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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 SEPTEMBER 30, 1997
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
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THE VANTIVE CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
DELAWARE 77-0266662
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
</TABLE>
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 November 4, 1997, was 25,145,636.
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<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
THE VANTIVE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
------------ ------------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................ $93,856 $26,017
Short-term investments........................... 9,795 6,853
Accounts receivable, net......................... 21,637 13,775
Prepaid expenses and other current assets........ 6,408 4,492
------------ ------------
Total current assets..................... 131,696 51,137
Property and equipment, net........................ 11,110 6,764
Other assets....................................... 3,764 463
------------ ------------
TOTAL ASSETS....................................... $146,570 $58,364
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and other accrued liabilities... $15,327 $8,137
Commissions payable.............................. 3,851 2,395
Consulting expenses payable...................... 1,341 835
Deferred revenues................................ 7,908 6,811
------------ ------------
Total current liabilities................ 28,427 18,178
Convertible debt................................... 69,000 --
Other long-term liabilities........................ 479 755
Stockholders' equity:
Preferred Stock: $.001 par value, 2,000,000
shares authorized; no shares issued and
outstanding at September 30, 1997............. -- --
Common Stock: $.001 par value, 50,000,000
shares authorized; 25,118,755 shares at
September 30, 1997 and 24,140,441 shares at
December 31, 1996 issued and outstanding...... 25 24
Additional paid-in-capital....................... 54,429 33,410
Retained earnings (deficit)...................... (5,790) 5,997
------------ ------------
Total stockholders' equity............... 48,664 39,431
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY......... $146,570 $58,364
============ ============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE>
THE VANTIVE CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------- -------------------
1997 1996 1997 1996
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
REVENUES:
License................................ $19,889 $11,102 $51,808 $28,104
Service................................ 11,199 6,147 27,813 15,159
--------- --------- --------- ---------
Total revenues................. 31,088 17,249 79,621 43,263
--------- --------- --------- ---------
COST OF REVENUES:
License................................ 210 113 512 266
Service................................ 6,444 3,316 15,463 8,407
--------- --------- --------- ---------
Total cost of revenues......... 6,654 3,429 15,975 8,673
--------- --------- --------- ---------
GROSS MARGIN............................. 24,434 13,820 63,646 34,590
--------- --------- --------- ---------
OPERATING EXPENSES:
Sales and marketing.................... 11,811 6,462 32,147 16,389
Research and development............... 4,689 1,694 11,598 4,199
General and administrative............. 2,413 1,511 6,169 3,726
Acquired in-process research
and development...................... 21,121 -- 21,121 --
--------- --------- --------- ---------
Total operating expenses....... 40,034 9,667 71,035 24,314
--------- --------- --------- ---------
OPERATING INCOME (LOSS).................. (15,600) 4,153 (7,389) 10,276
OTHER INCOME............................. 376 370 1,133 930
--------- --------- --------- ---------
INCOME (LOSS) BEFORE PROVISION
FOR INCOME TAXES....................... (15,224) 4,523 (6,256) 11,206
PROVISION FOR INCOME TAXES............... 2,178 1,357 5,492 3,362
--------- --------- --------- ---------
NET INCOME (LOSS)........................ ($17,402) $3,166 ($11,748) $7,844
========= ========= ========= =========
NET INCOME (LOSS) PER SHARE.............. ($0.71) $0.12 ($0.48) $0.31
========= ========= ========= =========
SHARES USED IN PER SHARE COMPUTATION..... 24,632 26,046 24,363 25,713
========= ========= ========= =========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE>
THE VANTIVE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION> NINE MONTHS ENDED
September 30,
--------------------------
1997 1996
------------ ------------
<C> <C>
<S>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)................................... ($11,748) $7,844
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization.................... 1,829 874
Write-off of acquired in-process reseach and
development ................................... 21,121 --
Provision for sales allowances and
and doubtful accounts.......................... 649 365
Changes in net assets and liabilities --
Increase in accounts receivable................ (8,469) (7,755)
Increase in prepaid expenses and
other current assets......................... (2,090) (506)
Increase in other assets....................... (3,188) (64)
Increase in accounts payable and
other accrued liabilities.................... 7,483 4,010
Increase in deferred revenues.................. 1,097 4,044
Increase in long-term liabilities.............. (89) 73
------------ ------------
Net cash provided by operating activities... 6,595 8,885
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of short-term investments.................. (2,942) (3,878)
Purchase of property and equipment.................. (5,904) (3,489)
------------ ------------
Net cash used in investing activities....... (8,846) (7,367)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of convertible debt.......... 69,000 --
Proceeds from issuance of common stock.............. 1,368 565
Repurchase of common stock.......................... (2) (15)
Payments on capital lease obligations............... (237) (256)
------------ ------------
Net cash provided by financing activities... 70,129 294
------------ ------------
NET INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS.. 67,878 1,812
EFFECT OF EXCHANGE RATE CHANGES ON CASH............... (39) (2)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD........ 26,017 17,614
------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD.............. $93,856 $19,424
============ ============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE>
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 the rules and
regulations. The Company believes the disclosures included in the
unaudited consolidated condensed financial statements, when 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, 1996, are adequate to make the information presented not misleading.
The unaudited condensed consolidated financial statements included
herein reflect all adjustments which are, in the opinion of the
Company's management, necessary for a fair presentation of the
information for the periods presented. These adjustments are of a
normal, recurring nature. Operating results for the three and nine
months ended September 30, 1997, are not necessarily indicative of the
results expected for any future periods.
2. Acquisition
On August 26, 1997, the Company completed the acquisition of
Innovative Computer Concepts, Inc. ("ICC"), a leading developer of
software that improves spare parts, procurement and management for field
service applications (the "Merger"). The Company issued 655,571 shares
of its common stock in exchange for all outstanding shares of ICC,
$125,000 in cash, and assumed all outstanding options which were
converted to options to purchase approximately 32,381 shares of the
Company's common stock. The Merger was recorded under the purchase
method of accounting and the results of operations of ICC and the fair
value of the acquired assets and liabilities were included in the
Company's financial statements beginning on the acquisition date. Upon
consummation of the Merger, ICC became a wholly-owned subsidiary of the
Company. In connection with the purchase price allocation, the Company
received an appraisal of the intangible assets which indicated that
approximately $21.1 million of the purchase price was allocated to in-
process research and development. Because there can be no assurance
that the Company will be able to successfully complete the development
and integration of the ICC products or that the acquired technology has
any alternative future use, the acquired in-process research and
development was expensed in the three months ended September 30, 1997.
In addition, the Company has recorded goodwill of approximately
$680,000 that will be amortized over the next five years. A pro forma
summary for this purchase acquisition was presented on a Form 8-K/A
filed by the Company on November 4, 1997.
The following table presents the unaudited pro forma results for
informational purposes to present the results assuming that the Company
had acquired ICC at the beginning of 1997 and 1996, respectively. This
information may not necessarily be indicative of the future combined
results of operations of the Company.
Nine Months Ended Nine Months Ended
September 30, 1997 September 30, 1996
Revenue $ 80,062 $ 44,300
Net Income $ 8,780 $ 7,752
Net Income per Share $ 0.35 $ 0.29
3. Summary of Significant Accounting Policies
Principles of Consolidation
The condensed consolidated financial statements include the
accounts of the Company and its subsidiaries. All significant
intercompany accounts and transactions are eliminated in consolidation.
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 customer support, consulting, and training services
performed for customers that license its products.
Revenues from 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 generally recognized as
reported by the reseller in relicensing the Company's products to
end-users.
Revenues from customer support services are recognized ratably
over the term of the support period. If customer support services are
included free or at a discount in a license agreement, these amounts are
allocated out of the license fee at their fair market value based on the
value established by independent sale of the customer 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.
Earnings (Loss) Per Share
The computation of earnings per share is based on the weighted
average number of common stock and common stock equivalents from
outstanding stock options. Common stock equivalents have been excluded
from the computation of net loss per share as they are anti-dilutive.
In March 1997, the Financial Accounting Standards Board issued Statement
No. 128 (SFAS No. 128), "Earnings per Share," which the Company will be
required to adopt on a retroactive basis in the fourth quarter of 1997.
The pro forma effect of SFAS No. 128 for the three and nine months
ended September 30, 1997 and 1996 would be as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------- -------------------
1997 1996 1997 1996
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Reported earnings (loss) per share.... ($0.71) $0.12 ($0.48) $0.31
Basic earnings (loss) per share........ ($0.71) $0.13 ($0.48) $0.33
Diluted earnings (loss) per share...... ($0.71) $0.12 ($0.48) $0.31
</TABLE>
Software Development Costs
The Company capitalizes certain eligible 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 has charged its software development costs to research
and development expense in the accompanying condensed consolidated
statements of operations.
Investments
The Company accounts for its investments under the provisions of
Statement of Financial Accounting Standards (SFAS) No. 115 "Accounting
for Certain Investments in Debt and Equity Securities." The Company
classifies its investments as held to maturity investments as defined
under the provisions of SFAS 115 and carries these investments at
amortized cost in the accompanying financial statements.
Convertible Subordinated Notes
On August 21, 1997, the Company sold an aggregate of $69.0 million
in principal amount of convertible subordinated notes due 2002 to
certain investors in the United States and outside the United States and
incurred approximately $2.4 million of offering expenses in connection
with this issuance. These notes have a 4.75% coupon over a five-year
term and are convertible into the Company's common stock at the
Company's option, if and when the share price exceeds $41.93 per share.
The Company intends to use the net proceeds of $66.6 million for
working capital and other general corporate purposes.
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's principal suite of products addresses
the Front Office Automation Market and is called the Vantive Enterprise.
The Vantive Enterprise consists of the following applications: Vantive
Support, Vantive Quality, Vantive HelpDesk, Vantive Sales, Vantive
FieldService, Vantive VanWeb, and Vantive On- the- Go. The release of
Vantive Enterprise 7.0 in the third quarter of 1997 contains significant
enhancements to all applications and a new development environment,
Vantive Object Studio, which allows for rapid customization, deployment,
and administration of the Vantive Enterprise. 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, named or mobile 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 customer support, consulting and
training revenue. Of these service revenues, only customer support
revenues are expected to be recurring. Customer support revenues
accounted for approximately 12.0% and 12.6% of total revenues, in the
nine months ended September 30, 1996 and 1997 respectively. Because
concurrent user fees are not application specific, the Company cannot
precisely determine the breakdown of revenues attributable to specific
applications for customers that have purchased more than one
application. 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 large sales to a limited
number of customers. During the quarter ended September 30, 1996, no
customer accounted for over 10% or more of total revenues. However,
during the quarter ended September 30, 1997, one customer accounted for
approximately 16% of total revenues. During the first nine months of
1996 and 1997, no customers accounted for over 10% or more 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 and 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, customer support revenues and, to a
lesser extent, training revenues. Consulting and training revenues
generally are recognized as services are performed. Customer support
revenues are recognized ratably over the term of the support period,
which is typically one year. If customer support services are included
free or at a discount in a license agreement, the amounts are allocated
out of the license fee at their fair market value based on the value
established by independent sale of the customer support services to
customers. 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 terms for licenses are
not subject to acceptance criteria. In cases where licenses 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.
This Management's Discussion and Analysis of Financial Condition
and Results of Operations includes several 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. The Company undertakes no obligation to revise or
publicly release the results of any revision to these forward-looking
statements. Readers should carefully review the risk factors described
in other documents the Company files with the Securities Exchange
Commission, including the Annual Report on Form 10-K for the fiscal year
ended December 31, 1996.
Results of Operations
The following table sets forth the percentages that income
statement items are to total revenues for the three and nine
months ended September 30, 1997 and 1996.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------- -------------------
1997 1996 1997 1996
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
REVENUES:
License................................ 64.0% 64.4% 65.1% 65.0%
Service................................ 36.0% 35.6% 34.9% 35.0%
--------- --------- --------- ---------
Total revenues................. 100.0% 100.0% 100.0% 100.0%
--------- --------- --------- ---------
COST OF REVENUES:
License................................ 0.7% 0.7% 0.6% 0.6%
Service................................ 20.7% 19.2% 19.4% 19.4%
--------- --------- --------- ---------
Total cost of revenues......... 21.4% 19.9% 20.0% 20.0%
--------- --------- --------- ---------
GROSS MARGIN............................. 78.6% 80.1% 80.0% 80.0%
--------- --------- --------- ---------
OPERATING EXPENSES:
Sales and marketing.................... 38.0% 37.4% 40.4% 37.9%
Research and development............... 15.1% 9.8% 14.6% 9.7%
General and administrative............. 7.8% 8.8% 7.7% 8.6%
Acquired in-process research
and development...................... 67.9% -- 26.5% --
--------- --------- --------- ---------
Total operating expenses....... 128.8% 56.0% 89.2% 56.2%
--------- --------- --------- ---------
OPERATING INCOME (LOSS).................. -50.2% 24.1% -9.2% 23.8%
OTHER INCOME............................. 1.2% 2.1% 1.4% 2.1%
--------- --------- --------- ---------
INCOME (LOSS) BEFORE PROVISION
FOR INCOME TAXES....................... -49.0% 26.2% -7.8% 25.9%
PROVISION FOR INCOME TAXES............... 7.0% 7.8% 6.9% 7.8%
--------- --------- --------- ---------
NET INCOME (LOSS)........................ -56.0% 18.4% -14.7% 18.1%
========= ========= ========= =========
</TABLE>
Revenues
License. License revenues increased by 79.1% from $11.1 million
to $19.9 million, in the three months ended September 30, 1996 and 1997,
respectively, and by 84.3% from $28.1 million to $51.8 million, in the
first nine months ended 1996 and 1997, respectively. The increase in
license revenues was due primarily to the market's growing acceptance of
the Company's products, in particular Vantive Support and Vantive
HelpDesk, Vantive Sales, Vantive FieldService, Vantive VanWeb, Vantive
On-the-Go, and the release of Vantive Enterprise 7.0. The Company does
not believe that the historical growth rates of license revenues will be
sustainable or are indicative of future results.
Service. Service revenues are primarily comprised of fees from
consulting, customer support and, to a lesser extent, training services.
Service revenues increased by 82.2% from $6.1 million to $11.2 million,
in the three months ended September 30, 1996 and 1997, respectively, and
by 83.5% from $15.2 million to $27.8 million, in the first nine months
ended 1996 and 1997, respectively. The increase in service revenues
primarily was due to the increase in consulting, customer support and,
to a lesser extent, 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 revenue
increased by 85.8% from $113,000, or 1.0% of the related license
revenues to $210,000, or 1.1% of the related license revenues, in the
three months ended September 30, 1996 and 1997, respectively, and
increased by 92.5% from $266,000, or 0.9% of the related license
revenues to $512,000, or 1.0% of the related license revenues in the
first nine months ended 1996 and 1997, respectively. The increase in
cost of license revenues primarily was due to the increases in volume
shipments of the Company's software applications.
Service. Cost of service revenues is primarily comprised of
employee-related costs and fees for third-party consultants incurred in
providing consulting, customer support and training services. Cost of
service revenue increased by 94.3% from $3.3 million, or 53.9% of the
related service revenues to $6.4 million, or 57.5% of the related
service revenues, in the three months ended September 30, 1996 and 1997,
respectively, and increased by 83.9% from $8.4 million, or 55.5% of the
related service revenues to $15.5 million or 55.6% of the related
service revenues in the first nine months ended 1996 and 1997,
respectively. The increase in absolute dollars was due primarily to
increases in consulting, support and training personnel during these
periods. 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 by
82.8% from $6.5 million, or 37.5% of revenues to $11.8 million, or 38.0%
of revenues, in the three months ended September 30, 1996 and 1997,
respectively. Sales and marketing expenses increased by 96.1% from
$16.4 million, or 37.9% of revenues to $32.1 million, or 40.4% of
revenues in the first nine months ended 1996 and 1997, respectively.
The increase in absolute dollars and as a percentage of revenue was
primarily related to the expansion of the Company's sales and marketing
resources, increased commissions expense because of higher sales levels
and increased marketing activities, including trade shows, promotional
expenses, and direct mail.
Research and Development. Research and development expenses
increased by 176.8% from $1.7 million, or 9.8% of revenues to $4.7
million, or 15.1% of revenues, in the three months ended September 30,
1996 and 1997, respectively. Research and development expenses
increased by 176.2% from $4.2 million, or 9.7% of revenues to $11.6
million, or 14.6% of revenues in the first nine months ended 1996 and
1997, respectively. Research and development expenses increased in
absolute dollars and as a percent of total revenues primarily due to 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.
General and Administrative. General and administrative expenses
increased by 59.7% from $1.5 million or 8.8% of revenues to $2.4
million, or 7.8% of revenues, in the three months ended September 30,
1996 and 1997, respectively. General and administrative expenses
increased 65.6% from $3.7 million, or 8.6% of revenues to $6.2 million,
or 7.7% of revenues, in the first nine months ended 1996 and 1997,
respectively. 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. However, general and administrative
expenses decreased as a percentage of total revenues between the three
and nine months ended September 30, 1996 and 1997 primarily due to the
ability of the Company to increase revenues without a corresponding
increase in general and administrative expenses.
Acquired in-process research and development. On August 26,
1997, the Company completed the acquisition of Innovative Computer
Concepts, Inc. ("ICC"), a leading developer of software that improves
spare parts, procurement and management for field service applications
(the "Merger"). The Company issued 655,571 shares of its common stock
in exchange for all outstanding shares of ICC, $125,000 in cash, and
assumed all outstanding options which were converted to options to
purchase approximately 32,381 shares of the Company's common stock. The
Merger was recorded under the purchase method of accounting and the
results of operations of ICC and the fair value of the acquired assets
and liabilities were included in the Company's financial statements
beginning on the acquisition date. Upon consummation of the Merger, ICC
became a wholly-owned subsidiary of the Company. In connection with the
purchase price allocation, the Company received an appraisal of the
intangible assets which indicated that approximately $21.1 million of
the purchase price was allocated to in-process research and development.
Because there can be no assurance that the Company will be able to
successfully complete the development and integration of the ICC
products or that the acquired technology has any alternative future use,
the acquired in-process research and development was expensed in the
three months ended September 30, 1997. In addition, the Company has
recorded goodwill of approximately $680,000 that will be amortized over
the next five years. A pro forma summary for this purchase acquisition
was presented on a Form 8-K/A filed by the Company on November 4, 1997.
Provision for Income Taxes. The Company's provision for state,
federal and foreign income taxes for the three months ended September
30, 1997, was $2.2 million. The effective tax rate in the three months
ended September 30, 1997, was negatively affected due to the non-
deductibility of the charges related to the acquired in-process research
and development. Excluding the effect of these charges, the effective
tax rate for the three months ended September 30, 1997, would have been
37% compared to an effective tax rate of 30% for fiscal 1996. The
primary reason for the increase in the effective tax rate is that the
Company utilized its remaining domestic net operating loss carryforwards
during 1996 and had no net operating loss carryforwards remaining to
benefit the 1997 tax rate.
Net Income (Loss) And Earnings (Loss) Per Share. Net income
(loss) was $3.2 million and $(17.4) million for the three months ended
September 30, 1996 and 1997, respectively and $7.8 million and $(11.7)
million for the nine months ended September 30, 1996 and 1997,
respectively. Net income (loss) per share was $0.12 and $(0.71) for the
three months ended September 30, 1996 and 1997, respectively and $0.31
and $(0.48) for the nine months ended September 30, 1996 and 1997,
respectively. Excluding the financial statement effects of the Merger,
net income for the three and nine months ended September 30, 1997, was
$3.7 million and $9.4 million, respectively. Net income per share
excluding the effects of the Merger for the three and nine months ended
September 30, 1997, was $0.14 and $0.36, respectively.
Business Risks
This report includes several forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of
the Securities Exchange Act of 1934. These statements 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," "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 period-to-period fluctuations in revenues and operating
results and anticipates that these fluctuations will continue. These
fluctuations may be attributable to several factors, including 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. The future operating results of the Company
may fluctuate because of these and other 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.
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 businesses, 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 Front Office Automation
software products is rapidly evolving. The Company's sales cycle is
typically six to nine months and varies substantially from customer to
customer. 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. The
Company operates with little order backlog because its products are
typically shipped shortly after orders are received. 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. In
particular, the Company is currently investing, and intends to continue
to invest, significant resources to develop its sales strategy, which
includes hiring significant numbers of direct sales personnel, and
developing relationships with high-end integrators and resellers. If
revenues are below the Company's 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 are fixed and 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 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 these 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 the event, the price of the Company's Common Stock would likely be
materially adversely affected.
Rapid Technological Change and Product Development Risks. The
Front Office Automation 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. For example, the Company's
customers have adopted a wide variety of hardware, software, database,
Internet-based and networking platforms, and as a result, to gain broad
market acceptance, the Company must continue to support and maintain its
products on a variety of the platforms. The Company's future success will
depend on its ability to address the increasingly sophisticated needs of
its customers by supporting existing and emerging hardware, software,
database, Internet-based and networking platforms and by developing and
introducing enhancements to its products and new products on a timely
basis that keep pace with technological developments, evolving industry
standards and changing customer requirements. The success of the
Company's products may also depend, in part, on the ability of the
Company to effectively distribute its products through the Internet.
There can be no assurance that the Company will be able to successfully
change other aspects of its business, such as its distribution channels
or cost structure, if technological changes in its market require the
change. 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 these 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,
including but not limited to, Vantive Version 7.0, Vantive Version 7.5,
Vantive On-the-Go, and Vantive VanWeb. In addition, there can be no
assurance that these 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.
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.
Need to Expand Distribution Channels And Successfully Leverage Third
Party Relationships. An important element of the Company's distribution
strategy is to expand its direct sales force, to create additional
relationships with third parties and to dedicate certain direct sales
resources and leverage third party relationships toward key vertical
markets. An important element of the Company's product development
strategy is to integrate with applications from Enterprise Resource
Planning ("ERP") vendors. The Company is currently investing, and
intends to continue to invest, significant resources toward these
strategies, which could adversely affect the Company's operating margins.
In this regard, the Company has, in the past, hired and intends to
continue to hire significant numbers of direct sales personnel.
Competition for sales personnel is intense, and there can be no assurance
that the Company can retain its existing sales personnel or that it can
attract, assimilate and retain additional highly qualified sales
personnel in the future. The strategy also depends, in large part, on
attracting and retaining beneficial third party relationships. In this
regard, the Company has developed relationships with several high-end
integrators and resellers, including EDS, Deloitte & Touche, Price
Waterhouse, KPMG Peat Marwick, HBO and Company, and Lucent Technologies,
and announced a strategic relationship with PeopleSoft, an ERP vendor.
There also can be no assurance that the Company will be able to attract
and retain appropriate high-end integrators, resellers, other third party
distributors or ERP vendors. The Company's agreements with these third
parties are not exclusive and, in many cases, may be terminated by either
party without cause. In addition, many of these third parties sell or
co-market competing product lines. Therefore, there can be no assurance
that any of these parties will continue to represent or recommend the
Company's products. There also can be no assurance that the Company will
effectively identify key vertical markets. The inability to recruit, or
the loss of, important direct sales personnel, high-end integrators,
resellers, other third party distributors or ERP vendors, or the failure
to effectively identify key vertical markets, could have a material
adverse effect on the Company's business, results of operations and
financial condition.
International Operations, Foreign Currency Fluctuations. The
Company believes that its continued growth and profitability will require
further 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, any of the Company's growth in international
sales will be limited, and the Company's business, results of operations
and financial condition could be materially adversely affected. In
addition, as European revenues increase as a percentage of overall
revenues, the Company's business, results of operations and financial
condition may be adversely affected by the seasonality of European
procurement cycles. 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. In
addition, future increases in the value of the U.S. dollar could make the
Company's products less competitive in foreign markets. As the Company
increases its foreign sales, it may be materially and adversely affected
by fluctuations in currency exchange rates, increases in duty rates,
exchange or price controls or other restrictions on foreign currencies.
Additional risks inherent in the Company's international business
activities generally include economic conditions in each country,
unexpected changes in regulatory requirements, tariffs and other trade
barriers, costs of localizing products for foreign countries, lack of
acceptance of localized products in foreign countries, longer accounts
receivable payment cycles, difficulties in managing international
operations, potentially adverse tax consequences including restrictions
on the repatriation of earnings and the burdens of complying with a wide
variety of foreign laws. There can be no assurance that these factors
will not have a material adverse effect on the Company's future
international sales and, consequently, the Company's business, results of
operations and financial condition. There can be no assurances that the
Company will be able to successfully address each of these challenges.
Competition. The Front Office Automation Market is intensely
competitive, highly fragmented and subject to rapid change. Because the
Company offers multiple software applications which can be purchased
separately or integrated as part of Vantive Enterprise, the Company
competes with a variety of other businesses depending on the target
market for their applications software products. These competitors
include a select number of businesses targeting the enterprise level and
department level Front Office Automation Markets, such as the Baan
Company, Scopus Technology, and Siebel Systems, Inc. some of which have
only recently entered these markets. The Company also competes with a
substantial number of small private businesses and certain public
businesses which offer products targeted at one or more specific markets,
including the customer support market, the help desk market, the quality
assurance market and the sales and marketing automation market, such as
Remedy Corporation, Onyx Software, and Software Artistry, Inc. In
addition, the Company believes that existing competitors and new market
entrants such as Oracle Corp. will attempt to develop fully integrated
front office 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 interaction applications. Among the Company's current
and potential competitors are also numerous large hardware and software
businesses that may develop or acquire products that compete with the
Company's products. In this regard, SAP AG, the Baan Company, and Oracle
have each introduced a customer support module as part of their
application suites. In addition, Oracle has recently announced a sales
force automation application, customer support products, as well as the
creation of a network of third party dealers that will sell Oracle's
application suites exclusively to medium-sized businesses. These
competitors have significantly greater financial, technical, marketing
and other resources than the Company.
The Company also expects that competition will increase from any
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. The Company also
expects that competition may increase because of both new software start
ups entering the market and existing software industry vendors which may
be planning to enter the market for Front Office Automation applications.
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 their 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.
The Company believes that the principal competitive factors
affecting its market include product features such as adaptability,
scalability, ability to integrate with products produced by other
vendors, functionality, ease of use, product reputation, quality,
performance, price, customer service and support, the effectiveness of
sales and marketing efforts and company reputation. Although the Company
believes that its products currently compete favorably with respect to
these factors, there can be no assurance that the Company can maintain
its competitive position against current and potential competitors,
especially those with significantly greater financial, marketing,
service, support, technical and other resources.
Management of Expanding Operations; Dependence Upon Key Personnel.
The Company's ability to compete effectively and to manage any future
growth will require the Company to continue to improve its financial and
management controls, reporting systems and procedures on a timely basis
and expand, train and manage its employee workforce. There can be no
assurance that the Company will be able to do so successfully. The
Company's failure to do so could have a material adverse effect upon the
Company's business, results of operations and financial condition. The
Company has recently hired a significant number of employees, including
senior sales, marketing, research and development, and finance personnel,
and in order to maintain its ability to grow in the future, the Company
will be required to significantly increase its total headcount.
In addition, the Company's future performance depends in
significant part upon attracting and retaining key technical, sales,
senior management and financial personnel. In particular, delays in
hiring sales or research and development personnel may have a material
adverse effect on the Company's business, results of operations and
financial condition. The loss of the services of one or more of the
Company's executive officers or the inability to recruit other additional
senior management could have a material adverse effect on the Company's
business, results of operations and financial condition. Competition for
these personnel is intense, and the inability to retain its key
technical, sales, senior management and financial personnel or to
attract, assimilate or retain other highly qualified technical, sales,
senior management, and financial personnel in the future on a timely
basis could have a material adverse effect on the Company's business,
results of operations and financial condition.
Increased Use of Third-Party Software. 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 will require the Company to make greater use of third party
software in the future. In particular, the Company has recently
announced that Vantive Encyclopedia, a Web-based marketing encyclopedia
based on FirstFloor's Java-based server, and configuration capabilities,
based on Calico Technology's configuration engine, are available with
Vantive Version 7.0. The greater use of third party software could
require the Company to invest significant resources in rewriting some or
all of its software applications products utilizing third party software
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.
Dependence on Emerging Markets for Front Office Automation
Software; Product Concentration. The Company's future financial
performance will depend in large part on the growth in demand for
individual Front Office Automation applications and the number of
organizations adopting comprehensive Front Office Automation information
systems for their client/server and Web computing environments. To date,
much of the Company's license revenues have resulted from sales of
individual applications, particularly Vantive Support and Vantive
HelpDesk. The markets for these applications are relatively new and
undeveloped, and failure of these markets to develop would have a
material adverse effect on the Company's business, results of operations
and financial condition. Additionally, the Company is investing in the
sales, field service and quality automation markets. Should these markets
fail to develop, not accept the Company's products, or cause the company
to lose new business and/or customers in its traditional markets, the
Company would experience an adverse effect on the Company's business,
results of operations and financial condition.
The Company believes that an important competitive advantage for
its software applications is their ability to be integrated with one
another and with back office applications software produced by third
party software vendors into a Customer Asset Management information
system. If the demand for integrated suites of Customer Asset Management
applications fails to develop, or develops more slowly than the Company
currently anticipates, it could have a material adverse effect on the
demand for the Company's applications and on its business, results of
operations and financial condition. In addition, any other factors
adversely affecting the demand for the Company's existing applications,
particularly Vantive Support, Vantive HelpDesk and Vantive Quality, or
newer applications such as Vantive-On-The-Go, Vantive VanWeb, Vantive
Sales, and Vantive FieldService could have a material adverse effect on
the Company's business, results of operations and financial condition.
Leverage; Subordination. In connection with the sale of its 4.75%
Convertible Subordinated Notes (the "Notes"), the Company has incurred
$69.0 million indebtedness and as a result, the Company's principal and
interest obligations have increased substantially. The degree to which
the Company is leveraged could materially and adversely affect the
Company's ability to obtain financing for working capital, acquisitions
or other purposes and could make it more vulnerable to industry downturns
and competitive pressures. The Company's ability to meet its debt
service obligations is dependent upon the Company's future performance,
which will be subject to financial, business and other factors affecting
the operations of the Company, many of which are beyond its control.
New Business Area; Future Acquisitions. As part of its business
strategy, the Company has completed the acquisition of ICC to expand its
operations and offer complementary products, services, and technology.
These areas are relatively new to the Company's product development and
sales and marketing personnel. The ICC acquisition and any future
acquisitions or investments will be accompanied by the risks commonly
encountered in acquisitions of businesses. These risks include, among
other things, difficulties in assimilation of acquired operations,
technologies and products, diversion of management's attention to other
business concerns, risks of entering markets in which the Company has no
or limited prior experience and potential loss of key employees of
acquired organizations. No assurance can be given as to the ability of
the Company to successfully integrate the business, products,
technologies or personnel of ICC or those that might be acquired in the
future, the potential disruption of the Company's ongoing business, the
inability of management to maximize the financial and strategic position
of the Company, the maintenance of uniform standards, controls,
procedures, and policies and the impairment of relationships with
employees and clients as a result of any integration of new management
personnel. While the Company believes that the ICC product, "Pinnacle"
for spare parts management, offers complementary architecture to the
Company's existing products, there can be no assurance that the Company
will not need to substantially rewrite portions or all of the ICC product
using Vantive tools, and the related costs, or risk of product delays, in
doing so could have a material adverse effect on the Company's business,
results of operations and financial condition.
In addition, any future acquisitions by the Company could result in
potentially dilutive issuances of equity securities, the incurrence of
debt and contingent liabilities or amortization expenses related to
goodwill and other intangible assets, any of which could materially
adversely affect the Company's operating results, the price of the
Company's Common Stock, results of operations and/or financial condition.
Further, there is no assurance that the Company will compete effectively
or will generate significant revenues in any new areas.
Dependence on Licensed Technology. Vantive licenses technology on
a non-exclusive basis from several businesses for use with its products
and anticipates that it will continue to do so in the future. The
inability of the Company to continue to license these products or to
license other necessary products for use with its products or substantial
increases in royalty payments under third party licenses could have a
material adverse effect on its business, results of operations and
financial condition. In addition, the effective implementation of the
Company's products depends upon the successful operation of these
licensed products in conjunction with the Company's products, and
therefore any undetected errors in these licensed products may prevent
the implementation or impair the functionality of the Company's products,
delay new product introductions and/or injure the Company's reputation.
These problems could have a material adverse effect on the Company's
business, results of operations and financial condition.
Dependence on Proprietary Technology; Risks of Infringement. The
Company's success is heavily dependent upon proprietary technology. The
Company relies primarily on a combination of copyright, trademark and
trade secrets laws, and confidentiality procedures and contractual
provisions to protect its proprietary rights. There can be no assurance
that these measures will be adequate to protect the Company from
infringement of its technology. The Company presently has no patents or
patent applications pending. Despite the Company's efforts to protect
its proprietary rights, attempts may be made to copy aspects of the
Company's products or to obtain and use information that the Company
regards as proprietary. In particular, as the Company provides its
licensees with access to the data model and other proprietary information
underlying the Company's licensed applications, there can be no assurance
that licensees or others will not develop products which infringe the
Company's proprietary rights. Policing unauthorized use of the Company's
products is difficult, and while the Company is unable to determine the
extent to which piracy of its software products exists, software piracy
can be expected to be a persistent problem. In addition, the
laws of some foreign countries do not protect the Company's proprietary
rights to as great an extent as do the laws of the United States. There
can be no assurance that the Company's means of protecting its
proprietary rights will be adequate or that the Company's competitors
will not independently develop similar technology. The Company is not
aware that any of its products infringe the proprietary rights of third
parties, although the Company has in the past, and may in the future,
receive communications alleging possible infringement of third party
intellectual property rights. The Company expects that software
companies will increasingly be subject to infringement claims as the
number of products and competitors in the Company's target markets grows
and the functionality of products in these markets overlaps. Any of the
claims, with or without merit, could be time-consuming, result in costly
litigation, cause product shipment delays or require the Company to enter
into royalty or licensing agreements. These royalty or licensing
agreements, if required, may not be available on terms acceptable to the
Company or at all, which could have a material adverse effect upon the
Company's business, results of operations and financial condition.
Product Liability. The Company's license agreements with its
customers typically contain provisions intended to limit the Company's
exposure to potential product liability claims. It is possible that the
limitation of liability provisions contained in the Company's agreements
may not be effective. Although the Company has not experienced any
product liability claims to date, the sale and support of products by the
Company and the incorporation of products from other businesses may
entail the risk of the claims. A successful product liability action
brought against the Company could have a material adverse effect upon the
Company's business, results of operations and financial condition.
Possible Volatility of Stock Price. The market price of the
Company's common stock has historically experienced significant
fluctuations and may continue to fluctuate significantly. The market
price of the common stock may be significantly affected by factors such
as future announcements concerning the Company or its competitors,
quarterly variations in operating results, announcements of technological
innovations, the introduction of new products or changes in product
pricing policies by the Company or its competitors, proprietary rights or
other litigation, changes in earnings estimates by analysts, speculation
in the press or analyst community and general market conditions or market
conditions specific to particular industries.
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 1996 Report on Form 10-K
filed with the Securities and Exchange Commission.
Financial Condition
Total assets as of September 30, 1997 increased $88.2 million from
December 31, 1996. The increase primarily was due to increases in cash
from the issuance of convertible subordinated notes, accounts
receivable, property and equipment, and other assets. Cash increased
$67.8 million primarily due to issuance of $69.0 million in principal
amount of convertible subordinated notes, net of issuance costs of $2.4
million. Net accounts receivable increased $7.9 million primarily due
to increased sales activity. Net property and equipment increased $4.3
million primarily due to equipment purchases associated with supporting
the growth of the Company's business during this period. Other assets
increased $3.3 million due to a purchase of intellectual property.
Total current liabilities as of September 30, 1997 increased $10.2
million from December 31, 1996. The increase primarily was due to
increases in accounts payable and other accrued liabilities, commissions
payable, and deferred revenues of $7.2 million, $1.5 million, and $1.1
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 $6.6 million in the nine
months ended September 30, 1997. The primary source of these funds was
income from operations after the write-off of acquired in-process
research and development costs, an increase in accounts payable and
accrued liabilities and deferred revenues, partially offset by increases
in accounts receivable, prepaid and other assets. Operating activities
provided cash of $8.9 million in the nine months ended September 30,
1996, primarily due to increases in net income, accounts payable and
accrued liabilities, and deferred revenues.
Investing activities used cash of $8.8 million and $7.4 million,
in the nine months ended September 30, 1997 and 1996, respectively,
primarily for the purchase of capital equipment and short-term,
interest-bearing, investment-grade securities. The Company does not
currently have any material commitments for capital equipment
acquisitions.
Financing activities provided cash of $70.1 million and $294,000
in the nine months ended September 30, 1997 and 1996, respectively. The
primary source of these funds in the 1997 period was proceeds from the
issuance of convertible debt. On August 21, 1997, the Company sold an
aggregate of $69.0 million in principal amount of convertible
subordinated notes due 2002 to certain investors in the United States
and outside the United States and incurred approximately $2.4 million of
offering expenses in connection with this issuance. These notes have a
4.75% coupon over a five-year term and are convertible into the
Company's common stock at the Company's option, if and when the share
price exceeds $41.93 per share. The Company intends to use the net
proceeds of $66.6 million for working capital and other general
corporate purposes.
At September 30, 1997, the Company's principal sources of
liquidity were its cash, cash equivalents and short-term investments of
$103.7 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, the growth may
require the Company to obtain additional sources of financing.
The Company effected its initial public offering through a
Registration Statement on Form S-1 (No. 33-94244) that was declared
effective by SEC on August 14, 1995. The Company's most recent
disclosure of its use of proceeds obtained therefrom is contained in a
Report on Form SR filed with SEC in May 1997. Since its initial public
offering, the Company has used approximately $10.5 million of the
proceeds for the purchase and installation of machinery and equipment
and approximately $12.2 million of proceeds for working capital
purposes. As of September 30, 1997, the Company has used all of the
proceeds from its initial public offering.
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS:
Not Applicable.
ITEM 2. CHANGES IN SECURITIES:
On August 21, 1997, the Company sold an aggregate of $69,000,000
of convertible subordinated notes due 2002 (the "Notes") to
certain qualified investors in the United States and outside the
United States and incurred approximately $2.4 million of offering
expenses in connection with this issuance. The Notes have a 4.75%
coupon, are convertible into the Company's common stock at the
Company's option, if and when the share price exceeds $41.93 per
share and have a five-year term. The Notes were sold to qualified
investors in reliance on Regulation S, Rule 144A or Section 4(2)
pursuant to the Securities Act of 1933, as amended.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES:
Not Applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS:
Not Applicable.
ITEM 5. OTHER INFORMATION:
Not Applicable.
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.
=4.1 Declaration of Registration Rights made on August 31, 1997
by the Company for the benefit of the holders of Common
Stock of Innovative Computer Concepts, Inc.
*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.
*10.9.1 International VAR Agreement dated June 28, 1996 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.
#10.16 Lease Agreement dated September 4, 1996 between John Arrillaga,
Trustee, or his Successor Trustee, UTA dated July 20, 1977
(Arrillaga Family 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.
**10.17 Agreement and Plan of Merger dated August 13, 1997 by
and among The Vantive Corporation, Igloo Acquisition
Corporation and Innovative Computer Concepts, Inc. as amended.
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.
# Incorporated by reference from the Company's Report on Form 10-K for the
Fiscal Year ended December 31, 1996.
** Previously filed in the Company's Report on Form 8-K filed on September
26, 1997 and on Form 8-KA. filed on November 4, 1997.
= Incorporated by reference from the Company's Registration Statement (No.
3333-36547), declared effective on November 4, 1997.
B. Reports on Form 8-K
(1) On September 5 ,1997 , the Company filed Current Report on
Form 8-K to report under Item 9, "Sales of Equity Securities pursuant
to Regulation S", the issuance of a convertible subordinated debt
offering of $69,000,000 aggregate principal amount of 4.75% due 2002.
No financial statements were filed as part of the report.
On September 26, 1997, the Company filed Current Report on
Form 8-K to report the following:
Item 2 "Other Events":
The acquisition of Innovative Computer Concepts, Inc.
("ICC"). Upon consummation of the Merger, ICC became a wholly-owned
subsidiary of the Company.
Item 7 "Exhibits":
The Agreement and Plan of Merger, dated as of August 13,
1997 by and among the Vantive Corporation, Igloo Acquisition Corporation
and Innovative Computer Concepts, Inc., as amended.
Press Release dated August 27, 1997 announcing completion
of ICC acquisition.
(2) On November 4, 1997, the Company filed an Amended Contract
Report on Form 8-K/A to file the financial statements required to be
filed within 60 days of the required filing date of the 8-K announcing
the acquisition of ICC was required to be filed.
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: November 12, 1997
By: /s/ KATHLEEN MURPHY
------------------------------------
Kathleen Murphy
Chief Financial Officer
(Principal Financial Officer)
Dated: November 12, 1997
By: /s/ MICHAEL M. LOO
------------------------------------
Michael M. Loo
Vice President, Finance
(Principal Accounting Officer)
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