<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington DC 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1996
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from to
------------ ------------
Commission File Number: 0-26592
THE VANTIVE CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 77-0266662
(State or other (I.R.S. Employer
jurisdiction of Identification No.)
incorporation or
organization)
2455 Augustine Drive
Santa Clara, California 95054
(408) 982-5700
(Address and telephone number of principal executive offices)
Indicate by check mark whether 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
------ ------
The number of shares of the Registrant's $0.001 par value Common
Stock outstanding on August 6, 1996, was 12,027,815.
This report consists of 17 pages.
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THE VANTIVE CORPORATION
FORM 10-Q
TABLE OF CONTENTS
PAGE NO.
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PART I: FINANCIAL INFORMATION
Item 1: Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets as of 3
June 30, 1996 and December 31, 1995
Condensed Consolidated Statements of Operations 4
for the Quarters Ended June 30, 1996 and 1995 and the Six
Months ended June 30, 1996 and 1995
Condensed Consolidated Statements of Cash Flows 5
for the Six Months ended June 30, 1996 and 1995
Notes to Condensed Consolidated Financial Statements 6
Item 2: Management's Discussion and Analysis of Financial 8
Condition and Results of Operations
PART II: OTHER INFORMATION
Item 1: Legal Proceedings 15
Item 2: Changes in Securities 15
Item 3: Defaults upon Senior Securities 15
Item 4: Submissions of Matters to a Vote of Security Holders 15
Item 5: Other Information 15
Item 6: Exhibits and Reports on Form 8-K 16
Signatures 17
2
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Part I: Financial Information
Item I: Financial Statements
THE VANTIVE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Share and Per Share Amounts)
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995
--------- ------------
(unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ..................... $ 20,345 $ 17,614
Short-term investments ........................ 10,725 8,815
Accounts receivable, net ..................... 7,270 4,049
Prepaid expenses and other current assets ..... 1,559 1,265
--------- ------------
Total current assets ........................ 39,899 31,743
Property and equipment, net ................... 4,065 2,628
Other assets ................................. 246 216
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TOTAL ASSETS .................................. $ 44,210 $ 34,587
--------- ------------
--------- ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued liabilities ...... $ 6,636 $ 4,328
Deferred revenues ............................. 5,303 2,952
--------- ------------
Total current liabilities ................... 11,939 7,280
Long-term liabilities ........................ 621 650
STOCKHOLDERS' EQUITY
Preferred Stock: $.001 par value, 2,000,000
shares authorized; no shares issued and
outstanding at June 30, 1996 ................. -- --
Common Stock: $.001 par value, 50,000,000
shares authorized; 11,947,619 shares at
December 31, 1995 and 12,004,335 shares at
June 30, 1996 issued and outstanding ......... 12 12
Additional paid-in-capital ................... 31,850 31,538
Accumulated deficit ........................... (212) (4,893)
--------- ------------
Total stockholders' equity ................... 31,650 26,657
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ..... $ 44,210 $ 34,587
--------- ------------
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</TABLE>
3
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THE VANTIVE CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(In Thousands, Except Per Share Amounts)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------------ ------------------------
1996 1995 1996 1995
----------- ----------- ----------- -----------
(unaudited) (unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C>
REVENUES:
License fees ................ $ 9,914 $ 3,634 $ 17,002 $ 6,687
Services .................... 5,287 1,883 9,012 3,017
----------- ----------- ----------- -----------
Total revenues ............. 15,201 5,517 26,014 9,704
COST OF REVENUES:
Licenses .................... 97 47 153 82
Services..................... 2,769 1,477 5,091 2,530
----------- ----------- ----------- -----------
Total cost of revenues ..... 2,866 1,524 5,244 2,612
----------- ----------- ----------- -----------
GROSS MARGIN ................. 12,335 3,993 20,770 7,092
OPERATING EXPENSES:
Sales and marketing ......... 5,100 2,390 9,926 4,266
Research and development .... 1,403 761 2,505 1,468
General and administrative .. 1,136 459 2,215 873
----------- ----------- ----------- -----------
Total operating expenses ... 7,639 3,610 14,646 6,607
----------- ----------- ----------- -----------
OPERATING INCOME ............. 4,696 383 6,124 485
----------- ----------- ----------- -----------
OTHER INCOME/(EXPENSE) ....... 287 (4) 559 5
----------- ----------- ----------- -----------
INCOME BEFORE PROVISION
FOR INCOME TAXES ............. 4,983 379 6,683 490
PROVISION FOR INCOME TAXES ... 1,665 38 2,005 49
----------- ----------- ----------- -----------
NET INCOME ................... $ 3,318 $ 341 $ 4,678 $ 441
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
NET INCOME PER SHARE ......... $ 0.26 $ 0.03 $ 0.37 $ 0.04
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
SHARES USED IN PER SHARE
COMPUTATION .................. 12,813 11,064 12,773 10,959
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
4
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THE VANTIVE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
-------------------------
1996 1995
----------- -----------
(unaudited) (unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ...................................... $ 4,678 $ 441
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization .................. 548 253
Provision for sales allowances ................. 285 150
Changes in net assets and liabilities -
Increase in accounts receivable ................ (3,506) (2,001)
Increase in prepaid expenses and other current
assets......................................... (297) (106)
Increase in other assets ....................... (20) (75)
Increase in accounts payable and accrued
liabilities.................................... 2,320 589
Increase in deferred revenues .................. 2,351 692
Increase in deferred rent ...................... 57 11
----------- -----------
Net cash provided by (used in) operating
activities..................................... 6,416 (46)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of short-term investments .............. (1,916) --
Purchase of property and equipment .............. (1,985) (641)
----------- -----------
Net cash used in investing activities .......... (3,901) (641)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of mandatorily redeemable
convertible preferred stock .................... -- 50
Proceeds from issuance of common stock .......... 325 183
Repurchase of common stock ...................... (15) --
Payments on capital lease obligations ........... (98) (158)
----------- -----------
Net cash provided by financing activities ...... 212 75
----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS ..................................... 2,727 (612)
EFFECT OF EXCHANGE RATE CHANGES ON CASH .......... 4 9
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD ... 17,614 3,154
----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD ......... $ 20,345 2,551
----------- -----------
----------- -----------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW ACTIVITY
Cash paid for interest .......................... $ 95 $ 52
----------- -----------
----------- -----------
Cash paid for income taxes ...................... $ 1,268 $ -
----------- -----------
----------- -----------
</TABLE>
5
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THE VANTIVE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED
1. BASIS OF PRESENTATION
The condensed consolidated financial statements included
herein have been prepared by the Company, without audit, pursuant
to the rules and regulations of the Securities and Exchange
Commission. Certain information and footnote disclosures
normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed
or omitted pursuant to such rules and regulations. However, the
Company believes that the disclosures are adequate to make the
information presented not misleading. These condensed
consolidated financial statements should be read in conjunction
with the financial statements and the notes thereto included in
the Company's Annual Report on Form 10-K for the year ended
December 31, 1995.
The unaudited information has been prepared on the same
basis as the annual financial statements, and in the opinion of
the Company's management, reflects all normal recurring
adjustments necessary for a fair presentation of the information
for the periods presented. Operating results for any quarter are
not necessarily indicative of the results for any future periods.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The condensed consolidated financial statements include the
accounts of the Company and its wholly-owned subsidiaries.
Intercompany accounts and transactions have been eliminated.
REVENUES
The Company generates revenues from licensing the rights to
use its software products directly to end-users and indirectly
through sublicense fees from resellers. The Company also
generates revenues from sales of post-contract support,
consulting and training services performed for customers who
license its products.
Revenues from perpetual software license agreements are
recognized upon shipment of the software if there are no
significant post-delivery obligations, if collection is probable
and if payment is due within one year. If an acceptance period
is required, revenues are recognized upon the earlier of customer
acceptance or the expiration of the acceptance period. The
Company enters into reseller arrangements that typically provide
for sublicense fees payable to the Company based on a percent of
the Company's list price. Sublicense fees are recognized as
reported by the reseller in relicensing the Company's products to
end-users.
Revenues from post-contract support services are recognized
ratably over the term of the support period. If post-contract
support services are included free or at a discount in a license
agreement, such amounts are allocated out of the license fee at
their fair market value based on the value established by
independent sale of such post-contract support services to
customers. Consulting revenues are primarily related to
implementation services performed on a time and materials basis
under separate service arrangements related to the installation
of the Company's software products. Revenues from consulting and
training services are recognized as services are performed. If a
transaction includes both license and service elements, license
fee revenue is recognized upon shipment of the software, provided
services do not include significant customization or modification
of the base product and the payment term for licenses are not
subject to acceptance criteria. In cases where license fee
payments are contingent upon the acceptance of services, revenues
from both the license and the service elements are deferred until
the acceptance criteria are met.
6
<PAGE>
NET INCOME PER SHARE
Except as noted below, net income per share is computed
using the weighted average number of outstanding shares of common
and common equivalents from outstanding stock options (when
dilutive using the treasury stock method). Common equivalent
shares were excluded from the computation if their effect was
antidilutive except that, pursuant to the Securities and Exchange
Commission Staff Accounting Bulletins and staff policy, the
computations for net income per share in 1995 include all common
and common stock equivalent shares issued within 12 months
preceding the filing date of the Company's initial public
offering as if they were outstanding for all periods presented
(using the treasury stock method assuming the public offering
price). Mandatorily redeemable convertible preferred stock and
warrants outstanding during that period were included (using the
if converted method) in the 1995 computations as common
equivalent shares even though the effect was antidilutive.
Primary and fully diluted earnings per common share were
substantially the same in all periods presented.
SOFTWARE DEVELOPMENT COSTS
The Company capitalizes eligible computer software
development costs upon the establishment of technological
feasibility, which the Company has defined as completion of a
working model. For the periods presented, costs eligible for
capitalization were insignificant and, thus, the Company charged
all software development costs to research and development
expense.
INVESTMENTS
Investments have been accounted for in accordance with
Statement of Financial Accounting Standards (SFAS) No. 115. The
Company classifies its investments as held to maturity
investments as defined under the provisions of SFAS 115 and
carries such investments at amortized cost in its balance sheet.
7
<PAGE>
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
THE VANTIVE CORPORATION
The Company was founded in October 1990 to develop software
to enable businesses to improve their customer service. The
Company was engaged principally in research and development from
inception through December 31, 1992. The Company introduced its
first product, VANTIVE SUPPORT, in July 1992, and introduced
VANTIVE QUALITY and the Oracle version of VANTIVE SUPPORT in the
fall of 1993. The Company introduced VANTIVE HELPDESK in August
1994, VANTIVE SALES in early 1995, and VANTIVE FIELDSERVICE in
early 1996. License fees for the Company's software products
consist of (i) a per server fee based on the specific VANTIVE
ENTERPRISE application(s) licensed and (ii) a fee based on the
maximum number of concurrent or named users allowed to access
those applications. Most of the Company's revenues to date have
resulted from non-recurring license fees based on sales of
concurrent user licenses. The remaining revenues are primarily
attributable to service revenues, which include post-contract
support, consulting and training revenue. Of these service
revenues, only post-contract support revenues are expected to be
recurring. Post-contract support revenues accounted for
approximately 12% of total revenues, in the six months ended June
30, 1996. Because concurrent user fees are not application
specific, the breakdown of revenues attributable to specific
applications for customers that have purchased more than one
application cannot be precisely determined by the Company.
However, the Company believes that most of its revenues have been
derived from fees associated with VANTIVE SUPPORT and, to a
lesser degree, VANTIVE HELPDESK. In any period, a significant
portion of the Company's revenues may be derived from significant
sales to a limited number of customers. During the three months
ended June 30, 1996, two customers accounted for approximately
16% and 11% of total revenues. During the three months ended
June 30, 1995, the first six months of 1995 and the first six
months of 1996, no customers accounted for over 10% of total
revenues. As significant sales to a particular customer are
typically non-recurring, the Company does not believe its future
results are dependent on recurring revenues from any particular
customer.
The Company's revenues are derived from software license
fees and fees for its services. License revenues consist of
license fees for the Company's products as well as fees from
sublicensing third party software products. The Company
generally recognizes license fees upon shipment of software
products if there are no significant post-delivery obligations,
if collection is probable and if the license agreement requires
payment within one year. If significant post-delivery
obligations exist or if a product is subject to customer
acceptance, revenues are deferred until no significant
obligations remain or acceptance has occurred. Revenues from
services have to date consisted primarily of consulting revenues,
post-contract support revenues and, to a lesser extent, training
revenues. Consulting and training revenues generally are
recognized as services are performed. Post-contract support
revenues are recognized ratably over the term of the support
period, which is typically one year. See Note 2 of Notes to
Condensed Consolidated Financial Statements.
THIS MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS INCLUDES A NUMBER OF FORWARD-
LOOKING STATEMENTS WHICH REFLECT THE COMPANY'S CURRENT VIEWS WITH
RESPECT TO FUTURE EVENTS AND FINANCIAL PERFORMANCE. THESE
FORWARD-LOOKING STATEMENTS ARE SUBJECT TO CERTAIN RISKS AND
UNCERTAINTIES, INCLUDING THOSE DISCUSSED BELOW THAT COULD CAUSE
ACTUAL RESULTS TO DIFFER MATERIALLY FROM HISTORICAL RESULTS OR
THOSE ANTICIPATED. IN THIS REPORT, THE WORDS "ANTICIPATES,"
"BELIEVES," "EXPECTS," "FUTURE," "INTENDS," AND SIMILAR
EXPRESSIONS IDENTIFY FORWARD-LOOKING STATEMENTS. READERS ARE
CAUTIONED NOT TO PLACE UNDUE RELIANCE ON THESE FORWARD-LOOKING
STATEMENTS, WHICH SPEAK ONLY AS OF THE DATE HEREOF.
8
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth the percentages that income
statement items are to total revenues for the second quarter and
six months ended June 30, 1995 and 1996.
THE VANTIVE CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------------- -------------------------
1996 1995 1996 1995
----------- ----------- ----------- -----------
(unaudited) (unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C>
REVENUES:
License fees ................ 65.2% 65.9% 65.4% 68.9%
Services .................... 34.8 34.1 34.6 31.1
----------- ----------- ----------- -----------
Total revenues ............. 100.0 100.0 100.0 100.0
COST OF REVENUES:
Licenses .................... 0.7 0.9 0.6 0.8
Services .................... 18.2 26.7 19.6 26.1
----------- ----------- ----------- -----------
Total cost of revenues ..... 18.9 27.6 20.2 26.9
----------- ----------- ----------- -----------
GROSS MARGIN ................. 81.1 72.4 79.8 73.1
OPERATING EXPENSES:
Sales and marketing ......... 33.6 43.3 38.2 44.0
Research and development .... 9.2 13.8 9.6 15.1
General and administrative .. 7.5 8.4 8.5 9.0
----------- ----------- ----------- -----------
Total operating expenses ... 50.3 65.5 56.3 68.1
----------- ----------- ----------- -----------
OPERATING INCOME ............. 30.8 6.9 23.5 5.0
----------- ----------- ----------- -----------
OTHER INCOME/(EXPENSE) ....... 1.9 (0.1) 2.2 0.1
----------- ----------- ----------- -----------
INCOME BEFORE PROVISION
FOR INCOME TAXES ............. 32.7 6.8 25.7 5.1
PROVISION FOR INCOME TAXES ... 10.9 0.6 7.7 0.5
----------- ----------- ----------- -----------
NET INCOME ................... 21.8% 6.2% 18.0% 4.6%
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
REVENUES
LICENSE. License revenues increased by 173% from $3.6
million to $9.9 million, in the quarters ended June 30, 1995 and
1996, respectively, and by 154% from $6.7 million, in the first
six months of 1995 to $17.0 million, in the first six months of
1996. The increase in license revenues was due to the market's
growing acceptance of the Company's products, the introduction of
the Company's products using the Oracle relational database
management system and the Microsoft NT operating system, and
increased sales as a result of the expansion of the Company's
direct sales force. The Company does not believe that the
historical growth rates of license revenues will be sustainable
or are indicative of future results.
9
<PAGE>
SERVICE. Service revenues are primarily comprised of
fees from consulting, post-contract support and, to a lesser
extent, training services. Service revenues increased by 181%
from $1.9 million to $5.3 million, in the quarters ended June 30,
1995 and 1996, respectively, and by 199% from $3.0 million, in
the first six months of 1995 to $9.0 million, in the first six
months of 1996. The increase in service revenues was primarily
due to the increase in consulting, post-contract support and
training services associated with increased sales of the
Company's applications. As the Company implements its strategy
of encouraging third party organizations such as systems
integrators to become proficient in implementing the Company's
products, consulting revenues as a percentage of total revenues
may decrease.
COST OF REVENUE
LICENSE. Cost of license revenues includes the cost of
product media, product duplication and manuals. Cost of license
revenues was approximately $47,000, or 1.3% of the related
license revenues and $97,000, or 1.0% of the related license
revenues, in the quarters ended June 30, 1995 and 1996,
respectively, and was approximately $82,000 in the first six
months of 1995 and approximately $153,000 in the first six months
of 1996, or 1.2% and 0.9% of the related license revenues,
respectively. The increase in cost of license revenues was
primarily due to the increases in volume shipments of the
Company's software applications. The decrease in cost of license
revenues as a percentage of the related license revenues from
June 30, 1995 to the comparable 1996 period was primarily due to
economies of scale realized as a result of shipping greater
quantities of product during the quarter ended June 30, 1996.
SERVICE. Cost of service revenues is primarily
comprised of employee-related costs and fees for third-party
consultants incurred in providing consulting, post-contract
support and training services. Cost of service revenues was $1.5
million, or 78.4% of the related service revenues and $2.8
million, or 52.4% of the related service revenues, in the
quarters ended June 30, 1995 and 1996, respectively, and was $2.5
million, in the first six months of 1995 and $5.1 million, in the
first six months of 1996, or 83.9% and 56.5% of the related
services revenues for these periods, respectively. The increase
in absolute dollars was due primarily to increases in consulting,
support and training personnel during these periods. Cost of
service revenues decreased as a percentage of service revenues
between the quarter ended June 30, 1995, and the quarter ended
June 30, 1996, primarily due to increased service revenues during
this period. The cost of services as a percentage of service
revenues may vary between periods due to the mix of services
provided by the Company and the resources used to provide these
services.
OPERATING EXPENSES
SALES AND MARKETING. Sales and marketing expenses
increased from $2.4 million, or 43.3% of revenues to $5.1
million, or 33.6% of revenues, in the quarters ended June 30,
1995 and 1996, respectively. Sales and marketing expenses
increased by 133% from $4.3 million, or 44.0% of revenues, in the
first six months of 1995 to $9.9 million, or 38.2% of revenues,
in the first six months of 1996. The increase in absolute
dollars was primarily related to the expansion of the Company's
sales and marketing resources, increased commissions expense as a
result of higher sales levels and increased marketing activities,
including direct mail, trade shows and promotional expenses.
RESEARCH AND DEVELOPMENT. Research and development
expenses increased from $0.8 million, or 13.8% of revenues to
$1.4 million, or 9.2% of revenues, in the quarters ended June 30,
1995 and 1996, respectively. Research and development expenses
increased by 71% from $1.5 million, or 15.1% of revenues, in the
first six months of 1995 to $2.5 million, or 9.6% of revenues, in
the first six months of 1996. Research and development expenses
increased in absolute dollars primarily as a result of an
increase in personnel to support the Company's product
development activities.
Research and development expenses are generally charged
to operations as incurred. In accordance with Statement of
Financial Accounting Standards No. 86, costs which were eligible
for capitalization for these periods were insignificant, and the
Company charged all software development costs to research and
development expense.
10
<PAGE>
GENERAL AND ADMINISTRATIVE. General and administrative
expenses increased from $0.5 million, or 8.3% of revenues to $1.1
million, or 7.5% of revenues, in the quarters ended June 30, 1995
and 1996, respectively. General and administrative expenses
increased 154% from $0.9 million, or 9.0% of revenues, in the
first six months of 1995 to $2.2 million, or 8.5% of revenues, in
the first six months of 1996. General and administrative
expenses increased in absolute dollars during these periods
primarily due to the addition of staff and information system
investments to support the growth of the Company's business
during these periods.
PROVISION FOR INCOME TAXES. The Company's provision
for state, federal and foreign income taxes for the three months
ended June 30, 1996, was $1.7 million, based upon an estimated
effective tax rate of approximately 30%. As of December 31,
1995, the Company had net operating loss carryforwards for
Federal tax reporting purposes of approximately $2.5 million. The
Company had other tax credit carryforwards of approximately $0.5
million. The net operating loss and research and development tax
credit carryforwards expire in 2005 through 2009 if not utilized.
BUSINESS RISKS
THIS REPORT INCLUDES A NUMBER OF FORWARD-LOOKING
STATEMENTS WHICH REFLECT THE COMPANY'S CURRENT VIEWS WITH RESPECT
TO FUTURE EVENTS AND FINANCIAL PERFORMANCE. THESE FORWARD-
LOOKING STATEMENTS ARE SUBJECT TO CERTAIN RISKS AND
UNCERTAINTIES, INCLUDING THOSE DISCUSSED BELOW THAT COULD CAUSE
ACTUAL RESULTS TO DIFFER MATERIALLY FROM HISTORICAL RESULTS OR
THOSE ANTICIPATED. IN THIS REPORT, THE WORDS "ANTICIPATES,"
"BELIEVES," "INTENDS," "FUTURE," AND SIMILAR EXPRESSIONS IDENTIFY
FORWARD-LOOKING STATEMENTS. READERS ARE CAUTIONED NOT TO PLACE
UNDUE RELIANCE ON THESE FORWARD-LOOKING STATEMENTS, WHICH SPEAK
ONLY AS OF THE DATE HEREOF.
FUTURE OPERATING RESULTS UNCERTAIN. The Company has
experienced significant growth in revenues in recent periods.
The Company does not believe that the historical growth rates of
revenues, or the corresponding declines of operating expenses as
a percentage of revenues, will be sustainable or are indicative
of future results. In addition, the Company's limited operating
history makes the prediction of future operating results
difficult or impossible. The Company's future operating results
will depend on many factors, including demand for the Company's
products, the level of product and price competition, the ability
of the Company to develop and market new products and to control
costs, the ability of the Company to expand its direct sales
force and indirect distribution channels and the ability to
attract and retain key personnel. In particular, the ability of
the Company to achieve significant revenue growth in the future
will depend on its success in adding a substantial number of
direct sales personnel in future periods. Competition for such
personnel is intense, and there can be no assurance that the
Company can retain its existing sales personnel or that it can
attract, assimilate or retain additional highly qualified sales
personnel in the future. Further, the Company believes, based on
interactions with its customers and potential customers, that the
purchase of its products is relatively discretionary and
generally involves a significant commitment of capital. As a
result, in the event of any downturn in any potential customer's
business or the economy in general, purchases of the Company's
products may be deferred or canceled, which could have a material
adverse effect on the Company's business, results of operations
and financial condition.
FLUCTUATIONS IN QUARTERLY OPERATING RESULTS. The
Company's quarterly operating results have in the past varied and
may in the future vary significantly depending on factors such as
the size, timing and recognition of revenue from significant
orders, increased competition, the timing of new product releases
by the Company and its competitors, market acceptance of the
Company's products, changes in the Company's and its competitors'
pricing policies, the mix of license and service revenue,
budgeting cycles of its customers, seasonality, the mix of direct
and indirect sales, changes in operating expenses, changes in
Company strategy, personnel changes, foreign currency exchange
rates and general economic factors. Further, the Company
believes, based on interactions with its customers and potential
customers, that the purchase of its products is relatively
discretionary and generally involves a significant commitment of
capital. As a result, in the event of any downturn in any
potential customer's business or the economy in general,
purchases of the Company's products may be deferred or canceled.
11
<PAGE>
A significant portion of the Company's revenues in any
quarter are typically derived from non-recurring sales to a
limited number of customers. Accordingly, revenues in any one
quarter are not indicative of revenues in any future period. In
addition, like many software applications companies, the Company
has generally recognized a substantial portion of its revenues in
the last month of each quarter, with these revenues concentrated
in the last weeks of the quarter. Any significant deferral of
purchases of the Company's products could have a material adverse
effect on the Company's business, results of operations and
financial condition in any particular quarter, and to the extent
that significant sales occur earlier than expected, operating
results for subsequent quarters may be adversely affected.
Product revenues are also difficult to forecast because the
market for customer asset management software products is rapidly
evolving. The Company's sales cycle is typically six to nine
months and varies substantially from customer to customer. In
addition, the Company expects that sales derived through indirect
channels, which are harder to predict and may have lower margins
than direct sales, will increase as a percentage of total
revenues. As a result of these factors, quarterly revenues for
any future quarter are not predictable with any significant
degree of certainty. The Company's expense levels are based, in
part, on its expectations as to future revenues. If revenues are
below expectations, operating results are likely to be adversely
affected. Net income may be disproportionately affected by a
reduction in revenues, because a significant portion of the
Company's expenses do not vary with revenues. The Company may
also choose to reduce prices or increase spending in response to
competition or to pursue new market opportunities. In
particular, if new competitors, technological advances by
existing competitors, or other competitive factors require the
Company to invest significantly greater resources in research and
development efforts, the Company's operating margins in the
future may be adversely affected. THE FOREGOING STATEMENTS
REGARDING THE COMPANY'S FUTURE REVENUES, OPERATING MARGINS AND
NET INCOME ARE FORWARD-LOOKING STATEMENTS, AND ACTUAL RESULTS MAY
VARY SUBSTANTIALLY DEPENDING UPON A VARIETY OF FACTORS DESCRIBED
IN THIS PARAGRAPH AND ELSEWHERE IN THIS REPORT.
Because of these factors, the Company believes that
period-to-period comparisons of its results of operations are not
necessarily meaningful and that such comparisons should not be
relied upon as indications of future performance. Due to all of
the foregoing factors, it is likely that in some future quarter
the Company's operating results will be below the expectations of
public market analysts and investors. In such event, the price
of the Company's Common Stock would likely be materially
adversely affected.
RAPID TECHNOLOGICAL CHANGE AND PRODUCT DEVELOPMENT
RISKS. The client/server applications software market is subject
to rapid technological change, changing customer needs, frequent
new product introductions and evolving industry standards that
may render existing products and services obsolete. As a result,
the Company's position in its existing markets or other markets
that it may enter could be eroded rapidly by product advances.
The life cycles of the Company's products are difficult to
estimate. The Company's growth and future financial performance
will depend in part upon its ability to enhance existing
applications, develop and introduce new applications that keep
pace with technological advances, meet changing customer
requirements, respond to competitive products and achieve market
acceptance.
The Company's product development efforts are expected
to require, from time to time, substantial investments by the
Company in product development and testing. There can be no
assurance that the Company will have sufficient resources to make
the necessary investments. The Company has in the past
experienced development delays, and there can be no assurance
that the Company will not experience such delays in the future.
There can be no assurance that the Company will not experience
difficulties that could delay or prevent the successful
development, introduction or marketing of new or enhanced
products. In addition, there can be no assurance that such
products will meet the requirements of the marketplace and
achieve market acceptance, or that the Company's current or
future products will conform to industry requirements. If the
Company is unable, for technological reasons, to develop and
introduce new and enhanced products in a timely manner, the
Company's business, results of operations and financial condition
could be materially adversely affected.
12
<PAGE>
Software products as complex as those offered by the
Company may contain errors that may be detected at any point in
the products' life cycles. The Company has in the past
discovered software errors in certain of its products and has
experienced delays in shipment of products during the period
required to correct these errors. There can be no assurance
that, despite testing by the Company and by current and potential
customers, errors will not be found, resulting in loss of, or
delay in, market acceptance and sales, diversion of development
resources, injury to the Company's reputation, or increased
service and warranty costs, any of which could have a material
adverse effect on the Company's business, results of operations
and financial condition.
INTERNATIONAL OPERATIONS. The Company believes that
its continued growth and profitability will require expansion of
its international operations. To successfully expand
international sales, the Company must establish additional
foreign operations, hire additional personnel and recruit
additional international resellers. To the extent that the
Company is unable to do so in a timely manner, the Company's
growth in international sales, if any, will be limited, and the
Company's business, results of operations and financial condition
could be materially adversely affected. As the Company continues
to expand its international operations, significant costs may be
incurred ahead of any anticipated international revenues, which
could have a material adverse effect on the Company's business,
results of operations and financial condition.
COMPETITION. The client/server applications software
market, including the market for customer asset management
software, is intensely competitive, highly fragmented and subject
to rapid change. Because the Company offers multiple
applications which can be purchased separately or integrated as
part of VANTIVE ENTERPRISE, the Company competes with a variety
of other companies depending on the market for their applications
software products. These competitors include companies targeting
the customer support market, the help desk market and the sales
and marketing automation market. In addition, the Company
believes that existing competitors and new market entrants will
attempt to develop fully integrated customer information systems.
The Company also competes with third party professional service
organizations that develop custom software and with internal
information technology departments of customers which develop
customer information systems. Among the Company's current and
potential competitors are also a number of large hardware and
software companies that may develop or acquire products that
compete with the Company's products. The Company also expects
that competition will increase as a result of software industry
consolidations. Current and potential competitors have
established or may establish cooperative relationships among
themselves or with third parties to increase the ability of their
products to address the needs of the Company's prospective
customers. Accordingly, it is possible that new competitors or
alliances among competitors may emerge and rapidly acquire
significant market share. Increased competition is likely to
result in price reductions, reduced operating margins and loss of
market share, any of which could materially adversely affect the
Company's business, results of operations and financial
condition. Many of the Company's current and potential
competitors have significantly greater financial, technical,
marketing and other resources than the Company. As a result,
they may be able to respond more quickly to new or emerging
technologies and changes in customer requirements, or to devote
greater resources to the development, promotion and sale of
products than can the Company. There can be no assurance that
the Company will be able to compete successfully against current
and future competitors or that competitive pressures faced by the
Company will not materially adversely affect its business,
results of operations and financial condition.
INCREASED USE OF THIRD PARTY DEVELOPMENT TOOLS. The
Company currently markets a proprietary application development
environment for its customers to tailor its applications. This
application development environment is also used by the Company
to build and modify its applications products. While the Company
believes based on interactions with its customers and potential
customers, that it currently derives significant competitive
advantage from this proprietary application development
environment, it believes that competitive pressures,
technological changes demanded by customers, and significant
advances in the sophistication of third party application
development tools such as VISUAL BASIC FOR APPLICATIONS will
require the Company to make greater use of third party tools in
the future.
13
<PAGE>
This could require the Company to invest significant
resources in rewriting some or all of its applications products
utilizing these third party tools and/or to enter into license
arrangements with third parties which could result in higher
royalty payments and a loss of product differentiation. There
can be no assurance that the Company would be able to
successfully rewrite its applications or enter into commercially
reasonable licenses, and the costs of, or inability or delays in,
doing so could have a material adverse effect on the Company's
business, results of operations and financial condition.
In addition to the "BUSINESS RISKS" mentioned above,
the Company's business entails a variety of additional risks,
which are set forth in the "BUSINESS RISKS" section of the
Company's 1995 Report on Form 10-K filed with the Securities and
Exchange Commission.
FINANCIAL CONDITION
Total assets as of June 30, 1996, increased $9.6
million from December 31, 1995. The increase was primarily due
to increases in cash from operations, short-term investments,
accounts receivable and property and equipment. The combined
balance of cash and short-term investments increased by $4.6
million, primarily due to increased net income. Net accounts
receivable increased $3.2 million primarily due to increased
sales activity. Net property and equipment increased $1.4
million, primarily due to equipment purchases associated with
supporting the growth of the Company's business during this
period.
Total liabilities as of June 30, 1996, increased $4.7
million from December 31, 1995. The increase was primarily due
to increases in accounts payable and accrued liabilities and
deferred revenues of $2.3 million and $2.4 million, respectively.
These increases were primarily due to increased expense levels
and accruals associated with a higher transaction volume and
associated deferrals of revenues related to post-contract
support.
LIQUIDITY AND CAPITAL RESOURCES
Operating activities provided cash of $6.4 million, in
the six months ended June 30, 1996. The primary source of these
funds was net income and increases in deferred revenues and
accrued liabilities, partially offset by increases in accounts
receivable. Operating activities used $46,000 in the six months
ended June 30, 1995, primarily due to increases in accounts
receivable, partially offset by increases in deferred revenues
and accrued liabilities.
Investing activities used cash of $2.0 million, in the
six months ended June 30, 1996, primarily for the purchase of
capital equipment and, to a lesser extent, purchase of short-
term, interest-bearing, investment-grade securities. Investing
activities used cash of $0.6 million, in the six months ended
June 30, 1995, primarily for the purchase of capital equipment.
The Company does not currently have any material commitments for
capital equipment acquisitions.
Financing activities provided cash of $213,000 and
$75,000, in the six months ended June 30, 1996 and 1995,
respectively. The primary source of these funds was proceeds
from the issuance of common stock, partially offset by payments
on capital lease obligations.
At June 30, 1996, the Company's principal sources of
liquidity was its cash, cash equivalents and short-term
investments of $31.1 million. The Company believes that existing
cash and short-term investment balances and potential cash flow
from operations will be sufficient to meet its cash requirements
for the next twelve months. While operating activities may
provide cash in certain periods to the extent the Company
experiences growth in the future, operating and investing
activities may use cash, and consequently, such growth may
require the Company to obtain additional sources of financing.
14
<PAGE>
PART II: OTHER INFORMATION
Item 1: Legal Proceedings:
Not Applicable.
Item 2: Changes in Securities:
Not Applicable.
Item 3: Defaults upon Senior Securities:
Not Applicable.
Item 4: Submission of Matters to a Vote of Security Holders:
The Company's Annual Meeting of Stockholders was held on May
2, 1996. Proxies for the meeting were solicited pursuant to
Regulation 14A. At the meeting, management's nominees for
directors were elected. A summary of the nominees and
voting results are as follows:
Nominee Shares Voting For Shares Withheld
------- ----------------- ---------------
John R. Luongo 10,798,177 700
Steven M. Goldsworthy 10,798,177 700
Yogen K. Dalal 10,798,177 700
William Davidow 10,798,177 700
Kevin Hall 10,798,177 700
Peter Roshko 10,798,177 700
Roger J. Sippl 10,798,177 700
Additionally, the selection of Arthur Andersen LLP as
independent public accountants for the year ending December
31, 1996, was ratified with 10,798,469 shares voting in
favor, 200 shares voting against and 208 shares abstaining.
Item 5: Other Information:
Not Applicable.
15
<PAGE>
Item 6: Exhibits and Reports on Form 8-K:
A. Exhibits
* 3.1 Form of Agreement and Plan of Merger between The
Vantive Corporation, a California corporation, and The
Vantive Corporation, a Delaware corporation.
* 3.2 Bylaws.
* 10.1 Form of Indemnity Agreement for officers and
directors.
* 10.2 1991 Stock Option Plan, as amended.
* 10.3 1995 Outside Directors Stock Option Plan.
* 10.4 1995 Employee Stock Purchase Plan.
* 10.5 Offer Letter dated May 21, 1993 between the
Company and John R. Luongo.
* 10.6 Offer Letter dated April 6, 1995 between the
Company and John M. Jack.
*+10.7 Value Added Reseller License Agreement dated
October 5, 1993 by and between Inference Corporation
and the Company.
*+10.8 Basicscript License Agreement dated
October 4, 1994 by and between Henneberry Hill
Technologies Corporation doing business as Summit
Software Company and the Company.
*+10.9 International VAR Agreement dated March 26,
1992 between Oracle Corporation and the Company, as
amended.
* 10.10 Value Added Remarketer Agreement dated
December 20, 1991 between Sybase, Inc. and the Company,
as amended.
* 10.11 Security and Loan Agreement dated May 12,
1995 between the Company and Imperial Bank.
*+10.12 Application Bridge API VAR License
Agreement dated January 22, 1993 between the Company
and Prospect Software, Inc.
*+10.13 Compensation Letter dated May 10, 1995
between the Company and John R. Luongo.
*+10.14 Compensation Letter dated May 10, 1995
between the Company and Steven M. Goldsworthy.
* 10.15 Lease Agreement dated January 13, 1995
between John Arrillaga, Trustee, or his Successor
Trustee, UTA dated July 20, 1977 (John Arrillaga
Separate Property Trust) as amended, and Richard T.
Peery, Trustee, or his Successor Trustee, UTA dated
July 20, 1977 (Richard T. Peery Separate Property
Trust) as amended, and the Company.
27.1 Financial Summary Table
- ---------------
* Incorporated by reference from the Company's Registration
Statement (No. 33-94244), declared effective on August 14,
1995.
+ Confidential Treatment has been granted for portions of this exhibit.
B. Reports of Form 8-K
No report of Form 8-K was filed by the Company during
the three month period ended June 30, 1996.
16
<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.
THE VANTIVE CORPORATION
Dated: August 12, 1996 By: /s/ Kathleen Murphy
-----------------------------
Kathleen Murphy
Chief Financial Officer
(Principal Financial Officer)
Dated: August 12, 1996 By: /s/ Michael M. Loo
-----------------------------
Michael M. Loo
Vice President, Finance
(Principal Accounting Officer)
17
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