<PAGE>
================================================================================
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 September 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 000-25375
VIGNETTE CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 74-2769415
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
901 South Mopac Expressway
Austin, Texas 78746
(Address of principal executive offices)
----------------
(512) 306-4300 (Registrant's telephone number, including area code)
----------------
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
(1) Yes X No
------- --------
(2) Yes X No
------- --------
As of October 31, 1999 there were 28,088,473 shares of the Registrant's
common stock outstanding.
================================================================================
<PAGE>
VIGNETTE CORPORATION
FORM 10-Q
INDEX
PART I. FINANCIAL INFORMATION PAGE
----
Item 1. Financial Statements 3
Condensed Consolidated Balance Sheets at September
30, 1999 and December 31, 1998 3
Condensed Consolidated Statements of Operations
for the three months and nine months ended September 30,
1999 and 1998 4
Condensed Consolidated Statements of Cash Flows
for the nine months ended September 30, 1999 and 1998 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
Item 3. Quantitative and Qualitative Disclosures about 18
Market Risk
PART II. OTHER INFORMATION 29
Item 6. Exhibits and Reports on Form 8-K 29
SIGNATURES 31
2
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
VIGNETTE CORPORATION
Condensed Consolidated Balance Sheets
(in thousands)
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
-------- --------
(Unaudited)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 73,702 $ 12,242
Accounts receivable, net 23,502 7,488
Prepaid expenses and other 2,386 390
-------- --------
Total current assets 99,590 20,120
Property and equipment, net 5,493 1,754
Intangibles, net 15,380 -
Acquired technology, net 5,985 -
Other assets 5,616 907
-------- --------
Total assets $132,064 $ 22,781
======== ========
Liabilities and Stockholders' Equity (Deficit)
Current liabilities:
Accounts payable and accrued expenses $ 16,579 $ 8,090
Deferred revenue 29,728 6,092
Current portion of long-term debt and capital lease 274 1,902
Other current liabilities 1,151 279
-------- --------
Total current liabilities 47,732 16,363
Long-term debt and capital lease, less current portion 8 758
-------- --------
Total liabilities 47,740 17,121
Redeemable convertible preferred stock - 36,258
Warrant - 169
Stockholders' equity (deficit) 84,324 (30,767)
-------- --------
Total liabilities and stockholders' equity (deficit) $132,064 $ 22,781
======== ========
</TABLE>
See accompanying notes.
3
<PAGE>
VIGNETTE CORPORATION
Condensed Consolidated Statements of Operations
(in thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three months ended September 30, Nine months ended September 30,
-------------------------------- -------------------------------
1999 1998 1999 1998
------- ------- -------- --------
<S> <C> <C> <C> <C>
Revenue:
Product license $12,364 $ 2,230 $ 24,562 $ 5,152
Services 11,874 2,108 23,681 4,359
------- ------- -------- --------
Total revenue 24,238 4,338 48,243 9,511
Cost of revenue:
Product license 777 266 1,930 510
Services 9,734 2,862 19,968 5,579
------- ------- -------- --------
Total cost of revenue 10,511 3,128 21,898 6,089
Gross profit 13,727 1,210 26,345 3,422
Operating expenses:
Research and development 4,514 1,861 10,231 4,840
Sales and marketing 12,239 4,397 28,819 9,398
General and administrative 2,637 1,619 5,986 3,451
Purchased in-process
research and development,
acquisition-related, and other
charges 493 - 15,183 2,089
Amortization of deferred
stock compensation 1,161 352 4,118 867
Amortization of intangibles 898 - 898 -
------- ------- -------- --------
Total operating expenses 21,942 8,229 65,235 20,645
------- ------- -------- --------
Loss from operations (8,215) (7,019) (38,890) (17,223)
Other income, net 829 141 2,039 204
------- ------- -------- --------
Net loss $(7,386) $(6,878) $(36,851) $(17,019)
======= ======= ======== ========
Basic net loss per share $ (0.28) $ (2.72) $ (1.72) $ (7.72)
======= ======= ======== ========
Shares used in computing
basic net loss per share 26,046 2,528 21,433 2,205
======= ======= ======== ========
</TABLE>
See accompanying notes.
4
<PAGE>
VIGNETTE CORPORATION
Condensed Consolidated Statements of Cash Flows
(in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine months ended September 30,
---------------------------------
1999 1998
-------- --------
<S> <C> <C>
Operating activities:
Net loss $(36,851) $(17,019)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation 1,807 737
Non cash compensation expense 4,118 867
Amortization of intangibles 898 -
Purchased in-process research and development,
acquisition-related, and other charges 14,512 2,000
Loss on disposal of fixed assets - 101
Changes in operating assets and liabilities net of
effects from purchase of business:
Accounts receivable, net (15,899) (4,333)
Prepaid expenses and other assets (2,341) (872)
Accounts payable and accrued expenses 6,436 4,941
Deferred revenue 22,919 3,672
Other liabilities 729 173
-------- --------
Net cash used in operating activities (3,672) (9,733)
Investing activities:
Purchase of property and equipment (5,368) (1,049)
Purchase of business, net of cash acquired 56 -
Purchase of equity securities (4,025) -
Proceeds from repayment of shareholder notes receivable 59 -
-------- --------
Net cash used in investing activities (9,278) (1,049)
Financing activities:
Proceeds from issuance of common stock, net 73,914 -
Proceeds from issuance of series F convertible preferred
stock, net - 14,246
Payments for series G convertible preferred stock
issuance costs - (14)
Proceeds from long-term debt and capital lease obligation - 1,837
Payments on long-term debt and capital lease obligation (2,734) (17)
Proceeds from exercise of stock options 3,163 265
Payments for repurchase of unvested common stock (8) (1)
-------- --------
Net cash provided by financing activities 74,335 16,316
Effect of exchange rate on cash and cash equivalents 75 (2)
-------- --------
Net increase in cash and cash equivalents 61,460 5,532
Cash and cash equivalents at beginning of period 12,242 6,865
-------- --------
Cash and cash equivalents at end of period $ 73,702 $ 12,397
======== ========
</TABLE>
Supplemental schedule for noncash investing and financing activities:
Effective June 30, 1999, the Company purchased all of the outstanding capital
stock of Diffusion, Inc. in exchange for 393,271 shares of the Company's common
stock. In conjunction with the acquisition, the fair value of assets acquired
and liabilities assumed were as follows:
<TABLE>
<S> <C>
Fair value of assets acquired $ 34,503
Liabilities assumed (3,269)
--------
Fair value of common stock issued and transaction costs $ 31,234
========
</TABLE>
See accompanying notes.
5
<PAGE>
VIGNETTE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1999
1. General and Basis of Financial Statements
The unaudited interim condensed consolidated financial statements include the
accounts of Vignette Corporation and its wholly-owned subsidiaries
(collectively, the "Company" or "Vignette"). All material intercompany accounts
and transactions have been eliminated in consolidation.
In February 1999, the Company completed an initial public offering in which the
Company sold 4,280,000 shares of its common stock for net proceeds to the
Company of $73.9 million. Upon closing of the initial public offering, each
outstanding share of the Company's Redeemable Convertible Preferred Stock and
Convertible Preferred Stock was automatically converted into one share of common
stock of the Company resulting in the issuance of 16,958,319 shares of common
stock.
The 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 Company's financial position, results of
operations and cash flows for the periods presented. These financial statements
should be read in conjunction with the Company's consolidated financial
statements and notes thereto for the year ended December 31, 1998, which are
contained in the Company's Registration Statement filed on Form S-1, as amended,
on February 18, 1999 (File No. 333-68345) as well as with other documents filed
with the Securities and Exchange Commission. The results of operations for the
three-month and nine-month periods ended September 30, 1999 and 1998 are not
necessarily indicative of results that may be expected for any other interim
period or for the full fiscal year.
2. Net Loss Per Share
Basic net loss per share is based on the weighted effect of all common shares
issued and outstanding and is calculated by dividing net loss available to
common stockholders by the weighted average shares outstanding during the
period. Diluted net loss per share is calculated by dividing net loss available
to common stockholders by the weighted average number of common shares used in
the basic net loss per share calculation plus the number of common shares that
would be issued assuming conversion of all potentially dilutive common shares
outstanding. Diluted net loss per share has not been presented as the effect of
the assumed exercise of stock options, warrants and contingently issued shares
is antidilutive due to the Company's net loss for the indicated period.
The Company's historical capital structure is not indicative of its prospective
structure due to the automatic conversion of all shares of convertible preferred
stock and redeemable convertible preferred stock into common stock concurrent
with the closing of the Company's recent initial public offering. Accordingly, a
pro forma calculation assuming the conversion of all outstanding shares as of
September 30, 1999 and 1998 of convertible preferred stock and redeemable
convertible preferred stock into common stock upon the Company's initial public
offering using the if-converted method from their respective dates of issuance
is presented below.
6
<PAGE>
The following table presents the calculation of basic and pro forma basic net
loss per share (in thousands, except per share data):
<TABLE>
<CAPTION>
Three months ended September 30, Nine months ended September 30,
-------------------------------- -------------------------------
1999 1998 1999 1998
------- ------- -------- --------
<S> <C> <C> <C> <C>
Net loss $(7,386) $(6,878) $(36,851) $(17,019)
======= ======= ======== ========
Basic:
Shares used in computing
basic net loss 26,046 2,528 21,433 2,205
======= ======= ======== ========
Basic net loss per share $ (0.28) $ (2.72) $ (1.72) $ (7.72)
======= ======= ======== ========
Pro forma:
Shares used above 26,046 2,528 21,433 2,205
Pro forma adjustment to
reflect weighted effect of
assumed conversion of
convertible preferred stock - 15,934 3,044 14,667
------- ------- -------- --------
Shares used in computing pro
forma basic
net loss per share 26,046 18,462 24,477 16,872
======= ======= ======== ========
Pro forma basic net loss per
share $ (0.28) $ (0.37) $ (1.51) $ (1.01)
======= ======= ======== ========
</TABLE>
3. Comprehensive Loss
The components of comprehensive loss are as follows (in thousands):
<TABLE>
<CAPTION>
Three months ended September 30, Nine months ended September 30,
-------------------------------- -------------------------------
1999 1998 1999 1998
------- ------- -------- --------
<S> <C> <C> <C> <C>
Net loss $(7,386) $(6,878) $(36,851) $(17,019)
Foreign currency
translation adjustments 34 (3) 75 (2)
------- ------- -------- --------
Comprehensive loss $(7,352) $(6,881) $(36,776) $(17,021)
======= ======= ======== ========
</TABLE>
7
<PAGE>
4. Business Combinations
Effective June 30, 1999, Vignette acquired 100 percent of the outstanding stock
and assumed all outstanding stock options of Diffusion, Inc. ("Diffusion"), a
leader in multi-channel information delivery solutions, in exchange for 393,271
shares of Vignette common stock. The total cost of the acquisition, including
transaction costs, was approximately $31.2 million.
The acquisition was accounted for as a purchase business combination.
Accordingly, the results of operations of Diffusion have been included with
those of the Company for periods subsequent to the date of acquisition, and the
acquired net assets were recorded at their estimated fair values at the
effective date of the acquisition. The following table presents the allocation
of the purchase price (in thousands):
<TABLE>
<CAPTION>
<S> <C>
In-process research and development $ 11,600
Acquired technology 6,300
Workforce 900
Excess of cost over fair value of net assets acquired 15,063
Net fair value of tangible assets acquired and
liabilities assumed (2,629)
---------
$ 31,234
=========
</TABLE>
Included in the acquired net assets of Diffusion was in-process research and
development efforts related to the development of Diffusion Server 4.0.
Diffusion Server 4.0 was expected to expand the delivery capabilities, user
features and functionality of the existing Diffusion Server 3.0 multi-channel
platform as well as add new components. We intended to re-work the acquired
technology and integrate it with Vignette's products.
A significant amount of uncertainty existed surrounding the successful
development and completion of the research and development acquired, which was
estimated to be 88% complete at the date of the acquisition. We were uncertain
of our ability to complete the development of a new product within a timeframe
acceptable to the market and ahead of competitors. Additionally, the amount of
development required to enable the acquired in-process research and development
to be compatible with StoryServer was significant. The results of the in-process
research and development effort at the time of purchase had not progressed to a
stage where they met technological feasibility as they lacked many key elements
including standardized implementation capabilities and a scalable and extensible
architecture.
We assigned values of $11.6 million to in-process research and development and
$6.3 million to existing core technology based upon a modified discounted cash
flow model. We based the cash flow projections for revenue on the projected
incremental increase in revenue that we expected to receive from the completed
acquired in-process research and development. We expected revenue to commence
with the product's release in December 1999 and continue throughout its economic
life of five years. We deducted estimated operating expenses from estimated
revenue to arrive at estimated pre-tax cash flows. Projected operating expenses
included cost of goods sold, selling general and administrative expense, and
research and development expense. We estimated operating expenses as a percent
of revenue based on Diffusion's historical results for the fiscal years ended
December 31, 1996 to 1998. Projected results for the fiscal years ended
December 31, 1999 to 2001 were also used in combination with past operating
results and industry averages. We also deducted capital charges, or cash flow
attributable to other assets such as working capital and assembled workforce,
from pre-tax operating income to isolate the cash flow solely attributable to
the in-process research and development. Income taxes were then deducted to
arrive at after-tax cash flows. We discounted the after-tax cash flow
projections using a risk-adjusted rate of return of 23%. In using the
discounted model, we excluded the costs to complete the in-process technology
from the research and development expense for 1999, and we reflected the
percentage completion of the in-process research and development in each year's
projected cash flow.
In connection with the transaction, the Company has incurred charges totaling
$15.2 million for the write-off of in-process research and development (based
upon an independent third party appraisal), acquisition-related expenses and
integration costs in the consolidated statement of operations for the nine
months ended September 30, 1999. The amounts allocated to acquired technology
and workforce were determined based
8
<PAGE>
upon a valuation performed by an independent third party appraiser and are being
amortized over a five-year period. The excess of cost over fair value of net
assets acquired is being amortized over a seven-year period.
The unaudited pro forma combined results of operations of Vignette and Diffusion
for the nine months ended September 30, 1999 and 1998 after giving effect to
certain pro forma adjustments, including the exclusion of one-time charges
related to the acquisition of Diffusion, are as follows (in thousands, except
per share data):
<TABLE>
<CAPTION>
Nine months ended September 30,
--------------------------------
1999 1998
--------- ---------
<S> <C> <C>
Revenue $ 48,676 $ 10,420
Operating loss (29,203) (24,137)
Net loss (27,148) (23,795)
Basic net loss per share $ (1.25) $ (9.21)
</TABLE>
5. Subsequent Events
In November 1999, the Company announced a 2-for-1 stock dividend of its common
stock. Stockholders will receive one additional share for every share of
Vignette common stock held on the record date of November 15, 1999. These
shares are expected to be payable after market close on December 1, 1999, and
accordingly, share and per share information will not be retroactively restated
until such date.
In October 1999, the Company purchased equity securities of Vitessa (formerly
ECDirect) in exchange for $22.9 million in cash. The investment represents a
15% ownership position in Vitessa, and provides a strategic partnership in which
Vignette will integrate Vitessa's core technology for distributed e-commerce
into Vignette's e-Business applications.
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The statements contained in this Report on Form 10-Q that are not purely
historical statements are forward looking statements within the meaning of
Section 21E of the Securities and Exchange Act of 1934, including statements
regarding our expectations, beliefs, hopes, intentions or strategies regarding
the future. These forward-looking statements involve risks and uncertainties.
Actual results may differ materially from those indicated in such forward-
looking statements. We are under no duty to update any of the forward-looking
statements after the date of this filing on Form 10-Q to conform these
statements to actual results. See "Risk Factors that May Affect Future Results,"
and the factors and risks discussed in our Registration Statement filed on Form
S-1 on February 18, 1999 (File No. 333-68345) with the Securities and Exchange
Commission.
Overview
Vignette is a leading global provider of software products and services for e-
Business applications designed to enable businesses to build sustainable online
customer relationships, increase the returns on their Internet-related
investments and capitalize on Internet business opportunities. To date, we have
developed and released several versions of our StoryServer product and have sold
our products and services to over 390 clients. We market and sell our products
worldwide primarily through our direct sales force.
We derive our revenue from the sale of software product licenses and from
professional consulting, maintenance and support services. Product license
revenue is recognized when persuasive evidence of an agreement exists, the
product has been delivered, we have no remaining significant obligations with
regard to implementation, the license fee is fixed or determinable and
collection of the fee is probable. Services revenue consists of fees from
professional services and from maintenance and telephone support. Professional
services include integration of software, application development, training and
software installation. We bill professional services fees either on a time-and-
materials or on a fixed-price basis. We recognize professional services fees
billed on a time-and-materials basis as the services are performed. We recognize
professional services fees on fixed-price service arrangements on the completion
of specific contractual milestone events, or based on an estimated percentage of
completion as work progresses. Our clients typically purchase maintenance
agreements annually, and we price maintenance agreements based on a percentage
of our current product list price. We price telephone support based on differing
levels of support. Clients purchasing maintenance agreements receive unspecified
product upgrades and electronic, Web-based technical support, while purchasers
of support contracts receive additional telephone support. We recognize revenue
from maintenance and support agreements ratably over the term of the agreement,
typically one year. We record cash receipts from clients and billed amounts due
from clients in excess of revenue recognized as deferred revenue. The timing and
amount of cash receipts from clients can vary significantly depending on
specific contract terms and can therefore have a significant impact on the
amount of deferred revenue in any given period.
Cost of revenue consists of costs to manufacture, package and distribute our
products and related documentation, as well as personnel and other expenses
related to providing professional services. Since our inception, we have
incurred substantial costs to develop our technology and products, to recruit
and train personnel for our engineering, sales and marketing and professional
services departments, and to establish an administrative organization. As a
result, we have incurred significant losses since inception and, as of September
30, 1999, we had an accumulated deficit of approximately $74.1 million. We
believe our success depends on further increasing our client base and on growth
in the emerging e-Business applications market. Accordingly, we intend to
continue to invest heavily in sales, marketing, professional services, research
and development and in our operational and financial systems. Furthermore, we
expect to continue to incur substantial operating losses at least through the
third quarter of 2000, and our expected increase in operating expenses will
require significant increases in revenues before we become profitable.
We had 542 full-time employees at September 30, 1999, up from 219 at September
30, 1998. This rapid growth places a significant demand on our management and
operational resources. In order to manage growth effectively, we must implement
and improve our operational systems, procedures and controls on a timely basis.
In addition, we expect that future expansion will continue to challenge our
ability to hire, train, motivate, and manage our employees. Competition is
intense for highly qualified technical, sales
10
<PAGE>
and marketing and management personnel. If our total revenue does not increase
relative to our operating expenses, our management systems do not expand to meet
increasing demands, we fail to attract, assimilate and retain qualified
personnel, or our management otherwise fails to manage our expansion
effectively, there would be a material adverse effect on our business, financial
condition and operating results.
Effective June 30, 1999, Vignette acquired Diffusion, Inc., a leader in multi-
channel information delivery solutions, in exchange for 393,271 shares of
Vignette common stock. The total cost of the acquisition, including transaction
costs, was approximately $31.2 million. The acquisition was accounted for as a
purchase business combination. Accordingly, the results of operations of
Diffusion have been included with those of Vignette for periods subsequent to
the date of acquisition, and the acquired net assets were recorded at their
estimated fair values at the effective date of the acquisition. In connection
with the transaction, Vignette has incurred charges totaling $15.2 million for
the nine months ended September 30, 1999 for the write-off of in-process
research and development, acquisition-related expenses and integration costs.
Results of Operations
The following table sets forth for the periods indicated the percentage of
revenues represented by certain lines in our consolidated statements of
operations.
<TABLE>
<CAPTION>
Three months ended September 30, Nine months ended September 30,
-------------------------------- -------------------------------
1999 1998 1999 1998
-------- -------- -------- ---------
<S> <C> <C> <C> <C>
Revenue:
Product license 51% 51% 51% 54%
Services 49 49 49 46
-------- -------- -------- ---------
Total revenue 100 100 100 100
Cost of revenue:
Product license 3 6 4 5
Services 40 66 41 59
-------- -------- -------- ---------
Total cost of revenue 43 72 45 64
Gross profit 57 28 55 36
Operating expenses:
Research and development 19 43 21 51
Sales and marketing 50 102 60 99
General and administrative 11 37 12 36
Purchased in-process
research and development,
acquisition-related, and other
charges 2 - 31 22
Amortization of deferred
stock compensation 5 8 9 9
Amortization of intangibles 4 - 2 -
-------- -------- -------- ---------
Total operating expenses 91 190 135 217
-------- -------- -------- ---------
Loss from operations (34) (162) (80) (181)
Other income, net 4 3 4 2
-------- -------- -------- ---------
Net loss (30)% (159)% (76)% (179)%
======== ======== ======== =========
</TABLE>
Revenue
Total revenue increased 459% to $24.2 million in the three months ended
September 30, 1999 from $4.3 million in the three months ended September 30,
1998. Total revenue increased 407% to $48.2 million in the nine months ended
September 30, 1999 from $9.5 million in the nine months ended September 30,
1998. This increase was attributable to an increase in our client base, which
grew from 152 at the end of the third quarter of
11
<PAGE>
1998 to 393 at the end of the third quarter of 1999, an increase in the average
deal size of new client orders and follow-on orders from existing clients.
Although our revenues have increased in recent periods, we cannot be certain
that revenues will grow in future periods or that they will grow at similar
rates as in the past.
Product License. Product license revenue increased 454% to $12.4 million in the
three months ended September 30, 1999 from $2.2 million in the three months
ended September 30, 1998, representing 51% of total revenue in both periods.
Product license revenue increased 377% to $24.6 million in the nine months ended
September 30, 1999 from $5.2 million in the nine months ended September 30,
1998, representing 51% and 54% of total revenue, respectively. The increase in
absolute dollars was due to increases in the number of clients and the average
size of new client orders resulting from growing market acceptance of our
StoryServer product line over prior year periods, as well as increased follow-on
orders from existing clients. Product license revenue decreased as a percentage
of total revenue during the nine months ended September 30, 1999 due to the
higher growth in services revenue during the same period.
Services. Services revenue increased 463% to $11.9 million in the three months
ended September 30, 1999 from $2.1 million in the three months ended September
30, 1998, representing 49% of total revenue in both periods. Services revenue
increased 443% to $23.7 million in the nine months ended September 30, 1999 from
$4.4 million in the nine months ended September 30, 1998, representing 49% and
46% of total revenue, respectively. Services revenue from professional services
fees continue to be the primary component of total services revenue,
representing 40% of total revenues in both the three months and nine months
ended September 30, 1999 as compared to 39% in the three months ended September
30, 1998 and 37% in the nine months ended September 30, 1998. During the three
months and nine months ended September 30, 1999, services revenue from
professional services fees increased 463% and 446%, respectively, compared to
the three months and nine months ended September 30, 1998. Services revenue from
maintenance and support agreements increased 463% and 432% in the three months
and nine months ended September 30, 1999, compared to the three months and nine
months ended September 30, 1998. The increase in all types of services revenue
was primarily driven by the increase in the number of clients and the sale of
product licenses, which generally include or lead to contracts to perform
professional services and purchases of software maintenance and technical
support service agreements.
Services revenue increased as a percentage of total revenue during the nine
months ended September 30, 1999 due to the expansion of our services
capabilities through the hiring of additional services personnel. We believe
that growth in our product license sales depends on our ability to provide our
clients with support, training, consulting and implementation services and
educating third-party resellers on how to implement our products. As a result,
we continued to expand our professional services organization throughout the
first nine months of fiscal 1999 and intend to continue expanding our
professional services organization for the foreseeable future. We do not believe
that services revenue will continue to increase as a percentage of total
revenue.
Cost of Revenue
Product License. Product license costs consist of expenses we incur to
manufacture, package and distribute our products and related documentation and
costs of licensing third-party software incorporated into our products. Product
license costs increased to $777,000 in the three months ended September 30, 1999
from $266,000 in the three months ended September 30, 1998, representing 6% and
12% of product license revenue, respectively. Product license costs increased
to $1.9 million in the nine months ended September 30, 1999 from $510,000 in the
nine months ended September 30, 1998, representing 8% and 10% of product license
revenue, respectively. The increase in absolute dollars for the three and nine-
month periods was principally a result of both product license sales growth and
royalties paid to third party vendors for technology embedded in our product
offerings. Product license costs decreased as a percentage of product license
revenue primarily because significant product license revenue growth outpaced
increases in product license costs in addition to a higher average sales price
in 1999 relative to 1998.
Services. Services costs include salary expense and other related costs for our
professional service, maintenance and customer support staffs, as well as third-
party contractor expenses. Services costs increased to $9.7 million in the three
months ended September 30, 1999 from $2.9 million in the three months ended
September 30, 1998, representing 82% and 136% of services revenue, respectively.
Service costs increased to $20.0 million in the nine months ended September 30,
1999 from $5.6 million in the
12
<PAGE>
nine months ended September 30, 1998, representing 84% and 128% of services
revenue, respectively. The increase in absolute dollars resulted from rapidly
expanding our services organization. The overall improvement in services gross
profit margin reflects increased leverage from the productivity of support,
training, consulting and implementation activities. We expect services costs to
increase in the future in absolute dollars to the extent that services revenues
increase. We expect services costs as a percentage of services revenue to
decrease over time.
Professional services-related costs increased to $9.2 million in the three
months ended September 30, 1999 from $2.7 million in the three months ended
September 30, 1998, representing 95% and 157% of professional services-related
revenue, respectively. Professional services-related costs increased to $18.6
million in the nine months ended September 30, 1999 from $5.3 million in the
nine months ended September 30, 1998, representing 97% and 149% of professional
services-related revenue, respectively. Maintenance and support-related costs
increased to $558,000 in the three months ended September 30, 1999 from $175,000
in the three months ended September 30, 1998, representing 25% and 44% of
maintenance and support-related revenue, respectively. Maintenance and support-
related costs increased to $1.4 million in the nine months ended September 30,
1999 from $328,000 in the nine months ended September 30, 1998, representing 30%
and 39% of maintenance and support-related revenue, respectively.
Operating Expenses
Research and Development. Research and development expenses consist primarily of
personnel costs to support product development. Research and development
expenses increased to $4.5 million in the three months ended September 30, 1999
from $1.9 million in the three months ended September 30, 1998, representing 19%
and 43% of total revenue, respectively. Research and development expenses
increased to $10.2 million in the nine months ended September 30, 1999 from $4.8
million in the nine months ended September 30, 1998, representing 21% and 51% of
total revenue, respectively. The increase in absolute dollars was due to the
increase in engineering personnel and to the expansion of our product offerings.
The decrease in research and development as a percentage of revenue resulted
primarily because significant revenue growth outpaced increases in research and
development expenditures. We believe that continued investment in research and
development is critical to maintaining a competitive advantage, and, as a
result, we expect research and development expenses to increase in absolute
dollars in future periods. Software development costs that were eligible for
capitalization in accordance with Statement of Financial Accounting Standards
No. 86, Accounting for the Costs of Computer Software to Be Sold, Leased, or
Otherwise Marketed, were insignificant during the periods presented.
Accordingly, all software development costs have been expensed in the period
incurred.
Sales and Marketing. Sales and marketing expenses consist primarily of salaries
and other related costs for sales and marketing personnel, sales commissions,
travel, public relations and marketing materials and tradeshows. Sales and
marketing expenses increased to $12.2 million in the three months ended
September 30, 1999 from $4.4 million in the three months ended September 30,
1998, representing 50% and 102% of total revenue, respectively. Sales and
marketing expenses increased to $28.8 million in the nine months ended September
30, 1999 from $9.4 million in the nine months ended September 30, 1998,
representing 60% and 99% of total revenue, respectively. Sales and marketing
expenses increased in absolute dollars due to a significant increase in sales
and marketing personnel, increased marketing program expenditures as well as
higher commissions resulting from the growth in our dollar bookings. The
decrease in sales and marketing expenses as a percentage of revenue resulted
primarily because significant revenue growth outpaced increases in sales and
marketing expenditures. We believe these expenses will continue to increase in
absolute dollars in future periods as we expect to continue to expand our sales
and marketing efforts to promote further growth. We also anticipate that sales
and marketing expenses may fluctuate as a percentage of total revenue from
period to period as new sales personnel are hired and begin to achieve
productivity and the timing of new product releases.
General and Administrative. General and administrative expenses consist
primarily of salaries and other related costs for operations and finance
employees, legal and accounting services and certain facilities-related
expenses. General and administrative expenses increased to $2.6 million in the
three months ended September 30, 1999 from $1.6 million in the three months
ended September 30, 1998, representing 11% and 37% of total revenue,
respectively. General and administrative expenses increased to $6.0 million in
the nine months ended September 30, 1999 from $3.5 million in the nine months
ended September 30, 1998, representing 12% and 36% of total revenue,
13
<PAGE>
respectively. The increase in absolute dollars for these periods was due to
increased personnel and facility expenses necessary to support our expanding
operations. General and administrative expenses decreased as a percentage of
revenue primarily because significant revenue growth outpaced increases in
general and administrative expenditures. We believe general and administrative
expenses will increase in absolute dollars as we expect to increase staffing and
infrastructure expenses to support the Company's continued growth.
Purchased In-Process Research and Development, Acquisition-Related, and Other
Charges. Effective June 30, 1999, Vignette acquired 100 percent of the
outstanding stock and assumed all outstanding stock options of Diffusion, Inc.,
a leader in multi-channel information delivery solutions, in exchange for
393,271 shares of Vignette common stock. The total value of the acquisition,
including transaction costs, was approximately $31.2 million. The acquisition
was accounted for as a purchase business combination. Accordingly, the acquired
net assets were recorded at their estimated fair values at the effective date of
the acquisition and the results of operations of Diffusion have been included
with our results of operations for periods subsequent to the date of
acquisition. In connection with the transaction, we incurred one-time
acquisition costs and integration-related charges, which include costs
associated with product integration, cross training, and other merger-related
costs. Additionally, a portion of the purchase price was allocated to in-
process research and development based upon an independent third party appraisal
and expensed upon the consummation of the transaction. These related charges
totaled $15.2 million for the nine months ended September 30, 1999.
Included in the acquired net assets of Diffusion was in-process research and
development efforts related to the development of Diffusion Server 4.0.
Diffusion Server 4.0 was expected to expand the delivery capabilities, user
features and functionality of the existing Diffusion Server 3.0 multi-channel
platform as well as add new components. We intended to re-work the acquired
technology and integrate it with Vignette's products.
A significant amount of uncertainty existed surrounding the successful
development and completion of the research and development acquired, which was
estimated to be 88% complete at the date of the acquisition. We were uncertain
of our ability to complete the development of a new product within a timeframe
acceptable to the market and ahead of competitors. Additionally, the amount of
development required to enable the acquired in-process research and development
to be compatible with StoryServer was significant.
The results of the in-process research and development effort at the time of
purchase had not progressed to a stage where they met technological feasibility
as they lacked many key elements including standardized implementation
capabilities and a scalable and extensible architecture.
We assigned values of $11.6 million to in-process research and development and
$6.3 million to existing core technology based upon a modified discounted cash
flow model. We based the cash flow projections for revenue on the projected
incremental increase in revenue that we expected to receive from the completed
acquired in-process research and development. We expected revenue to commence
with the product's release in December 1999 and continue throughout its economic
life of five years. We deducted estimated operating expenses from estimated
revenue to arrive at estimated pre-tax cash flows. Projected operating expenses
included cost of goods sold, selling general and administrative expense, and
research and development expense. We estimated operating expenses as a percent
of revenue based on Diffusion's historical results for the fiscal years ended
December 31, 1996 to 1998. Projected results for the fiscal years ended
December 31, 1999 to 2001 were also used in combination with past operating
results and industry averages. We also deducted capital charges, or cash flow
attributable to other assets such as working capital and assembled workforce,
from pre-tax operating income to isolate the cash flow solely attributable to
the in-process research and development. Income taxes were then deducted to
arrive at after-tax cash flows. We discounted the after-tax cash flow
projections using a risk-adjusted rate of return of 23%. In using the
discounted model, we excluded the costs to complete the in-process technology
from the research and development expense for 1999, and we reflected the
percentage completion of the in-process research and development in each year's
projected cash flow.
During May 1998, Vignette acquired from RandomNoise, Inc. certain in-process
research and development effort, a developed product and an insignificant amount
of equipment in exchange for $2.1 million, consisting of $100,000 in cash and
375,830 shares of our Series G Preferred Stock valued at $2.0 million.
Substantially all of the purchase
14
<PAGE>
price was allocated to in-process research and development and expensed upon the
consummation of the transaction. These related charges totaled $2.1 million for
the nine months ended September 30, 1998.
Amortization of Deferred Stock Compensation. We have recorded deferred
compensation for the difference between the exercise price of certain stock
option grants and the deemed fair value of our common stock at the time of such
grants. We are amortizing this amount over the vesting periods of the applicable
options, resulting in amortization expense of $1.2 million and $352,000 in the
three months ended September 30, 1999 and 1998, respectively, and $4.1 million
and $867,000 for the nine months ended September 30, 1999 and 1998,
respectively.
Amortization of Intangibles. In conjunction with our acquisition of Diffusion,
effective June 30, 1999, the purchase price amounts allocated to acquired
technology of $6.3 million and workforce of $900,000 are being amortized over a
five-year period. The excess of cost over fair value of net assets acquired of
$15.1 million is being amortized over a seven-year period.
Other Income, Net
Other income, net consists of interest income and expense and gain or loss on
disposals of equipment. Other income, net increased to $829,000 in the three
months ended September 30, 1999 from $141,000 in the three months ended
September 30, 1998 and to $2.0 million in the nine months ended September 30,
1999 from $204,000 in the nine months ended September 30, 1998. The increase was
due to interest income earned from cash balances on hand as a result of our
recent public offering.
Net Operating Losses and Tax Credit Carryforwards
We have provided a full valuation allowance on our deferred tax assets, which
include net operating loss and research and development carryforwards, because
of the uncertainty regarding their realization. Our accounting for deferred
taxes under Statement of Financial Accounting Standards No. 109, Accounting for
Income Taxes, involves the evaluation of a number of factors concerning the
realizability of our deferred tax assets. In concluding that a full valuation
allowance was required, management primarily considered such factors as our
history of operating losses and expected future losses and the nature of our
deferred tax assets.
Liquidity and Capital Resources
Cash used in operating activities was $3.7 million and $9.7 million for the nine
months ended September 30, 1999 and 1998, respectively. The decrease in cash
used in operating activities was due primarily to changes in operating working
capital. Our investing activities have consisted of capital expenditures
totaling $5.4 million and $1.0 million for the nine months ended September 30,
1999 and 1998, respectively, to acquire property and equipment, mainly computer
hardware and software, for our growing employee base. In addition, during the
nine months ended September 30, 1999, our investing activities included
purchases of equity securities totaling $4.0 million for strategic investments
in other e-commerce companies. We expect that our capital expenditures will
continue to increase as our employee base grows. Net cash provided by financing
activities for the nine months ended September 30, 1999 and 1998 was $74.3
million and $16.3 million, respectively. The increase was due primarily to the
receipt of proceeds from our initial public offering, partially offset by $2.7
million in payments made in April 1999 to retire all outstanding debt.
At September 30, 1999, we had $73.7 million in cash and cash equivalents and
$51.9 million in working capital. We have agreements with Comdisco, Inc.
providing for available credit of up to $5.0 million over a period of 36 months
at an interest rate of 12% per year and an equipment lease line of $1.25 million
over a period of 36 months at an interest rate of 7.5% per year. The line of
credit with Comdisco, Inc. is secured by our receivables, equipment, fixtures,
inventory and all other tangible property. We are currently in compliance with
all related financial covenants and restrictions.
In October 1999, the Company purchased equity securities of Vitessa (formerly
ECDirect) in exchange for $22.9 million in cash. The investment represents a
15% ownership position in Vitessa, and provides a strategic partnership in which
Vignette will integrate Vitessa's core technology for distributed e-commerce
into Vignette's e-Business applications.
15
<PAGE>
Based on our current operating plan, management believes that we will have
sufficient resources available to meet its cash requirements for the foreseeable
future, including working capital requirements and planned capital expenditures.
We may require additional funds to support our working capital requirements or
for other purposes and may seek to raise such additional funds through public
and private equity financings from other sources. There can be no assurance
that additional financing will be available at all or that, if available, such
financing will be obtainable on terms favorable to us or that any additional
financing will not be dilutive.
Recent Accounting Pronouncements
In December 1998, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants issued Statement of Position ("SOP")
98-9, Software Revenue Recognition, which amends SOP 97-2 and SOP 98-4. We are
required to adopt SOP 98-9 in the year ended December 31, 2000. We do not expect
such adoption will have a significant effect on our results of operations.
In March 1998, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants issued SOP 98-1, Accounting for the
Costs of Computer Software Developed or Obtained for Internal Use. We adopted
SOP 98-1 effective January 1, 1999. Such adoption did not have a significant
effect on our results of operations and financial condition.
In September 1998, the Financial Accounting Standards Board issued Statement No.
133, Accounting for Derivative Instruments and Hedging Activities, which is
required to be adopted in years beginning after September 15, 1999. Because of
the Company's minimal use of derivatives, management does not anticipate that
the adoption of the new Statement will have a significant effect on results of
operations or the financial position of the Company.
Year 2000 Compliance
The "Year 2000 Issue" refers generally to the problems that some software may
have in determining the correct century for the year. For example, software with
date-sensitive functions that is not Year 2000 compliant may not be able to
distinguish whether "00" means 1900 or 2000, which may result in failures or the
creation of erroneous results.
We have conducted a Year 2000 readiness review for the current versions of our
products. The review included assessment and implementation, which includes
remediation, upgrading and replacement of certain product versions, as well as
validation testing, and contingency planning. We continue to respond to customer
questions about prior versions of our products on a case-by-case basis.
We have completed all phases of our plan, except for contingency planning, with
respect to the current versions of all of our products. As a result, the current
versions of each of our products are "Year 2000 Compliant," as defined below,
when configured and used in accordance with the related documentation, and
provided that the underlying operating system of the host machine and any other
software used with or in the host machine or our products are also Year 2000
Compliant. The initial release of StoryServer 4 required a patch to fix a minor
error in a third-party product included in StoryServer 4. We have provided the
patch on our Web site in order to be Year 2000 Compliant.
We have defined "Year 2000 Compliant" as the ability to:
(a) correctly handle date information needed for the December 31, 1999 to
January 1, 2000 date change;
(b) function according to the product documentation provided for this
date change, without changes in operation resulting from the advent of a
new century, assuming correct configuration;
(c) where appropriate, respond to two-digit date input in a way that
resolves the ambiguity as to century in a disclosed, defined, and
predetermined manner;
(d) if the date elements in interfaces and data storage specify the
century, store and provide output of date information in ways that are
unambiguous as to century; and
16
<PAGE>
(e) recognize year 2000 as a leap year.
We have tested software obtained from third parties (licensed software,
shareware, and freeware) that is incorporated into our products, and are seeking
assurances from our vendors that licensed software is Year 2000 Compliant. To
date, we believe all critical software that we have obtained from third parties
is Year 2000 Compliant. Despite testing by us and by current and potential
clients, and assurances from developers of products incorporated into our
products, our products may contain undetected errors or defects associated with
Year 2000 date functions. Known or unknown errors or defects in our products
could result in delay or loss of revenue, diversion of development resources,
damage to our reputation, or increased service and warranty costs, any of which
could materially adversely affect our business, operating results, or financial
condition. Some commentators have predicted significant litigation regarding
Year 2000 compliance issues, and we are aware of such lawsuits against other
software vendors. Because of the unprecedented nature of such litigation, it is
uncertain whether or to what extent we may be affected by it.
Vignette's internal systems include both our information technology, or IT, and
non-IT systems. We obtained a third-party consulting group to provide an
assessment of our material internal IT systems, including both our own software
products and third-party software and hardware technology, and our non-IT
systems. The completion of testing yielded no significant exceptions for our
critical internal systems to be Year 2000 Compliant. To the extent that we were
not able to test the technology provided by third-party vendors, we are seeking
assurances from such vendors that their systems are Year 2000 Compliant.
Although we are not currently aware of any material operational issues or costs
associated with preparing our internal IT and non-IT systems for the Year 2000,
we may experience material unanticipated problems and costs caused by undetected
errors or defects in the technology used in our internal IT and non-IT systems.
We do not currently have any information concerning the Year 2000 compliance
status of our customers. Our current and potential clients may incur significant
expenses to achieve Year 2000 compliance. If our clients are not Year 2000
compliant, they may experience material costs to remedy problems, or they may
face litigation costs. In either case, Year 2000 issues could reduce or
eliminate budgets that current or potential customers could have for purchases
of our products and services. As a result, our business, results of operations
or financial condition could be materially adversely affected.
We have funded our Year 2000 plan from available cash and have not separately
accounted for these costs in the past. To date, these costs have not been
material. We will incur additional costs related to the Year 2000 plan for
administrative personnel to manage the project, outside contractor assistance,
technical support for our products, product engineering and customer
satisfaction. We may experience material problems and costs with Year 2000
compliance that could adversely affect our business, results of operations and
financial condition.
We have not yet fully developed a contingency plan to address situations that
may result if we are unable to achieve Year 2000 readiness of our critical
operations. The cost of developing and implementing such a plan may itself be
material. Finally, we are also subject to external forces that might generally
affect industry and commerce, such as utility or transportation company Year
2000 compliance failures and related service interruptions.
17
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The majority of our operations are based in the U.S. and, accordingly, the
majority of our transactions are denominated in U.S. Dollars. However, we do
have foreign-based operations where transactions are denominated in foreign
currencies and are subject to market risk with respect to fluctuations in the
relative value of currencies. Currently, we have operations in Australia,
England, France, Germany and Singapore and conduct transactions in the local
currency of each location. The impact of fluctuations in the relative value of
other currencies was not material for the nine months ended September 30, 1999.
Our interest income is sensitive to changes in the general level of U.S.
interest rates, particularly since the majority of our investments are in short-
term instruments. Due to the nature of our short-term investments, we have
concluded that we do not have material market risk exposure. Our investment
policy requires us to invest funds in excess of current operating requirements
in:
. obligations of the U.S. government and its agencies;
. investment grade state and local government obligations;
. securities of U.S. corporations rated A1 or P1 by Standard & Poors or the
Moody's equivalents; and/or
. money market funds, deposits or notes issued or guaranteed by U.S. and non-
U.S. commercial banks meeting certain credit rating and net worth
requirements with maturities of less than two years.
At September 30, 1999, our cash and cash equivalents consisted primarily of
demand deposits and money market funds held by large institutions in the U.S.,
and our short-term investments were invested in corporate debt maturing in less
than 90 days.
RISK FACTORS THAT MAY AFFECT FUTURE RESULTS
RISK
You should carefully consider the following risks before making an investment
decision. The risks described below are not the only ones that we face. Our
business, operating results or financial condition could be materially adversely
affected by any of the following risks. The trading price of our common stock
could decline due to any of these risks, and you as an investor may lose all or
part of your investment. You should also refer to the other information set
forth in this report, including our financial statements and the related notes.
Risks Related to Our Business
We Expect to Incur Future Losses
We incurred net losses of $3.6 million for the year ended December 31, 1996,
$7.5 million for the year ended December 31, 1997, $26.2 million for the year
ended December 31, 1998, and $36.9 million for the nine months ended September
30, 1999. As of September 30, 1999, we had an accumulated deficit of $74.1
million. We have not achieved profitability and we expect to incur net losses
for the foreseeable future. To date, we have primarily funded our operations
from the sale of equity securities and have not generated cash from operations.
We expect to continue to incur significant product development, sales and
marketing, and administrative expenses and, as a result, we will need to
generate significant revenues to achieve and maintain profitability. Although
our revenues have grown significantly in recent quarters, we cannot be certain
that we can sustain these growth rates or that we will achieve sufficient
revenues for profitability. If we do achieve profitability, we cannot be certain
that we can sustain or increase profitability on a quarterly or annual basis in
the future.
Our Limited Operating History Makes Financial Forecasting Difficult
Vignette was founded in December 1995 and has a limited operating history. As a
result of our limited operating history, we cannot forecast operating expenses
based on our historical results. Accordingly, we base our expenses in part on
future revenue projections. Most of our expenses are fixed in the short term and
we may not be able to
18
<PAGE>
quickly reduce spending if our revenues are lower than we had projected. Our
ability to forecast accurately our quarterly revenue is limited because our
software products have a long sales cycle that makes it difficult to predict the
quarter in which sales will occur. We would expect our business, operating
results and financial condition to be materially adversely affected if our
revenues do not meet our projections and that net losses in a given quarter
would be even greater than expected.
We Expect Our Quarterly Revenues and Operating Results to Fluctuate
Our revenues and operating results are likely to vary significantly from quarter
to quarter. A number of factors are likely to cause these variations, including:
. Demand for our products and services;
. The timing of sales of our products and services;
. The timing of customer orders and product implementations;
. Unexpected delays in introducing new products and services;
. Increased expenses, whether related to sales and marketing, product
development or administration;
. Changes in the rapidly evolving market for e-Business applications
solutions;
. The mix of product license and services revenue, as well as the mix of
products licensed;
. The mix of services provided and whether services are provided by our own
staff or third-party contractors;
. The mix of domestic and international sales; and
. Costs related to possible acquisitions of technology or businesses.
Accordingly, we believe that quarter-to-quarter comparisons of our operating
results are not necessarily meaningful. Investors should not rely on the results
of one quarter as an indication of our future performance.
We plan to increase our operating expenses to expand our sales and marketing
operations, develop new distribution channels, fund greater levels of research
and development, broaden professional services and support and improve
operational and financial systems. If our revenues do not increase along with
these expenses, our business, operating results or financial condition could be
materially adversely affected and net losses in a given quarter would be even
greater than expected.
Although we have limited historical financial data, we believe that our
quarterly operating results may experience seasonal fluctuations. For instance,
quarterly results may fluctuate based on our clients' calendar year budgeting
cycles, slow summer purchasing patterns in Europe and our compensation policies
that tend to compensate sales personnel, typically in the latter half of the
year, for achieving annual quotas.
Our Quarterly Results Often Depend on a Small Number of Large Orders
We derive a significant portion of our software license revenues in each quarter
from a small number of relatively large orders. Although we do not believe that
the loss of any particular customer would have an adverse effect on our
business, our operating results could be materially adversely affected if we
were unable to complete one or more substantial license sales in any future
period. For example, in five of the last eleven quarters in the period ended
September 30, 1999, we had at least one customer that accounted for at least 10%
of total revenue in such quarter.
We Depend on Increased Business from Our Current and New Customers and If We
Fail to Grow Our Customer Base or Generate Repeat Business, Our Operating
Results Could Be Harmed
If we fail to grow our customer base or generate repeat and expanded business
from our current and new customers, our business and operating results would be
seriously harmed. Most of our customers initially make a limited purchase of our
products and services for pilot programs. Many of these customers may not
choose to purchase additional licenses to expand their use of our products. Many
of these customers have not yet developed or deployed initial applications based
on our products. If these
19
<PAGE>
customers do not successfully develop and deploy such initial applications, they
may not choose to purchase deployment licenses or additional development
licenses. Our business model depends on the expanded use of our products within
our customers' organizations.
In addition, as we introduce new versions of our products or new products, our
current customers may not require the functionality of our new products and may
not ultimately license these products. Because the total amount of maintenance
and support fees we receive in any period depends in large part on the size and
number of licenses that we have previously sold, any downturn in our software
license revenue would negatively impact our future services revenue. In
addition, if customers elect not to renew their maintenance agreements, our
services revenue could be significantly adversely affected.
Our Operating Results May Be Adversely Affected By Small Delays in Customer
Orders or Product Implementations
Small delays in customer orders or product implementations can cause significant
variability in our license revenues and operating results for any particular
period. We derive a substantial portion of our revenue from the sale of products
with related services. In these cases, our revenue recognition policy requires
us to substantially complete the implementation of our product before we can
recognize software license revenue, and any end of quarter delays in product
implementation could materially adversely affect operating results for that
quarter.
In Order to Increase Market Awareness of Our Products and Generate Increased
Revenue We Need to Expand Our Sales and Distribution Capabilities
We must expand our direct and indirect sales operations to increase market
awareness of our products and generate increased revenue. We cannot be certain
that we will be successful in these efforts. We have recently expanded our
direct sales force and plan to hire additional sales personnel. Our products and
services require a sophisticated sales effort targeted at the senior management
of our prospective clients. New hires will require training and take time to
achieve full productivity. We cannot be certain that our recent hires will
become as productive as necessary or that we will be able to hire enough
qualified individuals in the future. We also plan to expand our relationships
with value-added resellers, systems integrators and other third-party resellers
to build an indirect sales channel. In addition, we will need to manage
potential conflicts between our direct sales force and third-party reselling
efforts.
Failure To Maintain The Support Of Third Party e-Business Consultants May Limit
Our Ability To Penetrate Our Markets
A significant portion of our sales are influenced by the recommendations of our
products made by systems integrators, consulting firms and other third parties
that help develop and deploy e-business applications for our clients. Losing the
support of these third parties may limit our ability to penetrate our markets.
These third parties are under no obligation to recommend or support our
products. These companies could recommend or give higher priority to the
products of other companies or to their own products. A significant shift by
these companies toward favoring competing products could negatively affect our
license and service revenue.
Our Lengthy Sales Cycle and Product Implementation Makes It Difficult to Predict
Our Quarterly Results
We have a long sales cycle because we generally need to educate potential
clients regarding the use and benefits of e-Business applications. Our long
sales cycle makes it difficult to predict the quarter in which sales may fall.
In addition, since we recognize the majority of our revenue from product sales
upon implementation of our product, the timing of product implementation could
cause significant variability in our license revenues and operating results for
any particular period. The implementation of our products requires a significant
commitment of resources by our clients, third-party professional services
organizations or our professional services organization, which makes it
difficult to predict the quarter when implementation will be completed.
We May Be Unable to Adequately Develop A Profitable Professional Services
Organization Which Could Affect Both Our Operating Results and Our Ability to
Assist Our Clients With the Implementation of Our Products
20
<PAGE>
We cannot be certain that we can attract or retain a sufficient number of the
highly qualified services personnel that our business needs and we cannot be
certain that our services business will ever achieve profitability. Clients that
license our software typically engage our professional services organization to
assist with support, training, consulting and implementation of their Web
solutions. We believe that growth in our product sales depends on our ability to
provide our clients with these services and to educate third-party resellers on
how to use our products. As a result, we plan to increase the number of service
personnel to meet these needs. New services personnel will require training and
education and take time to reach full productivity. To meet our needs for
services personnel, we may also need to use more costly third-party consultants
to supplement our own professional services organization. We expect our services
revenue to increase in absolute dollars as we continue to provide consulting and
training services that complement our products and as our installed base of
clients grows. To date, services costs related to professional services have
exceeded, or have been substantially equal to, professional services-related
revenue. Although we expect that our professional services-related revenue will
exceed professional services-related costs in future periods, we cannot be
certain that this will occur. We generally bill our clients for our services on
a "time and materials" basis. However, from time to time we enter into fixed-
price contracts for services. On occasion, the costs of providing the services
have exceeded our fees from these contracts and, from time to time, we may
misprice future contracts to our detriment. In addition, competition for
qualified services personnel with the appropriate Internet specific knowledge is
intense. We are in a new market and there is a limited number of people who have
acquired the skills needed to provide the services that our clients demand.
We May Be Unable To Attract Necessary Third Party Service Providers Which Could
Affect Our Ability To Provide Support, Consulting And Implementation Services
For Our Products
There may be a shortage of third party service providers to assist our clients
the implementation of our products. We do not believe our professional services
organization will be able to fulfill the expected demand for support, consulting
and implementation services for our products. We are actively attempting to
supplement the capabilities of our services organization by attracting and
educating third party service providers and consultants to also provide these
services. We may not be successful in attracting these third party providers or
maintaining the interest of current third party providers. In addition, these
third parties may not devote enough resources to these activities. A shortfall
in service capabilities may affect our ability to sell our software.
Our Business May Become Increasingly Susceptible to Numerous Risks Associated
With International Operations
International operations are generally subject to a number of risks, including:
. Expenses associated with customizing products for foreign countries;
. Protectionist laws and business practices that favor local competition;
. Dependence on local vendors;
. Multiple, conflicting and changing governmental laws and regulations;
. Longer sales cycles;
. Difficulties in collecting accounts receivable;
. Foreign currency exchange rate fluctuations; and
. Political and economic instability.
We received 16% of our total revenue in the nine months ended September 30,
1999, respectively, through licenses and services sold to clients located
outside of the United States. We expect international revenue to account for a
significant percentage of total revenue in the future and we believe that we
must continue to expand our international sales activities in order to be
successful. Our international sales growth will be limited if we are unable to
establish additional foreign operations, expand international sales channel
management and support organizations, hire additional personnel, customize
products for local markets, develop relationships with international service
providers and establish relationships with additional distributors and third
party integrators. In that case, our business, operating results and financial
condition could be materially adversely affected. Even if we are able to
21
<PAGE>
successfully expand international operations, we cannot be certain that we will
be able to maintain or increase international market demand for our products.
To date, a majority of our international revenues and costs have been
denominated in foreign currencies. We believe that an increasing portion of our
international revenues and costs will be denominated in foreign currencies in
the future. In addition, although we cannot predict the potential consequences
to our business as a result of the adoption of the Euro as a common currency in
Europe, the transition to the Euro presents a number of risks, including
increased competition from European firms as a result of pricing transparency.
To date, we have not engaged in any foreign exchange hedging transactions and we
are therefore subject to foreign currency risk.
In Order to Properly Manage Growth, We May Need to Implement and Improve Our
Operational Systems on a Timely Basis
We have expanded our operations rapidly since inception. We intend to continue
to expand in the foreseeable future to pursue existing and potential market
opportunities. This rapid growth places a significant demand on management and
operational resources. In order to manage growth effectively, we must implement
and improve our operational systems, procedures and controls on a timely basis.
If we fail to implement and improve these systems, our business, operating
results and financial condition will be materially adversely affected.
We May Be Adversely Affected If We Lose Key Personnel
Our success depends largely on the skills, experience and performance of some
key members of our management. If we lose one or more of these key employees,
our business, operating results and financial condition could be materially
adversely affected. In addition, our future success will depend largely on our
ability to continue attracting and retaining highly skilled personnel. Like
other software companies, we face intense competition for qualified personnel,
particularly in the Austin, Texas area. We cannot be certain that we will be
successful in attracting, assimilating or retaining qualified personnel in the
future.
We Have Relied and Expect to Continue to Rely on Sales of Our StoryServer
Product Line for Our Revenue
We currently derive substantially all of our revenues from the license and
related upgrades, professional services and support of our StoryServer software
products. We expect that we will continue to depend on revenue related to new
and enhanced versions of our StoryServer product line for at least the next
several quarters. We cannot be certain that we will be successful in upgrading
and marketing our products or that we will successfully develop and market new
products and services. If we do not continue to increase revenue related to our
existing products or generate revenue from new products and services, our
business, operating results and financial condition would be materially
adversely affected.
Our Future Revenue is Dependent Upon Our Ability to Successfully Market Our
Vignette Syndication Server
We expect that our future financial performance will depend significantly on
revenue from Vignette Syndication Server and the related tools that we plan to
develop, which is subject to significant risks. We began shipping Vignette
Syndication Server to clients in the first quarter of 1999. This is the first
version of a new product designed for a new market opportunity. There are
significant risks inherent in a product introduction such as Vignette
Syndication Server. Market acceptance of Vignette Syndication Server will depend
on a market developing for Internet syndication products and services and the
commercial adoption of standards on which Vignette Syndication Server is based.
We cannot be certain that either will occur. We cannot be certain that Vignette
Syndication Server will meet customer performance needs or expectations when
shipped or that it will be free of significant software defects or bugs. If
Vignette Syndication Server does not meet customer needs or expectations, for
whatever reason, upgrading or enhancing the product could be costly and time
consuming.
If We are Unable to Meet the Rapid Changes in e-Business Applications Technology
Our Existing Products Could Become Obsolete
The market for our products is marked by rapid technological change, frequent
new product introductions and Internet-related technology enhancements,
uncertain product
22
<PAGE>
life cycles, changes in client demands and evolving industry standards. We
cannot be certain that we will successfully develop and market new products, new
product enhancements or new products compliant with present or emerging Internet
technology standards. New products based on new technologies or new industry
standards can render existing products obsolete and unmarketable. To succeed, we
will need to enhance our current products and develop new products on a timely
basis to keep pace with developments related to Internet technology and to
satisfy the increasingly sophisticated requirements of our clients. Internet
commerce technology, particularly e-Business applications technology, is complex
and new products and product enhancements can require long development and
testing periods. Any delays in developing and releasing enhanced or new products
could have a material adverse effect on our business, operating results and
financial condition.
We Face Intense Competition for e-Business Applications Software Which Could
Make it Difficult to Acquire and Retain Clients Now and in the Future
The Internet software market is intensely competitive. Our clients' requirements
and the technology available to satisfy those requirements continually change.
We expect competition to persist and intensify in the future.
Our principal competitors include: in-house development efforts by potential
clients or partners; other vendors of software that directly address elements of
e-Business applications, such as BroadVision; and developers of software that
address only certain technology components of e-Business applications (e.g.,
content management), such as Interwoven.
Many of these companies, as well as some other competitors, have longer
operating histories and significantly greater financial, technical, marketing
and other resources than we do. Many of these companies can also leverage
extensive customer bases and adopt aggressive pricing policies to gain market
share. Potential competitors such as Netscape and Microsoft may bundle their
products in a manner that may discourage users from purchasing our products. In
addition, it is possible that new competitors or alliances among competitors may
emerge and rapidly acquire significant market share.
Competitive pressures may make it difficult for us to acquire and retain clients
and may require us to reduce the price of our software. We cannot be certain
that we will be able to compete successfully with existing or new competitors.
If we fail to compete successfully against current or future competitors, our
business, operating results and financial condition would be materially
adversely affected.
We Must Successfully Integrate Our Recent Acquisition of Diffusion, Inc.
We acquired Diffusion, Inc. on June 30, 1999. Our failure to successfully
address the risks associated with our acquisition of Diffusion could have a
material adverse affect on our ability to develop and market products based on
Diffusion's technology. In particular, we are developing Vignette Multi-Channel
Server based on Diffusion's technology and will be devoting significant
resources to product development, sales and marketing relating to this product.
The success of this acquisition will depend on our ability to:
. Successfully integrate and manage Diffusion's operations;
. Retain Diffusion's software developers; and
. Develop and market products, such as Vignette Multi-Channel Server, based
on Diffusion's technology.
Potential Future Acquisitions Could Be Difficult to Integrate, Disrupt Our
Business, Dilute Stockholder Value and Adversely Affect Our Operating Results
We may acquire other businesses in the future, which would complicate our
management tasks. We may need to integrate widely dispersed operations that
have different and unfamiliar corporate cultures. These integration efforts may
not succeed or may distract management's attention from existing business
operations. Our failure to successfully manage future acquisitions could
seriously harm our business. Also, our existing stockholders would be diluted
if we financed the acquisitions by issuing equity securities.
23
<PAGE>
The Internet is Generating Privacy Concerns in the Public and Within
Governments, Which Could Result in Legislation Materially and Adversely
Affecting Our Business or Result in Reduced Sales of Our Products, or Both
Businesses use our StoryServer product to develop and maintain profiles to
tailor the content to be provided to Web site visitors. Typically, the software
captures profile information when consumers, business customers or employees
visit a Web site and volunteer information in response to survey questions.
Usage data collected over time augments the profiles. However, privacy concerns
may nevertheless cause visitors to resist providing the personal data necessary
to support this profiling capability. More importantly, even the perception of
security and privacy concerns, whether or not valid, may indirectly inhibit
market acceptance of our products. In addition, legislative or regulatory
requirements may heighten these concerns if businesses must notify Web site
users that the data captured after visiting certain Web sites may be used by
marketing entities to unilaterally direct product promotion and advertising to
that user. We are not aware of any such legislation or regulatory requirements
currently in effect in the United States. Other countries and political
entities, such as the European Economic Community, have adopted such legislation
or regulatory requirements. The United States may adopt similar legislation or
regulatory requirements. If consumer privacy concerns are not adequately
addressed, our business, financial condition and operating results could be
materially adversely affected.
Our StoryServer product uses "cookies" to track demographic information and
user preferences. A "cookie" is information keyed to a specific server, file
pathway or directory location that is stored on a user's hard drive, possibly
without the user's knowledge, but generally removable by the user. Germany has
imposed laws limiting the use of cookies, and a number of Internet commentators,
advocates and governmental bodies in the United States and other countries have
urged passage of laws limiting or abolishing the use of cookies. If such laws
are passed, our business, operating results and financial condition could be
materially adversely affected.
We May Be Adversely Impacted by the Year 2000 and Other Information Technology
Issues
The "Year 2000 Issue" refers generally to the problems that some software may
have in determining the correct century for the year. For example, software with
date-sensitive functions that is not Year 2000 compliant may not be able to
distinguish whether "00" means 1900 or 2000, which may result in failures or
the creation of erroneous results. We are subject to potential Year 2000
problems affecting our products, our internal systems and the systems of our
suppliers and customers, any of which could have a material adverse effect on
our business, operating results and financial condition.
We have conducted a Year 2000 readiness review for the current versions of our
products. The review included assessment, implementation (including remediation,
upgrading and replacement of certain product versions), validation testing, and
contingency planning. We continue to respond to customer questions about prior
versions of our products on a case-by-case basis.
We have completed all phases of this plan, except for contingency planning, for
the current versions of our products. As a result, we believe all current
versions of our products are Year 2000 compliant, when configured and used in
accordance with the related documentation, and provided that the underlying
operating system of the host machine and any other software used with or in the
host machine or our products are also Year 2000 compliant. We tested our
products on all platforms or all versions of operating systems that we currently
support and found no significant exceptions. The initial release of StoryServer
4 required a patch to fix a minor error in a third-party product included in
StoryServer 4. We have provided the patch on our Web site in order to be Year
2000 compliant.
We have tested software obtained from third parties, including licensed
software, shareware, and freeware, that is incorporated into our products, and
we are seeking assurances from our vendors that licensed software is Year 2000
compliant. To date, we believe all critical software that we have obtained from
third parties is Year 2000 compliant. Despite testing by us and by current and
potential clients, and assurances from developers of products incorporated into
our products, our products may contain undetected errors or defects associated
with Year 2000 date functions. Known or unknown errors or defects in our
products could result in delay or loss of revenue, diversion of development
resources, damage to our reputation, or increased service and warranty costs,
any of which could materially adversely affect our business, operating results,
or financial condition. Some commentators have predicted significant litigation
24
<PAGE>
regarding Year 2000 compliance issues, and we are aware of such lawsuits against
other software vendors. Because of the unprecedented nature of such litigation,
it is uncertain whether or to what extent we may be affected by it.
Our internal systems include both our information technology, or IT, and non-IT
systems. We hired a third-party consulting group to provide an assessment of our
material internal IT systems, including both our own software products and
third-party software and hardware technology, and our non-IT systems. The
completion of testing yielded no significant exceptions for our critical
internal systems to be Year 2000 compliant. To the extent that we were not able
to test the technology provided by third-party vendors, we are seeking
assurances from vendors that their systems are Year 2000 Compliant. As a result
of testing, we are not currently aware of any material operational issues or
costs associated with preparing our internal IT and non-IT systems for the Year
2000. However, we may experience material unanticipated problems and costs
caused by undetected errors or defects in the technology used in our internal IT
and non-IT systems.
We do not currently have any information concerning the Year 2000 compliance
status of our customers. Our current or future customers may incur significant
expenses to achieve Year 2000 compliance. If our customers are not Year 2000
compliant, they may experience material costs to remedy problems, or they may
face litigation costs. In either case, Year 2000 issues could reduce or
eliminate the budgets that current or potential customers could have for
purchases of our products and services. As a result, our business, results of
operations or financial condition could be materially adversely affected. See
"Risks Related to the Internet Industry--Our Performance Will Depend on the
Growth of the Internet for Commerce."
We have funded our Year 2000 plan from available cash and have not separately
accounted for these costs in the past. To date, these costs have not been
material. We will incur additional costs related to the Year 2000 plan for
administrative personnel to manage the project, outside contractor assistance,
technical support for our products, product engineering and customer
satisfaction. In addition, we may experience material problems and costs with
Year 2000 compliance that could adversely affect our business, results of
operations, and financial condition.
We have not yet fully developed a contingency plan to address situations that
may result if we are unable to achieve Year 2000 readiness of our critical
operations. The cost of developing and implementing such a plan may itself be
material. Finally, we are also subject to external forces that might generally
affect industry and commerce, such as utility or transportation company Year
2000 compliance failures and related service interruptions.
We Develop Complex Software Products Susceptible to Software Errors or Defects
that Could Result in Lost Revenues, or Delayed or Limited Market Acceptance
Complex software products such as ours often contain errors or defects,
particularly when first introduced or when new versions or enhancements are
released. Despite internal testing and testing by current and potential
customers, our current and future products may contain serious defects,
including Year 2000 errors. Serious defects or errors could result in lost
revenues or a delay in market acceptance, which would have a material adverse
effect on our business, operating results and financial condition.
If We Experienced a Product Liability Claim We Could Incur Substantial
Litigation Costs
Since our clients use our products for mission critical applications such as
Internet commerce, errors, defects or other performance problems could result in
financial or other damages to our clients. They could seek damages for losses
from us, which, if successful, could have a material adverse effect on our
business, operating results or financial condition. Although our license
agreements typically contain provisions designed to limit our exposure to
product liability claims, existing or future laws or unfavorable judicial
decisions could negate such limitation of liability provisions. We have not
experienced any product liability claims to date. However, a product liability
claim brought against us, even if not successful, would likely be time consuming
and costly.
Our Product Shipments Could Be Delayed if Third Party Software Incorporated in
Our Products is No Longer Available
25
<PAGE>
We integrate third-party software as a component of our software. The third-
party software may not continue to be available to us on commercially reasonable
terms. If we cannot maintain licenses to key third-party software, such as
GroupLens Express, shipments of our products could be delayed until equivalent
software could be developed or licensed and integrated into our products, which
could materially adversely affect our business, operating results and financial
condition.
Our Business is Based on Our Intellectual Property and We Could Incur
Substantial Costs Defending Our Intellectual Property From Infringement or a
Claim of Infringement
In recent years, there has been significant litigation in the United States
involving patents and other intellectual property rights. We could incur
substantial costs to prosecute or defend any such litigation. Although we are
not currently involved in any intellectual property litigation, we may be a
party to litigation in the future to protect our intellectual property or as a
result of an alleged infringement of other's intellectual property, forcing us
to do one or more of the following:
. Cease selling, incorporating or using products or services that incorporate
the challenged intellectual property;
. Obtain from the holder of the infringed intellectual property right a license
to sell or use the relevant technology, which license may not be available on
reasonable terms; and
. Redesign those products or services that incorporate such technology.
We rely on a combination of patent, trademark, trade secret and copyright law
and contractual restrictions to protect our technology. These legal protections
provide only limited protection. If we litigated to enforce our rights, it would
be expensive, divert management resources and may not be adequate to protect our
business.
Anti-Takeover Provisions in Our Charter Documents and Delaware Law Could Prevent
or Delay a Change in Control of Our Company
Certain provisions of our certificate of incorporation and bylaws may
discourage, delay or prevent a merger or acquisition that a stockholder may
consider favorable. Such provisions include:
. Authorizing the issuance of "blank check" preferred stock;
. Providing for a classified board of directors with staggered, three-year
terms;
. Prohibiting cumulative voting in the election of directors;
. Requiring super-majority voting to effect certain amendments to our
certificate of incorporation and bylaws;
. Limiting the persons who may call special meetings of stockholders;
. Prohibiting stockholder action by written consent; and
. Establishing advance notice requirements for nominations for election to the
board of directors or for proposing matters that can be acted on by
stockholders at stockholder meetings.
Certain provisions of Delaware law and our stock incentive plans may also
discourage, delay or prevent someone from acquiring or merging with us.
Changes in Accounting Standards Could Adversely Affect Our Financial Results
The American Institute of Certified Public Accountants issued Statement of
Position 97-2, Software Revenue Recognition, in October 1997 and amended it by
Statement of Position 98-4. We adopted these statements effective January 1,
1998. In December 1998,
26
<PAGE>
the AICPA issued SOP 98-9 which further amended SOP 97-2 and 98-4. We believe
our current revenue recognition policies and practices are materially consistent
with these statements. However, full implementation guidelines for this standard
have not yet been issued. Once available, our current revenue accounting
practices may need to change and such changes could materially adversely affect
our future revenue and earnings.
Risks Related to the Internet Industry
Our Performance Will Depend on the Growth of the Internet for Commerce
Our future success depends heavily on the Internet being accepted and widely
used for commerce. If Internet commerce does not continue to grow or grows more
slowly than expected, our business, operating results and financial condition
would be materially adversely affected. Consumers and businesses may reject the
Internet as a viable commercial medium for a number of reasons, including
potentially inadequate network infrastructure, slow development of enabling
technologies or insufficient commercial support. The Internet infrastructure may
not be able to support the demands placed on it by increased Internet usage and
bandwidth requirements. In addition, delays in the development or adoption of
new standards and protocols required to handle increased levels of Internet
activity, or increased government regulation could cause the Internet to lose
its viability as a commercial medium. Even if the required infrastructure,
standards, protocols or complementary products, services or facilities are
developed, we may incur substantial expenses adapting our solutions to changing
or emerging technologies.
Our Performance Will Depend on the New Market for e-Business Applications
Software
The market for e-Business applications software is new and rapidly evolving. We
expect that we will continue to need intensive marketing and sales efforts to
educate prospective clients about the uses and benefits of our products and
services. Accordingly, we cannot be certain that a viable market for our
products will emerge or be sustainable. Enterprises that have already invested
substantial resources in other methods of conducting business may be reluctant
or slow to adopt a new approach that may replace, limit or compete with their
existing systems. Similarly, individuals have established patterns of purchasing
goods and services. They may be reluctant to alter those patterns. They may also
resist providing the personal data necessary to support our existing and
potential product uses. Any of these factors could inhibit the growth of online
business generally and the market's acceptance of our products and services in
particular.
There is Substantial Risk that Future Regulations Could Be Enacted that Either
Directly Restrict Our Business or Indirectly Impact Our Business By Limiting the
Growth of Internet Commerce
As Internet commerce evolves, we expect that federal, state or foreign agencies
will adopt regulations covering issues such as user privacy, pricing, content
and quality of products and services. If enacted, such laws, rules or
regulations could limit the market for our products and services, which could
materially adversely affect our business, financial condition and operating
results. Although many of these regulations may not apply to our business
directly, we expect that laws regulating the solicitation, collection or
processing of personal/consumer information could indirectly affect our
business. The Telecommunications Act of 1996 prohibits certain types of
information and content from being transmitted over the Internet. The
prohibition's scope and the liability associated with a Telecommunications Act
violation are currently unsettled. In addition, although substantial portions of
the Communications Decency Act were held to be unconstitutional, we cannot be
certain that similar legislation will not be enacted and upheld in the future.
It is possible that such legislation could expose companies involved in Internet
commerce to liability, which could limit the growth of Internet commerce
generally. Legislation like the Telecommunications Act and the Communications
Decency Act could dampen the growth in Web usage and decrease its acceptance as
a communications and commercial medium.
The United States government also regulates the export of encryption technology,
which our products incorporate. If our export authority is revoked or modified,
if our software is unlawfully exported or if the United States government adopts
new legislation or regulation restricting export of software and encryption
technology, our business, operating results and financial condition could be
materially adversely affected. Current or future export regulations may limit
our ability to distribute our software outside the United States. Although we
take precautions against unlawful
27
<PAGE>
export of our software, we cannot effectively control the unauthorized
distribution of software across the Internet.
Risks Related to the Securities Markets
Our Stock Price May Be Volatile
The market price of our common stock has been highly volatile and has fluctuated
significantly in the past. We believe that it may continue to fluctuate
significantly in the future in response to the following factors, some of which
are beyond our control:
. Variations in quarterly operating results;
. Changes in financial estimates by securities analysts;
. Changes in market valuations of Internet software companies;
. Announcements by us of significant contracts, acquisitions, strategic
partnerships, joint ventures or capital commitments;
. Loss of a major client or failure to complete significant license
transactions;
. Additions or departures of key personnel;
. Sales of common stock in the future; and
. Fluctuations in stock market price and volume, which are particularly
common among highly volatile securities of Internet and software
companies.
Our Business May Be Adversely Affected By Class Action Litigation Due to Stock
Price Volatility
In the past, securities class action litigation has often been brought against a
company following periods of volatility in the market price of its securities.
We may in the future be the target of similar litigation. Securities litigation
could result in substantial costs and divert management's attention and
resources, which could have a material adverse effect on our business, operating
results and financial condition.
We May Be Unable to Meet Our Future Capital Requirements
We expect the net proceeds from our recent initial public offering, cash on
hand, cash equivalents and commercial credit facilities to meet our working
capital and capital expenditure needs for at least the next 12 months. After
that time, we may need to raise additional funds and we cannot be certain that
we would be able to obtain additional financing on favorable terms, if at all.
Further, if we issue equity securities, stockholders may experience additional
dilution or the new equity securities may have rights, preferences or privileges
senior to those of existing holders of common stock. If we cannot raise funds,
if needed, on acceptable terms, we may not be able to develop or enhance our
products, take advantage of future opportunities or respond to competitive
pressures or unanticipated requirements, which could have a material adverse
effect on our business, operating results and financial condition.
28
<PAGE>
PART II. OTHER INFORMATION ITEM
6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS UNDER ITEM 601 OF REGULATION S-K
2.1* Agreement between Registrant and Diffusion, Inc. dated May 10, 1999.
3.1+ Certificate of Incorporation of the Registrant, as amended to date.
3.2+ Form of Amended and Restated Certificate of Incorporation to be
filed on the closing of the offering made hereby.
3.3+ Bylaws of the Registrant.
3.4+ Form of Bylaws to be filed on the closing of the offering made
hereby.
4.1+ Reference is made to Exhibits 3.1, 3.2, 3.3 and 3.4.
4.2+ Specimen common stock certificate.
4.3+ Nineth Amended and Restated Stockholders Agreement dated November
30, 1998.
4.4+ Fifth Amended and Restated Registration Rights Agreement dated
November 30, 1998.
10.1+ Form of Indemnification Agreements.
10.2+ 1995 Stock Option/Stock Issuance Plan and forms of agreements
thereunder.
10.3+ 1999 Equity Incentive Plan.
10.4+ Employee Stock Purchase Plan.
10.5+ 1999 Non-Employee Directors Option Plan.
10.6+ Security and Loan Agreement dated March 24, 1998 between the
Registrant and Imperial Bank.
10.7+ Lease Agreement dated September 20, 1996 between the Registrant and
David B. Barrow, Jr.
10.8+ First Supplement to Lease Agreement dated November 4, 1997 between
Registrant and 3410 Far West, Ltd.
10.9+ Second Supplement to Lease Agreement dated February 23, 1998
between Registrant and 3410 Far West, Ltd.
10.10+ Office Lease Agreement dated August 4, 1998 between Registrant and
B.O. III, Ltd.
10.11+ "Prism" Development and Marketing Agreement dated July 19, 1996
between the Registrant and CNET, Inc.
10.12+ Letter Amendment to "Prism" Development and Marketing Agreement
between the Registrant and CNET, Inc. dated August 15, 1998 and
attachments thereto.
10.13+ Software License Agreement dated April 6, 1998 between Registrant
and Net Perceptions, Inc.
10.14+ StoryServer Q2 Volume Purchase Agreement between Registrant and
Tribune Interactive Inc.
10.15+ Protege Software (Holdings) Confidential Professional Services
Agreement dated November 15, 1997.
10.16+ Subordinated Loan and Security Agreement dated December 3, 1998
between Registrant and Comdisco, Inc.
10.17+ Master Lease Agreement dated December 3, 1998 between Registrant
and Comdisco, Inc.
23.1+ Consent of Independent Auditors.
27.1 Financial Data Schedule.
+Incorporated by reference to the Company's Registration Statement on Form S-1,
as amended (File No. 333-68345).
*Incorporated by reference to the Company's Form 8-K filed on July 15, 1999
(File No. 000-25375).
29
<PAGE>
(b) REPORTS ON FORM 8-K
(i) Report on Form 8-K filed on July 15, 1999 containing Agreement between
Registrant and Diffusion, Inc. dated May 10, 1999 and text of press
release dated July 6, 1999, announcing that the Company acquired all
of the outstanding stock and assumed all outstanding stock options of
Diffusion, Inc. in exchange for approximately 400,000 shares of
Registrant common stock.
(ii) Report on Form 8-K/A filed on September 15, 1999 amending the Form 8-K
filed on July 15, 1999 to include financial statements and pro forma
financial information provided in accordance with the instructions for
Item 7.
30
<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: November 15, 1999 VIGNETTE CORPORATION
(Registrant)
By: /s/ Gregory A. Peters
-------------------------------------
Gregory A. Peters
President and Chief Executive Officer
31
<PAGE>
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
2.1* Agreement between Registrant and Diffusion, Inc. dated May 10, 1999.
3.1+ Certificate of Incorporation of the Registrant, as amended to date.
3.2+ Form of Amended and Restated Certificate of Incorporation to be
filed on the closing of the offering made hereby.
3.3+ Bylaws of the Registrant.
3.4+ Form of Bylaws to be filed on the closing of the offering made
hereby.
4.1+ Reference is made to Exhibits 3.1, 3.2, 3.3 and 3.4.
4.2+ Specimen common stock certificate.
4.3+ Nineth Amended and Restated Stockholders Agreement dated November
30, 1998.
4.4+ Fifth Amended and Restated Registration Rights Agreement dated
November 30, 1998.
10.1+ Form of Indemnification Agreements.
10.2+ 1995 Stock Option/Stock Issuance Plan and forms of agreements
thereunder.
10.3+ 1999 Equity Incentive Plan.
10.4+ Employee Stock Purchase Plan.
10.5+ 1999 Non-Employee Directors Option Plan.
10.6+ Security and Loan Agreement dated March 24, 1998 between the
Registrant and Imperial Bank.
10.7+ Lease Agreement dated September 20, 1996 between the Registrant and
David B. Barrow, Jr.
10.8+ First Supplement to Lease Agreement dated November 4, 1997 between
Registrant and 3410 Far West, Ltd.
10.9+ Second Supplement to Lease Agreement dated February 23, 1998
between Registrant and 3410 Far West, Ltd.
10.10+ Office Lease Agreement dated August 4, 1998 between Registrant and
B.O. III, Ltd.
10.11+ "Prism" Development and Marketing Agreement dated July 19, 1996
between the Registrant and CNET, Inc.
10.12+ Letter Amendment to "Prism" Development and Marketing Agreement
between the Registrant and CNET, Inc. dated August 15, 1998 and
attachments thereto.
10.13+ Software License Agreement dated April 6, 1998 between Registrant
and Net Perceptions, Inc.
10.14+ StoryServer Q2 Volume Purchase Agreement between Registrant and
Tribune Interactive Inc.
10.15+ Protege Software (Holdings) Confidential Professional Services
Agreement dated November 15, 1997.
10.16+ Subordinated Loan and Security Agreement dated December 3, 1998
between Registrant and Comdisco, Inc.
10.17+ Master Lease Agreement dated December 3, 1998 between Registrant
and Comdisco, Inc.
23.1+ Consent of Independent Auditors.
27.1 Financial Data Schedule.
+Incorporated by reference to the Company's Registration Statement on Form S-1,
as amended (File No. 333-68345).
*Incorporated by reference to the Company's Form 8-K filed on July 15, 1999
(File No. 000-25375).
32
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM SEPTEMBER
30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 73,702
<SECURITIES> 0
<RECEIVABLES> 24,483
<ALLOWANCES> 981
<INVENTORY> 77
<CURRENT-ASSETS> 99,590
<PP&E> 8,580
<DEPRECIATION> 3,087
<TOTAL-ASSETS> 132,064
<CURRENT-LIABILITIES> 47,732
<BONDS> 0
0
0
<COMMON> 281
<OTHER-SE> 84,043
<TOTAL-LIABILITY-AND-EQUITY> 132,064
<SALES> 0
<TOTAL-REVENUES> 48,243
<CGS> 0
<TOTAL-COSTS> 21,898
<OTHER-EXPENSES> 65,235
<LOSS-PROVISION> 652
<INTEREST-EXPENSE> 164
<INCOME-PRETAX> (36,851)
<INCOME-TAX> 0
<INCOME-CONTINUING> (36,851)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (36,851)
<EPS-BASIC> (1.72)
<EPS-DILUTED> (1.72)
</TABLE>
