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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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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 September 30, 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)
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(408) 573-3000
(Registrant's telephone number, including area code)
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http://www.clarify.com
(Registrant's home page on the Internet)
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Indicate by check mark 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 October 31, 1997 there were 21,309,044 shares of the Registrant's
$0.0001 par value Common Stock outstanding.
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<PAGE>
CLARIFY INC.
FORM 10-Q
<TABLE>
TABLE OF CONTENTS
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE
----
<S> <C> <C>
Item 1. Condensed Consolidated Financial Statements:
Condensed Consolidated Balance Sheets as
of September 30, 1997 and December 31, 1996................................................ 2
Condensed Consolidated Statements of Operations for the
three and nine months ended September 30, 1997 and 1996.................................... 3
Condensed Consolidated Statements of Cash Flows for the
nine months ended September 30, 1997 and 1996.............................................. 4
Notes to Condensed Consolidated Financial Statements....................................... 5
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations...... 6
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K........................................................... 17
SIGNATURE ........................................................................................... 18
</TABLE>
<PAGE>
PART I. FINANCIAL INFORMATION.
Item 1. Condensed Consolidated Financial Statements.
CLARIFY INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands; unaudited)
September 30, December 31,
1997 1996
------------- ------------
ASSETS
Current assets:
Cash and cash equivalents ....................... $ 20,537 $ 34,477
Short-term investments .......................... 12,492 1,486
Accounts receivable, net ........................ 22,961 17,977
Prepaid expenses and other current assets ....... 2,694 1,601
Deferred income tax assets ...................... 3,784 3,784
-------- --------
Total current assets ......................... 62,468 59,325
Property and equipment, net ......................... 9,438 8,470
Long-term investments ............................... 5,186 1,989
Other assets ........................................ 770 900
-------- --------
Total assets .............................. $ 77,862 $ 70,684
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ................................ $ 5,584 $ 3,920
Accrued payroll and related accruals ............ 6,501 4,771
Other accrued liabilities ....................... 5,011 2,284
Unearned revenue ................................ 8,595 12,764
-------- --------
Total current liabilities .................... 25,691 23,739
-------- --------
Stockholders' equity:
Common stock .................................... 2 2
Additional paid-in-capital ...................... 47,455 45,556
Cumulative translation adjustment ............... (38) (66)
Deferred compensation ........................... (77) (112)
Retained earnings ............................... 4,829 1,565
-------- --------
Total stockholders' equity ................... 52,171 46,945
-------- --------
Total liabilities and
stockholders' equity ................... $ 77,862 $ 70,684
======== ========
The accompanying notes are an integral part of these condensed
consolidated financial statements.
2
<PAGE>
<TABLE>
CLARIFY INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data; unaudited)
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
----------------- -----------------
1997 1996 1997 1996
------- ------- ------- -------
<S> <C> <C> <C> <C>
Revenues:
License fees ............................... $13,946 $12,168 $39,400 $25,692
Services ................................... 7,945 4,833 21,280 11,400
------- ------- ------- -------
Total revenues .......................... 21,891 17,001 60,680 37,092
------- ------- ------- -------
Cost of revenues:
License fees ............................... 585 425 1,596 914
Services ................................... 4,753 2,973 12,884 7,102
------- ------- ------- -------
Total cost of revenues ................... 5,338 3,398 14,480 8,016
------- ------- ------- -------
Gross profit ............................ 16,553 13,603 46,200 29,076
------- ------- ------- -------
Operating expenses:
Product development and engineering ........ 4,434 2,957 11,807 6,986
Sales and marketing ........................ 9,811 5,770 24,977 13,450
General and administrative ................. 2,203 1,304 5,286 3,176
Merger costs ............................... -- -- -- 1,061
------- ------- ------- -------
Total operating expenses ................ 16,448 10,031 42,070 24,673
------- ------- ------- -------
Operating income ........................ 105 3,572 4,130 4,403
Interest and other income, net ............... 360 389 1,052 1,110
------- ------- ------- -------
Income before provision
for income taxes ................. 465 3,961 5,182 5,513
Provision for income taxes ................... 172 792 1,918 214
------- ------- ------- -------
Net income ................................ $ 293 $ 3,169 $ 3,264 $ 5,299
======= ======= ======= =======
Net income per share ......................... $ 0.01 $ 0.15 $ 0.15 $ 0.25
======= ======= ======= =======
Shares used to compute net income per share .. 22,269 21,720 21,968 21,355
======= ======= ======= =======
<FN>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
</FN>
</TABLE>
3
<PAGE>
<TABLE>
CLARIFY INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands; unaudited)
<CAPTION>
Nine Months Ended
September 30,
--------------------
1997 1996
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income .............................................................. $ 3,264 $ 5,299
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization .......................................... 2,836 1,124
Deferred income taxes .................................................. -- (801)
Noncash charges, net ................................................... 338 649
Changes in operating assets and liabilities:
Accounts receivable .................................................. (5,378) (5,931)
Prepaid expenses and other current assets ............................ (1,019) (1,305)
Accounts payable ..................................................... 1,688 163
Accrued payroll and related accruals ................................. 1,750 2,256
Other accrued liabilities ............................................ 2,564 2,698
Unearned revenue ..................................................... (4,024) 5,638
-------- --------
Net cash provided by operating activities .................................. 2,019 9,790
-------- --------
Cash flows from investing activities:
Purchase of property and equipment ..................................... (4,078) (3,595)
Proceeds from disposal of property and equipment ....................... 267 --
Purchase of investments ................................................ (22,695) (2,987)
Proceeds from sale and maturity of investments ......................... 8,492 993
Increase (decrease) in other assets .................................... 84 (2,342)
-------- --------
Net cash used in investing activities ...................................... (17,930) (7,931)
-------- --------
Cash flows from financing activities:
Payments of capital lease obligations .................................. -- (81)
Proceeds from issuance of common stock ................................. 1,899 779
Payments of notes payable .............................................. -- (215)
-------- --------
Net cash provided by financing activities .................................. 1,899 483
-------- --------
Net increase (decrease) in cash and cash equivalents ....................... (14,012) 2,342
Effect of foreign exchange rate changes on cash ............................ 72 --
Cash and cash equivalents, beginning of period ............................. 34,477 31,813
-------- --------
Cash and cash equivalents, end of period ................................... $ 20,537 $ 34,155
======== ========
Supplemental disclosure of cash flow information:
Cash paid during the period for interest ................................ $ 1 $ 9
======== ========
Cash paid during the period for income taxes ............................ $ 94 $ 250
======== ========
Supplemental schedule of noncash investing and financing activities:
Forgiveness of notes payable to stockholders ............................ $ -- $ 1,047
======== ========
<FN>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
</FN>
</TABLE>
4
<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 the Company's 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 entire fiscal year ended December 31,
1997. 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 using the weighted average number of common
stock and common equivalent shares outstanding during the period. Common
equivalent shares consist of stock options calculated using the treasury method
and are excluded from the computation if their effect is antidilutive. Fully
diluted per share amounts are not presented, as the effect is not material.
Note 3. Stock Option Repricing Program
On May 9, 1997 the Compensation Committee of the 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 May
9, 1997), provided that such employees made the election to convert by that
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. Approximately 1,009,000 stock options
were repriced pursuant to this program.
Note 4. Recent Accounting Pronouncements
In February 1997, the Financial Accounting Standards Board (FASB) 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, "Earnings Per
Share," 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.
In June 1997, the FASB issued Statement No. 130, "Reporting Comprehensive
Income," (SFAS 130) which establishes requirements for disclosure of
comprehensive income and becomes effective for the Company for the year ending
December 31, 1998. Comprehensive income includes such items as foreign currency
translation adjustments that are currently being presented by the Company as a
component of stockholders' equity. The Company does not expect this
pronouncement to materially impact the Company's results of operations.
Also in June 1997, the FASB issued Statement No. 131, "Disclosures about
Segments of an Enterprise and Related Information," (SFAS 131). SFAS 131
establishes standards for disclosure about operating segments in annual
financial statements and selected information in interim financial reports. It
also establishes standards for related disclosures about products and services,
geographic areas and major customers. This statement supersedes SFAS No. 14,
"Financial Reporting for Segments of a Business Enterprise." SFAS 131 becomes
effective for the Company for the year ending December 31, 1998, and requires
that comparative information from earlier years be restated to conform to the
requirements of this standard. The Company does not expect this pronouncement to
materially change the Company's current reporting and disclosures.
5
<PAGE>
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, but not limited to, those
set forth herein under the sections entitled "Overview," "Risk Factors That May
Affect Future Results," and those found in the Company's annual report on Form
10-K filed with the Securities and Exchange Commission on March 31, 1997.
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.
The Company introduced additional product offerings, ClearTelebusiness(R), a
turnkey solution for developing and managing effective sales/marketing
campaigns, and ClearContracts(R), an integrated contracts management solution,
in April and June 1997, respectively. In conjunction with its software products,
the Company also offers consulting, training and technical support services.
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 and the continued overall growth in the front
office software industry. 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 product 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, license fee 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 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.
In addition, significant portions of the Company's revenues are typically
derived from non-recurring sales to a limited number of customers. Accordingly,
revenues in any one quarter are not indicative of revenues in any future period.
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 also be
6
<PAGE>
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.
Results of Operations
<TABLE>
The following table sets forth, as a percentage of total revenues, certain
condensed consolidated statement of operations data for the periods indicated:
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -------------------
1997 1996 1997 1996
----- ----- ----- -----
<S> <C> <C> <C> <C>
Revenues:
License fees ............................. 63.7% 71.6% 64.9% 69.3%
Services ................................. 36.3 28.4 35.1 30.7
----- ----- ----- -----
Total revenues ........................ 100.0 100.0 100.0 100.0
----- ----- ----- -----
Cost of revenues:
License fees ............................. 2.7 2.5 2.6 2.5
Services ................................. 21.7 17.5 21.3 19.1
----- ----- ----- -----
Total cost of revenues ................ 24.4 20.0 23.9 21.6
----- ----- ----- -----
Gross profit .......................... 75.6 80.0 76.1 78.4
----- ----- ----- -----
Operating expenses:
Product development and engineering ...... 20.2 17.4 19.4 18.8
Sales and marketing ...................... 44.8 33.9 41.2 36.3
General and administrative ............... 10.1 7.7 8.7 8.6
Merger costs ............................. -- -- -- 2.8
----- ----- ----- -----
Total operating expenses .............. 75.1 59.0 69.3 66.5
----- ----- ----- -----
Operating income ...................... 0.5 21.0 6.8 11.9
Interest income, net ....................... 1.6 2.3 1.7 3.0
----- ----- ----- -----
Income before provision
for income taxes ............... 2.1 23.3 8.5 14.9
Provision for income taxes ................. 0.8 4.7 3.1 0.6
----- ----- ----- -----
Net income ...................... 1.3% 18.6% 5.4% 14.3%
===== ===== ===== =====
</TABLE>
Revenues
Total revenues increased 29% to $21.9 million for the three months ended
September 30, 1997 from $17.0 million for the three months ended September 30,
1996, and increased 64% to $60.7 million for the nine months ended September 30,
1997 from $37.1 million for the nine months ended September 30, 1996. 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." 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 generally
recognizes initial license fee revenues upon 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
generally
7
<PAGE>
recognized upon shipment provided 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. Consulting
services consist primarily of implementation services related to the
installation of the Company's software and do not include significant
customization to or development of the underlying software code.
License Fees. License fee revenues increased by 15% to $13.9 million for
the three months ended September 30, 1997 from $12.2 million for the three
months ended September 30, 1996, and increased 53% to $39.4 million for the nine
months ended September 30, 1997 from $25.7 million for the nine months ended
September 30, 1996. The growth in license fee revenues was due to increased
market acceptance of the Company's existing products, continued enhancement and
increased breadth of the Company's product offerings, increased follow on sales
to existing customers, sales of the Company's products to new industry segments
and increased sales as a result of the expansion of the Company's direct sales
force and marketing organization. One customer accounted for a significant
portion of total license fee revenue recognized in the three months ended
September 30, 1997. Although the Company's customer base has grown as revenues
have increased, on a quarterly basis, significant portions of the Company's
license fee revenues are typically derived from non-recurring sales to a limited
number of customers. Accordingly, license fee revenues in any one quarter are
not indicative of license fee revenues in any future period. Further, the
Company does not believe that the percentage increases in revenues achieved in
prior periods should be anticipated in future periods.
Services. Revenues from services increased by 64% to $7.9 million for the
three months ended September 30, 1997 from $4.8 million for the three months
ended September 30, 1996, and increased 87% to $21.3 million for the nine months
ended September 30, 1997 from $11.4 million for the nine months ended September
30, 1996. The growth in service revenues was due to an 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 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. Cost of license fees increased by 38% to $0.6
million for the three months ended September 30, 1997 from $0.4 million for the
three months ended September 30, 1996, and increased 75% to $1.6 million for the
nine months ended September 30, 1997 from $0.9 million for the nine months ended
September 30, 1996, representing 4% and 3% of license fee revenues for the three
months ended September 30, 1997 and 1996, respectively, and 4% of license fee
revenues for the nine months ended September 30, 1997 and 1996. 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.
Although cost of license fees as a percentage of license fee revenues has been
relatively consistent, the Company expects the cost of license fees as a
percentage of license fee revenue to fluctuate in future periods as a result of
increases and decreases in sales of royalty bearing products and as the Company
enters into additional agreements to sublicense third-party software.
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 by 60% to $4.8 million for
the three months ended September 30, 1997 from $3.0 million for the three months
ended September 30, 1996, and increased 81% to $12.9 million for the nine months
ended September 30, 1997 from $7.1 million for the nine months ended September
30, 1996, representing 60% and 62% of service revenues for the three months
ended September 30, 1997 and 1996, respectively, and 61% and 62% of service
revenues for the nine months ended September 30, 1997 and 1996, respectively.
The absolute dollar increases are 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. The cost of services as a percentage
of service revenues may vary between periods due to the mix of services provided
by the Company. Generally the margins on maintenance are greater than those on
training and consulting. The Company expects to make continued investments in
its service organization in order to support the Company's customer installed
base and anticipates that cost of services will increase in absolute dollars in
future periods.
8
<PAGE>
Operating Expenses
Product Development and Engineering. Product development and engineering
expenses increased $1.5 million in the three months ended September 30, 1997
over the three months ended September 30, 1996, and increased $4.8 million in
the nine months ended September 30, 1997 over the nine months ended September
30, 1996. This represents an increase to 20% from 17% of total revenues for the
three months ended September 30, 1997 and 1996, respectively, and 19% of total
revenues for the nine months ended September 30, 1997 and 1996. 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 absolute dollars was
primarily attributable to an increase in personnel and related overhead costs as
well as consulting expenses. The Company currently anticipates that product
development and engineering expenses will 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 $4.0 million in
the three months ended September 30, 1997 over the three months ended September
30, 1996, and increased $11.5 million in the nine months ended September 30,
1997 over the nine months ended September 30, 1996. This represents an increase
to 45% from 34% of total revenues for the three months ended September 30, 1997
and 1996, respectively, and an increase to 41% from 36% of total revenues for
the nine months ended September 30, 1997 and 1996, 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 increase in sales and marketing expenses as a
percentage of total revenues for the three months ended September 30, 1997
compared to the three months ended September 30, 1996 reflects the significant
investment that the Company made during 1997 to expand both its direct sales
force and other distribution channels. The Company intends to continue to invest
substantial resources in expanding its direct sales force, both domestic and
international, expanding its other distribution channels, and conducting
marketing programs to support existing and new product offerings. Accordingly,
sales and marketing expenses are expected to increase in absolute dollars in
future periods.
General and Administrative. General and administrative expenses increased
$0.9 million in the three months ended September 30, 1997 over the three months
ended September 30, 1996, and increased $2.1 million in the nine months ended
September 30, 1997 over the nine months ended September 30, 1996. This
represents an increase to 10% from 8% of total revenues for the three months
ended September 30, 1997 and 1996, respectively, and 9% of total revenues for
the nine months ended September 30, 1997 and 1996. 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, related overhead costs and increases to the provision
for doubtful accounts. The Company currently expects general and administrative
expenses to increase in absolute dollars in the future as the Company expands
its infrastructure.
Merger Costs. During the three months ended June 30, 1996, the Company
incurred $1.1 million of one-time merger related expenses in connection with the
acquisition of Metropolis Software, Inc.
Operating Income. Operating income decreased by 97% to $105,000, or 1% of
total revenue, for the three months ended September 30, 1997 from $3.6 million,
or 21% of total revenue, for the three months ended September 30, 1996, and
decreased 6% to $4.1 million, or 7% of total revenue, for the nine months ended
September 30, 1997 from $4.4 million, or 12% of total revenue, for the nine
months ended September 30, 1996. During the three months ended September 30,
1997, the Company continued to make increased investments in resources required
to address the anticipated opportunity in the front office software marketplace.
Most notable were significant investments made in expanding the Company's direct
sales force. As a result, operating expenses, especially sales and marketing
expenses, have increased at a more rapid rate than the growth in revenue,
thereby negatively affecting operating income. As new sales personnel become
more effective in subsequent quarters, the Company anticipates that revenue
growth will exceed the growth in operating expenses, resulting in an increase in
the Company's operating income in subsequent periods.
9
<PAGE>
Interest and Other Income, net. Interest and other income, net, consists
primarily of interest income earned on the Company's cash and cash equivalents,
short and long-term investments, and other items including interest expense.
Interest and other income, net, decreased 7% to $360,000 in the three months
ended September 30, 1997 from $389,000 for the three months ended September 30,
1996 and decreased 5% to $1,052,000 for the nine months ended September 30, 1997
from $1,110,000 for the nine months ended September 30, 1996. The decrease is
primarily due to lower excess cash balances in 1997.
Provision for Income Taxes. The provision for income taxes reflects the
estimated annualized effective tax rate of 37% applied to earnings for the nine
months ended September 30, 1997 and 18% applied to earnings for the nine months
ended September 30, 1996 offset by a benefit resulting from the recognition of
deferred income tax assets of $800,000 in accordance with SFAS No. 109,
"Accounting for Income Taxes." The Company's effective tax rate increased to 37%
in 1997 due to federal and state operating loss carryforwards having been
recognized in 1996.
Recent Accounting Pronouncements
In February 1997, the Financial Accounting Standards Board (FASB) 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, "Earnings Per
Share," 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.
In June 1997, the FASB issued Statement No. 130, "Reporting Comprehensive
Income," (SFAS 130) which establishes requirements for disclosure of
comprehensive income and becomes effective for the Company for the year ending
December 31, 1998. Comprehensive income includes such items as foreign currency
translation adjustments that are currently being presented by the Company as a
component of stockholders' equity. The Company does not expect this
pronouncement to materially impact the Company's results of operations.
Also in June 1997, the FASB issued Statement No. 131, "Disclosures about
Segments of an Enterprise and Related Information," (SFAS 131). SFAS 131
establishes standards for disclosure about operating segments in annual
financial statements and selected information in interim financial reports. It
also establishes standards for related disclosures about products and services,
geographic areas and major customers. This statement supersedes SFAS No. 14,
"Financial Reporting for Segments of a Business Enterprise." SFAS 131 becomes
effective for the Company for the year ending December 31, 1998, and requires
that comparative information from earlier years be restated to conform to the
requirements of this standard. The Company does not expect this pronouncement to
materially change the Company's current reporting and disclosures.
Liquidity and Capital Resources
The Company's cash, cash equivalents and investments totaled $38.2 million
at September 30, 1997 representing 49% of total assets. The Company has invested
its cash in excess of current operating requirements in a portfolio of both
taxable and tax-exempt investment grade securities. The investments have
variable and fixed interest rates and short and long term maturities. In
accordance with SFAS 115, "Accounting for Certain Investments in Debt and Equity
Securities" such investments are classified as "available for sale".
Net cash provided by operating activities was $2.0 million and $9.8 million
for the nine months ended September 30, 1997 and 1996, respectively. The
decrease in cash provided by operating activities for the nine months ended
September 30, 1997 is attributed principally to a decrease in net income and
unearned revenue and an increase in accounts receivable, prepaid expenses and
other current assets. These changes were partially offset by an increase in
accounts payable, accrued payroll and related accruals and other accrued
liabilities. The increase in accounts receivable corresponds to the overall
growth in revenue. The decrease in unearned revenue was due to the Company
installing and fulfilling certain post-installation obligations for orders
deferred at December 31, 1996, as well as a large portion of product orders
received in the nine months ended September 30, 1997 being shipped and installed
within that period.
Investing activities used net cash of $17.9 million in the nine months
ended September 30, 1997 compared to $7.9 million in the nine months ended
September 30, 1996. Purchases of short and long-term investments used cash of
$18.5 million and $4.2 million, respectively, and the sale and maturity of short
and long-term investments generated cash of $7.5 million
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and $1.0 million, respectively, during the nine months ended September 30,
1997. During the nine months ended September 30, 1996, purchases of short-term
investments used net cash of $3.0 million while the sale and maturity of
short-term investments generated net cash of $1.0 million. The Company used $4.1
million and $3.6 million of cash during the nine months ended September 30, 1997
and 1996, respectively, to purchase property and equipment to support its
increased headcount. 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 $1.9 million and $0.5 million in the
nine months ended September 30, 1997 and 1996, respectively. Cash provided from
financing activities during the nine months ended September 30, 1997 and 1996
consisted of proceeds from the issuance of common stock pursuant to the Employee
Stock Purchase Plan and the exercise of options granted under the Company's
Stock Option Plans.
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
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 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 and in the Company's 1996 annual report on Form 10-K.
Fluctuations in Quarterly Results. 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 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 product 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, license fee 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 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.
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In addition, significant portions of the Company's revenues are typically
derived from non-recurring sales to a limited number of customers. Accordingly,
revenues in any one quarter are not indicative of revenues in any future period.
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. 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.
Limited Operating History; 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, the Company incurred net operating losses in each fiscal year
from inception through 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. The Company is currently
investing, and intends to continue to invest, significant resources to develop
its sales strategy, which could adversely affect the Company's operating
margins. In this regard, the Company has recently hired and continues to hire
significant numbers of direct sales personnel. Competition for sales personnel
is intense, and there can be no assurance that the Company can retain its
existing sales personnel or that it can attract, train and retain additional
highly qualified sales personnel in the future. If revenues are below
expectations, operating results are likely to be adversely affected. Net income
may be disproportionately affected by a reduction in revenues, because a
significant portion of the Company's expenses do not vary with revenues.
Intense Competition. The front office solutions market, including the
market for customer service, field service and logistics, 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.
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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 initial license revenues for new customers where installation is
contracted with Clarify's implementation staff 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 that 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.
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 Chief Financial Officer in August 1997. 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, financial 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, financial and
managerial employees or that it can attract, assimilate or retain other highly
qualified technical, sales, financial and managerial personnel in the future.
Product Concentration. To date, a significant portion 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
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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, upgrades or enhancements, including
the next version of ClearSupport, are delayed, experience quality problems or do
not achieve market acceptance, the Company's business, operating results and
financial condition will be materially adversely affected.
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.
Continued Volatility of Stock Price. Future announcements concerning the
Company or its competitors, quarterly variations in operating results,
announcements of technological innovations, the introduction of new products or
changes in product pricing policies by the Company or its competitors,
proprietary rights or other litigation, changes in earnings estimates by
analysts or other factors could cause the market price of the Company's common
stock to fluctuate substantially, particularly on a quarterly basis. In
addition, stock prices for many technology companies fluctuate widely for
reasons which may be unrelated to operating results of such companies. These
fluctuations, as well as general economic, market and political conditions such
as recessions or military conflicts, may materially and adversely affect the
market price of the Company's common stock. In the past, following periods of
volatility in the market price of a company's securities, securities class
action litigation has often been instituted against such companies. Such
litigation could result in substantial costs and a diversion of management's
attention and resources, which could have a material adverse effect on the
Company's business, results of operations and financial condition.
Expansion of Distribution Channels. The Company has historically sold its
products primarily 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.
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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.
International Operations; Foreign Currency Fluctuations. The Company
established its 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.
Furthermore, future increases in the value of the U.S. dollar could make
the Company's products less competitive in foreign markets. As the Company
increases its foreign sales, it may be materially and adversely affected by
fluctuations in currency exchange rates, increases in duty rates, exchange or
price controls or other restrictions on foreign currencies. Additional risks
inherent in the Company's international business activities include, among
others, 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 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.
Acquisition; Significant Growth; Management of Expanding Operations. 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 merged companies is
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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 approximately 320 employees at September 30,
1996 to over 450 employees at September 30, 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 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.
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PART II. OTHER INFORMATION.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
Number Description
- ------ -----------
1.0 Rights Agreement, dated as of June 13, 1997 between the Company and
Harris Trust Company of California, including the Certificate of
Designation of Series A Junior Participating Preferred Stock, Form of
Right Certificate and Summary of Rights to Purchase Preferred Shares
attached thereto as Exhibits A, B and C, respectively, which is
incorporated by reference to the Form 8-A filed with the Securities
and Exchange Commission on June 24, 1997
3.1(3) Certificate of Incorporation of the Company, as amended to date
3.2 Amended and Restated Bylaws of the Company which is incorporated by
reference to the 8-K filed with the Securities and Exchange Commission
on June 25, 1997
4.1(1) Specimen Common Stock certificate
4.2(1) Restated Investor Rights Agreement, dated March 7, 1994, among the
Company and the investors and founders named therein
10.1(1) Form of Indemnification Agreement
10.2(1) 1991 Stock Option/Stock Issuance Plan
10.3(2) 1995 Stock Option/Stock Issuance Plan
10.4(2) Employee Stock Purchase Plan
10.5(1) Loan and Security Agreement between Silicon Valley Bank and Clarify
Inc.
10.6(1) Lease by and between Orchard Investment Company Number 6.9 and Clarify
Inc. dated March 16, 1992, as amended by the First Amendment to Lease,
dated February 28, 1995
10.7(1) Master Equipment Lease Agreement by and between Costella Kirsch/GATX
Partnership No. 1 and the Company, dated February 18, 1992
10.8(1) Master Equipment Lease Agreement by and between Venture Leasing Assoc.
and the Company, dated May 7, 1991
10.9(1) Master Equipment Lease Agreement by and between Phoenix Leasing Inc.
and the Company, dated June 30, 1993
10.10(3) Lease by and between Orchard Investment Company Number 901 and Clarify
Inc. dated August 8, 1996
11.1 Computation of Net Income Per Share
27.0 Commercial and Industrial Companies Article 5 of Regulation S-X
(1) Incorporated by reference from an Exhibit filed with the
Company's Registration Statement on Form S-1 (file number
33-97004) declared effective by the Securities and Exchange
Commission on November 2, 1995.
(2) Incorporated by reference from an exhibit filed with the
Company's Registration Statement on Form S-8 (file number
33-98928) filed with the Securities and Exchange Commission on
November 3, 1995.
(3) Incorporated by reference from an exhibit filed with the
Company's Form 10-Q for the quarterly period ended June 30, 1997.
(b) Reports on Form 8-K
There were no reports filed on Form 8-K during the quarter ended September 30,
1997.
17
<PAGE>
SIGNATURE
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: November 14, 1997 CLARIFY INC.
(Registrant)
By: /s/ Dave A. Stamm
----------------------------------------
Dave A. Stamm
President and Chief Executive Officer
(Duly Authorized Officer and Interim
Principal Financial Officer)
18
EXHIBIT 11.1
<TABLE>
COMPUTATION OF NET INCOME PER SHARE
(in thousands, except per share data)
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- ---------------------
1997 1996 1997 1996
------ ------ ------ ------
<S> <C> <C> <C> <C>
Primary:
Weighted average number of common shares
outstanding ....................................... 20,900 19,836 20,441 19,368
Common equivalent shares of restricted stock
subject to repurchase ............................. 184 338 232 421
Common equivalent shares assuming conversion
of stock options ................................. 1,185 1,546 1,295 1,566
------- ------- ------- -------
Shares used in computing per share amounts .......... 22,269 21,720 21,968 21,355
======= ======= ======= =======
Net income .......................................... $ 293 $ 3,169 $ 3,264 $ 5,299
======= ======= ======= =======
Net income per share (1) ............................ $ 0.01 $ 0.15 $ 0.15 $ 0.25
======= ======= ======= =======
<FN>
(1) There is no difference between primary and fully diluted net income per share.
</FN>
</TABLE>
19
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
EXHIBIT 27.0
COMMERCIAL AND INDUSTRIAL COMPANIES
ARTICLE 5 OF REGULATION S-X
<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> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 20,537
<SECURITIES> 17,678
<RECEIVABLES> 24,035
<ALLOWANCES> 1,074
<INVENTORY> 0
<CURRENT-ASSETS> 62,468
<PP&E> 14,687
<DEPRECIATION> 5,249
<TOTAL-ASSETS> 77,862
<CURRENT-LIABILITIES> 25,691
<BONDS> 0
0
0
<COMMON> 2
<OTHER-SE> 52,169
<TOTAL-LIABILITY-AND-EQUITY> 77,862
<SALES> 39,400
<TOTAL-REVENUES> 60,680
<CGS> 1,596
<TOTAL-COSTS> 14,480
<OTHER-EXPENSES> 42,070
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (1,052)
<INCOME-PRETAX> 5,182
<INCOME-TAX> 1,918
<INCOME-CONTINUING> 3,264
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,264
<EPS-PRIMARY> 0.15
<EPS-DILUTED> 0.15
</TABLE>
