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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
Annual report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the fiscal year ended December 31, 1996 Commission file number 0-26542
THE VANTIVE CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 77-0266662
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2455 Augustine Drive
Santa Clara, California 95054
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (408) 982-5700
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.001 Par Value
(Title of class)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K (Section 229.405 of this chapter) is not contained
herein, and will not be contained, to the best of registrant's knowledge, in
definitive proxy or information statements incorporated by reference in Part
III of this Form 10-K or any amendment to this Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates
of the registrant, based upon the closing price of the Common Stock on January
31, 1997, as reported on Nasdaq National Market was approximately $396,465,962.
Shares of Common Stock held by each executive officer and director and by each
person who owns 5% or more of the outstanding Common Stock have been excluded
in that such persons may be deemed to be affiliates. This determination of
affiliates status is not necessarily a conclusive determination for other
purposes.
The number of shares of the registrant's $0.001 par value Common Stock
outstanding on January 31, 1997, was 24, 141, 316.
Part III incorporates by reference from the definitive proxy statement
for the registrant's 1997 annual meeting of stockholders to be filed with the
Commission pursuant to Regulation 14A not later than 120 days after the end of
the fiscal year covered by this Form.
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TABLE OF CONTENTS
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PART I . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Item 1. Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Item 2. Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Item 3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Item 4. Submission of Matters to a Vote of Securities Holders. . . . . . . . . . . . . . . . . . . . . . . . . . . 14
PART II . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Item 5. Market for the Registrant's Common Stock and Related Stockholder Matters . . . . . . . . . . . . . . . . . 15
Item 6. Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations . . . . . . . . . . 18
Item 8. Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure . . . . . . . . . . . 28
PART III . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
Item 10. Directors and Executive Officers of the Registrant . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
Item 11. Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
Item 12. Security Ownership of Certain Beneficial Owners and Management . . . . . . . . . . . . . . . . . . . . . 29
Item 13. Certain Relationships and Related Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
PART IV . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . 31
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PART I
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," "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.
ITEM 1. BUSINESS
The Vantive Corporation ("Vantive" or the "Company") is a leading provider of
Customer Asset Management applications software that enables businesses to
attract, acquire, retain, and leverage customers by automating marketing and
sales, customer support, defect tracking, field service and internal help desk
functions. These tightly integrated Customer Asset Management applications,
called the Vantive Enterprise, are based on a multi-tiered client/server
architecture and a common data model. The Company's Customer Asset Management
applications may also be used through a Web-based browser, thereby providing
the applications directly to the end-user outside the boundaries of the
business. The software can be used independently or as part of an integrated,
enterprise-wide, Customer Asset Management information system. The Company
believes businesses implementing a Customer Asset Management information system
can better manage customer relationships by leveraging valuable customer
information that is shared throughout the organization. The Company's software
applications have been deployed by businesses in a broad range of industries,
including software, communications, consumer products, finance,
outsourcing/services, personal computer hardware, healthcare, manufacturing,
medical projects, public sector/regulated industry, online services, consumer
goods and retail.
BACKGROUND
Intensifying global competition has increased the need for businesses
to focus on growth by retaining loyal, satisfied customers while acquiring new
customers. As satisfied customers are more likely to become repeat and loyal
customers, every state of the customer life cycle is critical to achieving
total customer satisfaction. According to the Harvard Business Review
March-April 1996, "U.S. corporations (now) lose half of their customers in five
years." Additionally, according to Gartner Group, many businesses report that
sales and marketing expenses required to attract new customers are rising. As
a result of these trends, businesses are focusing more attention on attracting,
acquiring, retaining and leveraging customers profitably: the Customer Asset
Management strategy. Based on the axiom that customers are the most valuable
asset of any business, Customer Asset Management moves beyond the traditional
management organization of independent, disconnected marketing, sales, customer
service and information systems to integrated systems intended to improve the
entire interaction between a business and its customers through the seamless
integration of people, processes and systems.
Throughout the customer life cycle, a business has multiple points of
customer interaction, including marketing and sales, customer support, defect
tracking and field service. For example, customers may first come in contact
with an organization through the marketing and sales departments when they
purchase a product from the business. The customers may continue to have
contact with the business as support is needed, through technical support and
field service, as well as through the marketing and sales functions as the
business markets to its existing customer base for the purchase of additional
products. As demand has increased for packaged software applications to
replace existing, in-house legacy systems, independent software vendors have
emerged to provide single point solutions, or solutions targeted at specific
segments of the customer interaction market, such as marketing and sales,
customer support, defect tracking and field service.
Businesses are demanding one cohesive approach to Customer Asset
Management, however, which includes integration and sharing of information
across all customer contact points. For example, businesses are often unable
to adequately address customer issues or capitalize on sales opportunities when
customer contacts occur in independent, disconnected departments that do not
share customer information. As a result, businesses are restructuring their
operations to be more customer-focused, shifting from separate marketing, sales
and customer service functions to a
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fully integrated Customer Asset Management approach, in which the customers
effectively interact with the entire business whenever they are in contact with
any part of that business. This requires that all departments within the
business use a common base of customer information for all customer
interactions.
As the use of the World Wide Web continues to increase, significant
opportunities for Customer Asset Management applications exist. The ability to
access Customer Asset Management software over the Web through
industry-standard browsers simplifies the installation and the maintenance of
the software. Businesses are also recognizing that the Web may enable their
customers to electronically request products and information directly from, or
provide information directly to, the business.
The growing need for Customer Asset Management software, combined with
complex technology infrastructures, has resulted in a corresponding need for
internal support or help desk solutions. The movement toward rapidly changing,
client/server, Internet-enabled desktop computing environments, built from
hardware and software from multiple vendors, has made support of this
sophisticated technology increasingly difficult. Help desk solutions provide
support within increasingly large, geographically distributed and
technology-dependent organizations and distribute valuable problem-solving
information. Internal help desks must be able to quickly and accurately process
high volumes of employee requests, much like the challenges of providing to
customers timely responses to sales and service information. Furthermore, as
businesses continue to establish numerous, coordinated internal help desks,
they seek to extend this solution to other employee support operations and
organizational infrastructures, such as human resources, asset management and
facilities management help desks. Internal help desks have become an important
component of a Customer Asset Management solution as businesses recognize that
internal employee productivity facilitates improved customer response.
According to the Harvard Business Review March-April 1994: "Value is reated
(for customers) by satisfied, loyal and productive employees. Employee
satisfaction, in turn, results primarily from high-quality support services and
policies that enable employees to deliver results to customers."
In order to satisfy the wide variety of requirements of businesses for
a common base of customer information, a Customer Asset Management solution
must be easily customizable. In addition, a Customer Asset Management solution
must be scalable to address a small number of individual users or a large
number of users across departments and enterprises. To fully utilize all
available customer information, businesses are also demanding that their
Customer Asset Management applications integrate with back office, enterprise
resource planning (ERP) systems such as finance, human resources and
manufacturing. Finally, businesses are demanding ease of accessibility to
Customer Asset Management applications by mobile users not on the corporate
network and by all users through the Internet. With these attributes, Customer
Asset Management can enable businesses to move beyond isolated, departmental
views of the customer, to real-time access to all customer information held by
the business.
VANTIVE SOLUTION
Vantive is a leading provider in the Customer Asset Management
information systems market through its suite of integrated applications called
Vantive Enterprise. Vantive Enterprise enables organizations to address
specific needs of many aspects of customer interaction, on departmental and
enterprise-wide levels. The software applications that comprise Vantive
Enterprise are designed to automate and integrate sales and marketing, customer
support, help desk operations, quality assurance and field service. Vantive's
strategy is to provide its users with an integrated, Customer Asset Management
applications solution.
Complete Suite of Customer Asset Management Applications. Vantive
Enterprise, a complete set of Web-enabled, client/server software applications,
is the Company's integrated Customer Asset Management information system. These
applications enable businesses to leverage customer information on an
enterprise-wide basis, ensuring that the right customer information goes to the
right person at the right time. Vantive Enterprise currently includes Vantive
Sales, Vantive Support, Vantive HelpDesk, Vantive Quality, and Vantive
FieldService. Each component provides easy-to-use, "best of breed"
functionality for each of the respective segments of the Customer Asset
Management market.
Integrated Customer Asset Management Solution. Vantive Enterprise
provides the customer with a single solution to help automate and manage the
complete customer life cycle. In addition, Vantive Enterprise integrates help
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desk operations, recognizing that employees are "internal customers" whose
productivity affects interactions with external customers and partners. While
Vantive's applications are designed to be implemented together, they can be
deployed as a stand-alone system for each of the functional areas of Customer
Asset Management: sales and marketing, customer support, field service, defect
tracking and internal help desk. In addition, the Company is currently
partnering with PeopleSoft, Inc. ("PeopleSoft"), an ERP vendor, with the goal
of integrating Vantive Enterprise with back office inventory management and
distribution systems to create a single integrated suite of applications.
Customizable. Vantive Enterprise is highly customizable using Vantive
Tools, a set of application-specific customization tools that allows users to
modify their application on any platform without changing source code. This
enables businesses to customize applications for their own business model, to
tailor the user interface, to make modifications to the business rules and
processes, and to extend the application. This capability allows businesses to
capture customer information collected by the business to accommodate their
specific business needs. Additionally, businesses can modify the applications
as their business needs change.
Scalable, Enterprise-Wide Solution. Vantive's products address a wide
range of market needs, from departmental to enterprise-wide requirements, from
single point solutions to fully integrated Customer Asset Management
applications. This scaleability represents a key competitive advantage in
addressing the Customer Asset Management market by allowing businesses to
deploy applications for a growing number of users, while also fully maintaining
system performance. Vantive Enterprise applications have been implemented at
the departmental and enterprise-wide level, supporting from 10 to more than
10,000 registered or named users.
Web-Enabled Functionality. The Company's VanWeb product allows access
to Vantive's applications from the World Wide Web. Van Web leverages the
Vantive Dynamic Dictionary, to preserve workflow rules, data integrity and
permissions schemes when executing Vantive applications across the Web.
Additionally, in response to an increasing demand from Web users, the Company's
applications enable "self service" by a business' customers -- or
electronically providing information to the business, and "assisted buying" by
their customers -- or electronically requesting products and information from
the business. "Self service" and "assisted buying" each occur without any
necessary direct prompting by the business. By leveraging the Web, Vantive
Enterprise extends its usefulness beyond the business, to its most important
asset, its customers.
Mobile Solution. In addition to supporting LAN, WAN and Internet
access, The Vantive Enterprise also supports mobile users through
Vantive-on-the-Go as well as through wireless modems and special Web enabled
telephones. Mobile users may seamlessly access Vantive Sales through
Vantive-On -The-Go, enabling mobile users to benefit from the same
functionality, performance, real-time upgrades, and data access capabilities as
individuals on the internal corporate network. Upon reconnecting with the
corporate network, the Company's software will automatically synchronize any
differences between the files accessed by the mobile user. The Company's
applications also can be accessed through Unwired Planet, Inc.'s
character-based Web browser that operates on special cellular telephones that
recognize the CDPD digital standard. Using this technology, the Company has
developed a product which allows Vantive Sales users to access the Vantive
database via these CDPD-enabled cellular telephones, thereby further enhancing
the ability of mobile users to easily access key customer information.
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STRATEGY
Vantive's strategy is to become the leading supplier of client/server
and Web-based Customer Asset Management application software that enables
businesses to improve customer acquisition and retention. The following are
the key elements of the Company's strategy:
Increase the Depth and Breadth of Customer Asset Management
Applications. Vantive has, since its inception, focused on customer support,
quality assurance and help desk applications. Recently, the Company has
developed marketing and sales and field service applications to complete its
initial core suite of Customer Asset Management products. In addition, the
Company has regularly made many enhancements to its core suite and has recently
added the following functionality: territory management, fulfillment, channel
management/channel partner integration, business rules and automated workflow
and advanced computer telephony integration (CTI). Vantive believes that its
technology architecture and common data model provide it with a competitive
advantage when adding and integrating key functionality to Vantive Enterprise.
The Company's strategy also includes continuing to add new functionality to its
core suite through internal development as well as through licensing "state of
the art" third party technology. To qualify as "state of the art," the Company
must determine that the technology has a clear future market direction, is
extremely robust and is commercially supported.
Expand Distribution Channels and Leverage Third Party Relationships.
Vantive's strategy is simultaneously to expand its direct sales force, to
develop additional relationships with third parties and to dedicate certain
direct sales resources and leverage third party relationships toward expanding
its presence in key "vertical" markets. By increasing the number of direct
field sales representatives, the Company intends to improve its geographic
reach and existing account coverage. The Company has developed relationships
with several high-end integrators and resellers, including EDS, Deloitte &
Touche, Price Waterhouse, KPMG Peat Marwick and HBO and Company. The Company
intends to continue to develop relationships with other third party resellers
in the future. In addition, the Company will focus certain field sales
representatives and leverage its relationships with third parties to vertical
markets that the Company believes value Vantive's general, or "horizontal,"
functionality as well as its and its partners' industry expertise in
implementing Customer Asset Management solutions in vertical markets. Examples
of such markets include healthcare, finance, telecommunications and utilities.
Extend Enterprise Integration. Vantive's strategy is to enable its
Customer Asset Management software applications to be easily integrated with
ERP systems, such as finance, manufacturing and human resources, through
strategic partnerships with ERP vendors as well as through internal
development. With VanAPI, an intelligent applications program interface, the
ability of a business to more easily integrate Vantive Enterprise with their
other information systems is increased. In particular, Vantive has announced a
development partnership with PeopleSoft with the goal of developing joint
applications. Vantive is currently integrating manufacturing and distribution
applications available from PeopleSoft with the Vantive FieldService
application. Currently intended to be completed in 1997 or early 1998, the
resulting integration of FieldService with inventory management and
distribution systems will improve a business' efficiency in meeting customer
needs. The Company intends, through this and other partnerships, to continue
to integrate back office applications with other Customer Asset Management
applications. The Company has also developed partnerships with several
high-end integrators to further facilitate integration between Vantive's
applications and other applications.
Leverage Scaleability. The Company's strategy is to continue to
develop scaleable Customer Asset Management applications that may be
effectively utilized by businesses of virtually all sizes, with varying number
of users, applications and levels of integration. In addition, to most
effectively maintain the scaleability of its solutions, the Company's strategy
is to design component based software that leverages additional transaction
processing capabilities into its solutions as the industry evolves in that
direction.
Exploit World Wide Web. As the Web continues to increase in importance
for businesses and their customers, Vantive's strategy is to continue to
exploit Web-enabled functionality in its Customer Asset Management
applications. Vantive plans to release VanWeb 3.0 and a set of Customer Asset
Management applets in 1997 or early 1998 based on Java, a software language
developed by Sun Microsystems. The Company believes these new technologies
will enhance the functionality, scaleability and customizability of the
Company's Web based Customer Asset
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Management software applications as well as expand its "self service" and
"assisted buying" application capabilities. They will also allow the Company's
customers to take advantage of new network computer architectures from
companies like Oracle Corporation, Sun Microsystems and Netscape Communications
Corporation.
Extend Mobility of User. The Company, recognizing that businesses are
demanding the availability of Customer Asset Management solutions for their
mobile users, recently extended the reach of its Vantive Sales product to the
mobile user through Vantive-On-The-Go. Users can also access Vantive database
information through a character-based Web browser developed by Unwired Planet,
Inc. operating through wireless telephones enabled with CDPD, a widely adopted
digital communications standard. Each of these solutions has further enhanced
the ability of users to become mobile when accessing the Company's Customer
Asset Management software applications. Vantive's strategy is to further
benefit mobile users by applying these benefits to each of its other
applications.
Enable Rapid Application Deployment. Vantive's strategy is to
continue to use and enhance the methodology developed for its own consultants,
third parties and customers to rapidly deploy client/server applications.
Vantive Enterprise applications are designed to be easily tailored. As a
result, a business can deploy applications quickly, typically in a few months,
and still easily refine the applications as its business needs change. The
customization of an application can be done using Vantive Tools as with well as
third party technology such as Visual Basic for Applications. User interface
customizations are done using VanEdit as the layout tool. In 1997 or early
1998, Vantive plans to ship VanDesign, an easy to use layout facility for
customizing the look and feel of an application without coding, that will be
the next-generation, successor product to VanEdit. Also in 1997 or early 1998,
Vantive Tools will support ActiveX, a software architecture for building
software components developed by Microsoft Corporation. Through ActiveX,
Vantive applications can easily incorporate third party software components
developed to the ActiveX standard. The Company believes that these new
technologies will enable the rapid development of more sophisticated and
ergonomic software.
The foregoing statements regarding the Company's strategy,
expectations and intentions are forward-looking statements, and actual results
may vary substantially depending upon a variety of factors, including the
development of emerging markets for Customer Asset Management software,
competition, technological change, changing customer needs, evolving industry
standards, any product development delays, and the ability of the Company to
manage any future growth and new distribution channels. There can be no
assurance that any new products will be completed in a timely basis or that
markets will develop for such products. See "Business Risks - Rapid
Technological Change and Product Development Risks," "- Competition," "-
Increased Use of Third Party Software" "- Management of Expanding Operations;
Dependence upon Key Personnel" and "- Need to Expand Distribution Channels and
Successfully Leverage Third Party Relationships."
PRODUCTS AND TECHNOLOGY
Vantive Enterprise is a suite of tightly integrated Customer Asset
Management applications that enable businesses to attract, acquire, retain, and
leverage customers by applying automation to marketing, sales, customer
support, defect tracking, field service and internal help desk functions. The
Company has designed its solution to be fully expandable through the enterprise
by sharing a common database and application architecture along with common
facilities for intelligent workflow routing, advanced problem solving and
measurement reporting. By building the applications using a three-tier
application architecture, Vantive believes its applications are more scalable
and easier to maintain than competing two-tier implementations. This
architecture also results in a smaller client footprint, less network traffic
and more efficient use of database resources. This three-tier architecture is
also well-suited for Web-based applications.
Vantive Enterprise consists of the following applications, each of
which can be purchased and implemented separately or integrated in any
combination:
Vantive Sales is a software application for automating the entire
sales and marketing process. The application can automate campaign lead
qualification and tracking, Web-enabled lead and opportunity management,
pipeline management, scheduling and contact management, account and territory
planning, distribution channel
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management, sales forecasting and fulfillment. The automated campaign
development feature enables a business to target specific prospects and measure
the return on investment of each marketing program. Vantive Sales also can
utilize a Web-based multimedia marketing encyclopedia. Using a flexible sales
process model that allows sales management to track sales activities according
to standard or proprietary selling methodologies, salespeople can track
prospects and issues and problems reported by customers. The system is designed
to help salespeople close more sales, shorten sales cycles, provide access to
critical product and competitive information, better manage existing accounts,
interact with distribution partners and share customer information on an
enterprise-wide basis. Through Vantive On-The-Go, mobile field sales personnel
have access to the corporate database to respond to customer inquiries and
update information.
Vantive Support is an application for automating and managing a
customer support center. The application supports activities such as product
support, consumer affairs and complaint management. Vantive Support manages
the major aspects of the customer support process, including user access,
customer entitlement, call tracking, problem diagnosis, problem resolution,
user performance measurement, management reporting and service and support
management. In addition to managing the customer support process, Vantive
Support provides opportunities for businesses to generate incremental revenue
through proactive service contract renewals, upgrades and cross-selling. When
combined with VanWeb, Vantive Support also allows businesses to provide their
customers with direct, electronic access to support resources via the Web.
This advanced software system is built around a comprehensive database of
information about customers, products and service contracts. When combined
with the Vantive workflow engine, in addition to helping customer support
personnel resolve customer issues quickly and accurately and manage and utilize
customer information across the business, Vantive Support provides the focal
point for a business' customers to interact with the entire business. To ensure
accountability and responsiveness to customers, Vantive Support tracks each
case, records each action that occurs relative to that case, and maintains a
complete audit trail of the case.
Vantive FieldService is an application for managing the allocation,
scheduling and dispatching of resources, including parts and materials, to
perform services or complete work orders to solve customer problems at their
site. Vantive FieldService helps service personnel track installed base
configurations, proactively model work plans, notify and dispatch technicians,
track and manage service events, request parts, track billing and RMA
information, and schedule the coordination of all these activities. Vantive
FieldService helps retain customer relationships with efficient,
cost-effective, on-site services. The application provides a field technician
with a complete view of the customer relationship, including which products are
under service contracts and whether there is an active sales opportunity with
the customer. With information from other departments, field technicians can
help leverage the overall customer relationship.
Vantive Quality is an application for collecting, distributing,
tracking and maintaining information about products. Vantive Quality manages
the complete product quality process, maintains multilevel product build
models, integrates with source code control systems and monitors processes for
ISO 9000 compliance. Vantive Quality helps organizations listen to their
customers and meet future customer needs by improving product quality and
customer service by tracking product failures, enhancement requests and changes
to products. With Vantive Quality, organizations can manage the workflow
between customer support, customer service, quality assurance, and engineering
groups more easily. This facilitates more consistent customer feedback and
higher customer satisfaction.
Vantive HelpDesk is an internal help desk application that logs,
tracks and assists in handling employee problems, issues, complaints,
suggestions and requests for assistance with technology, human resources and
facilities. Vantive HelpDesk solves the increasing need for internal help desk
solutions as the underpinning to support the sophisticated technology required
for a Customer Asset Management information system. Vantive HelpDesk offers
problem resolution and escalation capabilities similar to those in Vantive
Support. In addition, Vantive HelpDesk addresses unique requirements of
enterprise support management such as automatic case creation from network
management systems, asset tracking, change management, integration with network
management systems and access to pre-packaged experience or knowledge bases
such as those provided by ServiceWare Inc. and Knowledge Brokers Inc. These
features help ensure that a business' employees are as satisfied as its
customers.
The Company also offers several other software products and tools that
enhance the functionality and facilitate the integration and modification of
Vantive Enterprise applications:
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VanWeb enables anyone with an industry-standard Web browser to
interact dynamically with a Vantive Enterprise application from any platform
anywhere in the world. Combined with Vantive Enterprise applications, VanWeb
allows businesses to capture information from various sources, thereby enabling
the information to be properly distributed and utilized. VanWeb is the vehicle
for "self-service" and "assisted buying" application uses. This improves
customer sales and support effectiveness, while providing information useful in
developing goods and services for that customer. From customers requiring
24-hour access to support resolution databases or product marketing databases,
to field sales representatives who log customer site visits, to international
distributors who inquire about product availability, VanWeb supports the entire
enterprise. VanWeb leverages existing Vantive technologies, such as the Vantive
API and Vantive Dynamic Dictionary, to preserve workflow rules, data integrity
and permission schemes. In contrast to static, read-only hypertext pages,
VanWeb provides dynamic information generated directly from a Vantive database.
As a result, VanWeb enables businesses to communicate updated information among
diverse networks of customers, employees, business partners and suppliers,
while providing customers direct access to self-service options.
Vantive On-The-Go is Vantive's mobile computing product. Vantive
On-The-Go seamlessly accesses corporate database information, enabling mobile
users to experience the same functionality, performance, real-time upgrades
and data access capabilities as individuals working on the internal corporate
network. Vantive On-The-Go handles complex data synchronization and conflict
management, ensuring accurate and complete customer data. Designed with the
industry leading mobile database technology, SQLAnywhere, instead of
proprietary data synchronization engines, Vantive On-The-Go provides
significantly faster data synchronization than competing mobile applications.
Vantive Development Environment, which includes Vantive Tools, allows
a business to tailor the user interface, make modifications to business
processes and extend the application, all without changing the source code of
the Vantive Enterprise applications. Vantive Development Environment also
includes Visual Basic for Applications, a third party scripting tool that
further facilitates tailoring the user interface. The Company also has
developed VanAPI, an applications program interface that can be used to link
Vantive Enterprise software applications to corporate data in legacy or
client/server applications such as finance, human resources and manufacturing.
SALES AND MARKETING
The Company markets and sells its software and services in the United
States primarily through a direct sales organization. To support its sales
force, the Company conducts comprehensive marketing programs which include
direct mail, public relations, Web-based lead generation, advertising, trade
shows, seminars, ongoing customer communications programs and an annual,
international user group conference. Marketing also coordinates the Company's
participation in industry programs and forums and establishes and maintains
close relationships with recognized industry analysts. The sales cycle begins
with the generation of a sales lead, which is followed by qualification of the
lead, an analysis of the customer's needs, multiple presentations and/or
product demonstrations to the prospective customer, and ends with contract
negotiation and commitment. Due to the importance of the Company's
client/server applications to businesses, the Company focuses initial sales
efforts on senior personnel in the business' information technology department
and line management executives in the functional areas relevant to the
application. While the sales cycle varies substantially from customer to
customer, it typically requires six to nine months.
The Company markets its products outside of the United States through
wholly owned subsidiaries and independent distributors, and as of December 31,
1996, had wholly owned subsidiaries in Australia. Canada, France, Germany, the
Netherlands, Singapore and the United Kingdom, and distributors in Argentina,
Brazil, Chile, Columbia, Israel, Japan, Mexico, New Zealand, Scandinavia,
South Korea, Spain and Venezuela. In addition to marketing and selling the
Company's products, the distributors are required to provide technical support
to their customers.
The sales and marketing organization consists of 129 employees,
including 51 quota-carrying salespeople, as of December 31, 1996. The domestic
sales staff is based at the Company's corporate headquarters in
7
<PAGE> 10
Santa Clara, California and 13 field sales offices located in Atlanta, Boston,
Boulder Colorado, Brentwood California, Chicago, Dallas, Edison New Jersey,
Irvine California, New York, Portland, San Diego, Seattle and Washington, D.C.
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. The ability of the Company to
achieve significant revenue growth in the future will depend on its success in
executing this strategy. The Company is currently investing, and intends to
continue to invest, significant resources to develop its sales strategy, which
could adversely affect the Company's operating margins. In this regard, the
Company has recently hired and continues to hire significant numbers of direct
sales personnel and has developed relationships with several high-end
integrators and resellers, including EDS, Deloitte & Touche, Price Waterhouse,
KPMG Peat Marwick and HBO and Company. 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 appropriate third party relationships. There
also can be no assurance that the Company will be able to attract and retain
appropriate high-end integrators, resellers and other third party distributors
to market the Company's products effectively. In addition, 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 or
other third party distributors, 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. The foregoing
statements regarding the Company's intention to expand its distribution
channels are forward-looking statements, and actual results may vary
substantially depending upon a variety of factors, including but not limited
to, those contained in this paragraph.
PRODUCT DEVELOPMENT
The Company has historically developed and expects to continue to
develop its products in conjunction with its existing and potential customers.
Several products are currently in development. Vantive Version 7.0, scheduled
for release in 1997 or early 1998, is expected to include updates to the
Vantive Sales application, a more flexible user interface model, improved
reports for each application and a new release of the Vantive client that
functions as a container for ActiveX. Vantive Version 7.0 is also expected to
include VanDesign, a simple, visual layout facility for customizing the look
and feel of an application without coding. Vantive Version 7.0 applications
are expected to integrate with several third party technologies such as
marketing encyclopedia technology to manage and distribute information and
configuration technology to configure complex orders and quotes as part of the
sales process. Vantive Version 7.1, scheduled for release in 1997 or early
1998, is expected to include updates to the Sales application, a next
generation version of the FieldService application, and Web applets for use over
the Internet. VanWeb 3.0, scheduled for release in 1997 or early 1998, is
expected to provide better scaleability due to a multi- threaded Java
implementation, full customization of applets using leading HTML editors and
increased functionality. The evolution to component based software will also
significantly influence Vantive's future product direction. The Company
believes businesses will expect to be able to utilize portions of the Company's
integrated software solution and effectively integrate them with software
objects developed by other software vendors.
As of December 31, 1996, there were 54 employees on the Company's
product development staff. In addition, the Company regularly supplements its
workforce with consultants. As of December 31, 1996, there were 20 full-time
equivalent consultants on the Company's product development staff. The
Company's research and development expenditures in 1994, 1995 and 1996 were
$2.1 million, $3.3 million and $7.3 million, respectively, and represented
20.3%, 13.2% and 11.3% of revenues, respectively. The Company expects that it
will continue to commit substantial resources to product development in the
future.
The foregoing statements regarding scheduled introductions of the
Company's products under development and proposed enhancements and the features
included in such products or enhancements are forward-looking statements, and
the actual release dates for such products or enhancements could differ
materially from those projected
8
<PAGE> 11
as a result of a variety of factors, including but not limited to, those
contained in the following paragraphs. The Customer Asset Management 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. 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 such 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, including distribution
through the Internet, require such 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 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, including but not limited to Vantive Version 7.0,
Vantive Version 7.1 and VanWeb 3.0. 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.
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.
COMPETITION
The Customer Asset Management market is intensely competitive, highly
fragmented and subject to rapid change. Because the Company offers multiple
applications that 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 Customer Asset Management markets, such
as Astea International, Inc., Aurum Software, Inc., Clarify, Inc., Onyx
Software, Scopus Technology, Inc. and Siebel Systems, Inc. The Company also
competes with a substantial number of businesses that 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 and Software Artistry, Inc. The
Company believes that such point solution providers may expand their suite,
which could provide increased competition for the company across its market
segments. The Company also competes with third party professional service
organizations that develop custom software and with internal information
technology departments of customers that develop customer interaction
applications. Among the Company's current and potential competitors are also a
number of large hardware and software businesses that may develop or acquire
products that compete with the Company's products. In this regard, SAP AG,
Oracle Corporation ("Oracle") and The Baan Company have each introduced sales
automation and/or customer support modules as part of
9
<PAGE> 12
their application suites. In addition, Oracle has recently announced the
creation of a network of third party dealers that will sell Oracle's
application suites exclusively to medium-sized businesses. The Company expects
large software vendors in the ERP market may enter the Customer Asset
Management market. These competitors have significantly greater financial,
technical, marketing and other resources than the Company.
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. The Company also expects that competition may
increase as a result of both new software start ups entering the market as well
as existing software industry vendors which may be planning to enter the market
for Customer Asset Management 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, scaleability, 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 such 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.
INTELLECTUAL PROPERTY AND OTHER PROPRIETARY RIGHTS
The Company's success is heavily dependent upon proprietary
technology. The company relies primarily on a combination of copyright,
trademark and trade secrets laws, as well as confidentiality procedures and
contractual provisions to protect its proprietary rights. There can be no
assurance that such 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 believes that competitors
regularly evaluate and try to emulate its products. 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 product developers 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 such markets overlaps. Any such 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.
Such 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.
10
<PAGE> 13
EMPLOYEES
As of December 31, 1996, the Company had 254 employees, including 129
in sales and marketing, 20 in consulting, 54 in research and development, 33 in
general and administration and 18 in client services. Of these employees, ten
employees are located in the United Kingdom, eight in France, four in the
Netherlands, two in Australia, two in Canada and two in Germany. The remaining
employees are located in the United States. None of the Company's employees is
represented by a labor union. The Company has experienced no work stoppages and
believes its relationship with its employees is good. In addition, the Company
regularly supplements its workforce with consultants. As of December 31, 1996,
the Company employed 33 full-time equivalent consultants.
Competition for qualified personnel in the Company's industry is
intense. The Company believes that its future success will depend in part on
its continued ability to hire, assimilate and retain qualified personnel.
11
<PAGE> 14
DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
As of January 31, 1997, the Company's directors and executive officers
were as follows:
<TABLE>
<CAPTION>
Name Age Position Director or
---- --- --------
Officer Since
-------------
<S> <C> <C> <C>
John R. Luongo 47 President, Chief Executive Officer and 1993
Director
Roger J. Sippl 42 Chairman of the Board of Directors 1990
Aneel Bhusri 31 Director 1996
William H. Davidow 61 Director 1991
Kevin G. Hall 38 Director 1994
Raymond L. Ocampo Jr. 44 Director 1997
Peter A. Roshko 38 Director 1991
John M. Jack 42 Chief Operating Officer 1995
Christopher W. Lochhead 31 Executive Vice President of Strategic 1996
Marketing
Garry Hallee 36 Senior Vice President of Engineering 1996
Kathleen A. Murphy 50 Chief Financial Officer 1995
Michael M. Loo 40 Vice President, Finance 1993
</TABLE>
John R. Luongo has been President, Chief Executive Officer and a
director of the Company since June 1993. He was an independent consultant from
November 1992 to June 1993, President, Chief Executive Officer and Chairman of
the Board of Trifox, Inc., a software company, from September 1991 to November
1992, Senior Consultant at Merrill, Pickard, Anderson and Eyre, a venture
capital firm, from September 1990 to June 1991 and Senior Vice President
International Division, at Oracle Corporation from July 1982 to July 1990.
Roger J. Sippl is a co-founder of the Company and has served as a
director of the Company since December 1990 and as Chairman of the Board since
1996. Mr. Sippl is the founder of Visigenic Software, Inc., where he has
served as Chief Executive Officer since January 1993. Prior to his
relationship with Visigenic Software, Inc., Mr. Sippl founded Informix Software
in 1980 and served as that company's Chairman of the Board until 1992.
Aneel Bhusri has served as a director of the Company since December
1996. He has served in several capacities with PeopleSoft, Inc. since August
1993, currently as its Senior Vice President of Product Strategy. From June
1992 to March 1993, Mr. Bhusri served as an associate at Norwest Venture
Capital. From 1988 to 1991 he was a financial analyst in Morgan Stanley's
Corporate Finance Department.
William H. Davidow has served as a director of the Company since July
1991. He has been a General Partner at Mohr, Davidow Ventures since May 1985.
12
<PAGE> 15
Kevin G. Hall has served as a director of the Company since May 1994.
He has served as a General Partner of Norwest Equity Partners, IV since August
1993. Prior to his relationship with Norwest Equity Partners, IV, he served as
a principal in Brentwood Associates, a venture capital firm, from June 1988 to
August 1993.
Raymond L. Ocampo Jr. has served as a director of the Company since
January 1997. He served in several capacities with Oracle Corporation from
July 1986 to November 1996, primarily and most recently as its Senior Vice
President, General Counsel and Corporate Secretary.
Peter A. Roshko has served as a director of the Company since July
1991. Mr. Roshko co-founded and has been a co-member of Granite Investments,
an investment company, since August 1995. From December 1993 to August 1995,
Mr. Roshko was a General Partner at Cottonwood Ventures, a venture capital
firm. From June 1993 to December 1993, Mr. Roshko was an independent investor
and consultant in the venture capital industry. Mr. Roshko was a General
Partner at Mohr, Davidow Ventures from March 1987 to June 1993.
John M. Jack has served as Chief Operating Officer since January 1997
and as Vice President, Worldwide Sales of the Company from May 1995 to January
1997. He served as Vice President, Western Regional Sales at Sybase
Corporation, a client/server software company, from April 1991 to April 1995.
From November 1986 to April 1991, he held various sales management and sales
positions at Sybase Corporation.
Christopher W. Lochhead has served as Executive Vice President of
Strategic Marketing of the Company since June 1996. He served as President and
Chief Executive Officer of Always An Adventure, a strategy consulting company,
from November 1993 to June 1996. From September 1991 to November 1993, he was
Director of Canada at Platinum Software Corporation, a software company.
Garry Hallee has served as Senior Vice President of Engineering of the
Company since October 1996. He served as Vice President and General Manager at
Platinum Technology, a software company, from December 1995 to October 1996.
From July 1992 to December 1995, he served as Director, Product Development at
Trinzic, a software company. From May 1984 to July 1992, he served as Chief
Technology Officer and Development Manager at Aion, a software company.
Kathleen A. Murphy has served as Chief Financial Officer of the
Company since August 1995. She served as Chief Financial Officer at The
Imagination Network, an entertainment software company from April 1994 to
August 1995 and as Chief Financial Officer of Verity, Inc., an information
retrieval software company, from April 1989 to March 1994.
Michael M. Loo has served as Vice President, Finance of the Company
since May 1995. He initially served as its Director of Finance and
Administration from October 1993 to May 1995. Previously, he served in various
financial and accounting positions, most recently as Controller, Worldwide
Field Operations, at Sybase Corporation, a client/server software company, from
January 1990 to October 1993.
ITEM 2. PROPERTIES
The Company's principal administrative, engineering, manufacturing,
marketing and sales facilities total approximately 32,859 square feet and are
located in a single building in Santa Clara, California under a lease which
expires in May 2001. In addition, in September 1996, the Company leased an
additional 24,000 square feet in another building in Santa Clara, California,
under a lease which expires in 2003. The Company also leases offices
in the metropolitan areas of Amsterdam, Atlanta, Chicago, Dallas, Denver,
London, Los Angeles, New Jersey, New York, Seattle, Toronto and Washington,
D.C.
13
<PAGE> 16
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS.
None.
14
<PAGE> 17
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
The Company's stock has been traded on the Nasdaq National Market
since the Company's initial public offering on August 14, 1995 under the
Nasdaq symbol VNTV. The following table sets forth, for the periods indicated,
the high and low closing sales prices for the Company's common stock as
reported by Nasdaq:
<TABLE>
<CAPTION>
Year Ended December 31, 1995 High Low
---------------------------- ---- ---
<S> <C> <C>
Third Quarter (since August 14, 1995) $ 9.13 $6.44
Fourth Quarter $14.38 $6.75
Year Ended December 31, 1996
----------------------------
First Quarter $12.25 $9.50
Second Quarter $19.75 $11.00
Third Quarter $32.38 $12.75
Fourth Quarter $42.25 $24.75
</TABLE>
All sales prices have been adjusted for a two-for-one stock split paid
in the form of a 100% stock dividend in October 1996. As of December 31, 1996,
there were approximately 305 holders of record of the Company's common stock.
The Company has never paid cash dividends on its common stock. The
Company currently intends to retain earnings, if any, for use in its business
and does not anticipate paying any cash dividends in the foreseeable future.
15
<PAGE> 18
ITEM 6. SELECTED FINANCIAL DATA
THE VANTIVE CORPORATION
SELECTED CONSOLIDATED FINANCIAL DATA
(In thousands, except per share data)
<TABLE>
<CAPTION>
For the Years Ended December 31,
----------------------------------------------------
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenues:
License . . . . . . . . . . . . . . $ 14 $ 1,900 $7,141 $16,631 $41,513
Service . . . . . . . . . . . . . . -- 613 3,073 8,404 22,761
------- ------- ------ ------- -------
Total revenues . . . . . . 14 2,513 10,214 25,035 64,274
Cost of Revenues:
License . . . . . . . . . . . . . . -- 50 110 163 392
Service . . . . . . . . . . . . . . -- 1,227 2,383 5,968 12,263
------- ------- ------- ------- -------
Total cost of revenues . . -- 1,277 2,493 6,131 12,655
------- ------- ------- ------- -------
Gross margin . . . . . . . . . . . . . . . . 14 1,236 7,721 18,904 51,619
Operating Expenses:
Sales and marketing . . . . . . . . 917 2,142 5,068 11,582 24,676
Research and development . . . . . 1,016 1,726 2,072 3,319 7,261
General and administrative . . . . . 361 908 1,099 2,167 5,389
------- ------- ------- ------- -------
Total operating expenses . 2,294 4,776 8,239 17,068 37,326
------- ------- ------- ------- -------
Income/(loss) from operations . . . . . . . (2,280) (3,540) (518) 1,836 14,293
------- ------- ------- ------- -------
Other income/(expense), net . . . . . . . . 46 (92) (30) 439 1,286
------- ------- ------- ------- -------
Income/(loss) before provision for income
taxes. . . . . . . . . . . . . . . . . . . (2,234) (3,632) (548) 2,275 15,579
Provision for income taxes . . . . . . . . . -- -- -- 232 4,674
------- ------- ------- ------- -------
Net income/(loss) . . . . . . . . . . . . . $(2,234) $(3,632) $ (548) $ 2,043 $10,905
======= ======= ======= ======= =======
Pro forma net loss per share . . . . . . . . $ (0.03)
=======
Net income per share . . . . . . . . . . . . $ 0.09 $ 0.42
====== ======
Shares used in per share computation . . . . 17,570 23,012 25,847
====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
December 31,
-----------------------------------------------------
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Working capital . . . . . . . . . . . . . . $ 2,541 $ 1,553 $ 3,438 $24,463 $32,959
Total assets . . . . . . . . . . . . . . . . 3,130 3,365 7,457 34,587 58,364
Long-term liabilities . . . . . . . . . . . -- 294 415 650 755
Mandatorily redeemable convertible
preferred stock. . . . . . . . . . . . . . 5,522 8,244 10,801 -- --
Stockholders' equity/(accumulated deficit) . $(2,580) $(6,204) $(6,665) $26,657 $39,431
</TABLE>
16
<PAGE> 19
THE VANTIVE CORPORATION
QUARTERLY FINANCIAL DATA
<TABLE>
<CAPTION>
Quarter Ended
------------------------------------------------------------------------
Mar. June Sept. Dec. Mar. June Sept. Dec.
31, 30, 30, 31, 31, 30, 30, 31,
1995 1995 1995 1995 1996 1996 1996 1996
---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
License . . . . . . . . . . . $ 3,053 $ 3,634 $ 4,289 $ 5,655 $ 7,088 $ 9,914 $11,102 $13,409
Service . . . . . . . . . . . 1,134 1,883 2,320 3,067 3,725 5,287 6,147 7,602
------- ------- ------- ------- ------- ------- ------- -------
Total revenues . . . . . . 4,187 5,517 6,609 8,722 10,813 15,201 17,249 21,011
Cost of Revenues:
License . . . . . . . . . . . 35 47 51 31 56 97 113 126
Service . . . . . . . . . . . 1,053 1,477 1,510 1,928 2,322 2,769 3,316 3,856
------- ------- ------- ------- ------- ------- ------- -------
Total cost of revenues . . 1,088 1,524 1,561 1,959 2,378 2,866 3,429 3,982
------- ------- ------- ------- ------- ------- ------- -------
Gross margin . . . . . . . . . . 3,099 3,993 5,048 6,763 8,435 12,335 13,820 17,029
Operating Expenses:
Sales and marketing . . . . . 1,876 2,390 2,946 4,370 4,826 5,100 6,462 8,288
Research and development . . 707 761 890 960 1,102 1,403 1,694 3,062
General and administrative . 414 459 641 654 1,079 1,136 1,511 1,663
------- ------- ------- ------- ------- ------- ------- -------
Total operating expenses . 2,997 3,610 4,477 5,984 7,007 7,639 9,667 13,013
------- ------- ------- ------- ------- ------- ------- -------
Income from operations . . . . . 102 383 571 779 1,428 4,696 4,153 4,016
Other income/(expense), net . . . 9 (4) 131 302 272 287 370 357
------- ------- ------- ------- ------- ------- ------- -------
Income before provision for
income taxes . . . . . . . . . 111 379 702 1,081 1,700 4,983 4,523 4,373
Provision for income taxes . . . 11 38 70 112 340 1,665 1,357 1,312
------- ------- ------- ------- ------- ------- ------- -------
Net income . . . . . . . . . . . $ 100 $ 341 $ 632 $ 969 $ 1,360 $ 3,318 $ 3,166 $ 3,061
======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
As a Percentage of Total Revenues
--------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
License . . . . . . . . . . . 72.9% 65.9% 64.9% 64.8% 65.6% 65.2% 64.4% 63.8%
Service . . . . . . . . . . . 27.1 34.1 35.1 35.2 34.4 34.8 35.6 36.2
----- ------ ------ ------ ------ ------ ------ ------
Total revenues . . . . . . 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
Cost of Revenues:
License . . . . . . . . . . . 0.8 0.8 0.8 0.4 0.5 0.7 0.7 0.6
Service . . . . . . . . . . . 25.2 26.8 22.8 22.1 21.5 18.2 19.2 18.4
---- ---- ---- ---- ---- ---- ---- ----
Total cost of revenues . . 26.0 27.6 23.6 22.5 22.0 18.9 19.9 19.0
---- ---- ---- ---- ---- ---- ---- ----
Gross margin . . . . . . . . . . 74.0 72.4 76.4 77.5 78.0 81.1 80.1 81.0
Operating Expenses:
Sales and marketing . . . . . 44.8 43.3 44.6 50.1 44.6 33.6 37.5 39.4
Research and development . . 16.9 13.8 13.5 11.0 10.2 9.2 9.8 14.6
General and administrative . 9.9 8.4 9.7 7.5 10.0 7.5 8.8 7.9
---- ---- ---- ---- ---- ---- ---- ----
Total operating expenses . 71.6 65.5 67.8 68.6 64.8 50.3 56.1 61.9
---- ---- ---- ---- ---- ---- ---- ----
Income from operations . . . . . 2.4 6.9 8.6 8.9 13.2 30.8 24.0 19.1
Other income/(expense), net . . . 0.3 -- 2.0 3.5 2.5 1.9 2.1 1.7
---- ---- ---- ---- ---- ---- ---- ----
Income before provision for
income taxes . . . . . . . . . 2.7 6.9 10.6 12.4 15.7 32.7 26.1 20.8
Provision for income taxes . . . 0.3 0.7 1.1 1.3 3.1 10.9 7.8 6.2
---- ---- ---- ---- ---- ---- ---- ----
Net income . . . . . . . . . . . 2.4% 6.2% 9.5% 11.1% 12.6% 21.8% 18.3% 14.6%
==== ==== ==== ==== ==== ==== ==== ====
</TABLE>
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<PAGE> 20
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
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 12.1% of
total revenues in 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 large sales to a limited number of
customers. However, no customer accounted for 10% or more of total revenues in
1995 or 1996. 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. 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. 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 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. See
Note 2 of Notes to Condensed Consolidated Financial Statements.
International revenues, or revenues derived from sales to customers in
foreign countries, accounted for approximately 19.0%, 9.8% and 9.3% of the
Company's revenue in 1994, 1995 and 1996, respectively. 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, 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. 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
18
<PAGE> 21
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 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 such 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.
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 "anticipate," "believes," "expects," "future," "intends," and
similar expressions identify forward-looking statements.
RESULTS OF OPERATIONS
The following table sets forth the percentages that income statement
items are to total revenues for the years ended December 31, 1994, 1995 and
1996:
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
Revenues:
License . . . . . . . . . . . . . . . . . . . . . . . . . . 69.9% 66.4% 64.6%
Service . . . . . . . . . . . . . . . . . . . . . . . . . . 30.1 33.6 35.4
---- ---- ----
Total revenues . . . . . . . . . . . . . . . . . . . . . 100.0 100.0 100.0
Cost of Revenues:
License . . . . . . . . . . . . . . . . . . . . . . . . . . 1.1 0.7 0.6
Service . . . . . . . . . . . . . . . . . . . . . . . . . . 23.3 23.8 19.1
---- ---- ----
Total cost of revenues . . . . . . . . . . . . . . . . . 24.4 24.5 19.7
---- ---- ----
Gross margin . . . . . . . . . . . . . . . . . . . . . . . . . . 75.6 75.5 80.3
Operating Expenses:
Sales and marketing . . . . . . . . . . . . . . . . . . . . 49.6 46.3 38.4
Research and development . . . . . . . . . . . . . . . . . . 20.3 13.2 11.3
General and administrative . . . . . . . . . . . . . . . . . 10.8 8.7 8.4
---- ---- ----
Total operating expenses . . . . . . . . . . . . . . . . 80.7 68.2 58.1
---- ---- ----
Operating income/(loss) . . . . . . . . . . . . . . . . . . . . . (5.1) 7.3 22.2
Other income/(expense) . . . . . . . . . . . . . . . . . . . . . (0.3) 1.8 2.0
---- ---- ----
Income/(loss) before provision for income taxes . . . . . . . . . (5.4) 9.1 24.2
Provision for income taxes . . . . . . . . . . . . . . . . . . . -- 0.9 7.3
---- ---- ----
Net income/(loss) . . . . . . . . . . . . . . . . . . . . . . . (5.4%) 8.2% 16.9%
==== ==== ====
</TABLE>
Revenues
License. The Company increased its license revenues by 132.9% from
$7.1 million in 1994 to $16.6 million in 1995, and by 149.6% to $41.5 million
in 1996. These increases were due to the market's growing acceptance of the
Company's products, in particular Vantive Support and Vantive HelpDesk, the
introduction of the Company's products using the Microsoft SQL server
relational database management system and the Microsoft NT operating systems,
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.
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<PAGE> 22
Service. Service revenues are primarily comprised of fees from
consulting, post-contract support and, to a lesser extent, training services.
Service revenues increased by 173.5% from $3.1 million in 1994 to $8.4 million
in 1995 and by 170.8% to $22.8 million in 1996. The increase in service
revenues was primarily due to the increase in consulting, post-contract 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 Revenues
License. Cost of license revenues includes the costs of product
media, product duplication and manuals. Cost of license revenues increased
from $110,000, or 1.5% of related license revenues, in 1994, to $163,000, or
1.0% of related license revenues, in 1995 and to $392,000, or 0.9% of related
license revenues, in 1996. The increase in absolute dollars in cost of license
revenues was primarily due to the increase in volume shipments of the Company's
software applications and the cost of sublicensing third-party software. The
decrease in cost of license revenues as a percentage of the related license
revenues was primarily due to economies of scale realized as a result of
shipping greater quantities of product during the year ended December 31, 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 increased from $2.4 million, or 77.5% of related service
revenues, in 1994, to $6.0 million, or 71.0% of related service revenues, in
1995 and to $12.3 million, or 53.9% of related service revenues, in 1996.
These increases in absolute dollars were due primarily to increases in
consulting, support and training personnel, and third-party service providers
during these periods. The decrease in cost of service revenues as a percentage
of the related service revenues from 1995 to 1996 was primarily due to
economies of scale realized as a result of a higher level of service activity
and due post-contract support revenues constituting a higher proportion of
total service revenues. The cost of services as a percentage of service
revenues may vary between periods due to 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 $5.1
million, or 49.6% of revenues, in 1994 to $11.6 million, or 46.3% of revenues,
in 1995 and to $24.7 million, or 38.4% of revenues, in 1996. These increases
in absolute dollars were primarily related to the expansion of the Company's
sales and marketing resources, increased commissions expenses as a result of
higher sales levels and increased marketing activities, including direct mail,
trade shows and other promotional expenses. The Company plans to continue to
invest heavily in expanding its sales and marketing activities. Accordingly,
sales and marketing expenses are anticipated to increase both in absolute
dollars and as a percent of revenues over the coming year.
Research and development. Research and development expenses increased
from $2.1 million, or 20.3% of revenues, in 1994 to $3.3 million, or 13.2% of
revenues, in 1995 and to $7.3 million, or 11.3% of revenues in 1996. Research
and development expenses increased in absolute dollars primarily as a result of
an increase in personnel and outside contractors to support the Company's
product development activities. Over the coming years, the Company plans to
continue to invest heavily in research and development. As a result, research
and development expenses are anticipated to increase both in absolute dollars
and as a percent of revenues.
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 its software development costs to
research and development expense.
General and administrative. General and administrative expenses
increased from $1.1 million, or 10.8% of revenues, in 1994 to $2.2 million, or
8.7% of revenues, in 1995 and to $5.4 million, or 8.4% of revenues in 1996.
General and administrative expenses increased in absolute dollars during these
periods primarily due to the addition of
20
<PAGE> 23
staff and information system investments to support the growth of the Company's
business during these periods. The Company expects general and administrative
expenses will increase in absolute dollars.
Provision for income taxes. The Company's provision for state and
federal income taxes in 1994 was immaterial due to cumulative operating losses.
The provision for income taxes for 1995 was $232,000 and $4,674,000 in 1996,
based upon an estimated effective tax rate of approximately 10% and 30%,
respectively, resulting primarily from state and federal alternate minimum and
foreign taxes. See Note 10 of the Notes to Consolidated Financial Statements.
The Company expects its effective tax rate to increase in 1997.
FINANCIAL CONDITION
Total assets as of December 31, 1996 increased $23.8 million from
December 31, 1995. The increase was primarily due to increases in cash and
cash equivalents, accounts receivable, prepaid expenses and other current
assets, and property and equipment. Cash, cash equivalents and short-term
investments increased by $6.4 million, primarily due to increased net income.
Net accounts receivable increased $9.7 million primarily due to increased sales
activity. Net property and equipment increased $4.1 million primarily due to
equipment purchases associated with supporting the growth of the Company's
business during this period.
Current liabilities as of December 31, 1996 increased $10.9 million
from December 31, 1995. The increase was due to increases in accounts payable,
accrued liabilities and deferred revenues of $2.6 million, $4.6 million and
$3.9 million, respectively. These increases were primarily due to increased
expense levels and accruals associated with a higher transaction volume and
deferrals of revenues related to post- contract support.
LIQUIDITY AND CAPITAL RESOURCES
Operating activities provided $10.3 million in 1996. The primary
source of these funds was net income and increases in accounts payable, accrued
liabilities and deferred revenues, partially offset by increases in accounts
receivable and prepaid expenses and other current assets. Operating activities
provided $4.7 million in 1995. The primary source of these funds was net
income, increases in accounts payable, accrued liabilities and deferred
revenues, partially offset by increases in accounts receivable.
Investing activities used cash of $3.2 million in 1996, primarily for
the purchase of capital equipment. Investing activities used cash of $10.3
million in 1995, primarily for the purchase of short-term, interest-bearing,
investment-grade securities and, to a lesser extent, for the purchase of
capital equipment. The Company does not currently have any material
commitments for capital equipment acquisitions.
Financing activities provided cash of $1.3 million in 1996. The
primary source of these funds was proceeds from issuance of common stock
pursuant to the exercise of outstanding stock options, partially offset by
payments on capital lease obligations. Financing activities provided $20.1
million in 1995, principally due to proceeds from the Company's initial public
offering completed in August 1995.
At December 31, 1996, the Company's principal sources of liquidity
were its cash, cash equivalents and short-term investments of $32.9 million.
The Company believes that existing cash and short-term investments 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.
21
<PAGE> 24
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," "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 growth in revenues in recent periods. The Company does not believe
that the historical growth rates of revenues, or the corresponding general
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. The Company is currently investing, and intends to
continue to invest, significant resources to develop its sales strategy, which
could adversely affect the Company's operating margins. In this regard, the
Company has recently hired and continues to hire significant numbers of direct
sales personnel and has developed relationships with several high-end
integrators and resellers, including EDS, Deloitte & Touche, Price Waterhouse,
KPMG Peat Marwick, and HBO and Company. 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 appropriate third party relationships. There
also can be no assurance that the Company will be able to attract and retain
appropriate high-end integrators, resellers and other third party distributors
to market the Company's products effectively. 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. The Company was not profitable prior to 1995, and there can be no
assurance that the Company will remain profitable on a quarterly or annual
basis.
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. The Company is currently
investing, and intends to continue to invest, significant resources to develop
its sales strategy, which could adversely affect the Company's operating
margins. In this regard, the Company has recently hired and continues to hire
significant numbers of direct sales personnel and has developed relationships
with several high-end integrators and resellers, including EDS, Deloitte &
Touche, Price Waterhouse, KPMG Peat Marwick and HBO and Company. 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 appropriate third
party relationships. There also can be no assurance that the Company will be
able to attract and retain appropriate high-end integrators, resellers and
other third party distributors to market the Company's products effectively.
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.
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
22
<PAGE> 25
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 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. 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
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 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
customer asset management 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 such 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 such 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 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,
including but not limited to, Vantive Version 7.0, Vantive Version 7.1 and
VanWeb 3.0. 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,
23
<PAGE> 26
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. See "Business-Product Development" on page 8 of this report.
International Operations, Foreign Currency Fluctuations.
International revenue, or revenue derived from sales to customers in foreign
countries, accounted for approximately 19.0%, 9.8% and 9.3% of the Company's
revenue in 1994, 1995 and 1996, respectively. 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, 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. 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 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 such 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.
Competition. The Customer Asset Management software 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 Customer Asset
Management markets, such as Aurum Software, Inc., Clarify, Inc., Onyx Software,
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 and Software Artistry,
Inc. In addition, the Company believes that existing competitors and new market
entrants will attempt to develop fully integrated customer asset management
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 a number of 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 the creation of a network of third party dealers
that will sell Oracle's application suites exclusively to medium-sized
businesses. The Company expects large software vendors in the ERP market may
enter the Customer Asset Management market. These competitors have
significantly greater financial, technical, marketing and other resources than
the Company.
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<PAGE> 27
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. The Company also expects that competition may
increase as a result of both new software start ups entering the market as well
as existing software industry vendors which may be planning to enter the market
for Customer Asset Management 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, scaleability, 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 such 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 future growth, if
any, 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 such 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 for Applications 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, will be
available with Vantive Version 7.0. The Company has also announced that it has
entered into a development partnership with PeopleSoft with the goal of
developing joint applications. Vantive is currently integrating manufacturing
and distribution applications available from PeopleSoft with the Vantive
FieldService
25
<PAGE> 28
application. 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. A recently defeated ballot
initiative in California would have subjected corporations and their directors
and officers to increased risk of suit and may prohibit corporations from
indemnifying officers and directors and expose directors and officers of
corporations to increased risk of personal liability. Such a law could
increase litigation expenses and the cost of related insurance and adversely
affect the financial position and results of operations of the Company. In
addition, the increased risk of personal liability could interfere with the
ability of the Company to attract and retain directors and officers, which in
turn could adversely affect the Company's competitive position.
Dependence on Emerging Markets for Customer Asset Management Software;
Product Concentration. The Company's future financial performance will depend
in large part on the growth in demand for individual Customer Asset Management
applications as well as the number of organizations adopting comprehensive
Customer Asset Management software 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 other back office applications software 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 factor 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 Sales or Vantive FieldService 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 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 recently hired and continues 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 and HBO and Company, and announced a partnership 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
26
<PAGE> 29
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.
Possible Volatility of Stock Price. 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 or other factors could cause the market price of the Common Stock to
fluctuate substantially, particularly on a quarterly basis. In addition, stock
prices for many technology companies fluctuate widely for reasons which may be
unrelated to operating results of such companies. These fluctuations, as well
as general economic, market and political conditions such as recessions or
military conflicts, may materially and adversely affect the market price of the
Company's Common Stock. In the past, following periods of volatility in the
market price of a company's securities, securities class action litigation has
often been instituted against such companies. Such litigation could result in
substantial costs and a diversion of management's attention and resources,
which could have a material adverse effect on the Company's business, results
of operations and financial condition.
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 such 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. Such 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, as well as confidentiality procedures and contractual provisions
to protect its proprietary rights. There can be no assurance that such
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 product
developers 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 such markets overlaps. Any such 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. Such 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. See "Business-Intellectual Property and Other
Proprietary Rights" on page 10 of this report.
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 such
claims. A successful product liability action brought against the
27
<PAGE> 30
Company could have a material adverse effect upon the Company's business,
results of operations and financial condition.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Financial Statements and supplemental data of the Company required
by this item are set forth at the pages indicated at Item 14(a).
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
28
<PAGE> 31
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information relating to the directors and executive officers of the
Company is set forth in Part I of this report under the caption "Directors and
Executive Officers of the Registrant."
Information required by this item with respect to compliance with
Section 16(a) of the Securities Exchange Act of 1934 is incorporated by
reference from the definitive proxy statement for the Company's 1997 annual
meeting of stockholders to be filed with the Commission pursuant to Regulation
14A not later than 120 days after the end of the fiscal year covered by this
Form (the "Proxy Statement") under the caption "EXECUTIVE COMPENSATION AND
OTHER MATTERS".
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference
from the Proxy Statement under the caption "EXECUTIVE COMPENSATION AND OTHER
MATTERS".
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated by reference
from the Proxy Statement under the captions "STOCK OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated by reference
from the Proxy Statement under the caption "EXECUTIVE COMPENSATION AND OTHER
MATTERS".
29
<PAGE> 32
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM
8-K
(a) The following documents are filed as a part of this Form:
<TABLE>
Page Number
-----------
<S> <C> <C>
1. Financial Statements:
Report of Independent Public Accountants F-1
Consolidated Balance Sheets -
As of December 31, 1996 and 1995 F-2
Consolidated Statements of Operations -
For the Three Years Ended December 31, 1996 F-3
Consolidated Statements of Stockholders' Equity/(Accumulated Deficit)-
For the Three Years Ended December 31, 1996 F-4
Consolidated Statements of Cash Flows -
For the Three Years Ended December 31, 1996 F-5
Notes to Consolidated Financial Statements F-6
2. Computation of Net Income Per Share -
For years ended December 31, 1996, 1995 and 1994: S-1
List of Subsidiaries S-2
Consent of Independent Public Accountants S-3
Valuation and Qualifying Accounts S-4
All other schedules are omitted because they are not
applicable or the required information is shown in the
consolidated financial statements or notes thereto.
3. Exhibits: See Index to Exhibits. The Exhibits
listed in the accompanying Index to Exhibits are filed or
incorporated by reference as part of this report.
</TABLE>
(b) Reports on Form 8-K:
None.
30
<PAGE> 33
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To The Vantive Corporation:
We have audited the accompanying consolidated balance sheets of The Vantive
Corporation, (a Delaware corporation) and subsidiaries as of December 31, 1996
and 1995, and the related consolidated statements of operations, stockholders'
equity/(accumulated deficit) and cash flows for each of the three years in the
period ended December 31, 1996. These consolidated financial statements and
the schedule referred to below are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of The Vantive
Corporation and subsidiaries as of December 31, 1996 and 1995, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1996 in conformity with generally accepted accounting
principles.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed under Item 14(a)2.
is presented for purposes of complying with the Securities and Exchange
Commission's rules and is not a part of the basic financial statements. This
schedule has been subjected to the auditing procedures applied in our audits of
the basic financial statements and, in our opinion, fairly states in all
material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
San Jose, California
January 20, 1997
F-1
<PAGE> 34
THE VANTIVE CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
<TABLE>
<CAPTION>
December 31,
---------------------------
1996 1995
------- -------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents...................... $26,017 $17,614
Short-term investments......................... 6,853 8,815
Accounts receivable, net of allowance for
doubtful accounts of $780 and $325 in 1996
and 1995, respectively....................... 13,775 4,049
Prepaid expenses and other current assets...... 4,492 1,265
------- -------
Total current assets.................. 51,137 31,743
Property and equipment, net.................... 6,764 2,628
Other assets................................... 463 216
------- -------
TOTAL ASSETS............................................ $58,364 $34,587
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable............................... $ 3,230 $ 619
Accrued liabilities............................ 7,760 3,179
Current portion of capital lease obligations... 377 530
Deferred revenues.............................. 6,811 2,952
------- -------
Total current liabilities............. 18,178 7,280
Capital lease obligations, net of current
portion...................................... 346 571
Other.......................................... 409 79
STOCKHOLDERS' EQUITY
Preferred Stock: $.001 par value, 2,000,000
shares authorized; no shares issued and
outstanding at December 31, 1996............. -- --
Common Stock: $.001 par value, 50,000,000
shares authorized; 24,140,441 and 23,895,238
shares issued and outstanding at December 31,
1996 and 1995, respectively.................. 24 12
Additional paid-in-capital..................... 33,410 31,538
Cumulative translation adjustment.............. (25) (22)
Retained earnings/(accumulated deficit)........ 6,022 (4,871)
------- -------
Total stockholders' equity............ 39,431 26,657
------- -------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.............. $58,364 $34,587
======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-2
<PAGE> 35
THE VANTIVE CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
For the Years Ended December 31,
-----------------------------------------------
1996 1995 1994
------- ------- --------
<S> <C> <C> <C>
REVENUES:
License ................................ $41,513 $16,631 $ 7,141
Service ................................ 22,761 8,404 3,073
------- ------- -------
Total revenues.......................... 64,274 25,035 10,214
COST OF REVENUES.................................
License................................. 392 163 110
Service................................. 12,263 5,968 2,383
------- ------- -------
Total cost of revenues......... 12,655 6,131 2,493
------- ------- -------
GROSS MARGIN..................................... 51,619 18,904 7,721
OPERATING EXPENSES:
Sales and marketing..................... 24,676 11,582 5,068
Research and development................ 7,261 3,319 2,072
General and administrative ............. 5,389 2,167 1,099
------- ------- -------
Total operating expenses....... 37,326 17,068 8,239
------- ------- -------
INCOME/(LOSS) FROM OPERATIONS.................... 14,293 1,836 (518)
------- ------- -------
OTHER INCOME/(EXPENSE):
Interest income ........................ 1,445 534 60
Interest expense ....................... (159) (95) (90)
------- ------- -------
Total other income/(expense) .. 1,286 439 (30)
------- ------- -------
INCOME/(LOSS) BEFORE PROVISION FOR INCOME TAXES 15,579 2,275 (548)
PROVISION FOR INCOME TAXES....................... 4,674 232 -
------- ------- -------
NET INCOME/(LOSS)................................ $10,905 $ 2,043 $ (548)
======= ======= =======
NET INCOME PER SHARE ............................ $0.42 $0.09
======= =======
PRO FORMA NET LOSS PER SHARE .................... $ (0.03)
=======
SHARES USED IN PER SHARE COMPUTATION ............ 25,847 23,012 17,570
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE> 36
THE VANTIVE CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY/(ACCUMULATED DEFICIT)
(In thousands, except share and per share amounts)
<TABLE>
<CAPTION>
Total
Common Stock Retained Stockholders
----------------- Additional Cumulative Earnings/ Equity/
Par Paid-in Translation (Accumulated (Accumulated
Shares Value Capital Adjustment Deficit) Deficit)
--------- ----- ---------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1993 3,241,670 $1 $ 161 $ -- $(6,366) $(6,204)
Exercise of stock options at
$0.04 to $0.12 per share.......... 1,377,376 1 103 -- -- 104
Repurchase of common stock at
$0.09 per share................... (100,000) -- (9) -- -- (9)
Translation adjustment.............. -- -- -- (8) -- (8)
Net loss............................ -- -- -- -- 548) (548)
--------- -- ------ ---- ------- ------
BALANCE AT DECEMBER 31, 1994 4,519,046 2 255 (8) (6,914) (6,665)
Exercise of stock options at
$0.04 to $2.00 per share.......... 1,414,068 1 288 -- -- 289
Repurchase of common stock
at $0.09 to $0.50 per share....... (14,628) -- (3) -- -- (3)
Conversion of mandatorily
redeemable convertible preferred
stock into common stock:
Series A................... 3,523,106 2 1,487 -- -- 1,489
Series B................... 6,101,538 3 4,822 -- -- 4,825
Series C................... 2,381,718 1 2,067 -- -- 2,068
Series D................... 2,083,334 1 2,468 -- -- 2,469
Common stock issued in initial
public offering at $6.00 per
share, net of insurance costs
of $2,644......................... 3,800,000 2 20,154 -- -- 20,156
Warrant exercised for common
stock (Note 6)................... 87,056 -- -- -- -- -
Translation adjustment.............. -- -- -- (14) -- (14)
Net income.......................... -- -- -- -- 2,043 2,043
---------- --- ------ ----- ------- -------
BALANCE AT DECEMBER 31, 1995................. 23,895,238 12 31,538 (22) (4,871) 26,657
Exercise of stock options at $0.02
to $6.38 per share................ 246,854 -- 498 -- -- 498
Repurchase of common stock at $0.04
to $0.75 per share................ (44,452) -- (20) -- -- (20)
Common stock issued under employee
stock purchase plan............... 42,801 -- 324 -- -- 324
Translation adjustment.............. -- -- -- (3) -- (3)
Stock dividend (2-for-1
stock split)...................... -- 12 -- -- (12) -
Disqualifying disposition of
stock options..................... -- -- 1,070 -- -- 1,070
Net income.......................... -- -- -- -- 10,905 10,905
---------- --- ------- ----- -------- -------
BALANCE AT DECEMBER 31, 1996................. 24,140,441 $24 $33,410 $ (25) $ 6,022 $39,431
========== === ======= ===== ======== =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE> 37
THE VANTIVE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
For the Years Ended December 31,
------------------------------------------
1996 1995 1994
------- ------- ------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss).................................................. $10,905 $2,043 $(548)
Adjustments to reconcile net income (loss) to net cash provided
by (used in) operating activities:
Depreciation and amortization...................................... 1,388 637 347
Provision for sales allowances and doubtful accounts............... 455 325 --
Changes in net assets and liabilities -
Increase in accounts receivable................................. (10,181) (1,600) (1,607)
Increase in prepaid expenses and other current assets........... (3,377) (840) (361)
Increase in other assets........................................ (247) (120) (48)
Increase/(decrease) in accounts payable......................... 2,611 (442) 887
Increase in accrued liabilities................................. 4,581 2,321 280
Increase in long-term liabilities............................... 330 70 --
Increase in deferred revenues................................... 3,859 2,261 559
------- ------- -------
Net cash provided by (used in) operating activities. 10,324 4,655 (491)
------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of short-term investments................................ (36,363) (8,815) --
Maturities of short-term investments............................... 38,325 -- --
Purchases of property and equipment................................ (5,180) (1,483) (172)
------- ------- -------
Net cash used in investing activities............... (3,218) (10,298) (172)
------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from sale of mandatorily redeemable convertible
preferred stock................................................ -- -- 2,557
Net proceeds from issuance of common stock......................... 1,892 20,445 104
Repurchase of common stock......................................... (20) (3) (9)
Payments on capital lease obligations.............................. (572) (325) (189)
------- ------- -------
Net cash provided by financing activities........... 1,300 20,117 2,463
------- ------- -------
NET INCREASE IN CASH AND CASH EQUIVALENTS.............................. 8,406 14,474 1,800
EFFECT OF EXCHANGE RATE CHANGES ON CASH................................ (3) (14) (8)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD......................... 17,614 3,154 1,362
------- ------- -------
CASH AND CASH EQUIVALENTS, END OF PERIOD............................... $26,017 $17,614 $ 3,154
======= ======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW ACTIVITY
Cash paid for interest............................................. $159 $101 $80
------- ------- -------
Cash paid for income taxes......................................... $4,375 $80 $-
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE> 38
THE VANTIVE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
1. THE COMPANY:
The Vantive Corporation (formerly ProActive Software, Inc.) was
incorporated on October 25, 1990. During 1994, The Vantive Corporation
established two wholly-owned subsidiaries: one in the United Kingdom and one
in Canada. During 1995, the Vantive Corporation established a wholly-owned
subsidiary in the Netherlands and in 1996 established wholly owned
subsidiaries; France, Germany, Australia and Singapore. The Vantive
Corporation and subsidiaries (the "Company") operate in a single industry
segment and are involved in the design, marketing and support of a suite of
client/server customer interaction software applications including marketing
and sales, customer support, defect tracking, field service and internal help
desk functions.
In September 1996, the Company declared a two-for-one stock split in the
form of a 100% stock dividend paid in October 1996. All common and common
equivalent shares and per share amounts in the accompanying consolidated
financial statements have been restated to reflect the stock split.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its subsidiaries. All significant intercompany accounts and transactions
are eliminated in consolidation.
Foreign Currency Translation
The functional currency of the Company's subsidiaries is the local currency.
Accordingly, the Company applies the current rate method to translate the
subsidiaries' financial statements into U.S. dollars. Translation adjustments
are included as a separate component of stockholders' equity/(accumulated
deficit) in the accompanying consolidated financial statements.
Revenue Recognition
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 as
revenues 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.
F-6
<PAGE> 39
THE VANTIVE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
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
terms 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.
Cost of license revenues consists of the cost of media on which product is
delivered. Cost of service revenues consists primarily of salaries, benefits
and allocated overhead costs related to consulting training and the customer
support persons.
Deferred revenues primarily relate to post-contract support which has been
paid by the customers prior to the performance of these services.
Major Customers
During 1994, 1995 and 1996, no customer accounted for 10% or more of total
revenues.
Export Sales
Export sales, which consist of domestic sales to customers in foreign
countries, were as follows:
<TABLE>
<CAPTION>
For the Year
December 31, 1994
-----------------
<S> <C>
Europe 14%
Australia 1%
Canada and other 4%
</TABLE>
For 1995 and 1996, export sales were less than 10% of total revenues.
Cash and Cash Equivalents
For purposes of the Statement of Cash Flows, the Company considers all
highly liquid investments with an original maturity of three months or less to
be cash equivalents. The Company's cash investments have consisted of
certificates of deposit, treasury bills and commercial paper with a maturity of
three months or less and money market accounts.
F-7
<PAGE> 40
THE VANTIVE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
Statement of Cash Flows
For purposes of the Statement of Cash Flows, non-cash transactions for the
years ended December 31, 1994, 1995 and 1996 include capital lease additions of
approximately $458,000, $781,000 and $194,000, respectively.
Investments
The Company accounts for its investments under the provision of Statement of
Financial Accounting Standards No. 115 (FAS 115), "Accounting for Certain
Investments in Debt and Equity Securities." All investments purchased during
1995 and 1996 were debt securities which the Company has the intent and ability
to hold until maturity, therefore all such investments are classified as held
to maturity investments and carried at amortized cost in the accompanying
financial statements.
As of December 31, 1996, the Company's investments consisted of the
following (in thousands):
<TABLE>
<CAPTION>
Maturity of Securities
-----------------------
Amortized
Cost Basis Within One Year
---------- ---------------
<S> <C> <C>
Debt securities by the U.S. Treasury and
other U.S. government agencies $ 973 $ 973
Corporate debt securities 5,880 5,880
------ ------
$6,853 $6,853
====== ======
</TABLE>
As of December 31, 1995, the Company's investments consisted of the
following (in thousands):
<TABLE>
<CAPTION>
Maturity of Securities
-----------------------
Amortized
Cost Basis Within One Year
---------- ---------------
<S> <C> <C>
Debt securities by the U.S. Treasury and
other U.S. government agencies $4,893 $4,893
Corporate debt securities 3,922 3,922
------ ------
$8,815 $8,815
====== ======
</TABLE>
At December 31, 1995 and 1996, the estimated fair value of these securities
approximated cost, and the amount of gross unrealized gains or gross unrealized
losses was not significant.
Concentration of Credit Risk
Financial instruments which potentially subject the Company to a
concentration of credit risk principally consist of accounts receivable. The
Company generally does not require collateral on accounts receivable as a
majority of the Company's customers are large, well established companies. The
Company provides reserves for credit losses and such losses have been
insignificant.
F-8
<PAGE> 41
THE VANTIVE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
Property and Equipment
Property and equipment are carried at cost and depreciated or amortized
using the straight-line method over the estimated useful lives of the related
assets (or over the lease term if it is shorter for leasehold improvements)
which range from two to seven years.
The Company was required to adopt Statement of Financial Accounting
Standards (SFAS) No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed of," for its fiscal year beginning
January 1, 1996. The impact of the adoption did not have a material effect on
the Company's consolidated financial condition or results of operations.
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 1994, 1995 and 1996, costs which were
eligible for capitalization were insignificant and, thus, the Company has
charged its software development costs to research and development expense in
the accompanying consolidated statements of operations.
Net Income Per Share and Pro Forma Net Loss Per Share
For periods after the Company's initial public offering in August 1995, net
income per share has been computed using the weighted average number of common
and common equivalent shares (using the treasury stock method for outstanding
stock options).
For the year ended December 31, 1994 and for the portion of 1995 preceding
the initial public offering, net income per share was computed on a pro forma
basis.
Pro forma net loss per share was computed using the weighted average number
of common and common equivalent shares outstanding during the period. Common
equivalent shares consisted of Mandatorily redeemable convertible preferred
stock (using the if converted method) and stock options and warrants (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,
such computations included all common and common equivalent shares issued
within the twelve months preceding the filing date as if they were outstanding
for all periods presented (using the treasury stock method and the initial
public offering price of $6.00 per share). Mandatorily redeemable convertible
preferred stock and warrants outstanding during the period were included (using
the if converted method) in the computation as common equivalent shares even
though the effect was anti-dilutive.
Use of Estimates
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
F-9
<PAGE> 42
THE VANTIVE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
3. PROPERTY AND EQUIPMENT:
Property and equipment, at cost, consist of the following (in thousands):
<TABLE>
<CAPTION>
December 31,
-----------------
1996 1995
---- ----
<S> <C> <C>
Computer and office equipment . . . . . . . . . . . . . . . $5,726 $2,762
Furniture and fixtures . . . . . . . . . . . . . . . . . . 1,899 191
Leasehold improvements . . . . . . . . . . . . . . . . . . 366 279
Purchased software . . . . . . . . . . . . . . . . . . . . 1,158 499
------ ----
9,149 3,731
Less accumulated depreciation and amortization . . . . . . (2,385) (1,103)
------ ------
$6,764 $2,628
====== ======
</TABLE>
Included in property and equipment are assets acquired under capital lease
obligations with an original cost of approximately $1,703,000 and $1,897,000 as
of December 31, 1995 and 1996, respectively. Accumulated amortization on the
leased assets was approximately $731,000 and $1,272,000 as of December 31, 1995
and 1996, respectively.
4. ACCRUED LIABILITIES:
Accrued liabilities consist of the following (in thousands):
<TABLE>
<CAPTION>
December 31,
---------------
1996 1995
---- ----
<S> <C> <C>
Employee compensation . . . . . . . . . . . . . . . . . . $1,427 $ 800
Commissions . . . . . . . . . . . . . . . . . . . . . . . 2,395 1,273
Other . . . . . . . . . . . . . . . . . . . . . . . . . . 3,938 1,106
------ ------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . $7,760 $3,179
====== ======
</TABLE>
5. COMMITMENTS AND CAPITAL LEASE OBLIGATIONS:
The Company leases its facilities under noncancelable operating lease
agreements which expire on various dates through December of 2003.
Borrowings are secured by the purchased equipment. As of December 31, 1996,
the Company had acquired approximately $880,000 of equipment under an equipment
lease line which expired in March 1996.
F-10
<PAGE> 43
THE VANTIVE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
Minimum future lease payments under noncancelable capital and operating
leases as of December 31, 1996 are summarized as follows (in thousands):
<TABLE>
<CAPTION>
Capital Operating
Leases Leases
------ ------
<S> <C> <C>
1997 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 513 $ 2,210
1998 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 252 1,917
1999 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 1,697
2000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- 1,535
2001 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- 1,566
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . -- 1,224
------- -------
Total minimum lease payments . . . . . . . . . . . . . . . . . 784 $10,149
=======
Less: Amount representing interest at 10.0% - 11.2% . . . . . . (61)
-------
Present value of lease payments . . . . . . . . . . . . . . . . . 723
Less: Current portion . . . . . . . . . . . . . . . . . . . . . (377)
-------
Long-term portion . . . . . . . . . . . . . . . . . . . . . . . . $ 346
=======
</TABLE>
Rental expense was approximately $419,000, $740,000 and $1,447,000 in
1994, 1995 and 1996, respectively.
6. MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK AND WARRANTS:
Mandatorily Redeemable Preferred Stock
In conjunction with the initial public offering of the Company's Common
Stock in 1995, all outstanding shares of Mandatorily Redeemable Convertible
Preferred Stock were automatically converted into Common Stock upon the closing
of the Offering. Additionally, 104,562 shares of Common Stock were issued upon
the exercise of certain warrants for Preferred Stock upon the closing of the
Offering.
Warrants
In connection with several financing and leasing transactions in 1992
through 1994, the Company issued three series of warrants to purchase an
aggregate of 63,804 shares of Series B preferred stock at $0.80 per share,
62,894 shares of Series C preferred stock at $0.88 per share and 41,668 shares
of Series D preferred stock at $1.20 per share. During June 1995, the Series B
warrant holders exercised their warrants. All other warrants were exercised
upon the closing of the initial public offering and immediately converted to
shares of Common Stock. The value of the warrants at the date of issuance was
nominal; therefore, no value was assigned to the warrants for accounting
purposes. Holders of warrants for 104,562 shares of Series C and D agreed to
receive a lesser number of shares of common stock (87,056 shares) upon exercise
and conversion of their warrants, the difference representing an amount of
shares that would have been sold at the initial public offering price to pay
for the common stock exercise under the warrant.
7. COMMON STOCK AND PREFERRED STOCK
The Company is authorized to issue 50,000,000 shares of Common Stock and
2,000,000 shares of undesignated Preferred Stock and the Board of Directors has
the authority to issue the undesignated Preferred Stock in one or more series
and to fix the rights, preferences, privileges and restrictions thereof.
F-11
<PAGE> 44
THE VANTIVE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
All shares of common stock issued by the Company as a result of the exercise
of stock options under the 1991 Stock Option Plan are subject to stock
repurchase agreements whereby the Company has the option to repurchase unvested
shares upon termination of employment at the original price paid for the shares
(See Note 8). As of December 31, 1996, 486,860 shares of common stock at $0.08
to $4.50 per share are subject to repurchase.
8. STOCK OPTION AND EMPLOYEE STOCK PURCHASE PLANS:
Under the Company's 1991 Stock Option Plan (the "Option Plan"), the Board of
Directors may grant incentive and nonqualified stock options to employees,
directors and consultants. The exercise price per share for an incentive stock
option cannot be less than the market price on the date of grant. The exercise
price per share for a nonqualified stock option cannot be less than 85% of the
market price on the date of grant. Options granted under the Option Plan are
immediately exercisable, subject to a right of repurchase in favor of the
Company for all unvested shares. Option grants under the Option Plan generally
expire ten years after the date of grant and generally vest over a four year
period. In addition, in the event of a Change in Control (as defined) of the
Company's ownership, the Company has agreed with the President and other
officers that they will be credited with 12 months of service for purposes of
option vesting. As of December 31, 1996, a total of 7,000,000 shares of common
stock have been authorized by the Company's stockholders for grant under the
plan.
Option activity under the 1991 Stock Option Plan is as follows:
<TABLE>
<CAPTION>
Options Outstanding
---------------------------
Shares Number of Weighted Average
for Grant Shares Exercise Price
-------- --------- ----------------
<S> <C> <C> <C>
Balance, December 31, 1993 . . . . . . . . . . . 670,482 2,463,204 $0.08
Granted . . . . . . . . . . . . . . . . . . . . . (685,500) 685,500 $0.11
Exercised . . . . . . . . . . . . . . . . . . . . -- (1,377,376) $0.08
Canceled . . . . . . . . . . . . . . . . . . . . 189,076 (189,076) $0.08
---------- ----------
Balance, December 31, 1994 . . . . . . . . . . . 174,058 1,582,252 $0.09
Authorized . . . . . . . . . . . . . . . . . . . 3,707,262 -- --
Granted . . . . . . . . . . . . . . . . . . . . . (2,095,100) 2,095,100 $3.12
Exercised . . . . . . . . . . . . . . . . . . . -- (1,413,818) $0.20
Canceled . . . . . . . . . . . . . . . . . . . . 94,880 (94,880) $0.78
Unvested shares repurchased . . . . . . . . . . . 14,628 -- $0.81
---------- ----------
Balance, December 31, 1995 . . . . . . . . . . . 1,895,728 2,168,654 $2.91
Authorized . . . . . . . . . . . . . . . . . . . -- -- --
Granted . . . . . . . . . . . . . . . . . . . . . (1,652,975) 1,652,975 $18.82
Exercised . . . . . . . . . . . . . . . . . . . . -- (246,854) $2.08
Canceled . . . . . . . . . . . . . . . . . . . . 498,251 (498,251) $9.99
Unvested shares repurchased . . . . . . . . . . . 44,452 -- $8.79
---------- ----------
Balance, December 31, 1996 . . . . . . . . . . . 785,456 3,076,524 $10.81
========== ==========
</TABLE>
As of December 31, 1996, all of the outstanding options were immediately
exercisable in full on the date of grant subject to repurchase of unvested
shares by the Company at cost and at the option of the Company if employment is
terminated.
The Company's 1995 Outside Directors Stock Option Plan (the "Directors
Plan") was adopted in July 1995. A total of 400,000 shares of Common Stock has
been reserved for issuance under the Directors Plan. The Directors Plan
provides for the grant of nonstatutory stock options to future nonemployee
directors of the Company including
F-12
<PAGE> 45
THE VANTIVE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
an option to purchase 30,000 shares of Common Stock on the date on which the
optionee first becomes a nonemployee director of the Company and an additional
option to purchase 10,000 shares of Common Stock on the next anniversary. The
exercise price per share of all options granted under the Directors Plan shall
be equal to the market price of the Company's Common Stock on the date of grant
of the option. As of December 31, 1996, 180,000 option shares have been
granted of which 30,000 shares have been canceled. Of these, 150,000 shares
were outstanding as December 31, 1996 and no options have been exercised. Such
shares vest over four years.
The Company's 1995 Employee Stock Purchase Plan (the "Purchase Plan")
was adopted in July 1995. A total of 700,000 shares of Common Stock has been
reserved for issuance under the Purchase Plan. The Purchase Plan will enable
eligible employees to purchase Common Stock at 85% of the lower of the fair
market value of the Company's Common Stock on the first day or the last day of
each six-month purchase period. During 1996, 42,801 shares were purchased
under the Purchase Plan.
In October 1995, the Financial Accounting Standards Board issued Statement
No. 123 (SFAS No. 123), "Accounting for Stock-Based Compensation," which
establishes a fair value based method of accounting for stock-based
compensation plans and requires additional disclosures for those companies who
elect not to adopt the new method of accounting. The Company has adopted SFAS
No. 123 in fiscal 1996, and in accordance with the provisions of SFAS No. 123,
the Company applies APB Opinion 25 and related interpretations in accounting
for its stock option and stock purchase plans. Had compensation cost for these
plans been determined consistent with FASB Statement No. 123, the Company's net
income and earnings per share would have been reduced to the following pro
forma amounts indicated in the table below (in thousands, except per share
amounts):
<TABLE>
<CAPTION>
1996 1995
-------------------------------------------------------------
<S> <C> <C>
Net income - as reported $10,905 $2,043
Net income - pro forma $ 7,904 $1,483
Primary earnings per share - as reported $ 0.42 $ 0.09
Primary earnings per share - pro forma $ 0.31 $ 0.06
</TABLE>
Because the FASB Statement No. 123 method of accounting has not been applied
to options granted prior to January 1, 1995, the resulting pro forma
compensation cost may not be representative of that to be expected in future
years.
The weighted average fair values of options granted during 1995 and 1996
were $1.63 and $9.78, respectively. The options outstanding at December 31,
1996, have exercise prices between $0.04 and $34.63, with a weighted average
exercise price of $10.81 and a weighted average remaining contractual life of
8.84 years.
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following weighted-average
assumptions used for grants in 1996 and 1995: risk-free interest rates ranged
from 5 to 7 percent; expected dividend yields of 0%; expected lives of 0.22
years beyond vest date; and expected volatility of 85%.
F-13
<PAGE> 46
THE VANTIVE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
<TABLE>
<CAPTION>
OUTSTANDING AND EXERCISABLE BY PRICE RANGE
AS OF DECEMBER 31, 1996
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------------------------------------ --------------------------------------------
Weighted
Range of Number Outstanding Remaining Weighted Number Exercisable Weighted Average
Exercise Prices As of December 31, 1996 Contractual Exercise Price As of December 31, 1996 Exercise Price
------------------ ----------------------- ----------- -------------- ----------------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
$ 0.040 - $ 1.500 860,705 7.88 $ 0.9053 860,705 $ 0.9053
$ 2.000 - $ 7.000 650,314 8.48 $ 3.2298 650,314 $ 3.2298
$ 7.250 - $12.750 977,729 9.27 $11.6749 977,729 $11.6749
$17.500 - $34.250 721,150 9.71 $27.7435 588,650 $29.5587
$34.625 - $34.625 16,626 9.91 $34.6250 16,626 $34.6250
--------- ---- -------- --------- --------
$ 0.040 - $34.625 3,226,524 8.84 $10.8096 3,094,024 $10.4297
</TABLE>
The table above includes options outstanding under the 1991 Employee and
1995 Outside Directors Stock Option Plans.
As of December 31, 1996, the Company has reserved 3,226,524 shares of
common stock for future issuance upon the exercise of currently outstanding
stock options.
9. THE VANTIVE CORPORATION 401(k) PLAN:
During 1993, the Company adopted the Vantive Corporation 401(k) Plan (the
"401(k) Plan"). The 401(k) Plan is administered by the Company.
All employees who are 21 years of age or older are entitled to participate
on their first day of employment. Under the 401(k) Plan, eligible employees
are entitled to make tax-deferred contributions and the Company may, at its
discretion, make matching or discretionary contributions to the 401(k) Plan.
For the years ended December 31, 1994, 1995 and 1996, no matching or
discretionary contributions were made by the Company.
10. INCOME TAXES:
The Company has accounted for income taxes pursuant to Statement of
Financial Accounting Standards No. 109 (SFAS No. 109), "Accounting for Income
Taxes," since its inception. SFAS No. 109 provides for an asset and liability
approach to accounting for income taxes under which deferred income taxes are
provided based upon enacted tax laws and rates applicable to the periods in
which taxes become payable.
F-14
<PAGE> 47
THE VANTIVE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
The provision for income taxes consists of the following (in
thousands):
<TABLE>
<CAPTION>
December 31,
----------------------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Current:
Federal . . . . . . . . . $3,729 $133 $--
State . . . . . . . . . . 748 99 --
Foreign . . . . . . . . . 197 -- --
------ ---- ---
$4,674 $232 $--
------ ---- ---
Deferred:
Federal . . . . . . . . . -- -- --
State . . . . . . . . . . -- -- --
Foreign . . . . . . . . . -- -- --
------ ---- ---
$ -- $ -- $--
------ ---- ---
</TABLE>
The provision for income taxes is net of the benefit of a net
operating loss carryforward of $2.3 million for the year ended December 31,
1996.
The provision for income taxes was based upon income before taxes as follows
(in thousands):
<TABLE>
<CAPTION>
December 31,
----------------------------------------------
1996 1995 1994
------ ------ -----
<S> <C> <C> <C>
Domestic . . . . . . . . . . . . . $15,495 $2,934 $(461)
Foreign . . . . . . . . . . . . . . 84 (659) (87)
------- ------ -----
Total . . . . . . . . . . . . $15,579 $2,275 $(548)
======= ====== =====
</TABLE>
The provision for income taxes differs from the statutory U.S. federal
income tax rate due to the following:
<TABLE>
<CAPTION>
1996 1995
----- ------
<S> <C> <C>
Provision at U.S. statutory rate . . . . . . . . . . . . . . 35.00% 35.00%
State income taxes, net of federal benefit . . . . . . . . . 5.47 1.45
Change in valuation allowance . . . . . . . . . . . . . . . (8.42) (32.27)
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . (2.05) 5.82
----- -----
30.00% 10.00%
===== =====
</TABLE>
F-15
<PAGE> 48
THE VANTIVE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
The components of the net deferred tax assets are as follows (in
thousands):
<TABLE>
<CAPTION>
December 31,
----------------------
1996 1995
------ -------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards . . $ 224 $ 1,169
Capitalized start-up costs . . . . . 28 77
Tax credit carryforwards . . . . . . -- 513
Accruals not currently deductible . 1,239 145
Other . . . . . . . . . . . . . . . (186) 165
----- -------
1,305 2,069
Valuation allowance . . . . . . . . (754) (2,069)
------ -------
Net deferred tax asset . . . . . $ 551 $ --
====== =======
</TABLE>
As of December 31, 1996, the Company had net operating loss
carryforwards of approximately $659,000. These net operating loss carryforwards
expire in various periods from 2000 to 2002. The change in the valuation
allowance in 1996 primarily relates to realization of net operating loss
carryforwards. The net deferred tax asset is included as a component of prepaid
expenses and other current assets on the accompanying balance sheet.
F-16
<PAGE> 49
SIGNATURES
pursuant to the requirements of Section 13 or 15(d) 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
(Registrant)
/s/ Kathleen A. Murphy
--------------------------------------
Kathleen A. Murphy
Chief Financial Officer (Principal
Financial Officer)
Date: March 28, 1997
31
<PAGE> 50
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below
constitutes and appoints John R. Luongo and/or Kathleen A. Murphy as his or
her attorney-in-fact, with the power of substitution, for him or her in any and
all capacities, to sign any amendments to this Report on Form 10-K, and to file
same, with exhibits thereto and other documents in connection therewith, with
the Securities and Exchange Commission.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below on March 28, 1997 by the following persons on
behalf of the registrant and in the capacities and on the date indicated.
<TABLE>
<CAPTION>
Signature Title
--------- -----
<S> <C>
/s/ John R. Luongo President, Chief Executive Officer and Director
- ---------------------------------------------- (Principal Executive Officer)
(John R. Luongo)
/s/ Kathleen A. Murphy Vice President, Finance and Administration, Chief
- ---------------------------------------------- Financial Officer (Principal Financial Officer)
(Kathleen A. Murphy)
/s/ Michael M. Loo Vice President, Finance (Principal Accounting
- ---------------------------------------------- Officer)
(Michael M. Loo)
/s/ Roger J. Sippl Chairman of the Board of Directors
- ----------------------------------------------
(Roger J. Sippl)
/s/ Aneel Bhusri Director
- ----------------------------------------------
(Aneel Bhusri)
/s/ William H. Davidow Director
- ----------------------------------------------
(William H. Davidow)
/s/ Kevin G. Hall Director
- ----------------------------------------------
(Kevin G. Hall)
/s/ Raymond L. Ocampo Jr Director
- ----------------------------------------------
(Raymond L. Ocampo Jr.)
/s/ Peter A. Roshko Director
- ----------------------------------------------
(Peter A. Roshko)
</TABLE>
32
<PAGE> 51
EXHIBIT 11.1
THE VANTIVE CORPORATION
COMPUTATION OF NET INCOME PER SHARE
(In thousands, except per share data)
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------
PRIMARY 1996 1995 1994
---- ---- ----
<S> <C>
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . $10,905 $ 2,043 $ (548)
======= ======= =======
Weighted average common shares outstanding . . . . . . . . . . . 24,002 21,034 4,038
Weighted average common equivalent shares:
Weighted average preferred stock outstanding . . . . . . . . . -- -- 11,842
Weighted average preferred stock warrants outstanding . . . . -- -- 156
Common stock option grants . . . . . . . . . . . . . . . . . . 1,845 1,212 --
Adjustments to reflect requirements of the Securities and
Exchange Commission's Staff Accounting Bulletin No. 83:
Common stock issuances . . . . . . . . . . . . . . . . . . . . -- -- --
Preferred stock issuances . . . . . . . . . . . . . . . . . . -- -- --
Common stock option grants . . . . . . . . . . . . . . . . . . -- 766 1,532
------- ------- -------
Pro forma total weighted average common shares and equivalents. . 17,568
-------
Pro forma net loss per share . . . . . . . . . . . . . . . . . . $ (0.03)
=======
Total weighted average common shares and equivalents . . . . . . 25,847 23,012
====== ======
Net income per share . . . . . . . . . . . . . . . . . . . . . . $ 0.42 $ 0.09
====== ======
Year Ended December 31,
--------------------------------------
FULLY DILUTED 1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . $10,905 $ 2,043 $ (548)
======= ======= ========
Weighted average common shares outstanding . . . . . . . . . . . . 24,002 21,034 4,038
Weighted average common equivalent shares:
Weighted average preferred stock outstanding . . . . . . . . . -- -- 11,842
Weighted average preferred stock warrants outstanding . . . . . -- -- 156
Common stock option grants . . . . . . . . . . . . . . . . . . 1,936 1,282 --
Adjustments to reflect requirements of the Securities and Exchange
and Commission's Staff Accounting Bulletin No. 83:
Common stock issuances . . . . . . . . . . . . . . . . . . . . -- -- --
Preferred stock issuances . . . . . . . . . . . . . . . . . . . -- -- --
Common stock option grants . . . . . . . . . . . . . . . . . . -- 766 1,532
------- ------- --------
Pro forma total weighted average common shares and equivalents . . 17,568
--------
Pro forma net loss per share . . . . . . . . . . . . . . . . . . $ (0.03)
========
Total weighted average common shares and equivalents . . . . . . . 25,938 23,082
====== ======
Net income per share . . . . . . . . . . . . . . . . . . . . . . $ 0.42 $ 0.09
====== ======
</TABLE>
S-1
<PAGE> 52
EXHIBIT 21.1
THE VANTIVE CORPORATION
LIST OF SUBSIDIARIES
<TABLE>
<CAPTION>
Jurisdiction of Ownership
Name of Subsidiary Incorporation Percentage
- ------------------ ------------- ----------
<S> <C> <C>
Always An Adventure International, Inc. Canada 100%
Vantive Australia PTY Limited Australia 100%
Vantive B.V. The Netherlands 100%
Vantive Canada PTE Ltd. Canada 100%
Vantive France, SARL France 100%
Vantive Germany, GmbH Germany 100%
Vantive Singapore, Inc. Singapore 100%
Vantive UK Limited United Kingdom 100%
</TABLE>
S-2
<PAGE> 53
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of
our report included in this Form 10-K, into the Company's previously filed
Registration Statement File No. 333-960 on Form S-8.
ARTHUR ANDERSEN LLP
San Jose, California
March 28, 1997
S-3
<PAGE> 54
SCHEDULE I
THE VANTIVE CORPORATION AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
AMOUNTS
BALANCE AT CHARGED TO BALANCE
BEGINNING PROFIT AND AT END OF
DESCRIPTION OF YEAR LOSS DEDUCTIONS YEAR
----------- ------- ---- ---------- ----
<S> <C> <C> <C> <C>
Year ended December 31, 1994
Allowance for doubtful accounts . . . . . . . . . . $ ---- $ ---- $ ---- $ ----
Year ended December 31, 1995
Allowance for doubtful accounts . . . . . . . . . . $ ---- $ 325 $ ---- $ 325
Year ended December 31, 1996
Allowance for doubtful accounts . . . . . . . . . . $ 325 $ 455 $ ---- $ 780
</TABLE>
S-4
<PAGE> 55
INDEX TO EXHIBITS FILED TOGETHER WITH THIS ANNUAL REPORT
<TABLE>
<S> <C> <C>
* 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.
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 July 20, 1977 (Richard T. Peery Separate Trust) as amended, and the Company.
11.1 Computation of Net Income Per Share (See page S-1).
21.1 List of Subsidiaries (See page S-2).
23.1 Consent of Arthur Andersen LLP, Independent Public Accountants (See page S-3).
24.1 Power of Attorney (See page 32).
27.1 Financial Data Schedule.
</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.
<PAGE> 1
EXHIBIT 10.16
LEASE AGREEMENT
BLDG: PSII-2
OWNER: 500
PROP: 322
UNIT: 101
TENANT: 32208
THIS LEASE, made this 4th day of September, 1996 between JOHN
ARRILLAGA, Trustee, or his Successor Trustee, UTA dated 7/20/77 (ARRILLAGA
FAMILY TRUST) as amended and RICHARD T. PEERY, Trustee, or his Successor
Trustee, UTA dated 7/20/77 (RICHARD T. PEERY SEPARATE PROPERTY TRUST) as
amended, hereinafter called Landlord, and THE VANTIVE CORPORATION, a California
corporation, hereinafter called Tenant.
WITNESSETH:
Landlord hereby leases to Tenant and Tenant hereby hires and takes from
Landlord those certain premises (the "Premises") outlined in red on Exhibit
"A", attached hereto and incorporated herein by this reference thereto more
particularly described as follows:
All of that certain 24,000(plus or minus) square foot, one-story
building located at 3333 Octavius Drive, Santa Clara, California
95054. Said Premises is more particularly shown within the area
outlined in Red on Exhibit A. The entire parcel, of which the
Premises is a part, is shown within the area outlined in Green
on Exhibit A attached hereto. The Premises is leased on an
"as-is" basis, in its present condition, and in the
configuration as shown in Red on Exhibit B attached hereto.
As used herein the Complex shall mean and include all of the land outlined in
Green and described in Exhibit "A", attached hereto, and all of the buildings,
improvements, fixtures and equipment now or hereafter situated on said land.
Said letting and hiring is upon and subject to the terms, covenants and
conditions hereinafter set forth and Tenant covenants as a material part of the
consideration for this Lease to perform and observe each and all of said terms,
covenants and conditions. This Lease is made upon the conditions of such
performance and observance.
1. USE Tenant shall use the Premises only in conformance with applicable
governmental laws, regulations, rules and ordinances for the purpose of general
office, light manufacturing, research and development, and storage and other
uses necessary for Tenant to conduct Tenant's business, provided that such uses
shall be in accordance with all applicable governmental laws and ordinances and
for no other purpose. Tenant shall not do or permit to be done in or about the
Premises or the Complex nor bring or keep or permit to be brought or kept in or
about the Premises or the Complex anything which is prohibited by or will in
any way increase the existing rate of (or otherwise affect) fire or any
insurance covering the Complex or any part thereof (unless Tenant agrees to pay
any increased portion of any premium for such insurance), or any of its
contents, or will cause a cancellation of any insurance covering the Complex or
any part thereof, or any of its contents. Tenant shall not do or permit to be
done anything in, on or about the Premises or the Complex which will in any way
obstruct or interfere with the rights of other tenants or occupants of the
Complex or injure or annoy them, or use or allow the Premises to be used for
any unlawful purpose, nor shall Tenant cause, maintain or permit any nuisance
in, on or about the Premises or the Complex. No sale by auction shall be
permitted on the Premises. Tenant shall not place any loads upon the floors,
walls, or ceiling, which endanger the structure, or place any harmful fluids or
other materials in the drainage system of the building, or overload existing
electrical or other mechanical systems. No waste materials or refuse shall be
dumped upon or permitted to remain upon any part of the Premises or outside of
the building in which the Premises are a part, except in trash containers
placed inside exterior enclosures designated by Landlord for that purpose or
inside of the building proper where designated by Landlord. No materials,
supplies, equipment, finished products or semi-finished products, raw materials
or articles of any nature shall be stored upon or permitted to remain outside
the Premises or on any portion of common area of the Complex. No loudspeaker or
other device, system or apparatus which can be heard outside the Premises shall
be used in or at the Premises without the prior written consent of Landlord.
Tenant shall not commit or suffer to be committed any waste in or upon the
Premises. Tenant shall indemnify, defend and hold Landlord harmless against any
loss, expense, damage, attorneys' fees, or liability arising out of failure of
Tenant to comply with any applicable law governing Tenant's use of the
Premises. Tenant shall comply with any covenant, condition, or restriction
("CC&R's") affecting the Premises of which Tenant has notice. The provisions of
this paragraph are for the benefit of Landlord only and shall not be construed
to be for the benefit of any tenant or occupant of the Complex.
2. TERM *
A. The term of this Lease shall be for a period of SEVEN (7) years
(unless sooner terminated as hereinafter provided) and, subject to Paragraphs
2(B) and 3, shall commence on the 1st day of January, 1997 and end on the 31st
day December of 2003.
B. Possession of the Premises shall be deemed tendered and the term of
this Lease shall commence on January 1, 1997, or
(d) As otherwise agreed in writing.
3. POSSESSION If Landlord, for any reason whatsoever, cannot deliver possession
of said premises to Tenant at the XXXXXX specified, this Lease shall
not be void or voidable; no obligation of Tenant shall be XXXXXX in
that event the commencement and termination dates of the Lease, and all other
dates affected thereby shall be revised to conform to the date of Landlord's
delivery of possession, as specified in Paragraph 2(b), above. The above is,
however, subject to the provision that the period of delay, of delivery of the
premises shall not exceed 30 days from the commencement date herein (except
those delays caused by Acts of God, strikes, war, utilities, governmental
bodies, weather, unavailable materials, and delays beyond Landlord's control
shall be excluded in calculating such period) in which instance Tenant, at its
option, may, by written notice to Landlord, terminate this Lease.
* It is agreed in the event said Lease commences on a date other than the first
day of the month the term of the Lease will be extended to account for the
number of days in the partial month. The Basic Rent during the resulting
partial month will be pro-rated (for the number of days in the partial month)
at the Basic Rent scheduled for the projected commencement date as shown in
Paragraph 43.
[INITIAL STAMP]
/s/ XXXX
page 1 of 8
<PAGE> 2
4. RENT
A. Basic Rent. Tenant agrees to pay to Landlord at such place as Landlord
may designate without deduction, affect, prior notice, or demand, and Landlord
agrees to accept as Basic Rent for the leased Premises the total sum of FOUR
MILLION THIRTY TWO THOUSAND AND NO/100----------($4,032,000.00) Dollars in
lawful money of the United States of America payable as follows:
See Paragraph 43 for Basic Rent Schedule
B. Time for Payment. In the event that the term of this Lease commences on a
date other than the first day of a calendar month, on the date of commencement
of the term hereof Tenant shall pay to Landlord as rent for the period from
such date of commencement to the first day of the next succeeding calendar
month that proportion of the monthly rent hereunder which the number of days
between such date of commencement and the first day of the next succeeding
calendar month bears to thirty (30). In the event that the term of this Lease
for any reason ends on a date other than the last day of a calendar month, on
the first day of the last calendar month of the term hereof Tenant shall pay
to Landlord as rent for the period from said first day of said last calendar
month to and including the last day of the term hereof that proportion of the
monthly rent hereunder which the number of days between said first day of said
last calendar month and the last day of the term hereof bears to thirty (30).
C. Late Charge. Notwithstanding any other provision of this Lease, if Tenant
is in default in the payment of rent as set forth in this Paragraph 4 when due,
or any part thereof. Tenant agrees to pay Landlord, in addition to the
delinquent rental due, a late charge for each rental payment in default ten
(10) days. Said late charge shall equal ten (10%) percent of each rental
payment so in default.
D. Additional Rent. Beginning with the commencement date of the term of this
Lease, Tenant shall pay to Landlord in addition to the Basic Rent and as
Additional Rent the following:
(a) Tenant's proportionate share of all Taxes relating to the Complex as set
forth in Paragraph 12, and
(b) Tenant's proportionate share of all insurance premiums relating to the
Complex, as set forth in Paragraph 15, and
(c) Tenant's proportionate share of expenses for the operation, management,
maintenance and repair of the Building (including common areas of the
Building) and Common Areas of the Complex in which the Premises are
located as set forth in Paragraph 7, and
(d) All charges, costs and expenses, which Tenant is required to pay
hereunder, together with all interest and penalties, costs and expenses
including attorneys' fees and legal expenses, that may accrue thereto in
the event of Tenant's failure to pay such amounts, and all damages,
reasonable costs and expenses which Landlord may incur by reason of
default of Tenant or failure on Tenant's part to comply with the terms
of this Lease. In the event of nonpayment by Tenant of Additional Rent
Landlord shall have all the rights and remedies with respect thereto as
Landlord has for nonpayment of rent.
The Additional Rent due hereunder shall be paid to Landlord or Landlord's agent
(i) within five days for taxes and insurance and within thirty (30) days for all
other Additional Rent items after presentation of invoice from Landlord or
Landlord's agent setting forth such Additional Rent and/or (ii) at the option of
Landlord, Tenant shall pay to Landlord monthly, in advance, Tenant's prorata
share of an amount estimated by Landlord to be Landlord's approximate average
monthly expenditure for such Additional Rent items, which estimated rent items
shall be reconciled within 120 days of the end of each calendar year or more
frequently if Landlord so elects to do so at Landlord's sole and absolute
discretion, as compared to Landlord's actual expenditure for said Additional
Rent items, with Tenant paying to Landlord, upon demand any amount of actual
expenses expended by Landlord in excess of said estimated amount, or Landlord
refunding to Tenant (providing Tenant is not in default in the performance of
any of the terms, covenants and conditions of this Lease) any amount of
estimated payments made by Tenant in excess of Landlord's actual expenditures
for said Additional Rent items.
The respective obligations of Landlord and Tenant under this paragraph shall
survive the expiration or other termination of the term of this Lease, and if
the term hereof shall expire or shall otherwise terminate on a day other than
the last day of a calendar year, the actual Additional Rent XXXXXX
calendar year in which the term hereof expires or otherwise terminates shall be
determined and settled on the basis of the statement of actual Additional Rent
for such calendar year and shall be prorated in the proportion which the number
of days in such calendar year preceding such expiration or termination bears to
365. See Paragraph 54
E. Fixed Management Fee. Beginning with the Commencement Date of the Term of
this Lease, Tenant shall pay to Landlord, in addition to the Basic Rent and
Additional Rent, a fixed monthly management fee equal to 2% of the Basic Rent
due for each month during the Lease Term ("Management Fee").
F. Place of Payment of Rent and Additional Rent. All Basic Rent hereunder
and all payments hereunder for Additional Rent shall be paid to Landlord at the
office of Landlord at Peery/Arrillaga, File 1504, Box 60000, San Francisco, CA
94160 or to such other person or to such other place as Landlord may from
time to time designate in writing.
G. Security Deposit. Concurrently with Tenant's execution of this Lease,
Tenant shall deposit with Landlord the sum of ONE HUNDRED THREE THOUSAND TWO
HUNDRED AND NO/100 ($103,200.00) Dollars. Said sum shall be held by Landlord
as a Security Deposit for the faithful performance by Tenant of all of the
terms, covenants, and conditions of this Lease to be kept and performed by
Tenant during the term hereof. If Tenant defaults with respect to any provision
of this Lease, including, but not limited to, the provisions relating to the
payment of rent and any of the monetary sums due herewith, Landlord may (but
shall not be required to) use, apply or retain all or any part of this Security
Deposit for the payment of any other amount which Landlord may spend by
reason of Tenant's default or to compensate Landlord for any other loss or
damage which Landlord may suffer by reason of Tenant's default. If any portion
of said Deposit is so used or applied Tenant shall, within ten(10) days after
written demand therefor, deposit cash with Landlord in the amount sufficient to
restore the Security Deposit to its original amount. Tenant's failure to do so
shall be a material breach of this Lease. Landlord shall not be required to
keep this Security Deposit separate from its general funds, and Tenant shall
not be entitled to interest on such Deposit. If Tenant fully and faithfully
performs every provision of this Lease to be performed by it, the Security
Deposit or any balance thereof shall be returned to Tenant (or at Landlord's
option, to the last assignee of Tenant's interest hereunder) within thirty (30)
days following the expiration of the Lease term and after Tenant has vacated
the Premises. In the event of termination of Landlord's interest in this Lease,
Landlord shall transfer said Deposit to Landlord's successor in interest
whereupon Tenant agrees to release Landlord from liability for the return of
such Deposit or the accounting therefor.
5. RULES AND REGULATIONS AND COMMON AREA XXXX XXXX XXXX XXXX
XXXX XXXX as Landlord may from time to time prescribe, Tenant and Tenant's
employees, invitees and customers shall, in common with other occupants of the
Complex in which the Premises are located, and their respective employees,
invitees and customers, and others entitled to the use thereof, have the
non-exclusive right to use the access roads, parking areas, and facilities
provided and designated by Landlord for the general use and convenience of the
occupants of the Complex in which the Premises are located, which areas and
facilities are referred to herein as "Common Area". This right shall terminate
upon the termination of this Lease. Landlord reserves the right from time to
time to make changes in the shape, size, location, amount and extent of Common
Area. Landlord further reserves the right to promulgate such reasonable rules
and regulations relating to the use of the Common Area, and any part or parts
thereof, as Landlord may deem appropriate for the best interests of the
occupants of the Complex. The Rules and Regulations shall be binding upon
Tenant upon delivery of a copy of them to Tenant, and Tenant shall abide by
them and cooperate in their observance. Such Rules and Regulations may be
amended by Landlord from time to time, with or without advance notice, and all
amendments shall be effective upon delivery of a copy to Tenant. Landlord shall
not be responsible to Tenant for the non-performance by any other tenant or
occupant of the Complex of any of said Rules and Regulations.
Landlord shall operate, manage and maintain the Common Area. The manner in
which the Common Area shall be maintained and the expenditures for such
maintenance shall be at the discretion of Landlord.
[INITIAL STAMP]
/s/ XXXX
--------------------------
page 2 of 8
<PAGE> 3
6. PARKING Tenant shall have the right to use with other tenants or
occupants of the Complex 96 parking spaces in the common parking areas of the
Complex. Tenant agrees, that Tenant, Tenant's employees, agents,
representatives and/or invitees shall not use parking spaces in excess of said
96 spaces allocated to Tenant hereunder. Landlord shall have the right, at
Landlord's sole discretion, to specifically designate the location of Tenant's
parking spaces within the common parking areas of the Complex in the event of a
dispute among the tenants occupying the building and/or Complex referred to
herein, in which event Tenant agrees that Tenant, Tenant's employees, agents,
representatives and/or invitees shall not use any parking spaces other than
those parking spaces specifically designated by Landlord for Tenant's use. Said
parking spaces, if specifically designated by Landlord to Tenant, may be
relocated by Landlord at any time, and from time to time. Landlord reserves the
right, at Landlord's sole discretion, to rescind any specific designation of
parking spaces, thereby returning Tenant's parking spaces to the common parking
area. Landlord shall give Tenant written notice of any change in Tenant's
parking spaces. Tenant shall not, at any time, park, or permit to be parked,
any trucks or vehicles adjacent to the loading areas so as to interfere in any
way with the use of such areas, nor shall Tenant at any time park, or permit
the parking of Tenant's trucks or other vehicles or the trucks and vehicles of
Tenant's suppliers or others, in any portion of the common area not designated
by Landlord for such use by Tenant. Tenant shall not park nor permit to be
parked, any inoperative vehicles or equipment on any portion of the common
parking area or other common areas of the Complex. Tenant agrees to assume
responsibility for compliance by its employees with the parking provision
contained herein. If Tenant or its employees park in other than such designated
parking areas, then Landlord may charge Tenant, at an additional charge, and
Tenant agrees to pay, ten ($10.00) Dollars per day for each day or partial day
each such vehicle is parked in any area other than that designated. Tenant
hereby authorizes Landlord at Tenant's sole expense to tow away from the
Complex any vehicle belonging to Tenant or Tenant's employees parked in
violation of these provisions, or to attach violation stickers or notices to
such vehicles. Tenant shall use the parking areas for vehicle parking only, and
shall not use the parking areas for storage.
7. EXPENSES OF OPERATION, MANAGEMENT, AND MAINTENANCE OF THE COMMON AREAS OF
THE COMPLEX As Additional Rent and in accordance with Paragraph 4 D of this
Lease, Tenant shall pay to Landlord Tenant's proportionate share (calculated on
a square footage or other equitable basis as calculated by Landlord) of all
expenses of operation, management, maintenance and repair of the Common Areas
of the Complex including, but not limited to, license, permit, and inspection
fees; security; utility charges associated with exterior landscaping and
lighting (including water and sewer charges); all charges incurred in the
maintenance of landscaped areas, lakes, parking lots, sidewalks, driveways;
maintenance, repair and replacement of all fixtures and electrical, mechanical,
and plumbing systems; structural elements and exterior surfaces of the
buildings; salaries and employee benefits of personnel and payroll taxes
applicable thereto; supplies, materials, equipment and tools; the amortized
cost of capital expenditures which have the effect of reducing operating
expenses, provided, however, that in the event Landlord makes such capital
improvements, Landlord shall amortize its investment in said improvements over
the useful life thereof (together with interest at the rate of fifteen (15%)
percent per annum on the unamortized balance) as an operating expense in
accordance with standard accounting practices, provided, that such amortization
is not at a rate greater than the reasonably anticipated savings in the
operating expenses.
"Additional Rent" as used herein shall not include Landlord's debt
repayments; interest on charges; expenses directly or indirectly incurred by
Landlord for the benefit of any other tenant; cost for the installation of
partitioning or any other tenant improvements; cost of attracting tenants;
depreciation; interest, or executive salaries.
8. ACCEPTANCE AND SURRENDER OF PREMISES Subject to Paragraphs 44, 51 and 53,
and by entry hereunder, Tenant accepts the Premises as being in good and
sanitary order, condition and repair and accepts the building and improvements
included in the Premises in their present condition and without representation
or warranty by Landlord as to the condition of such building or as to the use or
occupancy which may be made thereof. Any exceptions to the foregoing must be by
written agreement executed by Landlord and Tenant. Tenant agrees on the last day
of the Lease term, or on the sooner termination of this Lease, to surrender the
Premises promptly and XXXXXX to Landlord in good condition and repair
(damage by Acts of God, fire, normal wear and tear excepted), with all interior
walls painted, or cleaned so that they appear freshly painted, and repaired and
replaced, if damaged; all floors cleaned and waxed; all carpets cleaned and
shampooed; the airconditioning and heating equipment serviced by a reputable and
licensed service firm and in good operating condition (provided the maintenance
of such equipment has been Tenant's responsibility to pay for during the term of
this Lease) together with all alterations, additions, and improvements which may
have been made in, to, or on the Premises (except movable trade fixtures
installed at the expense of Tenant) except that Tenant shall ascertain from
Landlord within thirty (30) days before the end of the term of this Lease
whether Landlord desires to have the Premises or any part or parts thereof
restored to their condition and configuration as when the Premises were
delivered to Tenant and if Landlord shall so desire, then Tenant shall restore
said Premises or such part or parts thereof before the end of this Lease at
Tenant's sole cost and expense. Tenant, on or before the end of the term or
sooner termination of this Lease, shall remove all of Tenant's personal property
and trade fixtures from the Premises, and all property not so removed on or
before the end of the term or sooner termination of this Lease shall be deemed
abandoned by Tenant and title to same shall thereupon pass to Landlord without
compensation to Tenant. Landlord may, upon termination of this Lease, remove all
moveable furniture and equipment so abandoned by Tenant, at Tenant's sole cost,
and repair any damage caused by such removal at Tenant's sole cost. If the
Premises be not surrendered at the end of the term or sooner termination of this
Lease, Tenant shall indemnify Landlord against loss or liability resulting from
the delay by Tenant in so surrendering the Premises including, without
limitation, any claims made by any succeeding tenant founded on such delay.
Nothing contained herein shall be construed as an extension of the term hereof
or as a consent of Landlord to any holding over by Tenant. The voluntary or
other surrender of this Lease or the Premises by Tenant or a mutual cancellation
of this Lease shall not work as a merger and, at the option of Landlord, shall
either terminate all or any existing subleases or subtenancies or operate as an
assignment to Landlord of all or any such subleases or subtenancies.
9. ALTERATIONS AND ADDITIONS Tenant shall not make, or suffer to be made, any
alteration or addition to the Premises, or any part thereof, without the written
consent of Landlord (not to be unreasonably withheld) first had and obtained by
Tenant, but at the cost of Tenant, and any addition to, or alteration of, the
Premises, except moveable furniture and trade fixtures, shall at once become a
part of the Premises and belong to Landlord. Landlord reserves the right to
reasonably approve all contractors and mechanics proposed by Tenant to make such
alterations and additions. Tenant shall retain title to all moveable furniture
and trade fixtures placed in the Premises. All heating, lighting, electrical,
airconditioning, floor to ceiling partitioning, drapery, carpeting, and floor
installations made by Tenant, together with all property that has become an
integral part of the Premises, shall not be deemed trade fixtures. Tenant agrees
that it will not proceed to make such alteration or additions, without having
obtained consent from Landlord to do so, and until five (5) days from the
receipt of such comment, in order that Landlord may post appropriate notices to
avoid any liability to contractors or material suppliers for payment for
Tenant's improvements. Tenant will at all times permit such notices to be posted
and to remain posted until the completion of work. Tenant shall, if required by
Landlord, secure at Tenant's own cost and expense, a completion and lien
indemnity bond, satisfactory to Landlord, for such work. Tenant further
covenants and agrees that any mechanic's lien filed against the Premises or
against the Complex for work claimed to have been done for, or materials claimed
to have been furnished to Tenant, will be discharged by Tenant, by bond or
otherwise, within ten (10) days after the filing thereof, at the cost and
expense of Tenant. Any exceptions to the foregoing must be made in writing and
executed by both Landlord and Tenant.
10. TENANT MAINTENANCE Tenant shall, at its sole cost and expense, keep and
maintain the Premises (including appurtenances) and every part thereof in a high
standard of maintenance and repair, and in good and sanitary condition. Tenant's
maintenance and repair responsibilities herein referred to include, but are not
limited to, all windows, window frames, plate glass, glazing, truck doors,
plumbing systems (such as water and drain lines, sinks, toilets, faucets,
drains, showers and water fountains), electrical systems (such as panels,
conduits, outlets, lighting fixtures, lamps, bulbs, tubes, ballasts), heating
and air-conditioning systems (such as compressors, fans, air handlers, ducts,
mixing boxes, thermostats, time clocks, boilers, heaters, supply and return
grills), store fronts, roofs, downspouts, all interior improvements within the
premises including but not limited to wall coverings, window coverings, carpet,
floor coverings, partitioning, ceilings, doors (both interior and exterior,
including closing mechanisms, latches, locks, skylights (if any), automatic fire
extinguishing systems, and elevators and all other interior improvements of any
nature whatsoever. Tenant agrees to provide carpet shields under all rolling
chairs or to otherwise be responsible for wear and tear of the carpet caused by
such rolling chairs if such wear and tear exceeds that caused by normal foot
traffic in surrounding areas. Areas of excessive wear shall be replaced at
Tenant's sole expense upon Lease termination. Tenant hereby waives all rights
under, and benefits of, subsection 1 of Section 1932 and Section 1941 and 1942
of the California XXXXXX or ordinance now or hereafter in effect.
11. UTILITIES Tenant shall pay promptly, as the same becomes due, all charges
for water, gas, electricity, telephone, telex and other electronic
communications service, sewer service, waste pick-up and any other utilities,
materials or services furnished directly to or used by Tenant on or about the
Premises during the term of this Lease, including, without limitation, any
temporary or permanent utility surcharge or other exactions whether or not
hereinafter imposed.
Landlord shall not be liable for and Tenant shall not be entitled to any
abatement or reduction of rent by reason of any interruption or failure of
utility services to the Premises when such interruption or failure is caused by
accident, breakage, repair, strikes, lockouts, or other labor disturbances or
labor disputes of any nature, or by any other cause, similar or dissimilar,
beyond the reasonable control of Landlord.
12. TAXES A. As Additional Rent and in accordance with Paragraph 4 D of this
Lease, Tenant shall pay to Landlord Tenant's proportionate share of all Real
Property Taxes, which prorata share shall be allocated to the leased Premises
by square footage or other equitable basis, as calculated by Landlord. The term
"Real Property Taxes", as used herein, shall mean (i) all taxes, assessments,
levies and other charges of any kind or nature whatsoever, general and special,
foreseen and unforeseen (including all installments of principal and interest
required to pay any general or special assessments for public improvements and
any increases resulting from reassessments caused by
[INITIAL STAMP]
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<PAGE> 4
any change in ownership of the Complex) now or hereafter imposed by any
governmental or quasi-governmental authority or special district having the
direct or indirect power to tax or levy assessments, which are levied or
assessed against, or with respect to the value, occupancy or use of, all or any
portion of the Complex (as now constructed or as may at any time hereafter be
constructed, altered, or otherwise changed) or Landlord's interest therein, any
improvements located within the Complex (regardless of ownership); the
fixtures, equipment and other property of Landlord, real or personal, that are
an integral part of and located in the Complex; or parking areas, public
utilities, or energy within the Complex; (ii) all charges, levies or fees
imposed by reason of environmental regulation or other governmental control of
the Complex; and (iii) all costs and fees (including reasonable attorneys' fees)
incurred by Landlord in contesting any Real Property Tax and in negotiating
with public authorities as to any Real Property Tax. If at any time during the
term of this Lease the taxation or assessment of the Complex prevailing as of
the commencement date of this Lease shall be altered so that in lieu of or in
addition to any Real Property Tax described above there shall be levied,
assessed or imposed (whether by reason of a change in the method of taxation or
assessment, creation of a new tax or charge, or any other cause) an alternate
or additional tax or charge (i) on the value, use of occupancy of the Complex
or Landlord's interest therein or (ii) on or measured by the gross receipts,
income or rentals from the Complex, on Landlord's business of leasing the
Complex, or computed in any manner with respect to the operation of the
Complex, then any such tax or charge, however designated, shall be included
within the meaning of the term "Real Property Taxes" for purposes of this
Lease. If any Real Property Tax is based upon property or rents unrelated to
the Complex, then only that part of such real Property Tax that is fairly
allocable to the Complex shall be included within the meaning of the term "Real
Property Taxes". Notwithstanding the foregoing, the term "Real Property Taxes"
shall not include estate, inheritance, gift or franchise taxes of Landlord or
the federal or state net income tax imposed on Landlord's income from all
sources, or interest charges or other penalties or fines for Landlord's late
payment or Property Taxes, provided Tenant has paid its Taxes by the due dated
as stated herein.
B. Taxes on Tenant's Property
(a) Tenant shall be liable for and shall pay ten days before delinquency, taxes
levied against any personal property or trade fixtures placed by Tenant in or
about the Premises. If any such taxes on Tenant's personal property or trade
fixtures are levied against Landlord or Landlord's property or if the assessed
value of the Premises is increased by the inclusion therein of a value placed
upon such personal property or trade fixtures of Tenant and if Landlord, after
written notice to Tenant, pays the taxes based on such increased assessment,
which Landlord shall have the right to do regardless of the validity thereof,
but only under proper protest if requested by Tenant, Tenant shall upon demand,
as the case may be, repay to Landlord the taxes so levied against Landlord, or
the proportion of such taxes resulting from such increase in the assessment;
provided that in any such event Tenant shall have the right, in the name of
Landlord and with Landlord's full cooperation, to bring suit in any court of
competent jurisdiction to recover the amount of any such taxes so paid under
protest, and any amount so recovered shall belong to Tenant.
(b) if the Tenant improvements in the Premises, whether installed, and/or paid
for by Landlord or Tenant and whether or not affixed to the real property so as
to become a part thereof, are assessed for real property tax purposes at a
valuation higher than the valuation at which standard office improvements in
other space in the Complex are assessed, then the real property taxes and
assessments levied against Landlord or the Complex by reason of such excess
assessed valuation shall be deemed to be taxes levied against personal
property of Tenant and shall be governed by the provisions of 12Ba above. If
the records of the County Assessor are available and sufficiently detailed to
serve as a basis for determining whether said Tenant improvements are assessed
at a higher valuation than standard office improvements in other space in the
Complex, such records shall be binding on both the Landlord and the Tenant. If
the records of the County Assessor are not available or sufficiently detailed
to serve as a basis for making said determination, the actual cost of
construction shall be used.
13. LIABILITY INSURANCE Tenant at Tenant's expense, agrees to keep in force
during the term of this Lease a policy of commercial general liability
insurance with combined single limit coverage of not less than Two Million
Dollars ($2,000,000) for injuries to or death of persons occurring in, on or
about the Premises or the Complex, and property damage insurance with limits of
$500,000. The policy or policies affecting such insurance, certificates of
insurance of which shall be furnished to Landlord, shall name Landlord as
additional insureds, and shall insure any liability of Landlord, contingent or
otherwise, as respects acts or omissions of Tenant, its agents, employees or
invitees or otherwise by any conduct or transactions of any of said persons in
or about or concerning the Premises, including any failure of Tenant to
observe or perform any of its obligations hereunder, shall be issued by an
insurance company admitted to transact business in the State of California; and
shall provide that the insurance effected thereby shall not be canceled, except
upon thirty (30) days' prior written notice to Landlord. If, during the term
of this Lease, in the considered opinion of Landlord's Lender or insurance
advisor, the amount of insurance described in this paragraph 13 is not
adequate, Tenant agrees to increase said coverage to such reasonable amount as
Landlord's Lender, insurance advisor, or counsel shall deem adequate. Landlord
agrees that such adjustments shall not take place more than one time in any
twelve (12) month period.
14. TENANT'S PERSONAL PROPERTY INSURANCE AND WORKMAN'S COMPENSATION INSURANCE
Tenant shall maintain a policy or policies of fire and property damage
insurance in "all risk" form with a sprinkler leakage endorsement insuring the
personal property, inventory, trade fixtures, and leasehold improvements within
the leased Premises for the full replacement value thereof. The proceeds from
any of such policies shall be used for the repair or replacement of such items
so insured.
Tenant shall also maintain a policy or policies of workman's compensation
insurance and any other employee benefit insurance sufficient to comply with
all laws.
15. PROPERTY INSURANCE Landlord shall purchase and keep in force and as
Additional Rent and in accordance with Paragraph 4D of this Lease, Tenant shall
pay to Landlord, (or Landlord's agent if so directed by Landlord) Tenant's
proportionate share (calculated on a square footage or other equitable basis as
calculated by Landlord) the deductibles on insurance claims and the cost of
policy or policies of insurance covering loss or damage to the Premises and
Complex in the amount of the full replacement value thereof, providing
protection against those perils included within the classification of "all
risks" insurance and flood and/or earthquake insurance, if available, plus a
policy of rental income insurance in the amount of one hundred (100%) percent of
twelve (12) months Basic Rent, plus sums paid as Additional Rent and any
deductibles related thereto. If such insurance cost is increased solely due to
Tenant's use of the Premises or the Complex, Tenant agrees to pay to Landlord
the full cost of such increase or its pro rata share if the increase results
from two or more tenants' use. Tenant shall have no interest in nor any right
to the proceeds of any insurance procured by Landlord for the Complex.
Any other provision of this Lease to the contrary notwithstanding, Landlord
and Tenant do each hereby respectively release the other, to the extent of
insurance coverage of the releasing party, from any liability for loss or damage
caused by fire or any of the extended coverage casualties included in the
releasing party's insurance policies, irrespective of the cause of such fire or
casualty; provided, however, that if the insurance policy of either releasing
party prohibits such waiver, then this waiver shall not take effect until
consent to such waiver is obtained. If such waiver is so prohibited, the
insured party affected shall promptly notify the other party thereof.
16. INDEMNIFICATION Landlord shall not be liable to Tenant and Tenant hereby
waives all claims against Landlord for any injury to or death of any person or
damage to or destruction of property in or about the Premises or the Complex by
or from any cause whatsoever, including, without limitation, gas, fire, oil,
electricity or leakage of any character from the roof, walls, basement or other
portion of the Premises or the Complex but excluding, however, the willful
misconduct or negligence of Landlord, its agents, servants, employees, invitees,
or contractors of which negligence Landlord has knowledge and reasonable time to
correct. Except as to injury to persons or damage to property to the extent
arising from the willful misconduct or the negligence of Landlord, its agents,
servants, employees, invitees, or contractors, Tenant shall hold Landlord
harmless from and defend Landlord against any and all expenses, including
reasonable attorneys' fees, in connection therewith, arising out of any injury
to or death of any person or damage to or destruction of property occurring in,
on or about the Premises, or any part thereof, from any cause whatsoever.
17. COMPLIANCE Tenant, at its sole cost and expense, shall promptly comply with
all laws, statutes, ordinances and governmental rules, regulations or
requirements now or hereafter in effect; with the requirements of any board of
fire underwriters or other similar body now or hereafter constituted; and with
any direction or occupancy certificate issued pursuant to law by any public
officer; provided, however, that no such failure shall be deemed a breach of the
provisions if Tenant, immediately upon notification, commences to remedy or
rectify said failure. The judgment of any court of competent jurisdiction or
the admission of Tenant in any action against Tenant, whether Landlord be a
party thereto or not, that Tenant has violated any such law, statute, ordinance
or governmental rule, regulation, requirement, direction or provision, shall be
conclusive of that fact as between Landlord and Tenant. This paragraph shall
not be interpreted as requiring Tenant to make structural changes or
improvements, except to the extent such changes or improvements are required as
a result of Tenant's particular use of the Premises. Tenant shall, at its sole
cost and expense, comply with any and all requirements pertaining to said
Premises of any insurance organization or maintenance of reasonable fire and
public liability insurance covering the Premises. See Paragraph 53.
18. LIENS Tenant shall keep the Premises and the Complex free from any liens
arising out of any work performed, materials furnished or obligation incurred
by Tenant. In the event that Tenant shall not, within ten (10) days following
the imposition of such lien, cause the same to be released of record, Landlord
shall have, in addition to all other remedies provided herein and by law, the
right, but no obligation, to cause the same to be released by such means as it
shall deem proper, including payment of the claim giving rise to such lien.
All sums paid by Landlord for such purpose, and all expenses incurred by it in
connection therewith, shall be payable to Landlord by Tenant on demand with
interest at the prime rate of interest as quoted by the Bank of America.
[INITIAL STAMP]
/s/ XXXX
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<PAGE> 5
19. ASSIGNMENT AND SUBLETTING See Paragraph 49
20. SUBORDINATION AND MORTGAGES In the event Landlord's XXXXXX or
leasehold XXXXXX is now or hereafter encumbered by a deed of trust, upon
the interest of Landlord in the land and buildings in which the demised Premises
are located, to secure a loan from a lender (hereinafter referred to as
"Lender") to Landlord, Tenant shall, at the request of Landlord or Lender,
execute in writing an agreement subordinating its rights under this Lease to the
lien of such deed of trust, or, if so requested, agreeing that the lien of
Lender's deed of trust shall be or remain subject and subordinate to the rights
of Tenant under this Lease. Notwithstanding any such subordination, Tenant's
possession under this Lease shall not be disturbed if Tenant is not in default
and so long as Tenant shall pay all cost and observe and perform all of the
provisions set forth in this Lease. See Paragraph 56
21. ENTRY BY LANDLORD Landlord reserves, and shall at all reasonable times
after at least 24 hours notice (except in emergencies) have, the right to enter
the Premises to inspect them; to perform any services to be provided by Landlord
hereunder; to submit the Premises to prospective purchasers, mortgagers or
(during the last eighteen (18) months of the Term of this Lease) XXXXXX; to
post notices of nonresponsibility; and to alter, improve or repair the Premises
and any portion of the Complex, all without abatement of rent; and may erect
scaffolding and other necessary structures in or through the Premises where
reasonably required by the character of the work to be performed; provided,
however that the business of Tenant shall be interfered with to the least extent
that is reasonably practical. For each of the foregoing purposes, Landlord shall
at all times have and retain a key with which to unlock all of the doors in an
emergency in order to obtain entry to the Premises, and any entry to the
Premises obtained by Landlord by any of said means, or otherwise, shall not
under any circumstances be construed or deemed to be a forcible or unlawful
entry into or a detainer of the Premises or an eviction, actual or constructive,
of Tenant from the Premises or any portion thereof, Landlord shall also have the
right at any time to change the arrangement or location of entrances or
passageways, doors and doorways, and corridors, elevators, stairs, toilets or
other public parts of the Complex and to change the name, number or designation
by which the Complex is commonly known, and none of the foregoing shall be
deemed an actual or constructive eviction of Tenant, or shall entitle Tenant to
any reduction of rent hereunder. See Paragraph 57
22. BANKRUPTCY AND DEFAULT The commencement of a bankruptcy action or
liquidation action or reorganization action or insolvency action or an
assignment of or by Tenant for the benefit of creditors, or any similar action
undertaken by Tenant, or the insolvency of Tenant, shall, at Landlord's option,
constitute a breach of this Lease by Tenant. If the trustee or receiver
appointed to serve during a bankruptcy, liquidation, reorganization, insolvency
or similar action elects to reject Tenant's unexpired Lease, the trustee or
receiver shall notify Landlord in writing of its election within thirty (30)
days after an order for relief in a liquidation action or within thirty (30)
days after the commencement of any action.
Within thirty (30) days after court approval of the assumption of this
Lease, the trustee or receiver shall cure (or provide adequate assurance to the
reasonable satisfaction of Landlord that the trustee or receiver shall cure) any
and all previous defaults under the unexpired Lease and shall compensate
Landlord for all actual pecuniary loss and shall provide adequate assurance of
future performance under said Lease to the reasonable satisfaction of Landlord.
Adequate assurance of future performance, as used herein, includes, but shall
not be limited to: (i) assurance of source and payment of rent, and other
consideration due under this Lease; (ii) XXXXXX that the assumption or
assignment of this Lease will not breach substantially any provision, such as
radius, location, use, or exclusivity provision, in any agreement relating to
the above described Premises.
Nothing contained in this section shall affect the existing right of
Landlord to refuse to accept an assignment upon commencement of or in connection
with a bankruptcy, liquidation, reorganization or insolvency action or an
assignment of Tenant for the benefit of creditors or other similar act. Nothing
contained in this Lease shall be construed as giving or granting or creating an
equity in the demised Premises to Tenant, in no event shall the leasehold estate
under this Lease, or any XXXXXX therein, be assigned by voluntary or
involuntary bankruptcy proceeding without the prior written consent of Landlord.
In no event shall this Lease or any rights or privileges hereunder be an asset
of Tenant under any bankruptcy, insolvency or reorganization proceedings.
The failure to perform or honor any covenant, condition or
representation made under this Lease shall constitute a default hereunder by
Tenant upon expiration of the appropriate grace period hereinafter provided.
Tenant shall have a period of five (5) days from the date of written notice
from Landlord within which to cure any default in the payment of rental or
adjustment thereto. Tenant shall have a period of thirty (30) days from the
date of written notice from Landlord within which to cure any other default
under this Lease; provided, however, that if the nature of Tenant's failure is
such that more than thirty (30) days is reasonably required to cure the same,
Tenant shall not be in default so long as Tenant commences performance within
such thirty (30) day period and thereafter prosecutes the same to completion.
Upon an incurred default of this Lease by Tenant, Landlord shall have the
following rights and remedies in addition to any other rights or remedies
available to Landlord at law or in equity:
(a). The rights and remedies provided for by California Civil Code
Section XXXXXX including but not limited to, recovery of the worth at the
time of award of the amount by which the unpaid rent for the balance of the term
after the time of award XXXXXX the amount of rental loss for the same
period that Tenant XXXXXX be reasonably avoided, as computed pursuant to
subsection (b) of said Section 1951.2. Any proof by Tenant under subparagraphs
(2) and (3) of Section 1951.2 of the California Civil Code of the amount of
rental loss that could be reasonably avoided shall be made in the following
manner: Landlord and Tenant shall each select a licensed real estate broker in
the business of renting property of the same type and use as the Premises and in
the same geographic vicinity. Such two real estate brokers shall select a third
licensed real estate broker, and the three licensed real estate brokers so
selected shall determine the amount of the rental loss that could be reasonably
avoided from the balance of the term of this Lease after the time of award. The
decision of the majority of said licensed real estate brokers shall be final and
binding upon the parties hereto.
(b). The rights and remedies provided by California Civil Code Section
which allows Landlord to continue the Lease in effect and to enforce all of its
rights and remedies under this Lease, including the right to recover rent as it
becomes due, for as long as Landlord does not terminate Tenant's right to
possession, acts of maintenance or preservation, efforts to relet the Premises,
or the appointment of a receiver upon Landlord's initiative to protect its
interest under this Lease shall not constitute a termination of Tenant's right
to possession.
(c). The right to terminate this Lease by giving notice to Tenant in
accordance with applicable law.
(d). To the extent permitted by law the right and power to enter the
Premises and remove therefrom all persons and property, to store such property
in a public warehouse or elsewhere at the cost of and for the account of Tenant,
and to sell such property and supply such proceeds therefrom pursuant to
applicable California law, Landlord, may from time to time sublet the Premises
or XXXXXX terms (which may extend beyond the term of this Lease) and as
such rent and such other XXXXXX alterations and repairs to the Premises.
Upon each subletting, (i) Tenant shall be immediately liable to pay Landlord, in
addition to indebtedness other than rent due hereunder, the cost of such
subletting, including, but not limited to, reasonable attorneys' fees, and any
real estate commissions actually paid, and the cost of such alterations and
repairs incurred by Landlord and the amount, if any, by which the rent hereunder
for the period of such subletting (to the extent such period does not exceed the
term hereof) exceeds the amount to be paid as rent for the Premises for such
period or (ii) at the option of Landlord, rents received from such subletting
shall be applied first to payment of indebtedness other than rent due hereunder
from Tenant to Landlord; second, to the payment of any costs of such subletting
and of such alterations and repairs; third to payment of rent due and unpaid
hereunder, and the residue, if any, shall be held by Landlord and applied in
payment of future rent as the same becomes due hereunder. If Tenant has been
credited with any rent to be received by such subletting under option (i) and
such rent shall not be promptly paid to Landlord by the subtenant(s), or if such
rentals received from such subletting under option (ii) during any month be less
than that to be paid during that month by Tenant hereunder, Tenant shall pay any
such deficiency to Landlord. Such deficiency shall be calculated and paid
monthly. No taking possession of the Premises by Landlord, shall be construed as
an election on its part to terminate this Lease unless a written notice of such
[INITIAL STAMP]
/s/ XXXX
page 5 of 8
<PAGE> 6
intention be given to Tenant. Notwithstanding any such subletting without
termination. Landlord may at any time hereafter elect to terminate this Lease
for such previous breach.
(e). The right to have a receiver appointed for Tenant upon application
by Landlord, to take possession of the Premises and to apply any rental
collected from the Premises and to exercise all other rights and remedies
granted to Landlord pursuant to subparagraph d. above.
23. ABANDONMENT Tenant shall not vacate or abandon the Premises at any time
during the term of this Lease (except that Tenant may vacate so long as it pays
rent, provides an on-site security guard during normal business hours from
Monday through Friday, and otherwise performs its obligations hereunder) and if
Tenant shall abandon, vacate or surrender said Premises, or be dispossessed by
the process of law, or otherwise, any personal property belonging to Tenant and
left on the Premises shall be deemed to be abandoned, at the option of Landlord,
except such property as may be mortgaged to Landlord.
24. DESTRUCTION In the event the Premises are destroyed in whole or in part from
any cause, except for routine maintenance and repairs and incidental damage and
destruction caused from vandalism and accidents for which Tenant is responsible
for under Paragraph 10, Landlord may, at its option:
(a) Rebuild or restore the Premises to their condition prior to the
damage or destruction, or
(b) Terminate this Lease. (providing that the Premises is damaged to
the extent of 33 1/3% of the replacement cost)
If Landlord does not give Tenant notice in writing within thirty (30)
days from the destruction of the Premises of its election to either rebuild and
restore them and the estimated time required to rebuild or restore or to
terminate this Lease, Landlord shall be deemed to have elected to rebuild or
restore them, in which event Landlord agrees, at its expense, promptly to
rebuild or restore the Premises to their condition prior to the damage or
destruction. Tenant shall be entitled to a reduction in rent while such repair
is being made in the proportion that the area of the Premises rendered
untenantable by such damage bears to the total area of the Premises if Landlord
initially estimates that the building or restoration will exceed 180 days or if
Landlord does not complete the rebuilding or restoration within one hundred
eighty (180) days following the date of destruction (such period of time to be
extended for delays caused by the fault or neglect of Tenant, or because of Acts
of God, acts of public agencies, labor disputes, strikes, fires, freight
embargoes, rainy or stormy weather, inability to obtain materials, supplies or
fuels, acts of contractors or subcontractors, or delay of the contractors or
subcontractors due to such causes or other contingencies beyond the control of
Landlord, then Tenant shall have the right to terminate this Lease by giving
fifteen (15) days prior written notice to Landlord. Notwithstanding anything
herein to the contrary, Landlord's obligation to rebuild or restore shall be
limited to the building and interior improvements constructed by Landlord as
they existed as of the commencement date of the Lease and shall not include
restoration of Tenant's trade fixtures, equipment, merchandise, or any
improvements, alterations or additions made by Tenant to the Premises, which
Tenant shall forthwith replace or fully repair at Tenant's sole cost and expense
provided this Lease is not cancelled according to the provisions above.
Unless this Lease is terminated pursuant to the foregoing provisions,
this Lease shall remain in full force and effect. Tenant hereby expressly
waives the provisions of Section 1932, Subdivision 2, in Section 1933,
Subdivision 4 of the California Civil Code.
In the event that the building in which the Premises are situated is
damaged or destroyed to the extent of not less than 33 1/3% of the replacement
cost thereof, Landlord may elect to terminate this Lease, whether the Premises
be injured or not.
25. EMINENT DOMAIN If all or any part of the Premises shall be taken by any
public or quasi-public authority under the power of eminent domain or
conveyance in lieu thereof, this Lease shall terminate as to any portion of the
Premises so taken or conveyed on the date when title vests in the condemnor,
and Landlord shall be entitled to any and all payment, income, rent, award, or
any interest therein whatsoever which may be paid or made in connection with
such taking or conveyance, and Tenant shall have no claim against Landlord or
otherwise for the value of any unexpired term of this Lease. Notwithstanding
the foregoing paragraph, any compensation specifically awarded Tenant for loss
of business, Tenant's personal property, moving cost or loss of goodwill, shall
be and remain the property of Tenant.
If (i) any action or proceeding is commenced for such taking of the
Premises or any part thereof, or if Landlord is advised in writing by any
entity or body having the right or power of condemnation of its intention to
condemn the premises or any portion thereof, or (ii) any of the foregoing
events occur with respect to the taking of any space in the Complex not leased
hereby, or if any such spaces so taken or conveyed in lieu of such taking and
Landlord shall decide to discontinue the use and operation of the Complex, or
decide to demolish, alter or rebuild the Complex, then, in any of such events
Landlord shall have the right to terminate this Lease by giving Tenant written
notice thereof within sixty (60) days of the date of receipt of said written
advice, or commencement of said action or proceeding, or taking conveyance,
which termination shall take place as of the first to occur of the last day of
the calendar month next following the month in which such notice is given or
the date on which title to the Premises shall vest in the condemnor.
In the event of such a partial taking or conveyance of the Premises, if
the portion of the Premises taken or conveyed is so substantial that the Tenant
can no longer reasonably conduct its business, Tenant shall have the privilege
of terminating this Lease within sixty (60) days from the date of such taking
or conveyance, upon written notice to Landlord of its intention so to do, and
upon giving of such notice this Lease shall terminate on the last day of the
calendar month next following the month in which such notice is given, upon
payment by Tenant of the rent from the date of such taking or conveyance to the
date of termination.
If a portion of the Premises be taken by condemnation or conveyance in
lieu thereof and neither Landlord nor Tenant shall terminate this Lease as
provided herein, this Lease shall continue in full force and effect as to the
part of the Premises not so taken or conveyed, and the rent herein shall be
apportioned as of the date of such taking or conveyance so that thereafter the
rent to be paid by Tenant shall be in the ratio that the area of the portion of
the Premises not so taken or conveyed bears to the total area of the Premises
prior to such taking.
26. SALE OR CONVEYANCE BY LANDLORD In the event of a sale or conveyance of the
Complex or any interest therein, by any owner of the reversion then
constituting Landlord, the transferor shall thereby be released from any
further liability upon any of the terms, covenants or conditions (express or
implied) herein contained in favor of Tenant, and in such event, insofar as
such transfer is concerned, Tenant agrees to look solely to the responsibility
of the successor in interest of such transferor in and to the Complex and this
Lease. This Lease shall not be affected by any such sale or conveyance, and
Tenant agrees to attorn to the successor in interest of such transferor. See
Paragraph 58.
27. ATTORNMENT TO LENDER OR THIRD PARTY In the event the interest of Landlord
in the land and buildings in which the leased Premises are located (whether
such interest of Landlord is a fee title interest or a leasehold interest) is
encumbered by deed of trust, and such interest is acquired by the lender or any
third party through judicial foreclosure or by exercise of a power of sale at
private trustee's foreclosure sale, Tenant hereby agrees to attorn to the
purchaser in any such foreclosure sale and to recognize such purchaser as the
Landlord under this Lease. In the event the lien of the deed of trust securing
the loan from Lender to Landlord is prior and paramount to the Lease, this
Lease shall nonetheless continue in full force and effect for the remainder of
the unexpired term hereof, at the same rental herein reserved and upon all the
other terms, conditions and covenants herein contained.
28. HOLDING OVER Any holding over by Tenant after expiration or other
termination of the term of this Lease with the written consent of Landlord
delivered to Tenant shall not constitute a renewal or extension of the Lease or
give Tenant any rights in or to the leased Premises except as expressly
provided in this Lease. Any holding over after the expiration or other
termination of the term of this Lease, with the consent of Landlord, shall be
construed to be a tenancy from month to month, on the same terms and conditions
herein specified insofar as applicable except that the monthly Basic Rent shall
be increased to an amount equal to one hundred fifty (150%) percent of the
monthly Basic Rent required during the last month of the Lease term.
29. CERTIFICATE OF ESTOPPEL Either party shall at any time upon not less than
ten (10) days' prior written notice from the other party exercise, acknowledge
and deliver to the requesting party a statement in writing (i) certifying that
this Lease is unmodified and in full force and effect (or, if modified, stating
the nature of such modification and certifying that this Lease, as so modified,
is in full force and effect) and the date to which the rent and other charges
are paid in advance, if any, and (ii) acknowledging that there are not, to the
best of such party's knowledge, any uncured defaults on the part of the other
party hereunder, or specifying such defaults, if any, are claimed. Any such
statement may be conclusively relied upon by any prospective purchaser or
encumbrancer of the Premises. The party receiving such request's failure to
deliver such statement within such time shall be conclusive upon the other party
that this Lease is in full force and effect, without modification except as may
be requested by Landlord; that there are no uncured defaults in the requesting
party's performance, and that no more than one month's XXXXXX
30. CONSTRUCTION CHANGES It is understood that the description of the Premises
and the location of ductwork, plumbing and other facilities therein are subject
to such minor changes as Landlord or Landlord's architect determines to be
desirable in the course of construction of the Premises, and no such changes,
or any changes in plans for any other portions of the Complex shall affect this
Lease or entitle Tenant to any reduction of rent hereunder or result in any
liability of Landlord to Tenant. Landlord does not guarantee the accuracy of
any drawings supplied to Tenant and verification of the accuracy of such
drawings rests with Tenant.
31. RIGHT OF LANDLORD TO PERFORM All terms, covenants and conditions of this
Lease to be performed or observed by Tenant shall be performed or observed by
Tenant at Tenant's sole cost and expense and without any reduction of rent. If
Tenant shall fail to pay any sum of money, or other rent, required to be paid
by it hereunder or shall fail to perform any other term or covenant hereunder
on its part to be performed, and such failure shall continue for five (5) days
after written notice thereof by Landlord, Landlord, without waiving or
releasing Tenant from any obligation of Tenant hereunder, may, but shall not be
obligated to, make any such payment or perform
[INITIAL STAMP]
/s/ XXXX
page 6 of 8
<PAGE> 7
any such other term or covenant on Tenant's part to be performed. All sums so
paid by Landlord and all necessary costs of such performance by Landlord
together with interest thereon at the rate of the prime rate of interest per
annum as quoted by the Bank of America from the date of such payment or
performance by Landlord, shall be paid (and Tenant covenants to make such
payment) to Landlord on demand by Landlord, and Landlord shall have (in
addition to any other right or remedy of Landlord) the same rights and remedies
in the event of nonpayment by Tenant as in the case of failure by Tenant in the
payment of rent hereunder.
32. ATTORNEYS' FEES.
(A) In the event that either Landlord or Tenant should bring suit for
the possession of the Premises, for the recovery of any sum due under this
Lease, or because of the breach of any provision of this Lease, or for any other
relief against the other party hereunder, then all costs and expenses, including
reasonable attorneys' fees, incurred by the prevailing party therein shall be
paid by the other party, which obligation on the part of the other party shall
be deemed to have accrued on the date of the commencement of such action and
shall be enforceable whether or not the action is prosecuted to judgement.
(B) Should Landlord be named as a defendant in any suit brought against
Tenant in connection with or arising out of Tenant's occupancy hereunder, Tenant
shall pay to Landlord its costs and expenses incurred in such suit, including a
reasonable attorney's fee.
33. WAIVER. The waiver by either party of the other party's failure to perform
or observe any term, covenant or condition herein contained to be performed or
observed by such waiving party shall not be deemed to be a waiver of such term,
covenant or condition or of any subsequent failure of the party failing to
perform or observe the same or any other such term, covenant or condition
therein contained, and no custom or practice which may develop between the
parties hereto during the term hereof shall be deemed a waiver of, or in any way
affect, the right of either party to insist upon performance and observance by
the other party in strict accordance with the terms hereof.
34. NOTICES. All notices, demands, requests, advices or designations which may
be or are required to be given by either party to the other hereunder shall be
in writing. All notices, demands, requests, advices or designations by Landlord
to Tenant shall be sufficiently given, made or delivered if personally served
on Tenant by leaving the same at the Premises or if sent by United States
certified or registered mail, postage prepaid, addressed to Tenant at the
Premises. All notices, demands, requests, advices or designations by Tenant to
Landlord shall be sent by United States certified or registered mail, postage
prepaid, addressed to Landlord at its offices at Peery/Arrillaga, 2560 Mission
College Blvd., Suite 101, Santa Clara, CA 95054. Each notice, request, demand,
advice or designation referred to in this paragraph shall be deemed received
on the date of the personal service or the date of actual receipt or refusal of
delivery, as the case may be.
35. EXAMINATION OF LEASE. Submission of this instrument for examination or
signature by Tenant does not constitute a reservation of or option for a lease,
and this instrument is not effective as a lease or otherwise until its
execution and delivery by both Landlord and Tenant.
36. DEFAULT BY LANDLORD. Landlord shall not be in default unless Landlord fails
to perform obligations required of Landlord within a reasonable time, but in no
event earlier than thirty (30) days after written notice by Tenant to Landlord
and to the holder of any first mortgage or deed of trust covering the Premises
whose name and address shall have heretofore been furnished to Tenant in
writing, specifying wherein Landlord has failed to perform such obligations;
provided, however, that if the nature of Landlord's obligations is such that
more than thirty (30) days are required for performance, then Landlord shall
not be in default if Landlord commences performance within such thirty (30)
day period and thereafter diligently prosecutes the same to completion.
37. CORPORATE AUTHORITY. If Tenant is a corporation, (or a partnership) each
individual executing this Lease on behalf of said corporation (or partnership)
represents and warrants that he is duly authorized to execute and deliver this
Lease on behalf of said corporation (or partnership) in accordance with the
by-laws of said corporation (or partnership in accordance with the partnership
agreement) and that this Lease is binding upon said corporation (or
partnership) in accordance with its terms. If Tenant is a corporation, Tenant
shall, within thirty (30) days after execution of this Lease, deliver to
Landlord a certified copy of the resolution of the Board of Directors of said
corporation authorizing or ratifying the execution of this Lease.
39. LIMITATION OF LIABILITY. In consideration of the benefits accruing
hereunder, Tenant and all successors and assigns covenant and agree that, in the
event of any actual or alleged failure, breach or default hereunder by Landlord:
(i) the sole and exclusive remedy shall be against Landlord's interest in
the Premises leased herein;
(ii) no partner of Landlord shall be sued or named as a party in any suit or
action (except as may be necessary to secure jurisdiction of the
partnership)
(iii) no service of process shall be made against any partner of Landlord
(except as may be necessary to secure jurisdiction of the partnership)
(iv) no partner of Landlord shall be required to answer or otherwise plead
to any service of process;
(v) no judgment will be taken against any partner of Landlord;
(vi) any judgment taken against any partner of Landlord may be vacated and
set aside at any time without hearing;
(vii) no writ of execution will ever be leveled against the assets of any
partner of Landlord;
(viii) these covenants and agreements are enforceable both by Landlord and
also by any partner of Landlord.
Tenant agrees that each of the foregoing covenants and agreements shall be
applicable to any covenant or agreement either expressly contained in this
Lease or imposed by statute or at common law.
40. MISCELLANEOUS AND GENERAL PROVISIONS
a. Tenant shall not, without the written consent of Landlord, use the name
of the building for any purpose other than as the address of the business
conducted by Tenant in the Premises.
b. This lease shall in all respects be governed by and construed in
accordance with the laws of the State of California. If any provision of
this Lease shall be invalid, unenforceable or ineffective for any reason
whatsoever, all other provisions hereof shall be and remain in full force
and effect.
c. The term "Premises" includes the space leased hereby and any improvements
now or hereafter installed therein or attached thereto. The term "Landlord"
or any pronoun used in place thereof includes the plural as well as the
singular and the successors and assigns of Landlord. The term "Tenant" or
any pronoun used in place thereof includes the plural as well as the
singular and individuals, firms, associations, partnerships and
corporations, and their and each of their respective heirs, executors,
administrators, successors and permitted assigns, according to the context
hereof, and the provisions of this Lease shall inure to the benefit of and
bind such heirs, executors, administrators, successors and permitted
assigns.
The term "person" includes the plural as well as the singular and
individuals, firms, associations, partnerships and corporations. Words used
in any gender include other genders. If there be more than one Tenant the
obligations of Tenant hereunder are joint and several. The paragraph
headings of this Lease are for convenience of reference only and shall have
no effect upon the construction or interpretation of any provision hereof.
d. Time is of the essence of this Lease and of each and all of its
provisions.
[INITIAL STAMP]
/s/ XXXXXX
page 7 of 8
<PAGE> 8
e. At the expiration or earlier termination of this Lease, Tenant shall
execute, acknowledge and deliver to Landlord, within ten (10) days after
written demand from Landlord to Tenant, any quitclaim deed or other
document required by any reputable title company, licensed to operate in
the State of California, to remove the cloud or encumbrance created by
this Lease from the real property of which Tenant's premises are a part.
f. This instrument along with any exhibits and attachments hereto
constitutes the entire agreement between Landlord and Tenant relative to
the Premises and this agreement and the exhibits and attachments may be
altered, amended or revoked only by an instrument in writing signed by
both Landlord and Tenant. Landlord and Tenant agree hereby that all
prior or contemporaneous oral agreements between and among themselves
and their agents or representatives relative to the leasing of the
Premises are merged in or revoked by this agreement.
g. Neither Landlord nor Tenant shall record this Lease or a short form
memorandum hereof without the consent of the other.
h. Tenant further agrees to execute any amendments required by a lender
to enable Landlord to obtain financing, so long as Tenant's rights
hereunder are not substantially affected.
i. Paragraphs 43 through 60 are added hereto and are included as a part
of this lease.
j. Clauses, plats and riders, if any, signed by Landlord and Tenant and
endorsed on or affixed to this Lease are a part hereof.
k. Tenant covenants and agrees that no diminution or shutting off of
light, air or view by any structure which may be hereafter erected
(whether or not by Landlord) shall in any way affect his Lease, entitle
Tenant to any reduction of rent hereunder or result in any liability of
Landlord to Tenant.
41. BROKERS Tenant warrants that it had dealings with only the following real
estate brokers or agents in connection with the negotiation of this Lease: none
----
and that it knows of no other real estate broker or agent who is entitled
to a commission in connection with this Lease.
42. SIGNS No sign, placard, picture, advertisement, name or notice shall be
inscribed, displayed or printed or affixed on or to any part of the outside of
the Premises or any exterior windows of the Premises without the written
consent of Landlord first had and obtained (such consent not be unreasonably
withheld) and Landlord shall have the right to remove any such sign, placard,
picture, advertisement, name or notice without notice to and at the expense of
Tenant. If Tenant is allowed to print or affix or in any way place a sign in,
on, or about the Premises, upon expiration or other sooner termination of this
Lease, Tenant at Tenant's sole cost and expense shall both remove such sign and
repair all damage in such a manner as to restore all aspects of the appearance
of the Premises to the condition prior to the placement of said sign.
All approved signs or lettering on outside doors shall be printed, painted,
affixed or inscribed at the expense of Tenant by a person approved of by
Landlord.
Tenant shall not place anything or allow anything to be placed near the
glass of any window, door partition or wall which may appear unsightly from
outside the Premises. During the Term of this Lease in which Tenant is the sole
occupant of said Premises, Tenant shall be entitled to use the entire monument
sign designated for said Building.
IN WITNESS WHEREOF, Landlord and Tenant have executed and delivered this
Lease as of the day and year last written below.
LANDLORD: TENANT:
ARRILLAGA FAMILY TRUST THE VANTIVE CORPORATION
a California corporation
By /s/ John Arrillaga By /s/ Michael Loo
----------------------------------- -----------------------------------
John Arrillaga, Trustee Michael Loo, Director of Finance
Date: 12/2/96 Date: 28-OCT-96
-------------------------------- --------------------------------
RICHARD T. PEERY SEPARATE PROPERTY TRUST
By /s/ Richard T. Peery
-----------------------------------
Richard T. Peery, Trustee
Date:
--------------------------------
page 8 of 8
<PAGE> 9
Paragraphs 43 through 60 to Lease Agreement Dated September 4, 1996, By and
Between the Arrillaga Family Trust and the Richard T. Peery Separate Property
Trust, as Landlord, and THE VANTIVE CORPORATION, a California corporation, as
Tenant for 24,000 plus/minus Square Feet of Space Located at 3333 Octavius
Drive, Santa Clara, California.
43. BASIC RENT: In accordance with Paragraph 4A herein, the total aggregate
sum of FOUR MILLION THIRTY TWO THOUSAND AND NO/100 DOLLARS ($4,032,000.00),
shall be payable as follows:
On January 1, 1997, the sum of FORTY FOUR THOUSAND FOUR HUNDRED AND
NO/100 DOLLARS ($44,400.00) shall be due, and a like sum due on the first day of
each month thereafter, through and including December 1, 1997.
On January 1, 1998, the sum of FORTY FIVE THOUSAND SIX HUNDRED AND
NO/100 DOLLARS ($45,600.00) shall be due, and a like sum due on the first day
of each month thereafter, through and including December 1, 1998.
On January 1, 1999, the sum of FORTY SIX THOUSAND EIGHT HUNDRED AND
NO/100 DOLLARS ($46,800.00) shall be due, and a like sum due on the first day
of each month thereafter, through and including December 1, 1999.
On January 1, 2000, the sum of FORTY EIGHT THOUSAND AND NO/100 DOLLARS
($48,000.00) shall be due, and a like sum due on the first day of each month
thereafter, through and including December 1, 2000.
On January 1, 2001, the sum of FORTY NINE THOUSAND TWO HUNDRED AND
NO/100 DOLLARS ($49,200.00) shall be due, and a like sum due on the first day of
each month thereafter, through and including December 1, 2001.
On January 1, 2002, the sum of FIFTY THOUSAND FOUR HUNDRED AND NO/100
DOLLARS ($50,400.00) shall be due, and a like sum due on the first day of each
month thereafter, through and including December 1, 2002.
On January 1, 2003 the sum of FIFTY ONE THOUSAND SIX HUNDRED AND NO/100
DOLLARS ($51,600.00) shall be due, and a like sum due on the first day of each
month thereafter, through and including December 1, 2003; or until the entire
aggregate sum of FOUR MILLION THIRTY TWO THOUSAND AND NO/100 DOLLARS
($4,032,000.0) has been paid.
44. "AS-IS" BASIS: Subject only to Paragraphs 51, 52, 53 and 55, it is
hereby agreed that the Premises leased hereunder is leased strictly on an
"as-is" basis and in its present condition, and in the configuration as shown on
Exhibit B attached hereto, and by reference made a part hereof. Except as
specifically noted herein, it is specifically agreed between the parties that
Landlord shall not be required to make, nor be responsible for any cost, in
connection with any repair, restoration, and/or improvement to the Premises in
order for this Lease to commence, or thereafter, throughout the Term of this
Lease. Landlord makes no warranty or representation of any kind or nature
whatsoever as to the condition or repair of the Premises, nor as to the use or
occupancy which may be made thereof.
45. CONSENT: Whenever the consent of one party to the other is required
hereunder, such consent shall not be unreasonably withheld.
46. CHOICE OF LAW: SEVERABILITY. This Lease shall in all respects be
governed by and construed in accordance with the XXXXXX.
If any provisions of this Lease shall be invalid, unenforceable, or ineffective
for any reason whatsoever, all other provisions hereof shall be and remain in
full force and effect.
47. AUTHORITY TO EXECUTE. The parties executing this Lease Agreement hereby
warrant and represent that they are properly authorized to execute this Lease
Agreement and bind the parties on behalf of whom they execute this Lease
Agreement and to all of the terms, covenants and conditions of this Lease
Agreement as they relate to the respective parties hereto.
[INITIAL STAMP]
/s/ XXXXXX
Page 9
<PAGE> 10
48. ASSESSMENT CREDITS: The demised property herein may be subject to a
special assessment levied by the City of Santa Clara as part of an Improvement
District. As a part of said special assessment proceedings (if any),
additional bonds were or may be sold and assessments were or may be levied to
provide for construction contingencies and reserve funds. Interest shall be
earned on such funds created for contingencies and on reserve funds which will
be credited for the benefit of said assessment district. To the extent
surpluses are created in said district through unused contingency funds,
interest earnings or reserve funds, such surpluses shall be deemed the property
of Landlord. Notwithstanding that such surpluses may be credited on assessments
otherwise due against the Leased Premises, Tenant shall pay to Landlord, as
additional rent if, and at the time of any such credit of surpluses, an amount
equal to all such surpluses so credited. For example: if (i) the property is
subject to an annual assessment of $1,000.00, and (ii) a surplus of $200.00 is
credited towards the current year's assessment which reduces the assessment
amount shown on the property tax bill from $1,000.00 to $800.00, Tenant shall,
upon receipt of notice from Landlord, pay to Landlord said $200.00 credit as
Additional Rent.
49. ASSIGNMENT AND SUBLETTING:
A. Subject to Paragraph 49B below, Tenant shall not assign, transfer, or
hypothecate the leasehold estate under this Lease, or any interest therein, and
shall not sublet the Premises, or any part thereof, or any right or privilege
appurtenant thereto, or suffer any other person or entity to occupy or use the
Premises, or any portion thereof, without, in each case, the prior written
consent of Landlord which consent shall not be unreasonably withheld. As a
condition for granting this consent to any assignment, transfer, subletting or
sub-subletting, Landlord may require that Tenant agrees to pay to Landlord, as
Additional Rent, fifty percent (50%) of all rents or additional consideration
(net of reasonable third party broker fees) received by Tenant from its
assignees, transferees, subtenants, and/or sub-subtenants (if any, which in any
and all cases require the written approval of Landlord) in excess of the rent
payable by Tenant to Landlord hereunder. Tenant shall, by thirty (30) days
written notice, advise Landlord of its intent to assign or transfer Tenant's
interest in the Lease or sublet the Premises or any portion thereof for any part
of the term hereof. Within two (2) weeks after receipt of said written notice,
Landlord may, at its sole discretion, elect to terminate this Lease as to the
portion of the Premises described in Tenant's notice on the date specified in
Tenant's notice by giving written notice of such election to terminate; however,
Tenant may, within three (3) business days after receipt of such election by
Landlord, rescind its request to assign or transfer Tenant's interest in the
Lease by providing Landlord written notice thereof, in which event Landlord's
election to terminate shall be null and void. If no such notice to terminate is
given to Tenant within said two (2) week period, Tenant may proceed to locate an
acceptable sublessee, assignee, or other transferee for presentment to Landlord
for Landlord's approval, all in accordance with the terms, covenants and
conditions of this Paragraph. If Tenant intents to sublet the entire Premises
and Landlord elects to terminate this Lease, this Lease shall be terminated on
the date specified in Tenant's notice. If, however, this Lease shall terminate
pursuant to the foregoing with respect to less than all the Premises, the rent,
as defined and reserved hereinabove shall be adjusted on a pro rata basis to the
number of square feet retained by Tenant, and this Lease as so amended shall
continue in full force and effect. In the event Tenant is allowed to assign,
transfer or sublet the whole or any part of the Premises, with the prior written
consent of Landlord, which consent shall not be unreasonably withheld, no
assignee, transferee, subtenant or sub-subtenant shall assign or transfer this
Lease, either in whole or in part, or sublet the whole or any part of the
Premises, without also having obtained the prior written consent of Landlord,
which consent shall not be unreasonably withheld. A consent of Landlord to one
assignment, transfer, hypothecation, subletting, sub-subletting, occupation or
use by any other person shall not release Tenant from any of Tenant's
obligations hereunder or be deemed to be a consent to any subsequent similar or
dissimilar assignment, transfer, hypothecation, subletting, sub-subletting,
occupation or use by any other person. Any such assignment, transfer,
hypothecation, subletting, sub-subletting, occupation or use without such
consent shall be void and shall constitute a breach of this Lease by Tenant and
shall, at the option of Landlord exercised by written notice to Tenant,
terminate this Lease. The leasehold estate under this Lease shall not, nor
shall any interest therein, be assignable for any purpose by operation of law
without the written consent of Landlord, which consent shall not be unreasonably
withheld. As a condition XXXX may require Tenant to pay all expenses in
connection with the assignment, and Landlord may require Tenant's assignee or
transferee (or other assignees or transferees) to assume in writing all of the
obligations under this Lease and for Tenant to remain liable to Landlord under
the Lease.
B. In addition to and notwithstanding anything to the contrary in
Paragraph 49A above, Tenant shall be entitled to assign or sublet without
Landlord's consent (but shall still give Landlord notice thereof) to: (i) any
parent or subsidiary corporation, or corporation with which Tenant merges or
consolidates, or (ii) any third party or entity to whom Tenant sells all or
substantially all of its assets; provided, that the net worth of the resulting
or acquiring corporation has a net worth after the merger.
[INITIAL STAMP]
/s/ XXXXXX
---------------
Page 10
<PAGE> 11
consolidation or acquisition equal to or greater than the net worth of Tenant at
the time of such merger, consolidation or acquisition. No such assignment or
subletting will release the Tenant from its liability and responsibility under
this Lease to the extent Tenant continues in existence following such
transaction.
C. Any and all sublease agreement(s) between Tenant and any and all
subtenant(s) (which agreements must be consented to by Landlord, pursuant to
the requirements of this Lease) shall contain the following language:
"If Landlord and Tenant jointly and voluntarily elect, for any
reason whatsoever, to terminate the Master Lease prior to the scheduled
Master Lease termination date, then this Sublease (if then still in
effect) shall terminate concurrently with the termination of the Master
Lease. Subtenant expressly acknowledges and agrees that (1) the
voluntary termination of the Master Lease by Landlord and Tenant and the
resulting termination of this Sublease shall not give Subtenant any
right or power to make any legal or equitable claim against Landlord,
including without limitation any claim for interference with contract or
interference with prospective economic advantage, and (2) Subtenant
hereby waives any and all rights it may have under law or at equity
against Landlord to challenge such an early termination of the Sublease,
and unconditionally releases and relieves Landlord, and its officers,
directors, employees and agents, from any and all claims, demands,
and/or causes of action whatsoever (collectively, "Claims"), whether
such matters are known or unknown, latent or apparent, suspected or
unsuspected, foreseeable or unforeseeable, which Subtenant may have
arising out of or in connection with any such early termination of this
Sublease. Subtenant knowingly and intentionally waives any and all
protection which is or may be given by Section 1542 of the California
Civil Code which provides as follows: "A general release does not extend
to claims which the creditor does not know or suspect to exist in his
favor at the time of executing the release, which if known by him must
have materially affected his settlement with debtor.
The term of this Sublease is therefore subject to early
termination. Subtenant's initials here below evidence (a) Subtenant's
consideration of and agreement to this early termination provision, (b)
Subtenant's acknowledgment that, in determining the net benefits to be
derived by Subtenant under the terms of this Sublease, Subtenant has
anticipated the potential for early termination, and (c) Subtenant's
agreement to the general waiver and release of Claims above.
Initials: Initials: "
----------- -----------
Subtenant Tenant
50. HAZARDOUS MATERIALS: Landlord and Tenant agree as follows with respect
to the existence or use of "Hazardous Materials" (as defined herein) on, in,
under or about the Premises and real property located beneath said Premises
(hereinafter collectively referred to as the "Property") and the Complex:
A. As used herein, the term "Hazardous Materials" shall mean any
hazardous or toxic substance, material or waste which is or becomes subject to
or regulated by any local governmental authority, the State of California, or
the United States Government. The term "Hazardous Materials" includes, without
limitation any material or hazardous substance which is (i) listed under
Article 9 or defined as "hazardous" or "extremely hazardous" pursuant to
Article 11 of Title 22 of the California Administrative Code, Division 4,
Chapter 30, (ii) listed or defined as a "hazardous waste" pursuant to the
Federal Reserve Resource Conservation and Recovery Act, Section 42 U.S.C.
Section 6901 et. seq., (iii) listed or defined as a "hazardous substance"
pursuant to the Comprehensive Environmental Response, Compensation and
Liability Act, 42 U.S.C. Section 9601 et. seq. (42 U.S.C. Section 9601),
(iv) petroleum or any derivative of petroleum, or (v) asbestos.
B. Subject to the terms of this Paragraph 50, Tenant shall have no
obligation to "clean up", reimburse, release indemnify [xxxx] respect to any
Hazardous Materials or wastes which Tenant (prior to and during the term of the
Lease) or other parties on the Property (during the term of this Lease) did not
store, dispose, or transport in, use, or cause to be on the Property in
violation of applicable law.
C. Tenant will be 100 percent liable and responsible for: (i) any and
all "cleanup" of said Hazardous Materials contamination which Tenant, its
agents, employees, contractors, invitees or its future subtenants and/or
assignees (if any), or other parties (other than Landlord or Landlord's
employees, agents, contractors or invitees) on the Property, does store,
dispose, or transport in, use or cause to be on the Property and which Tenant,
its agents, employees, contractors, invitees or its future
[INITIAL STAMP]
Page 11 /s/ XXXXX
--------
<PAGE> 12
subtenants and/or assignees (if any), or other parties on the Property, does
store, dispose, or transport in, use or cause to be on the Property, and (ii)
any claims, including third party claims, resulting from such Hazardous
Materials contamination described in clause (i) above. Tenant shall indemnify
Landlord and hold Landlord harmless from any liabilities, demands, costs,
expenses and damages, including, without limitation, attorney fees incurred as
a result of any claims resulting from such Hazardous Materials contamination
described in clause (i) above.
D. Tenant also agrees not to use or dispose of any Hazardous Materials
on the Property or the Complex without first obtaining Landlord's written
consent, except for the normal use in day-to-day operations of substances which
are substances which in certain strengths or quantities would be deemed
hazardous Materials, but which are typical for office use (e.g., so-called
"liquid paper", copier toner, etc.). In the event consent is granted by
Landlord, Tenant agrees to complete compliance with governmental regulations,
and prior to the termination of said Lease Tenant agrees to follow the proper
closure procedures and will obtain a clearance from the local fire department
and/or the appropriate city agency. If Tenant uses Hazardous Materials, Tenant
also agrees: (i) to install, at Tenant's expense, such Hazardous Materials
monitoring devices as Landlord reasonably deems necessary and (ii) at Tenant's
sole cost and expense, each year upon the anniversary of the Commencement Date
of the Lease Term ("Anniversary Date"), to hire a qualified environmental
consultant, acceptable to Landlord, to evaluate whether Tenant is in compliance
with all applicable Governmental Regulations pertaining to Hazardous Materials.
Tenant shall submit to Landlord a report from such environmental consultant
which discusses the environmental consultant's findings within two (2) months
of each Anniversary Date. Tenant shall promptly take all steps necessary to
correct any and all problems identified by the environmental consultant and
provide Landlord with documentation of all such corrections. It is agreed that
the Parties' responsibilities related to Hazardous Materials will survive the
Termination Date of the Lease and that Landlord may obtain specific performance
of Tenant's responsibilities under this Paragraph 50.
51. MAINTENANCE OF THE PREMISES:
A. Roof: In addition to, and notwithstanding anything to the contrary
in Paragraphs 10, 44, and 55 Landlord shall, during the first six (6) months of
the Term of this Lease, be responsible for any costs for repair or damage (but
not maintenance) to the roof membrane covering the Leased Premises; provided
that if Tenant has caused such damage, Tenant shall be responsible for one
hundred (100%) percent of any such costs for repair or damage to the roof
membrane so caused by Tenant. Following the expiration of such six (6) month
period Tenant shall be responsible for paying one hundred percent (100%) of the
cost of repairs, maintenance and the replacement of the roof membrane
throughout the Term of the Lease as described in Paragraphs 4(D) and 7 above.
B. Building Systems: In addition to, and notwithstanding anything to
the contrary contained in Paragraphs 10 and 45, Landlord shall repair or cause
to be repaired, at Landlord's expense, any necessary repairs, as reasonably
determined by Landlord, (excluding maintenance) to the HVAC system, plumbing
and standard electrical wiring during the first six (6) month period in the
initial Lease Term, provided however, any repair resulting from Tenant's use
will be paid for one hundred (100%) percent by Tenant. Tenant shall notify
Landlord of any such necessary repairs and Landlord will approve such repairs
and the related cost before such repairs are made.
52. AMORTIZATION OF CAPITAL IMPROVEMENTS: Notwithstanding anything to the
contrary in Paragraphs 7 and 10, Landlord shall amortize the cost of capital
improvements (if any) as an operating expense in accordance with standard
accounting practices and Tenant shall pay its pro rata share of said capital
improvement cost based on the remaining Term (and/or extended Term, if any) of
the Lease. For example: (i) Landlord incurs capital improvement costs of
$10,000 one year prior to Lease Termination Date, and (ii) said capital
improvement's life is ten (10) years; Tenant shall pay upon receipt of invoice
from Landlord its pro rata share of $1,000.00).
In the event the Term of the Lease is extended XXXXXX pro rata share of the
capital improvement cost shall be increased to include the additional amount
payable to Landlord due to the Extended Term of the Lease. For Example: In the
event: (i) Landlord incurred capital improvement costs illustrated above; and
(ii) this Lease is extended for an additional three year period, Tenant would be
liable for an additional payment to Landlord of $3,000.00 as Additional Rent.
Said payment would be due in full immediately upon Tenant's execution of Lease
documentation related to said Lease extension.
Page 12
<PAGE> 13
53. COMPLIANCE (CONTINUED): Any non-conformance of the Tenant Improvements
installed and paid for by Landlord as set forth on Exhibit B, required to be
corrected by a governing agency, shall be corrected at the cost and expense of
Landlord if such non-conformance exists as of the Commencement Date of the
Lease and further provided that such governing agency's requirement to correct
the non-conformance is not initiated as a result of: (i) any future
improvements made by Tenant; or (ii) any permit request made to a governing
agency by Tenant. Any non-conformance of the Premises occurring after the
Commencement Date of this Lease Agreement shall be the responsibility of Tenant
to correct at Tenant's cost and expense.
54. ADDITIONAL RENT (CONTINUED): Notwithstanding anything to the contrary
in Paragraph 4D, Landlord shall provide a written reconciliation in reasonable
detail of the foregoing expenses within one hundred twenty (120) days after the
end of each calendar year, or more frequently if Landlord elects to do so, at
Landlord's sole and absolute discretion. Within thirty (30) days after receipt
of Landlord's reconciliation, Tenant shall have the right, at Tenant's sole
expense, to audit, at a mutually convenient time at Landlord's office,
Landlord's records relating to the foregoing expenses. Such audit must be
conducted by Tenant or an independent nationally recognized accounting firm
that is not being compensated by Tenant or other third party on a contingency
fee basis. If such audit reveals that Landlord has overcharged Tenant, the
amount overcharged shall be credited to Tenant's account within thirty (30)
days after the audit is concluded. If the audit reveals Tenant has been
undercharged, Tenant shall pay the amount of the undercharge within thirty (30)
days of receipt of a statement from Landlord.
The following items shall be excluded from "Additional Rent":
A. Any expense reasonably allocable to a particular building in the
Complex, rather than to the Complex as a whole; provided
however, that any expense incurred by Landlord for Tenant's
Leased Premises shall be included as Additional Rent.
B. Leasing commissions, attorney's fees, costs, disbursements, and
other expenses incurred in connection with negotiations with
other tenants, or disputes between Landlord and other tenants,
or in connection with marketing, leasing, renovating, or
improving space for other current or prospective tenants or
other current or prospective occupants of the Complex.
C. The cost of any service sold to any other tenant or other
occupant for which Landlord is entitled to be reimbursed as an
additional charge or rental over and above the basic rent and
additional rent payable under the lease agreement with said
other tenant or other occupant (including, without limitation,
after-hours HVAC costs or over-standard electrical consumption
costs incurred by other tenants or occupants).
D. Any costs for which Landlord is reimbursed by others.
E. Any costs, fines, or penalties incurred due to violations by
Landlord of any governmental rule or authority.
F. Management costs to the extent they exceed two percent (2%) of
the monthly Basic Rent due under the Lease.
G. Wages, salaries, or other compensation paid to executive
employees above the grade of Property Manager.
H. The cost of correcting any building code or other violations
which are violations prior to the Lease Commencement Date and
which violations were not caused by or contributed to by Tenant.
I. Repairs or other works XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX
XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX casualty or hazard, to the
extent that Landlord shall receive proceeds of such insurance or
would have received such proceeds had Landlord maintained the
insurance coverage required under this Lease.
J. Repairs or building necessitated by condemnation.
K. Depreciation and amortization, other than as permitted pursuant
to this Lease.
L. Except as otherwise noted in this Lease, debt service payments
on any indebtedness
<PAGE> 14
applicable to the Complex or any portion thereof, including any
mortgage debt, or ground rents or any other amounts payable
under any ground lease for the Property.
M. Space planning fees and commissions.
N. Any amounts paid to any person, firm, or corporation related or
otherwise affiliated with Landlord or any general partner,
officer, or director of Landlord or any general partners,
to the extent same exceeds arms-length competitive prices paid
in the Santa Clara, California metropolitan area for the
services or goods provided.
55. COMMON AREA MAINTENANCE: Subject to Paragraph 5, ("Rules and
Regulations and Common Area") and Paragraph 7, ("Expenses of Operation,
Management, and Maintenance of the Common Areas of the Complex and Building in
Which the Premises are Located"), Landlord shall maintain or cause to be
maintained and repaired the Common Areas of the Complex (such as Common Area
elevators, stairs, corridors, restrooms and sidewalks), all landscaping,
parking areas and all portions of the Complex, the maintenance of which is not
the express obligation of Tenant or other occupants of the Complex, and Tenant
shall pay its pro rata share of said costs and expenses for said maintenance
and repairs.
56. SUBORDINATION AND MORTGAGES (CONTINUED): Notwithstanding anything to
the contrary contained in Paragraph 20 of this Lease, Tenant's agreement to
subordinate to any existing or future lender shall be conditional upon the
receipt by Tenant of a non-disturbance agreement on such lender's commercially
reasonable form, executed by Landlord and such lender.
57. ENTRY BY LANDLORD (CONTINUED): Notwithstanding anything to the contrary
contained in Paragraph 21 of this Lease. Tenant shall have the right to require
that Landlord be accompanied by a representative of Tenant during any entry of
the Premises pursuant to the provisions of Paragraph 21 of the Lease (except in
the case of emergency).
58. SALE OR CONVEYANCE BY LANDLORD (CONTINUED): Notwithstanding anything to
the contrary in the Lease, if Landlord sells or otherwise conveys its interest
in the Premises, Landlord shall not be relieved of its obligation under the
Lease, unless and until Landlord transfers the balance of Tenant's Security
Deposit (if any) to its successor and the successor assumes in writing
Landlord's obligations under the Lease.
59. OPTION TO EXTEND LEASE FOR FIVE (5) YEARS: Provided Tenant is not in
default (pursuant to Paragraph 22 of the Lease, i.e., Tenant has received
notice and any applicable cure period has expired without cure) of any of
the terms, covenants, and conditions of this Lease Agreement, Landlord hereby
grants to Tenant an Option to Extend this Lease Agreement for an additional
five (5) year period (the "Extended Term") upon the following terms and
conditions:
A. Tenant shall give Landlord written notice of Tenant's exercise of this
Option to Extend not later than twelve (12) months prior to the scheduled Lease
Termination Date, which date is currently projected to be December 31, 2003, in
which event the Lease shall be considered extended for an additional five (5)
years subject to the Basic Rental set forth below and with: (i) the terms and
conditions subject to amendment by Landlord (Landlord, in its sole and absolute
discretion, may, but is not required to, incorporate its current Lease
provisions that are standard in Landlord's leases as of the date of Tenant's
exercise of its Option to Extend) and (ii) this Paragraph 59 deleted. In the
event that Tenant fails to timely exercise Tenant's option as set forth herein
in writing. Tenant shall have no further Option to extend this lease OEL, and
this lease shall continue in full force and effect for the full remaining term
hereof, absent this Paragraph 59.
B. The following summarizes the Basic Monthly Rental and the related per
square foot charge by period under the Lease Agreement that would be applied to
the Extended Term:
Page 14
[INITIAL STAMP]
/s/ XXXXX
---------
<PAGE> 15
<TABLE>
<CAPTION>
Monthly
Period PSF Rate Basic Rental
<S> <C> <C>
01/01/04 - 12/31/04 $2.20 $52,800.00
01/01/05 - 12/31/05 $2.25 $54,000.00
01/01/06 - 12/31/06 $2.30 $55,200.00
01/01/07 - 12/31/07 $2.35 $56,400.00
01/01/08 - 12/31/08 $2.40 $57,600.00
</TABLE>
C. The option rights of Tenant under this Paragraph 59, and the Extended Term
thereunder, are granted for Tenant's personal benefit and may not be assigned or
transferred by Tenant, (except to a parent or subsidiary corporation, or
corporation with which Tenant merges or consolidates or to whom Tenant sells
all or substantially all of its assets as provided for in Paragraph 49), either
voluntarily or by operation of law, in any manner whatsoever. In the event that
Landlord consents to a sublease or assignment under Paragraph 49, the option
granted herein and any Extended Term thereunder shall be void and of no force
and effect, whether or not Tenant shall have purported to exercise such option
prior to such assignment or sublease.
D. INCREASED SECURITY DEPOSIT: In the event the term of Tenant's Lease is
extended pursuant to this Paragraph 59, Tenant's Security Deposit shall be
increased to equal twice the Basic Rental due for the last month of the
extended term (i.e., $57,600.00 per month X 2 = $115,200.00).
60. MAINTENANCE OF THE PREMISES: Notwithstanding anything to the contrary in
Paragraph 10, Landlord shall repair damage to the structural shell, foundation,
and roof structure (but not the interior improvements, roof membrane, or
glazing) of the building leased hereunder at Landlord's cost and expense
provided Tenant has not caused such damage, in which event Tenant shall be
responsible for 100 percent of any such costs for repair or damage so caused by
the Tenant. Notwithstanding the foregoing, a crack in the foundation, or
exterior walls that does not endanger the structural integrity of the building,
or which is not life-threatening, shall not be considered material, and shall
not require either Landlord or Tenant to repair the same (unless Tenant has
caused the damage, in which case Tenant shall be responsible for the cost of
said repair(s) regardless of how minor said repair(s) may be).
[INITIALS]
<PAGE> 16
PARK SQUARE - PHASE 2
BUILDINGS 1-6
SANTA CLARA, CALIFORNIA 95051
PEERY/LANDLORD
EXHIBIT A TO LEASE AGREEMENT DATED SEPTEMBER 4, 1996 BY AND BETWEEN THE
ARRILLAGA FAMILY TRUST AND THE RICHARD T. PEERY SEPARATE PROPERTY TRUST, AS
LANDLORD AND VANTIVE CORPORATION, AS TENANT.
[SITE PLAN DIAGRAM] [INITIAL STAMP]
/s/ XXXXX
<PAGE> 17
[FLOOR PLAN 3333 OCTAVIUS ST. SANTA CLARA, CA]
EXHIBIT B TO LEASE AGREEMENT DATED SEPTEMBER 4, 1996 BY AND BETWEEN THE
ARRILLAGA FAMILY TRUST AND THE RICHARD T. PEERY SEPARATE PROPERTY TRUST, AS
LANDLORD AND THE VANTIVE CORPORATION, AS TENANT.
[INITIAL STAMP]
/s/ XXXXX
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<EXCHANGE-RATE> 1
<CASH> 26,017,000
<SECURITIES> 6,853,000
<RECEIVABLES> 14,555,000
<ALLOWANCES> 780,000
<INVENTORY> 0
<CURRENT-ASSETS> 51,137,000
<PP&E> 9,149,000
<DEPRECIATION> 2,385,000
<TOTAL-ASSETS> 58,364,000
<CURRENT-LIABILITIES> 18,178,000
<BONDS> 0
0
0
<COMMON> 24,000
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 58,364,000
<SALES> 41,513,000
<TOTAL-REVENUES> 64,274,000
<CGS> 392,000
<TOTAL-COSTS> 12,655,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 455,000
<INTEREST-EXPENSE> 159,000
<INCOME-PRETAX> 15,579,000
<INCOME-TAX> 4,674,000
<INCOME-CONTINUING> 10,905,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 10,905,000
<EPS-PRIMARY> 0.42
<EPS-DILUTED> 0.42
</TABLE>
