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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington DC 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from __________ to __________
Commission File Number: 0-26592
THE VANTIVE CORPORATION
(Exact name of registrant as specified in its charter)
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<S> <C>
DELAWARE 77-0266662
State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
</TABLE>
2455 AUGUSTINE DRIVE
SANTA CLARA, CALIFORNIA 95054
(408) 982-5700
(Address and telephone number of principal executive offices)
Indicate by check mark whether registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for the shorter period that the registrant was
required to file these reports), and (2) has been subject to the filing
requirements for the past 90 days.
YES X NO
--- ---
The number of shares of the Registrant's $0.001 par value Common Stock
outstanding on November 11, 1998 was 26,235,795.
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THE VANTIVE CORPORATION
FORM 10-Q
TABLE OF CONTENTS
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PAGE NO.
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PART I: FINANCIAL INFORMATION
Item 1: Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets as of 3
September 30, 1998 and December 31, 1997
Condensed Consolidated Statements of Operations 4
for the Three Months Ended September 30, 1998 and 1997, and
Nine Months Ended September 30, 1998 and 1997
Condensed Consolidated Statements of Cash Flows 5
for the Nine Months Ended September 30, 1998 and 1997
Notes to Condensed Consolidated Financial Statements 6
Item 2: Management's Discussion and Analysis of Financial 9
Condition and Results of Operations
PART II: OTHER INFORMATION
Item 1: Legal Proceedings 25
Item 2: Changes in Securities 25
Item 3: Defaults upon Senior Securities 25
Item 4: Submissions of Matters to a Vote of Security Holders 25
Item 5: Other Information 25
Item 6: Exhibits and Reports on Form 8-K 25
Signatures 27
</TABLE>
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PART I: FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
THE VANTIVE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
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<CAPTION>
September 30, December 31,
------------- ------------
1998 1997
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<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 35,291 $ 77,583
Short-term investments 55,881 23,800
Accounts receivable, net 41,480 33,295
Prepaid expenses and other current assets 14,197 11,896
------------- ------------
Total current assets 146,849 146,574
Property and equipment, net 22,366 12,465
Other assets 6,604 3,700
============= ============
TOTAL ASSETS $ 175,819 $ 162,739
============= ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 11,031 $ 3,680
Accrued liabilities 16,158 23,868
Current portion of capital lease obligations 437 270
Deferred revenues 15,271 9,827
------------- ------------
Total current liabilities 42,897 37,645
Convertible debt 69,000 69,000
Capital lease obligations, net of current portion 2 25
Other 227 337
STOCKHOLDERS' EQUITY:
Preferred Stock: $.001 par value, 2,000,000 shares authorized;
no shares issued and outstanding at September 30, 1998 -- --
Common Stock: $.001 par value, 50,000,000 shares authorized;
26,131,763 shares at September 30, 1998 and 25,275,191 shares
at December 31, 1997 issued and outstanding 26 25
Additional paid-in-capital 67,404 56,741
Cumulative translation adjustment 517 (98)
Accumulated deficit (4,254) (936)
------------- ------------
Total stockholders' equity 63,693 55,732
============= ============
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 175,819 $ 162,739
============= ============
</TABLE>
3
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THE VANTIVE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- --------------------------------
1998 1997 1998 1997
----------- ----------- ------------- --------------
(unaudited) (unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C>
REVENUES:
License $ 21,736 $ 19,889 $ 63,435 $ 51,808
Service 19,940 11,199 52,263 27,813
---------- ----------- ---------- ---------
Total revenues 41,676 31,088 115,698 79,621
COST OF REVENUES:
License 537 210 856 512
Service 10,902 6,444 29,151 15,463
---------- ----------- ---------- ---------
Total cost of revenues 11,439 6,654 30,007 15,975
---------- ----------- ---------- ---------
GROSS MARGIN 30,237 24,434 85,691 63,646
OPERATING EXPENSES:
Sales and marketing 17,744 11,811 48,061 32,147
Research and development 7,803 4,689 19,982 11,598
General and administrative 3,059 2,413 8,921 6,169
Acquired in-process research and development -- 21,121 8,206 21,121
Acquisition-related compensatory expense 179 -- 1,469 --
---------- ----------- ---------- ---------
Total operating expenses 28,785 40,034 86,639 71,035
INCOME (LOSS) FROM OPERATIONS 1,452 (15,600) (948) (7,389)
OTHER INCOME 75 376 499 1,133
---------- ----------- ---------- ---------
INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES 1,527 (15,224) (449) (6,256)
PROVISION FOR INCOME TAXES 565 2,178 2,870 5,492
---------- ----------- ---------- ---------
NET INCOME (LOSS) $ 962 $ (17,402) $ (3,319) $ (11,748)
---------- ----------- ---------- ---------
NET INCOME (LOSS) PER BASIC SHARE $ 0.04 $ (0.71) $ (0.13) $ (0.48)
========== =========== ========== =========
NET INCOME (LOSS) PER DILUTED SHARE $ 0.04 $ (0.71) $ (0.13) $ (0.48)
========== =========== ========== =========
BASIC - SHARES USED IN PER SHARE COMPUTATION 26,039 24,632 25,696 24,363
========== =========== ========== =========
DILUTED - SHARES USED IN PER SHARE COMPUTATION 26,747 24,632 25,696 24,363
========== =========== ========== =========
</TABLE>
See accompanying notes
4
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THE VANTIVE CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands)
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Nine Months Ended September 30,
-------------------------------
1998 1997
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(unaudited) (unaudited)
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (3,319) $ (11,748)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Acquired in-process research and development 8,206 21,121
Acquisition-related compensatory expense 1,290 --
Depreciation and amortization 4,019 1,829
Provision for sales allowances and doubtful accounts 656 649
Changes in net assets and liabilities -
Increase in accounts receivable (9,041) (8,469)
Increase in prepaid expenses and other current assets (2,064) (2,090)
Increase in other assets (720) (3,188)
Increase (decrease) in accounts payable/accrued liabilities (5,527) 7,483
Decrease in long-term liabilities (2,268) (89)
Increase in deferred revenues 4,552 1,097
------------- -------------
Net cash provided by (used in) operating activities (4,216) 6,595
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of short-term investments (32,078) (2,942)
Purchase of property and equipment (11,318) (5,904)
------------- -------------
Net cash used in investing activities (43,396) (8,846)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of convertible debt -- 69,000
Proceeds from issuance of common stock 4,958 1,368
Repurchase of common stock -- (2)
Payments on capital lease obligations (252) (237)
------------- -------------
Net cash provided by financing activities 4,706 70,129
------------- -------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (42,906) 67,878
EFFECT OF EXCHANGE RATE CHANGES ON CASH 614 (39)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 77,583 26,017
============= =============
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 35,291 $ 93,856
============= =============
</TABLE>
See accompanying notes
5
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THE VANTIVE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The consolidated financial statements included herein have been prepared by
the Company, without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to the
rules and regulations. The Company believes the disclosures included in the
unaudited consolidated financial statements, when read in conjunction with the
financial statements and the notes thereto included in the Company's Annual
Report on Form 10-K for the year ended December 31, 1997, are adequate to make
the information presented not misleading.
The unaudited consolidated financial statements included herein reflect all
adjustments, which are in the opinion of the Company's management, necessary for
a fair presentation of the information for the periods presented. These
adjustments are of a normal, recurring nature. Operating results for the three
and nine months ended September 30, 1998 are not necessarily indicative of the
results expected for any future periods.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries. All inter-company accounts and transactions
have been eliminated in consolidation.
Cash and Cash Equivalents
For purposes of the Statements of Cash Flows, the Company considers all
highly liquid investments with an original maturity of 90 days or less to be
cash equivalents. Cash equivalents primarily consist of certificates of deposit,
money market accounts, treasury bills and commercial paper with a maturity of
less than 90 days.
Investments
The Company accounts for its investments under the provision of Statement
of Financial Accounting Standards No. 115 (SFAS 115), "Accounting for Certain
Investments in Debt and Equity Securities." The Company has classified all
marketable debt securities and long-term debt investments as held-to-maturity
and has accounted for these investments at amortized cost. The Company currently
has the intent and believes it has the ability to hold these securities until
maturity.
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 customer
support, consulting and training services performed for customers that license
its products.
Revenues from software license agreements are recognized upon shipment of
the software if collection is probable, payment is due within one year, the fee
is fixed or determinable and vendor specific evidence exists to allocate the
total fee to all elements of the arrangement. If an acceptance period is
required, revenues are recognized upon the earlier of customer acceptance or the
expiration of the acceptance period. If significant post-delivery obligations
exist or if a product is subject to customer acceptance, revenues are deferred
until no significant
6
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obligations remain or acceptance has occurred. Revenues from services have to
date consisted primarily of consulting revenues, customer support revenues and,
to a lesser extent, training revenues. 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 re-licensing the Company's products to
end-users. In certain circumstances, sublicense fees are recognized upon the
initial sale if all products subject to sublicensing are shipped in the current
period, no rights of return policy exists, collection is probable, payment is
due within one year, and fee is fixed or determinable. If these conditions are
not met, the Company does not recognize sublicense fees until reported by the
reseller in re-licensing the Company's products to end-users.
Revenues from customer support services are recognized ratably over the
term of the support period. If customer support services are included free or at
a discount in a license agreement, these amounts are allocated out of the
license fee at their fair market value based on the value established by
independent sale of the customer support services to customers. Consulting
revenues are primarily related to implementation services performed on a time
and materials basis under separate service arrangements related to the
installation of the Company's software products. Revenues from consulting and
training services are recognized as services are performed. If a transaction
includes both license and service elements, license fee revenue is recognized
upon shipment of the software, provided services do not include significant
customization or modification of the base product and the payment 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 includes the cost of royalties due on embedded
third-party licenses, cost of product media, product duplication and manuals.
Cost of service revenues is primarily comprised of employee-related costs and
fees for third-party consultants incurred in providing consulting, customer
support and training services.
Deferred revenues primarily relate to customer support fees, which have
been paid by the customers prior to the performance of these services.
Software Development Costs
The Company capitalizes internally generated software development costs
under the provision of Statement of Financial Accounting Standards No. 86 (SFAS
86), "Accounting for Costs of Computer Software to be Sold, Leased or Otherwise
Marketed." Capitalization of computer software development costs begins upon the
establishment of technological feasibility, which the Company has defined as
completion of a working model. Internally generated capitalizable software
development costs have not been material for the periods presented and thus, the
Company has charged its software development costs to research and development
expense in the accompanying condensed consolidated statements of operations.
Earnings per Share:
Statement of Financial Accounting Standards No. 128 (SFAS 128), "Earnings
per Share," requires companies to compute net income per share under two
different methods, basic and diluted per share data, for all periods for which
an income statement is presented. Basic earnings per share is computed by
dividing net income by the weighted average number of common shares outstanding
for the periods ended September 30, 1998 and 1997. Diluted earnings per share
reflects the potential dilution that could occur if the income were divided by
the weighted-average number of common and potential common stock equivalent
shares outstanding during the period. Diluted earnings per share is computed by
dividing net income by weighted average number of common shares and common stock
equivalents from outstanding stock options for the three month period ended
September 30, 1998. Common stock equivalents are calculated using the treasury
stock method and represent incremental shares issuable upon exercise of the
Company's outstanding options. For the nine months ended September 30, 1998, and
the three and nine months ended September 30, 1997, net loss per diluted share
is based on weighted average common shares and excludes any common stock
equivalents as they would be anti-dilutive due to the reported loss. The
following table provides a reconciliation of the numerators and denominators
used in calculating basic and diluted earnings per share for the three and nine
months ended September 30, 1998 and 1997.
7
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Three Months Ended September 30, Nine Months Ended September 30,
- ------------------------------------------------------------------------------------------------------------------------------------
1998 1997 1998 1997
------------ ----------- -------------- -------------
<S> <C> <C> <C> <C>
Net income (loss) $ 962 $ (17,402) $ (3,319) $ (11,748)
Basic Earnings Per Share:
Income (loss) available to common shareholders $ 962 $ (17,402) $ (3,319) $ (11,748)
Weighted average common shares outstanding 26,039 24,632 25,696 24,363
Basic earnings (loss) per share $ 0.04 $ (0.71) $ (0.13) $ (0.48)
Diluted Earnings Per Share:
Income (loss) available to common shareholders $ 962 $ (17,402) $ (3,319) $ (11,748)
Weighted average common shares outstanding 26,039 24,632 25,696 24,363
Common stock option grants 708 - - -
Total weighted average common shares and equivalents 26,747 24,632 25,696 24,363
Diluted earnings (loss) per share $ 0.04 $ (0.71) $ (0.13) $ (0.48)
</TABLE>
Approximately 1.4 million shares of weighted average common stock
equivalents were excluded in the computation of diluted earnings per share for
the nine months ended September 30, 1998, as a result of their anti-dilutive
effect due to the reported loss. Approximately 2.0 million shares of weighted
average common stock equivalents were excluded in the computation of diluted
earnings per share for the quarter and nine months ended September 30, 1997 as a
result of their anti-dilutive effect due to the reported loss. Approximately 1.6
million shares of convertible debt securities and the related interest expense
were excluded for all periods, as such inclusion would be anti-dilutive.
Stock Option Repricing Program:
Effective as of October 30, 1998, the Compensation Committee of the
Company's Board of Directors authorized employees the right to exchange certain
outstanding stock options for option grants with an exercise price of $7.3125
per share (the fair market value on October 30, 1998), provided that such
employees made the election to convert by that date. In connection with the
reprice, option holders who exchange their options will not be permitted to
exercise any exchanged options for a six-month period beginning on the effective
date of the exchange.
Convertible Subordinated Notes
On August 21, 1997, the Company sold an aggregate of $69.0 million in
principal amount of convertible subordinated notes, due August 2002, to certain
investors and incurred approximately $2.4 million of offering expenses in
connection with this issuance. These notes have a 4.75% coupon over a five-year
term and are convertible into the Company's common stock at the investor's
option, if and when the share price exceeds $41.93 per share.
Comprehensive Income
Financial Accounting Standards Board issued SFAS No. 130 (SFAS 130),
"Reporting Comprehensive Income," which establishes standards for reporting and
display of comprehensive income and its components (revenue, expenses, gains and
l osses) in a full set of general-purpose financial statements. The following
table reconciles the reported results of the three months and nine months ended
September 30, 1998 and 1997 to comprehensive income under the provisions of SFAS
130.
8
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<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
1998 1997 1998 1997
-----------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net income (loss) $ 962 $ (17,402) $ (3,319) $ (11,748)
Other Comprehensive income ( loss), net of tax
Unrealized Currency Gain (Loss) $ 507 $ (16) $ 392 $ (24)
------------------------------ ------------------------------
Comprehensive Income (Loss) $ 1,469 $ (17,418) $ (2,927) $ (11,772)
============================== ==============================
</TABLE>
In June 1997, the FASB issued SFAS No. 131, "Disclosure about Segments of
an Enterprise and Related Information" which changes the way public companies
report information about operating segments. SFAS No. 131, which is based on the
management approach to segment reporting, establishes requirements to report
entity wide disclosures about products and services, major customers and the
material countries in which the entity holds assets and reports revenue. The
Company will adopt SFAS No. 131 in the fiscal year ended 1998. Management
believes the adoption of SFAS No. 131 will not have a material effect on the
consolidated financial statements.
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THE VANTIVE CORPORATION
OVERVIEW
The Company was founded in October 1990 to develop software to enable
businesses to improve their customer service. The Company's suite of products
addresses the front-office automation market and is called the Vantive
Enterprise. The Vantive Enterprise consists of the following applications:
Vantive Sales, Vantive Support, Vantive FieldService, Vantive Inventory, Vantive
Procurement, Vantive HelpDesk and Vantive Quality. The Company made available
Vantive 8 in the second quarter of 1998, which contains significant enhancements
including the integration of Vantive Inventory and Vantive Procurement and the
global Vantive Enterprise with the addition of the Partner Desktop feature.
License fees for the Company's software products consist of (i) a per server fee
based on the specific Vantive Enterprise application(s) licensed and (ii) a fee
based on the maximum number of concurrent, named or mobile users allowed to
access applications. Most of the Company's revenues to date have resulted from
non-recurring license fees based on sales of concurrent user licenses. The
remaining revenues are primarily attributable to service revenues, which include
customer support, consulting and training revenue. Of these service revenues,
only customer support revenues are expected to be recurring. Customer support
revenues accounted for approximately 18.0% and 11.8% of total revenues for the
quarters ended September 30, 1998 and 1997, respectively, and accounted for
approximately 17.6% and 12.6% of total revenues for the nine months ended
September 30, 1998 and 1997, respectively. Because concurrent user fees are not
application specific, the Company cannot precisely determine the breakdown of
revenues attributable to specific applications for customers that have purchased
more than one application. However, the Company believes that most of its
revenues have been derived from fees associated with Vantive Support, Vantive
Sales and, to a lesser degree, Vantive HelpDesk. In any period, a significant
portion of the Company's revenues may be derived from large sales to a limited
number of customers. During the quarter ended September 30, 1998, no customer
accounted for over 10% of total revenues. However, during the quarter ended
September 30, 1997, one customer accounted for approximately 16% of total
revenues. During the first nine months ended September 30, 1998 and 1997, no
customer accounted for over 10% of total revenues. As significant sales to a
particular end user customer are typically non-recurring, the Company does not
believe its future results are dependent on recurring revenues from any
particular customer, however the Company has derived recurring revenues from
customers who use the Company's products to deliver software services to other
customers.
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
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Company generally recognizes license fees upon shipment of software products if
collection is probable, the license agreement requires payment within one year,
the fee is fixed or determinable and vendor specific evidence exists to allocate
the total fee to all elements of the arrangement. If significant post-delivery
obligations exist or if a product is subject to customer acceptance, revenues
are deferred until no significant obligations remain or acceptance has occurred.
Revenues from services have to date consisted primarily of consulting revenues,
customer support revenues and, to a lesser extent, training revenues. Consulting
and training revenues generally are recognized as services are performed.
Customer support revenues are recognized ratably over the term of the support
period, which is typically one year. If customer support services are included
free or at a discount in a license agreement, such amounts are allocated out of
the license fee at their fair market value based on the value established by
independent sale of such customer support services to customers. If a
transaction includes both license and service elements, license fee revenue is
recognized upon shipment of the software, provided services do not include
significant customization or modification of the base product and the payment
terms for licenses are not subject to acceptance criteria. In cases where
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.
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. Readers are cautioned
not to place undue reliance on these forward-looking statements, which speak
only as of the date hereof. Readers should carefully review the risk factors
described in other documents the Company files with the Securities Exchange
Commission, including the Annual Report on Form 10-K for the fiscal year ended
December 31, 1997. See "Business Risks."
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RESULTS OF OPERATIONS
The following table sets forth the percentages that income statement items are
to total revenues for the three and nine months ended September 30, 1998 and
1997.
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Three Months Ended Nine Months Ended
September 30, September 30,
------------------ ------------------
1998 1997 1998 1997
------------------- -------------------
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REVENUES:
License 52.2% 64.0% 54.8% 65.1%
Service 47.8% 36.0% 45.2% 34.9%
------------------- -------------------
Total revenues 100% 100% 100% 100%
COST OF REVENUES:
License 1.2% 0.7% 0.7% 0.6%
Service 26.1% 20.7% 25.2% 19.4%
------------------- -------------------
Total cost of revenues 27.3% 21.4% 25.9% 20.0%
------------------- -------------------
GROSS MARGIN 72.7% 78.6% 74.1% 80.0%
OPERATING EXPENSES:
Sales and marketing 42.8% 38.0% 41.5% 40.4%
Research and development 18.7% 15.1% 17.3% 14.6%
General and administrative 7.3% 7.8% 7.7% 7.7%
Acquired in-process research and development -- 67.9% 7.1% 26.5%
Acquisition-related compensatory expense 0.4% -- 1.3% --
------------------- -------------------
Total operating expenses 69.2% 128.8% 74.9% 89.2%
INCOME (LOSS) FROM OPERATIONS 3.5% -50.2% -0.8% -9.2%
OTHER INCOME 0.2% 1.2% 0.4% 1.4%
------------------- -------------------
INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES 3.7% -49.0% -0.4% -7.8%
PROVISION FOR INCOME TAXES 1.4% 7.0% 2.5% 6.9%
------------------- -------------------
NET INCOME (LOSS) 2.3% -56.0% -2.9% -14.7%
=================== ===================
</TABLE>
REVENUES
License. The Company increased its license revenues by 9.3% to $21.7
million from $19.9 million for the three months ended September 30, 1998 and
1997, respectively, and by 22.4% to $63.4 million from $51.8 million in the
first nine months ended September 30, 1998 and 1997, respectively. The increase
in license revenues was due to market growth for the Company's products. The
Company does not believe that the historical growth rates of license revenues
will necessarily be sustainable or are indicative of future results.
Service. Service revenues are primarily comprised of fees from consulting,
customer support and, to a lesser extent, training services. Service revenues
increased by 78.1% to $19.9 million from $11.2 million for the three months
ended September 30, 1998 and 1997, respectively, and by 87.9% to $52.3 million
from $27.8 million in the first nine months ended September 30, 1998 and 1997,
respectively. The increase in service revenues was primarily due to the
increased demand for consulting, customer support and, to a lesser extent,
training services associated with 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, but demand
for consulting services provided by the Company has continued to grow even while
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the Company has pursued this strategy. The Company does not believe that the
historical growth rates of service revenues will necessarily be sustainable or
are indicative of future results.
COST OF REVENUE
License. Cost of license revenues includes the cost of royalties due on
embedded third-party licenses, cost of product media, product duplication and
manuals. Cost of license revenues increased by 155.7% to $537,000 or 2.5% of the
related license revenues from $210,000 or 1.1% of related license revenues for
the three months ended September 30, 1998 and 1997, respectively. The increase
in cost of license revenues in absolute dollars and as a percentage of the
related license revenues was primarily due to the increase in volume shipments
of the Company's software applications and the royalties due on embedded
third-party licenses. The cost of license revenues increased by 67.2% to
$856,000, or 1.3% of the related license revenues from $512,000 or 1.0% of
related license revenues in the first nine months ended September 30, 1998 and
1997, respectively. The increase in absolute dollars was primarily attributed to
the increases in volume shipments of the Company's software applications and
royalties due on embedded third-party licenses.
Service. Cost of service revenues is primarily comprised of
employee-related costs and fees for third-party consultants incurred in
providing consulting, customer support and training services. Cost of service
revenues increased by 69.2% to $10.9 million, or 54.7% of the related service
revenues from $6.4 million, or 57.5% of related service revenues for the
quarters ended September 30, 1998 and 1997, respectively. The decrease in cost
of service revenue as a percentage of total service revenue in the quarter ended
September 30, 1998 was primarily due to an overall increase in customer support
revenues. Cost of service revenues increased by 88.5% to $29.2 million, or 55.6%
of the related service revenues from $15.5 million, or 55.6% of the related
service revenues in the first nine months ended September 30, 1998 and 1997,
respectively. The increase in absolute dollars was due primarily to increases in
consulting, support and training personnel and third-party service providers
during these periods. The cost of services as a percentage of service revenues
may vary between periods due to the mix of services provided by the Company and
the resources used to provide these services.
OPERATING EXPENSES
SALES AND MARKETING. Sales and marketing expenses increased by 50.2% to
$17.7 million, or 42.8% of total revenues from $11.8 million, or 38.0% of total
revenues for the quarters ended September 30, 1998 and 1997, respectively. Sales
and marketing expenses increased by 49.5% to $48.1 million, or 41.5% of total
revenues from $32.2 million, or 40.4% of total revenues in the nine months ended
September 30, 1998 and 1997, respectively. This increase in absolute dollars was
primarily related to the expansion of the Company's sales force and marketing
activities, increased expenses as a result of the increase in sales related
headcount, and increased marketing activities, including trade show, direct mail
and other promotional expenses. The Company plans to continue to invest in
expanding its sales and marketing activities. Accordingly, sales and marketing
expenses are anticipated to increase both in absolute dollars and as a
percentage of revenues over the coming year.
RESEARCH AND DEVELOPMENT. Research and development expenses increased by
66.4% to $7.8 million, or 18.7% of total revenues from $4.7 million, or 15.1% of
total revenues for the quarters ended September 30, 1998 and 1997, respectively.
Research and development expenses increased by 72.3% to $19.9 million, or 17.3%
of total revenues from $11.6 million, or 14.6% of total revenues in the nine
months ended September 30, 1998 and 1997, respectively. Research and development
expenses increased in absolute dollars and as percentage of total revenues
primarily as a result of an increase in personnel, acquisition of Wayfarer
Communications Corp., and outside contractors to support the Company's product
development activities. Over the coming years, the Company plans to continue to
invest in research and development. As a result, research and development
expenses are anticipated to increase in absolute dollars over the coming year.
Research and development expenses are generally charged to operations as
incurred. In accordance with Statement of Financial Accounting Standards No. 86,
internally-generated costs which were eligible for capitalization for these
periods were insignificant and the Company charged all internally-generated
software development costs to research and development expense.
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GENERAL AND ADMINISTRATIVE. General and administrative expenses increased
by 26.7% to $3.1 million, or 7.3% of total revenues from $2.4 million or 7.8% of
total revenues in the quarters ended September 30,1998 and 1997, respectively.
General and administrative expenses increased by 44.7% to $8.9 million, or 7.7%
of total revenues from $6.2 million, or 7.7% of total revenues in the first nine
months ended September 30, 1998 and 1997, respectively. General and
administrative expenses increased in absolute dollars during these periods
primarily due to the addition of staff and information system investments to
support the growth of the Company's business during these periods. The Company
expects general and administrative expenses will increase in absolute dollars
over the coming year.
PROVISION FOR INCOME TAXES. The Company's provision for state, federal and
foreign income taxes was $565,000 and $2.2 million for the quarters ended
September 30, 1998 and 1997, respectively, based upon an estimated effective tax
rate of 37% for both periods. The Company's provision for state, federal and
foreign income taxes was $2.8 million and $5.5 million in nine months ended
September 30, 1998 and 1997, respectively, based upon an estimated effective tax
rate of 37% for both periods. The estimated effective tax rates are stated as a
percentage of pre-tax income before the effect of charges for acquired
in-process research and development projects.
ACQUIRED RESEARCH & DEVELOPMENT.
ICC. Innovative Computer Concepts, Inc. ("ICC") was acquired in the quarter
ended September 30, 1997 in a transaction accounted for under the purchase
method of accounting. The Company acquired in-process research and development
related to a client/server-based spare parts, inventory and procurement
application. At the time of the acquisition, ICC was a development-stage company
located in Manchester, New Hampshire. ICC was founded in 1994 with the intent of
designing and marketing a client/server spare parts, inventory and procurement
management software system.
At the time of the acquisition, ICC's in-process research and development
value was comprised of several individual on-going projects which included (1) a
client/server object-oriented application server architecture; (2) a transaction
bus; (3) an event logger; (4) a transaction processor; (5) a business rule
engine; (6) an object/relational data layer; and (7) productivity tools. These
projects had not yet reached technological feasibility at the time of the
acquisition.
The remaining efforts necessary to develop the acquired in-process
technology into commercially viable products and services principally related to
the completion of all planning, designing, prototyping, scalability
verification, and testing activities that were necessary to establish that the
proposed technologies would meet their design specifications including
functional, technical, and economic performance requirements. The Company has
successfully developed the acquired in-process research and development and is
currently benefiting from the license sales of the Vantive Inventory and
Procurement applications.
The acquired in-process research and development was valued at $21.1
million by an independent appraiser. This valuation was predicated on the
determination that the developmental projects at the time of the acquisition
were not technologically feasible and had no alternative future use. This
conclusion was attributable to the fact that ICC had not completed a working
model that had been tested and proven to work at performance levels which were
expected to be commercially viable and that the technologies of the projects
have no alternative use other than as a software application. The value is
attributable solely to the development efforts completed as of the acquisition
date.
The income approach was the primary technique utilized in calculating
purchased research and development. This approach included, but was not limited
to, an analysis of (1) the market for ICC products; (2) the completion costs for
the projects; (3) the expected cash flows attributable to the in-process
research and development projects; and (4) the risks associated with achieving
such cash flows. The assumptions underlying the cash flow projections were
derived primarily from investment banking reports, independent analyst reports,
acquiring and target company records, and discussions with the management of
both companies. Primary assumptions such as revenue growth and profitability
were compared to indications of similar public companies as well as indications
from industry analyst reports, to determine the extent to which these
assumptions were supportable. The Company did not assume in its model any
material change in its profit margins as a result of the acquisition and did not
assume any material increases in selling, general and administrative ("SG&A")
expenses as a result of
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the acquisition. Because ICC was a development stage enterprise, the Company did
not anticipate any expense reductions/synergies as a result of the acquisition.
The basis of the acquisition was to enhance the Company's competitive position
by increasing the scope of its product offerings.
Cash flows from license and services revenue obtained from the combined
ICC-derived technology and Vantive products whose sales the Company believes
were dependent upon the Company being able to offer the ICC-derived technology
(together, the "Combined Revenues") were estimated to be approximately $360
million over five years assuming the successful completion and market acceptance
of the ICC technology in conjunction with the Vantive products. The Combined
Revenues were expected to peak in 1999 and then decline as other new products
and technologies are expected to enter into the market. The Company offers its
products both as a suite and as single applications, and derives concurrent user
fees which are not necessarily application specific. As a result, the Company
cannot determine precisely the breakdown of revenues attributable to specific
applications for customers who have purchased more than one application.
However, the Company believes that the Combined Revenues generated to date have
been below the assumptions used in the analysis due to the decline of the
overall growth rates assumed for the industry.
Growth rates assumed in the analysis for the Combined Revenues were based
upon external market expectations for growth in the overall Front Office Market
segment at the time of the acquisition. For the nine months ended September 30,
1998, the Company's overall revenue growth was materially less than the growth
assumed in the analysis and the Company anticipates this trend to continue based
upon the current market outlook. These lowered market expectations are
consistent with projections made by other vendors in the ERP and Front Office
Automation markets. As a result of the lower-than-anticipated overall growth,
the Company is experiencing lower growth in Combined Revenues and receiving less
return on its investment than anticipated in its analysis. Although
lower-than-anticipated overall growth has had an adverse effect on the Company's
results of operations, the Company believes that its investment in ICC has
contributed materially to its overall revenues and earnings.
Because the Company does not account for expenses by product, it is not
possible to determine the actual expenses associated with the technology
acquired from ICC; however, the Company does maintain a dedicated facility in
New Hampshire and has numerous consulting and training resources dedicated to
support the Vantive Inventory and Procurement modules. The Company currently
believes that expenses associated with completing the purchased in-process
research and development and integrating the technology with the Company's
existing products are approximately consistent with the Company's estimates used
in its analysis, and that completion dates for the various individual on-going
projects discussed above have concurred with projections at the time of the
acquisition. Research and development spending with respect to these offerings
is expected to continue at a rate that is consistent with the Company's overall
research and development spending. The Company does not believe that the
acquisition resulted in any material changes in its profit margins or SG&A
expenses. The Company does not believe that it achieved any material expense
reductions or synergies as a result of the acquisition.
The rates utilized to discount the net cash flows to their present value
were based on venture capital rates of return. Due to the nature of the forecast
and the risks associated with the projected growth, profitability and
developmental projects, a discount rate of 40 percent was deemed appropriate for
the business enterprise and for the in-process research and development. These
discount rates were consistent with ICC's stage of development; the
uncertainties in the economic estimates described above; the inherent
uncertainty at the time of the acquisition surrounding the successful
development of the purchased in-process technology; the useful life of such
technology; the profitability levels of such technology; and, the inherent
uncertainties of the technological advances that were indeterminable at the time
of the acquisition.
The forecast used in valuing the in-process research and development were
based upon assumptions the Company believed to be reasonable but which were
inherently uncertain and unpredictable. For these reasons, actual results may
vary from projected results.
Currently, approximately 80 percent of the Company's Field Service specific
sales include the ICC-derived inventory and procurement modules. This is
consistent with the original expectations for the Field Service Product. Sales
of the Company's HelpDesk and Sales Force Automation applications have been less
impacted by the
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availability of the ICC derived spare parts inventory and procurement modules.
This metric is expected to increase over time as the Company has completed the
integration of the inventory and procurement components with HelpDesk and Sales
Force Automation. The Company's Field Service modules, in conjunction with the
inventory and procurement modules are competitive product offerings.
If sales of the Combined Revenues are unsuccessful, the profitability may
be adversely affected in future periods. Commercial results will also be subject
to uncertain market events and risks, which are beyond the Company's control,
such as trends in technology, government regulations, market size and growth,
and product introduction or other actions by competitors and other factors
discussed herein (See "Business Risks").
WAYFARER. A majority interest in Wayfarer Communications Corp. ("Wayfarer")
was acquired in the quarter ended June 30, 1998 in a transaction accounted for
under the purchase method of accounting. The Company acquired in-process
research and development related to the creation of a web-browser front end
which would be used in conjunction with a new technology designed to distribute,
leverage and make use of the knowledge, resources, and information that
companies had stored in their ERP and front office automation systems. At the
time of the acquisition, Wayfarer was a development-stage company located in
Mountain View, California.
At the time of the acquisition, Wayfarer's in-process research and
development value was comprised of several individual on-going projects which
related to the technology associated with the development of (1) a user
interface; (2) a monitor for internal and external Web pages; (3) an application
for the construction of modules that track information from internal corporate
information sources and various ERP systems; and (4) a server based tool. These
projects had not yet reached technological feasibility at the time of the
acquisition.
The remaining efforts necessary to develop the acquired in-process
technology into commercially viable products and services principally related to
the completion of all planning, designing, prototyping, scalability
verification, and testing activities that were necessary to establish that the
proposed technologies would meet their design specifications including
functional, technical, and economic performance requirements.
The acquired in-process research and development was valued at $9.2 million
by an independent appraiser. This valuation was predicated on the determination
that the developmental projects at the time of the acquisition were not
technologically feasible and had no alternative future use. This conclusion was
attributable to the fact that Wayfarer had not completed a working model that
had been tested and proven to work at performance levels which were expected to
be commercially viable and that the technologies of the projects have no
alternative use. The value is attributable solely to the development efforts
completed as of the acquisition date. The Company expensed $8.2 million of the
acquired in-process research and development. This amount represents the 89%
majority interest purchased in the quarter ended June 30, 1998. The Company
intends to apply the purchase method of accounting principles for the
acquisition of the remaining minority interest and allocate the purchase price
paid to the fair market value of net assets acquired at that time.
The remaining development efforts for these projects include various phases
of design, development and testing. Anticipated completion dates for the
projects in progress will occur over the next 3-9 months, at which time the
Company expects to begin generating the economic benefits from the technologies.
Funding for such projects is expected to be obtained from working capital.
Expenditures to complete these projects are expected to total approximately $1.1
million over the remainder of the fiscal year 1998 and the first quarter of
1999. These estimates are subject to change, given the uncertainties of the
development process, and no assurance can be given that deviations from these
estimates will not occur.
The income approach was the primary technique utilized in calculating
purchased research and development. This approach included, but was not limited
to, an analysis of (1) the market for Wayfarer products; (2) the completion
costs for the projects; (3) the expected cash flows attributable to the
in-process research and development projects; and (4) the risks associated with
achieving such cash flows. The assumptions underlying the cash flow projections
were derived primarily from investment banking reports, acquiring and target
company records, and discussions with the management of both companies. Primary
assumptions such as revenue growth and profitability were compared to
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indications of similar companies as well as indications from industry analyst
reports, to determine the extent to which these assumptions were supportable.
The Company did not assume in its model any material change in its profit
margins as a result of the acquisition and did not assume any material increases
in SG&A expenses as a result of the acquisition. Because Wayfarer was a
development stage enterprise, the Company did not anticipate any expense
reductions/synergies as a result of the acquisition. The basis of the
acquisition was to enhance the Company's competitive position by increasing the
scope of its product offerings.
Cash flows from license and services revenue obtained from Vantive's
ability to offer Wayfarer's information distribution capabilities, the
Web-enabled architecture, and an innovative "dashboard environment" interface,
were estimated to be approximately $140 million over five years after the
initial release, assuming the successful completion and market acceptance of the
products incorporating Wayfarer technology. The estimated revenues for the
in-process projects were expected to peak in 2004 and then decline as other new
products and technologies are expected to enter into the market.
Growth rates assumed in the analysis for the in-process technology were
based upon external market expectations for growth in the overall Front Office
Market segment at the time of the acquisition. Since the time of the
acquisition, the market expectations have been lowered for the overall Front
Office Market segment and as a consequence, the growth rates used in the
analysis may not be met. These lowered market expectations are consistent with
projections made by other vendors in the ERP and Front Office Automation
markets. As a result of the lower-than-anticipated overall growth, the Company
may experience lower growth attributed to the in-process technology and receive
less return on its investment than anticipated in its analysis. However, the
Company believes that its investment in the in-process technology will
contribute to its overall revenues and earnings.
Expenses were estimated based on Wayfarer's internally generated
projections, on Vantive data, on discussions with management regarding
anticipated margin trends, and by examining similar companies within the
software industry. Expenses (excluding research and development) utilized in the
analysis average approximately 67 percent of revenues through the forecasted
time horizon. Research and development expenditures were expected to approximate
15 percent of the revenues for the forecasted time horizon.
The rates utilized to discount the net cash flows to their present value
are based on venture capital rates of return. Due to the nature of the forecast
and the risks associated with the projected growth, profitability and
developmental projects, a discount rate of approximately 27 percent was deemed
appropriate for the business enterprise and for the in-process research and
development. These discount rates are commensurate with Wayfarer's stage of
development; the uncertainties in the economic estimates described above; the
inherent uncertainty surrounding the successful development of the purchased
in-process technology; the useful life of such technology; the profitability
levels of such technology; and, the uncertainty of technological advances that
are indeterminable at this time.
The forecast used in valuing the in-process research and development were
based upon assumptions the Company believed to be reasonable but which were
inherently uncertain and unpredictable. For these reasons, actual results may
vary from projected results.
The Company believes that the assumptions used in the forecasts were
reasonable at the time of the acquisition. No assurance can be given that the
underlying assumptions used to estimate expected project sales, development
costs or profitability, or the events associated with such projects, will
transpire as anticipated. The Company's assumptions may be incomplete or
inaccurate, and unanticipated events and circumstances are likely to occur. For
these reasons, actual results may vary from the projected results.
As of September 30, 1998, Wayfarer's results have not differed
significantly from the forecast assumptions. Wayfarer engineering personnel
continue to work toward the completion of the in-process projects. The majority
of the projects are on schedule within two to three months of planned releases.
The Company's research and development expenditures since the Wayfarer
acquisition have not differed materially from expectations. As the acquired
in-process research and development technologies have not yet been released,
revenues attributable to the in-process technologies have not yet begun to
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materialize. The risks associated with these efforts are still considered high
and no assurance can be made that products derived from the Wayfarer technology
will meet market expectations.
Management expects to continue its support of these efforts and believes
the Company will successfully complete the research and development projects.
However, there is risk associated with the completion of the projects and there
is no assurance that any will meet with either technological or commercial
success.
If these projects are unsuccessful, the sales and profitability of the
combined company may be adversely affected in future periods. Commercial results
will also be subject to uncertain market events and risks, which are beyond the
Company's control, such as trends in technology, government regulations, market
size and growth, and product introduction or other actions by competitors and
the other factors discussed herein (See "Business Risks").
BUSINESS RISKS
This report includes a number of forward-looking statements, which reflect
the Company's current views on future events and its operations and financial
performance. These forward-looking statements are subject to certain risks and
uncertainties, including those discussed below which could cause actual results
to differ materially from historical results or those anticipated. Some of the
forward-looking statements are generally applicable to emerging growth companies
or to the software industry, others are specific to the front-office automation
market and others are specific to the Company. 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 and significant fluctuations in growth in revenues in recent periods. The
Company does not believe that the historical growth rates 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 things, 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. Competition for good
salespeople and sales managers 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 Company's strategy also depends, in part, on relationships with third
parties. There also can be no assurance that the Company will 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 substantially and will probably in the
future vary significantly depending on factors such as the size, timing and
recognition of revenue from significant orders, increased competition, sales
execution, 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.
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A significant portion of the Company's revenues in any quarter is typically
derived from non-recurring sales to a limited number of customers. Accordingly,
revenues in any one quarter are not indicative of revenues in any future period.
In addition, like many software applications businesses, the Company has
generally recognized a substantial portion of its revenues in the last month of
each quarter, with these revenues concentrated in the last weeks of the quarter.
Any significant deferral of purchases of the Company's products, or failure by
the Company to close anticipated transactions could have a material adverse
effect on the Company's business, results of operations and financial condition
in any particular quarter and to the extent that significant sales occur earlier
than expected, operating results for subsequent quarters may be adversely
affected. Product revenues are also difficult to forecast because the market for
front-office automation software products is rapidly evolving. The Company's
sales cycle is typically six to nine months but varies substantially from
customer to customer. The Company expects that sales made through indirect
channels, which are harder to predict and usually 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. Net income may be
disproportionately affected by a reduction in revenues, because most 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 section 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, and as occurred in the quarter ended June
30, 1998, it is likely that in some future quarter the Company's operating
results will be below the expectations of public market analysts and investors.
If this happens, the price of the Company's Common Stock will likely be
materially adversely affected.
Rapid Technological Change and Product Development Risks. The front-office
automation 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 less marketable or
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 on 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. These are increasingly
complex and costly undertakings. 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 Company may not 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 require substantial investments
by the Company. There can be no assurance that the Company will have sufficient
resources to make the necessary investments. The Company has in the past
experienced development delays and there can be no assurance that the Company
will not experience such delays in the future. There can be no assurance that
the Company will not experience difficulties that could delay or prevent the
successful development, introduction or marketing of new or enhanced products in
the future. In addition, there can be no
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assurance that such products will meet the requirements of the marketplace and
achieve market acceptance. If the Company is unable, for technological or any
other 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 delayed 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.
Risks Associated with Potential Acquisitions. As part of its business
strategy, the Company expects to review acquisition prospects that would
complement its existing product offerings, augment its market coverage or
enhance its technological capabilities or that may otherwise offer growth
opportunities. Future acquisitions by the Company could result in potentially
dilutive issuances of equity securities, the incurrence of debt and contingent
liabilities or amortization expenses related to goodwill and other intangible
assets, any of which could materially adversely affect the Company's operating
results and/or the price of the Company's Common Stock. Acquisitions entail
numerous risks, including difficulties in the assimilation of acquired
operations, technologies and products, diversion of management's attention to
other business concerns, risks of entering markets which the Company has no or
limited prior experience and potential loss of key employees of acquired
organizations. No assurance can be given as to the ability of the Company to
successfully integrate any businesses, products, technologies or personnel that
might be acquired in the future, and the failure of the Company to do so could
have a material adverse effect on the business, operating results and financial
condition of the Company.
Competition. The front-office automation software 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 front-office markets, such as Astea
International, Inc., Aurum Software, Inc. (a subsidiary of The Baan Company),
Clarify, Inc., Onyx Software, 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. (which was acquired by the IBM subsidiary, Tivoli Systems, Inc.).
The Company believes that such point solution providers may expand their product
offerings, 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 and The Baan Company have each introduced sales automation
and/or customer support modules as part of their application suites. Oracle has
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 that large software vendors in the enterprise resource
planning market will continue to enter and pursue the front-office automation
market. These competitors have significantly greater financial, marketing,
service, support, technical 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
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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
front-office 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, marketing, service, support, technical 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, service and sale of
their products than can the Company. There can be no assurance that the Company
will be able to compete successfully against current and future competitors or
that competitive pressures faced by the Company will not materially adversely
affect its business, results of operations and financial condition.
The Company believes that the principal competitive factors affecting its
market include product features such as adaptability, scalability, ability to
integrate with products produced by other vendors, functionality, ease of use
and such other factors as 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.
Dependence on Emerging Markets for Front-Office Automation Software;
Product Concentration. The Company's future financial performance will depend in
large part on the growth in demand for individual front-office automation
applications as well as the number of organizations adopting comprehensive
front-office automation software information systems. To date, much of the
Company's license revenues have resulted from sales of individual applications,
particularly Vantive Support, Vantive HelpDesk, and Vantive Sales. The markets
for these applications are relatively new and undeveloped and failure of these
markets to expand would have a material adverse effect on the Company's
business, results of operations and financial condition. Additionally, the
Company is investing in the 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, there
would be 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 software applications to create an enterprise-wide
information system. If the demand for integrated suites of front-office
automation 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 could have a material adverse
effect on the Company's business, results of operations and financial condition.
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 workforce. There can be no assurance that the Company will be
able to do so. The Company's failure to do so could have a material adverse
effect on the Company's business, results of operations and financial condition.
The Company has recently hired a significant number of employees, including
senior sales and marketing 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 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
20
<PAGE> 21
timely basis could have a material adverse effect on the Company's business,
results of operations and financial condition.
International Operations, Foreign Currency Fluctuations. International
revenue, or revenue derived from sales to customers in foreign countries,
accounted for approximately 23% and 14% of the Company's revenue in the quarter
ended September 30, 1998 and 1997, and 26% and 14% of the Company's revenue in
the nine months ended September 30, 1998 and 1997, respectively. International
revenues increased by 109% for the quarter ended September 30, 1998 compared to
quarter ended September 30, 1997 and by 172% for the nine months ended September
30, 1998 compared to nine months ended September 30, 1997, demonstrating the
increased acceptance of Vantive's front office automation products
internationally and the Company's increased international marketing and sales
efforts. The majority of this international revenue has come from Europe. The
Company believes that its continued growth and profitability will require
further expansion of its international operations. The majority of the Company's
revenues are denominated in the subsidiaries' functional currency and as a
result, the Company has no material unhedged monetary assets, liabilities, or
commitments denominated in currencies other than the operation's functional
currency. Further, the Company has not hedged against any monetary assets or
liabilities denominated in currencies other than the operation's functional
currency. 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.
There are certain risks inherent in doing business on an international
level, such as unexpected changes in regulatory requirements, export
restrictions, tariffs and other trade barriers, difficulties in staffing and
managing foreign operations, longer payment cycles, problems in collecting
accounts receivable, political instability, changes in foreign economic
conditions, fluctuations in currency exchange rates, seasonal reductions in
business activity during the summer months in Europe and certain other parts of
the world and potentially adverse tax consequences, any of which could adversely
impact the success of the combined company's international operations. As the
Company continues to expand its international operations, significant costs may
be incurred before achieving any additional 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.
The Company's foreign subsidiaries operate primarily in local currencies, and
their results are translated into US dollars. If the value of the US dollar
increases relative to foreign currencies, the Company's operating results could
be materially adversely affected. In particular, revenue from sales in the
Pacific Rim could be adversely affected by declines in the value of such
currencies against the dollar.
The Company has not been significantly affected by the recent unfavorable
economic conditions in certain Asian, Pacific Rim, and Latin American countries.
If the economic conditions in these markets do not improve however, this may
have a materially 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
products. This application development environment is also used by the Company
to build and modify its products. The Company believes, based on interactions
with its customers and potential customers, that it currently derives a
competitive advantage from this proprietary application development environment.
However, the Company believes that competitive pressures, technological changes
demanded by customers and significant advances in the sophistication of third
party application development tools such as Visual Basic will require the
Company to make greater use of third party software in the future. 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 and any competitive advantage associated with the
proprietary development environment. 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.
Leverage; Subordination. In connection with the August 1997 sale of its
4.75% Convertible Subordinated Notes (the "Notes"), the Company has incurred $69
million of indebtedness. As a result of this additional indebtedness, the
21
<PAGE> 22
Company's principal and interest obligations have increased substantially. The
degree to which the Company is leveraged could materially and adversely affect
the Company's ability to obtain financing for working capital, acquisitions or
other purposes and could make it more vulnerable to industry downturns and
competitive pressures. The Company's ability to meet its debt service
obligations is dependent upon the Company's future performance, which will be
subject to financial, business and other factors affecting the operations of the
Company, many of which are beyond its control.
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 to cover key vertical markets. An important element of the
Company's strategy is to integrate its products with products from enterprise
resource planning ("ERP") vendors. The Company is currently investing and
intends to continue to invest, significant resources toward these strategies,
which could adversely affect the Company's operating margins. In this regard,
the Company has recently hired significant numbers of direct salespeople.
Competition for salespeople is intense and there can be no assurance that the
Company can retain its existing salespeople or that it can attract, assimilate
and retain additional highly qualified salespeople in the future. The Company's
distribution strategy also depends, in large part, on attracting and retaining
beneficial third party relationships. There also can be no assurance that the
Company will be able to attract and retain appropriate high-end integrators,
resellers, other third party distributors or ERP vendors. The Company's
agreements with these third parties are not exclusive and, in many cases, may be
terminated by either party without cause. In addition, many of these third
parties sell or co-market competing product lines. Therefore, there can be no
assurance that any of these parties will continue to represent or recommend the
Company's products. There also can be no assurance that the Company will
effectively identify key vertical markets. The inability to recruit, or the loss
of, important direct sales personnel, high-end integrators, resellers, other
third party distributors or ERP vendors, or the failure to effectively identify
key vertical markets, could have a material adverse effect on the Company's
business, results of operations and financial condition.
Anti-Takeover Effects of Restated Certificate of Incorporation, Bylaws and
Delaware Law. Certain provisions of the Company's Restated Certificate of
Incorporation and Bylaws and of Delaware law could discourage potential
acquisition proposals and could delay or prevent a change in control of the
Company. Such provisions could diminish the opportunities for a stockholder to
participate in tender offers, including tender offers at a price above the then
current market value of the Common Stock. Such provisions may also inhibit
increase in the market price of the Common Stock that could result from takeover
attempts. In addition, the Restated Certificate of Incorporation authorizes
2,000,000 shares of undesignated preferred stock. The Board of Directors of the
Company, without further stockholder approval, may issue this preferred stock
with such terms as the Board of Directors may determine, which could have the
effect of delaying or preventing a change in control of the Company. The
issuance of preferred stock could also adversely affect the voting power of the
holders of Common Stock, including the loss of voting control. Such preferred
stock could be utilized to implement, without stockholder approval, a
stockholders' right plan that could be triggered by certain change in control
transactions, which could delay or prevent a change in control of the Company or
could impede a merger, consolidation, takeover or other business Combination
involving the Company, or discourage a potential acquirer from making a tender
offer or otherwise attempting to obtain control of the Company. The Company's
Bylaws and indemnity agreements provide that the Company will indemnify officers
and directors against losses that they may incur in legal proceedings resulting
from their service to the Company. In addition, the Restated Certificate of
Incorporation and Bylaws eliminate the right of stockholders to take action by
written consent. Moreover, Section 203 of the Delaware General Corporation Law
restricts certain business combinations with "interested stockholders" as
defined by that statute. The provisions of the Restated Certificate of
Incorporation and Bylaws and of Delaware law are intended to encourage potential
acquirers to negotiate with the Company and allow the Board of Directors the
opportunity to consider alternative proposals in the interest of maximizing
stockholder value. However, such provisions may also have the effect of
discouraging acquisition proposals or delaying or preventing a change in control
of the Company, which in turn may have an adverse effect on the market price of
the Company's Common Stock.
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. In addition, stock prices for many technology companies
fluctuate widely for reasons which may be unrelated to operating
22
<PAGE> 23
results of such companies. These fluctuations, as well as general economic,
market and political conditions such as changes in interest rates, 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 products for
use with its products or substantial increases in royalty payments under these
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 Com-pany'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 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 infringe-ment
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 licensin g agreements, if
required, may not be available on terms acceptable to the Company or at all,
which could have a material adverse effect upon the Company's business, results
of operations and financial condition.
Product Liability. The Company's license agreements with its customers
typically contain provisions intended to limit the Company's exposure to
potential product liability claims. It is possible that the limitation of
liability provisions contained in the Company's agreements may not be effective.
Although the Company has not experienced any product liability claims to date,
the sale and support of products by the Company and the incorporation of
products from other businesses may entail the risk of such claims. A successful
product liability action brought against the Company could have a material
adverse effect upon the Company's business, results of operations and financial
condition.
Year 2000 Compliance. As is true for most companies, the Year 2000 computer
issue creates a risk for Vantive. If systems do not correctly recognize date
information when the year changes to 2000, there could be an adverse impact on
the Company's operations. The risk for Vantive exists in four areas: systems
used by the Company to run it's business, systems used by the Company's
suppliers, potential warranty or other claims from Vantive's customers, and the
potential reduced spending by other companies on front office automation
software as a result of significant information systems pending on Year 2000
remediation. The Company is currently evaluating its exposure to all of these
areas.
23
<PAGE> 24
Vantive is in the process of conducting a comprehensive inventory and
evaluation of the information systems used to run its business. For the Year
2000 non-compliance issues identified to date, the cost of remediation is not
expected to be material to the Company's operating results.
The Company believes its current products are Year 2000 compliant; however,
since all customer situations cannot be anticipated, particularly those
involving third party products, Vantive may see an increase in warranty and
other claims as a result of the Year 2000 transition. In addition, litigation in
general for the industry regarding Year 2000 compliance issues may escalate. For
these reasons, the impact of customer claims could have a material adverse
impact on the Company's results of operations or financial condition.
Year 2000 compliance is an issue for virtually all businesses, whose
computer systems and applications may require significant hardware and software
upgrades or modifications. Companies owning and operating such systems may plan
to devote a substantial portion of their information systems' spending to fund
such upgrades and modifications and divert spending away from front office
automation software. Such changes in customers' spending patterns could have a
material adverse impact on the Company's sales, operating results or financial
condition.
FINANCIAL CONDITION
Total assets as of September 30, 1998 increased by 8.0%, or $13.1 million
from December 31, 1997. The combined balance of cash and cash equivalents
decreased by $10.2 million primarily due to payment of liabilities from
acquisition of Wayfarer. Net property and equipment increased $9.9 million
primarily due to capital investments associated with supporting the growth of
the Company's business during this period.
Total current liabilities as of September 30, 1998 increased by 14.0%, or
$5.3 million from December 31, 1997. The increase was primarily due to increases
in accounts payable of $7.3 million and deferred revenues of $5.4 million,
offset by a decrease in accrued liabilities of $7.7 million. The increase in
accounts payable is primarily due to increased business activities and the
increase in deferred revenues is primarily due to deferrals associated with
higher volume of revenues related to post-contract support.
LIQUIDITY AND CAPITAL RESOURCES
Operating activities used cash of $4.2 million in the nine months ended
September 30, 1998. The primary use of these funds was an increase in accounts
receivable and prepaid expenses and other assets and a decrease in accounts
payable and other accrued liabilities. This is partially offset by the net
income from operations after the write-off of acquired in-process research and
development costs. Operating activities provided cash of $6.6 million in the
nine months ended September 30, 1997. The primary source of these funds was net
income from operations after the write-off of acquired in-process research and
development costs, an increase in accounts payable and other accrued
liabilities.
Investing activities used cash of $43.3 million and $8.8 million in the
nine months ended September 30, 1998 and 1997, respectively, primarily for the
purchase of short-term, interest-bearing, investment-grade securities and for
the purchase of capital equipment. The Company does not currently have any
material commitments for capital equipment acquisitions.
Financing activities provided cash of $4.6 million in the nine months ended
September 30, 1998. The primary source of these funds was proceeds from the
issuance of common stock pursuant to the exercise of outstanding stock options,
partially offset by payments on capital lease obligations. Financing activities
provided cash of $70.1 million in the nine months ended September 30, 1997. The
primary source of these funds was proceeds from the issuance of convertible debt
of $69.0 million and common stock pursuant to the exercise of outstanding stock
options, partially offset by payments on capital lease obligations.
24
<PAGE> 25
On August 21, 1997, the Company sold an aggregate of $69.0 million in
principal amount of convertible subordinated notes due 2002 to certain investors
and incurred approximately $2.4 million of offering expenses in connection with
this issuance. These notes have a 4.75% coupon over a five-year term and are
convertible into the Company's common stock at the Company's option, if and when
the share price exceeds $41.93 per share. The Company has used the proceeds
primarily for operating activities and equipment purchases.
At September 30, 1998, the Company's principal sources of liquidity were
its cash, cash equivalents and short-term investments of $91.2 million. The
Company believes that existing cash and short-term investment balances and
potential cash flow from operations will be sufficient to meet its cash
requirements for the next twelve months. While operating activities may provide
cash in certain periods to the extent the Company experiences growth in the
future, operating and investing activities may use cash and consequently, such
growth may require the Company to obtain additional sources of financing.
PART II: OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS:
Not Applicable.
ITEM 2: CHANGES IN SECURITIES:
Not Applicable.
ITEM 3: DEFAULTS UPON SENIOR SECURITIES:
Not Applicable.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS:
Not Applicable
ITEM 5: OTHER INFORMATION:
Not Applicable.
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K:
A. Exhibits
<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.
= 4.1 Declaration of Registration Rights made on August 31, 1997 by the Company for the benefit of the
holders of Common Stock of Innovative Computer Concepts, Inc.
* 10.1 Form of Indemnity Agreement for officers and directors.
* 10.2 1991 Stock Option Plan, as amended.
* 10.3 1995 Outside Directors Stock Option Plan.
* 10.4 1995 Employee Stock Purchase Plan.
* 10.5 Offer Letter dated May 21, 1993 between the Company and John R. Luongo.
* 10.6 Offer Letter dated April 6, 1995 between the Company and John M. Jack.
</TABLE>
25
<PAGE> 26
<TABLE>
<S> <C> <C>
*+ 10.7 Value Added Reseller License Agreement dated October 5, 1993 by and between Inference Corporation
and the Company.
*+ 10.8 Basicscript License Agreement dated October 4, 1994 by and between Henneberry Hill Technologies
Corporation doing business as Summit Software Company and the Company.
*+ 10.9 International VAR Agreement dated March 26, 1992 between Oracle Corporation and the Company, as amended.
# 10.9.1 International VAR Agreement dated June 28, 1996 between Oracle Corporation and the Company, as amended.
*+ 10.10 Value Added Remarketer Agreement dated December 20, 1991 between Sybase, Inc. and the Company,
as amended.
*+ 10.11 Application Bridge API VAR License Agreement dated January 22, 1993 between the Company and Prospect
Software, Inc.
*+ 10.12 Compensation Letter dated May 10, 1995 between the Company and John R. Luongo.
* 10.13 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.
# 10.14 Lease Agreement dated September 4, 1996 between John Arrillaga, Trustee, or his Successor Trustee, UTA
dated July 20, 1977 (Arrillaga Family Trust) as amended, and Richard T. Peery, Trustee, or his Successor
Trustee, UTA dated July 20, 1977 (Richard T. Peery Separate Property Trust) as amended, and the Company.
** 10.15 Agreement and Plan of Merger dated August 13, 1997 by and among The Vantive Corporation, Igloo
Acquisition Corporation and Innovative Computer Concepts, Inc. as amended.
@ 10.16 Lease Agreement dated June 22, 1998 between Augustine Partners, LLC and the Company.
@ 10.17 Offer Letter dated July 31, 1998 between the Company and Leonard Le Blanc.
27.1 Financial Summary Table
</TABLE>
- ----------------------------
* Previously filed in the Company's Registration Statement (No. 33-94244),
declared effective on August 14, 1995.
+ Confidential Treatment has been granted for portions of this exhibit.
# Previously filed in the Report on Form 10-K filed on March 31, 1997.
** Previously filed in the Company's Report on Form 8-K filed on September 26,
1997 and on Form 8-K/A filed on November 4, 1997.
@ Previously filed in the Company's Report on Form 8-K/A filed on
September 14, 1998.
= Incorporated by reference from the Company's Registration Statement (No.
333-36547), declared effective on November 4, 1997.
26
<PAGE> 27
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE VANTIVE CORPORATION
Dated: November 13, 1998 By: /s/ Leonard Le Blanc
--------------------------------
Leonard Le Blanc
Chief Financial Officer
Dated: November 13, 1998 By: /s/ Michael M. Loo
--------------------------------
Michael M. Loo
Vice President, Finance
(Principal Accounting Officer)
27
<PAGE> 28
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<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.
= 4.1 Declaration of Registration Rights made on August 31, 1997 by the Company for the benefit of the
holders of Common Stock of Innovative Computer Concepts, Inc.
* 10.1 Form of Indemnity Agreement for officers and directors.
* 10.2 1991 Stock Option Plan, as amended.
* 10.3 1995 Outside Directors Stock Option Plan.
* 10.4 1995 Employee Stock Purchase Plan.
* 10.5 Offer Letter dated May 21, 1993 between the Company and John R. Luongo.
* 10.6 Offer Letter dated April 6, 1995 between the Company and John M. Jack.
*+ 10.7 Value Added Reseller License Agreement dated October 5, 1993 by and between Inference Corporation
and the Company.
*+ 10.8 Basicscript License Agreement dated October 4, 1994 by and between Henneberry Hill Technologies
Corporation doing business as Summit Software Company and the Company.
*+ 10.9 International VAR Agreement dated March 26, 1992 between Oracle Corporation and the Company, as amended.
# 10.9.1 International VAR Agreement dated June 28, 1996 between Oracle Corporation and the Company, as amended.
*+ 10.10 Value Added Remarketer Agreement dated December 20, 1991 between Sybase, Inc. and the Company,
as amended.
*+ 10.11 Application Bridge API VAR License Agreement dated January 22, 1993 between the Company and Prospect
Software, Inc.
*+ 10.12 Compensation Letter dated May 10, 1995 between the Company and John R. Luongo.
* 10.13 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.
# 10.14 Lease Agreement dated September 4, 1996 between John Arrillaga, Trustee, or his Successor Trustee, UTA
dated July 20, 1977 (Arrillaga Family Trust) as amended, and Richard T. Peery, Trustee, or his Successor
Trustee, UTA dated July 20, 1977 (Richard T. Peery Separate Property Trust) as amended, and the Company.
** 10.15 Agreement and Plan of Merger dated August 13, 1997 by and among The Vantive Corporation, Igloo
Acquisition Corporation and Innovative Computer Concepts, Inc. as amended.
@ 10.16 Lease Agreement dated June 22, 1998 between Augustine Partners, LLC and the Company.
@ 10.17 Offer Letter dated July 31, 1998 between the Company and Leonard Le Blanc.
27.1 Financial Summary Table
</TABLE>
- ----------------------------
* Previously filed in the Company's Registration Statement (No. 33-94244),
declared effective on August 14, 1995.
+ Confidential Treatment has been granted for portions of this exhibit.
# Previously filed in the Report on Form 10-K filed on March 31, 1997.
** Previously filed in the Company's Report on Form 8-K filed on September 26,
1997 and on Form 8-K/A filed on November 4, 1997.
@ Previously filed in the Company's Report on Form 8-K/A filed on
September 14, 1998.
= Incorporated by reference from the Company's Registration Statement (No.
333-36547), declared effective on November 4, 1997.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 35,291,000
<SECURITIES> 55,881,000
<RECEIVABLES> 42,136,000
<ALLOWANCES> 656,000
<INVENTORY> 0
<CURRENT-ASSETS> 146,849,000
<PP&E> 26,385,000
<DEPRECIATION> 4,019,000
<TOTAL-ASSETS> 175,819,000
<CURRENT-LIABILITIES> 42,897,000
<BONDS> 0
0
0
<COMMON> 26,000
<OTHER-SE> 63,667,000
<TOTAL-LIABILITY-AND-EQUITY> 175,819,000
<SALES> 63,435,000
<TOTAL-REVENUES> 115,698,000
<CGS> 856,000
<TOTAL-COSTS> 30,007,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,736,000
<INCOME-PRETAX> (449,000)
<INCOME-TAX> 2,870,000
<INCOME-CONTINUING> (3,319,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,319,000)
<EPS-PRIMARY> ($0.13)
<EPS-DILUTED> ($0.13)
</TABLE>
