceasing on

such amounts.

January 1, 2002, the date the Company fully adopted SFAS 142. As a result of meeting certain revenue targets, as defined in the

MOHR Development, Inc.: On June 22, 2000, the Company acquired

merger agreement, the Company paid additional consideration of

all of the outstanding securities of MOHR Development, Inc. (“MOHR”),

$1,756,000 to Paragren’s stockholders during the first quarter of

a privately held provider of sales training solutions and consulting

2001. The Company recorded this additional consideration as good-

services. The Company acquired MOHR for net cash consideration

will, which is being amortized over the remaining two-year life of the

of $7,905,000 and an obligation to pay an additional $3,000,000

goodwill through January 1, 2002, the date the Company fully

(the “MOHR Obligation”). The Company paid $1,500,000 of the

adopted SFAS 142.

MOHR Obligation in January 2001 and is required to make an additional payment of $1,500,000 on January 31, 2002. The purchase

LivePage Corporation: On October 1, 1999, Janna acquired all of

price of $10,905,000 was allocated to tangible net assets, includ-

the outstanding securities of LivePage Corporation (“LivePage”), a

ing current assets of $799,000, assumed current liabilities of

provider of Web content management and personalization software

$2,031,000 and property and equipment of $115,000. The excess

located in Ontario, Canada. Janna acquired LivePage for total

of the purchase price over the fair value of the tangible net assets

consideration of $12,537,000, consisting of cash consideration

acquired of $12,022,000 was allocated to goodwill, which is being

of $802,000 and the issuance of 1,520,000 shares of common

amortized using a three-year life, with amortization ceasing on

stock valued at $11,735,000. The purchase price was allocated

January 1, 2002, the date the Company fully adopted SFAS 142.

to tangible net assets, including current assets of $815,000, prop-

As a result of meeting certain revenue targets, as defined in the

erty and equipment of $55,000, and assumed current liabilities of

merger agreement, the Company paid additional consideration of

$1,052,000. The Company allocated $3,443,000 of the purchase

105

price to an identifiable intangible asset (acquired technology), which is currently being amortized over three years. The excess of the purchase price over the fair value of the identifiable tangible and intangible net assets acquired of $9,276,000 was allocated to goodwill and is being amortized over a five-year life, with amortization ceasing on January 1, 2002, the date the Company fully adopted SFAS 142. Archer Enterprise Systems, Inc.: On September 24, 1999, Janna acquired all of the outstanding securities of Archer Enterprise Systems, Inc. (“Archer”), a provider of customer relationship management synchronization software located in Ontario, Canada. Janna acquired Archer for total consideration of $2,147,000, consisting of cash consideration of $441,000 and the issuance of 222,000 shares of common stock valued at $1,706,000. The purchase price was allocated to tangible net assets, including current assets of $2,876,000, property and equipment of $111,000, and assumed current liabilities of $840,000. The entire purchase price was allocated to identifiable tangible assets and, accordingly, the Company did not allocate any of the purchase price to goodwill. Target Marketing Systems and The Sales Consultancy, Inc.: In January and February 1999, OnTarget acquired Target Marketing Systems Worldwide Limited, Target Marketing Systems S.A., and The Sales Consultancy Inc. in exchange for convertible notes and OnTarget stock. OnTarget recorded goodwill of $9,745,000 in connection with these acquisitions. The goodwill is being amortized over a five-year life using the straight-line method, with amortization ceasing on January 1, 2002, the date the Company fully adopted SFAS 142. Each of the above transactions was accounted for by the purchase method of accounting and, accordingly, the operating results of each of the acquired companies have been included in the accompanying consolidated financial statements of the Company from the date of acquisition. Pro forma information giving effect to these acquisitions has not been presented since the pro forma information would not differ materially from the historical results of the Company.

106

REPORT

OF

MANAGEMENT

Responsibility for the integrity and objectivity of the financial information presented in this annual report rests with Siebel management. The accompanying financial statements have been prepared in conformity with generally accepted accounting principles (“GAAP”) in the United States of America. Management has applied certain estimates and judgments as required by GAAP and believes these estimates and judgments to be reasonable based on the information available at the time of such estimates and judgments. As of the date of this report, management continues to believe these estimates and judgments are appropriate. In order to ensure that the Company provides a clear view of its financial performance, the Company has avoided some of the accounting practices currently in question, such as disclosing operating results on a “pro forma” basis that excludes the amortization of intangibles and/or stock-based compensation from reported results. In addition, the Company has not entered into any significant transactions with related parties. The Company has chosen not to use off-balance-sheet arrangements with unconsolidated related parties, nor to use other forms of off-balance-sheet arrangements such as research and development arrangements. Siebel maintains an effective internal control structure that consists, in part, of an organization with clearly defined lines of responsibility and delegation of authority and comprehensive systems and control procedures. The Company believes this structure provides reasonable assurance that transactions are executed in accordance with management’s authorization, and that they are appropriately recorded in order to permit preparation of financial statements in accordance with GAAP. The Company also believes that this internal control structure allows management to adequately safeguard, verify, and maintain accountability of its assets. To assure effective internal controls, the Company carefully selects and trains its employees, develops and disseminates written policies and procedures, and fosters an environment that is conducive to effective internal controls. Siebel believes that it is essential for the Company to conduct its business affairs in accordance with the highest ethical standards, as set forth in Siebel Core Values. These core values are communicated to employees throughout the world and reemphasized through internal programs. Siebel’s internal control structure is enhanced by the Company’s internal audit department and the Audit Committee of the Board of Directors. The latter group is composed solely of outside directors and meets periodically and privately with the independent accountants, the Company’s internal auditors, and Siebel management to review accounting, auditing, internal control structure, and financial reporting matters. In summary, management believes that the accompanying consolidated financial statements are presented fairly in accordance with generally accepted accounting principles in the United States of America and provide a clear view of the Company’s financial performance.

Thomas M. Siebel

Kenneth A. Goldman

Chairman and Chief Executive Officer

Senior Vice President, Finance and Administration and Chief Financial Officer

March 29, 2002

March 29, 2002

107

INDEPENDENT

A U D I T O R S’ R E P O R T

The Board of Directors and Stockholders Siebel Systems, Inc.: We have audited the accompanying consolidated balance sheets of Siebel Systems, Inc. and subsidiaries (the “Company”) as of December 31, 2000 and 2001, and the related consolidated statements of operations and comprehensive income, stockholders’ equity and cash flows for each of the years in the three-year period ended December 31, 2001. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Siebel Systems, Inc. and subsidiaries as of December 31, 2000 and 2001, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States of America.

Mountain View, California January 21, 2002

108

SELECTED

QUARTERLY

FINANCIAL

DATA

(UNAUDITED)

The following table presents selected quarterly information for 2000 and 2001 (in thousands, except share data): First quarter

Second quarter

Third quarter

Fourth quarter

Total revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$319,691

$397,544

$496,515

$581,634

Gross margin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

241,830

294,856

369,625

445,304

Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

35,313

39,599

67,503

79,484

Net income (loss) available to common stockholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(41,735)

17,892

67,503

79,484

Diluted net income (loss) per common share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(0.10)

0.04

0.13

0.15

Basic net income (loss) per common share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(0.10)

0.04

0.16

0.18

2000:

2001: Total revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$588,741

$549,742

$428,487

$481,431

Gross margin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

423,092

397,761

291,214

355,540

Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

76,921

76,557

35,197

65,900

Net income available to common stockholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

76,921

76,557

35,197

65,900

Diluted net income per common share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

0.15

0.15

0.07

0.13

Basic net income per common share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

0.17

0.17

0.08

0.14

MARKET

PRICE

OF

COMMON

STOCK

The Company’s common stock is traded on the Nasdaq National Market under the symbol “SEBL.” The following high and low sales prices were reported by Nasdaq in each quarter during the last two years. All amounts give retroactive effect to the Company’s stock split, which was effective September 8, 2000. High

Low

Quarter Ended March 31, 2000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 87.56

$32.75

Quarter Ended June 30, 2000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

85.13

37.69

Quarter Ended September 30, 2000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

118.44

66.00

Quarter Ended December 31, 2000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

119.88

55.75

Quarter Ended March 31, 2001 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

84.50

24.14

Quarter Ended June 30, 2001 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

55.90

22.95

Quarter Ended September 30, 2001 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

50.91

12.32

Quarter Ended December 31, 2001 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

31.06

12.24

As of December 31, 2001, the Company had approximately 1,610 holders of record of its common stock. The Company’s policy has been to reinvest earnings to fund future growth and, accordingly, the Company has never paid any cash dividends on its common stock and does not expect to pay any such dividends in the foreseeable future. The last reported sale price of the Company’s common stock on March 14, 2002, was $33.91 per share.

109

WORLDWIDE

World Headquarters

LOCATIONS

Fort Lauderdale, Florida

Nashua, New Hampshire

Sandy, Utah

Tel: +1-954-489-2703

Tel: +1-603-882-5991

Tel: +1-801-258-2000

San Mateo, California 94404

Orlando, Florida

Morris Plains, New Jersey

Glen Allen, Virginia

Tel:

+1-800-647-4300

Tel: +1-407-667-3490

Tel: +1-973-682-8300

Tel: +1-804-935-8516

Tel:

+1-650-295-5000

Palm Beach, Florida

Mount Laurel, New Jersey

Reston, Virginia

Tel: +1-561-799-1225

Tel: +1-856-231-5344

Tel: +1-703-796-7500

Tampa, Florida

Short Hills, New Jersey

Bellevue, Washington

Tel: +1-813-908-1305

Tel: +1-973-327-0100

Tel: +1-425-201-8400

Alpharetta, Georgia

New York, New York

Brookfield, Wisconsin

Tel: +1-678-319-4500

Tel: +1-212-520-7300

Tel: +1-262-641-7800

Tempe, Arizona

Atlanta, Georgia

Rochester, New York

Tel: +1-480-377- 3700

Tel: +1-404-965-1611

Tel: +1-585-383-5540

Canada

El Segundo, California

Atlanta, Georgia

Charlotte, North Carolina

Calgary, Alberta

Tel: +1-310-416-8000

Tel: +1-678-530-1200

Tel: +1-704-331-3970

Tel: +1-403-508-2075

Emeryville, California

Rosemont, Illinois

Durham, North Carolina

Edmonton, Alberta

Tel: +1-510-788-6100

Tel: +1-847-460-6400

Tel: +1-919-287-0200

Tel: +1-780-424-3361

Gold River, California

Urbana, Illinois

Greensboro, North Carolina

Ottawa, Ontario

Tel: +1-916-631-1500

Tel: +1-217-568-0687

Tel: +1-336-854-3640

Tel: +1-613-688-5624

Irvine, California

Evansville, Indiana

Cincinnati, Ohio

Toronto, Ontario

Tel: +1-949-809-9500

Tel: +1-812-436-9243

Tel: +1-513-564-1600

Tel: +1-416-306-3000

La Jolla, California

Indianapolis, Indiana

Independence, Ohio

Waterloo, Ontario

Tel: +1-858-546-4834

Tel: +1-317-818-5590

Tel: +1-216-606-3000

Tel: +1-519-885-2181

Pasadena, California

Overland Park, Kansas

Worthington, Ohio

Montreal, Quebec

Tel: +1-626-584-6045

Tel: +1-913-451-6960

Tel: +1-614-438-7544

Tel: +1-514-841-1400

Woodland Hills, California

Louisville, Kentucky

Portland, Oregon

Tel: +1-818-598-1190

Tel: +1-502-254-6186

Tel: +1-503-293-8400

Denver, Colorado

Bethesda, Maryland

Malvern, Pennsylvania

Tel: +1-720-529-4100

Tel: +1-901-896-9424

Tel: +1-610-408-4000

Farmington, Connecticut

Burlington, Massachusetts

Pittsburgh, Pennsylvania

Tel: +1-860-676-7760

Tel: +1-781-359-8500

Tel: +1-412-809-3400

Hartford, Connecticut

Bloomington, Michigan

Providence, Rhode Island

Tel: +1-860-249-7212

Tel: +1-952-838-1700

Tel: +1-401-751-0800

Ridgefield, Connecticut

Southfield, Michigan

Austin, Texas

Tel: +1-203-431-7610

Tel: +1-248-727-1700

Tel: +1-512-370-4020

Stamford, Connecticut

St. Louis, Missouri

Dallas, Texas

Tel: +1-203-921-0326

Tel: +1-314-984-6888

Tel: +1-972-884-8000

Boca Raton, Florida

Omaha, Nebraska

Houston, Texas

Tel: +1-561-988-2658

Tel: +1-402-431-8012

Tel: +1-713-346-0100

2207 Bridgepointe Parkway

Fax: +1-650-295-5111

North America United States

110

Europe

Amsterdam, The Netherlands Tel: + 31-20-540-1000

Vienna, Austria Tel: + 43-1-53712-4125

Oslo, Norway

South Africa

Malaysia

Johannesburg, South Africa

Kuala Lumpur, Malaysia

Tel: + 27-11-881-5600

Tel: + 603-2168-4238

Asia Pacific

Singapore

Australia

Singapore

Tel: + 47-22-99-6000

Brussels, Belgium Tel: + 32-2-352-88-88 Prague, Czech Republic Tel: + 420-2-2185-2100

Warsaw, Poland Tel: + 48-22-520-6700 Lisbon, Portugal Tel: + 351-21-723-0600

Lyngby, Denmark Tel: + 45-44-20-99-00

Edinburgh, Scotland Tel: + 44-131-452-2009

Helsinki, Finland Tel: + 358-9-430-7830

Barcelona, Spain Tel: + 34-93-228-7800

Lyon, France Tel: + 33-4-72-91-3000

Madrid, Spain Tel: + 34-91-714-9800

Paris, France Tel: + 33-1-46-96-2000

Stockholm, Sweden

Canberra, Australia Tel: + 61-2-6243-4855

Tel: + 33-1-58-44-9000 Düsseldorf, Germany Tel: + 49-211-940-980 Frankfurt, Germany Tel: + 49-69-60329-0 Ismaning, Germany Tel: + 49-89-957-18-0 Stuttgart, Germany Tel: + 49-711-783-370 Budapest, Hungary Tel: + 36-1-474-8100 Dublin, Ireland Tel: + 353-1631-9000 Galway, Ireland Tel: + 353-91-518400 Milan, Italy

Geneva, Switzerland

Tel: + 61-3-9657-5100 North Sydney, Australia Tel: + 61-2-9012-3100

Tel: + 61-8-9268-2559

China

Zürich, Switzerland

Tel: + 86-10-6539-1030

Tel: + 41-1-308-35-35

Shanghai, China

Egham, United Kingdom

Tel: + 86-21-5047-9477

Tel: + 44-1784-494-900 Hong Kong Admiralty, Hong Kong

London, United Kingdom

Tel: + 852-2206-0000

Tel: + 44-20-7464-8400 Japan

Tel: + 44-161-932-6000

Osaka, Japan

Staines, United Kingdom

Tel: + 81-6-4806-8823

Tel: + 44-1784-49-49-00

Tokyo, Japan Tel: + 81-3-5464-7700

Seoul, Korea

Vercelli, Italy Tel: + 39-0-161-54376

111

Buenos Aires, Argentina

São Paulo, Brazil

Bogota, Colombia Tel: + 57-1-2960450 Lomas de Chapultepec, Mexico Tel: + 52-55-1997-1000 Monterrey, Mexico Tel: + 52-81-8399-0000

Tel: + 0113-300-2039

Korea

Tel: + 39-06-367121

Latin America

Tel: + 55-11-3444-0450

Tel: + 39-02-62-031 Rome, Italy

Tel: + 886-2-2577-0249

Tel: + 54-11-4590-2250

Beijing, China

Manchester, United Kingdom

Taipei, Taiwan

Perth, Australia

Tel: + 41-22-786-06-80

Leeds, United Kingdom

Taiwan

Melbourne, Australia

Tel: + 46-8-655-2600

Paris, France

Tel: + 65-212-9200

Tel: + 822-780-7814

CORPORATE

INFORMATION

Officers and Directors

Board of Directors

European Board of Directors

Form 10-K as filed with the

Thomas M. Siebel

James C. Gaither, Esq.

Giuliano Amato

Securities and Exchange

Chairman and

Managing Director,

Former Prime Minister, Italy

Commission or would like

Chief Executive Officer

Sutter Hill Ventures Senior Counsel,

Jacques Attali

communications, please

Cooley Godward LLP

Former Advisor to French

direct your request to:

President François Mitterrand

Investor Relations

President and Chief Operating Officer

Siebel Systems, Inc.

Eric E. Schmidt, Ph.D. Chairman of the Board

The Right Honorable

2207 Bridgepointe Parkway

R. David Schmaier

and Chief Executive Officer,

John Major

San Mateo, California 94404

Executive Vice President

Google, Inc.

Former Prime Minister,

Kenneth A. Goldman

Charles R. Schwab

Senior Vice President,

Chairman and Co-Chief

Dr. h.c. Horst Teltschik

85 Challenger Road

Finance and Administration

Executive Officer,

Chairman of the Board,

Ridgefield Park,

and Chief Financial Officer

The Charles Schwab

BMW Herbert Quandt

New Jersey 07660

Corporation

Foundation

Tel: +1-800-356-2017

Senior Vice President,

George T. Shaheen

Corporate Office

Annual Meeting

Marketing

Former Chief Executive Officer,

Siebel Systems, Inc.

Andersen Consulting

The annual meeting of

2207 Bridgepointe Parkway

stockholders will be held at

United Kingdom

Transfer Agent and Registrar Mellon Investor Services LLC

Bruce Cleveland

Mark D. Hanson

San Mateo, California 94404

Senior Vice President,

A. Michael Spence, Ph.D.

Corporate Development

Former Dean, Graduate School of Business

Karen M. Riley

Stanford University

Senior Vice President,

Partner,

Global Services

Oak Hill Venture Partners

2:00 p.m. on June 6, 2002, at:

Marriott Hotel Legal Counsel

1770 S. Amphlett Boulevard

Cooley Godward LLP

San Mateo, California 94402

Palo Alto, California For more information Independent Auditors

on Siebel Systems’

David C. Schwartz

Patricia A. House

KPMG LLP

products and services,

Senior Vice President,

Vice Chairman and

Mountain View, California

contact the Company at:

Engineering

Vice President, Strategic Planning

William R. McDermott

Stock Listing Siebel Systems’ common stock is

Executive Vice President,

Marc F. Racicot

traded on the over-the-counter

Worldwide Sales Operations

Partner, Bracewell

market and is quoted on the

& Patterson LLP

Nasdaq National Market

Chairman, Republican

under the symbol “SEBL.”

National Committee Form 10-K If you would like to receive, without charge, the Company’s

112

Tel:

+1-800-647-4300

Tel:

+1-650-295-5000

Fax: +1-650-295-5111 Email: [email protected] URL: www.siebel.com © 2002 Siebel Systems, Inc. All rights reserved. Siebel, the Siebel logo, ActiveBriefings, tsq, Universal Agent, and/or other Siebel products referenced herein are trademarks of Siebel Systems, Inc. and may be registered in certain jurisdictions. Other product names, company names, marks, logos, and symbols referenced herein may be the trademarks or registered trademarks of their respective owners.

Design: Cahan & Associates, San Francisco + Illustrations: Jeff West + Photography: Jock McDonald Film Inc. (still life), Albert Watson (portraiture) + Printing: Lithographix

Paul Wahl

to receive other stockholder

World Headquarters Siebel Systems, Inc. 2207 Bridgepointe Parkway

San Mateo, CA 94404 United States Tel:

+1-800-647-4300

Tel:

+1-650-295-5000

Fax: +1-650-295-5111 Europe Siebel Systems UK Limited Siebel Centre The Glanty Egham, Surrey TW20 9DW United Kingdom Tel:

+44-1784-494900

Fax: +44-1784-494901 Asia Pacific Siebel Systems Australia Level 1, 80 Pacific Highway North Sydney, NSW 2060 Australia Tel:

+61-2-9012-3100

Fax: +61-2-9012-3333 Japan Siebel Systems Japan K.K. Ebisu Prime Square 1-1-39 Hiroo, Shibuya-Ku

Tokyo, 150-0012 Japan Tel:

+81-3-5464-7700

Fax: +81-3-5464-7702 Latin America Siebel Systems Brasil Ltda Av. Nações Unidas, 12.901 20 andar - Torre Norte 04578-903 - São Paulo - SP Brazil Tel:

+55-11-3444-0450

Fax: +55-11-3444-0666

www.siebel.com 10P10-AR002-05625 (06/02)