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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998 COMMISSION FILE NUMBER 0-26542
THE VANTIVE CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE 77-0266662
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
2455 AUGUSTINE DRIVE 95054
SANTA CLARA, CALIFORNIA (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
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REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (408) 982-5700
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, $0.001 PAR VALUE
(TITLE OF CLASS)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (sec. 229.405 of this chapter) is not contained herein and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of
the registrant, based upon the closing price of the Common Stock on March 19,
1999, as reported on NASDAQ National Market was approximately $235,764,150.
Shares of Common Stock held by each executive officer and director and by each
person who owns 5% or more of the outstanding Common Stock have been excluded in
that such persons may be deemed to be affiliates. This determination of
affiliates status is not necessarily a conclusive determination for other
purposes.
The number of shares of the registrant's $0.001 par value Common Stock
outstanding on March 19, 1999 was 26,435,501.
DOCUMENTS INCORPORATED BY REFERENCE
Part III incorporates by reference from the definitive proxy statement for
the registrant's 1999 annual meeting of stockholders to be filed with the
Commission pursuant to Regulation 14A not later than 120 days after the end of
the fiscal year covered by this Form.
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TABLE OF CONTENTS
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PART I...................................................... 1
Item 1. Business........................................ 1
Item 2. Properties...................................... 15
Item 3. Legal Proceedings............................... 15
Item 4. Submission of Matters to a Vote of Securities
Holders................................................ 15
PART II..................................................... 16
Item 5. Market Price of and Dividends on the
Registrant's Common Stock and Related
Stockholder Matters............................ 16
Item 6. Selected Consolidated Financial Data............ 17
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of
Operations..................................... 19
Item 7A. Quantitative and Qualitative Disclosures About
Market Risk............................................... 28
Item 8. Financial Statements and Supplementary Data..... 38
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure............. 38
PART III.................................................... 39
Item 10. Directors and Executive Officers of the
Registrant............................................. 39
Item 11. Executive Compensation.......................... 39
Item 12. Security Ownership of Certain Beneficial Owners
and Management......................................... 39
Item 13. Certain Relationships and Related
Transactions........................................... 39
PART IV..................................................... 40
Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K.................................... 40
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PART I
This report includes a number of forward-looking statements which reflect
Vantive'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 that we anticipate will occur. In this
report, the words "anticipates," "believes," "expects," "intends," "future" and
similar expressions identify forward-looking statements. We caution you not to
place undue reliance on these forward-looking statements, which speak only as of
the date of this report.
ITEM 1. BUSINESS
The Vantive Corporation ("Vantive") is a leading provider of customer
relationship management solutions. We empower companies to more effectively win,
keep, and know their customers. The Vantive Enterprise, Vantive's integrated
software suite, enables call center, marketing, field sales, help-desk and field
service personnel to deliver consistent customer service across many channels
via the Internet, the call center, or in person. The consulting implementation
and integration services that we provide are intended to help our customers
implement and optimize our software products.
The Vantive Enterprise is built using a component-based, multi-tier
architecture and a common data model. Vantive Enterprise software may also be
used through a Web browser, providing the end-user access to the software
outside the traditional office environment. Vantive Enterprise software may be
used independently or as part of an integrated, enterprise-wide, front-office
automation system. We believe businesses can better manage customer
relationships by sharing valuable customer information throughout their
organizations. The Vantive Enterprise has been deployed by businesses in a broad
range of industries, including software, communications, consumer products,
finance, outsourcing/services, personal computer hardware, healthcare,
manufacturing, medical products, public sector/regulated industry, online
services, consumer goods and retail.
INDUSTRY BACKGROUND AND MARKET OPPORTUNITY
In recent years, many companies have sought to use technology to improve
interactions with their customers, and some companies have implemented customer
interaction software systems to automate these interactions. Some of this
automation is accomplished through single software applications that automate a
specific function that touches a customer, such as sales force automation.
Increasingly, however, companies are deploying more advanced software
applications that create a single repository of data concerning a customer that
is accessible to many audiences through many channels and that automate all of
the interactions a company has with its customers: through sales; customer
support and field service.
The software solutions or applications that address this market have been
called a number of things, including "front-office automation," "customer
relationship management" and "enterprise relationship management." We most often
refer to ourselves as a customer relationship management software vendor, and
our focus is on marketing software and services to companies that serve what we
call the "e-customer." The "e" can stand for "electronic," but we use it to mean
the "empowered" customer -- one who demands a level of service from its vendors
that we believe can best be provided through the type of customer relationship
management solutions that we market.
We believe that companies who want to attract and retain customers
increasingly must interact with and support them throughout the entire customer
life cycle. Recently, the expanding use of the Internet has increased the need
for high-performance customer relationship management solutions that span the
Internet, call centers and field personnel. Companies that don't provide
adequate support and service to Web customers risk customer defection. Today's
empowered customers, or e-customers, expect constant personalized access to a
company, through e-mails, call centers, faxes and Web sites. We believe our
software enables companies to meaningfully interact with their customers through
all of these media.
Companies perceive the need to combine their Web initiatives with the rest
of their enterprise and call center solutions to deliver this quality of
service. Many businesses are recognizing a significant opportunity to
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collect and leverage the information gathered at customer interaction
points -- including the Internet -- to capitalize on sales opportunities and
improve customer service. Better knowledge of the customer may lead to improved
customer loyalty and repeat business. These businesses may replace their
existing, isolated Web and departmental systems with integrated customer
relationship management solutions.
For example, businesses are often unable to effectively address customer
issues or capitalize on sales opportunities when customer contacts occur in
independent, disconnected departments that do not share customer information. As
a result, businesses are restructuring their operations to be more
customer-focused, shifting from separate sales and marketing and customer
service functions to a fully integrated front-office automation system. An
integrated Web and front-office system allows a business to leverage and access
common customer information during all customer interactions. This requires that
all departments within the business use a common base of customer information
for all customer interactions.
We believe that there are several considerations that businesses look for
in a customer relationship management system for their traditional and Web
business needs. The system must be both customizable and scalable. Businesses
seek to customize their Web and front-office software to align with their
individual business processes, as well as the business processes of their
customers. Businesses also seek software that is scalable in order to adapt to
business growth and the fluctuating numbers of users who may need to access the
software. Businesses are also often looking for Web and front-office systems
that can integrate with back-office, enterprise resource planning ("ERP")
systems such as finance, human resources and manufacturing software
applications.
We also believe that businesses are looking for powerful Web (or Internet)
solutions for their customers and partners. Web access also provides greater
functionality and access to end-users, allowing them to perform self-service
functions -- such as electronically requesting products and services -- directly
to providers of goods and services via the Web. The ability to access
front-office automation software over the Web may simplify the installation and
maintenance of the software, which may reduce total cost of ownership.
Businesses are also demanding ease of accessibility to front-office software
through mobile, data synchronization and cellular technology.
Our front-office automation software, combined with a powerful Web solution
and strategy, allow businesses to move beyond an isolated, departmental view of
the customer and leverage valuable customer information throughout all their
operations in an effort to increase customer loyalty and revenue.
Vantive integrates the sales, marketing, call center, field service, help
desk and web service functionality into one system.
VANTIVE SOFTWARE
We provide an integrated suite of software applications called The Vantive
Enterprise. The Vantive Enterprise enables organizations to address specific
needs of many aspects of customer interaction, on departmental or
enterprise-wide levels, or both. The software applications that comprise The
Vantive Enterprise are designed to automate and integrate sales and marketing,
customer support call centers, field service, internal help desk operations and
quality assurance. Our strategy is to provide our users with an integrated
front-office automation software solution that can be extended to multiple
access media including the Internet.
Complete Suite of Integrated Front-Office Automation Software. The Vantive
Enterprise is designed to provide customers with a consistent experience
whenever they interact with a company that has deployed the suite of products
throughout its business. The individual applications that make up the Vantive
Enterprise are designed to enable businesses to leverage customer information on
an enterprise-wide basis, ensuring that the right customer information goes to
the right person at the right time. The Vantive Enterprise currently includes
Vantive Sales, Vantive Support, Vantive FieldService, Vantive Inventory, Vantive
Procurement, Vantive HelpDesk and Vantive Quality. The Vantive Enterprise
provides our customers with a single integrated front-office solution to help
automate and manage the complete interaction life cycle for their customers.
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While our software applications are designed to be implemented together,
each can also be deployed as a stand-alone application for a specific functional
area of the front-office market such as sales and marketing, customer support
call centers, field service, help desk and quality assurance. In addition,
Vantive has completed integrations with software marketed by PeopleSoft, Inc.
("PeopleSoft") and Oracle Corporation ("Oracle") which support integrated
front-office and back-office business processes and permit sharing of
information between the Vantive products and those from PeopleSoft and Oracle.
Customizable. The Vantive Enterprise is highly customizable using Vantive
Object Studio, a set of application-specific customization tools that allow
users to modify the modules we market without changing the underlying source
code. This enables businesses to customize applications for their own business
models, by tailoring the user interface, making modifications to the business
rules and processes and extending the application. This capability allows a
business to capture customer information collected by the business to
accommodate its specific business needs and the business needs of its customers.
Additionally, businesses can modify the application, as their business needs
change.
Scalable, Enterprise-Wide Solution. Our products address a wide range of
market needs, from departmental to enterprise-wide requirements and from single
point solutions to fully integrated front-office software applications. This
flexibility permits deployment of one specific application or module now, and
then later deployment of additional modules as business needs evolve. In
addition, we believe our products scale very well, which means that they can be
used by a large number of users concurrently. We believe this scalability
represents a key competitive advantage in addressing the front-office automation
market by allowing businesses to deploy applications for a growing number of
users, while also fully maintaining system performance. The Vantive Enterprise
applications have been tested to scale to 15,000 concurrent users handling over
100,000 calls per hour.
Powerful Web Solutions. Our products provide enterprise-wide Web
functionality to partners, employees and customers. We understand that the
companies who deploy our software may wish to enable their customers to perform
certain functions, such as self-service and inquiries about the status of
problem reports and other functions. To address this market need, we deliver Web
applications for self-service support, (Web Self-Service) and for interacting
with selling partners (Partner Desktop). We also deliver what we believe to be a
robust set of APIs and a powerful Web development solution, VanWeb, that enables
customers to develop their own Web solutions. An "API" is an "Applications
Programming Interface," which is a technology that enables software produced by
other companies to exchange data with our software. Our VanWeb product allows
access to our software applications from the World Wide Web. VanWeb uses our
application server to use the same workflow rules and permission, as our
tethered client. By leveraging the Web, we believe The Vantive Enterprise
extends its usefulness beyond the business, to its most important asset, its
customers.
Mobile Solutions. In addition to supporting access through the Internet,
local area networks and wide area networks, The Vantive Enterprise also supports
mobile users through Vantive On-The-Go. Mobile users may access the Vantive
Sales or Vantive Field Service products through Vantive On-The-Go, enabling
mobile users to benefit from the same functionality, performance, real-time
upgrades and data access capabilities as individuals on the internal corporate
network. Upon reconnecting with the corporate network, our software will
automatically reconcile differences between the data on the mobile users' client
and the corporate database.
STRATEGY
Vantive's goal is to become the leading supplier of customer relationship
management software that enables businesses to drive revenues through customer
acquisition and retention. The following are the key elements of our strategy to
achieve that goal:
Create a Vantive Community. We plan to continue to build a strong community
of customers, partners and industry developers. We believe our greatest asset is
our large base of over 700 customers. Our product, support and consulting
service strategy will continue to focus on creating referenceable, successful
customers. In addition, Vantive's strategy is to increase marketing programs
that highlight successful customers and increase our repeat business from our
existing customers.
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From a partner and developer perspective, Vantive intends to increase the
quality and quantity of software vendors that create software solutions
complementary to The Vantive Enterprise. Vantive has created the Vantive
Industry Partner Program, which was developed to help grow and support the
growing number of Vantive system integrator, platform and value added reseller
partners. This program is designed to provide Vantive customers with broad,
robust solutions to meet their specific business and technology requirements.
Vantive plans to focus its partner recruiting activities on partners that
address targeted vertical and geographic lines of business opportunities.
Leverage the Web and Deliver Powerful e-Customer Solutions. Our goal is to
make the Web a critical component of the way we do business, our product and our
partner strategy. Vantive plans to continue to deliver powerful Web solutions
for customers, partners and employees. Our strategy is to strengthen the
functionality, scalability and customizability of Vantive's Web-based
front-office automation software applications as well as expand its "self
service" and "assisted buying" application capabilities. We believe that this
strategy will allow a business to deliver personalized information to its
partners, employees and prospects through an industry-standard Web browser. We
believe Vantive will be an essential component in a company's e-business
solutions, providing the service, support and sales capabilities necessary to
support Web customers.
Enhance Current Technology and Application Base. Vantive plans to continue
to build on its core competencies such as the contact center, enterprise and
high-performance technology base. Vantive's strategy is to also increase its
focus on markets such as the field service market and the telecommunications
vertical market.
Leverage the Contact Center. Vantive believes the call center market will
continue to grow at a considerable pace. Our applications are well-suited to a
call center, or contact center, environment, in which all the customer
interaction needs to be centered in a single location. We believe our integrated
application model makes The Vantive Enterprise a strong solution for companies
that need an integrated scalable contact center solution.
Leverage the Integrated Enterprise Application Suite. Vantive has, since
its beginning, focused on customer support, help desk and quality assurance
applications. More recently, we have developed and released broader
functionality in our sales, marketing and field service applications to enhance
our front-office automation product offering. For instance, we believe we have
made significant advances in sales and field service functionality with the
release of The Vantive Enterprise Version 8 ("Vantive 8") last year. Vantive 8
enhancements included adding best-practice selling to the Vantive Sales
application, designed to coach sales representatives on speeding up the sales
cycle and driving productivity. Vantive Sales was also enhanced by a Web-based
solution for channel partners, the Partner Desktop, and an integration with
Trilogy's Selling Chain suite of products. The enhancements to the Vantive
Support application included adding a robust Web Self-Service application and
increased management measurement capabilities. Enhancements to the FieldService
product included enhanced inventory and call management functionality and the
mobilization of the entire FieldService product.
Vantive provides solutions that integrate the web, front and back offices.
Our strategy is to enable our front-office automation software applications to
be easily integrated with back-office systems, such as finance, manufacturing
and human resources software, through strategic partnerships with ERP vendors
and through internal development. We have completed our integration efforts with
leading back-office vendors such as PeopleSoft and Oracle and are also a member
of the Cooperative Applications Initiative of Oracle. Our strategy also includes
working with third-party integrators, as well as working with third-party
providers of integration software, such as Active Software, Inc., CrossWorlds
Software, Inc. and SoftPlus, Inc. which will provide customers the ability to
link The Vantive Enterprise to a broad range of applications. We intend to
continue to integrate other back-office applications with our front-office
software applications. We have also developed relationships with several
high-end integrators to further facilitate integration between our software
applications and other software and hardware applications.
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Leverage Vantive Technology. We plan to leverage the flexibility and
scalability of our architecture. We believe that our technology design,
architecture and common data model provide a competitive advantage when adding
and integrating key functionality to The Vantive Enterprise. Our strategy also
includes continuing to add new functionality to our core suite through internal
research and development as well as through licensing "best-of-breed" technology
from third parties. To qualify as "best-of-breed," we must determine that the
technology has a clear future market direction, is extremely robust and is
commercially supported. Vantive's strategy is to continue to develop scalable
front-office applications that may be effectively utilized by businesses of
virtually all sizes, with varying number of users, applications and levels of
integration. Our long-term strategy is to design and enhance our integration and
scalability with industry-leading technology.
Build Field Service Business Unit. Vantive plans to establish an internal
business unit to leverage and expand Vantive's leading position in integrated
field service operations. This organization will include the specialized field
sales and technical support in order to serve the unique needs of the field
service market. Vantive believes this business unit will allow us to increase
our market share and revenue growth rate in this market, while improving sales
productivity.
Build Telecommunications Vertical. Vantive intends to establish the
organization and product required to effectively target, leverage and expand
Vantive's experience and framework for the telecommunications vertical. Our goal
is to build upon our current success in the telecommunications market, with such
customers as Sprint, AT&T and Sage Networks. We plan to expand our product line
through partnerships with value-added resellers and developers, as well as an
internal development team, focused on delivering best-of-breed solutions to this
market space. We plan to support this by sales and technical staff who
specialize in the telecommunications market space. Additionally, Vantive plans
to leverage our experience in the telecommunications vertical to develop
solutions in other vertical markets.
Expand Channels. Our sales and marketing strategy is to expand distribution
capabilities through our direct and indirect sales force. We plan to increase
our direct sales force in line with our revenue growth. We believe our indirect
sales force will increase by developing and expanding our relationships with
third-party system integrators, providers of outsource services, resellers,
value added resellers, distributor and software and hardware suppliers. Vantive
plans to leverage partnerships as a means to expand our mid-market presence by
increasing our selling capabilities through the use of relationships with
several high-end integrators and resellers. Vantive has established
relationships with many such third-parties, including IBM's Global Business
Services, Renaissance Worldwide, GE Capital, Nexgen, Cambridge Technology
Partners, Electronic Data Services Corporation and Lucent Technologies and hopes
to enhance and grow these relationships.
Develop Consulting Business. Another part of our strategy is to continue to
use and enhance the methodology developed for our consultants, third-parties and
our customers to rapidly deploy front-office automation software applications.
The foregoing statements regarding our strategy, expectations and
intentions are forward-looking statements and the actual results we achieve and
the activities we undertake may vary substantially depending upon a variety of
factors, including but not limited to the development of emerging markets for
customer relationship management software, competition, technological change,
changing customer needs, evolving industry standards, any product development
delays and our ability to manage any future growth and new distribution
channels. Please see the "Quantitative and Qualitative Disclosures About Market
Risk" section for further information.
VANTIVE PRODUCTS
The Vantive Enterprise is an integrated software suite that is designed to
leverage the Internet in order to increase sales, marketing, call center, field
service, help desk and web service effectiveness. We designed the Vantive
Enterprise with the intent to make it fully scalable and customizable in order
to evolve and align with the growth and processes of different businesses. The
Vantive Enterprise applications share a common database and architecture to
facilitate information transfer and communication throughout a customer's entire
organization.
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By building the software applications using a component-based, multi-tier
application architecture, we believe that our applications are more scalable and
easier to maintain than competing two-tier implementations. This architecture
also results in what we believe to be a thinner "client" (or desktop) portion of
the software, less network traffic, more efficient use of database resources and
a good complement to Web-based applications. The Vantive Enterprise consists of
the following applications, each of which can be purchased and implemented
separately or integrated in any combination.
Vantive Sales is a front-office software application designed to automate
the sales and marketing process. Vantive Sales enables companies to distribute
the collective knowledge, information, experience and expertise of top sales
performers to the entire sales force. Vantive Sales enhances sales performance
through effective knowledge sharing, informed decision making and improved
understanding of the customer. Vantive Sales also enables sales representatives
to align their selling cycles with their customer's buying process, provides
sales knowledge-on-demand and increases sales effectiveness and enhances the
sales management function by helping managers track the prospects on which sales
representatives are working. Vantive Sales delivers up-to-the-minute sales,
product and customer information with the Vantive Encyclopedia (a web-based
document management and delivery system) and provides a single source for
managing tasks, contacts, opportunities and scheduling through bi-directional
integration with Microsoft Outlook (the leading email and contact management
software application). Vantive Sales functionality includes pipeline and
forecast management, account and territory planning, quote/product
configurations and channel management. Marketing campaign management, telesales
and lead tracking are also provided by Vantive Sales. By using Vantive
On-The-Go, mobile Vantive Sales users can access and synchronize data with the
corporate database. Vantive Sales also has an optional module for extending lead
and opportunity management to channel partners called the Partner Desktop.
Vantive Sales can be used independently or as part of an integrated,
enterprise-wide front-office automation system.
Vantive Support is a front-office software application designed to automate
and provide end-to-end management of call center and customer support
operations. Vantive Support is designed to help companies improve customer
retention, build customer loyalty and increase call center revenue. Vantive
Support provides a complete solution for customer service call centers including
automated call tracking, entitlement processing, workflow, problem resolution,
revenue generation, performance measurement, advanced research tools and service
management. Vantive Support also logs and tracks customer issues and requests,
routes leads to sales and marketing departments and supports customer access via
phone, fax, email and the Web. Business rules embedded in Vantive Support
automatically route customers to the right call center agent and provide
automatic escalations and notifications. Vantive Support can also be used to
generate call center revenue through proactive service contract renewals,
upgrades and cross-selling functionality. Vantive Support also provides
Web-based, self-service options through the Web Self-Service application, which
may increase call center agent productivity by reducing the number of calls to
the call center. Vantive Support can be used independently or as part of an
integrated, enterprise-wide front-office automation system.
Vantive FieldService, Vantive Inventory and Vantive Procurement are
front-office automation field service software modules designed to manage and
enhance field service operations. Vantive field service solutions are designed
to provide the right people, with the right parts, at the right time and to
service and fix problems quickly with minimal disruption to customers. Vantive's
three field service modules each play an integral role as part of a complete
field service solution and can be purchased and used separately or together.
Vantive FieldService manages the allocation, scheduling and dispatching of
service technicians, service providers and resources. Vantive FieldService
allows a business to create detailed work plans that permit users to evaluate
tasks, materials and skills needed to provide optimal solutions for customer
service requests. Vantive FieldService also generates work orders that create a
single, detailed information source for notification, billing and tracking
purposes. Customer configurations and Return Material Authorizations (RMAs) are
also key features in Vantive FieldService. Field technicians can also log and
track tasks, time, materials and expenses into Vantive FieldService from the
road using VanWeb.
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Vantive Inventory automates the control, management, tracking and status of
spare parts inventory. Vantive Inventory tracks inventory costs such as weighted
average, standard costs and last purchase cost. It also provides up-to-the
minute stock status information and complete inventory analysis and usage
models, which allow users to make informed decisions about managing spare parts.
Vantive Inventory is specifically designed to support businesses with multiple
product lines by providing cataloging and cross-referencing functionality and
tools for locating part status and supporting multiple transaction types.
Vantive Procurement manages and streamlines the purchase and receipt of
spare parts from external departments and suppliers. Vantive Procurement
provides spare parts status, vendor availability and detailed goods information
to assist in the requisition and procurement process. The Vantive Procurement
event tracking system automatically generates orders to fill requisitions and
tracks purchase orders placed against the request. Vantive Procurement also
streamlines the purchase order process by bringing together on-line master
records, requirements and requisitions in real-time. Purchase orders can be
generated through requirements, requisitions, manually or through an external
system interface. Vantive Procurement also allows users to track requisitions
through general requirement functions, which determine whether combined orders
can take advantage of cost-saving options such as volume discounts and joint
shipping.
The Vantive field service software modules support complex global
organizations through advanced logistics functionality that allows users to
track centralized and regional operations at different levels. Businesses can
also create "cross-hierarchical business entities" that allow two similar
departments' warehouses in two different divisions to be treated as one
department in the Vantive system. Vantive field service software modules also
are intended to integrate with back-office systems such as manufacturing,
distribution and accounting to provide a "full-view" of a business's global
field service operations.
Vantive HelpDesk is a front-office software solution designed to automate
internal help desk operations. Vantive HelpDesk enhances customer interactions
by improving employee productivity, satisfaction and retention. Vantive HelpDesk
tracks and resolves employee issues, suggestions and requests for assistance.
Vantive HelpDesk manages hardware and software configurations, catalogs and
tracks company assets. Vantive HelpDesk maintains employee history, provides
Web-enabled self-service options and supports the entire enterprise
infrastructure including mainframe systems, client/server systems, networks and
telecommunications equipment. Vantive HelpDesk enables end-to-end management of
technical support issues by providing a single information repository that
includes data, business rules and workflow. Vantive HelpDesk can be used
independently or as part of an integrated, enterprise-wide front-office
automation system.
Vantive Quality is a front-office software solution designed to collect and
leverage customer feedback on products and services. Feedback can be used to
design, build and deliver high-quality, customer-aligned products and services.
Vantive Quality integrates product quality and enhancement processes across the
entire enterprise, allowing engineering and information technology departments
to track and resolve product defects. The software is used to identify product
failures and defects, create enhancement requests and build documentation and
track product information. Vantive Quality also assists companies with ISO 9000
compliance by providing data and information on product fault, fix, ownership
and action history. Vantive Quality can be used independently or as part of an
integrated, enterprise-wide front-office automation system.
VANTIVE TECHNOLOGY
Vantive is often perceived to have the leading technology base in the
customer relationship management market. Our multi-tier, component-based
architecture has enabled Vantive to achieve scalability benchmarks to 15,000
concurrent users supporting over 100,000 calls per hour, and to extend our
functionality to the Internet.
Vantive Object Architecture is a component-based, multi-tier architecture
that serves as the foundation for all of our software applications and
technology. The Vantive Object Architecture provides proven reliability and
scalability to protect mission-critical systems and software. The Vantive Object
Architecture is designed to reduce network traffic, increase system performance
and enhance employee productivity. We have
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also pioneered a component-based software approach that we believe allows for
rapid delivery and deployment of the latest, best-of-breed software technology
to the desktop. The component-based approach also allows us to deliver
state-of-the-art, ergonomic interfaces for all of our software solutions.
Multi-Tier Computing. The Vantive Object Architecture utilizes a multi-tier
approach that allows the application processing to be partitioned on the
appropriate tier. The architecture provides a clean break between the
presentation services, application business processing and database services. We
believe that this approach enhances system performance and scalability and is
production-proven with hundreds of production sites, many supporting thousands
of concurrent users.
Component-based architecture. The Vantive Object Architecture is an
object-based infrastructure that enables the integration of front-office
software components. We believe that this component-based approach provides us
and our customers with the ability to rapidly develop and deploy critical
business solutions. These components encourage reuse and provide an integration
infrastructure that allows other systems to leverage functionality of our
products via a variety of programming languages.
Multiple Access Channels. The Vantive Object Architecture provides for
state-of-the-art, ergonomic interfaces on a variety of computing devices. This
allows The Vantive Enterprise to be provided on the client platform that best
fits the individual needs of the user. The client platform options include the
Web, mobile, tethered LAN/WAN users and PDAs, such as the PalmPilot and
Microsoft CE devices.
Powerful Web Solutions. Vantive has Web technology that enables Vantive
developers and customers to create Web interfaces to The Vantive Enterprise. We
support Microsoft's Active Server Page technology, enabling us to deliver
powerful Web applications such as Web Self-Service and Partner Desktop. VanWeb
is a Web technology designed to enable anyone with an industry-standard Web
browser, such as Microsoft Internet Explorer or Netscape Navigator, to access
The Vantive Enterprise applications through the World Wide Web. Combined with
Vantive Support and Vantive HelpDesk, we believe that VanWeb can significantly
improve customer satisfaction through Web-based self-service options.
Mobile Technology. Vantive On-The-Go is Vantive's mobile computing product.
Vantive On-The-Go seamlessly accesses corporate database information, which is
intended to enable mobile users to experience the same functionality,
performance, real-time upgrades and data access capabilities as individuals
working on the internal corporate network. Vantive On-The-Go handles complex
data synchronization and conflict management which is designed to ensure
accurate and complete customer data.
Flexible Development Solutions. Vantive Object Studio is a software package
designed to help customize, deploy and administer The Vantive Enterprise
software applications. The Vantive Object Studio leverages ActiveX Control
technology, provides a "drag-and-drop" design environment and allows a company
to develop Vantive applications once and deploy them universally to tethered,
mobile and Web clients. The Vantive Object Studio includes two software tools:
VanDesign and VanTools. VanDesign is an advanced graphical object builder that
allows companies to easily develop and customize The Vantive Enterprise
software. VanTools is a graphic deployment environment that we believe makes it
easy to maintain system security, add and delete users and modify workflow and
reports.
Vantive can be further customized using our powerful integration
technology. VanAPI is Vantive's applications program interface designed to
facilitate integration with new technologies, e-business solutions, and legacy
and back-office systems. VanAPI provides a simple, user-friendly programming
interface that allows a company to establish interactive, bi-directional
connections between The Vantive Enterprise products and other software such as
manufacturing, finance and accounting systems. Standard programming languages
such as C, C++, OLE, Java, Perl and Visual Basic can use VanAPI.
SALES AND MARKETING
We market and sell our software and services in the United States primarily
through a direct sales organization. To support our sales force, we conduct
comprehensive marketing programs which include direct mail, public relations,
Web-based lead generation, advertising, trade shows, seminars, ongoing customer
communications programs and an annual international user group conference. We
also participate in industry
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<PAGE> 11
programs and forums and we strive to establish and maintain close relationships
with recognized industry analysts.
Our sales cycle begins with the generation of a sales lead, which is
followed by qualification of the lead, an analysis of the prospective customer's
needs, multiple presentations and/or product demonstrations to the prospective
customer and ends with contract negotiation and commitment. While the duration
of the sales cycle varies substantially from customer to customer, it frequently
lasts between six and nine months.
We market our products outside of the United States both through
wholly-owned subsidiaries and independent distributors. As of December 31, 1998,
we had wholly-owned subsidiaries in Australia, Canada, France, Germany, the
Netherlands, Singapore and the United Kingdom and distributors in Argentina,
Belgium, Brazil, Chile, Columbia, Greece, Israel, Italy, Japan, Liechtenstein,
Mexico, New Zealand, Norway, Peru, Philippines, Poland, South Africa, South
Korea, Spain, Switzerland, United Arab Emirates and Venezuela. In addition to
marketing and selling our products, the distributors provide at least initial
technical support to their customers.
Our sales and marketing organization consisted of 293 employees as of
December 31, 1998. Our domestic sales staff is based at our corporate
headquarters in Santa Clara, California and more than 15 field sales offices
located in Atlanta, Georgia; Baltimore, Maryland; Boston, Massachusetts;
Boulder, Colorado; Chicago, Illinois; Columbus, Ohio; Dallas, Texas; Denver,
Colorado; Iselin, New Jersey; Irvine, California; Philadelphia, Pennsylvania;
Los Angeles, California; Manchester, New Hampshire; McLean, Virginia; Newport
Beach, California; New York, New York; Overland Park, Kansas; Portland, Oregon;
San Diego, California; Seattle, Washington; and Washington, D.C.
An important element of our distribution strategy is to expand our direct
sales force, to create additional relationships with third-parties and to
dedicate certain direct sales resources and leverage third-party relationships
for greater access into certain vertical markets. The ability of Vantive to
achieve significant revenue growth in the future will depend, in part, on its
success in executing this strategy. Vantive is currently investing and intends
to continue to invest significant resources to develop our sales strategy, which
could, among other things, adversely affect Vantive's operating margins. In this
regard, Vantive has recently hired and continues to hire significant numbers of
direct sales personnel and has developed relationships with several high-end
integrators and resellers, including IBM Global Business Services, GE Capital,
Nexgen, Impact Innovations, High Q, Cambridge Technology Partners, Electronic
Data Systems Corporation, Lucent Technologies and Renaissance Worldwide.
Competition for sales personnel is intense and there can be no assurance
that Vantive can retain its existing sales personnel or that it can attract,
assimilate and retain additional highly qualified sales personnel in the future.
The strategy also depends, in large part, on attracting and retaining
appropriate third-party relationships. There also can be no assurance that
Vantive will be able to attract and retain appropriate high-end integrators,
resellers and other third-party distributors to market Vantive's products
effectively. In addition, Vantive's agreements with these third parties are not
exclusive and in many cases may be terminated by either party without cause and
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 Vantive's products. There also can be no assurance that
Vantive will effectively identify key vertical markets. The inability to
recruit, or the loss of, important direct sales personnel, high-end integrators,
resellers or other third party distributors, or the failure to effectively
identify key vertical markets any one of which could have a material adverse
effect on Vantive's business, results of operations and financial condition.
The foregoing statements regarding our intention to expand our distribution
channels are forward-looking statements and actual results and activities may
vary substantially depending upon a variety of factors, including but not
limited to, those contained in the section entitled "Quantitative and
Qualitative Disclosures About Market Risk."
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<PAGE> 12
PRODUCT DEVELOPMENT
We have historically developed and expect to continue to develop our
products in conjunction with our existing and potential customers and their
needs. Several products and enhancements to existing products are currently in
development. The evolution to component-based or object-based software, which we
believe is currently occurring, will also significantly influence our future
product direction. We believe businesses will expect to be able to utilize
portions of our integrated front-office software solution and effectively
integrate them with software objects developed by other software vendors.
As of December 31, 1998, there were 126 employees in research and
development. In addition, we regularly supplement our workforce with
consultants. Our research and development expenditures in 1998, 1997 and 1996
were $28.3 million, $17.5 million and $7.3 million, respectively, and
represented 17.3%, 14.9% and 11.3% of revenues, respectively. We expect to
continue to commit substantial resources to product development in the future.
The front-office automation software market is subject to rapid
technological change, changing customer needs and frequent new product
introductions and evolving industry standards that may render existing products
and services obsolete. As a result, our position in our existing markets or
other markets that we may enter could be eroded rapidly by product advances. It
is very difficult to estimate the life cycles of our products.
Our growth and future financial performance will depend, in part, upon our
ability to enhance existing applications, develop and introduce new applications
that keep pace with technological advances, meet changing customer requirements,
respond to competitive products and achieve market acceptance. For example, our
customers have adopted a wide variety of hardware, software, database,
Internet-based and networking platforms and as a result, to gain broad market
acceptance, we must continue to support and maintain our products on a variety
of such platforms. Our future success will depend, in part, on our ability to
address the increasingly sophisticated needs of our customers by supporting
existing and emerging hardware, software, database, Internet-based and
networking platforms and by developing and introducing enhancements to our
products and new products on a timely basis that keep pace with technological
developments, evolving industry standards and changing customer requirements.
We can't be certain that we will be able to successfully change other
aspects of our business, such as our distribution channels or cost structure, if
technological changes in our market, including distribution through the
Internet, require such change. We expect our research and development efforts to
require substantial investments in product development and testing. We can't be
certain that we will have sufficient resources to make the necessary
investments. We have in the past experienced development delays and we can't be
certain that we will not experience such delays in the future. We cannot be
certain that we will not experience difficulties that could delay or prevent the
successful development, introduction or marketing of new or enhanced products.
In addition, we can't be certain that such products will meet the requirements
of the marketplace and achieve market acceptance or that our current or future
products will conform to industry requirements. If we are unable, for
technological reasons, to develop and introduce new and enhanced products in a
timely manner, results of operations and financial condition could be materially
adversely affected.
Software products as complex as the ones that we develop and market may
contain errors that may be detected at any point in the products' life cycles.
We have in the past discovered software errors in some of our products and have
experienced delays in shipment of products during the period required to correct
these errors. We cannot be certain that, despite our testing of products and the
testing of such products by current and potential customers, that we will find
all errors. This could result in loss of, or delay in, market acceptance and
sales, diversion of development resources, injury to our reputation, or
increased service and warranty costs, any of which could have a material adverse
effect on our business, results of operations and financial condition.
The foregoing statements regarding introductions of our products under
development, proposed enhancements and the features included in those products
or enhancements are forward-looking statements, and the
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<PAGE> 13
actual release dates for those products or enhancements could differ materially
from those projected as a result of a variety of factors, including but not
limited to, those contained in the section entitled "Quantitative and
Qualitative Disclosures About Market Risk."
COMPETITION
The front-office automation software market is intensely competitive,
highly fragmented and subject to rapid change. Because we offer multiple
applications that can be purchased separately or integrated as part of The
Vantive Enterprise, we compete 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 (in alphabetical order) Aurum
Software, Inc. (a subsidiary of The Baan Company), Clarify, Inc., Onyx Software
Corporation, Pivotal Software and Siebel Systems, Inc.
We also compete 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 field service market and the sales and marketing
automation market, such as Remedy Corporation. We expect to see increased
competition from several smaller, Internet-focused solution providers such as
Silknet Software, Inc. and Vignette Corporation. We believe that such point
solution providers may expand their product offerings, which could provide
increased competition across our market segments. We also compete with
third-party professional service organizations that develop custom software and
with the internal information technology departments of customers that develop
customer interaction applications.
Among our current and potential competitors are also a number of large
hardware and software businesses that have already developed, have announced
their intention to develop or may develop or acquire products that compete with
our products. In this regard, Oracle, SAP AG 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. Also, IBM has announced its CorePoint business unit,
which will develop and market products that compete with ours and JD Edwards &
Company plans to market competing products, as well.
We expect that large software vendors in the enterprise resource planning
market, such as PeopleSoft, 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 we do.
We also expect 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 our
prospective customers. Accordingly, it is possible that new competitors or
alliances among competitors may emerge and rapidly acquire significant market
share. Moreover, many of our competitors have similar or more established
relationships with Vantive partners such as distributors, systems consulting or
integration firms who either distribute, implement, provide customer support on
or endorse our products. We also expect 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 have a material adverse effect on our business, results of operations and
financial condition.
Many of our current and potential competitors have significantly greater
financial, marketing, service, support, technical and other resources than we
do. 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
we can. There can be no assurance that we will be able to compete successfully
against current and future competitors or that the competitive pressures we face
will not have a material adverse effect on our business, results of operations
and financial condition.
We believe that the principal competitive factors affecting our market
include product features such as adaptability, scalability, ability to integrate
with products produced by other vendors, functionality, ease of use
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<PAGE> 14
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 we believe that our products currently compete
favorably on all of these factors, we can't be certain that we can maintain our
competitive position against current and potential competitors, especially those
with significantly greater financial, marketing, service, support, technical and
other resources.
INTELLECTUAL PROPERTY AND OTHER PROPRIETARY RIGHTS
Our success is heavily dependent upon proprietary technology. We rely
primarily on a combination of copyright, trademark and trade secrets laws, as
well as confidentiality procedures and contractual provisions (such as those
contained in license agreements with consultants, vendors and customers) to
protect our proprietary rights, although we have not signed such agreements in
every case. We can't be certain that our measures will be adequate to protect us
from infringement of our technology.
We currently own two software patents and have embarked on a program to
apply for a number of software patents during 1999. We have registered the
trademark "Vantive" in the United States and a number of other jurisdictions
throughout the world, and have applications pending for a number of other
trademarks.
Despite our efforts to protect our proprietary rights, unauthorized parties
may attempt to copy aspects of our products or to obtain and use information
that we regard as proprietary. In particular, as we provide our licensees with
access to the proprietary information underlying our licensed applications, and
we can't be certain that licensees or others will not develop products or
provide services which infringe our proprietary rights. Companies with which we
have entered into agreements may breach these agreements or other protective
contracts that we have entered into, and we may not become aware of, or have
adequate remedies in the event of such breach.
In addition, policing unauthorized use of our products is difficult, and
while we are unable to determine the extent to which piracy of our software
products exists, we expect that software piracy will be a persistent problem.
The laws of some foreign countries do not protect our proprietary rights to as
great an extent as do the laws of the United States. We can't be certain that
our methods of protecting our proprietary rights will be adequate or that our
competitors will not independently develop similar technology. We believe that
competitors regularly evaluate and try to emulate our products. We are not aware
that any of our products infringe the proprietary rights of third-parties,
although we have in the past, and may in the future, receive communications
alleging possible infringement of third-party intellectual property rights.
We expect that software product developers will increasingly be subject to
infringement claims as the number of products and competitors in our target
markets grows and the functionality of products in such markets overlap. Any
such claims, with or without merit, could be time-consuming, result in costly
litigation, cause product shipment delays or require us to enter into royalty or
licensing agreements. Such royalty or licensing agreements, if required, may not
be available on terms acceptable to us or if so could have a material adverse
effect upon our business, results of operations and financial condition.
EMPLOYEES
As of December 31, 1998, we had 592 full-time employees, including 293 in
sales and marketing, 53 in consulting, 126 in research and development, 77 in
general and administration and 43 in client services. Of these employees, 61
were located outside the United States, principally in the United Kingdom,
France, the Netherlands and Germany. The remaining employees were located in the
United States. None of our employees is represented by a labor union. We have
experienced no work stoppages and believe our relationship with our employees is
good. In addition, we regularly supplement our workforce with consultants. As of
December 31, 1998, we had 43 full-time equivalent consultants.
Competition for qualified personnel in our industry is intense. We believe
that our future success will depend in large part on our continued ability to
hire, assimilate and retain qualified personnel.
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DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
As of March 1, 1999, our directors and executive officers were as follows:
<TABLE>
<CAPTION>
DIRECTOR OR
NAME AGE POSITION OFFICER SINCE
---- --- -------- -------------
<S> <C> <C> <C>
John R. Luongo............ 49 Chairman of the Board of Directors, 1993
Chief Executive Officer
Phillip M. Dunkelberger... 40 President and Chief Operating Officer 1998
Leonard J. LeBlanc........ 58 Executive Vice President and 1998
Chief Financial Officer
Guy DuBois................ 44 Executive Vice President and 1999
General Manager, International
Michael M. Loo............ 42 Vice President, Finance 1993
Steven J. Sherman......... 40 Vice President of Product Development 1999
David R. Schellhase....... 35 Vice President & General Counsel 1997
James Whitaker............ 51 Vice President and Chief Information 1998
Officer
Marie Alexander........... 40 Vice President of Client Services 1998
Donna Allen Taylor........ 50 Vice President, Human Resources 1998
William H. Davidow........ 63 Director 1991
Patti S. Manuel........... 43 Director 1998
Raymond L. Ocampo Jr. .... 46 Director 1997
Peter A. Roshko........... 40 Director 1991
Thomas L. Thomas.......... 50 Director 1998
</TABLE>
John R. Luongo has served as Chairman of the Board of Directors and Chief
Executive Officer of Vantive since January 1999. From June 1993 until January
1999 he was President and Chief Executive Officer of Vantive and a member of the
Board of Directors. He was an independent consultant from November 1992 to June
1993, President, Chief Executive Officer and Chairman of the Board of Trifox,
Inc., a software company, from September 1991 to November 1992, Senior
Consultant at Merrill, Pickard, Anderson and Eyre, a venture capital firm, from
September 1990 to June 1991 and Senior Vice President International Division at
Oracle Corporation from July 1982 to July 1990.
Phillip M. Dunkelberger has served as President and Chief Operating Officer
of Vantive since January 1999. From March 1998 to January 1999 he was Vantive's
Chief Marketing Officer. From September 1996 to February 1998 he was President
and Chief Executive Officer of Pretty Good Privacy, Inc. Prior to that, from
October 1995 to August 1996 he was Executive Vice President and Chief Operating
Officer at Centerview Software. From January 1990 to January 1995 he served as
Vice President of U.S. Sales, at Symantec Corp.
Leonard J. LeBlanc has served as Executive Vice President and Chief
Financial Officer of Vantive since August 1998. Previously, he was an Executive
Vice President with Infoseek Corporation, serving as Chief Operating Officer
from April 1997 until July 1997 and Chief Financial Officer from March 1996
until July 1997. He was Senior Vice President and Chief Financial Officer of
GTech Corporation from September 1993 to December 1994 and was Chief Financial
Officer at Cadence Design Corporation from May 1987 to December 1992.
Guy DuBois has served as Executive Vice President and General Manager,
International of Vantive since March 1999. He was Vice President and General
Manager of the Europe, Middle East, Africa operations of Sybase Corporation from
August 1995 to March 1999. From August 1994 to August 1995 he was Vice President
of Southern Europe at Sybase. Prior to that, he was Deputy Managing Director of
Digital Equipment Corporation France.
Michael M. Loo has served as Vice President, Finance of Vantive since May
1995. He initially served as Vantive's Director of Finance and Administration
from October 1993 to May 1995. Previously, he served in various financial and
accounting positions, most recently as Controller, Worldwide Field Operations at
Sybase
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<PAGE> 16
Corporation from January 1990 to October 1993. Prior to that, he held a number
of positions with Oracle Corporation and ROLM Corporation.
Steven J. Sherman has served as Vice President of Product Development of
Vantive since January 1999. He was Executive Vice President, Product Development
and President of Tetra International from June 1996 to January 1999, where he
also served on the board of directors. From March 1994 to May 1996, he was Vice
President of Engineering at Frame Technology and then Vice President of
Publishing Engineering at Adobe Systems after the acquisition of Frame by Adobe.
Prior to that, he was the General Manager of the Project Management Group at
Symantec Corp.
David R. Schellhase has served as Vice President & General Counsel of
Vantive since August 1997. He was General Counsel at Premenos Technology Corp.
from November 1995 to August 1997. From July 1993 to November 1995 he was
Corporate Counsel at Oracle Corporation. Prior to that he was an associate with
the law firm of Brobeck, Phleger & Harrison. He is also an adjunct faculty
member at Golden Gate University School of Law.
James Whitaker has served as Vice President and Chief Information Officer
at Vantive since December 1998. From February 1998 to November 1998 he was Vice
President and Chief Information Officer at Coherent, Inc. From October 1995 to
January 1998 he was Vice President and Chief Information Officer at Network
Associates Inc. (previously Network General, Inc.). Previously from January
1994, he was Director, Application Development at Apple Computer, Inc. and
before that held a number of management positions at Apple.
Marie Alexander has served as Vice President of Client Services of Vantive
since August 1994. She was Senior Director of Client Services at Harbinger
Corporation, an electronic commerce software and services provider, from January
1992 to August 1994.
Donna Allen Taylor has served as Vantive's Vice President of Human
Resources since September 1996. From September 1995 to August 1996 she was a
Senior Human Resources Consultant with Post Associates. From September 1993
until August 1995 she was Corporate Human Resources Manager for Intel
Corporation, and prior to that was Group Human Resources Director for the
Software, Information Design and Consulting group of Digital Equipment
Corporation. Prior to almost ten years in Digital, where she held a variety of
senior human resource management positions, she served as an Executive Director
of Exodus Center, Inc., a non-profit educational organization serving the New
England region.
William H. Davidow has served as a director of Vantive since July 1991. He
has been a General Partner at Mohr, Davidow Ventures since May 1985. From 1973
to 1985 he held a number of management positions at Intel Corporation, including
Senior Vice President of Marketing and Sales. He also serves as Chairman of the
Board of Directors of Rambus, Inc. and is a director of Power Integrations, Inc.
and several private companies.
Patti S. Manuel has served as a director of Vantive since August 1998. She
was President and Chief Operating Officer of the Long Distance Division of
Sprint Corporation from February 1998 to March 1999. She also served as
President of Sprint Business, a division of Sprint, from May 1997 to March 1999.
She was President of Sales and Marketing for Sprint Business from 1994 to 1997.
She is also a director of Earthlink Network, Inc.
Peter A. Roshko has served as a director of Vantive since July 1991. He
co-founded and has been a co-manager of Granite Investments, an investment
company, since August 1995. From December 1993 to August 1995, he was a General
Partner at Cottonwood Ventures, a venture capital firm, and previously was a
General Partner at Mohr, Davidow Ventures.
Raymond L. Ocampo Jr. has served as a director of Vantive since January
1997. He is currently Executive Director of the Berkeley Center for Law and
Technology. He also serves as an independent mediator and arbitrator of disputes
among high technology companies and as an expert witness in technology-related
litigation. He served in several capacities with Oracle Corporation from July
1986 to November 1996, primarily and most recently as its Senior Vice President,
General Counsel & Secretary. He is a member of the
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<PAGE> 17
board of directors of KQED, a public radio and television broadcasting
organization based in the San Francisco Bay Area, and of several other private
companies and nonprofit organizations.
Thomas L. Thomas has served as a director of Vantive since October 1998. He
has been Senior Vice President, Global Information Systems and Chief Information
Officer of 3Com Corporation since August 1996. From September 1995 to July 1996
he was Vice President, Global Information Systems and Chief Information Officer
of 3Com. From 1993 to 1995 he was Vice President and Chief Information Officer
of Dell Computer Corporation. From 1987 to 1993 he was Vice President of
Management Information Systems at Kraft General Foods. He is also a director of
ATL Products, Inc.
ITEM 2. PROPERTIES
Our principal administrative, engineering, manufacturing, marketing and
sales facilities total approximately 162,000 square feet and are located in
three buildings in Santa Clara, California under leases which expire in May
2001, December 2003 and October 2005. In addition, we lease offices in
approximately 35 cities in Asia, Australia, Europe, North America and South
America.
ITEM 3. LEGAL PROCEEDINGS
We are subject to legal proceedings and claims that arise in the course of
our business. We currently believe that the aggregate amount of liability, if
any, for any pending actions (either alone or combined) will not materially
affect our financial position, results of operations or liquidity.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
None.
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<PAGE> 18
PART II
ITEM 5. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON STOCK AND
RELATED STOCKHOLDER MATTERS
The Company's stock has been traded on the NASDAQ National Market System
since the Company's initial public offering on August 14, 1995, under the NASDAQ
symbol VNTV. The following table sets forth, for the periods indicated, the high
and low closing sales prices for the Company's common stock as reported by
NASDAQ:
<TABLE>
<CAPTION>
HIGH LOW
Year Ended December 31, 1997: ------- -------
<S> <C> <C>
First Quarter........................................ $34.250 $19.000
Second Quarter....................................... 30.875 14.500
Third Quarter........................................ 38.000 21.750
Fourth Quarter....................................... $30.625 $21.375
Year Ended December 31, 1998:
First Quarter........................................ $36.563 $24.375
Second Quarter....................................... 39.375 20.125
Third Quarter........................................ 19.125 6.000
Fourth Quarter....................................... $10.063 $ 5.000
</TABLE>
As of December 31, 1998, there were approximately 397 holders of record of
the Company's common stock.
The Company has never paid cash dividends on its common stock. The Company
currently intends to retain earnings, if any, for use in its business and does
not anticipate paying any cash dividends in the foreseeable future.
In November 1998, the Company's Board of Directors declared a dividend
distribution of one Preferred Stock Purchase Right (each a "Right" and
collectively the "Rights") for each outstanding share of Common Stock, $0.001
par value ("Common Stock"), of the Company. The distribution was paid as of
December 15, 1998 (the "Record Date"), to stockholders of record on that date.
Each Right entitles the registered holder to purchase from the Company one
one-thousandth of a share of the Company's Series A Preferred Stock, $0.001 par
value (the "Preferred Stock"), at the price of $75.00 per Right (the "Purchase
Price"). The Rights will expire upon the earlier of (i) ten years after the date
of issuance, or November 18, 2008; or (ii) redemption or exchange by the
Company. The Rights will be exercisable only if a person or group, other than an
exempted person, makes a tender offer for, or acquires beneficial ownership of
15% or more of the Company's outstanding Common Stock.
If any person other than an exempted person becomes the beneficial owner of
15% or more of the Company's outstanding Common Stock, then each Right not owned
by such person or certain related parties will entitle its holder to purchase,
at the Right's then-current exercise price, shares of the Company's Common Stock
(or, in certain circumstances, cash, property or other securities of the
Company) having a market value equal to twice the then-current exercise price.
In addition, if after a person becomes the beneficial owner of 15% or more of
the Company's outstanding Common Stock, the Company is acquired in a merger or
other business combination transaction, or sells 50% or more of its assets or
earning power of the Company and its subsidiaries to another person, each Right
will entitle its holder to purchase, at the right's then current exercise price,
shares of Common Stock of such other person having a market value equal to the
Purchase Price divided by one-half the Current Market Price of such common
stock.
The Company's Board of Directors will generally be entitled to redeem the
Rights at $0.001 per Right at any time prior to a person or group acquiring 15%
or more of the Company's Common Stock.
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<PAGE> 19
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
THE VANTIVE CORPORATION
SELECTED CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
-------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Consolidated Statement of Operations Data:
Revenues:
License................................... $ 89,215 $ 76,471 $41,513 $16,631 $ 7,141
Service................................... 73,885 40,875 22,761 8,404 3,073
-------- -------- ------- ------- -------
Total revenues....................... 163,100 117,346 64,274 25,035 10,214
Cost of Revenues:
License................................... 1,485 736 392 163 110
Service................................... 41,436 22,748 12,263 5,968 2,383
-------- -------- ------- ------- -------
Total cost of revenues............... 42,921 23,484 12,655 6,131 2,493
-------- -------- ------- ------- -------
Gross Margin................................. 120,179 93,862 51,619 18,904 7,721
Operating Expenses:
Sales and marketing....................... 67,615 45,811 24,676 11,582 5,068
Research and development.................. 28,293 17,508 7,261 3,319 2,072
General and administrative................ 12,827 9,377 5,389 2,167 1,099
Acquired in-process research and
development............................. 9,229 21,121 -- -- --
Acquisition related compensatory
expense................................. 1,666 -- -- -- --
-------- -------- ------- ------- -------
Total operating expenses............. 119,630 93,817 37,326 17,068 8,239
-------- -------- ------- ------- -------
Income (loss) from operations................ 549 45 14,293 1,836 (518)
-------- -------- ------- ------- -------
Other income (expense), net.................. 711 1,305 1,286 439 (30)
-------- -------- ------- ------- -------
Income (loss) before provisions for income
taxes..................................... 1,260 1,350 15,579 2,275 (548)
Provision for income taxes................... 3,546 8,308 4,674 232 --
-------- -------- ------- ------- -------
Net income (loss)............................ $ (2,286) $ (6,958) $10,905 $ 2,043 $ (548)
======== ======== ======= ======= =======
Net income (loss) per basic share(*)......... $ (0.09) $ (0.28) $ 0.45 $ 0.10 $ (0.14)
======== ======== ======= ======= =======
Net income (loss) per diluted share(*)....... $ (0.09) $ (0.28) $ 0.42 $ 0.09 $ (0.14)
======== ======== ======= ======= =======
Basic -- Shares Used in Per Share
Computation(*)............................ 25,852 24,570 24,008 21,034 4,038
======== ======== ======= ======= =======
Diluted -- Shares Used in Per Share
Computation(*)............................ 25,852 24,570 25,847 23,012 4,038
======== ======== ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Consolidated Balance Sheet Data:
Working capital.............................. $109,422 $108,929 $32,959 $24,463 $ 3,438
Total assets................................. 184,268 162,739 58,364 34,587 7,457
Total liabilities............................ 115,230 107,007 18,933 7,930 3,321
Mandatorily redeemable convertible preferred
stock..................................... -- -- -- -- 10,801
Stockholders' equity (deficit)............... $ 69,038 $ 55,732 $39,431 $26,657 $(6,665)
</TABLE>
- ---------------
* Net income (loss) per share in 1996, 1995 and 1994 have been restated in
accordance with the requirements of SFAS No. 128, "Earnings Per Share" and SEC
Staff Accounting Bulletin No. 98.
17
<PAGE> 20
THE VANTIVE CORPORATION
QUARTERLY FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
QUARTER ENDED
------------------------------------------------------------------------------------------
DEC 31, SEPT 30, JUNE 30, MAR. 31, DEC 31, SEPT 30, JUNE 30, MAR. 31,
1998 1998 1998 1998 1997 1997 1997 1997
------- -------- -------- -------- ------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
License............................ $25,780 $21,736 $19,182 $22,517 $24,663 $ 19,889 $16,893 $15,026
Service............................ 21,622 19,940 18,560 13,763 13,062 11,199 9,117 7,497
------- ------- ------- ------- ------- -------- ------- -------
Total revenues............... 47,402 41,676 37,742 36,280 37,725 31,088 26,010 22,523
Cost of Revenues:
License............................ 629 537 115 204 224 210 182 120
Service............................ 12,285 10,902 10,937 7,312 7,285 6,444 4,975 4,044
------- ------- ------- ------- ------- -------- ------- -------
Total cost of revenues....... 12,914 11,439 11,052 7,516 7,509 6,654 5,157 4,164
======= ======= ======= ======= ======= ======== ======= =======
Gross Margin......................... 34,488 30,237 26,690 28,764 30,216 24,434 20,853 18,359
Operating Expenses:
Sales and marketing................ 19,554 17,744 16,191 14,126 13,664 11,811 10,674 9,662
Research and development........... 8,311 7,803 6,235 5,944 5,910 4,689 3,610 3,299
General and administrative......... 3,906 3,059 2,860 3,002 3,208 2,413 2,037 1,719
Acquired in-process research and
development...................... 1,023 -- 8,206 -- -- 21,121 -- --
Acquisition related compensatory
expense.......................... 197 179 1,290 -- -- -- -- --
------- ------- ------- ------- ------- -------- ------- -------
Total operating expenses..... 32,991 28,785 34,782 23,072 22,782 40,034 16,321 14,680
------- ------- ------- ------- ------- -------- ------- -------
Income (loss) from operations........ 1,497 1,452 (8,092) 5,692 7,434 (15,600) 4,532 3,679
Other income......................... 212 75 213 211 172 376 390 367
------- ------- ------- ------- ------- -------- ------- -------
Income (loss) before provision for
income taxes....................... 1,709 1,527 (7,879) 5,903 7,606 (15,224) 4,922 4,046
Provision for income taxes........... 676 565 121 2,184 2,816 2,178 1,817 1,497
------- ------- ------- ------- ------- -------- ------- -------
Net income (loss).................... $ 1,033 $ 962 $(8,000) $ 3,719 $ 4,790 $(17,402) $ 3,105 $ 2,549
======= ======= ======= ======= ======= ======== ======= =======
Net income (loss) per basic share.... $ 0.04 $ 0.04 $ (0.31) $ 0.15 $ 0.19 $ (0.71) $ 0.13 $ 0.11
======= ======= ======= ======= ======= ======== ======= =======
Net income (loss) per diluted
share.............................. $ 0.04 $ 0.04 $ (0.31) $ 0.14 $ 0.19 $ (0.71) $ 0.12 $ 0.10
======= ======= ======= ======= ======= ======== ======= =======
</TABLE>
<TABLE>
<CAPTION>
AS A PERCENTAGE OF TOTAL REVENUES
------------------------------------------------------------------------------------------
DEC 31, SEPT 30, JUNE 30, MAR. 31, DEC 31, SEPT 30, JUNE 30, MAR. 31,
1998 1998 1998 1998 1997 1997 1997 1997
------- -------- -------- -------- ------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
License............................ 54.4% 52.2% 50.8% 62.1% 65.4% 64.0% 64.9% 66.7%
Service............................ 45.6 47.8 49.2 37.9 34.6 36.0 35.1 33.3
----- ----- ----- ----- ----- ----- ----- -----
Total revenues............... 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
Cost of Revenues:
License............................ 1.3 1.2 0.3 0.5 0.6 0.7 0.7 0.5
Service............................ 25.9 26.1 29.0 20.2 19.3 20.7 19.1 18.0
----- ----- ----- ----- ----- ----- ----- -----
Total cost of revenues....... 27.2 27.3 29.3 20.7 19.9 21.4 19.8 18.5
===== ===== ===== ===== ===== ===== ===== =====
Gross Margin......................... 72.8 72.7 70.7 79.3 80.1 78.6 80.2 81.5
Operating Expenses:
Sales and marketing................ 41.3 42.8 42.9 38.9 36.2 38.0 41.0 42.9
Research and development........... 17.5 18.7 16.5 16.4 15.7 15.1 13.9 14.7
General and administrative......... 8.2 7.3 7.6 8.3 8.5 7.8 7.8 7.6
Acquired in-process research and
development...................... 2.2 -- 21.8 -- -- 67.9 -- --
Acquisition related compensatory
expense.......................... 0.4 0.4 3.4 -- -- -- -- --
----- ----- ----- ----- ----- ----- ----- -----
Total operating expenses..... 69.6 69.2 92.2 63.6 60.4 128.8 62.7 65.2
----- ----- ----- ----- ----- ----- ----- -----
Income (loss) from operations........ 3.2 3.5 (21.5) 15.7 19.7 (50.2) 17.5 16.3
Other income......................... 0.4 0.2 0.6 0.6 0.5 1.2 1.4 1.6
===== ===== ===== ===== ===== ===== ===== =====
Income (loss) before provision for
income taxes....................... 3.6 3.7 (20.9) 16.3 20.2 (49.0) 18.9 17.9
Provision for income taxes........... 1.4 1.4 0.3 6.0 7.5 7.0 7.0 6.6
----- ----- ----- ----- ----- ----- ----- -----
Net income (loss).................... 2.2% 2.3% 21.2% 10.3% 12.7% (56.0)% 11.9% 11.3%
===== ===== ===== ===== ===== ===== ===== =====
</TABLE>
18
<PAGE> 21
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
The Company was founded in October 1990 to develop software to enable
businesses to improve their customer service. The Company'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
Version 8 of The Vantive Enterprise in the second quarter of 1998, which
contains significant enhancements including the integration of Vantive Inventory
and Vantive Procurement with The Vantive Enterprise and 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. The greatest
percentage of the Company's license revenues to date has resulted from
non-recurring license fees based on sales of concurrent user licenses. The
remaining revenues are primarily attributable to service revenues, which include
consulting, customer support and training revenue. Of these service revenues,
only customer support revenues are expected to be recurring. Customer support
revenues accounted for 17.4%, 13.5% and 12.1% of total revenues, in 1998, 1997
and 1996, 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. However, no customer accounted for over 10% of total
revenues during 1998, 1997 or 1996. 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 and expects to continue to derive recurring
revenues from customers who use the Company's products to deliver software
services to other customers.
The Company's revenues are derived primarily from software license fees and
fees for its services. License revenues consist of license fees for the
Company's products as well as fees from sublicensing third-party software
products. The Company generally recognizes license fees upon shipment of
software products if it believes collection is probable, the license agreement
requires payment within one year and the fee is fixed or determinable. 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 revenues from consulting services, 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. In cases where license fee payments are
contingent upon the acceptance of services, revenues from both the license and
the service elements are deferred until the acceptance criteria are met. See
Note 2 of Notes to Consolidated Financial Statements.
International revenues, or revenues derived from sales to customers in
foreign countries, primarily in Europe, accounted for 27.3%, 16.0% and 9.3% of
the Company's revenue in 1998, 1997 and 1996, respectively. 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 performed any hedging activities to date. 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
19
<PAGE> 22
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 an 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 an adverse effect on the Company's business, results of operations and
financial condition.
The Company is also subject to risks associated with the change in century
dates from 1999 to 2000 -- the so-called "Year 2000" issue. The date change
could cause the potential disruption of the Company's internal operations, the
operations of the Company's suppliers or customers or potential issues related
to the Company's products or services. See the section entitled "Quantitative
and Qualitative Disclosures About Market Risks -- Year 2000 Readiness
Disclosure" for a discussion of this issue.
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.
20
<PAGE> 23
RESULTS OF OPERATIONS
The following table sets forth the percentages that income statement items
are to total revenues for the years ended December 31, 1998, 1997 and 1996:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1998 1997 1996
----- ----- -----
<S> <C> <C> <C>
Revenues:
License................................................... 54.7% 65.2% 64.6%
Service................................................... 45.3 34.8 35.4
----- ----- -----
Total revenues.................................... 100.0 100.0 100.0
Cost of Revenues:
License................................................... 0.9 0.6 0.6
Service................................................... 25.4 19.4 19.1
----- ----- -----
Total cost of revenues............................ 26.3 20.0 19.7
----- ----- -----
Gross Margin................................................ 73.7 80.0 80.3
Operating Expenses:
Sales and marketing....................................... 41.4 39.0 38.4
Research and development.................................. 17.3 14.9 11.3
General and administrative................................ 7.9 8.0 8.4
Acquired in-process research and development.............. 5.7 18.0 --
Acquisition related compensatory expense.................. 1.0 -- --
----- ----- -----
Total operating expenses.......................... 73.3 79.9 58.1
----- ----- -----
Income (loss) from operations............................... 0.4 0.1 22.2
Other income (expense), net................................. 0.4 1.1 2.0
----- ----- -----
Income (loss) before provisions for income taxes............ 0.8 1.2 24.2
Provision for income taxes.................................. 2.2 7.1 7.3
----- ----- -----
Net income (loss)........................................... (1.4%) (5.9%) 16.9%
===== ===== =====
</TABLE>
Revenues
License. License revenues represent fees earned from licensing the rights
to use the Company's software products to customers. The Company increased its
license revenue by 16.7% to $89.2 million in 1998 from $76.5 million in 1997 and
by 84.2% in 1997 from $41.5 million in 1996. These increases were 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 consist of consulting, customer support and, to a
lesser extent, training services. Service revenues increased by 80.8% to $73.9
million in 1998 from $40.9 million in 1997 and by 79.6% in 1997 from $22.8
million in 1996. 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 licenses of the Company's software.
Also, services revenue increased due to longer implementation project periods,
as well as an increase in post-implementation projects from our existing
customers. 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 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.
21
<PAGE> 24
COST OF REVENUES
License. Cost of license revenues includes the cost of royalties due on
embedded third-party technology, cost of product media, product duplication and
manuals. Cost of license revenues increased to $1.5 million, or 1.7% of related
license revenues in 1998, from $736,000, or 1.0% of related license revenues, in
1997 and from $392,000, or 0.9% of related license revenues in 1996. The
increase in absolute dollars in cost of license revenues was primarily due to
the increase in volume shipments of the Company's software applications and the
related cost of sublicensing embedded third-party software.
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 to $41.4 million, or 56.1% of related service revenues in
1998, from $22.7 million, or 55.7% of related service revenues, in 1997 and from
$12.3 million, or 53.9% of related service revenues, in 1996. These increases in
absolute dollars were due primarily to increases in consulting, support and
training personnel and third-party service providers during these periods. The
increase in 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. Operating expenses increased to $119.6 million, or
73.3% of revenues, in 1998 from $93.8 million, or 79.9% of revenues, in 1997 and
from $37.3 million, or 58.1% of revenues in 1996. Excluding the acquired
in-process research and development charge of $9.2 million and acquisition
related compensatory expense of $1.7 million, operating expenses would have been
$108.7 million, or 66.6% of revenues in 1998. Excluding the acquired in-process
research and development charge of $21.1 million, operating expenses would have
been $72.7 million, or 62.0% of revenues in 1997.
Sales and marketing. Sales and marketing expenses increased to $67.6
million, or 41.5% of revenues, in 1998, from $45.8 million, or 39.0% of
revenues, in 1997 and from $24.7 million, or 38.4% of revenues, in 1996. These
increases in absolute dollars were primarily related to the expansion of the
Company's sales force and marketing activities, increased expenses as a result
of the increase in sales related headcount and increased marketing activities,
including trade show, advertising 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 in
absolute dollars over the coming year.
Research and development. Research and development expenses increased to
$28.3 million, or 17.3% of revenues, in 1998, from $17.5 million, or 14.9% of
revenues in 1997 and from $7.3 million, or 11.3% of revenues, in 1996. Research
and development expenses increased in absolute dollars between the years
primarily as a result of an increase in personnel and outside contractors to
support the Company's product development activities. The Company expects
research and development expenses will increase in absolute dollars over the
coming years.
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 software development
costs to research and development expense.
In March 1998, the American Institute of Certified Public Accountants,
("AICPA") issued SOP No. 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use." SOP No. 98-1 requires entities to
capitalize certain costs related to internal-use software once certain criteria
have been met. Management expects that the adoption of SOP No. 98-1 will not
have a material impact on the Company's financial position or results of
operations. The Company will implement SOP No. 98-1 for fiscal year 1999.
General and administrative. General and administrative expenses increased
to $12.8 million, or 7.9% of revenues, in 1998, from $9.4 million, or 8.0% of
revenues in 1997 and from $5.4 million, or 8.4% of revenues, in 1996. General
and administrative expenses increased in absolute dollars during these periods
primarily due to the addition of staff and information system investments to
support the growth of the Company's business
22
<PAGE> 25
during these periods. The Company expects general and administrative expenses
will increase in absolute dollars over the coming years.
Acquired in-process research and development. In June 1998, the Company
acquired Wayfarer Communications, Inc. ("Wayfarer"), a privately-held California
corporation that specializes in web-based information delivery, by merging a
wholly-owned subsidiary of the Company into Wayfarer (the "Acquisition"). The
Company issued 163,969 shares of its common stock and exchanged 2,251 shares of
the Company's common stock for 89% of Wayfarer shares. In December 1998, the
Company issued 12,780 shares for the remaining shares of Wayfarer and recorded
charges associated with acquiring the remaining minority interest of
approximately 11% of Wayfarer. The Acquisition was recorded under the purchase
method of accounting and the results of operations of Wayfarer and the fair
value of the acquired assets and liabilities were included in the Company's
financial statements beginning on the acquisition date. The Company filed a
Report on Form 8-K with the SEC on July 15, 1998 in connection with the
acquisition.
In connection with the acquisition of the majority interest, an acquired
in-process research and development charge of approximately $8.2 million was
expensed in the quarter ended June 30, 1998. An additional acquired in-process
research and development charge of approximately $1.0 million associated with
the acquisition of the remaining minority interest was expensed in the quarter
ended December 31, 1998.
The Company has also recorded a compensatory expense of approximately $1.7
million associated with the Acquisition for the year ended December 31, 1998.
The remaining intangibles were recorded as goodwill and will be amortized on a
straight-line basis over five years.
Provision for income taxes. The Company's provision for federal, state and
foreign income taxes for fiscal 1998 was $3.5 million. The effective tax rate
for fiscal 1998 was negatively affected due to the non-deductibility of the
charges related to the acquired in-process research and development that
resulted from the Acquisition. Excluding the effect of these charges, the
effective tax rate for fiscal 1998 would have been 34%, compared to an effective
tax rate of 37% for fiscal 1997. See Note 14 of the Notes to Consolidated
Financial Statements.
ACQUISITIONS
ICC. Innovative Computer Concepts, Inc. ("ICC") was acquired in the year
ended 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 a
client/server object-oriented application server architecture; a transaction
bus; an event logger; a transaction processor; a business rule engine; an
object/relational data layer; and 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
23
<PAGE> 26
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 the market for ICC products; the completion costs for the
projects; the expected cash flows attributable to the in-process research and
development projects; and 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 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 year ended December 31, 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 acquired 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.
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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% 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 acquired 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 acquired in-process research and
development was 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% of the Company's FieldService specific sales
include the ICC-derived inventory and procurement modules. This is consistent
with the original expectations for the FieldService product. Sales of the
Company's HelpDesk and Sales Force Automation applications have been less
influenced by the availability of the ICC derived spare parts inventory and
procurement modules. The Company expects that the availability of the modules
derived from ICC technology will have a greater impact on sales of HelpDesk and
Sales over time as the Company has completed the integration of the inventory
and procurement components with HelpDesk and Sales Force Automation. The
Company's FieldService modules, in conjunction with the inventory and
procurement modules are competitive product offerings.
If sales of the Combined Revenues are below anticipated levels,
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, product introduction or other actions by competitors and other
factors discussed herein (See "Quantitative and Qualitative Disclosures About
Market Risks").
Wayfarer. Wayfarer Communications Corp. ("Wayfarer") was acquired in the
year ended 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 a user interface; a
monitor for internal and external Web pages; an application for the construction
of modules that track information from internal corporate information sources
and various ERP systems; and 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 research
and development 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 $9.2 million of the
acquired in-process research and development.
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 three to nine months,
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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.
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 the market for Wayfarer products; the completion costs for
the projects; the expected cash flows attributable to the in-process research
and development projects; and 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 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% of revenues through the forecasted time horizon.
Research and development expenditures were expected to approximate 15% 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% 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 was
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
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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 December 31, 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 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 "Quantitative and Qualitative
Disclosures About Market Risks."
FINANCIAL CONDITION
Total assets as of December 31, 1998 increased $21.5 million from December
31, 1997. The increase was primarily due to increases in accounts receivable and
property and equipment. Net accounts receivable increased $8.8 million primarily
due to increased revenues from sales of the Company's products and services. Net
property and equipment increased $11.3 million primarily due to equipment
purchases associated with supporting the growth of the Company's business during
this period.
Current liabilities as of December 31, 1998 increased $8.3 million from
December 31, 1997. The increase was due to increases in accounts payable of $6.3
million and deferred revenues of $6.3 million, partially offset by a decrease in
accrued liabilities of $4.2 million. These increases were primarily due to
increased expense levels and accruals associated with a higher transaction
volume and deferrals of revenues related to customer support.
LIQUIDITY AND CAPITAL RESOURCES
Operating activities used cash of $1.4 million in 1998. The primary use of
these funds was an increase in accounts receivable, prepaid expenses and other
assets and in accounts payable, partially offset by decrease in other accrued
liabilities and net loss from operations after the write-off of acquired
in-process research and development costs. Operating activities provided cash of
$5.6 million in 1997. The primary source of these funds was income from
operations after the write-off of acquired in-process research and development
costs, increase in accrued liabilities and deferred revenues, partially offset
by increases in accounts receivables and prepaid expenses and other current
assets.
Investing activities used cash of $34.1 million in 1998, primarily for the
purchase of short-term, interest-bearing, investment-grade securities and for
the purchase of capital equipment. Investing activities used cash of $26.2
million in 1997, 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 $9.1 million in 1998. The primary
source of these funds was proceeds from the issuance of Common Stock pursuant to
the exercise of outstanding stock options. Financing activities provided cash of
$72.2 million in 1997. The primary source of these funds was proceeds from the
issuance of the convertible debt as discussed below.
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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 working capital. Based on the traded yield to maturity, the
approximate fair market value of the convertible subordinated notes was $47.6
million and $63.9 million as of December 31, 1998 and 1997, respectively.
At December 31, 1998, the Company's principal sources of liquidity were its
cash, cash equivalents and short-term investments of $94.8 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
at least 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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
OUR FUTURE OPERATING RESULTS ARE UNCERTAIN.
Vantive's future operating results are uncertain and likely to fluctuate.
Our operating results have varied in the past, and we expect that they will
continue to fluctuate in the future. In addition, our operating results may not
follow any past trends. It is particularly difficult to predict the timing or
amount of our license revenues because:
- our sales cycles are lengthy and variable, typically ranging between six
and nine months from our initial contact with a potential customer to the
signing of a license agreement, although occasionally sales require
substantially more time and, in any event, vary from customer to
customer;
- the amount of unfulfilled orders for our products at the beginning of a
quarter is either zero or small because our products are typically
shipped shortly after orders are received;
- we recognize a substantial portion of our license revenues in the last
month of a quarter, and often in the last weeks or days of a quarter; and
- revenue recognition accounting policies may require us to defer
recognition of license revenue for software products from the period in
which the agreement for the sale of such license is signed to subsequent
periods.
Nevertheless, we base our decisions regarding our operating expenses in
part on anticipated revenue trends. Because many of our expenses are relatively
fixed in the short term, a delay in recognizing revenue from a limited number of
license transactions could cause our operating results to vary significantly
from quarter to quarter and could result in operating losses. To the extent
these expenses are not followed by increased revenues that match our
projections, our operating results will suffer. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
OUR QUARTERLY RESULTS FLUCTUATE SIGNIFICANTLY AND CAN FALL SHORT OF
ANTICIPATED LEVELS.
Our quarterly operating results have varied significantly in the past and
we expect that they will vary significantly from quarter to quarter in the
future. These quarterly variations are caused by a number of factors, including:
- variations in demand for our products;
- delays in customer orders;
- timing of product deployments and achievement of milestones, particularly
for large orders;
- delays in recognition of revenue in accordance with applicable accounting
principles;
- the timing and mix of our license and services orders;
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- our ability to attract and train qualified sales personnel;
- changes in the development of the market for our products and services;
- our ability to develop, introduce, ship and support new and enhanced
products that respond to changing technology trends in a timely manner
and our ability to manage product transitions;
- the amount and time of increases in expenses;
- costs and complications relating to acquisitions and integration of new
technologies or businesses;
- our ability to expand our international operations;
- the utilization rate of our services personnel; and
- possible purchasing delays by customers as they divert resources to
address Year 2000 issues.
In addition, our stock price fluctuates based upon how our results measure
against investor expectations.
OUR MARKET IS SUBJECT TO RAPID TECHNOLOGICAL CHANGE.
The software market in which we compete is characterized by rapid
technological change. Existing products may become obsolete and unmarketable
when products using new technologies are introduced and or when industry
standards emerge. For example, Vantive's customers have adopted a wide variety
of hardware, software, database, Internet-based and networking platforms, we
must continue to support and maintain our products on a variety of such
platforms. As a result, the life cycles of our products are difficult to
estimate. To be successful, we must continue to enhance our current product line
and develop new products that successfully respond to such developments. We have
delayed enhancements or new product release dates several times in the past and
may not be able to introduce enhancements or new products successfully or in a
timely manner in the future. We believe that such delays have not to date had a
material adverse impact on our financial condition or operating results. Our
business, financial condition and operating results could be materially harmed
if we delay the release of our products and product enhancements or if these
products or product enhancements fail to achieve market acceptance when
released. In addition, customers may defer or forego purchases of our products
if we, our competitors or major hardware, systems or software vendors introduce
or announce new products or product enhancements. Such events could materially
adversely effect our business, financial condition and operating results. See
the section entitled "Business -- Product Development."
OUR BUSINESS DEPENDS ON THE SUCCESSFUL DEVELOPMENT OF NEW PRODUCTS.
Our product development requires substantial investment. There can be no
assurance that we will have sufficient resources to make the necessary
investments. We have in the past experienced development delays and it is
possible that we will experience such delays in the future. There is no
assurance that we 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 is no assurance that such products
will meet the requirements of the marketplace and achieve market acceptance. If
we are unable, for technological or any other reasons, to develop and introduce
new and enhanced products in a timely manner, our business could be materially
adversely affected.
OUR PRODUCTS MUST OPERATE PROPERLY.
Our software products are complex and may contain errors that may be
detected at any point in the products' life cycles. We have in the past
discovered software errors in certain of our products and as a result have
experienced delays in shipment of products during the period required to correct
these errors. Although we have not experienced any material adverse effects from
any such errors to date, there can be no assurance that, despite testing by us
and by current and potential customers, errors will not be found in new products
or
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releases after shipment, resulting in loss of revenue or delay in market
acceptance and sales, diversion of development resources, injury to our
reputation, or increased service and warranty costs, any of which could severely
harm our business. Our products are generally used in systems with other
vendors' products, and as a result, they must integrate successfully with
existing systems. System errors, whether caused by our products or those of
another vendor, could adversely affect the market acceptance of our products,
and any necessary revisions could cause us to incur significant expenses. The
occurrence of any such problems could harm our business.
Since our products are often used for mission critical applications such as
sales, marketing or field services, errors, defects or other performance
problems could result in financial or other damages to our customers. Although
our license agreements generally contain provisions designed to limit our
exposure to product liability claims, existing or future laws or unfavorable
judicial decisions could negate such limitation or liability provisions.
Although no product liability claim has been made against us to date, such a
claim, even if it were unsuccessful, would be time-consuming and costly to
defend and could harm our business. See the section entitled
"Business -- Product Development.".
WE FACE RISKS FROM GLOBAL OPERATIONS AND EXPANSION OF INTERNATIONAL
OPERATIONS.
International revenue, or revenue derived from sales to customers in
foreign countries, accounted for 27.3%, 16.0%, and 9.3% of our revenue in 1998,
1997 and 1996, respectively. We intend to continue and substantially expand our
international operations and to enter new international markets. This expansion
will require significant management attention and financial resources to
successfully translate and localize our software products into various languages
and to develop direct and indirect international sales, consulting and support
channels. We may not be able to maintain or increase international market demand
for our products. We, or our distributors or resellers, may not be able to
sustain or increase international revenues from licenses or from consulting and
customer support or our relationships with our distributors may deteriorate.
Additionally, recent unfavorable economic and political conditions in the Asian
markets have occurred and we believe if such conditions continue over the
foreseeable future they could negatively impact our business. Moreover, our
foreign subsidiaries operate primarily in local currencies and their results are
translated into U.S. dollars. We do not currently engage in currency hedging
activities, but we may do so in the future. Increases in the value of the U.S.
dollar relative to foreign currencies could materially harm our operating
results.
WE DEPEND ON SERVICE REVENUES.
Support and service revenues represented 45.3% of our total revenues for
1998, 34.8% for 1997 and 35.4% for 1996. We anticipate that service revenues
will continue to represent a significant percentage of total revenues.
- Because service revenues have lower gross margins than license revenues,
a continued increase in the percentage of total revenues represented by
service revenues or an unexpected decrease in license revenues could have
a detrimental impact on overall gross margins and our operating results.
- We subcontract certain consulting, customer support and training services
to third-party service providers. Third-party contract revenues generally
carry lower gross margins than our service business overall; as a result,
our service revenues and related margins may vary from period to period,
depending on the mix of these third-party contract revenues.
- Service revenues depend in part on ongoing renewals of support contracts
by our customers, some of which may not renew their support contracts.
- In addition, consulting revenues as a percentage of our total revenues
could decline if customers select third-party service providers to
install and service our products more frequently than they have in the
past.
If service revenues are lower than anticipated, our business, financial
condition and operating results could be materially adversely affected. Our
ability to increase service revenues will depend in large part on our
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ability to increase the scale of our services organization, including our
ability to successfully recruit and train a sufficient number of qualified
services personnel. We may not be able to do so. See the section entitled
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
WE DEPEND ON LICENSED TECHNOLOGY AND WE MAY INCREASE USE OF SOFTWARE LICENSED
TO US BY THIRD PARTIES.
We license technology on a non-exclusive basis from several businesses for
use with our products and anticipate that we will continue to do so in the
future. Our inability to continue to license these products or to license other
necessary products for use with our products or substantial increases in royalty
payments under third-party licenses could harm our business. In addition, the
effective implementation of our products depends upon the successful operation
of third-party licensed products in conjunction with our products, and therefore
any undetected errors in such licensed products may prevent the implementation
or impair the functionality of products, delay new product introductions and/or
injure our reputation.
Vantive currently markets products that allow customers to make
modifications to tailor our software to their business. While we believe, based
on interactions with our customers, and potential customers, that customers
derive significant competitive advantage from such modifications, we believe
that competitive pressures, technological changes demanded by customers, and
significant advances in the sophistication of third-party application
development tools such as Visual Basic for Applications will require us to make
greater use of third-party software in the future. Additionally, our commitment
to adopt or interface with best-of-breed software technology may require us to
increase use of third-party software. The greater use of third-party software
could require us to invest significant resources in rewriting some or all of our
software applications products utilizing third-party software and/or to enter
into license arrangements with third parties which could result in higher
royalty payments and a loss of product differentiation. There can be no
assurance that we would be able to successfully rewrite our products or enter
into commercially reasonable licenses, and the costs of, or inability or delays
in, doing so could materially harm our business.
OUR MARKET IS HIGHLY COMPETITIVE.
The market for enterprise relationship management software and services is
intensely competitive, fragmented and rapidly changing. We face competition or
potential competition in the customer relationship management software market
and services primarily from the following types of companies:
- front-office software applications vendors such as (in alphabetical
order) Aurum Software, Inc. (a subsidiary of The Baan Company), Clarify,
Inc., Onyx Software Corporation, Pivotal Software and Siebel System,
Inc.;
- large enterprise hardware and software vendors such as Oracle,
PeopleSoft, SAP AG, IBM's CorePoint business unit and JD Edwards &
Company;
- system integrators;
- Internet start-ups such as Silknet Software, Inc. and Vignette
Corporation; and
- our potential customers' internal information technology departments,
which may seek to develop proprietary enterprise relationship management
systems.
In addition, as we develop new products, particularly applications focused
on particular industries, we may begin competing with companies with whom we
have not previously competed. It is also possible that new competitors will
enter the market or that our competitors will form alliances that may enable
them to rapidly increase their market share or that our current alliance
partners may now or in the future compete with us. See the section entitled
"Business -- Competition."
CONTINUED GROWTH MAY STRAIN OUR OPERATIONS.
We have recently experienced a period of growth and expansion. Our new
employees include a number of key managerial, marketing, planning, technical and
operations personnel who have not yet been fully integrated into our
organization.
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We intend to continue to expand our operations internationally and
domestically, grow our customer base and pursue market opportunities through
multiple growth strategies. Our rapid growth and expansion places significant
demands on our managerial, administrative, operational, financial and other
resources. To accommodate continued anticipated growth and expansion, we will be
required to:
- improve existing and implement new operational and financial systems,
procedures and controls;
- hire, train, manage, retain and motivate qualified personnel and enter
into relationships with strategic partners;
- integrate our new management team; and
- anticipate and respond to changing market conditions.
These measures may place a significant burden on our management and our
internal resources. If we are not able to install adequate control systems in an
efficient and timely manner, if our current or planned personnel systems,
procedures and controls are not adequate to support our future operations, or if
we are unable to otherwise manage growth effectively, our business could be
harmed.
WE DEPEND ON KEY PERSONNEL AND MUST ATTRACT AND RETAIN ADDITIONAL QUALIFIED
PERSONNEL.
Our success depends largely on the continued contributions of our key
management, engineering, sales and marketing and professional services
personnel, many of whom would be difficult to replace. Our success also depends
on our ability to attract and retain additional qualified engineering, sales and
marketing and professional services personnel. Competition for such personnel is
intense, especially in Silicon Valley, where our principal facilities are
located. If we are unable to retain our existing key personnel, or attract and
train additional qualified personnel, our business could be harmed.
In addition, companies in the software industry whose employees accept
positions with competitors frequently claim that such competitors have breached
non-competition agreements. Although no such claim has been made against us to
date, we may receive such claims in the future as we hire qualified personnel,
and if such a claim were to be made against us, it may result in material
litigation. We could incur substantial costs in defending ourselves against any
such claims, regardless of the merits of such claims.
WE ARE DEPENDENT ON EMERGING MARKETS FOR THE GROWTH OF FRONT-OFFICE AUTOMATION
SOFTWARE.
Vantive's future financial performance will depend in large part on the
growth in demand for individual front-office automation software as well as the
number of organizations adopting comprehensive front-office automation software
information systems for their client/server and Web computing environments. We
believe that an important competitive advantage for our products is their
ability to be integrated with one another and with other back office software
into a front-office automation information system. If the demand for integrated
suites of front-office automation applications fails to develop, or develops
more slowly than we currently anticipate, this could have a material adverse
effect on the demand for our products and on its business, results of operations
and financial condition.
OUR SUCCESS DEPENDS ON A LIMITED NUMBER OF PRODUCTS AND THE SUCCESSFUL
DEVELOPMENT OF NEW PRODUCTS.
To date, a significant portion of our license revenue is derived from the
sale of a limited number of individual products, and in particular, Vantive
Support, Vantive FieldService, Vantive Sales and Vantive HelpDesk. We expect
license revenues from these products and their enhanced versions to continue to
account for a significant portion of our future revenues. As a result, factors
adversely affecting the pricing of or demand for such products such as
competition or technological change could materially affect our business. Our
future financial performance will depend, in significant part, on the successful
development, introduction and customer acceptance of new and enhanced versions
of these products and other products. Additionally, we are investing in the
field service, eCommerce and Web product markets. Should these markets fail to
develop, not accept our products, or cause the company to lose new business
and/or customers in its traditional markets our business.
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WE NEED TO EXPAND AND LEVERAGE OUR DISTRIBUTION CHANNELS.
We have historically sold our products through our direct sales force. Our
ability to achieve significant revenue growth in the future will depend in large
part on our success in recruiting and training sufficient sales personnel and
establishing relationships with distributors, resellers and systems integrators.
We are currently investing, and plan to continue to invest, significant
resources to expand our domestic and international direct sales force and to
develop distribution relationships with certain third-party distributors,
resellers and systems integrators. There can be no assurance that we will be
able to attract a sufficient number of third-party distribution partners or that
such partners will recommend our products. The inability to establish successful
relationships with distributors, resellers or systems integrators could have a
material adverse effect on our business, operating results and financial
condition. In addition, there can be no assurance that we will be able to
successfully expand our direct sales force or other distributors. If we fail
expand our direct sales force or other distribution channels our business could
be harmed.
WE NEED TO SUCCESSFULLY LEVERAGE THIRD-PARTY RELATIONSHIPS.
Vantive relies heavily on our relationships with a number of organizations
that are important to worldwide sales and marketing of our products. If we fail
to maintain our existing relationships, or to establish new relationships, or if
our partners do not perform to our expectations, our business, financial
condition and operating results could be materially adversely affected. We also
rely on a number of systems consulting and integration firms to implement our
software, provide customer support services and endorse our products during the
competitive evaluation stage of the sales cycle. Although we seek to maintain
relationships with these service providers, many of them have similar, and often
more established, relationships with our competitors. These third parties, many
of which have significantly greater resources than we have, may in the future
market software products that compete with ours or reduce or discontinue their
relationships with us or their support of our products. In addition, our
business, financial condition and operating results could be materially
adversely affected if:
- we are unable to develop and retain effective, long-term relationships
with systems integrators;
- we are unable to adequately train a sufficient number of systems
integrators;
- systems integrators do not have or do not devote the resources necessary
to facilitate implementation of our products; or
- systems integrators endorse a product or technology other than ours.
POSSIBLE VOLATILITY OF OUR STOCK PRICE.
In the past, the price of our common stock has been volatile. The market
price of the common stock could substantially fluctuate due to future
announcements concerning Vantive or our competitors such as:
- quarterly variations in operating results
- announcements of technological innovations
- the introduction of new products or changes in product pricing policies
by Vantive or its competitors
- proprietary rights or other litigation
- changes in earnings estimates by analysts
In addition, stock prices for many technology companies fluctuate widely
for reasons that may be unrelated to operating results of such companies and
could result from many other factors. These fluctuations, as well as general
economic, market and political conditions such as recessions or military
conflicts, may materially and adversely affect the market price of our common
stock, which could in turn harm our business.
33
<PAGE> 36
WE HAVE LIMITED PROTECTION OF OUR INTELLECTUAL PROPERTY.
Our success and ability to compete depend on our proprietary technology. We
rely primarily on copyright, trade secret and trademark law and, to a lesser
extent, patent law, to protect the source code for our proprietary software and
other proprietary information. We presently have only two patents and no patent
applications pending. We also enter into agreements with our employees,
consultants and customers to control their access to and distribution of our
software, documentation and other proprietary information. Nevertheless, a
third-party could copy or otherwise obtain our software or other proprietary
information without authorization, or could develop software competitive to
ours. In addition, effective trademark protection may not be available. Our
competitors may adopt names similar to our trade-names, thereby impeding our
ability to build brand identity and possibly leading to customer confusion.
We may have to litigate to enforce our intellectual property rights, to
protect our trade secrets of know-how or to determine their scope and validity,
or the scope, validity or enforceability of the proprietary rights of other
third parties. Enforcing or defending our proprietary technology is expensive,
could cause the diversion of our resources, and may not prove successful. In
addition, the laws of other countries may not protect our products and
intellectual property rights to the same extent as the laws of the United
States. Our protective measures may be inadequate in these countries to protect
our proprietary rights. Any failure to enforce or protect our intellectual
property rights could cause us to lose a valuable asset and could harm our
business.
WE MAY INFRINGE THE PROPRIETARY RIGHTS OF OTHERS.
Although we are not aware of any infringement by any of our products of the
patent, trademark, copyright or other proprietary rights of any third-party,
claims may be made against us in the future that allege violation of such
proprietary rights as a result of the use by us, our customers or other
third-parties of our products. Any such claim would be costly and time-consuming
to defend, would divert our management's attention, could cause product delays
and could otherwise harm our business. If we were to discover that our products
violate a third-party's proprietary rights, we could be required to enter into
royalty or licensing agreements in order to be able to sell our products. Such
arrangements may not be available to us, and even if they are available, they
might be prohibitively expensive.
PRODUCT LIABILITY.
Our license agreements with our customers typically contain provisions
intended to limit our exposure to potential product liability claims. It is
possible that the limitation of liability provisions contained in such
agreements may not be effective or may not be enforced in a particular
jurisdiction. Although we have not experienced any product liability claims to
date, our sale and support of such products and the acquisition of other
businesses may entail the risk of such claims. A successful product liability
action brought against us could harm our business.
YEAR 2000 READINESS DISCLOSURE
As is true for most companies, the Year 2000 issue creates risks for
Vantive. If systems do not correctly recognize date information when the year
changes to 2000, there could be an adverse impact on our operations. The Year
2000 issue not only has an impact on Vantive at the end of the calendar year
1999, but could also have an impact on us in the year 2000. Our risk exists
primarily in the following areas:
- systems used by Vantive to run its business including information
systems, equipment and facilities;
- systems used by Vantive's suppliers;
- potential warranty or other claims from our customers with respect to our
products or services; and
- potential for reduced spending, or a moratorium on spending, by potential
customers due to Year 2000 remediation.
We are continuing to evaluate and mitigate our exposure in those areas
where appropriate and possible.
34
<PAGE> 37
State of Readiness. In 1998 two groups were assigned to address Vantive's
Year 2000 readiness efforts. The head of our engineering department is in charge
of the product readiness group. Our head of internal systems and technology is
in charge of the internal systems readiness group. These groups have been
meeting on a regular basis to review Vantive's Year 2000 readiness and to
coordinate company-wide efforts.
Internal Systems and Equipment and Facilities. Internal systems include
those used to run Vantive's business, such as finance, manufacturing, order
processing and distribution. Vantive has completed its evaluation of most of
these applications for Year 2000 compliance, and has begun remediation or
replacement of systems, where necessary. We expect to achieve remediation
without significant impact on the operational results of our business by
September 1999, with continued testing through the end of 1999. In the event
that implementation of replacement systems is delayed, or if significant new
compliance issues are identified, our ability to conduct our business or record
transactions could be disrupted which could harm our results of operations or
financial condition.
Vantive is in the process of evaluating Year 2000 compliance of its
equipment and critical suppliers of goods and services. Critical equipment, such
as manufacturing equipment, has been identified, and Vantive is currently in the
process of contacting its suppliers to ascertain Year 2000 compliance. Vantive
has submitted questionnaires to those suppliers on its internal systems and has
received certification from suppliers on year 2000 readiness. We expect to
achieve remediation by September 1999 without significant impact on the
operational results of our business, with continued testing through the end of
1999. In the event that identification of non-compliant equipment and any
upgrade or replacement of equipment is delayed, our design, production and
shipping capabilities could be disrupted, which could harm our results of
operation or financial condition.
We are assessing Year 2000 readiness of our owned and leased facilities
worldwide. Priority is being placed on critical facilities that house large
numbers of employees or significant operations. We expect to complete
remediation by September 1999. The continued functioning of these facilities is
important to operations, and, as such, any delays in achieving Year 2000
compliance with respect to these facilities could harm Vantive's results of
operations or financial condition.
Vantive Products. Vantive has conducted evaluation of its currently
available products. We believe that our current products are materially Year
2000 compliant. We have not tested all previous releases or versions of all of
our products, nor have we tested all current products within all customers'
systems environments. To assist customers in evaluating Year 2000 readiness of
Vantive's products, we have developed information on the capability of our
products. This information is located on Vantive's website (www.Vantive.com) and
is periodically updated as assessment of additional products is completed.
Certain of our disclosures and announcements concerning our products and Year
2000 programs, including those in this report on Form 10-K, are intended to
constitute "Year 2000 Readinesss Disclosures" as defined in the recently enacted
Year 2000 Information and Readiness Disclosure Act. The inability of any of our
products to operate properly in the Year 2000 could result in increased warranty
costs, customer satisfaction issues, litigation or other material costs and
liabilities, which could materially harm our results of operations or financial
condition. Additionally, because there is no uniform definition of Year 2000
"compliance" and because all customer situations cannot be anticipated,
particularly those involving other vendors' products, Vantive may see a change
in demand or an increase in warranty and other claims as a result of the Year
2000 transition. Such events, should they occur, could have a material adverse
impact on future results.
Key Suppliers of Technology for Resale by Vantive for Use With Vantive
Products. Vantive has contacted suppliers of products resold by Vantive to
determine that the suppliers' operations and the products and services they
provide are Year 2000 compliant. We believe such suppliers' products are
materially Year 2000 compliant and plan to work with all suppliers for
assessment and remediation for Year 2000 compliance. Because Vantive does not
provide a warranty for such products, and because only a small percentage of our
customers have purchased such products from us, we believe our exposure to
product warranty claims is minimal. As needed, Vantive will identify alternative
sources of such products. If suppliers fail to adequately address the Year 2000
issue for the products or services they provide to Vantive and which are resold
by Vantive, this could materially harm our results of operations or financial
condition.
35
<PAGE> 38
Contingency Plans. Because we are still assessing our Year 2000 compliance
in all areas, contingency plans have not yet been determined. As the assessments
are completed, contingency plans will be developed as needed. For example,
contingency plans for production facilities could include shifting production
and distribution to other Vantive facilities or engaging subcontractors.
Costs to Address Year 2000 Issues. Based on our current assessment, it is
expected that the total cost of these programs could be between $500,000 and
$1,700,000. Approximately $100,000 has been spent on these programs to date. All
expected costs are based on our current evaluation of the Year 2000 programs and
are subject to change as the programs progress. It is anticipated that the
majority of the Year 2000 costs incurred will consist of consultant's fees and
internal hardware and software upgrades or replacements. We do not separately
track the internal labor costs associated with the Year 2000 project unless it
is an employee's principal job function. These internal labor costs, including
employee efforts involved in assessing our Year 2000 exposures, testing, and
remediating non-compliant Year 2000 systems, communicating with customers, and
various other employee-related tasks, have not been included in the total
estimated costs. Any costs associated with potential Year 2000 litigation
exposure are not currently ascertainable and are not included in the total cost
estimate above.
Future Sales Impact. 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
technology spending to fund such upgrades and modifications and divert spending
away from projects such as customers relationship management or front office
software applications. We believe that some companies have instituted a
moratorium on new information technology projects until their Year 2000 issues
are satisfactorily addressed. Such changes in customers' spending patterns could
materially harm our sales, operating results or financial condition.
REMEDIATION OF PROBLEMS RELATED TO THE EUROPEAN MONETARY CONVERSION MAY
INVOLVE SIGNIFICANT TIME AND EXPENSE AND MAY REDUCE OUR FUTURE SALES.
Vantive is aware of the issues associated with the changes in Europe aimed
at forming a European economic and monetary union. One of the changes resulting
from this union required member countries to irrevocably fix their respective
currencies to a new currency, the Euro, on January 1, 1999, at which date the
Euro became a functional legal currency of these countries. During the next
three years, business in member countries will be conducted in both the existing
national currency, such as the French Franc or the Deutschemark, and the Euro.
As a result, companies operating in or conducting business in member countries
will need to ensure that their financial and other software systems are capable
of processing transactions and properly handling these currencies, including the
Euro.
We are still assessing the impact the conversion to the Euro will have on
both our internal systems and the products we sell. We will take appropriate
corrective actions based on the results of such assessment. We have not yet
determined the costs related to addressing this issue. This issue and its
related costs could harm our business.
ACQUISITION AND NEW VENTURES MAY PRESENT RISKS TO OUR BUSINESS.
As part of our business strategy, we may in the future make acquisitions
of, or investments in, companies, products or technologies that complement our
current products, augment our market coverage, enhance our technical
capabilities or that may otherwise offer growth opportunities. Future
acquisitions may create risks for us, including:
- difficulties in the assimilation of acquired personnel, operations,
technologies or products;
- unanticipated costs associated with the acquisition;
- diversion of management's attention from other business concerns;
- adverse effects on existing business relationships with suppliers and
customers;
36
<PAGE> 39
- risks of entering markets where we have no or limited prior experience;
- potential loss of key employees of acquired organizations; and
- loss of customers that, as a result of an acquisition, become
competitors.
These risks and difficulties could disrupt our ongoing business, distract
our management and employees and increase our expenses. We may not be able to
successfully integrate any businesses, products, technologies or personnel that
we might acquire in the future and our failure to do so could harm our business.
In addition, in connection with any future acquisitions, we could:
- issue equity securities which would dilute current stockholders'
percentage ownership;
- incur substantial debt; or
- assume significant liabilities.
Such actions by us could materially adversely affect our operating results
and/or the price of our common stock.
CHANGES IN ACCOUNTING STANDARDS COULD AFFECT THE CALCULATION OF OUR FUTURE
OPERATING RESULTS.
We recognize revenues from software license agreements upon delivery of our
software products if:
- persuasive evidence of an arrangement exists;
- collection is probable; and
- the fee is fixed or determinable.
We recognize customer support (maintenance) revenues ratably over the
contract term -- typically one year -- and recognize revenues for consulting and
training services as such services are performed.
Statement of Position 97-2, "Software Revenue Recognition," was issued in
October 1997 by the American Institute of Certified Public Accountants and
amended by Statement of Position 98-4. We adopted Statement of Position 97-2
effective January 1, 1998. Based on our interpretation of Statement of Position
97-2 and Statement of Position 98-4, we believe our current revenue recognition
policies and practices are consistent with Statement of Position 97-2 and
Statement of Position 98-4.
In December 1998, the Accounting Standards Executive Committee, released
Statement of Position 98-9 ("SOP 98-9"), "Software Revenue Recognition", with
respect to certain transactions. SOP 98-9 amends SOP 97-2 to require that an
entity recognize revenue by means of the "residual method" when (1) there is
vendor-specific objective evidence (VSOE) of the fair values of all undelivered
elements in a multiple-element arrangement that is not accounted for using
long-term contract accounting, (2) VSOE of fair value does not exist for one or
more of the delivered elements in the arrangement, and (3) all revenue
recognition criteria of SOP 97-2 other than the requirement for VSOE of the fair
value of each delivered element of the arrangement are satisfied. Under the
residual method, the arrangement fee is recognized as follows: (1) the total
fair value of the undelivered elements, as indicated by VSOE, is deferred and
subsequently recognized in accordance with the relevant sections of SOP 97-2 and
(2) the difference between the total arrangement fee and the amount deferred for
the undelivered elements is recognized as revenue related to the delivered
elements. The provisions of SOP 98-9 that extend the deferral of certain
paragraphs of SOP 97-2 and SOP 98-9 will be effective for transactions that are
entered into in fiscal years beginning after March 15, 1999 and prohibits any
retroactive application. The Company is evaluating the requirements of SOP 98-9
and the effects, if any, on our current revenue recognition policies.
YOU SHOULD NOT UNDULY RELY ON FORWARD-LOOKING STATEMENTS.
This report contains forward-looking statements that involve risks and
uncertainties. We use words such as "anticipate," "believes," "expects,"
"future" and "intends," and similar expressions, to identify forward-looking
statements. You should not place undue reliance on these forward-looking
statements, which apply
37
<PAGE> 40
only as of the date of this report. Our actual results could differ materially
from those anticipated in these forward-looking statements for many reasons,
including the risks described above and elsewhere in this report.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Financial Statements and supplemental data of the Company required by
this item are set forth at the pages indicated at Item 14(a).
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
38
<PAGE> 41
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information relating to the directors and executive officers of the Company
is set forth in Part I of this report under the caption "DIRECTORS AND EXECUTIVE
OFFICERS OF THE REGISTRANT."
Information required by this item with respect to compliance with Section
16(a) of the Securities Exchange Act of 1934 is incorporated by reference from
the definitive proxy statement for the Company's 1999 annual meeting of
stockholders to be filed with the Commission pursuant to Regulation 14A not
later than 120 days after the end of the fiscal year covered by this Form (the
"Proxy Statement") under the caption "EXECUTIVE COMPENSATION AND OTHER MATTERS."
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference from the
Proxy Statement under the caption "EXECUTIVE COMPENSATION AND OTHER MATTERS."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated by reference from the
Proxy Statement under the caption "STOCK OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated by reference from the
Proxy Statement under the caption "CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS."
39
<PAGE> 42
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
<TABLE>
<CAPTION>
PAGE NUMBER
-----------
<S> <C> <C>
(a) The following documents are filed as a part of this Form:
1. Financial Statements --
Report of Independent Public Accountants F-1
Consolidated Balance Sheets --
As of December 31, 1998 and 1997 F-2
Consolidated Statements of Operations --
For the Three Years Ended December 31, 1998 F-3
Consolidated Statements of Stockholders' Equity --
For the Three Years Ended December 31, 1998 F-4
Consolidated Statements of Cash Flows --
For the Three Years Ended December 31, 1998 F-5
Notes to Consolidated Financial Statements F-6
2... List of Subsidiaries S-1
Consent of Independent Public Accountants S-2
Valuation and Qualifying Accounts S-3
All other schedules are omitted because they are not
applicable or the required information is shown in the
consolidated financial statements or notes thereto.
3. Exhibits: See Index to Exhibits on page 37. The Exhibits
listed in the accompanying Index to Exhibits are filed or
incorporated by reference as part of this report.
(b) Reports on Form 8-K:
1. Report on Form 8-K filed on June 23, 1998
2. Report on Form 8-K filed on July 15, 1998
3. Report on Form 8-K/A filed on September 14, 1998
4. Report on Form 8-K filed on December 18, 1998
(c) Exhibits
1. Offer Letter dated November 4, 1998 between the Company and
James Whitaker.
2. Offer Letter dated November 25, 1998 between the Company and
Steven J. Sherman.
3. Offer Letter dated January 27, 1999 between the Company and
Guy Dubois.
</TABLE>
40
<PAGE> 43
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO THE VANTIVE CORPORATION:
We have audited the accompanying consolidated balance sheets of The Vantive
Corporation, (a Delaware corporation) and subsidiaries as of December 31, 1998
and 1997, and the related consolidated statements of operations, stockholders'
equity and cash flows for each of the three years in the period ended December
31, 1998. These consolidated financial statements and the schedule referred to
below are the responsibility of the Company's management. Our responsibility is
to express an opinion on these financial statements and schedule based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of The Vantive
Corporation and subsidiaries as of December 31, 1998 and 1997, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1998 in conformity with generally accepted accounting
principles.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed under Item 14(a)2 is
presented for purposes of complying with the Securities and Exchange
Commission's rules and is not a part of the basic financial statements. This
schedule has been subjected to the auditing procedures applied in our audits of
the basic financial statements and, in our opinion, fairly states in all
material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
San Jose, California
January 22, 1999
F-1
<PAGE> 44
THE VANTIVE CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1998 1997
-------- --------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents................................. $ 51,636 $ 77,583
Short-term investments.................................... 43,174 23,800
Accounts receivable, net of allowance for doubtful
accounts of $2,370 and $1,820 in 1998 and 1997,
respectively........................................... 42,110 33,295
Prepaid expenses and other current assets................. 18,433 11,896
-------- --------
Total current assets.............................. 155,353 146,574
-------- --------
Property and equipment, net............................... 23,736 12,465
Other assets.............................................. 5,179 3,700
-------- --------
TOTAL ASSETS...................................... $184,268 $162,739
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable.......................................... $ 6,615 $ 3,680
Accrued liabilities....................................... 23,042 23,868
Current portion of capital lease obligations.............. 185 270
Deferred revenues......................................... 16,089 9,827
-------- --------
Total current liabilities......................... 45,931 37,645
-------- --------
Convertible debt.......................................... 69,000 69,000
Capital lease obligations, net of current portion......... 165 25
Other..................................................... 134 337
STOCKHOLDERS' EQUITY:
Preferred Stock: $.001 par value, 2,000,000 shares
authorized; no shares issued and outstanding at
December 31, 1998...................................... -- --
Common Stock: $.001 par value, 50,000,000 shares
authorized; 26,414,607 and 25,275,191 shares issued and
outstanding at December 31, 1998 and 1997,
respectively........................................... 27 25
Additional paid-in-capital................................ 71,896 56,741
Accumulated other comprehensive income (loss)............. 337 (98)
Accumulated deficit....................................... (3,222) (936)
-------- --------
Total stockholders' equity........................ 69,038 55,732
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY........ $184,268 $162,739
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-2
<PAGE> 45
THE VANTIVE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
REVENUES:
License................................................... $89,215 $76,471 $41,513
Service................................................... 73,885 40,875 22,761
------- ------- -------
Total revenues.................................... 163,100 117,346 64,274
COST OF REVENUES:
License................................................... 1,485 736 392
Service................................................... 41,436 22,748 12,263
------- ------- -------
Total cost of revenues............................ 42,921 23,484 12,655
------- ------- -------
GROSS MARGIN................................................ 120,179 93,862 51,619
OPERATING EXPENSES:
Sales and marketing....................................... 67,615 45,811 24,676
Research and development.................................. 28,293 17,508 7,261
General and administrative................................ 12,827 9,377 5,389
Acquired in-process research and development (Note 3)..... 9,229 21,121 --
Acquisition related compensatory expense (Note 3)......... 1,666 -- --
------- ------- -------
Total operating expenses.......................... 119,630 93,817 37,326
------- ------- -------
INCOME FROM OPERATIONS...................................... 549 45 14,293
------- ------- -------
OTHER INCOME (EXPENSE):
Interest income........................................... 4,692 2,773 1,445
Interest expense.......................................... (3,981) (1,468) (159)
------- ------- -------
Total other income................................ 711 1,305 1,286
------- ------- -------
INCOME BEFORE PROVISION FOR INCOME TAXES.................... 1,260 1,350 15,579
PROVISION FOR INCOME TAXES.................................. 3,546 8,308 4,674
------- ------- -------
NET INCOME (LOSS)........................................... $(2,286) $(6,958) $10,905
======= ======= =======
NET INCOME (LOSS) PER BASIC SHARE........................... $ (0.09) $ (0.28) $ 0.45
======= ======= =======
NET INCOME (LOSS) PER DILUTED SHARE......................... $ (0.09) $ (0.28) $ 0.42
======= ======= =======
BASIC-SHARES USED IN PER SHARE COMPUTATION.................. 25,852 24,570 24,008
======= ======= =======
DILUTED-SHARES USED IN PER SHARE COMPUTATION................ 25,852 24,570 25,847
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE> 46
THE VANTIVE CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
TOTAL
COMMON STOCK ACCUMULATED RETAINED STOCKHOLDERS'
------------------ ADDITIONAL OTHER EARNINGS/ EQUITY/
PAR PAID-IN COMPREHENSIVE (ACCUMULATED (ACCUMULATED COMPREHENSIVE
SHARES VALUE CAPITAL INCOME/(LOSS) DEFICIT) DEFICIT) INCOME/(LOSS)
---------- ----- ---------- -------------- ------------ ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995.... 23,895,238 $12 $31,538 $(22) $(4,871) $26,657
Net income.................... -- -- -- -- 10,905 10,905 $10,905
Other comprehensive
income/(loss) -- foreign
currency translation
adjustments, net of tax..... -- -- -- (3) -- (3) (3)
-------
Comprehensive income.......... $10,902
=======
Exercise of stock options..... 246,854 -- 498 -- -- 498
Repurchase of common stock.... (44,452) -- (20) -- -- (20)
Common stock issued under
Employee Stock Purchase
Plan........................ 42,801 -- 324 -- -- 324
Stock dividend (2-for-1 stock
split)...................... 12 -- -- (12) --
Disqualifying disposition of
stock options............... -- -- 1,070 -- -- 1,070
---------- --- ------- ---- ------- -------
Balance at December 31, 1996.... 24,140,441 24 33,410 (25) 6,022 39,431
Net loss...................... -- -- -- -- (6,958) (6,958) $(6,958)
Other comprehensive
income/(loss) -- foreign
currency translation
adjustments, net of tax..... (73) (73) (73)
-------
Comprehensive loss............ $(7,031)
=======
Exercise of stock options..... 461,227 -- 1,333 -- -- 1,333
Repurchase of common stock.... (19,588) -- (7) -- -- (7)
Common stock issued under
Employee Stock Purchase
Plan........................ 37,540 -- 630 -- -- 630
Issuance of common stock for
acquisition................. 655,571 1 19,654 -- -- 19,655
Disqualifying disposition of
stock options............... -- -- 1,721 -- -- 1,721
---------- --- ------- ---- ------- -------
Balance at December 31, 1997.... 25,275,191 25 56,741 (98) (936) 55,732
Net loss...................... -- -- -- -- (2,286) (2,286) $(2,286)
Other comprehensive
income/(loss) -- foreign
currency translation
adjustments, net of tax..... 435 435 435
-------
Comprehensive loss............ $(1,851)
=======
Exercise of stock options..... 744,532 1 5,160 -- -- 5,161
Repurchase of common stock.... (15,416) -- (16) -- -- (16)
Common stock issued under
Employee Stock Purchase
Plan........................ 94,784 -- 915 -- -- 915
Issuance of common stock for
acquisitions................ 315,516 1 6,075 -- -- 6,076
Disqualifying disposition of
stock options............... -- -- 3,021 -- -- 3,021
---------- --- ------- ---- ------- -------
Balance at December 31, 1998.... 26,414,607 $27 $71,896 $337 $(3,222) $69,038
========== === ======= ==== ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE> 47
THE VANTIVE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)........................................ $ (2,286) $ (6,958) $ 10,905
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Acquired in-process research and development.......... 8,206 21,121 --
Acquisition related compensatory expense.............. 1,290 -- --
Depreciation and amortization......................... 6,028 2,519 1,388
Provision for sales allowances and doubtful
accounts............................................ 1,001 1,040 455
Changes in operating assets and liabilities, net of
acquisition --
Increase in accounts receivable..................... (9,789) (20,530) (10,181)
Increase in prepaid expenses and other current
assets........................................... (6,526) (7,393) (3,377)
Increase (decrease) in other assets................. 575 (2,600) (247)
Increase (decrease) in accounts payable/accrued
liabilities...................................... (3,057) 16,300 7,192
Increase (decrease) in long-term liabilities........ (2,198) (725) 330
Increase in deferred revenues....................... 5,370 2,804 3,859
-------- -------- --------
Net cash provided by (used in) operating
activities..................................... (1,386) 5,578 10,324
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of short term investments...................... (19,371) (16,947) 1,962
Purchase of ICC, net of cash acquired.................... -- (1,079) --
Purchases of property and equipment...................... (14,731) (8,130) (5,180)
-------- -------- --------
Net cash used in investing activities............ (34,102) (26,156) (3,218)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of convertible debt............... -- 69,000 --
Net proceeds from issuance of common stock............... 9,453 3,685 1,892
Repurchase of common stock............................... (16) (7) (20)
Payments on capital lease obligations.................... (330) (461) (572)
-------- -------- --------
Net cash provided by financing activities........ 9,107 72,217 1,300
-------- -------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS....... (26,381) 51,639 8,406
EFFECT OF EXCHANGE RATE CHANGES ON CASH.................... 434 (73) (3)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD............. 77,583 26,017 17,614
-------- -------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD................... $ 51,636 $ 77,583 $ 26,017
======== ======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW ACTIVITY
Cash paid for interest................................... $ 3,880 $ 1,468 $ 159
======== ======== ========
Cash paid for income taxes............................... $ 5,400 $ 5,864 $ 4,375
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE> 48
THE VANTIVE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS:
The Vantive Corporation (the "Company") designs, markets and supports a
suite of software applications in the front-office automation market that enable
businesses to improve sales performance and enhance customer loyalty. The
Company's suite of products addresses the front-office automation market and is
called The Vantive Enterprise. The Company also performs consulting, education
and support services for customers that license its products. The Company has
wholly-owned subsidiaries in Australia, Barbados, Canada, France, Germany, the
Netherlands, Singapore, United Kingdom and the United States.
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 intercompany
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.
Statements of Cash Flows. For purposes of the Statements of Cash Flows,
non-cash transactions for the years ended December 31, 1998, 1997 and 1996
include capital lease additions of approximately $350,000, $35,000 and $194,000,
respectively. For the year ended December 31, 1998, non-cash transactions also
included the issuance of $4,330,643 of common stock and stock options to acquire
Wayfarer Communications, Inc. (See Note 3).
Investments. The Company accounts for its investments under the provision
of Statement of Financial Accounting Standards No. 115 ("SFAS115"), "Accounting
for Certain Investment 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.
As of December 31, 1998, the Company's investments consisted of the
following (in thousands):
<TABLE>
<CAPTION>
AMORTIZED SECURITIES MATURING
COST BASIS WITHIN ONE YEAR
---------- -------------------
<S> <C> <C>
Debt securities issued by the U.S. Treasury and
other U.S. Government agencies................. $11,711 $11,711
Corporate Debt Securities........................ 31,463 31,463
------- -------
$43,174 $43,174
======= =======
</TABLE>
As of December 31, 1997, the Company's investments consisted of the
following (in thousands):
<TABLE>
<CAPTION>
AMORTIZED SECURITIES MATURING
COST BASIS WITHIN ONE YEAR
----------- -------------------
<S> <C> <C>
Debt securities issued by the U.S. Treasury and
other U.S. Government agencies................ $13,054 $13,054
Corporate Debt Securities....................... 10,746 10,746
------- -------
$23,800 $23,800
======= =======
</TABLE>
Concentration of Credit Risk. Financial instruments that potentially
subject the Company to a concentration of credit risk principally consist of
cash equivalents, short-term investments and accounts receivable. The company
places its cash equivalents and short-term investments with high-credit
qualified financial institutions and, by practice, limits the amount of credit
exposure to any one financial institution.
F-6
<PAGE> 49
THE VANTIVE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Concentrations of credit risk with respect to accounts receivable are limited
due to many customers comprising the company's customer base and their
dispersion across different industries and geographies.
As of December 31, 1998, approximately 21% of accounts receivable were
concentrated with five customers. The Company performs ongoing credit
evaluations of its customer's financial condition and the risk of loss with
respect to its trade receivables is further mitigated by the fact that the
Company's customer base is comprised of well established companies. The Company
provides reserves for credit losses and such losses have been insignificant to
date.
Property and Equipment. Property and equipment are carried at cost and
depreciated or amortized using the straight-line method over the estimated
useful lives of the related assets (or over the lease term if it is shorter for
leasehold improvements), which range from three to five years.
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 consulting, customer support 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 and the
fee is fixed or determinable. 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 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 the 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.
In December 1998, the Accounting Standards Executive Committee, released
Statement of Position 98-9 ("SOP 98-9"), "Software Revenue Recognition", with
respect to certain transactions. SOP 98-9 amends SOP 97-2 to require that an
entity recognize revenue by means of the "residual method" when (1) there is
vendor-specific objective evidence (VSOE) of the fair values of all undelivered
elements in a multiple-element arrangement that is not accounted for using
long-term contract accounting, (2) VSOE of fair value does not exist for one or
more of the delivered elements in the arrangement, and (3) all revenue
recognition criteria in SOP 97-2 other than the requirement for VSOE of the fair
value of each delivered element of the arrangement are satisfied. Under the
residual method, the arrangement fee is recognized as follows: (1) the
F-7
<PAGE> 50
THE VANTIVE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
total fair value of the undelivered elements, as indicated by VSOE, is deferred
and subsequently recognized in accordance with the relevant sections of SOP 97-2
and (2) the difference between the total arrangement fee and the amount deferred
for the undelivered elements is recognized as revenue related to the delivered
elements. The provisions of SOP 98-9 that extend the deferral of certain
paragraphs of SOP 97-2 and SOP 98-9 will be effective for transactions that are
entered into in fiscal years beginning after March 15, 1999 and prohibits any
retroactive application. The Company is evaluating the requirements of SOP 98-9
and the effects, if any, on our current revenue recognition policies.
In addition, such implementation guidance may necessitate substantial
changes in the Company's business practices in order for the Company to continue
to recognize a substantial portion of its license fee revenue upon delivery of
its software products. Such changes may reduce demand, extend sales cycles,
increase administrative costs and otherwise adversely affect operations. In
addition, the Company could become competitively disadvantaged relative to
foreign-based competitors not subject to U.S. generally accepted accounting
principles.
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.
Major Customers. During 1998, 1997 and 1996, no customer accounted for 10%
or more of total revenues.
Export Sales. Export sales consist of domestic sales to customers in
foreign countries. During 1998, 1997 and 1996, export sales were less than 10%
of total revenues.
International Revenues. International revenues, or revenues derived from
sales to customers in foreign countries, primarily in Europe, accounted for
approximately 27%, 16% and 9% of the Company's revenue in 1998, 1997 and 1996,
respectively.
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 years ended December 31, 1998, 1997 and 1996. The Company has
charged its software development costs to research and development expense in
the accompanying consolidated statements of operations.
Foreign Currency Translation. The functional currency of the Company's
subsidiaries is the local currency. Accordingly, the assets and liabilities of
operations outside the United States were translated into United States dollars
using current exchange rates and the effects of foreign currency translation
adjustments are included as a component of stockholders' equity. 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 performed any hedging
activities to date.
Earnings (Loss) 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
F-8
<PAGE> 51
THE VANTIVE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
all periods. Diluted earnings per share reflects the potential dilution that
could occur if the income were divided by the weighted-average number of common
and common stock equivalent shares outstanding during the period. Diluted
earnings per share is computed by dividing net income by the weighted average
number of common shares and common stock equivalents from outstanding stock
options. 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 years ended 1998 and 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 years ended
1998, 1997 and 1996.
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------------
1998 1997 1996
---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Net income (loss)............................. $(2,286) $(6,958) $10,905
Basic Earnings Per Share:
Income (loss) available to common
shareholders............................. (2,286) (6,958) 10,905
Weighted average common shares
outstanding.............................. 25,852 24,570 24,008
------- ------- -------
Basic earnings (loss) per share............... $ (0.09) $ (0.28) $ 0.45
======= ======= =======
Diluted Earnings Per Share:
Income (loss) available to common
shareholders............................. $(2,286) $(6,958) $10,905
Weighted average common shares
outstanding.............................. 25,852 24,570 24,008
Common stock options (unless
anti-dilutive)........................... -- -- 1,839
------- ------- -------
Total weighted average common shares
and equivalents................... 25,852 24,570 25,847
------- ------- -------
Diluted earnings (loss) per share............. $ (0.09) $ (0.28) $ 0.42
======= ======= =======
</TABLE>
Approximately 1.3 million shares of weighted average common stock
equivalents were excluded in the computation of diluted earnings per share for
the year ended December 31, 1998, as a result of their anti-dilutive effect due
to the reported net loss. Approximately 2.5 million shares of weighted average
common stock equivalents were excluded in the computation of diluted earnings
per share for the year ended December 31, 1997 as a result of their
anti-dilutive effect due to the reported net loss.
Comprehensive Income. In 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income," (SFAS No. 130),
which requires companies to report all changes in equity during a period, except
those resulting from investment by owners and distribution to owners, in a
financial statement for the period in which they are recognized. The Company has
chosen to disclose Comprehensive Income, which encompasses net income and
foreign currency translation adjustments, in the Consolidated Statement of
Stockholders' Equity. Prior years have been restated to conform to the SFAS No.
130 requirements.
Use of Estimates. The preparation of consolidated financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the consolidated financial statements and the reported amounts of revenues and
expenses during the reporting period.
Estimates are used for, but not limited to, the accounting for doubtful
accounts, depreciation and amortization, taxes and contingencies. Actual results
could differ from those estimates.
Recent Accounting Pronouncements. In June 1998, the FASB issued Statement
of Financial Accounting Standards No. 133, (SFAS No. 133), "Accounting for
Derivative Instruments and Hedging Activities".
F-9
<PAGE> 52
THE VANTIVE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SFAS 133 establishes new standards of accounting and reporting for derivative
instruments and hedging activities. SFAS 133 requires that all derivatives be
recognized at fair value in the balance sheet, and that the corresponding gains
or losses be reported either in the statement of operations or as a component of
comprehensive income, depending on the type of hedging relationship that exists.
SFAS 133 will be effective for fiscal years beginning after June 15, 1999. As
the Company does not currently hold derivative instruments or engage in hedging
activities, the Company does not believe the adoption of SFAS No. 133 will have
a material effect on the financial statement.
3. ACQUISITIONS:
In June 1998, the Company acquired Wayfarer Communications, Inc.
("Wayfarer"), a privately-held California corporation that specializes in
web-based information delivery by merging a wholly-owned subsidiary of the
Company into Wayfarer (the "Acquisition"). The Company issued 163,969 shares of
its common stock and exchanged 2,251 shares of the Company's common stock for
89% of Wayfarer shares. In December 1998, the Company issued 12,780 shares for
the remaining shares of Wayfarer and recorded charges associated with acquiring
the remaining minority interest of approximately 11% of Wayfarer. The
Acquisition was recorded under the purchase method of accounting and the results
of operations of Wayfarer and the fair value of the acquired assets and
liabilities were included in the Company's financial statements beginning on the
acquisition date. The Company filed a Report on Form 8-K with the SEC on July
15, 1998 in connection with the acquisition.
In connection with the acquisition of the majority interest, an acquired
in-process research and development charge of approximately $8.2 million was
expensed in the quarter ended June 30, 1998. An additional, acquired in-process
research and development charge of approximately $1.0 million associated with
the acquisition of the remaining minority interest was expensed in the quarter
ended December 31, 1998.
The Company has also recorded a compensatory expense of approximately $1.7
million associated with the Acquisition for the year ended December 31, 1998.
The remaining intangibles of $415,00 were recorded as goodwill and will be
amortized on a straight-line basis over five years.
The following table presents the unaudited pro forma results assuming that
the Company had acquired Wayfarer at the beginning of 1998 and 1997,
respectively. Net income and basic and diluted earnings per share amounts have
been adjusted to exclude the write-off of acquired in process research and
development of approximately $9.2 million and the acquisition-related
compensatory expense of $1.7 million and includes an adjustment for the goodwill
amortization that would have been recorded in each period. This information may
not necessarily be indicative of the future combined results of operations of
the Company.
<TABLE>
<CAPTION>
TWELVE MONTHS ENDED
DECEMBER 31,
----------------------
1998 1997
--------- ---------
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
<S> <C> <C>
Revenues............................................. $163,148 $117,956
Net income (loss).................................... 4,719 (11,772)
Basic earnings (loss) per share...................... 0.18 (0.48)
Diluted earnings (loss) per share.................... 0.17 (0.48)
</TABLE>
On August 26, 1997, the Company completed the acquisition of Innovative
Computer Concepts, Inc. ("ICC"), a leading developer of software that improves
spare parts, procurement and management for field service applications (the
"Merger"). The Company paid $125,000 in cash and issued 655,571 shares of its
common stock in exchange for all outstanding shares of ICC. The Company also
assumed all outstanding ICC options, which were converted to options to purchase
approximately 32,381 shares of the Company's common
F-10
<PAGE> 53
THE VANTIVE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
stock, resulting in a total purchase price of $21.0 million (including direct
costs of the acquisition). The Merger was recorded under the purchase method of
accounting and therefore, the results of operations of ICC and the fair value of
the acquired assets and liabilities were included in the Company's financial
statements beginning on the acquisition date. Upon consummation of the Merger,
ICC became a wholly owned subsidiary of the Company. In connection with the
acquisition, the Company received an appraisal of the intangible assets, which
indicated that approximately $21.1 million represented acquired in-process
research and development. The acquired in-process research and development was
expensed in the quarter ended September 30, 1997. In addition, the Company has
recorded goodwill of approximately $680,000 that will be amortized over the next
five years.
The valuation of the acquired in-process research and development 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 the
acquired in-process 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 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 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 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.
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.
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").
The following table presents the unaudited pro forma results for
informational purposes to present the results assuming that the Company had
acquired ICC at the beginning of 1997 and 1996, respectively. Net income and
basic and diluted earnings per share amounts have been adjusted to exclude the
write-off acquired in-process research and development of $21.1 million and
include the goodwill amortization of $136,000 for
F-11
<PAGE> 54
THE VANTIVE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
the twelve months ended December 31, 1997 and 1996. This information many not
necessarily be indicative of the future combined results of operations of the
Company.
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
---------------------
1997 1996
--------- --------
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
<S> <C> <C>
Revenues................................................ $117,787 $65,982
Net income.............................................. 13,550 10,521
Basic earnings per share................................ 0.54 0.43
Diluted earnings per share.............................. 0.49 0.40
</TABLE>
4. PROPERTY AND EQUIPMENT:
Property and equipment, at cost, consist of the following (in thousand):
<TABLE>
<CAPTION>
1998 1997
------- -------
<S> <C> <C>
Computer and office equipment............................ $18,253 $10,105
Furniture and fixtures................................... 7,150 3,448
Leasehold improvements................................... 832 489
Purchased software....................................... 8,318 3,326
------- -------
34,553 17,368
Less: Accumulated depreciation and amortization.......... (10,817) (4,903)
------- -------
$23,736 $12,465
------- -------
</TABLE>
Included in property and equipment are assets acquired under capital lease
obligations with an original cost of approximately $1,946,000 and $1,931,000 as
of December 31, 1998 and 1997, respectively. Accumulated amortization on the
leased assets was approximately $1,904,000 and $1,655,000 as of December 31,
1998 and 1997, respectively.
5. ACCRUED LIABILITIES:
Accrued liabilities consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1998 1997
------- -------
<S> <C> <C>
Employee compensation.................................... $ 3,626 $ 2,384
Commissions.............................................. 4,179 4,817
Taxes.................................................... 887 4,532
Consulting expenses...................................... 4,037 2,051
Other.................................................... 10,313 10,084
------- -------
Total.......................................... $23,042 $23,868
======= =======
</TABLE>
6. 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 rate 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
F-12
<PAGE> 55
THE VANTIVE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
$41.93 per share. Based on the traded yield to maturity, the approximate fair
market value of the convertible subordinated notes was $47.6 million and $63.9
million as of December 31, 1998 and 1997, respectively.
7. COMMITMENTS AND CAPITAL LEASE OBLIGATIONS:
Leases. The Company leases its facilities under non-cancelable operating
leases, which have expiration dates ranging from 1999 through 2004. Minimum
future lease payments under non-cancelable capital and operating leases as of
December 31, 1998 are summarized as follows (in thousands):
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
------- ---------
<S> <C> <C>
1999...................................................... $ 207 $ 6,071
2000...................................................... 127 5,663
2001...................................................... 50 5,242
2002...................................................... -- 4,476
2003...................................................... -- 4,314
Thereafter................................................ -- 5,392
----- -------
Total minimum lease payments.................... 384 $31,159
=======
Less: Amount representing interest at 10.0% -- 11.2%...... (34)
-----
Present value of lease payments:.......................... 350
Less: Current portion..................................... (185)
-----
Long-term portion......................................... $ 165
=====
</TABLE>
Rental expense was approximately $4,030,000, $3,275,000 and $1,447,000 in
1998, 1997 and 1996, respectively.
Legal Proceedings. The Company and its subsidiaries are subject to legal
proceedings, claims and litigation arising in the ordinary course of business.
The Company's management does not expect that the ultimate costs to resolve
these matters will have a material adverse effect on the Company's consolidated
financial position, results of operations and cash flows.
8. COMMON STOCK AND PREFERRED STOCK:
The Company is authorized to issue 50,000,000 shares of Common Stock and
2,000,000 shares of undesignated Preferred Stock and the Board of Directors has
the authority to issue the undesignated Preferred Stock in one or more series
and to fix the rights, preferences, privileges and restrictions thereof.
Shares of unvested common stock issued by the Company as a result of the
exercise of stock options under the 1991 Stock Option Plan are subject to stock
repurchase agreements whereby the Company has the option to repurchase unvested
shares upon termination of employment at the original price paid for the shares
(See Note 11). As of December 31, 1998, 20,625 shares of common stock at $0.12
to $7.5625 per share were subject to repurchase.
9. STOCK SPLIT
On September 23, 1996 the Company's Board of Directors authorized a
two-for-one stock split payable in the form of a dividend of one additional
share of the Company's common stock for each share owned by shareholders of
record on September 30, 1996. All share and per share information in the
accompanying consolidated financial statements has been restated to give
retroactive recognition to the stock split for all periods presented.
F-13
<PAGE> 56
THE VANTIVE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. STOCKHOLDER RIGHTS PLAN
In November 1998, the Company's Board of Directors declared a dividend
distribution of one Preferred Stock Purchase Right (each a "Right" and
collectively the "Rights") for each outstanding share of Common Stock, $0.001
par value ("Common Stock"), of the Company. The distribution was paid as of
December 15, 1998 (the "Record Date"), to stockholders of record on that date.
Each Right entitles the registered holder to purchase from the Company one
one-thousandth of a share of the Company's Series A Preferred Stock, $0.001 par
value (the "Preferred Stock"), at the price of $75.00 per Right (the "Purchase
Price"). The Rights will expire upon the earlier of (i) ten years after the date
of issuance, or November 18, 2008 or (ii) redemption or exchange by the Company.
The Rights will be exercisable only if a person or group, other than an exempted
person, makes a tender offer for, or acquires beneficial ownership of 15% or
more of the Company's outstanding Common Stock.
If any person other than an exempted person becomes the beneficial owner of
15% or more of the Company's outstanding Common Stock, then each Right not owned
by such person or certain related parties will entitle its holder to purchase,
at the Right's then current exercise price, shares of the Company's Common Stock
(or, in certain circumstances, cash, property or other securities of the
Company) having a market value equal to twice the then-current exercise price.
In addition, if after a person becomes the beneficial owner of 15% or more of
the Company's outstanding Common Stock, the Company is acquired in a merger or
other business combination transaction, or sells 50% or more of its assets or
earning power of the Company and its subsidiaries to another person, each Right
will entitle its holder to purchase, at the right's then current exercise price,
shares of common stock of such other person having a market value equal to the
purchase price divided by one-half the current market price of such common
stock.
The Company's Board of Directors will generally be entitled to redeem the
Rights at $0.001 per Right at any time prior to a person or group acquiring 15%
or more of the Company's Common Stock.
11. STOCK OPTION AND EMPLOYEE STOCK PURCHASE PLANS
Under the Company's 1991 Stock Option Plan (the "Option Plan"), the Board
of Directors may grant incentive and nonqualified stock options to employees,
directors and consultants. The exercise price per share for an incentive stock
option cannot be less than the market price on the date of grant. The exercise
price per share for a nonqualified stock option cannot be less than 85% of the
market price on the date of grant. Options granted under the Option Plan are
immediately exercisable, subject to a right of repurchase in favor of the
Company for all unvested shares. Option grants under the Option Plan generally
expire ten years after the date of grant and generally vest over a four year
period. In addition, in the event of a Change in Control (as defined) of the
Company's ownership, the Company has agreed with the President and other
officers that they will be credited with 12 months of service on then-vested
options for purposes of option vesting. As of December 31, 1998, a total of
9,400,000 shares of Common Stock have been authorized by the Company's
stockholders for grant under the plan.
F-14
<PAGE> 57
THE VANTIVE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Option activity under the 1991 Stock Option Plan is as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
--------------------------------------------------
SHARES AVAILABLE NUMBER OF WEIGHTED AVERAGE
FOR GRANT SHARES EXERCISE PRICE
---------------- ---------- ----------------
<S> <C> <C> <C>
Balance, December 31, 1995....... 1,895,728 2,168,404 $ 2.91
Authorized....................... -- -- --
Granted.......................... (1,652,975) 1,652,975 18.82
Exercised........................ -- (246,854) 2.08
Canceled......................... 498,251 (498,251) 9.99
Unvested shares repurchased...... 44,452 -- 8.79
---------- ---------- ------
Balance, December 31, 1996....... 785,456 3,076,274 $10.81
Authorized....................... 1,200,000 -- --
Granted.......................... (1,606,345) 1,606,345 25.13
Exercised........................ -- (461,227) 3.46
Canceled......................... 57,874 (57,874) 20.05
Unvested shares repurchased...... 22,608 -- 0.39
---------- ---------- ------
Balance, December 31, 1997....... 459,593 4,163,518 $12.26
Authorized....................... 1,221,375 -- --
Granted.......................... (6,013,284) 6,013,284 11.49
Exercised........................ -- (744,532) 6.95
Canceled......................... 6,071,204 (6,071,204) 18.13
Unvested shares repurchased...... 15,416 -- 1.03
---------- ---------- ------
Balance, December 31, 1998....... 1,754,304 3,361,066 $ 6.58
========== ========== ======
</TABLE>
As of December 31, 1998, all of the outstanding options were immediately
exercisable in full on the date of grant subject to repurchases of unvested
shares by the Company at cost and at the option of the Company if employment is
terminated.
The Company's 1995 Outside Directors Stock Option Plan (the "Directors
Plan") was adopted in July 1995. A total of 400,000 shares of Common Stock have
been reserved for issuance under the Directors Plan. The Directors Plan provides
for the grant of non-statutory stock options to certain non-employee directors
of the Company, including an option to purchase 30,000 shares of Common Stock on
the date on which the optionee first becomes a non-employee director of the
Company and an additional option to purchase 10,000 shares of Common Stock on
the next anniversary of such date. The exercise price per share of all options
granted under the Directors Plan shall be equal to the market price of the
Company's Common Stock on the date of grant of the option. As of December 31,
1998 options to purchase 200,000 shares of Common Stock issued pursuant to the
Directors Plan were outstanding of which none has been exercised.
In October 1997, the Company adopted the 1997 Stock Option Plan (the "1997
Plan") which provides for the issuance of nonqualified stock options to
employees, directors and consultants. Under the terms of this Plan, options to
purchase 3,750,000 shares of Common Stock were reserved for issuance. The
exercise price per share for a nonqualified stock option cannot be less than 85%
of the market price on the date of grant. Options granted under the Option Plan
are immediately exercisable, subject to a right of repurchase in favor of the
Company for all unvested shares. Option grants under the Option Plan generally
expire ten years after the date of grant and generally vest over a four-year
period. At December 31, 1998, options to purchase 2,050,438 shares of Common
Stock issued pursuant to the 1997 Plan were outstanding. Options for 1,693,704
shares were available for future grant under the 1997 Plan at December 31, 1998.
F-15
<PAGE> 58
THE VANTIVE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In July 1998, the Compensation Committee of the Company's Board of
Directors granted employees the right to exchange certain outstanding stock
options for option grants with an exercise price of $13.25 per share (the fair
market value on July 24, 1998), provided that such employees made the election
to convert by that date. In connection with the exchange, 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.
In October 1998, the Compensation Committee of the Company's Board of
Directors granted 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 exchange, option
holders who exchanged their options will not be permitted to exercise any
exchanged options for a six-month period beginning on the effective date of the
exchange. As of December 31, 1998, 5,849,831 shares were exchanged under the
program.
The Company has an Employee Stock Purchase Plan (the "Purchase Plan") under
which 700,000 shares of common stock have been reserved for issuance. The
Purchase Plan enables eligible employees to purchase Common Stock at 85% of the
lower of the fair market value of the Company's Common Stock on the first day or
the last day of each six-month purchase period. During 1998 and 1997, 94,784 and
37,540 shares, respectively, were issued under the Purchase Plan.
The Company has adopted the disclosure provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation," which establishes a fair value based
method of accounting for stock-based compensation plans. In accordance with the
provisions of SFAS No. 123, the Company applies APB Opinion 25 and related
Interpretations in accounting for its stock option and stock purchase plans and
accordingly, does not record compensation costs. If the Company had elected,
beginning in 1996, to recognize cost based on fair value of the options granted
at grant date as prescribed by SFAS No. 123, net income (loss) and net income
(loss) per share would have been reduced to the pro forma amounts indicated in
the table below (in thousands, except per share amounts):
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------
1998 1997 1996
--------- --------- --------
<S> <C> <C> <C>
Net income (loss) -- as reported............ $ (2,286) $ (6,958) $10,905
Net income (loss) -- pro forma.............. (24,181) (19,405) 7,904
Diluted earnings (loss) per share -- as
reported.................................. (0.09) (0.28) 0.42
Diluted earnings (loss) per share -- pro
forma..................................... (0.94) (0.79) 0.31
</TABLE>
The fair value of each option grant is estimated on the date of the grant
using the Black-Scholes option-pricing model with the following weighted average
assumptions:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
--------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Expected dividend yield................................ 0.0% 0.0% 0.0%
Risk free interest rate................................ 5.1% 5.2% 6.1%
Expected volatility.................................... 81.8% 81.8% 85.0%
Expected life beyond vest date......................... 0.32 0.40 0.22
</TABLE>
F-16
<PAGE> 59
THE VANTIVE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following table summarizes information concerning outstanding and
exercisable options at December 31, 1998:
OUTSTANDING AND EXERCISABLE BY PRICE RANGE
AS OF DECEMBER 31, 1998
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------------------------------------------- -------------------------------
WEIGHTED AVERAGE
RANGE OF NUMBER REMAINING CONTRACTUAL WEIGHTED AVERAGE NUMBER WEIGHTED AVERAGE
EXERCISE PRICES OUTSTANDING LIFE (IN YEARS) EXERCISE PRICE EXERCISABLE EXERCISE PRICE
--------------- ----------- --------------------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
$0.08 - $ 4.50 529,377 6.31 $ 1.6211 529,377 $1.6211
6.00 - 6.00 878,400 2.87 6.0000 21,994 6.0000
6.25 - 7.00 127,900 8.30 6.6093 7,491 6.9859
7.31 - 7.31 3,590,667 8.82 7.3125 2,467 7.3125
7.38 - 17.50 390,677 8.81 10.8506 175,182 10.9403
21.38 - 21.38 1,983 8.87 21.3750 1,765 21.3750
23.38 - 23.38 10,000 8.34 23.3750 -- --
26.75 - 26.75 625 8.02 26.7500 625 26.7500
30.97 - 30.97 10,000 9.34 30.9687 -- --
31.13 - 31.13 11,416 8.65 31.1250 984 31.1250
--------------- --------- ---- -------- ------- -------
$0.08 - $31.13 5,551,045 7.62 $ 6.9226 739,885 $4.1386
</TABLE>
The following table summarizes information concerning outstanding and
exercisable options at December 31, 1997:
OUTSTANDING AND EXERCISABLE BY PRICE RANGE
AS OF DECEMBER 31, 1997
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------------------------------------------- -------------------------------
WEIGHTED AVERAGE
RANGE OF NUMBER REMAINING CONTRACTUAL WEIGHTED AVERAGE NUMBER WEIGHTED AVERAGE
EXERCISE PRICES OUTSTANDING LIFE (IN YEARS) EXERCISE PRICE EXERCISABLE EXERCISE PRICE
--------------- ----------- --------------------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
$0.08 - $ 1.50 574,403 7.23 $ 1.0340 551,656 $ 1.0729
2.00 - 4.50 544,699 7.47 3.0730 544,699 3.0730
7.00 - 11.75 462,625 8.04 10.6830 462,625 10.6830
12.75 - 12.75 603,749 8.50 12.7500 603,749 12.7500
15.81 - 21.00 293,996 8.82 18.3752 221,496 18.6617
21.38 - 21.37 509,655 9.87 21.3750 179,670 21.3750
22.25 - 25.25 547,684 9.50 23.5782 497,684 23.5710
26.00 - 29.13 497,334 9.19 26.7822 474,834 26.7660
29.53 - 33.00 520,633 9.24 31.9128 497,508 31.8971
33.75 - 35.13 196,875 9.01 34.2287 196,875 34.2287
--------------- --------- ---- -------- --------- --------
$0.08 - $35.13 4,751,653 8.64 $17.0026 4,230,796 $16.5283
</TABLE>
The preceding table includes options outstanding under the 1991 Employee,
1995 Outside Directors Stock Option and the 1997 Plans. The weighted average
fair market value of the options as of the date of grant for the period ended
December 31, 1998 and 1997 is $3.63 and $13.06 per share, respectively.
As of December 31, 1998, the Company has reserved 5,551,045 of common stock
for future issuance upon the exercise of currently outstanding stock options.
F-17
<PAGE> 60
THE VANTIVE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. THE VANTIVE CORPORATION 401(K) PLAN:
During 1993, the Company adopted the Vantive Corporation 401(k) Plan (the
"401(k) Plan"). All employees who are 21 years of age or older are entitled to
participate on their first day of employment. Under the 401(k) Plan, eligible
employees are entitled to make tax-deferred contributions and the Company may,
at its discretion, make matching or discretionary contributions to the 401(k)
Plan. For the years ended December 31, 1998, 1997 and 1996, the Company made no
matching or discretionary contributions.
13. SEGMENT INFORMATION
The Company adopted SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information, during the first quarter of fiscal 1998.
SFAS No. 131 established standards for reporting information about operating
segments in annual financial statements and requires selected information about
operating segments in interim financial reports issued to stockholders. It also
established standards for related disclosures about products and services and
geographic areas. Operating segments are defined at components of an enterprise
about which separate financial information is available that is evaluated
regularly by the chief operating decision makers, or decision making group, in
deciding how to allocate resources and in assessing performance. The Company's
chief operating decision making group is the Executive Committee, which is
comprised of the Chief Executive Officer, the Chief Operating Officer and
various Vice Presidents of the Company.
The Company has identified three distinct reportable segments: license,
customer support and professional services. License revenues consist of fees for
the Company's products as well as fees from sublicensing third-party software
products. Customer support represents revenue from maintenance fees on software.
Professional service revenues consist of consulting and training services.
Consulting Services are related to implementation services performed on a time
and materials basis under separate service arrangements related to installation
of the Company's software products. Consulting and training revenues generally
are recognized as services are performed. While the Executive Committee
evaluates results in a number of different ways, the line of business management
structure is the primary basis for which it assesses financial performance and
allocates resources.
The accounting policies of the line of business operating segments are the
same as those described in the summary of significant accounting policies. The
following table represents the Company's segment information for the years ended
December 31, 1998, 1997 and 1996 (in thousands):
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
REVENUES FROM UNAFFILIATED CUSTOMERS:
Licenses................................... $ 89,215 $ 76,471 $ 41,513
Customer support........................... 28,312 15,737 7,770
Professional services...................... 45,573 25,138 14,991
-------- -------- --------
$163,100 $117,346 $ 64,274
======== ======== ========
COST OF REVENUE:
Licenses................................... 1,485 736 392
Customer support........................... 5,112 2,998 1,276
Professional services...................... 36,324 19,750 10,987
-------- -------- --------
42,921 23,484 12,655
======== ======== ========
</TABLE>
F-18
<PAGE> 61
THE VANTIVE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
GROSS MARGIN:
Licenses................................... 87,730 75,735 41,121
Customer support........................... 23,200 12,739 6,494
Professional services...................... 9,249 5,388 4,004
-------- -------- --------
120,179 93,862 51,619
======== ======== ========
PROFIT RECONCILIATION:
Gross margin for reportable segments....... 120,179 93,862 51,619
Operating expenses......................... (119,630) (93,817) (37,326)
Other income and expenses.................. 711 1,305 1,286
-------- -------- --------
Income before provision for income taxes... 1,260 1,350 15,579
======== ======== ========
</TABLE>
The Company does not track assets by operating segments. Consequently, it
is not practicable to show assets by operating segments.
14. INCOME TAXES:
The Company has accounted for income taxes pursuant to Statement of
Financial Accounting Standards No. 109 (SFAS No. 109), "Accounting for Income
Taxes," since its inception. SFAS No. 109 provides for an asset and liability
approach to accounting for income taxes under which deferred income taxes are
provided based upon enacted tax laws and rates applicable to the periods in
which taxes become payable. The provision for income taxes consists of the
following (in thousands):
The provision for income taxes was based upon income before taxes as
follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Current:
Federal......................................... $ 5,168 $10,075 $ 3,729
State........................................... 277 2,135 748
Foreign......................................... 887 98 197
------- ------- -------
6,332 $12,308 $ 4,674
Deferred:
Federal......................................... $(2,467) $(3,004) $ --
State........................................... (364) (1,175) --
Foreign......................................... 45 179 --
------- ------- -------
(2,786) $(4,000) $ --
------- ------- -------
Total Provision:........................ $ 3,546 $ 8,308 $ 4,674
======= ======= =======
</TABLE>
The components of the net deferred tax assets are as follows (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Domestic.......................................... $(1,377) $ 749 $15,495
Foreign........................................... 2,637 601 84
------- ------- -------
Total................................... $ 1,260 $ 1,350 $15,579
======= ======= =======
</TABLE>
F-19
<PAGE> 62
THE VANTIVE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The provision for income taxes differs from statutory U.S. federal income
tax rate due to the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1998 1997 1996
------ ------ -----
<S> <C> <C> <C>
Provision at U.S. statutory rate.................. 35.00% 35.00% 35.00%
State income taxes, net of federal benefit........ 4.56 5.59 5.47
Acquired net operating losses..................... (99.21) -- --
Change in valuation allowance..................... 99.21 (55.81) (8.42)
Acquired in-process research and development...... 288.89 634.86 --
Other............................................. (47.02) (4.23) (2.05)
------ ------ -----
281.43% 615.41% 30.00%
====== ====== =====
</TABLE>
The components of the net deferred tax assets are as follows (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1998 1997
------- ------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards........................ $ 2,859 $ 157
Accrued commission...................................... 1,015 279
Accrued vacation........................................ 568 361
Bad debt reserve........................................ 948 691
Other accruals not currently deductible................. 1,523 1,865
Credit carryforwards.................................... 1,630 --
Other................................................... 44 1,198
------- ------
8,587 4,551
Valuation allowance..................................... (1,250) --
------- ------
Net deferred tax asset............................. $ 7,337 $4,551
------- ------
</TABLE>
As of December 31, 1998 the Company had net operating loss carryforwards of
approximately $8,169,000. These net operating loss carryforwards expire in
various periods from 2009 through 2018. As of December 31, 1998, the Company had
credit carryforwards of approximately $1,630,000. These credit carryforwards
expire in various periods from 2003 through 2018. The Tax Reform Act of 1986
contains provisions that may limit the net operating loss and credit
carryforwards available to be used in any given year should certain events
occur. Management believes, however, that such a limitation will not have a
significant impact on the overall utilization of its net operating loss and
credit carryforwards. The net deferred tax asset is included as a component of
prepaid expenses and other current assets on the accompanying balance sheet.
F-20
<PAGE> 63
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
THE VANTIVE CORPORATION
(Registrant)
/s/ LEONARD J. LEBLANC
--------------------------------------
Leonard J. LeBlanc
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
Date: March 22, 1999
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints John R. Luongo and/or Leonard J. LeBlanc
as his or her attorney-in-fact, with the power of substitution, for him or her
in any and all capacities, to sign any amendments to this Report on Form 10-K
and to file same, with exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below on March 20, 1999 by the following persons on
behalf of the registrant and in the capacities and on the date indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<S> <C>
/s/ JOHN R. LUONGO Chairman of the Board of Directors
- ----------------------------------------------------- Chief Executive Officer
(John R. Luongo) (Principal Executive Officer)
/s/ LEONARD J. LEBLANC Executive Vice President,
- ----------------------------------------------------- Finance and Administration,
(Leonard J. LeBlanc) Chief Financial Officer
(Principal Financial Officer)
/s/ MICHAEL M. LOO Vice President, Finance
- ----------------------------------------------------- (Principal Accounting Officer)
(Michael M. Loo)
/s/ WILLIAM H. DAVIDOW Director
- -----------------------------------------------------
(William H. Davidow)
/s/ PATTI S. MANUEL Director
- -----------------------------------------------------
(Patti S. Manuel)
/s/ RAYMOND L. OCAMPO JR. Director
- -----------------------------------------------------
(Raymond L. Ocampo Jr.)
/s/ PETER A. ROSHKO Director
- -----------------------------------------------------
(Peter A. Roshko)
/s/ THOMAS L. THOMAS Director
- -----------------------------------------------------
(Thomas L. Thomas)
</TABLE>
F-21
<PAGE> 64
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO BALANCE
BEGINNING PROFIT AND AT END OF
DESCRIPTION OF YEAR LOSS DEDUCTIONS YEAR
----------- ---------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
Year ended December 31, 1996
Allowance for Doubtful accounts...................... $ 325 $ 455 $-- $ 780
Year ended December 31, 1997
Allowance for Doubtful accounts...................... $ 780 $1,040 $-- $1,820
Year ended December 31, 1998
Allowance for Doubtful accounts...................... $1,820 $ 550 $-- $2,370
</TABLE>
S-1
<PAGE> 65
INDEX TO EXHIBITS FILED TOGETHER WITH THIS ANNUAL REPORT
<TABLE>
<S> <C> <C>
* 3.1 Form of Agreement and Plan of Merger between The Vantive
Corporation, a California corporation, and The Vantive
Corporation, a Delaware corporation.
* 3.2 Bylaws.
= 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.
X 4.2 Rights Agreement between the Company and Harris Trust and
Savings Bank dated November 19, 1998.
* 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.
*+ 10.8 Basicscript License Agreement dated October 4, 1994 by and
between Henneberry Hill Technologies Corporation doing
business as Summit Software Company and the Company.
*+ 10.9.1 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 Compensation Letter dated May 10, 1995 between the Company
and John R. Luongo.
10.12 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.
# 10.13 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.
** 10.14 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.
+ 10.15 Agreement and Plan of Reorganization by and among the
Company, Revo Acquisition Corporation and Wayfarer
Communications, Inc. dated June 18, 1998.
* 10.16 Lease Agreement dated June 22, 1998 between Augustine
Partners, LLC & Vantive.
* 10.17 Offer Letter dated July 31, 1998 between Vantive and Leonard
LeBlanc.
10.18 Offer Letter dated November 4, 1998 between the Company and
James Whittaker.
10.19 Offer Letter dated November 25, 1998 between the Company and
Steven J. Sherman.
10.20 Offer Letter dated January 27, 1999 between the Company and
Guy Dubois.
21.1 The Vantive Corporation List of Subsidiaries
23.1 Consent of Arthur Andersen LLP, Independent Public
Accountants
24.1 Power of Attorney (See page 36)
27.1 Financial Summary Table
</TABLE>
- ---------------
* Previously filed in the Company's Registration Statement (No. 33-94244),
declared effective on August 14, 1995.
<PAGE> 66
+ Confidential Treatment has been granted for portions of this exhibit.
X Previously filed in the Company's Report on Form 8-K filed on December 18,
1998.
+ Previously filed in the Company's Report on Form 8-K filed on July 15,
1998.
# 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.
= Incorporated by reference from the Company's Registration Statement (No.
333-36547), declared effective on November 4, 1997.
<PAGE> 1
EXHIBIT 10.18
November 4, 1998
Jim Whitaker
1083 Belvedere Lane
San Jose, California 95129
Dear Jim,
We are delighted that you are considering joining us at The Vantive Corporation
(the "Company"). The purpose of this letter is to set forth the offer of
employment that we have discussed.
We propose that you begin employment with the Company as CIO, Chief Information
Officer, reporting to Leonard LeBlanc, Vantive CFO. The effective date of your
employment will be November 30, 1998.
Your base salary, before deductions computed on an annual basis and beginning on
the date you become an employee of the Company, will be initially $165,000 per
year. Such base salary shall be paid in installments in accordance with the
Company's US payroll policy for services performed prior to the date of payment.
You will be entitled to participate in Vantive's discretionary performance bonus
program for Corporate Vice Presidents. The targeted incentive bonus at this
level in 1998 has been $60,000 on an annual basis, subject to the achievement of
your quarterly performance goals, as well as Company performance goals. From
your first day through the end of 1998, your target bonus will be pro-rated.
Subject to the approval of the Board of Directors and your execution of the
Company's form of stock option agreement, you shall be awarded incentive stock
options under the Company's Stock Purchase and Option Plan to purchase a grant
of 60,000 shares of the common stock of the Company. This option agreement will
vest over a 48-month period at the rate of 6/48 after the first full six months
of employment, and 1/48 per month thereafter.
The price per share of this option agreement will be the fair market value of a
share of common stock of the Company as of the date of grant as determined by
the Board of Directors. The option grant is subject to your execution of a form
of the Company's standard form stock option agreement and will be governed by
the terms and conditions of that agreement.
Should The Vantive Corporation or an merging or acquiring entity terminate your
employment for any reason other than your voluntary resignation, death,
<PAGE> 2
disability or "just cause", you may invoke 3 months of paid COBRA coverage of
medical, dental, and other insurance, and a salary continuation of 3 months in
length, i.e. continuing to receive your base salary for a total of 3 months
beyond your last day of work on the same schedule as salary was paid prior to
such termination. As read herein, "just cause" shall mean: a) your commission of
a felony; b) your commission of an act of dishonesty, theft, misrepresentation,
or fraud; c) your commission of an act involving moral turpitude; d) your
failure to discharge the lawful directions given to you by your immediately
direct supervisor (that person to whom you report) or the Board of Directors of
The Vantive Corporation; e) your willful engagement in bad faith conduct or
professionally inappropriate conduct which is materially detrimental to Vantive;
f) the voluntary filing of bankruptcy petition by you; or g) the adjudication of
you as insane or incompetent.
In the case of any merger or acquisition or other business combination (a
"Transaction") involving all or substantially all of the assets of The Vantive
Corporation, other than re-incorporation where Vantive is not the surviving
company and where the acquiring company or merger partner controls a majority of
Vantive stock after a Transaction, any of your granted and unvested options will
have their vesting accelerated by six months, i.e. by 6/48, up to a maximum of
100% of your option shares.
This offer of employment is expressly subject to your executing the Company's
standard form of non-disclosure agreement in the form enclosed with this letter
as well as your agreement to follow all other rules, guidelines, and policies
that the Company may announce from time to time. The non-disclosure agreement
must be signed and returned to Vantive Human Resources in Santa Clara,
California, and received there before your start date.
As with all US-based employees, this offer of employment is not for any specific
period of time and your employment may be terminated with or without cause by
yourself or by the Company at any time and for any reason.
This offer of employment contains all terms and conditions of employment with
the Company and supersedes any and all prior, oral or written, representations
or agreements made by anyone employed by, or associated with, the Company.
Please note that on your first day of work, you will be asked to complete a
range of employment forms, including a US Employment Eligibility Verification
(I-9) form. The forms must be completed within three business days of the date
your employment begins, and will require you to present acceptable documentation
of that eligibility. Failure to do so may result in suspension without pay or
termination.
After you have commenced employment at Vantive, you authorize the Company to
capture your employee-related information in its worldwide database. This
information will be stored as part of your personnel record. You agree to
cooperate fully with such information requests from your manager or Human
Resources. Vantive will guarantee to do everything in its power to secure this
system and protect the sensitivity and integrity of the information.
<PAGE> 3
You shall be entitled to receive all other benefits of employment generally
available to the Company's other full time regular employees. All amounts
payable to you as taxable compensation shall be subject to income tax
withholdings as required by federal, state, and /or local authorities, and any
other applicable withholdings.
Jim, I believe your strengths and experience are well matched with Vantive's
requirements and opportunities. I hope that you will accept this offer. Please
be advised that this offer of employment is valid only until November 10, 1998.
Please acknowledge acceptance of this offer by signing and dating this letter
and returning it to us on or before the day the offer becomes invalid.
Sincerely,
Leonard LeBlanc
Chief Financial Officer
I agree to the terms and conditions of employment set forth above.
/s/ Jim Whitaker November 4, 1998
- ---------------------------------------- ---------------------
Jim Whitaker Date
<PAGE> 1
EXHIBIT 10.19
November 25, 1998
Steven J. Sherman
2101 Bridle Ridge Court
San Jose, CA 95138
Dear Steven,
We are pleased that you are considering joining us at The Vantive Corporation
(the "Company"). The purpose of this letter is to set forth the offer of
employment that we have discussed.
We propose that you begin employment with the Company as Vice President of
Engineering, reporting to Phil Dunkelberger, Vantive's Executive Vice President
of Product, Technology, and Marketing. The effective date of your employment
will be January 15, 1999 (We understand that your current employer has a
contractual request for 90-day notice. If the January 15, 1999 start date is
unattainable, you will need to so notify me so we can discuss some reasonable
extension of this start date that will be acceptable to Phil Dunkelberger).
Your base salary, before deductions, computed on an annual basis and beginning
on the date you become an employee of the Company, will be initially $225,000
per year. Such base salary shall be paid in installments in accordance with the
Company's payroll policy for services performed prior to the date of payment.
You will be eligible to participate in the Senior Management Bonus Plan, based
on Company, Engineering, and individual performance, which is targeted at
$100,000 annually (divided quarterly). This target will be reviewed each year.
You will be guaranteed a bonus on-target for your first six months.
Subject to the approval of the Board of Directors and your execution of the
Company's form of stock option agreement, you shall be awarded stock options
under the Company's Stock Purchase and Option Plan to purchase 145,000 shares of
the common stock of the Company. This option agreement will vest over a 48-month
period at the rate of 6/48 after the first full six months of employment, and
1/48 per month thereafter. The price per share of this option agreement will be
the fair market value of a share of common stock of the Company as of the date
of grant as determined by the Board of Directors.
This offer of employment is expressly subject to your executing the Company's
standard form of non-disclosure agreement in the form enclosed with this letter
as well as your agreement to follow all other rules, guidelines, and policies
that the Company may announce from time to time. The non-disclosure agreement
must be signed and returned to Vantive Human Resources in Santa Clara,
California, and received there before your start date.
<PAGE> 2
This offer of employment is not for any specific period of time and your
employment may be terminated with or without cause by yourself or by the Company
at any time for any reason.
This offer of employment contains all terms and conditions of employment with
the Company and supersedes any and all prior, oral or written, representations
of agreements made by anyone employed by, or associated with, the Company.
Please note that on your first day of work, you will be asked to complete a
range of employment forms, including a US Employment Eligibility Verification
(I-9) form. The forms must be completed within three business days of the date
your employment begins, and will require your presenting acceptable
documentation of that eligibility. Failure to do so may result in suspension
without pay or termination.
After you have commenced employment at Vantive, you authorize the Company to
capture your employee-related information in its worldwide database. This
information will be stored as part of your personnel record. You agree to
cooperate fully with such information requests from your manager or Human
Resources. Vantive will guarantee to do everything in its power to secure this
system and protect the sensitivity and integrity of the information.
You shall be entitled to receive all other benefits of employment generally
available to the Company's other employees. You are also being offered an
additional one week of vacation on top of Vantive's standard vacation policy of
three weeks.
All amounts payable to you as taxable compensation shall be subject to income
tax withholdings as required by federal, state, and/or local authorities, and
any other applicable withholding.
We hope that you will accept this offer. Please be advised that this offer of
employment is valid only until December 7, 1998. Please acknowledge acceptance
of this offer by signing and dating this letter and returning it to us on or
before December 7, 1998.
Sincerely,
Donna Allen Taylor
Vice President, Human Resources
I agree to the terms and conditions of employment set forth above.
/s/ Steven J. Sherman November 25, 1998
- ----------------------------------------- ---------------------
Steven J. Sherman Date
<PAGE> 1
EXHIBIT 10.20
CONTRACT OF EMPLOYMENT
BETWEEN:
VANTIVE FRANCE Sarl, located at 37-39 rue Boissiere, 75 116 Paris, registered
number: 40812364400010, represented by Mr. Nicholaas A. DOORNBERG, Managing
Director (hereinafter referred to as the "COMPANY") or the Chief Operating
Officer of The Vantive Corporation, Phillip Dunkelberger
ON THE ONE HAND
AND
Mr. Guy DUBOIS, residing at 34 Cathcart Road, SW10 9NN London, England, a
French citizen (hereinafter referred to as "Mr. DUBOIS")
ON THE OTHER HAND.
THE FOLLOWING PROVISIONS HAVE BEEN AGREED:
1. APPOINTMENT -- COLLECTIVE AGREEMENT
The Company undertakes to employ Mr. DUBOIS on a permanent basis from 15 March
1999 or from a given date prior to this. It is explicitly agreed that the
present offer shall be null and void if, for whatever reason, Mr. DUBOIS is not
available to take up his responsibilities in full on 15 March 1999.
Mr. DUBOIS shall be employed in compliance with the general conditions of the
Collective Agreement applying to the Company at all times and the conditions
defined hereafter.
The Company is currently subject to the National Collective Agreement governing
"Technical studies offices, Engineering consultancies and Consulting
Companies."
Mr. DUBOIS, who accepts this employment, formally states that he will not be
bound to any company by a Contract of Employment as from 12 April 1999 and
shall be free of any commitment to all previous employers.
2. RESPONSIBILITIES -- CLASSIFICATION
Mr. DUBOIS shall be appointed to the position of "Executive Vice-President,
General Manager of Vantive International" and shall be a member of the
Executive Committee Board of The Vantive Corporation.
<PAGE> 2
In this role, Mr. DUBOIS shall be responsible for managing the resources and
operations of the companies in the group (hereinafter referred to as "Vantive
International") and more especially for developing and increasing Vantive
International's revenues outside the United States.
Mr. DUBOIS shall perform his duties diligently in the Company's best interests
and according to its instructions and directives.
For the duration of the present contract, Mr. DUBOIS undertakes to comply with
all applicable legal and regulatory provisions, with all general or specific
instructions he receives from the Company and to comply with the rules and
practices governing the Company's internal operations as well as the terms and
conditions of the present Contract.
Mr. DUBOIS shall report to the Chief Operating Officer or the Chief Executive
Officer of The Vantive Corporation. Any substantial modification of the
responsibilities defined above shall be subject to an amendment agreed by the
parties to the Contract.
Mr. DUBOIS's job description is classified as Executive Position 3-3,
coefficient 270.
3. REMUNERATION
Mr. DUBOIS shall be paid:
3.1 firstly, a basic inclusive annual gross salary of 1,755,000 FF (one
million seven hundred and fifty five thousand French francs), including
overtime, payable in twelve (12) instalments at the end of each month.
This remuneration covers all overtime, a fact which Mr. DUBOIS
specifically accepts in advance as being inherent to his
responsibilities, in accordance with the provisions of Article 7 below;
3.2 secondly, an On-target Bonus equal to a gross annual sum of 877,500 FF
(eight hundred and seventy seven thousand five hundred French francs)
(the "On-target Bonus"), the payment of which shall be subject to the
following conditions:
3.2.1 For a period of six (6) months calculated from the Effective
Date of the present Contract ("the First Six Months"), Mr. DUBOIS shall
receive a guaranteed and non-recoverable advance equal to 100% of the
On-target Bonus calculated proportionally for the said period of six
(6) months.
3.2.2 For a period of six (6) months from the date of expiry of the
First Six Months ("the Second Six Months"), Mr. DUBOIS shall receive a
guaranteed and non-recoverable advance equal to 50% of the On-target
Bonus calculated proportionally for the said period of six (6) months.
<PAGE> 3
A Commission Plan outlining the elements comprising Mr. DUBOIS's variable
remuneration for the 1999 fiscal year shall be drawn up by joint agreement
between the Parties within one hundred and eighty (180) days following the
Effective Date of the present Contract and shall be reviewed annually by joint
agreement following a meeting with Mr. DUBOIS.
3.3 Mr. DUBOIS shall be entitled to receive Stock Options (share-purchase
subscription options) in the amount of 200,000 (two hundred thousand)
shares of the common stock of The Vantive Corporation in accordance with
the policy operating in The Vantive Corporation and in compliance with the
specific provisions stipulated by the said Company from time to time,
subject to approval by the said Company's Board of Directors and to
signature by Mr. DUBOIS of the Stock Options Agreement then in force, the
current conditions of which are set out in Annex A attached hereto. These
Stock Options shall be subject to the provisions applying in the event of a
merger or acquisition affecting all the assets of The Vantive Corporation
under the conditions more specifically described in Annex A. For
clarification purposes, it is stipulated that the conditions applicable to
Stock Options in accordance with the terms of the present Article 3.3 shall
be subject to the law of the State of California.
3.4 Mr. DUBOIS shall also be entitled to all the other benefits generally
offered to full-time employees of the Company, including supplementary
health insurance and life assurance entailing full or partial reimbursement
of costs incurred by Mr. DUBOIS. Furthermore, the Company shall guarantee
to Mr. DUBOIS that the provisions of the Collective Agreement relating to
compensation and length of illness shall be applied from the Effective Date
of the present Contract without any pre-condition of service with the
Company.
All sums or benefits which the Company shall pay or grant in addition to
the remuneration agreed in the present Article 3 shall be construed as
bonuses. The allocation of such bonuses during one particular year does not
imply any obligation on the part of the Company to pay similar bonuses in
subsequent years.
Within ninety (90) days from the Effective Date of the present Contract,
the Parties shall jointly carry out an analysis and decide (with the
assistance of external consultants, if necessary) on the appropriateness of,
the parties agreeing to pay the remuneration described in the present
Article 3 to Mr. DUBOIS in different countries ("split payroll"), within the
limits stipulated by and subject to the relevant legal and tax provisions in
each country concerned. In this event, Mr. DUBOIS shall be solely
responsible for storing all data and other documents relating to his
business travel required by the relevant social and fiscal legislation.
3.5 The total annual remuneration, comprising Mr. DUBOIS's basic salary and the
On-target Bonus described in the present Article, shall be reviewed
annually.
<PAGE> 4
4. TEMPORARY SECONDMENT
The Parties agree that during the period commencing on the Effective Date of the
present Contract and terminating on 30 June 1999 (the "Period of Secondment"),
Mr. DUBOIS shall perform his functions at Vantive (UK) Ltd., the British
subsidiary of The Vantive Corporation, currently located at Ascot, England.
During the Period of Secondment, Mr. DUBOIS' remuneration (as set out in Article
3 above) shall be paid in France and be subject to the relevant legal and tax
provisions. In addition, Mr. DUBOIS shall be entitled to the following fringe
benefits during the said Period of Secondment:
a gross monthly housing allowance of 46,800 FF (forty six thousand eight hundred
French francs),
and
a gross quarterly educational allowance of 20,475 FF (twenty thousand four
hundred and seventy five French francs) for the first two quarters of 1999.
5. REIMBURSEMENT OF EXPENSES
Mr. DUBOIS shall be entitled to reimbursement of transport and living expenses
as well as entertainment costs incurred while performing his duties, in
compliance with the policy operating in the Company and on presentation of
receipts. Mr. DUBOIS shall not be entitled to any reimbursement for expenses
incurred travelling from his residence to the Company's headquarters.
6. WORKPLACE
Subject to the provisions of Article 4 above, Mr. DUBOIS shall carry out his
duties from the Company's headquarters in Paris (or, if need be, in the Ile de
France).
The Parties agree that Mr. DUBOIS's workplace may be transferred temporarily in
the future to San Francisco or any other large European city such as London,
Brussels or Geneva, depending on the group's organisational requirements. If
this should occur, a separate amendment to the present Contract shall be drawn
up. Such amendment shall stipulate the duration and the effective date of the
transfer, which must ensure a notice compatible with his children's schooling
and cannot be lower than the current school year. Furthermore, this amendment
shall stipulate the conditions for payment of the costs associated with Mr.
DUBOIS's expatriation (removals, housing allowance and school fees). In
addition, Mr. DUBOIS recognises and accepts that the very nature of his position
shall entail a considerable amount of travel in the area where Vantive
International carries out its business, as set out in Article 8 below.
<PAGE> 5
7. WORKING HOURS
In view of Mr. DUBOIS's position in the organisational hierarchy and the large
amount of travel associated therewith, which makes it impossible to monitor
working hours effectively and ensures a large degree of freedom in terms or
organising schedules, it is explicitly agreed that Mr. DUBOIS shall devote as
much time to his functions as is required to fulfil his duties in a satisfactory
manner. As a result, the present Contract has been drawn up for an unspecified
number of working hours remunerated by the sums described in Article 3 above,
with this excluding the possibility of Mr. DUBOIS seeking additional payment for
overtime.
8. TRAVEL
Mr. DUBOIS shall undertake all long and short-distance business travel in France
and abroad as required by his position in compliance with the Company's
instructions. Mr. DUBOIS will fly business class.
9. ALLOCATION OF A COMPANY CAR
To enable Mr. DUBOIS to perform his duties, the Company will provide him with a
leased car (i.e. BMW 740 or a vehicle of equivalent value) and shall pay the
insurance-policy premiums as set out below and all maintenance costs. Said
allocation of a company car shall continue for the duration of the Contract and
constitutes a fringe benefit within the context of social and fiscal
legislation.
The vehicle can be used for both professional and private purposes, with the
Company paying all costs and charges associated with its use for business on
presentation of the usual receipts.
The insurance policy shall be taken out by the Company, which shall pay the
premiums.
Mr. DUBOIS undertakes to maintain said vehicle in good condition. Upon
termination of the present Contract, Mr. DUBOIS shall return the vehicle to the
Company by immediately bringing it to his workplace and shall hand over its
documents and keys at the same time.
Should the vehicle be involved in any incident, Mr. DUBOIS shall inform the
Company accordingly as soon as possible and, at the latest, within 48 hours to
enable the latter to take whatever steps are necessary.
In the event of an accident, Mr. DUBOIS shall comply with the provisions
stipulated by the law and his insurance policy in such a way that the Company is
not made liable at any time or for any reason. Mr. DUBOIS must, by registered
letter with confirmation of receipt, notify the Company and the insurer of any
accident occurring while the car is being used at the latest within 48 hours of
such accident.
<PAGE> 6
10. PAID HOLIDAYS
Mr. DUBOIS shall be entitled to paid holidays in accordance with French law, to
be taken at dates and for periods agreed with the Company depending on his
workload. Mr. DUBOIS shall have the right not to work on the legal holidays
provided for under French law.
11. DURATION OF THE CONTRACT - NOTICE OF TERMINATION
The present Contract is entered into for an unlimited period. With the exception
of circumstances involving serious professional misconduct, the Contract can be
terminated by giving three (3) months' notice.
In the event that the Company would elect to terminate the present Contract in
compliance with the present Article 11, Mr. DUBOIS shall be entitled to a
special redundancy payment, which shall include any legal or contractual
redundancy payment to which he would be entitled, for an amount equal to nine
(9) months' gross basic salary plus commissions (based on the amounts specified
in Article 3) and all other benefits applicable during the period in question,
excluding the housing and education allowances referred to under Article 4.
It is emphasised that no redundancy payment of any type is payable in the event
of dismissal for serious professional misconduct. The special redundancy payment
described in this Article shall not be payable either in the event of
resignation of Mr. DUBOIS.
12. EXCLUSIVITY OF SERVICES
Mr. DUBOIS shall reserve his services exclusively for the Company and may not
pursue any other professional activity for the duration of the present Contract.
13. ILLNESS, ACCIDENTS AND UNAVAILABILITY FOR WORK
Mr. DUBOIS shall inform the Company and provide written confirmation in the
event of any interruption of his professional activities so that the latter can
take whatever steps are necessary. Should he fall ill, Mr. DUBOIS must produce a
medical certificate indicating the type of sickness concerned and the length of
time he is expected to be unavailable for work.
14. INTELLECTUAL PROPERTY
14.1 Inventions
In addition to the duties described above, Mr. DUBOIS may, from time to
time, be assigned various study or research tasks by the Company under
the terms of the present Contract. Inventions produced by Mr. DUBOIS in
these
<PAGE> 7
circumstances shall be the Company's property in compliance with
Paragraph 1, Article 1(3) of amended statute no. 68-1 dated 2 January
1968.
Mr. DUBOIS's salary does take this possibility into account and
incorporates inclusive payment for the results of work carried out even
on an occasional basis under the terms of the present Contract.
Nonetheless, should any of Mr. DUBOIS's inventions be of exceptional
interest to the Company and of such importance that its contribution is
not reflected to a commensurate degree in the inventor's salary, Mr.
DUBOIS shall receive a supplementary payment based on the relevant
factors.
Mr. DUBOIS undertakes to inform his Employer immediately of all of his
inventions in compliance with Paragraph 3, Article 1(3) of the
above-mentioned law, using the method specified by his superiors for the
prescribed declaration. He is forbidden to disclose any information
concerning such inventions.
14.2 Patents on inventions
While working for the Company, Mr. DUBOIS undertakes wholly, unreservedly
and without seeking payment other than his stipulated remuneration to:
- - inform the Company of and transfer to it all his rights to any inventions,
patents, technical manufacturing procedures, improvements, commercial secrets
and plans which he has developed or helped to develop in all and any areas in
which the Company is or will be active for the duration of the present
Contract;
- - recognize the Company's ownership of these rights or to transfer ownership of
the same to the Company for both France and foreign countries;
- - comply with all the formalities and procedures necessary to establish the
Company's legal and proper possession of said inventions, improvements and
plans, as well as patents or other industrial property rights which may derive
from the above.
15. RESTITUTION AND USE OF COMPANY PROPERTY
All items, materials and information supports entrusted to Mr. DUBOIS by the
Company to assist him in carrying out his duties, especially information
referred to Article 14 as well as all files, documentation and correspondence,
manuals, books, folders, samples and other documents, lists and drawings, shall
remain the property of the Company and must be returned to it on termination of
employment or at any other time where requested.
<PAGE> 8
Mr. DUBOIS undertakes not to use any of the items referred to in the previous
paragraph for any purpose other than in relation to his professional activities
or to make copies or reproductions for personal use or any other reason, unless
explicitly authorized to do so by the Company. Furthermore, Mr. DUBOIS
explicitly undertakes to return said items, materials and supports
entrusted to him as well as all copies and reproductions in his possession on
the day he leaves the Company for whatever reason without the Company having
to request the same or give prior notice.
16. NON-COMPLETION CLAUSE
Mr. DUBOIS undertakes for the duration of the present Contract not to engage in
any direct or indirect act on behalf of competitors which could be detrimental
to the Company.
In the event of termination of this Contract of Employment for any reason,
Mr. DUBOIS undertakes not to work for the following competitor companies
immediately as from the date of termination:
o Siebel
o Clarify
The duration of this obligation of non-competition shall be one (1) year from
the termination of the Contract of Employment.
17. APPLICABLE LAW
The Parties agree that this Contract and any disputes arising hereunder shall
be governed by French Law.
18. COMPLETENESS OF THE AGREEMENT
The present Contract constitutes the complete agreement reached between the
Parties, annulling and superseding any previous commitments as well as any
verbal or written commitments relating to the present Contract. The Contract
can be modified or amended only on the basis of an addendum signed by the
Parties. No other entry, document, use or practice shall be recognized as an
annulment or modification of the present Contract.
<PAGE> 9
DRAWN UP AS TWO ORIGINALS, ON 27 January 1999
/s/ Phillip Dunhalbeger /s/ Guy DuBois
- ----------------------------- --------------------------------
THE COMPANY Mr. Dubois(1)
- ----------------------
(1) The signature is to be preceded in handwriting by the phrase "read and
approved, acceptable for the contract"
<PAGE> 10
ANNEX A
EXTRACT FROM THE PROPOSAL LETTER FROM THE VANTIVE CORPORATION TO MR. DUBOIS
Annex A 1: Stock option agreement
Annex A 2: Stock option plan
Annex A 3: Special conditions
Should The Vantive Corporation or a merging or acquiring entity terminate your
employment for any reason other than your voluntary resignation, death,
disability, or "just cause", you will be entitled to 9 months of paid coverage
of health insurance, 9 months stock vesting, as well as continued salary and
on-target bonus for a period of 9 months, with the amount paid out in a lump sum
within 30 days of your final day of employment and health insurance coverage
continued over a 9 month period.
In the case of any merger, acquisition or other business combination
("Transaction") involving all or substantially all of the assets of The Vantive
Corporation, other than reincorporation where Vantive is not the surviving
company and where the acquiring company or merger partner controls a majority of
Vantive stock after a Transaction, any granted and unvested options you may own
will have their vesting accelerated by one year, i.e. by 12/48, up to a maximum
of 100% of your option shares. Should this acceleration in the event of an
acquisition be "improved" for all other officers of the Corporation, your
position will be adjusted accordingly.
+ THE STOCK OPTION AGREEMENT AND STOCK OPTION PLAN SHALL BE ATTACHED AS SOON AS
GENERATED AND AVAILABLE.
<PAGE> 1
EXHIBIT 21.1
THE VANTIVE CORPORATION
LIST OF SUBSIDIARIES
<TABLE>
<CAPTION>
JURISDICTION OF OWNERSHIP
NAME OF SUBSIDIARY INCORPORATION PERCENTAGE
------------------ --------------- -----------
<S> <C> <C>
Vantive Australia PTY Limited Australia 100%
Vantive B.V The Netherlands 100%
Vantive Canada, Inc. Canada 100%
Vantive France, SARL France 100%
Vantive, GmbH Germany 100%
Vantive Singapore, PTE Ltd. Singapore 100%
Vantive UK Limited United Kingdom 100%
Innovative Computer Concepts, Inc United States 100%
Vantive International Barbados 100%
Scotch Bonnet Integration, Inc United States 100%
</TABLE>
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation
of our report included in this Form 10-K, into the Company's previously filed
Registration Statement Files No. 333-960, 333-36551, 333-52289 and 333-68449 on
Form S-8.
ARTHUR ANDERSEN LLP
San Jose, California
March 25, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-30-1998
<CASH> 51,636,000
<SECURITIES> 43,174,000
<RECEIVABLES> 42,110,000
<ALLOWANCES> 2,370,000
<INVENTORY> 0
<CURRENT-ASSETS> 155,353,000
<PP&E> 34,553,000
<DEPRECIATION> 10,817,000
<TOTAL-ASSETS> 184,268,000
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 27,000
<OTHER-SE> 71,895,000
<TOTAL-LIABILITY-AND-EQUITY> 184,268,000
<SALES> 89,215,000
<TOTAL-REVENUES> 163,100,000
<CGS> 1,485,000
<TOTAL-COSTS> 42,921,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 550,000
<INTEREST-EXPENSE> 3,981,000
<INCOME-PRETAX> 1,260,000
<INCOME-TAX> 3,546,000
<INCOME-CONTINUING> (2,286,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,286,000)
<EPS-PRIMARY> (.09)
<EPS-DILUTED> (.09)
</TABLE>
