================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------
FORM 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1997
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 0-26776
CLARIFY INC.
(Exact name of registrant as specified in its charter)
Delaware 77-0259235
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
2125 O'Nel Drive
San Jose, California 95131
(Address of principal executive offices)
----------------------
(408) 573-3000
(Registrant's telephone number, including area code)
----------------------
http://www.clarify.com
(Registrant's home page on the Internet)
----------------------
Indicate by check x whether the registrant (1) has filed all reports
required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
----- -----
As of May 1, 1997 there were 21,054,788 shares of the Registrant's common
stock outstanding.
================================================================================
<PAGE>
CLARIFY INC.
FORM 10-Q
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION PAGE
----
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
At March 31, 1997 and December 31, 1996................... 3
Condensed Consolidated Statements of Operations
For the three months ended March 31, 1997 and 1996........ 4
Condensed Consolidated Statements of Cash Flows
For the three months ended March 31, 1997 and 1996........ 5
Notes to Condensed Consolidated Financial Statements...... 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations....................... 7
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.......................... 17
SIGNATURES
.......................................................... 18
<PAGE>
PART I. FINANCIAL INFORMATION.
Item 1. Financial Statements.
<TABLE>
CLARIFY INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
March 31, 1997 and December 31, 1996
(in thousands, except per share data; unaudited)
<CAPTION>
March 31, December 31,
ASSETS 1997 1996
-------------- ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents ............................................... $ 31,441 $ 34,477
Short-term investments .................................................. 1,495 1,486
Accounts receivable, net ................................................ 20,431 17,977
Prepaid expenses and other current assets ............................... 1,281 1,601
Deferred tax ............................................................ 3,784 3,784
-------- --------
Total current assets ................................................. 58,432 59,325
Property and equipment, net ................................................. 8,666 8,470
Long-term investments ....................................................... 1,486 1,989
Other noncurrent assets ..................................................... 1,057 900
-------- --------
Total assets ......................................................... $ 69,641 $ 70,684
======== ========
LIABILITIES
Current liabilities:
Accounts payable ........................................................ $ 3,366 $ 3,920
Accrued payroll and related accruals .................................... 4,122 4,771
Other accrued liabilities ............................................... 3,177 2,284
Unearned revenue ........................................................ 9,966 12,764
-------- --------
Total current liabilities ............................................ 20,631 23,739
-------- --------
STOCKHOLDERS' EQUITY
Preferred stock, $.0001 par value:
Authorized: 5,000 shares;
Issued and outstanding: none
Common stock, $.0001 par value:
Authorized: 25,000 shares;
Issued and outstanding: 20,761 at March 31, 1997 and
20,600 at December 31, 1996 .......................................... 2 2
Capital in excess of par value .............................................. 45,684 45,556
Cumulative translation adjustment ........................................... (94) (66)
Deferred compensation ....................................................... (100) (112)
Retained earnings ........................................................... 3,518 1,565
-------- --------
Total stockholders' equity ........................................... 49,010 46,945
-------- --------
Total liabilities and stockholders' equity ........................ $ 69,641 $ 70,684
======== ========
<FN>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
</FN>
</TABLE>
3
<PAGE>
CLARIFY INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data; unaudited)
Three Months Ended
March 31,
-------------------
1997 1996
---- ----
Revenues:
License fees ..................................... $13,008 $ 5,816
Services ......................................... 6,352 3,138
------- -------
Total revenues ................................ 19,360 8,954
------- -------
Cost of revenues:
License fees ..................................... 520 183
Services ......................................... 3,977 1,987
------- -------
Total cost of revenues ........................ 4,497 2,170
------- -------
Gross margin .................................. 14,863 6,784
------- -------
Operating expenses:
Product development and engineering .............. 3,593 1,878
Sales and marketing .............................. 7,017 3,447
General and administrative ....................... 1,515 868
------- -------
Total operating expenses ...................... 12,125 6,193
------- -------
Operating income .............................. 2,738 591
Interest income, net ............................... 362 384
------- -------
Income before provision for income taxes ........ 3,100 975
Provision for income taxes ......................... 1,147 107
------- -------
Net income .............................. $ 1,953 $ 868
======= =======
Net income per share ............................... $ 0.09 $ 0.04
======= =======
Shares used in per share computations .............. 22,071 21,485
======= =======
The accompanying notes are an integral part of these condensed
consolidated financial statements.
4
<PAGE>
CLARIFY INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands; unaudited)
Three Months Ended
March 31,
------------------
1997 1996
---- ----
Cash flows from operating activities:
Net income .......................................... $ 1,953 $ 868
Adjustments to reconcile net income to
net cash provided by (used in)
operating activities:
Depreciation and amortization ...................... 865 304
Noncash charges (credits), net ..................... (7) (4)
Changes in assets and liabilities:
Accounts receivable .............................. (2,522) 723
Prepaid expenses and other current assets ........ 405 (209)
Accounts payable ................................. (529) 334
Accrued payroll and related accruals ............. (634) 371
Other accrued liabilities ........................ 844 510
Unearned revenue ................................. (2,779) (887)
-------- --------
Net cash provided by (used in) operating activities .... (2,404) 2,010
-------- --------
Cash flows from investing activities:
Purchase of property and equipment ................. (1,097) (871)
Purchase of investments ............................ (5,500) --
Sales and maturities of investments ................ 5,996 --
Increase in other assets ........................... (217) (7)
-------- --------
Net cash used in investing activities .................. (818) (878)
-------- --------
Cash flows from financing activities:
Payments of capital lease obligations .............. -- (36)
Proceeds from issuance of common stock ............. 128 9
Borrowings under notes payable ..................... -- 135
-------- --------
Net cash provided by financing activities .............. 128 108
-------- --------
Effect of foreign exchange rate changes on cash ........ 58 --
-------- --------
Net increase (decrease) in cash and cash equivalents ... (3,036) 1,240
Cash and cash equivalents, beginning of period ......... 34,477 31,813
-------- --------
Cash and cash equivalents, end of period ............... $ 31,441 $ 33,053
======== ========
Supplemental disclosure of cash flow information:
Cash paid during the period for interest ............ $ -- $ 3
======== ========
Cash paid during the period for income taxes ........ $ 28 $ 71
======== ========
Supplemental schedule of noncash investing and
financing activities:
Forgiveness of notes payable to stockholders ........ $ -- $ 1,047
======== ========
The accompanying notes are an integral part of these condensed
consolidated financial statements.
5
<PAGE>
CLARIFY INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note 1. Basis of Presentation
The unaudited condensed consolidated financial statements included herein
reflect all adjustments, consisting only of normal recurring adjustments which
in the opinion of management are necessary to fairly state the consolidated
financial position, results of operations, and cash flows of Clarify Inc. and
its subsidiaries ("Clarify" or the "Company"), for the periods presented. These
financial statements should be read in conjunction with the Company's audited
consolidated financial statements as included in its 1996 Annual Report on Form
10-K as filed with the Securities and Exchange Commission on March 31, 1997. The
consolidated results of operations for the interim periods presented are not
necessarily indicative of the results that may be expected for any future
interim periods or for the full fiscal year. The December 31, 1996 balance sheet
was derived from audited financial statements, but does not include all
disclosures required by generally accepted accounting principles.
Note 2. Computation of Net Income Per Share
Net income per share is computed on the basis of the weighted average number of
shares outstanding plus the common stock equivalents, consisting of outstanding
dilutive stock options (using the treasury stock method). Fully diluted per
share amounts are not presented, as the effect is not material. In September
1996, the Company announced a two-for-one stock split effected in the form of a
stock dividend. All shares, common stock equivalents, and per-share amounts
applicable to prior periods have been restated to reflect the stock split.
Note 3. Business Combination
In April 1996, the Company acquired Metropolis Software, Inc. (Metropolis), a
sales force automation software provider. The Company issued approximately
663,000 shares of its common stock in exchange for substantially all of the
shares of Metropolis. The Company also assumed stock options that converted into
options to purchase approximately 77,000 shares of the Company's common stock.
The business combination was accounted for as a pooling of interests and the
consolidated financial statements have been restated as if Metropolis had been
combined for all periods presented.
Note 4. Subsequent Event
On May 9, 1997 the Compensation Committee of the Company's Board of Directors
authorized employees the right to convert certain outstanding stock options for
option grants with an exercise price of $13.50 per share (the fair market value
on this date), provided that such employees made the election to convert by this
date. The converted option grants vest on a date that is seven months after the
date such installment would have vested had the option not been amended by the
employee exercising this conversion right.
6
<PAGE>
CLARIFY INC.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
This report contains forward looking statements that involve risks and
uncertainties. The statements contained in this report that are not purely
historical are forward looking statements within the meaning of Section 27A of
the Securities Act of 1933 and Section 21E of the Securities Exchange Act of
1934, including without limitation, statements regarding the Company's
expectations, beliefs, intentions or strategies regarding the future. All
forward looking statements included in this report are based on information
available to the Company on the date hereof, and the Company assumes no
obligation to update any such forward looking statements. The Company's actual
results could differ materially from those anticipated in these forward looking
statements as a result of certain factors, including those set forth below,
under "Overview," "Risk Factors That May Affect Future Results," and elsewhere
in this report.
Overview
Clarify Inc. ("Clarify" or the "Company") was founded in August 1990 to
develop customer-centric front office solutions, including customer service,
field service and logistics, quality assurance, help desk and sales and
marketing applications. The Company shipped its first product--ClearSupport(R)
Version 1, the Company's cornerstone product for the customer service
organization--in September 1992. The Company's other product offerings include
ClearLogistics(R), a field service and logistics management system that first
shipped in April 1996; ClearQuality(R), which first shipped in May 1993 and is
used by quality assurance and product development organizations to track defects
and enhancement requests; ClearHelpdesk(R), an employee support center that was
released for commercial use in December 1995; and ClearSales(R), a sales
automation solution that was first released for commercial use in January 1996.
Clarify operates in a highly competitive environment that involves a number
of risks, some of which are beyond the Company's control. Some of these risks
include continuing acceptance of Clarify's products in the marketplace, the
Company's ability to grow from the sales of these products, general competitive
pressures in the marketplace, the continued overall growth in the front office
software industry and the Company's ability to integrate a recently merged
company. In addition, the management of any future growth will require the
Company to continue to improve both its financial and management controls and
its reporting systems and procedures on a timely basis, as well as to
effectively expand, train and manage its workforce.
The Company's quarterly operating results have varied significantly in the
past and may vary significantly in the future. To achieve its quarterly revenue
objectives, the Company is dependent upon obtaining orders in any given quarter
for shipment and installation in that quarter. Furthermore, the Company has
often recognized a substantial portion of its revenues in the last month of a
quarter, with a concentration of these revenues in the last half of that month.
As a result, product revenues in any quarter are substantially dependent on
orders booked and installed in that quarter. The Company believes the purchase
of its products generally involves a significant commitment of capital, because
customers have tended to implement the products on a large scale and must also
establish certain minimum hardware capabilities. As a result, in the event of a
downturn in any existing or potential customer's business or the economy in
general, purchases of the Company's products may be deferred or canceled, which
could have a material adverse effect on the Company's business, operating
results and financial condition. Due to the foregoing factors, quarterly revenue
and operating results are not predictable with any significant degree of
accuracy. The Company's expense levels are based, in significant part, on the
Company's expectations as to future revenues and are therefore relatively fixed
in the short term. If revenue levels are below expectations, the Company's
business, operating results and financial condition are likely to be adversely
affected. Net income may be disproportionately adversely affected by a reduction
in revenues because a proportionately smaller amount of the Company's expenses
varies with its revenues. As a result, the Company believes that
period-to-period comparisons of its results of operations are not necessarily
meaningful and should not be relied upon as indications of future performance.
There can be no assurance that the Company will be able to achieve or maintain
profitability on a quarterly or annual basis in the future. It is likely that in
some future quarter the Company's operating results will be below the
expectations of public market analysts and investors. In such event, the price
of the Company's common stock would likely be materially adversely affected.
7
<PAGE>
Results of Operations
The following table sets forth, as a percentage of total revenues, certain
condensed consolidated statement of operations data for the periods indicated:
Three Months Ended
March 31,
------------------
1997 1996
---- ----
Statement of Operations Data:
Revenues:
License fees ................................... 67.2% 65.0%
Services ....................................... 32.8 35.0
----- -----
Total revenues .............................. 100.0 100.0
----- -----
Cost of revenues:
License fees ................................... 2.7 2.0
Services ....................................... 20.5 22.2
----- -----
Total cost of revenues ...................... 23.2 24.2
----- -----
Gross margin ................................ 76.8 75.8
----- -----
Operating expenses:
Product development and engineering ............ 18.6 21.0
Sales and marketing ............................ 36.2 38.5
General and administrative ..................... 7.8 9.7
----- -----
Total operating expenses .................... 62.6 69.2
----- -----
Operating income ............................ 14.2 6.6
Interest income .................................. 1.8 4.3
----- -----
Income before provision
for income taxes ..................... 16.0 10.9
Provision for income taxes ....................... 5.9 1.2
----- -----
Net income ............................ 10.1% 9.7%
===== =====
Revenues
The Company's revenues are derived primarily from license fees, fees from
sublicensing third-party software products and charges for services, including
maintenance, consulting and training. For all periods presented, the Company has
recognized revenue in accordance with Statement of Position 91-1 entitled
"Software Revenue Recognition," dated December 12, 1991, issued by the American
Institute of Certified Public Accountants. License fee revenues consist of
revenues from initial licenses for the Company's products, sales of licenses to
existing customers for additional users of the Company's products, product
documentation and fees from sublicensing third-party software products. The
Company recognizes initial license fee revenues after delivery and installation
of software products, if there are no remaining significant post-installation
obligations and if collection is probable. If significant post-installation
obligations exist or if a product is subject to customer acceptance, revenues
are deferred until no significant obligations remain or until acceptance has
occurred. Sales of additional licenses to the Company's existing customers are
recognized upon shipment providing no significant post-shipment obligations
exist. Service revenues consist primarily of maintenance, consulting and
training revenues. Maintenance revenues are recognized ratably over the term of
the support period, which is typically twelve months. Consulting and training
revenues generally are recognized when the services are performed.
Total revenues increased from $9.0 million in the first quarter of 1996 to
$19.4 million in the first quarter of 1997, representing an increase of 116% as
a result of growth in both license fees and services revenues. The Company
anticipates little, if any, revenue growth for the second quarter of 1997 over
the first quarter of 1997 as a result of slower than expected expansion of the
direct sales force. Accordingly, the Company does not believe that the
percentage increases in revenues achieved in prior periods should be anticipated
in future periods.
8
<PAGE>
License Fees. License fee revenues increased from $5.8 million in the first
quarter of 1996 to $13.0 million in the first quarter of 1997, representing an
increase of 124%. The increase is primarily due to increased market acceptance
of the Company's existing products, continuing enhancement and increasing
breadth of the Company's product offerings, the expansion of the Company's
direct sales force and marketing organization, and sales of the Company's
products to new industry segments. Two customers accounted for 14% and 10%,
respectively, of license fee revenues in the first quarter of 1997.
Services. Revenues from services increased from $3.1 million in the first
quarter of 1996 to $6.4 million in the first quarter of 1997, representing an
increase of 102%. The increase in dollar amount was due primarily to the
increase in maintenance and maintenance renewals, consulting, and training
services associated with increased sales of the Company's applications. The
Company expects revenues from maintenance to increase in future periods as the
customer installed base increases, though the percentage increases in service
revenues achieved in prior periods should not be anticipated in future periods.
Costs of Revenues
Cost of License Fees. Cost of license fees increased from $0.2 million in
the first quarter of 1996 to $0.5 million in the first quarter of 1997,
representing an increase of 184%. Cost of license fees represents 3% and 4% of
license fee revenues for the first quarters of 1996 and 1997, respectively. Cost
of license fees consists primarily of the costs of sublicensing third party
software products, product media, product duplication, product documentation and
shipping. Costs related to research, design and development of products are
charged to product development and engineering expenses as incurred.
Accordingly, cost of license fees includes no amortization of capitalized
software development costs. Cost of license fees as a percentage of license fee
revenues may fluctuate from period to period due to increased or decreased sales
of royalty bearing software products. The Company expects the cost of license
fees as a percentage of license fee revenue to continue to fluctuate in future
periods.
Cost of Services. Cost of services consists primarily of costs incurred in
providing telephone support, consulting services, shipment of product upgrades
and training to customers. Cost of services increased from $2.0 million for the
first quarter of 1996 to $4.0 million for the first quarter of 1997,
representing an increase of 100%. The increase is due primarily to the increase
in the number of customer support and training personnel and related overhead
costs necessary to support a larger installed customer base and costs related to
the increased use of independent consultants for systems integrations. Cost of
services represents 63% of service revenues in the both the first quarter of
1996 and the first quarter of 1997. The Company expects to make continued
investments in its service organization in anticipation of supporting the
increasing number of users in the customer installed base and, therefore,
currently anticipates that cost of services will increase in absolute dollars in
future periods.
Operating Expenses
Product Development and Engineering. Product development and engineering
expenses increased from $1.9 million in the first quarter of 1996 to $3.6
million in the first quarter of 1997, representing 21% and 19% of total
revenues, respectively. Product development and engineering expenses include
expenses associated with the development of new products, enhancements of
existing products and quality assurance activities, and consist primarily of
employee salaries, benefits, consulting expenses and the cost of software
development tools. Costs related to research, design and development of products
are charged to product development and engineering expenses as incurred. The
increase in dollar amount was primarily attributable to an increase in personnel
and related overhead costs. The decrease in product development and engineering
expenses as a percentage of total revenues was primarily due to the growth in
revenues. The Company currently anticipates that product development and
engineering expenses may increase in absolute dollars as the Company continues
to commit substantial resources to product development and engineering in future
periods.
Sales and Marketing. Sales and marketing expenses increased from $3.4
million in the first quarter of 1996 to $7.0 million in the first quarter of
1997, representing 39% and 36% of total revenues, respectively. Sales and
marketing expenses consist primarily of employee salaries, sales commissions,
travel and promotional expenses. The increase in dollar amount was primarily due
to the expansion of the Company's worldwide sales and marketing organization,
higher sales commissions associated with increased revenue, and increased
marketing activities. The decrease in sales and marketing expenses as a
percentage of total revenues was primarily due to the growth in revenues. The
Company
9
<PAGE>
plans to continue to invest substantial resources in expanding its sales and
marketing activities and therefore, sales and marketing expenses are expected to
increase in absolute dollars in future periods.
General and Administrative. General and administrative expenses increased
from $0.9 million in the first quarter of 1996 to $1.5 million in the first
quarter of 1997, representing 10% and 8% of total revenues, respectively.
General and administrative expenses consist primarily of salaries and occupancy
costs for administrative, executive and finance personnel. The increase in
dollar amount was due primarily to increases in personnel and related overhead
costs. The decrease in general and administrative expenses as a percentage of
total revenues was primarily due to the growth in revenues. The Company
currently expects general and administrative expenses to increase in absolute
dollars in the future as the Company expands its operations.
Interest Income (Expense), net. Net interest income decreased from $384,000
in the first quarter of 1996 to $362,000 in the first quarter of 1997. The
decrease is primarily due to lower excess cash balances in 1997 partially offset
by a decrease in interest expense due to the retirement of capital equipment
leases during 1996.
Provision for Income Taxes. Income taxes were provided at a rate of 11% for
the first three months of 1996 as compared to 37% for the same period of 1997.
The Company's effective income tax rate increased to 37% in the first quarter of
1997 due to federal and state operating loss carryforwards having been
recognized in fiscal year 1996. The Company recognized deferred tax assets in
accordance with SFAS No. 109, "Accounting for Income Taxes," of $800,000 and
$2,984,00 in the second and fourth quarters of 1996, respectively, amounting to
total deferred income tax assets of $3,784,000 at March 31, 1997.
Recent Accounting Pronouncements
During February 1997, the Financial Accounting Standards Board issued
Statement No. 128, "Earnings Per Share," (SFAS 128) which specifies the
computation, presentation and disclosure requirements for earnings per share.
SFAS 128 supersedes Accounting Principles Board Opinion No. 15 and will become
effective for the Company's 1997 fiscal year. SFAS 128 requires restatement of
all prior-period earnings per share data presented after the effective date.
SFAS 128 is not expected to have a material impact on the Company's financial
position, results of operations or cash flows.
Liquidity and Capital Resources
The Company's operating activities used net cash of $2.4 million in the
first quarter of 1997 compared to $2.0 million of net cash being generated in
the first quarter of 1996. The increase in cash used in operating activities in
the first quarter of 1997 is attributed principally to the decrease in unearned
revenue, accounts payable, and accrued payroll and related accruals and the
increase in accounts receivable. These changes were partially offset by a
decrease in prepaid expenses and other current assets and an increase in other
accrued liabilities. The increase in accounts receivable resulted from a higher
percentage of orders being received in the last month of the quarter as compared
to prior quarters. The decrease in unearned revenue was due to the Company
installing orders and fulfilling certain post-installation obligations relating
to orders deferred at December 31, 1996, as well as a large portion of first
quarter orders being shipped and installed within the first quarter.
Investing activities used net cash of $0.8 million in the first quarter of
1997 as compared to $0.9 million in the first quarter of 1996. Included in these
totals is net cash provided and used by the purchase and sale of investments and
purchases of property and equipment. Purchases of short and long-term
investments used $5.0 million and $0.5 million, respectively, of cash and the
sale of short and long-term investments generated $5.0 million and $1.0 million,
respectively, of cash during the first quarter of 1997. There were no purchases
or sales of investments in the first quarter of 1996. The Company used $1.1
million and $0.9 million of cash during the first quarter of 1997 and 1996,
respectively, to purchase property and equipment. The Company expects that the
rate of purchases of property and equipment will remain constant or increase as
the Company's employee base grows.
Financing activities generated cash of $0.1 million both in the first
quarter of 1997 and the first quarter of 1996. Cash provided from financing
activities in the first quarter of 1997 consisted of proceeds from the issuance
of common stock pursuant to the exercise of options granted under the 1991 and
1995 Stock Option Plans. Net cash provided from financing activities during the
first quarter of 1996 consisted principally of borrowings under a line of
credit.
The Company believes that cash generated from operations and its existing
cash and cash equivalents and short-term investment balances will satisfy the
Company's projected working capital and other cash requirements for at least the
10
<PAGE>
next twelve months. Although operating activities may provide cash in certain
periods, to the extent the Company grows in the future, its operating and
investing activities may use cash. In the event that cash generated from
operating activities may not be sufficient to meet future cash requirements,
there can be no assurance that any necessary additional financing will be
available to the Company on commercially reasonable terms, or at all.
Risk Factors That May Affect Future Results
The Company operates in a rapidly changing environment that involves a
number of risks, some of which are beyond the Company's control. The following
discussion highlights some of these risks. Other risks are presented elsewhere
in this report.
Limited Operating History; History of Operating Losses; Uncertainty of
Future Operating Results. The Company was founded in August 1990 and did not
begin shipping products until September 1992. Although the Company's revenues
have increased in each of the last six years, and the Company had net operating
income in each of the last ten quarters, the Company incurred net operating
losses in each year from inception through the year ended 1994. The Company's
limited operating history makes the prediction of future operating results
difficult or impossible. Accordingly, although the Company has recently
experienced significant revenue growth, such growth should not be considered
indicative of future revenue growth, if any, or of future operating results.
There can be no assurance that any of the Company's business strategies will be
successful or that the Company will be able to sustain profitability on a
quarterly or annual basis.
Fluctuations in Quarterly Results; Seasonality. The Company's quarterly
operating results have varied significantly in the past and may vary
significantly in the future, depending on factors such as the size and timing of
significant orders, the level of price and product competition, demand for the
Company's products, changes in pricing policies by the Company or its
competitors and the number, timing and significance of product enhancements and
new product announcements by the Company and its competitors. In addition, the
Company's quarterly operating results are dependent on factors such as the
ability of the Company to develop, introduce and market new and enhanced
versions of the Company's products on a timely basis, the size, timing and
structure of significant licenses, changes in the Company's sales incentive
strategy, the timing of revenue recognition, budgeting cycles of its customers,
customer order deferrals in anticipation of enhancements or new products, the
impact of acquisitions of competitors, the cancellation of licenses or
maintenance agreements, product life cycles, software bugs and other product
quality problems, personnel changes, changes in Company strategy, investments to
develop sales distribution channels, seasonal trends, changes in the level of
operating expenses and general domestic and international economic and political
conditions, among others. In particular, the timing of revenue recognition can
be affected by many factors, including the timing of customer installation and
implementation of the Company's products. The Company's license agreements
typically provide that a majority of payment is due upon installation of the
Company's products. In the past, the Company has experienced delays in
recognizing revenue with respect to particular orders. There can be no assurance
that the Company will not experience delays in recognizing revenue in the
future, particularly if the Company receives orders for large, complex
installations. Product revenues are also difficult to forecast because the
market for front office software products is rapidly evolving, and the Company's
sales cycle, from initial trial to purchase and the provision of support
services, varies substantially from customer to customer. See "Risk Factors That
May Affect Future Results--Lengthy Sales and Implementation Cycles."
To achieve its quarterly revenue objectives, the Company is dependent upon
obtaining orders in any given quarter for shipment and installation in that
quarter. Furthermore, the Company has often recognized a substantial portion of
its revenues in the last month of a quarter, with a concentration of these
revenues in the last half of that month. As a result, product revenues in any
quarter are substantially dependent on orders booked and installed in that
quarter. Further, the Company believes the purchase of its products generally
involves a significant commitment of capital, because customers have tended to
implement the products on a large scale and also must establish certain minimum
hardware capabilities. As a result, in the event of any downturn in any existing
or potential customer's business or the economy in general, purchases of the
Company's products may be deferred or canceled, which could have a material
adverse effect on the Company's business, operating results and financial
condition. Due to the foregoing factors, quarterly revenue and operating results
are not predictable with any significant degree of accuracy. The Company's
expense levels are based, in significant part, on the Company's expectations as
to future revenues and are therefore relatively fixed in the short term. If
revenue levels are below expectations, the Company's business, operating results
and financial condition are likely to be adversely affected. Net income may be
disproportionately adversely affected by a reduction in revenues because a
proportionately smaller amount of the Company's expenses
11
<PAGE>
varies with its revenues. As a result, the Company believes that
period-to-period comparisons of its results of operations are not necessarily
meaningful and should not be relied upon as indications of future performance.
There can be no assurance that the Company will be able to achieve or maintain
profitability on a quarterly or annual basis in the future. Due to all the
foregoing factors, it is likely that in some future quarter the Company's
operating results will be below the expectations of public market analysts and
investors. In such event, the price of the Company's common stock would likely
be materially adversely affected.
The Company's business has experienced and is expected to continue to
experience significant seasonality, in part due to customer buying patterns. In
recent years, the Company has generally had stronger demand for its products
during the quarters ending in June and December and weaker demand in the quarter
ending in March. To the extent international operations constitute a higher
percentage of the Company's total revenues, the Company anticipates that it may
also experience relatively weaker demand in the quarter ending in September.
Intense Competition. The front office solutions market, including the market
for customer service, field service and logistics, internal help desk, quality
assurance and sales and marketing applications, is intensely competitive, highly
fragmented and subject to rapid change. Competitors vary in size and in the
scope and breadth of the products and services offered. The Company encounters
competition from a number of sources, including: (i) other software companies,
(ii) third-party professional services organizations that develop custom
software and (iii) management information systems departments of potential
customers that develop custom internal software. In addition, because there are
relatively low barriers to entry in the software market, the Company expects
additional competition from other established and emerging companies as the
front office solutions market continues to develop and expand. Increased
competition could result in price reductions, reduced gross margins and loss of
market share, any of which could materially adversely affect the Company's
business, operating results and financial condition. Some of the Company's
current competitors, and many of the Company's potential competitors, have
significantly greater financial, technical, product development, marketing and
other resources than the Company. As a result, they may be able to respond more
quickly to new or emerging technologies and changes in customer requirements, or
to devote greater resources to the development, promotion and sale of their
products than the Company. In addition, many competitors and potential
competitors have significant established distribution networks and large
customer installed bases. The Company also expects that competition will
increase as a result of software industry consolidations. In addition, current
and potential competitors have established or may establish cooperative
relationships among themselves or with third parties to increase the ability of
their products to address the needs of the Company's prospective customers.
Accordingly, it is possible that new competitors or alliances among competitors
may emerge and rapidly acquire significant market share. In particular,
companies with greater technical, marketing and other resources than the Company
could compete directly with the Company either as a result of acquisition or by
direct entry into the market for the Company's products. There can be no
assurance that the Company will be able to compete successfully against current
and future competitors or that competitive pressures faced by the Company will
not materially adversely affect its business, operating results and financial
condition.
Lengthy Sales and Implementation Cycles. The Company's products are
typically intended for use in applications that may be critical to a customer's
business. The license and implementation of the Company's software products
generally involves a significant commitment of resources by prospective
customers. As a result, the Company's sales process is often subject to delays
associated with lengthy approval processes that typically accompany significant
capital expenditures. For these and other reasons, the sales cycle associated
with the license of the Company's products is often lengthy (recently averaging
approximately four to six months) and subject to a number of significant delays
over which the Company has little or no control. In addition, the Company does
not recognize the majority of license revenues until installations are complete
and does not recognize the consulting component of service revenues until the
services are rendered, which, in certain cases, can take several quarters. As a
result, revenue recognition may be delayed in many instances. The time required
to implement the Company's products can vary significantly with the needs of its
customers and is generally a process that extends for several months. Because of
their complexity, larger implementations can involve implementation cycles that
can take multiple quarters. When the Company has provided consulting services to
implement certain larger projects, a few customers have in the past delayed
payment of a portion of license fees until implementation was complete and in
some cases have disputed the consulting fees charged for implementation. There
can be no assurance the Company will not experience additional delays or
disputes regarding payment in the future, particularly if the Company receives
orders for large, complex installations. Therefore, the Company believes that
its quarterly operating results are likely to vary significantly in the future.
12
<PAGE>
Dependence Upon Key Personnel. The loss of the services of one or more of
the Company's executive officers could have a material adverse effect on the
Company's business, operating results and financial condition. There can be no
assurance that the Company will be able to retain its key personnel. In
addition, in the past there has been turnover in certain key positions in the
Company, including Vice President, Sales and Vice President, Customer Service
and Support. Additions of new and departures of existing personnel, particularly
in key positions, could have a material adverse effect upon the Company's
business, operating results and financial condition. The Company's future
performance depends significantly upon the continued service and performance of
these officers. The Company's future success also depends on its continuing
ability to attract and retain highly qualified technical, sales and managerial
personnel. In the event the Company experiences sales growth, there will be an
increased need for technical personnel to facilitate successful product
installations. Significant delays in product installations could have a material
adverse effect on the Company's business, operating results and financial
condition. The Company recently hired a significant number of employees, and in
order to maintain its ability to grow in the future, the Company will be
required to significantly increase the total number of employees. Competition
for such personnel is intense, and there can be no assurance that the Company
can retain its key technical, sales and managerial employees or that it can
attract, assimilate or retain other highly qualified technical, sales and
managerial personnel in the future.
Product Concentration. To date, the majority of the Company's revenues have
been attributable to sales of ClearSupport, the Company's primary product.
ClearSupport has typically been the first of the Company's products to be
deployed with the greatest number of users and often as a foundation for other
applications. The Company expects ClearSupport to account for a significant
portion of the Company's future revenues. As a result, factors adversely
affecting the pricing of or demand for the ClearSupport product such as
competition or technological change could have a material adverse effect on the
Company's business, operating results and financial condition. The Company's
future financial performance will depend, in significant part, on the successful
development, introduction and customer acceptance of new and enhanced versions
of the Company's product and other products. There can be no assurance that the
Company will continue to be successful in marketing the ClearSupport product or
other products.
Dependence on New Products and Rapid Technological Change. The front office
solutions market, including the market for customer service, field service and
logistics, quality assurance, helpdesk, and sales and marketing applications, is
characterized by rapid technological change, frequent new product introductions
and evolving industry standards. The introduction of products embodying new
technologies and the emergence of new industry standards can render existing
products obsolete and unmarketable. Any modification of third-party software
packages that the Company sublicenses for inclusion with its products could
require modification of the Company's products. The life cycles of the Company's
products are difficult to estimate. The Company's future success will depend
upon its ability to enhance its current products and develop and introduce new
products on a timely basis that keep pace with technological developments,
industry standards and the increasingly sophisticated needs of its customers.
There can be no assurance that the Company will be successful in developing and
marketing product enhancements or new products that respond to technological
change or evolving industry standards, or that the Company will not experience
difficulties that could delay or prevent the successful development,
introduction and marketing of these products, or that its new products and
product enhancements will adequately meet the requirements of the marketplace
and achieve market acceptance. Furthermore, reallocation of resources by the
Company, such as the diversion of research and development personnel to
development of a particular feature for a potential or existing customer, can
delay new products and certain product enhancements. If the Company is unable,
for technological or other reasons, to develop and introduce new products or
enhancements of existing products in a timely manner in response to changing
market conditions or customer requirements, the Company's business, operating
results and financial condition will be materially adversely effected. The
Company has in the past introduced product upgrades and enhancements on a
frequent basis, and expects to continue to introduce upgrades and enhancements
of its existing products. The Company also currently plans to introduce and
market new products. The upgrades, enhancements and new products are subject to
significant technical risks, including the difficulty of ensuring that such
products will permit successful migration of customer data from a variety of
existing platforms. In the past, the Company has experienced developmental
delays, which have resulted in delays in the commencement of commercial
shipments of new products and enhancements. There can be no assurance that the
Company will not experience difficulties that could delay or prevent the
successful development, introduction or marketing of new or enhanced products.
In addition, there can be no assurance that such products will meet the
requirements of the marketplace and achieve market acceptance on a timely basis,
or that the Company's current or future products will conform to industry
requirements. If any potential new products or upgrades or enhancements are
delayed, including the next version of ClearSupport or if any potential new
products or upgrades or enhancements experience quality problems or do not
achieve market acceptance, the Company's business, operating results and
financial condition will be materially adversely affected.
13
<PAGE>
Expansion of Distribution Channels. The Company has historically sold its
products through its direct sales force. The Company's ability to achieve
significant revenue growth in the future will depend in large part on its
success in recruiting and training sufficient sales personnel and establishing
relationships with distributors, resellers and systems integrators. The Company
is currently investing, and plans to continue to invest, significant resources
to expand its domestic and international direct sales force and develop
distribution relationships with certain third party distributors, resellers and
systems integrators. There can be no assurance that the Company will be able to
attract a sufficient number of third party distribution partners or that such
partners will recommend the Company's products. The inability to establish
successful relationships with distributors, resellers or systems integrators
could have a material adverse effect on the Company's business, operating
results or financial condition. In addition, there can be no assurance that the
Company will be able to successfully expand its direct sales force or other
distribution channels. Any failure by the Company to expand its direct sales
force or other distribution channels would materially adversely affect the
Company's business, operating results and financial condition.
Risk of Product Defects. Software products as complex as those offered by
the Company frequently contain errors or failures, especially when first
introduced or when new versions are released. Although the Company conducts
extensive product testing, the Company has in the past released products that
contained defects, and has discovered software errors in certain of its new
products and enhancements after their introduction and, as a result, has
experienced delays in recognizing revenues during the period required to correct
these errors. The Company could in the future lose revenues as a result of
software errors or defects. The Company's products are typically intended for
use in applications that may be critical to a customer's business. As a result,
the Company expects that its customers and potential customers have a greater
sensitivity to product defects than the market for software products generally.
Although the Company has not experienced material adverse effects resulting from
any such errors to date, there can be no assurance that, despite testing by the
Company and by current and potential customers, errors will not be found in new
products or releases after commencement of commercial shipments, resulting in
loss of revenue or delay in market acceptance, diversion of development
resources, damage to the Company's reputation, or increased service and warranty
costs, any of which could have a material adverse effect upon the Company's
business, operating results and financial condition.
International Operations. The Company established in European headquarters
in the United Kingdom in 1994. Since then, additional offices have been opened
in Germany, France, Japan, Australia and Canada. As part of its strategy to
increase growth and profitability, the Company intends to expand its existing
international operations and enter additional international markets, which will
require significant management attention and financial resources and could
adversely affect the Company's operating margins and earnings. To successfully
expand international sales, the Company must establish additional foreign
operations and hire additional personnel. To the extent that the Company is
unable to do so in a timely manner, the Company's growth in international sales,
if any, will be limited, and the Company's business, operating results and
financial condition could be materially adversely affected. In addition, there
can be no assurance that the Company will be able to maintain or increase
international market demand for its products. Additional risks inherent in the
Company's international business activities include, among others: currency
fluctuations, unexpected changes in regulatory requirements, tariffs and other
trade barriers, costs of localizing products for foreign countries, lack of
acceptance of localized products in foreign countries, longer accounts
receivable payment cycles, difficulties in managing international operations,
potentially adverse tax consequences including restrictions on the repatriation
of earnings, and the burdens of complying with a wide variety of foreign laws.
There can be no assurance that such factors will not have a material adverse
effect on the Company's future international sales and, consequently, the
Company's results of operations.
Dependence on Growth in the Front Office Software Market. The front office
software market, including the market for customer support, field service and
logistics, quality assurance, helpdesk, and sales and marketing applications, is
intensely competitive, highly fragmented and subject to rapid change. The front
office software market is still an emerging market. The Company's future
financial performance will depend in large part on continued growth in the
number of organizations adopting front office applications. There can be no
assurance that the market for front office software will continue to grow. If
the front office software market fails to grow or grows more slowly than the
Company currently anticipates, the Company's business, operating results and
financial condition would be materially adversely affected.
Dependence on Proprietary Technology; Risks of Infringement. The Company
relies primarily on a combination of copyright and trademark laws, trade
secrets, confidentiality procedures and contractual provisions to protect its
proprietary rights. The Company seeks to protect its software, documentation and
other written materials under trade
14
<PAGE>
secret and copyright laws, which affords only limited protection. The Company
has submitted only one patent application. Despite the Company's efforts to
protect its proprietary rights, unauthorized parties may attempt to copy aspects
of the Company's products or to obtain and use information that the Company
regards as proprietary. Policing unauthorized use of the Company's products is
difficult, and while the Company is unable to determine the extent to which
piracy of its software products exists, software piracy can be expected to be a
persistent problem. In addition, the laws of some foreign countries do not
protect the Company's proprietary rights to as great an extent as the laws of
the United States. There can be no assurance that the Company's means of
protecting its proprietary rights will be adequate or that the competitors will
not independently develop similar technology. The Company is not aware that any
of its products infringe on the proprietary rights of third parties. There can
be no assurance, however, that third parties will not claim infringement by the
Company with respect to current or future products. The Company expects that
software product developers will increasingly be subject to infringement claims
as the number of products and competitors in the Company's industry segment
grows and the functionality of products in different industry segments overlaps.
Any such claims, with or without merit could be time-consuming, result in costly
litigation, cause product shipment delays or require the Company to enter into
royalty or licensing agreements. Such royalty or licensing agreements, if
required, may not be available on commercially reasonable terms or at all, which
could have a material adverse effect upon the Company's business, operating
results and financial condition.
Recent Acquisition; Need to Manage Changing Business. In April 1996, the
Company acquired Metropolis Software, Inc. Management of the Company has been
and will be required to devote substantial time and attention to the integration
of these businesses for an extended period of time. The integration of recently
merged companies is extensive, difficult and time consuming and subject to a
number of inherent risks. There can be no assurance that operational or
financial problems will not occur as a result of the merger. The requirement
that management devote substantial time and resources to the process of
integrating the two companies and the occurrence of any material operational or
financial problems as a result of the merger could have a material adverse
affect on the Company's business, operating results and financial condition. The
acquisition and the Company's internal development efforts have placed and
continue to place a significant strain upon its management systems and
resources. The Company has grown from 223 employees at March 31, 1996 to 406
employees at March 31, 1997, and currently plans to continue to expand its
staff. To accommodate this growth, the Company will be required to implement a
variety of new and upgraded operational and financial systems, procedures and
controls, including the improvement of its accounting and other internal
management systems, some of which require substantial management effort. There
can be no assurance that the Company will be able to do so successfully. In
addition, the increase in the Company's number of employees and the Company's
market diversification and product development activities have resulted in
increased responsibility for the Company's management. The Company anticipates
that continued growth, if any, will require it to recruit and hire a substantial
number of new engineering, managerial, finance, sales and marketing and support
personnel; however, there can be no assurance that the Company will be
successful at hiring or retaining these personnel. The Company's ability to
compete effectively and to manage future growth, if any, will require the
Company to continue to implement and improve operational, financial and
management information systems on a timely basis and to expand, train, motivate
and manage its work force. There can be no assurance that the Company's
personnel, systems, procedures and controls will be adequate to support the
Company's operations. Any failure to implement and improve the Company's
operational, financial and management systems or to expand, train, motivate or
manage employees, including additional finance personnel, could have a material
adverse effect on the Company's business, operating results or financial
condition.
Product Liability. The Company's license agreements with its customers
typically contain provisions designed to limit the Company's exposure to
potential product liability claims. However, it is possible that the limitation
of liability provisions contained in the Company's license agreements may not be
effective under the laws of certain jurisdictions. Although the Company has not
experienced any product liability claims to date, the sale and support of
products by the Company may entail the risk of such claims, and there can be no
assurance that the Company will not be subject to such claims in the future. A
successful product liability claim brought against the Company could have a
material adverse effect upon the Company's business, operating results and
financial condition.
Effect of Certain Charter Provisions. The Company's Board of Directors has
the authority to issue up to 5,000,000 shares of Preferred Stock and to
determine the price, rights, preferences, privileges and restrictions, including
voting rights, of those shares without any further vote or action by the
stockholders. The Preferred Stock could be issued with voting, liquidation,
dividend and other rights superior to those of the Common Stock. The rights of
the holders of Common Stock will be subject to, and may be adversely affected
by, the rights of the holders of any Preferred Stock that may be issued in the
future. The issuance of Preferred Stock, while providing desirable flexibility
in connection
15
<PAGE>
with possible acquisitions and other corporate purposes, could have the effect
of making it more difficult for a third party to acquire a majority of the
outstanding voting stock of the Company. The Company has no current plans to
issue shares of Preferred Stock. Further, certain provisions of the Company's
Certificate of Incorporation and Bylaws and of Delaware law could delay or make
more difficult a merger, tender offer or proxy contest involving the Company.
16
<PAGE>
PART II. OTHER INFORMATION.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
11.1 Computation of Earnings Per Common Share
27.0 Commercial and Industrial Companies Article 5
of Regulation S-X
(b) Reports on Form 8-K
No Reports on Form 8-K were filed during the three months
ended March 31, 1997.
17
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: May 12, 1997 CLARIFY INC.
(Registrant)
By: /s/ Ray M. Fritz
---------------------------------
Ray M. Fritz
Vice President and Chief Financial
Officer (Duly Authorized Officer and
Principal Financial Officer)
18
EXHIBIT 11.1
<TABLE>
COMPUTATION OF NET INCOME PER SHARE
(in thousands, except share and per share data)
<CAPTION>
Three months ended
March 31,
1997 1996
----------- -----------
<S> <C> <C>
Primary:
Weighted average common shares outstanding for the period ... 20,390,763 19,417,168
Common equivalent shares of restricted stock subject to
repurchase ................................................ 277,667 475,114
Common equivalent shares assuming conversion of stock options
and warrants under the treasury stock method .............. 1,402,696 1,592,994
----------- -----------
Shares used in computing per share amounts .................. 22,071,126 21,485,276
=========== ===========
Net income .................................................. $ 1,953 $ 868
=========== ===========
Net income per share ........................................ $ 0.09 $ 0.04
=========== ===========
</TABLE>
19
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
ACCOMPANYING CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 31,441
<SECURITIES> 1,495
<RECEIVABLES> 20,431
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 58,432
<PP&E> 12,774
<DEPRECIATION> 4,108
<TOTAL-ASSETS> 69,641
<CURRENT-LIABILITIES> 20,631
<BONDS> 0
<COMMON> 0
0
2
<OTHER-SE> 49,008
<TOTAL-LIABILITY-AND-EQUITY> 69,641
<SALES> 13,008
<TOTAL-REVENUES> 19,360
<CGS> 520
<TOTAL-COSTS> 4,497
<OTHER-EXPENSES> 12,125
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (362)
<INCOME-PRETAX> 3,100
<INCOME-TAX> 1,147
<INCOME-CONTINUING> 1,953
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,953
<EPS-PRIMARY> 0.09
<EPS-DILUTED> 0.09
</TABLE>
