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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 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)
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(512) 306-4300 (Registrant's telephone number, including area code)
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days
(1) Yes X No
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(2) Yes No X
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As of May 7, 1999 there were 27,390,649 shares of the Registrant's common
stock outstanding.
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VIGNETTE CORPORATION
FORM 10-Q
INDEX
PART I. FINANCIAL INFORMATION PAGE
----
Item 1. Financial Statements 3
Condensed Consolidated Balance Sheets at March 31, 1999
and December 31, 1998 3
Condensed Consolidated Statements of Operations for the
three months ended March 31, 1999 and 1998 4
Condensed Consolidated Statements of Cash Flows for the
three months ended March 31, 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 8
Item 3. Quantitative and Qualitative Disclosures about Market Risk 15
PART II. OTHER INFORMATION 26
Item 6. Exhibits and Reports on Form 8-K 26
SIGNATURES 27
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
VIGNETTE CORPORATION
Condensed Consolidated Balance Sheets
(in thousands)
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
--------- ------------
(Unaudited)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $81,989 $ 12,242
Accounts receivable, net 10,763 7,488
Prepaid expenses and other 885 390
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Total current assets 93,637 20,120
Property and equipment, net 3,043 1,754
Other assets 362 907
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Total assets $97,042 $ 22,781
======= ========
Liabilities and Stockholders' Equity (Deficit)
Current liabilities:
Accounts payable and accrued expenses $ 7,636 $ 8,090
Deferred revenues 12,296 6,092
Current portion of long-term debt and capital lease 1,896 1,902
Other current liabilities 553 279
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Total current liabilities 22,381 16,363
Long-term debt and capital lease, less current portion 659 758
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Total liabilities 23,040 17,121
Redeemable convertible preferred stock - 36,258
Warrant - 169
Stockholders' equity (deficit) 74,002 (30,767)
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Total liabilities and stockholders' equity (deficit) $97,042 $ 22,781
======= ========
</TABLE>
See accompanying notes.
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VIGNETTE CORPORATION
Condensed Consolidated Statements of Operations
(in thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three months ended March 31,
----------------------------
1999 1998
------- --------
<S> <C> <C>
Revenue:
Product license $ 4,623 $ 1,293
Services 4,509 958
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Total revenue 9,132 2,251
Cost of revenue:
Product license 419 25
Services 4,469 850
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Total cost of revenue 4,888 875
Gross profit 4,244 1,376
Operating expenses:
Research and development 2,725 1,112
Sales and marketing 6,553 1,677
General and administrative 1,611 698
Amortization of deferred stock compensation 1,669 16
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Total operating expenses 12,558 3,503
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Loss from operations (8,314) (2,127)
Other income, net 376 38
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Net loss $(7,938) $(2,089)
======= =======
Basic net loss per share $ (0.61) $ (1.10)
======= =======
Shares used in computing basic net loss per share 12,988 1,902
======= =======
</TABLE>
See accompanying notes.
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VIGNETTE CORPORATION
Condensed Consolidated Statements of Cash Flows
(in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three months ended March 31,
----------------------------
1999 1998
-------- --------
<S> <C> <C>
Operating activities:
Net loss $(7,938) $(2,089)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation 441 84
Non cash compensation expense 1,669 16
Changes in operating assets and liabilities:
Accounts receivable, net (3,275) (1,529)
Prepaid expenses and other assets 50 (10)
Accounts payable and accrued expenses (454) (295)
Deferred revenue 6,204 939
Other liabilities 274 72
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Net cash used in operating activities (3,029) (2,812)
Investing activities:
Purchase of property and equipment (1,710) (300)
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Net cash used in investing activities (1,710) (300)
Financing activities:
Proceeds from issuance of common stock, net 74,008 -
Proceeds from long-term debt and capital lease obligation - 1,837
Payments on long-term debt and capital lease obligation (105) (6)
Proceeds from exercise of stock options 609 103
Payments for repurchase of unvested common stock (3) (1)
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Net cash provided by financing activities 74,509 1,933
Effect of exchange rate on cash and cash equivalents (23) (1)
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Net increase (decrease) in cash and cash equivalents 69,747 (1,180)
Cash and cash equivalents at beginning of period 12,242 6,865
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Cash and cash equivalents at end of period $81,989 $ 5,685
======= =======
</TABLE>
See accompanying notes.
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VIGNETTE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 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 $73.8 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). The results of operations for the
three month periods ended March 31, 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
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.
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
March 31, 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.
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 March 31,
----------------------------
1999 1998
-------- --------
<S> <C> <C>
Net loss $(7,938) $(2,089)
======= =======
Basic:
Shares used in computing basic net loss 12,988 1,902
======= =======
Basic net loss per share $ (0.61) $ (1.10)
======= =======
Pro forma:
Shares used above 12,988 1,902
Pro forma adjustment to reflect weighted effect of assumed
conversion of convertible preferred stock 9,233 12,871
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Shares used in computing pro forma basic net loss
</TABLE>
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<TABLE>
<S> <C> <C>
per share 22,221 14,773
======= =======
Pro forma basic net loss per share $ (0.36) $ (0.14)
======= =======
</TABLE>
3. Comprehensive Loss
Effective July 1, 1998, the Company adopted Financial Accounting Standards Board
(FASB) Statement No. 130, Reporting Comprehensive Income (Statement 130).
Statement 130 establishes new rules for the reporting and display of
comprehensive income (loss) and its components. The components of comprehensive
loss are as follows:
<TABLE>
<CAPTION>
Three months ended March 31,
----------------------------
1999 1998
------- -------
<S> <C> <C>
Net loss $(7,938) $(2,089)
Foreign currency translation adjustments (23) (1)
------- -------
Comprehensive loss $(7,961) $(2,090)
======= =======
</TABLE>
4. Subsequent Event
During May 1999, the Company entered into an agreement to acquire 100 percent of
the outstanding stock and assume all stock options of Diffusion, Inc. in
exchange for approximately 400,000 shares of Vignette common stock. Vignette
will account for the transaction using purchase accounting and expects to close
the acquisition by June 30, 1999, subject to approval by the shareholders of
Diffusion and other customary closing conditions. Vignette expects to incur one-
time acquisition costs and integration related charges associated with the
transaction which include costs associated with product integration, cross
training, and other merger related costs. Additionally, Vignette anticipates a
portion of the purchase price will be allocated to In Process Research and
Development and expensed upon the consummation of the transaction.
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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 Internet Relationship Management
software products and services, a new category of enterprise solutions 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 250 clients. We market and sell our products worldwide primarily through
our direct sales force. Our principal office is in Austin, Texas, and we also
have offices in Alexandria, Virginia; Atlanta, Georgia; Boston, Massachusetts;
Chicago, Illinois; Dallas, Texas; Denver, Colorado; Newport Beach, California;
New York, New York; San Mateo, California; Seattle, Washington; Valencia,
California; Hamburg, Germany; London, England; Paris, France; and Sydney,
Australia.
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 basis 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 the product license fee. 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.
Despite our revenue growth, we have incurred significant losses since inception
and, as of March 31, 1999, we had an accumulated deficit of approximately $45.3
million. We believe our success depends on further increasing our client base
and on growth in the emerging Internet Relationship Management 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 1999, and our expected increase in operating
expenses will require significant increases in revenues before we become
profitable.
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We had 350 full-time employees at March 31, 1999, up from 102 at March 31, 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 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.
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
operation.
<TABLE>
<CAPTION>
Three months ended March 31,
----------------------------
1999 1998
-------- --------
<S> <C> <C>
Revenue:
Product license 51% 58%
Services 49 42
---- ----
Total revenue 100 100
Cost of revenue:
Product license 5 1
Services 49 38
---- ----
Total cost of revenue 54 39
Gross profit 46 61
Operating expenses:
Research and development 30 49
Sales and marketing 71 75
General and administrative 18 31
Amortization of deferred stock compensation 18 1
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Total operating expenses 137 156
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Loss from operations (91) (95)
Other income, net 4 2
---- ----
Net loss (87)% (93)%
==== ====
</TABLE>
Revenue
Total revenue increased 306% to $9.1 million in the three months ended March 31,
1999 from $2.3 million in the first three months ended March 31, 1998. This
increase was attributable to product license and services sales to the increase
in our client base from 73 clients in the first quarter of 1998 to 229 clients
in the first quarter of 1999 resulting in substantial growth in product license
and services revenue. 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.
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Product License. Product license revenue increased 258% to $4.6 million in the
three months ended March 31, 1999 from $1.3 million in the first three months
ended March 31, 1998, representing 51% and 58% of total revenue, respectively.
The increase in product license revenue in absolute dollars was due primarily to
an increase in the number of clients and average deal size resulting from
growing market acceptance of our StoryServer product line. Product license
revenue decreased as a percentage of total revenue due to the increase in
services revenue during the same period.
Services. Services revenue increased 371% to $4.5 million in the three months
ended March 31, 1999 from $958,000 in the three months ended March 31, 1998,
representing 49% and 42% of total revenue, respectively. Services revenue from
professional services fees increased to $3.6 million in the three months ended
March 31, 1999 from $791,000 in the three months ended March 31, 1998. Services
revenue from maintenance and support agreements increased to $904,000 in the
three months ended March 31, 1999 from $167,000 in the three months ended March
31, 1998. The increase in all types of services revenue was due primarily to an
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 in the first quarter
of 1999 due to the expansion of our services capabilities by hiring 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 use and
sell our products. As a result, we continued to expand our professional services
organization in the first quarter of 1999 and intend to continue expanding our
professional services organization for the foreseeable future. We expect that
professional services-related revenue will increase in absolute dollars in the
future to the extent that additional clients license our products and as we
expand both our capacity for the delivery of professional services as well as
the scope of our professional services offerings. We expect that services
revenue from maintenance and support agreements will increase in absolute
dollars in the future due to the maintenance components of new and existing
license agreements.
Cost of Revenue
Product License. Product license costs consist of expenses we incurred 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 $419,000 in the three months ended March 31, 1999
from $25,000 in the three months ended March 31, 1998, representing 9% and 2% of
product license revenue, respectively. The increase in absolute dollars and as a
percentage of product license revenue in the first quarter of 1999 was primarily
attributable to an OEM royalty arrangement signed in the second quarter of 1998
which added functionality into StoryServer. We expect product license costs to
increase in the future in absolute dollar terms due to additional clients
licensing our products and the addition of third party technology that we
may choose to embed in our product offerings.
Services. Services costs include salary expense and other related costs for our
professional service, maintenance and telephone support staffs, as well as
third-party contractor expenses. Services costs increased to $4.5 million in the
three months ended March 31, 1999 from $850,000 in the three months ended March
31, 1998, representing 99% and 89% of services revenue, respectively. The
increase in dollar amount was primarily due to startup costs incurred from
rapidly expanding our professional services organization. Services costs related
to professional services increased to $4.1 million in the three months ended
March 31, 1999 from $786,000 in the three months ended March 31, 1998,
representing 114% and 99% of professional services-related revenue. Services
costs related to maintenance and support agreements
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increased to $373,000 in the three months ended March 31, 1999 from $64,000 in
the three months ended March 31, 1998, representing 41% and 38% of maintenance
and support-related revenue, respectively.
To date, our services costs related to professional services have been
significantly higher than our services revenue related to professional services,
and, overtime, we believe we will be able to reverse this trend. We expect
services costs to increase in the future in absolute dollars to the extent that
we continue to generate new clients and associated product license and services
revenue. Services costs as a percentage of services revenue can be expected to
vary from period to period depending on the mix of services we provide, whether
such services are provided by us or third-party contractors, and overall
utilization rates.
Operating Expenses
Research and Development. Research and development expenses consist primarily of
personnel costs to support product development. Research and development
expenses increased to $2.7 million in the three months ended March 31, 1999 from
$1.1 million in the three months ended March 31, 1998, representing 30% and 49%
of total revenue, respectively. The increase in absolute dollars in the first
quarter of 1999 was due to increases in engineering personnel. Research
and development expenses decreased as a percentage of revenues primarily because
significant revenue growth outpaced research and development expenditures. We
believe that continued investment in research and development is critical to
attaining our strategic objectives, and, as a result, we expect research and
development expenses to increase significantly in absolute dollars in future
periods. Software development costs that were eligible for capitalization in
accordance with Statement of Financial Accounting Standards No. 86 were
insignificant during these periods. 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 $6.6 million in the three months ended March 31,
1999 from $1.7 million in the three months ended March 31, 1998, representing
71% and 75% of total revenue, respectively. The increase in absolute dollars was
due to a significant increase in sales and marketing personnel and our increased
marketing program expenditures. We believe these expenses will continue to
increase in future periods as we expect to continue to expand our sales and
marketing efforts. We also anticipate that sales and marketing expenses may
fluctuate as a percentage of total revenue from period to period based on the
timing of new product releases and as new sales personnel are hired and begin to
achieve productivity.
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 $1.6 million in the
three months ended March 31, 1999 from $698,000 in the three months ended March
31, 1998, representing 18% and 31% of total revenue, 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 revenues primarily because
significant revenue growth outpaced general and administrative expenditures. We
believe general and administrative expenses will increase in absolute dollars as
we expect to add personnel to support our expanding operations and incur
additional costs related to the growth of our business.
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 $1.7 million in the three months
ended March 31, 1999 and $16,000 in the three months ended March 31, 1998.
Other Income, Net
Other income, net consists of interest income and expense and gain or loss on
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disposals of equipment. Other income, net increased to $376,000 in the three
months ended March 31, 1999 from $38,000 in the three months ended March 31,
1998. The increase was due to a $381,000 increase in interest income earned from
cash balances on hand as a result from our recent public offering, partially
offset by a $43,000 increase in interest expense and other in the first quarter
of 1999.
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 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 $2.8 million and $3.0 million for the
three months ended March 31, 1998 and 1999, respectively. Our investing
activities have consisted primarily of capital expenditures totaling $300,000
and $1.7 million for the three months ended March 31, 1998 and 1999,
respectively, for leasehold improvements and to acquire property and equipment,
mainly computer hardware and software, for our growing employee base. We expect
that our capital expenditures will increase as our employee base grows. Net cash
provided by financing activities for the three months ended March 31, 1998 and
1999 was $1.9 million and $74.5 million, respectively. The increase was due
primarily to the receipt of proceeds from our recent initial public offering.
At March 31, 1999, we had $82.0 million in cash and cash equivalents and $71.3
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.
Recent Accounting Pronouncements
SOP 98-9, which was issued in December 1998, 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 June 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 June 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 the first phases of a Year 2000 readiness review for the
current versions of our products. The review includes 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 largely completed all phases of our plan, except for contingency
planning,
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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
(e) recognize year 2000 as a leap year.
We have not tested our products on all platforms or all versions of operating
systems that we currently support. 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. 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 have initiated an assessment of our material internal IT
systems, including both our own software products and third-party software and
hardware technology, but we have not initiated an assessment of our non-IT
systems. We expect to complete testing of our IT systems in 1999. To the extent
that we are 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
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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.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The majority of the Company's operations are based in the U.S. and, accordingly,
the majority of its transactions are denominated in U.S. Dollars. However, the
Company does 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, the Company has operations in
Australia, England, France, and Germany and conducts transactions in the local
currency of each location. The impact of fluctuations in the relative value of
other currencies was not material for the quarter ended March 31, 1999.
RISK FACTORS THAT MAY AFFECT FUTURE RESULTS
RISK FACTORS
You should carefully consider the following risks before making an investment in
the Company. 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 may lose all or part of your
investment in the Company. 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 $7.9 million for the three months ended March 31,
1999. As of March 31, 1999, we had an accumulated deficit of $45.3 million. We
have not achieved profitability and we expect to incur net losses for the
foreseeable future. To date, we have 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 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;
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. 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 Internet Relationship
Management 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 nine quarters in the period ended March
31, 1999, we had at least one customer that accounted for at least 10% of total
revenue in such quarter.
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
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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.
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 Internet Relationship Management
applications. Our long sales cycle makes it difficult to predict the quarter in
which sales may fall. Delays in product implementation could cause significant
variability in our license revenues and operating results for any particular
period. In addition, the implementation of our products requires a significant
commitment of resources by our clients, third-party professional services
organizations or our professional services organization. In many cases, we
recognize a substantial portion of the revenue from product sales upon
implementation of our product.
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
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, our services costs have been significantly higher than
our services revenue, and we expect that trend to continue for the foreseeable
future. 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.
If Our International Revenue Continues to Grow in Absolute Dollars and as a
Percentage of Revenue, Our Business Would 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;
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. Foreign currency exchange rate fluctuations; and
. Political and economic instability.
We received 19% of our total revenue in the quarter ended March 31, 1999 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 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.
We Must Successfully Integrate Any Business Or Technology Acquisitions
Our failure to successfully address the risks associated with any acquisitions
could have a material adverse affect on our business, operating results and
financial condition. The success of any acquisition will depend on our ability
to:
. Successfully integrate and manage business operations and technology;
. Retain key employees; and
. Implement our business strategy relevant to the acquisition.
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. In
addition, we moved to new headquarters facilities in December 1998, which was
and will continue to be a disruptive, time consuming and expensive process.
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 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.
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Our Future Revenue is Dependent Upon Our Ability to Successfully Introduce
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 announced Vignette
Syndication Server in October 1998 and we shipped 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 Internet Relationship
Management 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 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 Internet Relationship
Management 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 Internet Relationship Management 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
Internet Relationship Management, such as BroadVision; and developers of
software that address only certain technology components of Internet
Relationship Management (e.g., content management), such as Inso Corporation.
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
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results and financial condition would be materially adversely affected.
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 the first phases of a Year 2000 readiness review for the
current versions of our products. The review includes 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 largely 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 have not
tested our products on all platforms or all versions of operating systems that
we currently support. 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
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assurances from our vendors that licensed software 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.
Our internal systems include both our information technology, or IT, and non-IT
systems. We have initiated an assessment of our material internal IT systems,
including both our own software products and third-party software and hardware
technology, but we have not initiated an assessment of our non-IT systems. We
expect to complete testing of our IT systems in 1999. To the extent that we are
not able to test the technology provided by third-party vendors, we are seeking
assurances from vendors that their systems are Year 2000 Compliant. 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.
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,
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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
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. For instance, we license GroupLens Express from Net Perceptions, Inc. for
certain personalization functionality in StoryServer 4. The agreement expires in
October 1999, but it is renewed automatically unless either party gives 60 days
notice prior to the renewal date. 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.
Our Existing Stockholders Exercise Significant Control Over Vignette
Executive officers and directors and their affiliates beneficially own, in the
aggregate, approximately 46% of our outstanding common stock. As a result, these
stockholders will be able to exercise significant control over all matters
requiring stockholder approval, including the election of directors and approval
of significant corporate transactions, which could delay or prevent someone from
acquiring or merging with us.
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;
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. 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, 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 Internet Relationship
Management Software
The market for Internet Relationship Management 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.
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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 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
An active public market for our common stock may not develop or be sustained.
The market price of the common stock may fluctuate significantly 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
24
<PAGE>
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 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.
25
<PAGE>
PART II. OTHER INFORMATION ITEM
6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS UNDER ITEM 601 OF REGULATION S-K
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+ Sixth 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 June 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).
(b) Reports on Form 8-K
None.
26
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: May 14, 1999 VIGNETTE CORPORATION
(Registrant)
By: /s/ Gregory A. Peters
---------------------------------------
Gregory A. Peters
President and Chief Executive
Officer
27
<PAGE>
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
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+ Sixth 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 June 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).
28
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM MARCH 31,
1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 81,989
<SECURITIES> 0
<RECEIVABLES> 11,130
<ALLOWANCES> 367
<INVENTORY> 0
<CURRENT-ASSETS> 93,637
<PP&E> 4,766
<DEPRECIATION> 1,723
<TOTAL-ASSETS> 97,042
<CURRENT-LIABILITIES> 22,381
<BONDS> 0
0
0
<COMMON> 274
<OTHER-SE> 73,728
<TOTAL-LIABILITY-AND-EQUITY> 97,042
<SALES> 0
<TOTAL-REVENUES> 9,132
<CGS> 0
<TOTAL-COSTS> 4,469
<OTHER-EXPENSES> 12,558
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 66
<INCOME-PRETAX> (7,938)
<INCOME-TAX> 0
<INCOME-CONTINUING> (7,938)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (7,938)
<EPS-PRIMARY> (0.61)
<EPS-DILUTED> (0.61)
</TABLE>
