<PAGE>
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE PERIOD ENDED JUNE 30, 2000
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 No.)
901 SOUTH MOPAC EXPRESSWAY
AUSTIN, TEXAS 78746
(Address, including Zip Code, of registrant's 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 Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
As of July 31, 2000, there were 231,654,477 shares of the Registrant's common
stock outstanding.
================================================================================
<PAGE>
VIGNETTE CORPORATION
FORM 10-Q QUARTERLY REPORT
FOR THE QUARTER ENDED JUNE 30, 2000
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
-----
<S> <C> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets at June 30, 2000 and 2
December 31, 1999.................................................
Condensed Consolidated Statements of Operations for the three
months and six months ended June 30, 2000 and 1999................ 3
Condensed Consolidated Statements of Cash Flows for the six
months ended June 30, 2000 and 1999............................... 4
Notes to Condensed Consolidated Financial Statements.............. 5
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................. 9
Item 3. Quantitative and Qualitative Disclosures about Market Risk........ 16
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders............... 26
Item 6. Exhibits and Reports on Form 8-K.................................. 27
SIGNATURES...................................................................... 28
</TABLE>
1
<PAGE>
PART I -- FINANCIAL INFORMATION
ITEM 1 -- FINANCIAL STATEMENTS
VIGNETTE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
in thousands
<TABLE>
<CAPTION>
ASSETS June 30, December 31,
2000 1999
---------- ------------
(Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents............................................. $ 383,541 $391,278
Marketable securities and short-term investments...................... 11,481 10,951
Accounts receivable, net.............................................. 106,398 45,065
Prepaid expenses and other............................................ 6,565 5,588
---------- --------
Total current assets.......................................... 507,985 452,882
Property and equipment, net............................................. 21,800 11,059
Investments............................................................. 60,309 27,011
Intangibles, net........................................................ 492,166 20,467
Other assets............................................................ 3,481 3,311
---------- --------
Total assets.................................................. $1,085,741 $514,730
========== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses................................. $ 56,645 $ 31,074
Deferred revenue...................................................... 75,510 44,846
Current portion of long-term debt and capital lease................... 257 254
Other current liabilities............................................. 5,806 1,497
---------- --------
Total current liabilities..................................... 138,218 77,671
Long-term debt and capital lease, less current portion.................. 135 -
---------- --------
Total liabilities............................................. 138,353 77,671
Stockholders' equity 947,388 437,059
---------- --------
Total liabilities and stockholders' equity.................... $1,085,741 $514,730
========== ========
</TABLE>
See accompanying notes.
2
<PAGE>
VIGNETTE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
in thousands, except per share data
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
----------------------------- ---------------------------
2000 1999 2000 1999
-------- -------- --------- --------
<S> <C> <C> <C> <C>
Revenue:
Product license.................................. $ 42,173 $ 7,575 $ 71,321 $ 12,198
Services......................................... 34,958 7,298 61,039 11,807
-------- -------- --------- --------
Total revenue............................ 77,131 14,873 132,360 24,005
Cost of revenue:
Product license.................................. 2,372 734 3,733 1,153
Services......................................... 25,724 5,765 45,413 10,234
-------- -------- --------- --------
Total cost of revenue.................... 28,096 6,499 49,146 11,387
-------- -------- --------- --------
Gross profit....................................... 49,035 8,374 83,214 12,618
Operating expenses:
Research and development......................... 10,386 2,992 17,920 5,717
Sales and marketing.............................. 34,661 10,027 61,733 16,580
General and administrative....................... 7,533 1,738 12,423 3,349
Purchased in-process research and development,
acquisition-related and other charges.......... 3,135 14,690 59,610 14,690
Amortization of deferred stock compensation...... 1,320 1,288 3,001 2,957
Amortization of intangibles...................... 48,503 - 74,584 -
-------- -------- --------- --------
Total operating expenses................. 105,538 30,735 229,271 43,293
-------- -------- --------- --------
Loss from operations............................... (56,503) (22,361) (146,057) (30,675)
Other income, net.................................. 5,814 834 11,851 1,210
-------- -------- --------- --------
Net loss........................................... $(50,689) $(21,527) $(134,206) $(29,465)
======== ======== ========= ========
Basic net loss per common share.................... $ (0.27) $ (0.14) $ (0.73) $ (0.26)
======== ======== ========= ========
Shares used in computing basic net loss per common
share............................................ 187,007 150,735 182,969 114,528
</TABLE>
See accompanying notes.
3
<PAGE>
VIGNETTE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
in thousands
<TABLE>
<CAPTION>
Six Months Ended June 30,
------------------------------
2000 1999
----------- ----------
<S> <C> <C>
Operating activities:
Net loss............................................................... $(134,206) $(29,465)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation...................................................... 3,673 1,019
Noncash compensation expense...................................... 3,001 2,957
Amortization...................................................... 74,584 -
Purchased in-process research and development,
acquisition-related and other charges (noncash).................. 57,536 14,512
Other noncash items................................................ 522 -
Changes in operating assets and liabilities, net of effects
from purchase of businesses:
Accounts receivable, net........................................ (59,706) (6,648)
Prepaid expenses and other...................................... (8,377) (1,628)
Accounts payable and accrued expenses........................... 21,484 2,881
Deferred revenue................................................ 30,211 11,218
Other liabilities............................................... 4,302 415
--------- --------
Net cash used in operating activities..................... (6,976) (4,739)
Investing activities:
Purchase of property and equipment..................................... (12,861) (3,824)
Purchase of businesses, net of cash acquired........................... 16,896 56
Purchase of short-term investments..................................... (530) -
Purchase of equity securities.......................................... (15,401) (2,000)
--------- --------
Net cash used in investing activities..................... (11,896) (5,768)
Financing activities:
Proceeds from issuance of common stock, net............................ - 73,757
Payments of long-term debt and capital
lease obligations................................................. (88) (2,660)
Proceeds from exercise of stock options
and purchase of employee stock purchase plan shares............... 11,255 632
Proceeds from exercise of warrants..................................... - 251
Payments for repurchase of unvested common
stock........................................................... - (3)
--------- --------
Net cash provided by financing activities................. 11,167 71,977
Effect of exchange rate changes on cash and cash equivalents............. (32) 41
--------- --------
Change in cash and cash equivalents...................................... (7,737) 61,511
Cash and cash equivalents at beginning of period......................... 391,278 12,242
--------- --------
Cash and cash equivalents at end of period............................... $ 383,541 $ 73,753
========= ========
</TABLE>
See accompanying notes.
4
<PAGE>
VIGNETTE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
JUNE 30, 2000
NOTE 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.
The unaudited 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 filed with the United States Securities
and Exchange Commission in the Company's Annual Report on Form 10-K for the year
ended December 31, 1999. The results of operations for the three-month and six-
month periods ended June 30, 2000 and 1999 are not necessarily indicative of
results that may be expected for any other interim period or for the full fiscal
year.
NOTE 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 initial public offering which occurred in
February 1999. Accordingly, a pro forma calculation assuming the conversion of
all outstanding shares as of June 30, 1999 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.
5
<PAGE>
The following table presents the calculation of basic and pro forma basic net
loss per common share (in thousands, except per share data):
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------------------------------------------------
2000 1999 2000 1999
--------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net loss................................... $(50,689) $(21,527) $(134,206) $(29,465)
======== ======== ========= ========
Basic:
Shares used in computing basic net
loss per common share.................. 187,007 150,735 182,969 114,528
======== ======== ========= ========
Basic net loss per common share.......... $ (0.27) $ (0.14) $ (0.73) $ (0.26)
======== ======== ========= ========
Pro forma:
Common shares used above................. 187,007 150,735 182,969 114,528
Pro forma adjustment to reflect weighted
effect of assumed conversion of
convertible preferred stock............ - - - 27,546
-------- -------- --------- --------
Shares used in computing pro forma
basic net loss per common share........ 187,007 150,735 182,969 142,074
======== ======== ========= ========
Pro forma basic net loss per common
share................................. $ (0.27) $ (0.14) $ (0.73) $ (0.21)
======== ======== ========= ========
</TABLE>
NOTE 3 -- COMPREHENSIVE LOSS
The Company's comprehensive loss is comprised of net loss, foreign currency
translation adjustments and unrealized gains and losses on investments held as
available-for-sale investments. The following table presents the calculation of
other comprehensive income for the comparative three and six months ended June
30, 2000 and 1999, respectively (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
----------------------------------------------------------------------
2000 1999 2000 1999
----------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net loss........................... $(50,689) $(21,527) $(134,206) $(29,465)
Foreign currency translation
adjustments..................... (511) 64 (7) 41
Unrealized gain on
investments..................... 17,965 - 17,736 -
-------- -------- --------- --------
Total comprehensive loss........... $(33,235) $(21,463) $(116,477) $(29,424)
======== ======== ========= ========
</TABLE>
NOTE 4 -- BUSINESS COMBINATIONS
During the first quarter of fiscal year 2000, Vignette acquired all of the
outstanding stock and assumed all outstanding stock options of two individual
companies: Engine 5, Ltd. and DataSage, Inc. Both acquisitions were accounted
for as business purchase combinations.
Engine 5. Effective January 18, 2000, the Company acquired Engine 5, Ltd.
("Engine 5"), a developer of enterprise-wide Java server technology, in exchange
for 248,012 shares of Vignette common stock and approximately $4.9 million in
cash. Of the common stock initially exchanged, approximately 143,397 shares
related to the assumption of Engine 5's existing pre-acquisition stock option
grants. The total cost of the acquisition, including transaction costs of
$400,000, was approximately $20.0 million. The acquired net assets were
recorded at their estimated fair values at the effective date of acquisition.
The following table presents the allocation of the purchase price (in
thousands):
6
<PAGE>
<TABLE>
<S> <C>
Acquired technology................................................. $ 1,000
Workforce........................................................... 300
Excess of cost over fair value of net assets
acquired.......................................................... 19,771
Net fair value of tangible assets acquired and
liabilities assumed............................................... (1,093)
-------
Purchase price...................................................... $19,978
=======
</TABLE>
Additionally, contingent consideration of approximately 88,461 shares of
Vignette common stock and approximately $4.3 million in cash will be based upon
defined future employment requirements earned through the first quarter of
fiscal year 2002. The contingent consideration related to the Engine 5
acquisition is not included in the total purchase price, above, but will be
expensed when the future employment requirements have been satisfied.
The amounts allocated to acquired technology and workforce are being amortized
over the assets' estimated useful life which is equivalent to a two-year period.
Similarly, the excess of cost over fair value of net liabilities acquired is
being amortized over the assets estimated useful life which is equivalent to a
two-year period.
DataSage. Effective February 15, 2000, the Company acquired all of the
outstanding stock and assumed all outstanding stock options of DataSage, Inc.
("DataSage"), a leading provider of e-Marketing and personalization applications
that help organizations create a comprehensive single enterprise-wide view of
their customers, in exchange for 9,479,229 shares of Vignette common stock. The
total cost of the acquisition, including transaction costs of $1.1 million, was
approximately $586.6 million. The acquired net assets were recorded at their
estimated fair values at the effective date of acquisition. The following table
presents the allocation of the purchase price (in thousands):
<TABLE>
<S> <C>
In-process research and development................................. $ 43,400
Acquired technology................................................. 4,000
Workforce........................................................... 3,300
Trademark........................................................... 800
Excess of cost over fair value of net assets
acquired.......................................................... 517,596
Net fair value of tangible assets acquired and
liabilities assumed............................................... 17,500
--------
Purchase price...................................................... $586,596
========
</TABLE>
The amounts allocated to acquired technology, workforce and trademark are being
amortized over the assets' estimated useful life which is equivalent to a three-
year period. Similarly, the excess of cost over fair value of net assets
acquired is being amortized over the assets estimated useful life which is
equivalent to a three-year period.
Because these two respective acquisitions were accounted for as purchases, the
results of operations have been included with those of the Company for periods
subsequent to their respective acquisition dates. The following presents the
unaudited pro forma combined results of operations of Vignette with Engine 5 and
DataSage for the six-month periods ended June 30, 2000 and 1999, after giving
effect to certain pro forma adjustments. These pro forma amounts are not
necessarily indicative of what the actual consolidated results of operations
might have been if the acquisition had been effective on January 1, 1999 or of
future results of operations of the consolidated entities (in thousands, except
for per share data):
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
------------------------------------
2000 1999
------------------------------------
<S> <C> <C>
Revenue....................................................... $ 133,435 $ 26,383
Operating loss................................................ (128,583) (122,065)
Net loss...................................................... (116,248) (120,778)
Basic loss per share.......................................... $ (0.63) $ (1.00)
</TABLE>
7
<PAGE>
In connection with our respective acquisitions of Engine 5 and DataSage, we
incurred one-time acquisition costs and integration-related charges, which
included costs associated with product integration, cross training, and other
merger-related costs. Additionally, a portion of the DataSage 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 $3.1 million and $59.6 million for the three-month and
six-month periods ended June 30, 2000, respectively.
NOTE 5 -- CAPITAL STRUCTURE
In November 1999, the Company announced a two-for-one stock split in the form of
a stock dividend. Stockholders received one additional share for each share of
Vignette common stock held on the record date of November 15, 1999. These shares
were paid after market close on December 1, 1999. All financial information
contained herein retroactively reflects the effect of this stock dividend.
In April 2000, the Company effected a three-for-one stock split in the form of a
stock dividend. Stockholders received two additional shares for each share of
Vignette common stock held on the record date of March 27, 2000. These shares
were paid after market close on April 13, 2000. All financial information
contained herein retroactively reflects the effect of this stock dividend.
NOTE 6 -- SUBSEQUENT EVENT
Effective July 5, 2000, the Company acquired all of the outstanding stock and
assumed all outstanding stock options of OnDisplay, Inc. ("OnDisplay"), a
leading provider of XML technology that powers business-to-business integration,
in exchange for approximately 35.9 million shares of the Company's common stock.
Under the terms of the agreement, OnDisplay stockholders received 1.58 shares of
Vignette common stock in exchange for each share of OnDisplay common stock. The
estimated purchase consideration totaled approximately $1.5 billion, inclusive
of estimated acquisition and severance costs. The acquisition will be accounted
for as a purchase business combination and accordingly, the total assets
acquired and liabilities assumed will be recorded at their respective fair
values. The excess of cost over fair value of net assets acquired will be
amortized over the assets estimated useful life and will be recorded in the
Company's consolidated results of operations commencing on the effective date of
the acquisition.
8
<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 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 REPORT ON FORM 10-Q TO CONFORM THESE
STATEMENTS TO ACTUAL RESULTS. SEE ITEM 3, "QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK."
OVERVIEW
We are a leading global provider of e-Business application software products and
services. Our e-Business solutions are designed to enable businesses to build
successful and sustainable online businesses. Our e-Business solutions allow
both traditional brick-and-mortar and startup dot-com businesses to create and
manage Internet business channels that are designed to attract, engage and
retain their customers, partners, and suppliers online. Using our solutions, our
clients build e-Business applications which are focused on personalized and mass
customized multiple touchpoints and communication channels. We were founded in
December 1995. To date, we have developed and released several versions of our
product and have sold our products and services to 802 clients. We market and
sell our products worldwide primarily through our direct sales force but also
market through third party providers.
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 on a time-and-
materials basis. We recognize professional services fees billed on a time-and-
materials basis as the services are performed. 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.
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 of these investments and charges
related to acquisitions, we have incurred significant losses since inception
and, as of June 30, 2000, we had an accumulated deficit of approximately $214.0
million. We believe our success depends on further increasing our client base
and on growth in the emerging e-Business solutions 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,
excluding amortization of intangibles and stock-based compensation, at least
through the first quarter of 2001, and our expected increase in operating
expenses will require significant increases in revenues before we become
profitable on an operating basis.
9
<PAGE>
We had 1,468 full-time employees at June 30, 2000, up from 422 at June 30, 1999.
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,
operating results and financial condition.
Effective January 18, 2000, we acquired Engine 5, Ltd. ("Engine 5"), a developer
of enterprise-wide Java server technology, in exchange for 248,012 shares of
Vignette common stock and approximately $4.9 million in cash. Of the common
stock initially exchanged, approximately 143,397 shares related to the
assumption of Engine 5's existing pre-acquisition stock option grants. The
total cost of the acquisition, including transaction costs of $400,000, was
approximately $20.0 million. The acquisition was accounted for as a purchase
business combination. Accordingly, the acquired net liabilities were recorded
at their estimated fair values at the effective date of the acquisition and the
results of operations of Engine 5 have been included with those of the Company
for the periods subsequent to the date of the acquisition.
Additionally, contingent consideration of approximately 88,461 shares of
Vignette common stock and approximately $4.3 million in cash will be based upon
defined future employment requirements earned through the first quarter of
fiscal year 2002. The contingent consideration related to the Engine 5
acquisition is not included in the total purchase price, above, but will be
expensed when the future employment requirements have been met.
Effective February 15, 2000, we acquired all of the outstanding stock and
assumed all outstanding stock options of DataSage, Inc. ("DataSage"), a leading
provider of e-Marketing and personalization applications that help organizations
create a comprehensive single enterprise-wide view of their customers, in
exchange for 9,479,229 shares of Vignette common stock. The total cost of the
acquisition, including transaction costs, was approximately $586.6 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 DataSage have
been included with those of the Company for the periods subsequent to the date
of the acquisition.
In connection with our respective acquisitions of Engine 5 and DataSage, we
incurred one-time acquisition costs and integration-related charges, which
included costs associated with product integration, cross training, and other
merger-related costs. Additionally, a portion of the DataSage 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 $3.1 million and $59.6 million for the three-month and
six-month periods ended June 30, 2000, respectively.
10
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated the percentage of
revenues represented by certain lines in our condensed consolidated statements
of operations.
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
----------------------------- ---------------------------
2000 1999 2000 1999
--------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
Revenue:
Product license.................................. 55% 51% 54% 51%
Services......................................... 45 49 46 49
---- ----- ----- -----
Total revenue............................ 100 100 100 100
Cost of revenue:
Product license.................................. 3 5 3 5
Services......................................... 33 39 34 43
---- ----- ----- -----
Total cost of revenue.................... 36 44 37 48
---- ----- ----- -----
Gross profit....................................... 64 56 63 52
Operating expenses:
Research and development......................... 13 20 14 24
Sales and marketing.............................. 45 67 47 69
General and administrative....................... 10 12 9 14
Purchased in-process research and development,
acquisition-related and other charges.......... 4 99 45 61
Amortization of deferred stock compensation...... 2 9 2 12
Amortization of intangibles...................... 63 - 56 -
---- ----- ----- -----
Total operating expenses................. 137 207 173 180
---- ----- ----- -----
Loss from operations............................... (73) (151) (110) (128)
Other income, net.................................. 7 6 9 5
---- ----- ----- -----
Net loss........................................... (66)% (145)% (101)% (123)%
==== ===== ===== =====
</TABLE>
Revenue
Total revenue increased 419% to $77.1 million in the three months ended June 30,
2000 from $14.9 million in the three months ended June 30, 1999. Total revenue
increased 451% to $132.4 million in the six months ended June 30, 2000 from
$24.0 million in the six months ended June 30, 1999. This increase was
attributable to an increase in our client base, which grew from 296 at the end
of the second quarter of 1999 to 802 at the end of the second quarter of 2000,
new client business and follow-on business from existing clients. Although our
total revenue has increased in recent periods, we cannot be certain that total
revenue will grow in future periods or that it will grow at similar rates as in
the past.
Product License. Product license revenue increased 457% to $42.2 million in the
three months ended June 30, 2000 from $7.6 million in the three months ended
June 30, 1999, representing 55% and 51% of total revenue, respectively. Product
license revenue increased 485% to $71.3 million in the six months ended June 30,
2000 from $12.2 million in the six months ended June 30, 1999, representing 54%
and 51% of total revenue, respectively. The increase in product license revenue
in absolute dollars was due to increases in the number of new client orders and
implementations resulting from growing market acceptance of our product lines
over prior periods, as well as an increase in follow-on business from existing
clients.
Services. Services revenue increased 379% to $35.0 million in the three months
ended June 30, 2000 from $7.3 million in the three months ended June 30, 1999,
representing 45% and 49% of total revenue,
11
<PAGE>
respectively. Services revenue increased 417% to $61.0 million in the six months
ended June 30, 2000 from $11.8 million in the six months ended June 30, 1999,
representing 46% and 49% of total revenue, respectively. Services revenue from
professional services fees continue to be the primary component of total
services revenue, representing 36% of total revenues in the three months ended
June 30, 2000 as compared to 40% in the three months June 30, 1999. The increase
in all types of services revenue was due primarily to an increase in the number
of clients, which generally include or lead to contracts to perform professional
services and training and purchases of software maintenance and technical
support service agreements.
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
during the first half of 2000 and intend to continue expanding our professional
services organization for the foreseeable future. We do not expect services
revenue 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 $2.4 million in the three months ended June 30, 2000
from $734,000 in the three months ended June 30, 1999, representing 6% and 10%
of product license revenue, respectively. Product license costs increased to
$3.7 million in the six months ended June 30, 2000 from $1.2 million in the six
months ended June 30, 1999, representing 5% and 9% of product license revenue,
respectively. The increase in absolute dollars for the three and six 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 2000 relative to 1999. We expect product license costs to increase in the
future in absolute dollar terms due to additional clients licensing our products
and the acquisition licenses to 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 customer support staffs, as well as third-
party contractor expenses. Services costs increased to $25.7 million in the
three months ended June 30, 2000 from $5.8 million in the three months ended
June 30, 1999, representing 74% and 79% of services revenue, respectively.
Services costs increased to $45.4 million in the six months ended June 30, 2000
from $10.2 million in the six months ended June 30, 1999, representing 74% and
87% of services revenue, respectively. The increase in absolute dollars resulted
from the rapid expansion of 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. Services costs as a percentage of
services revenue can be expected to vary significantly 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.
Professional services-related costs increased to $24.6 million in the three
months ended June 30, 2000 from $5.3 million in the three months ended June 30,
1999, representing 89% and 90% of professional services-related revenue,
respectively. Professional services-related costs increased to $43.4 million in
the six months ended June 30, 2000 from $9.4 million in the six months ended
June 30, 1999, representing 90% and 99% of professional services-related
revenue, respectively. Maintenance and support-related costs increased to $1.2
million in the three months ended June 30, 2000 from $429,000 in the three
months ended June 30, 1999, representing 16% and 32% of maintenance and support-
related revenue, respectively. Maintenance and support-related costs increased
to $2.0 million in the six months ended June 30, 2000 from $802,000 in the six
months ended June 30, 1999, representing 16% and 36% of maintenance and support-
related revenue, respectively.
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Operating Expenses
Research and Development. Research and development expenses consist primarily
of personnel costs to support product development. Research and development
expenses increased to $10.4 million in the three months ended June 30, 2000 from
$3.0 million in the three months ended June 30, 1999, representing 13% and 20%
of total revenue, respectively. Research and development expenses increased to
$17.9 million in the six months ended June 30, 2000 from $5.7 million in the six
months ended June 30, 1999, representing 14% and 24% 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 total 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, such 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 $34.7 million in the three months ended June 30,
2000 from $10.0 million in the three months ended June 30, 1999, representing
45% and 67% of total revenues, respectively. Sales and marketing expenses
increased to $61.7 million in the six months ended June 30, 2000 from $16.6
million in the six months ended June 30, 1999, representing 47% and 69% 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 absolute dollar growth in our customer bookings. The decrease in sales
and marketing expenses as a percentage of total 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
achieve commission accelerators as well as the timing of new product releases.
General and Administrative. General and administrative expenses consist
primarily of salaries and other related costs for operations, finance,
accounting, information technology, and legal employees and certain facilities-
related expenses. General and administrative expenses increased to $7.5 million
in the three months ended June 30, 2000 from $1.7 million in the three months
ended June 30, 1999, representing 10% and 12% of total revenue, respectively.
General and administrative expenses increased to $12.4 million in the six months
ended June 30, 2000 from $3.4 million in the six months ended June 30, 1999,
representing 9% and 14% of total revenue, respectively. The increase in absolute
dollars for these periods was due to increased personnel, information technology
and facility expenses necessary to support our expanding operations. General and
administrative expenses decreased as a percentage of total 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 our continued growth.
Purchased In-Process Research and Development, Acquisition-Related and Other
Charges. In connection with our acquisitions of Engine 5 and DataSage, 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 DataSage purchase price was
allocated to in-process research and development based upon an independent third
party appraisal and was expensed upon the consummation of the transaction. These
related charges totaled $3.1 million and $59.6 million for the three-month and
six-month periods ended June 30, 2000, respectively.
Amortization of Deferred Stock Compensation. We have recorded deferred
compensation for the difference
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between the exercise price of certain stock option grants and the estimated 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 $1.3 million for both three-month periods ended June 30,
2000 and 1999, respectively. Amortization expense related to deferred
compensation was $3.0 million for both six-month periods ended June 30, 2000 and
1999, respectively.
Amortization of Intangibles. In conjunction with our acquisition of Diffusion
Inc., effective June 30, 1999, the purchase price amounts allocated to acquired
technology of $6.3 million and workforce of $900,000, as well as excess of cost
over fair value of net assets acquired of $14.1 million, are being amortized
over the assets' estimated useful lives which is equivalent to three years.
In conjunction with our acquisition of Engine 5, effective January 18, 2000, the
purchase price amounts allocated to acquired technology of $1.0 million and
workforce of $300,000, as well as excess of cost over fair value of net assets
acquired of $19.8 million, are being amortized over the assets' estimated useful
lives, which is equivalent to two years.
Similarly, in conjunction with our acquisition of DataSage, effective February
15, 2000, the purchase price amounts allocated to acquired technology of $4.0
million, workforce of $3.3 million and trademark of $800,000, as well as excess
of cost over fair value of net assets acquired of $517.6 million, are being
amortized over the assets' estimated useful lives, which is equivalent to three
years.
Intangible amortization expense resulting from the above acquisitions was $48.5
million and $74.6 million for the three months and six months ended June 30,
2000, respectively.
Other Income, Net
Other income, net consists primarily of interest income and expense. Other
income, net increased to $5.8 million in the three months ended June 30, 2000
from $834,000 in the three months ended June 30, 1999. Other income, net
increased to $11.9 million in the six months ended June 30, 2000 from $1.2
million in the six months ended June 30, 1999. The increase was due to larger
cash balances on hand resulting from our initial and secondary public offerings
in February 1999 and December 1999, respectively, coupled with increases in
investment yields.
NET OPERATING LOSSES AND TAX CREDIT CARRYFORWARDS
We have provided a full valuation allowance on our net 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
Net cash used in operating activities was $7.0 million and $4.7 million in the
six months ended June 30, 2000 and 1999, respectively. The increase in cash used
in operating activities relates to a higher accounts receivable balance which
results primarily from increased sales.
Net cash used in investing activities was $11.9 million and $5.8 million in the
six months ended June 30, 2000 and 1999, respectively. Our investing activities
consisted largely of capital expenditures totaling $12.9 million and $3.8
million for the six months period ended June 30, 2000 and 1999, respectively, to
acquire property and equipment, mainly computer hardware and software and
leasehold improvements for facilities expansions for our growing employee base.
In addition, during the first half of 2000, our investing activities primarily
included purchases of equity securities totaling $13.6 million for strategic
investments in companies as compared to $2.0 million for the comparable period
in 1999.
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Our purchase of businesses, net of cash received, partially offset our use of
cash in investing activities by $16.9 million and $56,000 in the six months
ended June 30, 2000 and 1999, respectively. We expect that our investing
activities will continue to increase in the foreseeable future as we support our
continued growth.
Net cash provided by financing activities in the six months ended June 30, 2000
and 1999 was $11.2 million and $72.0 million, respectively. Cash provided by
financing activites in the six months ended June 30, 2000 resulted primarily
from proceeds received from the exercise of stock options and purchase of
employee stock purchase plan shares. Cash provided from financing activities for
the six months ended June 30, 1999 resulted from our initial public offering in
the first quarter of 1999.
At June 30, 2000, we had $383.5 million in cash and cash equivalents and $369.8
million in working capital. Based on our current operating plan, we believe that
our cash on hand, cash equivalents, short-term investments and commercial credit
facilities will be sufficient to meet our cash requirements for the foreseeable
future, including working capital requirements and planned capital expenditures.
We may require additional funds 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 June 1998, the Financial Accounting Standards Board issued Statement No. 133,
Accounting for Derivative Instruments and Hedging Activities ("Statement 133").
In June 1999, the FASB issued Statement of Financial Accounting Standards No.
137, Accounting for Derivative Instruments and Hedging Activities--Deferral of
the Effective Date of FASB Statement No. 133 ("Statement 137"), which defers for
one year the effective date of Statement 133. As a result of the deferral
provisions of Statement 137, Statement 133 is now effective for our fiscal year
2001. We have minimal use of derivatives, except for our strategic investments
which are generally in the form of redeemable convertible preferred stock. We
have not determined the impact, if any, that the adoption of Statement 133 will
have on our results of operations or financial position.
In December 1999, the Securities and Exchange Commission staff released Staff
Accounting Bulletin No. 101, Revenue Recognition ("SAB 101"), which provides
guidance on the recognition, presentation and disclosure of revenue in financial
statements. In June 2000, SAB 101B was released which delays the effective date
of SAB 101 until no later than the fourth quarter of fiscal years beginning
after December 15, 1999. The Company does not expect the adoption of SAB 101 to
have a material impact on our results of operations or our financial position.
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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 Europe and the
Asia Pacific region 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 six months ended June 30, 2000.
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 & Poor's 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 June 30, 2000, 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.
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, $42.5 million for the year ended December 31, 1999 and
$134.2 million for the six months ended June 30, 2000. As of June 30, 2000, we
had an accumulated deficit of $214.0 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
We were founded in December 1995 and thus have 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
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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 have varied significantly from quarter to
quarter in the past and we expect our operating results will continue 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 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 future performance.
We plan to increase our operating expenses to expand 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 a limited operating history, we believe that our quarterly
operating results may experience seasonal fluctuations. For instance, quarterly
results may fluctuate based on client 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.
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 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.
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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 certain 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.
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
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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
with 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 25% of our total revenue in the quarter ended June 30, 2000, through
licenses and services sold to clients located outside of the United States. We
expect international revenue to account for an increasing 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
the European Economic
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Community, 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 V/5 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 V/5 software
products. We expect that we will continue to depend on revenue related to new
and enhanced versions of our V/5 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 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
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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 many 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 Acquisitions of, Engine 5, Ltd.,
DataSage, Inc. and OnDisplay, Inc.
We acquired Engine 5, Ltd., DataSage, Inc. and OnDisplay Inc. on January 18,
2000, February 15, 2000, and July 5, 2000, respectively. Our failure to
successfully address the risks associated with our acquisitions of these
companies could have a material adverse effect on our ability to develop and
market products based on their respective technologies. In particular, we are
developing integrated products and, accordingly, are devoting significant
resources to product development, sales and marketing. The success of these
acquisitions will depend on our ability to:
. Successfully integrate and manage their operations;
. Retain their key employees; and
. Develop and market products based on the acquired 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.
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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 V/5 products 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 V/5 products use "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 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. 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
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.
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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.
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.
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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 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
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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 cash on hand, cash equivalents, marketable securities and short-
term investments, 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.
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<PAGE>
PART II -- OTHER INFORMATION
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The annual meeting of the Company's stockholders was held on May 15,2000. At
that meeting, two proposals were submitted to a vote of the Company's
stockholders. Proposal 1 was a proposal to elect two Class I directors (with
Joseph A. Marengi and Steven G. Papermaster being nominees). Proposal 2 was a
proposal to ratify the appointment of Ernst & Young LLP as the Company's
independent public accountants.
<TABLE>
<CAPTION>
NUMBER OF VOTES
-----------------------------------------------------------------
ABSTAIN/ BROKER
PROPOSAL FOR AGAINST WITHHOLD NON-VOTE
----------------- ------------- ------------ -------------
<S> <C> <C> <C> <C>
Proposal 1 - Election of directors:
Joseph A. Marengi 53,424,584 - - -
Steven G. Papermaster 53,421,551 - - -
Proposal 2 - Ratification of Ernst & Young LLP
appointment 53,489,612 8,489 25,574 -
</TABLE>
Consequently, all proposals were passed by the stockholders.
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<PAGE>
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
The following exhibits are filed as a part of this Report:
<TABLE>
<CAPTION>
Exhibit No. Description
--------------- ---------------------------------------------------------------------------------------------------
<C> <S>
2.1* Agreement between Registrant and Diffusion, Inc. dated May 10, 1999.
2.2** Agreement between Registrant and DataSage, Inc. dated January 7, 2000.
2.3**** Agreement and Plan of Merger, among Registrant, Wheels Acquisition Corp. and OnDisplay, Inc.
dated May 21, 2000.
3.1+ Certificate of Incorporation of the Registrant.
3.2*** Amendment to Certificate of Incorporation.
3.3+ Bylaws of the Registrant.
4.1 Reference is made to Exhibits 3.1, 3.2. and 3.3
4.2+ Specimen common stock certificate.
4.3+ 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 date 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.
27.1 Financial Data Schedule.
</TABLE>
_________
+ 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).
** Incorporated by reference to the Company's Form 8-K filed on
February 29, 2000 (File No. 000-25375).
*** Incorporated by reference to the Company's definitive Proxy Statement
for Special Meeting of Stockholders, dated February 17, 2000.
**** Incorporated by reference to the Company's Registration Statement on
Form S-4, as amended (File No. 333-38478).
(b) REPORTS ON FORM 8-K
(i) Report on Form 8-K filed on April 25, 2000 containing Registrant's April
19, 2000 press release announcing first quarter sales and earnings for the
three months ended March 31, 2000.
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<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.
VIGNETTE CORPORATION
Date: August 14, 2000 By: /s/ Joel G. Katz
-------------------------------
Joel G. Katz
Secretary and
Chief Financial Officer
(Duly Authorized Officer and
Principal Financial Officer)
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