-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, FN4Q06e0VRxWmwkgJG2cAQBD2ExeMz1WiVru6YtKfvC9z+KhP/EIclzHxg2fh1Wz 83uYJQV/MQIBhB6smaLy1g== 0000891618-98-001426.txt : 19980401 0000891618-98-001426.hdr.sgml : 19980401 ACCESSION NUMBER: 0000891618-98-001426 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980331 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: CLARIFY INC CENTRAL INDEX KEY: 0001000782 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PREPACKAGED SOFTWARE [7372] IRS NUMBER: 770259235 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 000-26776 FILM NUMBER: 98580384 BUSINESS ADDRESS: STREET 1: 2125 ONEL DRIVE CITY: SAN JOSE STATE: CA ZIP: 95134 BUSINESS PHONE: 4085733000 MAIL ADDRESS: STREET 1: 2125 ONEL DRIVE CITY: SAN JOSE STATE: CA ZIP: 95131 10-K405 1 FORM 10-K 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (MARK ONE) /X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED] FOR THE CALENDAR YEAR ENDED DECEMBER 31, 1997 OR / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] COMMISSION FILE NUMBER 0-26776 CLARIFY INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 77-0259235 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER) 2125 O'NEL DRIVE SAN JOSE, CALIFORNIA 95131 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (408) 573-3000 SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: COMMON STOCK, $0.0001 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 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. /X/ Approximate aggregate market value of the registrant's Common Stock held by nonaffiliates of the registrant (based on the closing sales price of such stock as reported in the NASDAQ National Market) on December 31, 1997 was $187,787,388. Excludes shares of Common Stock held by directors, officers and each person who holds 5% or more of the outstanding Common Stock at December 31, 1997 because such persons may be deemed to be affiliates. This exclusion is not a conclusive determination of such status for other purposes. Number of shares of Common Stock, $0.0001 par value, outstanding as of December 31, 1997 was 21,335,445. DOCUMENTS INCORPORATED BY REFERENCE PART III -- PORTIONS OF THE REGISTRANTS DEFINITIVE PROXY STATEMENT TO BE ISSUED IN CONJUNCTION WITH THE REGISTRANTS ANNUAL MEETING OF STOCKHOLDERS TO BE HELD ON JUNE 4, 1998. This Report contains 50 pages. The Index to Exhibits is located on page 49. - -------------------------------------------------------------------------------- 1 2 PART I In addition to historical information, this annual report on Form 10-K contains forward-looking statements that involve risks and uncertainties that could cause actual results to differ materially. Factors that might cause or contribute to such differences include, but are not limited to, those discussed in the section entitled "Management's Discussion and Analysis of Consolidated Financial Condition and Results of Operations" and "Certain Factors That May Affect Future Results of Operations." Readers should carefully review the risks described in other documents the Company files from time to time with the Securities and Exchange Commission, including the quarterly reports on Form 10-Q to be filed by the Company in 1998. Readers are cautioned not to place undue reliance on the forward-looking statements, including statements regarding the Company's expectations, beliefs, intentions or strategies regarding the future, which speak only as of the date of this annual report on Form 10-K. The Company undertakes no obligation to publicly release any revisions to the forward-looking statements or reflect events or circumstances after the date of this document. ITEM 1. BUSINESS. OVERVIEW Clarify Inc. ("Clarify" or the "Company"), founded in August 1990, is a leading developer and provider of integrated enterprise front office solutions. Clarify helps companies build service into every customer interaction, with solutions that automate call center, sales and marketing, technical support, field service and logistics, quality assurance and help desk processes. By uniting the entire virtual enterprise around the customer, Clarify helps companies attract, acquire and retain customers at significantly reduced costs. A variety of industries employ Clarify's solutions, including high-tech, health care, telecommunications and financial services. Clarify markets its software and services primarily through its direct sales organization in the United States, the United Kingdom, Germany, France, Canada, Japan and Australia. Clarify customers include, among others, ADP, Amoco Corp., Cisco Systems, General Electric, Georgia-Pacific, Gillette, Hewlett-Packard, Microsoft and Sprint PCS. The Company maintains its executive offices at 2125 O'Nel Drive, San Jose, California 95131. In April 1996, the Company acquired Metropolis Software, Inc. (Metropolis), a sales force automation software provider. The Company issued approximately 663,000 shares of common stock for all of the shares of common stock of Metropolis in a transaction that was accounted for as a pooling of interests. The Company also assumed options to purchase Metropolis stock that remain outstanding as options to purchase the Company's common stock. INDUSTRY BACKGROUND In today's highly competitive, fast-paced economy, companies are finding that winning and keeping customers is an increasingly difficult challenge--a trend that poses a very real threat to a company's bottom line. While at the same time, the cost of acquiring new customers is soaring. Today's customers want more personalized service, and faster, unfettered access to products and services--anytime, anywhere. And companies that can't adapt to this new business model are losing their customers to those that can. Many companies and vendors have responded to these business trends by focusing their efforts on automating the direct sales force in an attempt to reduce sales costs. Others have focused their energies solely on support solutions in order to retain existing customers--often at the expense of acquiring new 2 3 ones. However, neither of these strategies has provided companies with an integrated, long-term solution for effectively managing customer relationships across the entire customer life cycle. Recognizing this market need, Clarify began in 1996 to lay the foundation for providing its customers with a complete front office suite by acquiring Metropolis. The goal was to integrate Metropolis' sales automation product with Clarify's best-of-breed customer service and support applications. In 1997, Clarify achieved this goal. The Clarify front office suite now provides a broad set of full-featured business applications for call center, sales and marketing, technical support, field service and logistics, quality assurance and help desk organizations. PRODUCTS Clarify's innovative solutions help today's enterprise organizations work together to provide bulletproof accountability and powerful functionality to enterprise organizations focused on customer success. Clarify's turnkey business solutions are designed for fast, easy implementation, provide a low cost of ownership and establish a solid foundation for future growth. Clarify helps leverage experts' knowledge across the enterprise, providing a public knowledge base of solutions that enables front-line staff to address more customer requests on the first call. Clarify's problem resolution system leads support representatives through the diagnostic process to quickly solve customer problems. Tasks can even be "subcontracted" to specialists to complete, enabling enterprise-wide teams to collaborate on customer requests. Clarify's Web solutions help customers help themselves to product and support information by putting them in direct contact with a company's knowledge database over the World Wide Web. Clarify solutions give companies a comprehensive, enterprise view of the activity, inquiries, requests and problem reports across their entire account base--information that can be used to provide unique treatment for each customer. For example, requests can be routed to a customer's personal account representative and managed to that customer's unique service-level agreements. Point-and-click customizations enable users to easily and safely tailor their Clarify applications, without programming, providing powerful capabilities for adapting the Clarify application to meet customers' unique needs. In 1997, Clarify adapted its business initiatives to address key emerging markets for front office applications, including call center, enterprise front office and telecommunications by introducing new products and developing enhancements to meet the needs of customers in each of these markets. Call Center Industries such as financial services, insurance and utilities are rapidly expanding the traditional roles of their call centers from sales or service only organizations to multi-function "contact" centers that serve as the focal point for proactive customer relationship management. These call centers are consolidated entities that handle all types of contacts from all types of sources--whether it's a customer calling for general information, requesting simple service, or submitting an order via fax, e-mail or the Web. Competitive companies need a centralized resource for collecting and managing this data, plus representatives who are empowered to provide a broad range of services. Clarify identified this opportunity early on and in 1997 introduced ClearCallCenter(TM), a comprehensiVE solution that supports both inbound/outbound sales and service. Using ClearCallCenter, valuable customer information--from raw list data to established customer files--can be centralized and shared with everyonE throughout the enterprise for consistent, proactive customer interaction. Clarify's ClearCallCenter product was awarded the "Best Call Center Product of 1997" by Call Center Magazine. Enterprise Front Office Like multi-function call centers, large enterprises are finding it necessary to integrate their sales and service operations to better manage customer relationships. At the enterprise level, this integration takes 3 4 place across multiple organizations--including sales and marketing, technical support, field service, quality assurance and help desks--which handle complex sales and service needs. Traditionally, sales and service were viewed as separate functions, performed by different organizations at different points in the customer life cycle. Today, those lines are blurring, with multiple organizations and partners collaborating at all times to effectively serve customer needs. ClearSales 5.0 is the new release of Clarify's sales force automation system that is fully integrated with the Clarify product suite. With the incorporation of ClearSales into the Clarify product family, companies can now purchase a front office suite that integrates their sales and services operations. Enterprise Technical Support Developing long-term customer relationships requires a complex combination of timing, technology and resources. Clarify's best-of-breed technical support applications provide companies with the expertise and functionality they need to increase customer retention and loyalty. ClearSupport(R), the Company'S cornerstone product for the customer service organization, manages all aspects of call handling, allowing users to log cases, set priorities, route cases, verify contracts, review case histories, manage configurations and track case-related costs. A key component of Clarify's field service and logistics solutions, ClearLogistics(R) Depot Repair, automates and tracks the critical components of the repair process for service inventory such as time, materials and repair expense, allowing organizations to repair orders faster and improve profitability. ClearContracts(TM), the industry's first integrated contract management solution. helps contraCT administrators quickly define, price and roll out new service programs and develop custom service agreements. For internal support needs, Clarify's enterprise help desk solution lets companies quickly handle employee questions about technology, benefits and facilities. In 1997, Clarify introduced new asset management capabilities, including an Inventory Management Utility, that works with Microsoft's Systems Management Server (SMS). Using the Inventory Management Utility, help desk analysts can automatically retrieve a user's system configurations--including details such as supplier model, serial and part number--and use that information to more swiftly solve a technical problem. Clarify's ClearHelpdesk system has been adopted by several large corporations with enterprise help desks, including Transamerica, Gillette, Hewlett-Packard Co., Amoco Corp., Georgia-Pacific and Corning Clinical Labs. ClearQuality(R) is used by quality assurance and product development organizations to track defects anD enhancement requests. Tightly integrated with ClearSupport and ClearHelpdesk, it allows support representatives to view the status of a change request in development and report it to a customer. ClearQuality is based on a customer-defined process designed to ensure that quality management policies are implemented consistently and development processes are improved over time. Telecommunications In today's deregulated telecommunications market, service providers are competing to offer new and expanded services to the same customer base. At the same time, they're striving to retain those customers by building loyalty--a key advantage in this highly competitive market place. Clarify entered the telecommunications market in 1996 with the development of ClearSupport CommCenter(TM), an integrated customer care and trouble management solution designed specifically for tHE telecommunications industry. By the end of 1997, Clarify telecommunication customers included AT&T, British Telecom, Concert Global Networks, France Telecom, Intermedia, MCI, MetroNet and Sprint PCS. 4 5 Clarify's release 5.0, in 1997, also marked the delivery of ClearSupport CommCenter 2.0 and Services Manager, a new product offering targeted at the telecommunications market that enables the installation of a telecommunications service at multiple sites. TECHNOLOGY The Clarify product family is based upon an open and flexible client/server architecture that easily adapts to growth and change. The architecture ensures high performance and scalability by optimizing resource usage at all levels--client, server and network--even as an organization expands its operation from tens to thousands of users. Clarify's strategic yet flexible distribution of application logic across clients and servers delivers full application functionality to organizations, regardless of how it chooses to deploy the Company's products: over LANs, WANs, the Internet or mobile connections. Clarify invests in several technologies that enable front office organizations to ensure accountability and unique treatment of customers, and which the Company believes provide competitive advantage. Key technologies include: Workflow Engine. Clarify integrates a powerful workflow management engine into its support products to ensure that every customer request is owned, with automated notification and escalation capabilities to ensure that commitments are always met. Clarify also allows users to base commitments on their customers' business hours, enabling organizations to run a more customer-focused business. Desktop reports, real-time alerts and messaging functions help schedule tasks and manage activities, while business rules notify managers of potential issues, giving them more time to spend on proactive account management. Problem Resolution System. Clarify helps companies leverage their experts' knowledge across the enterprise, providing a public knowledge base of solutions that enables front-line staff to address more customer requests on the first call. Clarify's problem resolution system, the Diagnosis Engine, leads support representatives through the diagnostic process to quickly solve customer problems. Clarify's Full-Text Search product helps support specialists solve problems for the first time and seed the company's knowledge base. All of the support specialists' diagnostic work, such as the symptoms identified and diagnostic hints answered, can be captured by the system and associated with the new problem description. In this way, the problem description is entered only once by the support specialist who has done all the research, and who is therefore the most qualified to accurately describe the problem and solution. Together, these products enable support representatives to efficiently identify previously solved problems and rapidly provide customers with consistent, high-quality solutions. Tasks can even be "subcontracted" to specialists to complete, enabling enterprise-wide teams to collaborate on customer requests. World Wide Web Access. Clarify's ClearExpress products let customers and employees help themselves by putting them in direct contact with a company's knowledge base over the World Wide Web for access to product, solution and support information. These products are ready to use "out of the box" and require no customization or application building to integrate Web functionality into a company's front office solution. Customers can create cases, verify status and troubleshoot problems. ClearExpress products can also be used to leverage corporate Intranets to support internal information-sharing needs, such as those of a help desk or human resources organization. SALES AND MARKETING To meet the demands of the rapidly expanding front office market, Clarify made major investments in building its sales and support organizations in 1997. The Company markets its software and services primarily through its direct sales organization. To support its sales force, the Company conducts marketing programs that include public relations, advertising, World Wide Web and Internet 5 6 marketing, direct mail, trade shows, product seminars, user group conferences and ongoing customer communication programs. As of December 31, 1997, the Company's sales and marketing organization consisted of 210 employees. Field sales professionals and sales engineers are located throughout the United States, the United Kingdom, Germany, France, Canada, Japan and Australia. In 1997, the Company also announced a new channel sales program and established reseller agreements with Ernst & Young Technologies, Inc. (EYT) and Digital Worldwide Services--the services division of Digital Equipment Corporation. The EYT relationship enables the company to sell Clarify's front office software modules to Ernst & Young customers as part of an overall vertical industry solution. The agreement with Digital Worldwide Services enables Digital to resell Clarify products to customers who have outsourced the management of their information technology (IT) systems to Digital. Clarify also expanded its consulting agreement with KPMG Peat Marwick LLP to help joint clients maximize revenues and increase customer loyalty. An integral part of the Company's strategy is to expand its direct sales internationally. The Company intends to increase the size of its sales force in 1998 and in the future, which is required if the Company is to achieve significant revenue growth. International revenue was insignificant in 1995, but, it amounted to 15% of total revenue in 1996 and 10% of total revenue in 1997. There can be no assurance that the Company can retain its existing sales personnel or that it can attract, assimilate and retain highly qualified sales personnel in the future. If the Company is unable to hire such people on a timely basis, the Company's business, operating results and financial condition could be adversely affected. Furthermore, there can be no assurance that the expansion of the Company's sales force will result in significant revenue growth. See "Certain Factors That May Affect Future Results of Operations--International Operations." CUSTOMER SERVICE AND SUPPORT In 1997, Clarify expanded its service and support staff, and revamped the service delivery model to increase accessibility and speed resolution time. As of December 31, 1997, the Company had 111 employees in the customer service and support organization. A CustomerCARE call center introduced in 1997 provides Clarify customers with a single point of contact where Clarify customers can get answers to a sales or service question--via the phone, fax, e-mail or Web interaction. The Customer Service group is staffed and organized to help customers get the most from their Clarify solution, and our experienced implementation and application consultants also provide personal, hands-on help. In addition, the Company offers a comprehensive system administration course and project team training program to customers for applications, customization tools and data models. Training classes are provided at the Company's offices in San Jose, California; Marlborough, Massachusetts; and internationally. The Company also provides on-site training services upon request to customers at a higher cost. Supplementing its training and technical support services, the Company's consultants and third-party consulting organizations, such as Cambridge Technology Partners, support the Company's customers and provide customization, interface specification, and implementation and integration services. PRODUCT DEVELOPMENT The market for the Company's products is characterized by rapidly changing technologies, evolving industry standards, frequent new product introductions and rapid changes in customer requirements. The Company believes that its future performance will depend in large part on its ability to maintain and enhance its current product line, develop new products that achieve market acceptance, maintain 6 7 technological competitiveness and meet an expanding range of customer requirements. There can be no assurance, however, that the Company will be successful in developing and marketing product enhancements or new products that respond to technological change or evolving industry standards, or that the Company will not experience difficulties that could delay or prevent the successful development, introduction and marketing of these products, or that its new products and product enhancements will adequately meet the requirements of the marketplace and achieve market acceptance. If the Company is unable, for technological or other reasons, to successfully develop and introduce new products or enhancements, the Company's business, operating results and financial condition would be materially adversely affected. See "Certain Factors That May Affect Future Results of Operations--Dependence on New Products and Rapid Technological Change." In addition, software products as complex as those offered by the Company may contain undetected errors or failures when first introduced or when new versions are released. The Company has in the past discovered software errors in certain of its new products and enhancements and has experienced delays or lost revenues during the period required to correct those errors. There can be no assurance that, despite testing by the Company and by current and potential customers, errors will not be found in new products or releases after commencement of commercial shipments, resulting in loss of or delay in market acceptance, which could have a material adverse effect upon the Company's business, operating results and financial condition. See "Certain Factors That May Affect Future Results of Operations--Risk of Product Defects." Since its inception, the Company has made substantial investments in product development. The Company intends to expand its existing product offerings and to introduce new products for the front office solutions market. In the development of new products and enhancements to existing products, the Company uses its own products and tools extensively. Although the Company expects that certain of its new products will be developed internally, the Company may, based on timing and cost considerations, acquire technology and products from third parties. As of December 31, 1997, the Company had 118 employees in engineering and product development. The Company's total expenses for research and product development for fiscal years 1995, 1996 and 1997 were $5.5 million, $10.4 million and $16.8 million, respectively. The Company anticipates that it will continue to commit substantial resources to research and product development in the future and that product development expenses may increase in absolute dollars in future periods. All of the Company's expenditures for research and development have been expensed as incurred. COMPETITION The front office solutions market, including the markets for customer service, field service and logistics, help desk, quality assurance and sales and marketing applications, is currently intensely competitive, highly fragmented and subject to rapid change. The Company believes that the principal competitive factors affecting the markets for its products include quality, functionality, performance, breadth of product line, integration of products, frequency of upgrades and updates, manageability of products, customer support, company reputation and price. Competitors vary in size and in the scope and breadth of the products and services offered. The Company encounters competition from a number of sources, including: (i) other software companies, (ii) third-party professional services organizations that develop custom software and (iii) management information systems departments of potential customers that develop custom internal software. In addition, because there are relatively low barriers to entry in the market, the Company expects additional competition from other established and emerging companies as the front office solutions market continues to develop and expand. Increased competition could result in price reductions, reduced gross margins and loss of market share, any of which could materially adversely affect the Company's business, operating results and financial condition. Among software companies competing with the Company, principal competitors include Astea International Inc., Metrix Inc., Scopus Technology Inc., Siebel Systems, Inc., and The Vantive Corporation. Some of the Company's current competitors, and many of the Company's potential competitors, have significantly greater financial, 7 8 technical, product development, marketing and other resources than the Company. As a result, they may be able to respond more quickly to new or emerging technologies and changes in customer requirements, or to devote greater resources to the development, promotion and sale of their products than the Company. In addition, many competitors and potential competitors have significant established distribution networks and large customer installed bases. The Company also expects that competition will increase as a result of software industry consolidations. As an example, an announcement was made in March 1998 that two of the Company's principal competitors, Scopus Technology Inc. and Siebel Systems, Inc. intended to merge their operations. In addition, current and potential competitors have established or may establish cooperative relationships among themselves or with third parties to increase the ability of their products to address the needs of the Company's prospective customers. Accordingly, it is possible that these competitors will rapidly acquire significant market share. Furthermore, companies with greater technical, marketing and other resources than the Company could compete directly with the Company either as a result of acquisition or by direct entry into the market for the Company's products. There can be no assurance that the Company will be able to compete successfully against current or future competitors or that competitive pressures faced by the Company will not materially adversely affect its business, operating results and financial condition. The Company relies on a number of systems consulting and systems integration firms for implementation and other customer support services, as well as recommendations of its products during the evaluation stage of the purchase process. Although the Company seeks to maintain close relationships with these third party implementation providers, many of these third parties have similar, and often more established, relationships with the Company's principal competitors. If the Company is unable to develop and maintain effective, long-term relationships with these third parties, it would adversely affect the Company's competitive position. Further, there can be no assurance that these third parties, many of which have significantly greater financial, marketing and technical resources than the Company, will not in the future compete directly with the Company or otherwise discontinue their relationship with or their support of the Company and its products. The Company competes on the basis of certain factors, including credibility in the marketplace, proven implementations and key reference accounts, as well as product quality, product functionality, product performance, ease of use and customer support. Although the Company believes that it currently competes favorably overall with respect to these factors, there can be no assurance that the Company can maintain its competitive position against current and potential competitors, especially those with significantly greater financial, marketing, service, support, technical and other resources. See "Certain Factors That May Affect Future Results of Operations--Intense Competition." INTELLECTUAL PROPERTY AND OTHER PROPRIETARY RIGHTS The Company's success is heavily dependent upon proprietary software technology. The Company relies primarily on a combination of copyright and trademark laws, trade secrets, confidentiality procedures and contractual provisions to protect its proprietary rights. The Company seeks to protect its software, documentation and other written materials under trade secret and copyright laws, which affords only limited protection. The Company has submitted only one patent application. Despite the Company's efforts to protect its proprietary rights, unauthorized parties may attempt to copy aspects of the Company's products or to obtain and use information that the Company regards as proprietary. Policing unauthorized use of the Company's products is difficult, and while the Company is unable to determine the extent to which piracy of its software products exists, software piracy can be expected to be a persistent problem. In addition, the laws of some foreign countries do not protect the Company's proprietary rights to as great an extent as the laws of the United States. There can be no assurance that the Company's means of protecting its proprietary rights will be adequate or that the competitors will not independently develop similar technology. 8 9 The Company is not aware that any of its products infringe on the proprietary rights of third parties. There can be no assurance, however, that third parties will not claim infringement by the Company with respect to current or future products. The Company expects that software product developers will increasingly be subject to infringement claims as the number of products and competitors in the Company's industry segment grows and the functionality of products in different industry segments overlaps. Any such claims, with or without merit could be time-consuming, result in costly litigation, cause product shipment delays or require the Company to enter into royalty or licensing agreements. Such royalty or licensing agreements, if required, may not be available on commercially reasonable terms or at all, which could have a material adverse affect upon the Company's business, operating results and financial condition. EMPLOYEES As of December 31, 1997, the Company had a total of 488 employees, of which 430 were based in the United States and 58 were based in offices outside the United States. Of the total, 210 were engaged in sales and marketing, 111 were in customer service and support, 118 were in engineering and product development, and 49 were in administration, operations and finance. The Company's future performance depends in significant part upon the continued service of its key technical and senior management personnel and its continuing ability to attract and retain highly qualified technical and managerial personnel. Competition for such personnel is intense and there can be no assurance that the Company can retain its key managerial and technical employees or that it can attract, assimilate or retain other highly qualified technical and managerial personnel in the future. None of the Company's employees is represented by a labor union. The Company has not experienced any work stoppages and considers its relations with its employees to be good. CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS OF OPERATIONS The Company operates in a rapidly changing environment that involves a number of risks, some of which are beyond the Company's control. The following discussion highlights some of these risks. Other risks are presented elsewhere in this report. Limited Operating History; Limited and Variable Profitability The Company was founded in August 1990 and did not begin shipping products until September 1992. The Company has experienced substantial revenue growth in recent years, but its profitability, as a percentage of net revenues, has varied widely on a quarterly and annual basis, including incurred net operating losses in each fiscal year from inception through 1994. Due to the Company's limited operating history on a significant international scale, the rate of growth of the Company's business and the variability of operating results in past periods, there can be no assurance that the Company's revenues will continue at the current level or will grow, or that the Company will be able to sustain profitability on a quarterly or annual basis. Variability of Quarterly Operating Results The Company's net revenues and operating results can vary, sometimes substantially, from quarter to quarter. In general, the Company's revenues, and in particular license fees, are relatively difficult to forecast for a number of reasons, including (i) the size and timing of individual license transactions, (ii) the level of price and product competition, (iii) demand for the Company's products, (iv) the potential for deferral or delay of customer implementations of the Company's software, (v) the timing of the introduction of new products or product enhancements by the Company or its competitors, (vi) changes in customer budgets, (vii) changes in pricing policies by the Company or its competitors, and (viii) seasonality of technology purchases and other general economic conditions. The Company's software products generally are shipped as orders are received. Furthermore, the Company has often recognized a substantial portion of its revenues in the last month of a quarter, with a concentration of these revenues in the last half of that month. As a result, license fees in any quarter are 9 10 substantially dependent on orders booked and shipped in that quarter. In addition, there has been and continues to be a trend toward larger enterprise license transactions, which can have sales cycles of up to a year or more and require approval by a customer's upper management. These transactions are typically difficult to manage and predict. Failure to close any expected individually significant transactions could cause the Company's revenues and operating results in a period to fall short of expectations, and could result in losses. In addition, since a significant portion of the Company's quarterly revenues are typically derived from non-recurring sales to a limited number of customers, revenues in any one quarter are not indicative of revenues in any future period. The Company believes the purchase of its products generally involves a significant commitment of capital because customers have tended to implement the products on a large scale and must establish certain minimum hardware capabilities. As a result, in the event of any downturn in any existing or potential customer's business or the economy in general, purchases of the Company's products may be deferred or canceled, which could have a material adverse affect on the Company's business, operating results and financial condition. The Company's business has experienced and is expected to continue to experience seasonality, in part due to customer buying patterns. In recent years, the Company has generally had stronger demand for its products during the quarters ending in June and December and weaker demand in the quarter ending in March. To the extent international operations constitute a higher percentage of the Company's total revenues, the Company anticipates that it may also experience relatively weaker demand in the quarter ending in September. The foregoing factors make estimating quarterly revenue and operating results prior to the end of a quarter uncertain. The Company's expense levels are based, in significant part, on the Company's expectations as to future revenues and are therefore relatively fixed in the short term. If revenue levels are below expectations, the Company's business, operating results and financial condition are likely to be adversely affected. Net income may be disproportionately adversely affected by a reduction in revenues because a proportionately smaller amount of the Company's expenses varies with its revenues. As a result, the Company believes that period-to-period comparisons of its results of operations are not necessarily meaningful and should not be relied upon as indications of future performance. There can be no assurance that the Company will be able to achieve or maintain profitability on a quarterly or annual basis in the future. The Company plans to increase expenditures to fund continued build-up and expansion of international operations, a larger worldwide direct and indirect sales and marketing staff, development of new distribution and resale channels, greater levels of research and development, and broader customer service and support capability, although annual expenditures will depend upon ongoing results and evolving business needs. To the extent such expenses precede or are not subsequently followed by increased revenues, the Company's revenues, operating results and financial condition would be materially adversely affected. Due to all the foregoing factors, it is likely that in some future quarter the Company's operating results will be below the expectations of public market analysts and investors. In such event, the price of the Company's common stock would likely be materially adversely affected. Continued Volatility of Stock Price Future announcements concerning the Company or its competitors, quarterly variations in operating results, announcements of technological innovations, the introduction of new products or changes in product pricing policies by the Company or its competitors, proprietary rights or other litigation, changes in earnings estimates by analysts or other factors could cause the market price of the Company's common stock to fluctuate substantially, particularly on a quarterly basis. In addition, stock prices for many technology companies fluctuate widely for reasons which may be unrelated to operating results of such companies. These fluctuations, as well as general economic, market and political conditions such as recessions or military conflicts, may materially and adversely affect the market price of the Company's common stock. In the past, following periods of volatility in the market price of a company's securities, securities class action litigation has often been instituted against such companies. Such litigation could 10 11 result in substantial costs and a diversion of management's attention and resources, which could have a material adverse affect on the Company's business, results of operations and financial condition. Management of Growth The Company has grown rapidly in the last three years. The growth of the Company's business and the expansion of the Company's customer base has placed a significant strain on the Company's management and operations. The Company's recent growth and expansion has resulted in substantial increases in the number its employees and the geographic area of its operations. The Company's ability to support the growth of its operations will be substantially dependent upon having in place highly trained internal and third party resources to conduct pre-sales activity, product implementation, training and other customer support services. To accommodate this growth and the expected expansion of its staff, the Company's officers and other key employees will be required to improve and implement a variety of operational and financial systems and procedures, to expand, train and manage its employee base and to engage and work effectively with third party implementation providers. There can be no assurance that the Company will be able to manage its recent or any future expansion successfully. Any inability to do so would likely have a material adverse affect on the Company's business, results of operations and financial condition. International Operations The Company established its European headquarters in the United Kingdom in 1994. Since then, additional offices have been opened in Germany, France, Japan, Australia, Canada, and Singapore. To support the growth of the Company's international operations, the Company continues to incur significant costs to build its service and support infrastructure ahead of anticipated revenues. Operating costs in many countries, including some of those in which the Company operates, are often higher than in the United States. As a result of this expansion, the Company must continue to implement and improve its operational and financial systems and procedures and to expand, train and manage both its employee base and its relationships with third party implementation providers. These factors have placed, and are expected to continue to place, a significant strain on the Company's management and operations. There can be no assurance that the Company's international operations will continue to be successful or that the Company will be able to manage effectively the increased level of international operations. To the extent that the Company is unable to do so in a timely manner or is unable to manage these activities effectively, the Company's growth in international revenues, if any, will be limited, and the Company's business, operating results and financial condition could be materially adversely affected. In addition, there can be no assurance that the Company will be able to maintain or increase international market demand for its products. Furthermore, future increases in the value of the U.S. dollar could make the Company's products less competitive in foreign markets. As the Company increases its international operations, it may be materially adversely affected by fluctuations in currency exchange rates, increases in duty rates, exchange or price controls or other restrictions on foreign currencies. Additional risks inherent in the Company's international business activities include, among others, unexpected changes in regulatory requirements, tariffs and other trade barriers, costs of localizing products for foreign countries, lack of acceptance of localized products in foreign countries, longer accounts receivable payment cycles, difficulties in managing international operations, potentially adverse tax consequences including restrictions on the repatriation of earnings, and the burdens of complying with a wide variety of foreign laws. There can be no assurance that such factors will not have a material adverse affect on the Company's future international sales and, consequently, the Company's results of operations and financial condition. Intense Competition The front office solutions market, including the markets for customer service, field service and logistics, help desk, quality assurance and sales and marketing applications, is currently intensely competitive, highly fragmented and subject to rapid change. The Company believes that the principal competitive factors affecting the markets for its products include quality, functionality, performance, breadth of product line, integration of products, frequency of upgrades and updates, manageability of products, customer support, company reputation and price. Competitors vary in size and in the scope and 11 12 breadth of the products and services offered. The Company encounters competition from a number of sources, including: (i) other software companies, (ii) third-party professional services organizations that develop custom software and (iii) management information systems departments of potential customers that develop custom internal software. In addition, because there are relatively low barriers to entry in the market, the Company expects additional competition from other established and emerging companies as the front office solutions market continues to develop and expand. Increased competition could result in price reductions, reduced gross margins and loss of market share, any of which could materially adversely affect the Company's business, operating results and financial condition. Among software companies competing with the Company, principal competitors include Astea International Inc., Metrix Inc., Scopus Technology Inc., Siebel Systems, Inc. and The Vantive Corporation, Some of the Company's current competitors, and many of the Company's potential competitors, have significantly greater financial, technical, product development, marketing and other resources than the Company. As a result, they may be able to respond more quickly to new or emerging technologies and changes in customer requirements, or to devote greater resources to the development, promotion and sale of their products than the Company. In addition, many competitors and potential competitors have significant established distribution networks and large customer installed bases. The Company also expects that competition will increase as a result of software industry consolidations. As an example, an announcement was made in March 1998 that two of the Company's principal competitors, Scopus Technology Inc. and Siebel Systems, Inc. intended to merge their operations. In addition, current and potential competitors have established or may establish cooperative relationships among themselves or with third parties to increase the ability of their products to address the needs of the Company's prospective customers. Accordingly, it is possible that these competitors will rapidly acquire significant market share. Furthermore, companies with greater technical, marketing and other resources than the Company could compete directly with the Company either as a result of acquisition or by direct entry into the market for the Company's products. There can be no assurance that the Company will be able to compete successfully against current or future competitors or that competitive pressures faced by the Company will not materially adversely affect its business, operating results and financial condition. The Company relies on a number of systems consulting and systems integration firms for implementation and other customer support services, as well as recommendations of its products during the evaluation stage of the purchase process. Although the Company seeks to maintain close relationships with these third party implementation providers, many of these third parties have similar, and often more established, relationships with the Company's principal competitors. If the Company is unable to develop and maintain effective, long-term relationships with these third parties, it would adversely affect the Company's competitive position. Further, there can be no assurance that these third parties, many of which have significantly greater financial, marketing and technical resources than the Company, will not in the future compete directly with the Company or otherwise discontinue their relationship with or their support of the Company and its products. Lengthy Sales and Implementation Cycles The Company's products are typically intended for use in applications that may be critical to a customer's business. The license and implementation of the Company's software products generally involves a significant commitment of resources by prospective customers. As a result, the Company's sales process is often subject to delays associated with lengthy approval processes that typically accompany significant capital expenditures. For these and other reasons, the sales cycle associated with the license of the Company's products is often lengthy and subject to significant delays over which the Company has little or no control. Because of their complexity, larger implementations can involve implementation cycles that can take multiple quarters. When the Company has provided consulting services to implement certain larger projects, a few customers have in the past delayed payment of a portion of license fees until implementation was complete and in some cases have disputed the consulting fees charged for implementation. There can be no assurance that the Company will not experience additional delays or 12 13 disputes regarding payment in the future, particularly if the Company receives orders for large, complex installations. Therefore, the Company believes that its quarterly operating results are likely to vary significantly in the future. Dependence Upon Key Personnel The loss of the services of one or more of the Company's executive officers could have a material adverse affect on the Company's business, operating results and financial condition. There can be no assurance that the Company will be able to retain its key personnel. In addition, in the past there has been turnover in certain key positions in the Company, including Vice-President of Marketing and Vice-President of Customer Service and Support in February 1998, and Chief Financial Officer in August 1997. Furthermore, in March 1998, the Company's President and Chief Executive Officer, Dave Stamm, assumed the position of Chairman of the Board and a new President and Chief Executive Officer was named. Additions of new and departures of existing personnel, particularly in key positions, could have a material adverse affect upon the Company's business, operating results and financial condition. The Company's future performance depends significantly upon the continued service and performance of these officers. The Company's future success also depends on its continuing ability to attract and retain highly qualified technical, sales, financial and managerial personnel. The Company recently hired a significant number of employees, and in order to maintain its ability to grow in the future, the Company will be required to significantly increase the total number of employees. Competition for such personnel is intense, and there can be no assurance that the Company can retain its key technical, sales, financial and managerial employees or that it can attract, assimilate or retain other highly qualified technical, sales, financial and managerial personnel in the future. Product Concentration To date, a significant portion of the Company's revenues have been attributable to sales of ClearSupport, the Company's primary product. ClearSupport has typically been the first of the Company's products to be deployed with the greatest number of users and often as a foundation for other applications. The Company expects ClearSupport to account for a significant portion of the Company's future revenues. As a result, factors adversely affecting the pricing of or demand for the ClearSupport product such as competition or technological change could have a material adverse affect on the Company's business, operating results and financial condition. The Company's future financial performance will depend, in significant part, on the successful development, introduction and customer acceptance of new and enhanced versions of the Company's ClearSupport product and other products. There can be no assurance that the Company will continue to be successful in marketing the ClearSupport product or other products. Dependence on New Products and Rapid Technological Change The front office solutions market, including the markets for customer service, field service and logistics, quality assurance, help desk, and sales and marketing applications, is characterized by rapid technological change, frequent new product introductions, evolving industry standards and rapid changes in customer requirements. The introduction of products embodying new technologies and the emergence of new industry standards can render existing products obsolete and unmarketable. While the Company believes that it offers one of the broadest product lines in the front office solutions market, this market is continuing to evolve and customer requirements continue to change. The Company's future success will depend upon its ability to enhance its current products and develop and introduce new products on a timely basis that keep pace with technological developments, industry standards and the increasingly sophisticated needs of its customers. There can be no assurance that the Company will be successful in developing and marketing product enhancements or new products that respond to technological change or evolving industry standards, or that the Company will not experience difficulties that could delay or prevent the successful development, introduction and marketing of these products, or that its new products and product enhancements will adequately meet the requirements of the marketplace and achieve market acceptance. Furthermore, reallocation of resources by the Company, such as the diversion of research and development personnel to development of a particular feature for a potential or existing customer, can delay new products and certain product enhancements. If the Company is unable, for technological or other reasons, to develop and introduce new products or enhancements of existing products in a timely 13 14 manner in response to changing market conditions or customer requirements, the Company's business, operating results and financial condition will be materially adversely affected. The Company has in the past introduced product upgrades and enhancements on a frequent basis, and expects to continue to introduce upgrades and enhancements of its existing products. The Company also currently plans to introduce and market new products. The upgrades, enhancements and new products are subject to significant technical risks, including the difficulty of ensuring that such products will permit successful migration of customer data from a variety of existing platforms. In the past, the Company has experienced developmental delays, which have resulted in delays in the commencement of commercial shipments of new products and enhancements. There can be no assurance that the Company will not experience difficulties that could delay or prevent the successful development, introduction or marketing of new or enhanced products. In addition, there can be no assurance that such products will meet the requirements of the marketplace and achieve market acceptance on a timely basis, or that the Company's current or future products will conform to industry requirements. If any potential new products, upgrades or enhancements, including the next version of ClearSupport, are delayed, experience quality problems or do not achieve market acceptance, the Company's business, operating results and financial condition will be materially adversely affected. Risk of Product Defects Software products as complex as those offered by the Company frequently contain errors or failures, especially when first introduced or when new versions are released. Although the Company conducts extensive product testing, the Company has in the past released products that contained defects, and has discovered software errors in certain of its new products and enhancements after their introduction and, as a result, has experienced delays in recognizing revenues during the period required to correct these errors. The Company could in the future lose revenues as a result of software errors or defects. The Company's products are typically intended for use in applications that may be critical to a customer's business. As a result, the Company expects that its customers and potential customers have a greater sensitivity to product defects than the market for software products generally. Although the Company has not experienced material adverse affects resulting from any such errors to date, there can be no assurance that, despite testing by the Company and by current and potential customers, errors will not be found in new products or releases after commencement of commercial shipments, resulting in loss of revenue or delay in market acceptance, diversion of development resources, damage to the Company's reputation, or increased service and warranty costs, any of which could have a material adverse affect upon the Company's business, operating results and financial condition. Dependence on Proprietary Technology; Risks of Infringement The Company's success is heavily dependent upon proprietary software technology. The Company relies primarily on a combination of copyright and trademark laws, trade secrets, confidentiality procedures and contractual provisions to protect its proprietary rights. The Company seeks to protect its software, documentation and other written materials under trade secret and copyright laws, which affords only limited protection. The Company has submitted only one patent application. Despite the Company's efforts to protect its proprietary rights, unauthorized parties may attempt to copy aspects of the Company's products or to obtain and use information that the Company regards as proprietary. Policing unauthorized use of the Company's products is difficult, and while the Company is unable to determine the extent to which piracy of its software products exists, software piracy can be expected to be a persistent problem. In addition, the laws of some foreign countries do not protect the Company's proprietary rights to as great an extent as the laws of the United States. There can be no assurance that the Company's means of protecting its proprietary rights will be adequate or that the competitors will not independently develop similar technology. The Company is not aware that any of its products infringe on the proprietary rights of third parties. There can be no assurance, however, that third parties will not claim infringement by the Company with respect to current or future products. The Company expects that software product developers will increasingly be subject to infringement claims as the number of products and competitors in the Company's industry segment grows and the 14 15 functionality of products in different industry segments overlaps. Any such claims, with or without merit could be time-consuming, result in costly litigation, cause product shipment delays or require the Company to enter into royalty or licensing agreements. Such royalty or licensing agreements, if required, may not be available on commercially reasonable terms or at all, which could have a material adverse affect upon the Company's business, operating results and financial condition. Product Liability The Company's license agreements with its customers typically contain provisions designed to limit the Company's exposure to potential product liability claims. However, it is possible that the limitation of liability provisions contained in the Company's license agreements may not be effective under the laws of certain jurisdictions. Although the Company has not experienced any product liability claims to date, the sale and support of products by the Company may entail the risk of such claims, and there can be no assurance that the Company will not be subject to such claims in the future. A successful product liability claim brought against the Company could have a material adverse affect upon the Company's business, operating results and financial condition. Expansion of Distribution Channels The Company has historically sold its products primarily through its direct sales force. The Company's ability to achieve significant revenue growth in the future will depend in large part on its success in recruiting and training sufficient sales personnel and establishing relationships with distributors, resellers and systems integrators. The Company is currently investing, and plans to continue to invest, significant resources to expand its domestic and international direct sales force and develop distribution relationships with certain third party distributors, resellers and systems integrators. There can be no assurance that the Company will be able to attract a sufficient number of third party distribution partners or that such partners will recommend the Company's products. The inability to establish successful relationships with distributors, resellers or systems integrators could have a material adverse affect on the Company's business, operating results or financial condition. In addition, there can be no assurance that the Company will be able to successfully expand its direct sales force or other distribution channels. Any failure by the Company to expand its direct sales force or other distribution channels would materially adversely affect the Company's business, operating results and financial condition. "YEAR 2000" Issues The Company is aware of the issues associated with the programming code in existing computer systems as the year 2000 approaches. Many currently installed computer systems and software products are coded to accept only two digit entries in the date code field. These date code fields will need to accept four digit entries to distinguish 21st century dates from 20th century dates. As a result, many companies' software and computer systems may need to be upgraded or replaced in order to comply with such "Year 2000" requirements. The Company utilizes third party equipment and software that may not be "Year 2000" compliant. Failure of such third party equipment or software to operate properly with regard to the year 2000 and thereafter could require the Company to incur unanticipated expenses to remedy any problems, which could have a material adverse affect on the Company's business, operating results and financial condition. The Company is still assessing the impact the "Year 2000" issue will have on its products and internal information systems and will take appropriate corrective actions based on the results of such analysis. Management has not yet determined the cost related to achieving "Year 2000" compliance. In addition, the "Year 2000" issue could impact the products that the Company sells. The Company is utilizing resources to identify, analyze, reprogram and test the products it sells for the "Year 2000" compliance. It is currently anticipated that all reprogramming efforts will be completed during fiscal 1998. 15 16 Issues Related to the European Monetary Conversion The Company is aware of the issues associated with the forthcoming changes in Europe aimed at forming a European economic and monetary union (the "EMU"). One of the changes resulting from this union will require EMU member states to irrevocably fix their respective currencies to a new currency, the euro, on January 1, 1999. On that day, the euro will become a functional legal currency within these countries. During the next three years, business in the EMU member states will be conducted in both the existing national currency, such as the Franc or Deutsche Mark, and the euro. As a result, companies operating in or conducting business in EMU member states will need to ensure that their financial and other software systems are capable of processing transactions and properly handling these currencies, including the euro. The Company is still assessing the impact the EMU formation will have on both its internal systems and the products it sells. The Company will take appropriate corrective actions based on the results of such assessment. The Company has not yet determined the cost related to addressing this issue and there can be no assurance that this issue and its related costs will not have a materially adverse affect on the Company's business, operating results and financial condition. Effect of Certain Charter Provisions The Company's Board of Directors has the authority to issue up to 5,000,000 shares of Preferred Stock and to determine the price, rights, preferences, privileges and restrictions, including voting rights, of those shares without any further vote or action by the stockholders. The Preferred Stock could be issued with voting, liquidation, dividend and other rights superior to those of the Common Stock. The rights of the holders of Common Stock will be subject to, and may be adversely affected by, the rights of the holders of any Preferred Stock that may be issued in the future. The issuance of Preferred Stock, while providing desirable flexibility in connection with possible acquisitions and other corporate purposes, could have the effect of making it more difficult for a third party to acquire a majority of the outstanding voting stock of the Company. The Company has no current plans to issue shares of Preferred Stock. Further, certain provisions of the Company's Certificate of Incorporation and Bylaws and of Delaware law could delay or make more difficult a merger, tender offer or proxy contest involving the Company. ITEM 2. PROPERTIES. FACILITIES The Company's principal administrative, sales, marketing, support, research and development facility is located on approximately 100,375 square feet of space in San Jose, California. This facility is leased to the Company through November 2001 and the Company has an option to extend the lease for one additional five year term. The Company may outgrow this facility in the future and therefore may have a need to find suitable additional or alternative space. Management believes that suitable space is available on commercially reasonable terms. As of April 1997, the Company terminated the lease contract on its prior, unoccupied facility of 38,820 square feet, located in San Jose, California. ITEM 3. LEGAL PROCEEDINGS. None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. No matters were submitted to a vote of security holders during the fourth quarter ended December 31, 1997. 16 17 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. The Company's Common Stock is traded over-the-counter on the NASDAQ National Market under the symbol "CLFY".
High Low -------- ---------- Fourth quarter of 1997 ............... $15.8750 $ 10.0625 Third quarter of 1997 ................ $19.1250 $ 9.3750 Second quarter of 1997 .................. $26.7500 $ 6.5000 First quarter of 1997 ................ $52.7500 $ 18.7500 Fourth quarter of 1996................... $59.2500 $ 29.8750
The trading price of the Company's Common Stock could be subject to wide fluctuations in response to quarterly variations in operating results, announcements of technological innovations or new products by the Company or its competitors, changes in financial estimates by securities analysts and other events or factors. In addition, the stock market has experienced volatility that has particularly affected the market prices of equity securities of many high technology companies and that often has been unrelated to the operating performance of such companies. These broad market fluctuations may adversely affect the market price of the Company's Common Stock. As of December 31, 1997, the approximate number of common stockholders of record was 219. Since much of the Company's Common Stock is held by brokers and other institutions on behalf of stockholders, the company is unable to estimate the total number of stockholders represented by these record holders. The Company has never paid any cash dividends on its capital stock and does not expect to pay any cash dividends in the foreseeable future. The Company's Board of Directors has the authority to issue up to 5,000,000 shares of Preferred Stock and to determine the price, rights, preferences, privileges and restrictions, including voting rights, of those shares without any further vote or action by the stockholders. The Preferred Stock could be issued with voting, liquidation, dividend and other rights superior to those of the Common Stock. The rights of the holders of Common Stock will be subject to, and may be adversely affected by, the rights of the holders of any Preferred Stock that may be issued in the future. The issuance of Preferred Stock, while providing desirable flexibility in connection with possible acquisitions and other corporate purposes, could have the effect of making it more difficult for a third party to acquire a majority of the outstanding voting stock of the Company. The Company has no current plans to issue shares of Preferred Stock. Further, certain provisions of the Company's Certificate of Incorporation and Bylaws and of Delaware law could delay or make more difficult a merger, tender offer or proxy contest involving the Company. 17 18 ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA.
Years Ended December 31, ------------------------------------------------------------------- 1993 1994 1995 1996 1997 ------- -------- ------- ------- ------- (in thousands, except per share data) Statement of Operations Data: Revenues: License fees .............................. $ 2,607 $ 7,001 $15,749 $39,139 $59,214 Services .................................. 2,249 5,526 9,148 17,183 29,003 ------- -------- ------- ------- ------- Total revenues ......................... 4,856 12,527 24,897 56,322 88,217 ------- -------- ------- ------- ------- Cost of revenues: License fees .............................. 96 400 759 1,409 2,400 Services .................................. 1,430 3,419 5,714 10,711 18,149 ------- -------- ------- ------- ------- Total cost of revenues ................. 1,526 3,819 6,473 12,120 20,549 ------- -------- ------- ------- ------- Gross margin ........................... 3,330 8,708 18,424 44,202 67,668 Operating expenses: Product development and engineering ....... 2,724 3,951 5,547 10,384 16,777 Sales and marketing ....................... 2,377 4,162 9,017 20,351 38,054 General and administrative ................ 960 1,632 2,336 4,920 7,903 Merger costs .............................. -- -- -- 1,061 -- ------- -------- ------- ------- ------- Total operating expenses ............... 6,061 9,745 16,900 36,716 62,734 ------- -------- ------- ------- ------- Operating income (loss) ................ (2,731) (1,037) 1,524 7,486 4,934 Interest and other income (expense), net .... (10) (57) 109 1,644 1,304 Income (loss) before provision for income taxes ................ (2,741) (1,094) 1,633 9,130 6,238 Provision for (benefit from) income taxes ... -- -- 129 940 2,308 ------- -------- ------- ------- ------- Net income (loss) ................ $(2,741) $ (1,094) $ 1,504 $ 8,190 3,930 ======= ======== ======= ======= ------- Diluted net income (loss) per share ......... $ (0.78) $ (0.28) $ 0.09 $ 0.38 $ 0.18 ======= ======== ======= ======= ======= Shares used in per share computations (1) ... 3,530 3,975 17,351 21,768 22,164 ======= ======== ======= ======= ======= Pro forma net loss per share (2) ........ $ (0.07) ======= Pro forma shares used in per share computations (2) ................. 15,212 =======
December 31, ------------------------------------------------------------------ 1993 1994 1995 1996 1997 ------- ------- ------- ------- ------- (in thousands) Balance Sheet Data: Working capital ............... $ 2,039 $ 3,908 $30,129 $35,586 $42,470 Total assets .................. 5,293 9,884 42,283 70,684 86,831 Long-term obligations ......... 426 654 1,047 -- -- Retained earnings ............. (6,656) (7,950) (7,672) 1,565 5,492 Total stockholders' equity .... 2,523 4,368 31,482 46,945 57,097
(1) See Note (2) of Notes to Consolidated Financial Statements. (2) Assumes the common shares issuable upon conversion of the outstanding convertible preferred stock, which were excluded during the loss period, were outstanding for such period. 18 19 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION AND RESULTS OF OPERATIONS. In addition to historical information, this annual report on Form 10-K contains forward-looking statements that involve risks and uncertainties that could cause actual results to differ materially. Factors that might cause or contribute to such differences include, but are not limited to, those discussed in the section entitled "Management's Discussion and Analysis of Consolidated Financial Condition and Results of Operations" and "Certain Factors That May Affect Future Results of Operations." Readers should carefully review the risks described in other documents the Company files from time to time with the Securities and Exchange Commission, including the quarterly reports on Form 10-Q to be filed by the Company in 1998. Readers are cautioned not to place undue reliance on the forward-looking statements, including statements regarding the Company's expectations, beliefs, intentions or strategies regarding the future, which speak only as of the date of this annual report on Form 10-K. The Company undertakes no obligation to publicly release any revisions to the forward-looking statements or reflect events or circumstances after the date of this document. The following table sets forth the percentage of total revenues for certain items in the Company's Consolidated Statement of Operations data for the years ended December 31, 1995, 1996 and 1997. PERCENT OF TOTAL REVENUES
Years Ended December 31, -------------------------- 1995 1996 1997 ------ ------ ------ Revenues: License fees ............................ 63.3% 69.5% 67.1% Services ................................ 36.7 30.5 32.9 ------ ------ ------ Total revenues ....................... 100.0 100.0 100.0 ------ ------ ------ Cost of revenues: License fees ............................ 3.0 2.5 2.7 Services ................................ 23.0 19.0 20.6 ------ ------ ------ Total cost of revenues ............... 26.0 21.5 23.3 ------ ------ ------ Gross margin ......................... 74.0 78.5 76.7 Operating expenses: Product development and engineering ..... 22.3 18.4 19.0 Sales and marketing ..................... 36.2 36.1 43.1 General and administrative .............. 9.4 8.8 9.0 Merger costs ............................ -- 1.9 -- ------ ------ ------ Total operating expenses ............. 67.9 65.2 71.1 ------ ------ ------ Operating income ..................... 6.1 13.3 5.6 Interest and other income (expense), net ...... 0.4 2.9 1.5 Income before provision for income taxes .............. 6.5 16.2 7.1 Provision for income taxes .................... 0.5 1.7 2.6 ------ ------ ------ Net income ..................... 6.0% 14.5% 4.5% ====== ====== ======
19 20 RESULTS OF OPERATIONS Revenues Total revenues increased from $24.9 million in 1995 to $56.3 million in 1996 to $88.2 million in 1997, representing year over year increases of 126% and 57%, respectively. The Company does not believe that the percentage increases in revenues achieved in prior periods should be anticipated in future periods. International revenue was insignificant in 1995, but it accounted for approximately 15% and 10% of total revenues in 1996 and 1997, respectively. In 1995, one customer accounted for approximately 10% of total revenues. No one customer accounted for more than 10% of total revenues in either 1996 and 1997. The Company's revenues are derived primarily from license fees, fees from sublicensing third-party software products and charges for services, including maintenance, consulting and training. For all periods presented, the Company has recognized revenue in accordance with Statement of Position 91-1 entitled "Software Revenue Recognition." License fee revenues consist of revenues from initial licenses for the Company's products, sales of licenses to existing customers for additional users of the Company's products, product documentation and fees from sublicensing third-party software products. The Company generally recognizes initial license fee revenues upon delivery and installation of software products if there are no remaining significant post-installation obligations and if collection is probable. If significant post-installation obligations exist or if a product is subject to customer acceptance, revenues are deferred until no significant obligations remain or until acceptance has occurred. Sales of additional licenses to the Company's existing customers are generally recognized upon shipment provided no significant post-shipment obligations exist. Service revenues consist primarily of maintenance, consulting and training revenues. Maintenance revenues are recognized ratably over the term of the support period, which is typically twelve months. Consulting and training revenues generally are recognized when the services are performed. Consulting services consist primarily of implementation services related to the installation of the Company's software and generally do not include significant customization to or development of the underlying software code. Statement of Position (SOP) 97-2, "Software Revenue Recognition" was issued in October 1997 and amended in March 1998, and addresses software recognition matters primarily from a conceptual level and does not include specific implementation guidance. SOP 97-2 supersedes SOP 91-1 and is effective for transactions entered into by the Company after December 31, 1997. SOP 97-2 requires that if an arrangement to deliver software or a software system does not require significant production, modification, or customization of software, then revenue should be recognized when persuasive evidence of an arrangement exists, delivery has occurred, the vendor's fee is fixed or determinable, and collectibility is probable. Accordingly, upon adoption of SOP 97-2 (as amended), the Company will generally recognize license fee revenue upon product shipment provided there are no contingencies and collection is probable. License Fees. License fee revenues increased from $15.7 million in 1995 to $39.1 million in 1996 to $59.2 million in 1997, representing year over year increases of 149% and 51%, respectively. The growth in license fee revenues was due to increased market acceptance of the Company's existing products, continued enhancement and increased breadth of the Company's product offerings, increased follow on sales to existing customers, sales of the Company's products to new industry segments and increased sales as a result of the expansion of the Company's direct sales force and marketing organization. Although the Company's customer base has grown as revenues have increased, on a yearly basis, significant portions of the Company's license fee revenues are typically derived from non-recurring sales to a limited number of customers. Accordingly, license fee revenues in any one period are not indicative of license fee revenues in any future period. Further, the Company does not believe that the percentage increases in revenues achieved in prior periods should be anticipated in future periods. 20 21 Services. Revenues from services increased from $9.1 million in 1995 to $17.2 million in 1996 to $29.0 million in 1997, representing year over year increases of 88% and 69%, respectively. The growth in service revenues was due to an increase in maintenance and maintenance renewals, consulting and training services associated with increased sales of the Company's applications. The Company expects revenues from services to increase in future periods as the customer installed base increases, though the percentage increases in service revenues achieved in prior periods should not be anticipated in future periods. Costs of Revenues Cost of License Fees. Cost of license fees consists primarily of the costs of sublicensing third-party software products, product media, product duplication, product documentation and shipping. Costs related to research, design and development of products are charged to product development and engineering expense as incurred. Cost of license fees increased from $0.8 million in 1995 to $1.4 million in 1996 to $2.4 million in 1997, and represent 5%, 4% and 4% of license fee revenues for 1995, 1996 and 1997, respectively. Cost of license fees includes no amortization of capitalized software development costs. Cost of license fees as a percentage of license fees may fluctuate from period to period due to the increased or decreased sale of royalty bearing software products. The increase in dollar amount is primarily due to the higher volumes of products shipped during the year and increases in royalties paid to third party software suppliers. Cost of Services. Cost of services consists primarily of costs incurred in providing telephone support, consulting services, shipment of product upgrades and training of customers. Cost of services increased from $5.7 million in 1995 to $10.7 million in 1996 to $18.1 million in 1997, representing 62% of the related service revenues in 1995 and 1996, and 63% of the related service revenues in 1997. The absolute dollar increases are due primarily to the increase in the number of customer support and training personnel and related overhead costs necessary to support a larger installed customer base. The Company expects to make continued investments in its service organization in order to support the Company's customer installed base and anticipates that cost of services will increase in absolute dollars in future periods. Operating Expenses Product Development and Engineering. Product development and engineering expenses increased from $5.5 million in 1995 to $10.4 million in 1996 to $16.8 million in 1997, representing 22%, 18% and 19% of total revenues in 1995, 1996 and 1997, respectively. Product development and engineering expenses include expenses associated with the development of new products, enhancements of existing products and quality assurance activities and consist primarily of employee salaries, benefits, consulting expenses and the cost of software development tools. Costs related to research, design and development of products are charged to product development and engineering expenses as incurred. The increase in absolute dollars was primarily attributable to an increase in personnel and related overhead costs as well as consulting expenses. The Company currently anticipates that product development and engineering expenses will increase in absolute dollars as the Company continues to commit substantial resources to product development and engineering in future periods. Sales and Marketing. Sales and marketing expenses increased from $9.0 million in 1995 to $20.4 million in 1996 to $38.1 million in 1997, representing 36% of total revenues in 1995 and 1996 and 43% of total revenues in 1997. Sales and marketing expenses consist primarily of employee salaries, sales commissions, travel and promotional expenses. The increase in dollar amount was primarily due to the expansion of the Company's worldwide sales and marketing organization, higher sales commissions associated with increased revenue and increased marketing activities. The increase in sales and marketing expenses as a percentage of total revenues for 1997 compared to 1996 reflects the significant investment that the Company made during 1997 to expand both its direct sales force and other distribution channels. The Company intends to continue to invest substantial resources in expanding its direct sales force, both 21 22 domestic and international, expanding its other distribution channels, and conducting marketing programs to support existing and new product offerings. Accordingly, sales and marketing expenses are expected to increase in absolute dollars in future periods. General and Administrative. General and administrative expenses increased from $2.3 million in 1995 to $4.9 million in 1996 to $7.9 million in 1997, representing 9% of total revenues in 1995, 1996 and 1997. General and administrative expenses consist primarily of salaries and occupancy costs for administrative, executive and finance personnel. The increase in dollar amount was due primarily to increases in personnel, related overhead costs and expenses related to the Company's infrastructure expansion. The Company currently expects general and administrative expenses to increase in absolute dollars in the future as the Company continues to expand its infrastructure. Merger costs. The Company incurred $1.1 million of one time merger related expenses in 1996 in connection with the acquisition of Metropolis Software, Inc. Interest and Other Income (Expense), net. Interest and other income (expense) , net represents interest income earned on the Company's cash, cash equivalents and short and long term investment, and other items including foreign exchange gains and losses. The Company earned net interest income of $0.1 million, $1.6 million and $1.4 million in 1995, 1996 and 1997 respectively. Interest income earned on excess cash balances changed from $0.4 million in 1995 to $1.7 million in 1996 and $1.4 million in 1997. Such excess cash balances resulted primarily from the sale of common stock in November 1995 in an initial public offering which raised net proceeds of approximately $26.7 million. Provision for Income Taxes. The Company's effective tax rate for 1995, 1996 and 1997 was 8%, 10% and 37%, respectively. The Company's effective tax rate increased to 37% in 1997 primarily due to federal and state operating loss carryforwards having been recognized in 1996. Variability of Quarterly Operating Results The Company's net revenues and operating results can vary, sometimes substantially, from quarter to quarter. In general, the Company's revenues, and in particular license fees, are relatively difficult to forecast for a number of reasons, including (i) the size and timing of individual license transactions, (ii) the level of price and product competition, (iii) demand for the Company's products, (iv) the potential for deferral or delay of customer implementations of the Company's software, (v) the timing of the introduction of new products or product enhancements by the Company or its competitors, (vi) changes in customer budgets, (vii) changes in pricing policies by the Company or its competitors, and (viii) seasonality of technology purchases and other general economic conditions. The Company's software products generally are shipped as orders are received. Furthermore, the Company has often recognized a substantial portion of its revenues in the last month of a quarter, with a concentration of these revenues in the last half of that month. As a result, license fees in any quarter are substantially dependent on orders booked and shipped in that quarter. In addition, there has been and continues to be a trend toward larger enterprise license transactions, which can have sales cycles of up to a year or more and require approval by a customer's upper management. These transactions are typically difficult to manage and predict. Failure to close any expected individually significant transactions could cause the Company's revenues and operating results in a period to fall short of expectations, and could result in losses. In addition, since a significant portion of the Company's quarterly revenues are typically derived from non-recurring sales to a limited number of customers, revenues in any one quarter are not indicative of revenues in any future period. The Company believes the purchase of its products generally involves a significant commitment of capital because customers have tended to implement the products on a large scale and must establish certain minimum hardware capabilities. As a result, in the event of any downturn in any existing or potential customer's business or the economy in general, purchases of the Company's products may be 22 23 deferred or canceled, which could have a material adverse affect on the Company's business, operating results and financial condition. The Company's business has experienced and is expected to continue to experience seasonality, in part due to customer buying patterns. In recent years, the Company has generally had stronger demand for its products during the quarters ending in June and December and weaker demand in the quarter ending in March. To the extent international operations constitute a higher percentage of the Company's total revenues, the Company anticipates that it may also experience relatively weaker demand in the quarter ending in September. The foregoing factors make estimating quarterly revenue and operating results prior to the end of a quarter uncertain. The Company's expense levels are based, in significant part, on the Company's expectations as to future revenues and are therefore relatively fixed in the short term. If revenue levels are below expectations, the Company's business, operating results and financial condition are likely to be adversely affected. Net income may be disproportionately adversely affected by a reduction in revenues because a proportionately smaller amount of the Company's expenses varies with its revenues. As a result, the Company believes that period-to-period comparisons of its results of operations are not necessarily meaningful and should not be relied upon as indications of future performance. There can be no assurance that the Company will be able to achieve or maintain profitability on a quarterly or annual basis in the future. The Company plans to increase expenditures to fund continued build-up and expansion of international operations, a larger worldwide direct and indirect sales and marketing staff, development of new distribution and resale channels, greater levels of research and development, and broader customer service and support capability, although annual expenditures will depend upon ongoing results and evolving business needs. To the extent such expenses precede or are not subsequently followed by increased revenues, the Company's revenues, operating results and financial condition would be materially adversely affected. Due to all the foregoing factors, it is likely that in some future quarter the Company's operating results will be below the expectations of public market analysts and investors. In such event, the price of the Company's common stock would likely be materially adversely affected. The following table sets forth unaudited consolidated statement of operations data for each of the eight quarters beginning January 1, 1996 and ending December 31, 1997. This information has been derived from unaudited consolidated financial statements that, in the opinion of management, include all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of the information in accordance with generally accepted accounting principles. The business combination with Metropolis in 1996 was accounted for as a pooling of interests and the consolidated financial statements have been restated as if Metropolis had been combined for all periods presented. The Company's quarterly results have been in the past and may in the future be subject to fluctuations. Therefore, these results are not necessarily indicative of future quarterly results of operations.
Quarters ended, ------------------------------------------------------------------------------------ Mar. 31, June 30, Sept. 30, Dec. 31, Mar.31, June 30, Sept. 30, Dec. 31, 1996 1996 1996 1996 1997 1997 1997 1997 ------- ------- ------- ------- ------- ------- ------- ------- (in thousands except per share data) Statement of Operations Data: Revenues ....................... $ 8,954 $11,137 $17,001 $19,230 $19,360 $19,429 $21,891 $27,537 Gross Margin ................... $ 6,784 $ 8,689 $13,603 $15,126 $14,863 $14,784 $16,553 $21,468 Net income ..................... $ 868 $ 1,262 $ 3,169 $ 2,891 $ 1,953 $ 1,018 $ 293 $ 664 Diluted net income per share ... $ 0.04 $ 0.06 $ 0.15 $ 0.13 $ 0.09 $ 0.05 $ 0.01 $ 0.03 Shares used in per share computations ................ 21,485 21,581 21,720 22,284 22,071 21,744 22,269 22,167
23 24 LIQUIDITY AND CAPITAL RESOURCES The Company's cash, cash equivalents and investments totaled $36.4 million at December 31, 1997 representing about 42% of total assets. The Company has invested its cash in excess of current operating requirements in a portfolio of both taxable and tax-exempt investment grade securities. The investments have variable and fixed interest rates and short and long term maturities. In accordance with SFAS 115, "Accounting for Certain Investments in Debt and Equity Securities" such investments are classified as "available for sale". Net cash provided by operating activities was $3.9 million and $13.2 million in 1995 and 1996, respectively, and net cash used in operating activities was $2.7 million in 1997. Net cash used in operating activities in 1997 resulted primarily from an increase in accounts receivable, plus an increase in deferred income taxes partially offset by net income, depreciation and amortization, and increases in accounts payable, accrued payroll and related accruals, and other accrued liabilities. In 1996, net cash provided by operating activities consisted primarily of net income plus accounts payable, accrued liabilities and unearned revenue which was offset primarily by increases in accounts receivable and deferred income taxes. In 1995, net cash provided by operating activities consisted primarily of net income, accounts payable, accrued liabilities and deferred revenue offset primarily by increases in accounts receivable. The increase in accounts receivable corresponds to the overall growth in customer licensing activity offset by cash collections. Accounts receivable days sales outstanding ("DSO"), the ratio of the quarter-end accounts receivable balance to quarterly revenues, multiplied by 90, was 107 days as of December 31, 1997 compared to 84 days and 78 days as of December 31, 1996 and 1995, respectively. Since much of the Company's contracting activity is concentrated toward the end of each quarter and the Company provides extended payment terms to certain creditworthy customers, the Company believes that its DSO will continue to be elevated in future periods. Net cash used in investing activities was $1.1 million, $12.3 million and $17.3 million in 1995, 1996 and 1997, respectively, primarily reflecting net purchases of investments and purchases of property and equipment. The Company expects that the rate of purchases of property and equipment will remain constant or increase as the Company's employee base grows. Net cash provided by financing activities was $25.8 million, $1.8 million and $6.1 million in 1995, 1996 and 1997, respectively. The net cash provided by financing activities in both 1997 and 1996 consisted primarily of the proceeds from the issuance of common stock pursuant to the Employee Stock Purchase Plan and the exercise of options granted under the Company's Stock Option Plans. The net cash provided by financing activities in 1995 consisted primarily of the proceeds from the issuance of common stock in conjunction with the Company's initial public offering. The Company believes that cash generated from operations and its existing cash and cash equivalents and short-term investment balances will satisfy the Company's projected working capital and other cash requirements for at least the next twelve months. Although operating activities may provide cash in certain periods, to the extent the Company grows in the future, its operating and investing activities may use cash. In the event that cash generated from operating activities may not be sufficient to meet future cash requirements, there can be no assurance that additional financing will be available to the Company on commercially reasonable terms, or at all. RECENT ACCOUNTING PRONOUNCEMENTS In July 1997, the Financial Accounting Standards Board issued Statements of Accounting Standards No. 130 (SFAS 130), "Reporting Comprehensive Income" which is effective for financial statements issued for fiscal years beginning after December 15, 1997. SFAS 130 requires a separate financial statement showing changes in comprehensive income, and will require reclassification of all prior-period 24 25 financial statements for comparative purpose. The company is evaluating alternative formats for presenting this information, but does not expect this pronouncement to materially impact the Company's results of operations. In July 1997, the Financial Accounting Standards Board issued Statements of Accounting Standards No. 131 (SFAS 131), "Disclosures about Segments of an Enterprise and Related Information", which requires companies to report certain information about operating segments, including certain information about their products, services, the geographic area in which they operate and their major customers. This statement supersedes FASB Statements Nos. 14, 18, 24 and 30. SFAS 131 is effective for financial statements for fiscal years beginning after December 15, 1997. The company is evaluating the requirements of SFAS 131 and the effects, if any, on the Company's current reporting and disclosures. Statement of Position (SOP) 97-2, "Software Revenue Recognition" was issued in October 1997 and amended in March 1998, and addresses software recognition matters primarily from a conceptual level and does not include specific implementation guidance. The SOP supersedes SOP 91-1 and is effective for transactions entered into by the Company after December 31, 1997. The SOP requires that if an arrangement to deliver software or a software system does not require significant production, modification, or customization of software, then revenue should be recognized when persuasive evidence of an arrangement exists, delivery has occurred, the vendor's fee is fixed or determinable, and collectibility is probable. Accordingly, upon adoption of SOP 97-2 (as amended), the Company will generally recognize license fee revenue upon product shipment provided there are no contingencies and collection is probable. YEAR 2000 "YEAR 2000" Issues. The Company is aware of the issues associated with the programming code in existing computer systems as the year 2000 approaches. Many currently installed computer systems and software products are coded to accept only two digit entries in the date code field. These date code fields will need to accept four digit entries to distinguish 21st century dates from 20th century dates. As a result, many companies' software and computer systems may need to be upgraded or replaced in order to comply with such "Year 2000" requirements. The Company utilizes third party equipment and software that may not be "Year 2000" compliant. Failure of such third party equipment or software to operate properly with regard to the year 2000 and thereafter could require the Company to incur unanticipated expenses to remedy any problems, which could have a material adverse effect on the Company's business, operating results and financial condition. The Company is still assessing the impact the "Year 2000" issue will have on its products and internal information systems and will take appropriate corrective actions based on the results of such analysis. Management has not yet determined the cost related to achieving "Year 2000" compliance. In addition, the "Year 2000" issue could impact the products that the Company sells. The Company is utilizing resources to identify, analyze, reprogram and test the products it sells for the "Year 2000" compliance. It is currently anticipated that all reprogramming efforts will be completed during fiscal 1998. ISSUES RELATED TO THE EUROPEAN MONETARY CONVERSION The Company is aware of the issues associated with the forthcoming changes in Europe aimed at forming a European economic and monetary union (the "EMU"). One of the changes resulting from this union will require EMU member states to irrevocably fix their respective currencies to a new currency, the euro, on January 1, 1999. On that day, the euro will become a functional legal currency within these countries. During the next three years, business in the EMU member states will be conducted in both the 25 26 existing national currency, such as the Franc or Deutsche Mark, and the euro. As a result, companies operating in or conducting business in EMU member states will need to ensure that their financial and other software systems are capable of processing transactions and properly handling these currencies, including the euro. The Company is still assessing the impact the EMU formation will have on both its internal systems and the products it sells. The Company will take appropriate corrective actions based on the results of such assessment. The Company has not yet determined the cost related to addressing this issue and there can be no assurance that this issue and its related costs will not have a materially adverse affect on the Company's business, operating results and financial condition. ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. The Consolidated Balance Sheets of the Company as of December 31, 1996 and 1997 and the Consolidated Statements of Operations, Stockholders' Equity and Cash Flows for each of the three years in the period ended December 31, 1997, together with the related notes and the report of Coopers & Lybrand L.L.P., independent accountants, are set forth in the following pages. Other required financial information is set forth herein, as more fully described in Item 14 hereof. 26 27 CLARIFY INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Page Report of Independent Accountants ......................................................... 28 Consolidated Financial Statements: Consolidated Balance Sheets as of December 31, 1996 and 1997 ............................ 29 Consolidated Statements of Operations for each of the three years in the period ended December 31, 1997 .............................................................. 30 Consolidated Statements of Stockholders' Equity for each of the three years in the period ended December 31, 1997 ....................................................... 31 Consolidated Statements of Cash Flows for each of the three years in the period ended December 31, 1997 .............................................................. 32 Notes to Consolidated Financial Statements ................................................ 33 ------------------------------------------------------------------------------------------------
27 28 REPORT OF INDEPENDENT ACCOUNTANTS Board of Directors Clarify Inc. San Jose, California We have audited the consolidated balance sheets of Clarify Inc. as of December 31, 1996 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, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements 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 consolidated financial position of Clarify Inc. as of December 31, 1996 and 1997, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. COOPERS & LYBRAND L.L.P. San Jose, California January 20, 1998, except for Note 14 as to which the date is February 23, 1998 28 29 CLARIFY INC. CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1996 AND 1997 (IN THOUSANDS, EXCEPT PER SHARE DATA)
December 31 ------------------------ ASSETS 1996 1997 -------- -------- Current assets: Cash and cash equivalents ............................................ $ 34,477 $ 20,744 Short-term investments ............................................... 1,486 10,451 Accounts receivable, net of allowance for doubtful accounts of $763 at December 31, 1996 and $1,310 at December 31, 1997 .................. 17,977 32,854 Prepaid expenses and other current assets ............................ 1,601 2,463 Deferred income taxes ................................................ 3,784 5,692 -------- -------- Total current assets .............................................. 59,325 72,204 Property and equipment, net .............................................. 8,470 8,611 Long-term investments .................................................... 1,989 5,167 Other noncurrent assets .................................................. 900 849 -------- -------- Total assets ...................................................... $ 70,684 $ 86,831 ======== ======== LIABILITIES Current liabilities: Accounts payable ..................................................... $ 3,920 $ 5,047 Accrued payroll and related accruals ................................. 4,771 6,833 Other accrued liabilities ............................................ 2,124 4,269 Income taxes payable ................................................. 160 1,851 Unearned revenue ..................................................... 12,764 11,734 -------- -------- Total current liabilities ......................................... 23,739 29,734 -------- -------- Commitments (Note 7). STOCKHOLDERS' EQUITY Preferred stock, $.0001 par value: Authorized: 5,000 shares; Issued and outstanding: none Common stock, $.0001 par value: Authorized: 55,000 shares; Issued and outstanding: 20,600 at December 31, 1996, and 21,335 at December 31, 1997 ..................................... 2 2 Capital in excess of par value ........................................... 45,556 51,640 Unrealized holding gain on investments, net .............................. -- 22 Cumulative translation adjustment ........................................ (66) 6 Deferred compensation .................................................... (112) (65) Retained earnings ........................................................ 1,565 5,492 -------- -------- Total stockholders' equity ........................................ 46,945 57,097 -------- -------- Total liabilities and stockholders' equity ..................... $ 70,684 $ 86,831 ======== ========
The accompanying notes are an integral part of these consolidated financial statements. 29 30 CLARIFY INC. CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA)
Years Ended December 31, ---------------------------------------- 1995 1996 1997 -------- -------- -------- Revenues: License fees ..................................... $ 15,749 $ 39,139 $ 59,214 Services ......................................... 9,148 17,183 29,003 -------- -------- -------- Total revenues ................................ 24,897 56,322 88,217 -------- -------- -------- Cost of revenues: License fees ..................................... 759 1,409 2,400 Services ......................................... 5,714 10,711 18,149 -------- -------- -------- Total cost of revenues ........................ 6,473 12,120 20,549 -------- -------- -------- Gross margin .................................. 18,424 44,202 67,668 Operating expenses: Product development and engineering .............. 5,547 10,384 16,777 Sales and marketing .............................. 9,017 20,351 38,054 General and administrative ....................... 2,336 4,920 7,903 Merger costs ..................................... -- 1,061 -- -------- -------- -------- Total operating expenses ...................... 16,900 36,716 62,734 -------- -------- -------- Operating income .............................. 1,524 7,486 4,934 Interest income .................................... 358 1,653 1,437 Interest expense ................................... (249) (9) (6) Other expense, net ................................. -- -- (127) -------- -------- -------- Income before provision for income taxes ....................... 1,633 9,130 6,238 Provision for income taxes ......................... 129 940 2,308 -------- -------- -------- Net income .............................. $ 1,504 $ 8,190 $ 3,930 ======== ======== ======== Basic net income per share ......................... $ 0.09 $ 0.41 $ 0.19 ======== ======== ======== Shares used in per share computation - basic ....... 16,250 20,143 20,909 ======== ======== ======== Diluted net income per share ....................... $ 0.09 $ 0.38 $ 0.18 ======== ======== ======== Shares used in per share computation - diluted ..... 17,351 21,768 22,164 ======== ======== ========
The accompanying notes are an integral part of these consolidated financial statements. 30 31 CLARIFY INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (IN THOUSANDS)
Convertible Preferred Stock Common Stock Capital ---------------------- --------------------- In Excess Shares Amount Shares Amount of Par Value ------- --------- ------ ------- ------------ Balances December 31, 1994 ............................. 11,117 $ 1 2,993 $ -- $ 12,303 Conversion of convertible preferred stock ................................... (11,117) (1) 11,117 1 Issuance of common stock ............................ 4,600 1 26,663 Exercise of stock options ........................... 1,024 149 Net exercise of warrants ............................ 155 Common stock repurchased for cash ................... (20) (1) Deferred stock option compensation .................. 188 Amortization of deferred stock option compensation ............................... Amortization of interest from warrants ........................................... 14 Change in unrealized holding gain on investments, net ................................ Cumulative translation adjustment ................... Dividend distribution ............................... Net income .......................................... ------- --------- ------ ------- ------------ Balances, December 31, 1995 ............................ -- -- 19,869 2 39,316 Exercise of stock options ........................... 442 224 Employee stock purchases ............................ 289 1,845 Amortization of deferred stock option compensation .. Forgiveness of notes payable to stockholders .................................... Tax benefit from exercise of nonqualified stock options ........................... 4,171 Cumulative translation adjustment ...................... Net income .......................................... ------- --------- ------- ------- ------------ Balances, December 31, 1996 ............................ 20,600 2 45,556 Exercise of stock options .............................. 305 436 Employee stock purchases ............................ 463 3,370 Amortization of deferred stock option compensation ................................ Common stock repurchased for cash ...................... (33) (23) Tax benefit from exercise of nonqualified stock options ........................ 2,301 Change in unrealized holding gain on investments, net ................................. Cumulative translation adjustment ...................... Net income .......................................... ------- --------- ------ ------- ------------ Balances, December 31, 1997 ............................ -- $ -- 21,335 $ 2 $ 51,640 ======= ========= ====== ======= ============
Unrealized Holding Gain on Cumulative Deferred Retained Investments, Translation Stock Option Earnings Net Adjustment Compensation (Deficit) Total ------------ ------------ ------------- ---------- --------- Balances December 31, 1994 ............................. $ 14 $ -- $ -- $ (7,950) $ 4,368 Conversion of convertible preferred stock ................................... Issuance of common stock ............................ 26,664 Exercise of stock options ........................... 149 Net exercise of warrants ............................ Common stock repurchased for cash ................... (1) Deferred stock option compensation .................. (188) Amortization of deferred stock option compensation ............................... 29 29 Amortization of interest from warrants ........................................... 14 Change in unrealized holding gain on investments, net ................................ (14) (14) Cumulative translation adjustment ................... (5) (5) Dividend distribution ............................... (1,226) (1,226) Net income .......................................... 1,504 1,504 ------------ ------------ ------------- ---------- --------- Balances, December 31, 1995 ............................ -- (5) (159) (7,672) 31,482 Exercise of stock options ........................... 224 Employee stock purchases ............................ 1,845 Amortization of deferred stock option compensation .. 47 47 Forgiveness of notes payable to stockholders .................................... 1,047 Tax benefit from exercise of nonqualified stock options ........................... 4,171 Cumulative translation adjustment ...................... (61) (61) Net income .......................................... 8,190 8,190 ----------- ------------ ------------- ---------- -------- Balances, December 31, 1996 ............................ -- (66) (112) 1,565 46,945 Exercise of stock options .............................. 436 Employee stock purchases ............................ 3,370 Amortization of deferred stock option compensation ................................ 47 47 Common stock repurchased for cash ...................... (23) Tax benefit from exercise of nonqualified stock options ........................ 2,301 Change in unrealized holding gain on investments, net ................................. 22 22 Cumulative translation adjustment ...................... 72 (3) 69 Net income .......................................... 3,930 3,930 ------------ ------------ ------------- ---------- --------- Balances, December 31, 1997 ............................ $ 22 $ 6 $ (65) $ 5,492 $ 57,097 ============ ============ ============= ========== =========
The accompanying notes are an integral part of these consolidated financial 31 32 CLARIFY INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
Years Ended December 31, 1995 1996 1997 -------- -------- -------- Cash flows from operating activities: Net income ........................................................... $ 1,504 $ 8,190 $ 3,930 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization ...................................... 847 1,750 4,666 Provision for doubtful accounts .................................... 135 596 874 Deferred income taxes .............................................. -- (801) (1,909) Loss on disposal of assets ......................................... -- 133 271 Other .............................................................. (5) (61) 67 Changes in assets and liabilities: Accounts receivable ............................................. (3,362) (11,441) (15,913) Prepaids and other current assets ............................... (303) (663) (707) Accounts payable ................................................ 298 2,811 1,157 Accrued payroll and related accruals ............................ 1,508 2,777 2,085 Other accrued liabilities ....................................... 840 2,419 3,702 Unearned revenue ................................................ 2,405 7,462 (955) -------- -------- -------- Net cash provided by (used in) operating activities ................ 3,867 13,172 (2,732) -------- -------- -------- Cash flows from investing activities: Purchase of property and equipment ................................... (2,005) (8,048) (5,092) Purchase of investments .............................................. (972) (5,470) (22,695) Sale and maturities of investments ................................... 1,941 1,995 10,519 Increase in other assets ............................................. (58) (758) (9) -------- -------- -------- Net cash used in investing activities .............................. (1,094) (12,281) (17,277) -------- -------- -------- Cash flows from financing activities: Payments of capital lease obligations ................................ (954) (81) -- Proceeds from issuance of common stock, net .......................... 26,812 2,069 6,084 Repurchases of common stock .......................................... (1) -- -- Borrowings under (payments of) notes payable ......................... 115 (215) -- Dividends paid ....................................................... (179) -- -- -------- -------- -------- Net cash provided by financing activities .......................... 25,793 1,773 6,084 -------- -------- -------- Net increase in cash and cash equivalents ................................ 28,566 2,664 (13,925) Effect of foreign exchange rate changes on cash .......................... -- -- 192 Cash and cash equivalents, beginning of year ............................. 3,247 31,813 34,477 -------- -------- -------- Cash and cash equivalents, end of year ................................... $ 31,813 $ 34,477 $ 20,744 ======== ======== ======== Supplemental disclosure of cash flow information: Cash paid during the year for interest ............................... $ 187 $ 9 $ 6 ======== ======== ======== Cash paid during the year for taxes .................................. $ 60 $ 464 $ 233 ======== ======== ======== Supplemental disclosure of noncash investing and financing activities: Capital lease obligations incurred in connection with equipment leases ..................................................... $ 26 ======== Change in unrealized holding gain on investments ......................... $ (14) $ 22 ======== ======== Conversion of preferred stock to common stock ............................ $ 2 ======== Deferred compensation .................................................... $ 188 ======== Dividend distribution in exchange for notes payable to stockholders .......................................................... $ 1,047 ======== Tax benefit from exercise of nonqualified stock options .................. $ 4,171 $ 2,301 ======== ======== Forgiveness of notes payable to stockholders ............................. $ 1,047 ========
The accompanying notes are an integral part of these consolidated financial statements. 32 33 CLARIFY INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. BUSINESS OF THE COMPANY Clarify Inc. and subsidiaries (the Company), a Delaware corporation, was founded in August 1990 to develop, market and support adaptable client/server application software designed to address the external and internal service, support, and product quality needs of today's global enterprises. The Company markets its software and services primarily through its direct sales organization and focuses on large enterprises with complex requirements. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Consolidation The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany balances and transactions have been eliminated. Use of Estimates The preparation of 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 financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Cash and Cash Equivalents The Company considers cash and all highly liquid investments purchased with an original or remaining maturity of less than three months at the date of purchase to be cash equivalents. Investments All investments are classified as available-for-sale and therefore are carried at fair market value. Substantially all investments are custodied with three major financial institutions. Unrealized holding gains and losses on such investments are reported net of related taxes as a separate component of stockholders' equity. Realized gains and losses on sales of such investments are reported in earnings and computed using the specific identification cost method. Fair Value of Financial Instruments Carrying amounts of certain of the Company's financial instruments including cash and cash equivalents, accounts receivable, accounts payable and other accrued liabilities approximate fair value due to their short maturities. Estimated fair values for investments are determined using quoted market prices for those securities or similar financial instruments. Concentrations Cash and cash equivalents and investments are, for the most part, custodied with several major financial institutions. Deposits held with banks may exceed the amount of insurance provided on such deposits. These deposits may generally be redeemed upon demand and, therefore, bear minimal risk. 33 34 The Company's customer base is dispersed across many different geographic areas throughout the United States, Europe and Asia and consists principally of companies in the networking equipment, high-end software, telecommunications and computer systems industries. The Company performs ongoing credit evaluations of its customers and maintains an allowance for potential credit losses. Collateral, such as letters of credit and bank guarantees, is generally not required. Revenue Recognition License fee revenues consist of revenues from initial licenses for the Company's products, sales of licenses to existing customers for additional users of the Company's products and fees from sublicenses of third party software products. The Company generally recognizes initial license fee revenues only after delivery and installation of software products, if there are no remaining significant post-installation obligations and if collection is deemed probable. If significant post-installation obligations exist or if a product is subject to customer acceptance, revenues are deferred until no significant obligations remain or, until acceptance has occurred. Sales of additional licenses to the Company's existing customers are generally recognized upon shipment. Service revenues consist primarily of maintenance, consulting and training revenues. Maintenance revenues are recognized ratably over the term of the support period, which is typically twelve months. Consulting and training revenues generally are recognized when the services are performed. See Note 13 for discussion of Statement of Position 97-2 titled "Software Revenue Recognition" and its impact on the Company's revenue recognition practice for transactions entered into after December 31, 1997. Product Development and Engineering Expenditures Costs related to research, design and development of products are charged to product development and engineering expenses as incurred. Software development costs are capitalized beginning when a product's technological feasibility has been established and ending when a product is available for general release to customers. Generally, the Company's products are released soon after technological feasibility has been established. As a result, costs subsequent to achieving technological feasibility have not been significant and all software development cost have therefore been expensed. Property and Equipment Property and equipment are stated at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the related assets (generally three to five years). Assets under capital leases and leasehold improvements are amortized over the lesser of their useful lives or the term of the lease. Upon disposal, the assets and related accumulated depreciation are removed from the Company's accounts, and the resulting gains or losses are reflected in the statement of operations. Income Taxes Deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. The Company is required to adjust its deferred tax liabilities in the period when tax rates or the provisions of the income tax laws change. Valuation allowances are established when necessary to reduce deferred tax assets to the amounts expected to be realized. Computation of Net Income Net income per share has been computed in accordance with Statement of Financial Standards No. 128 "Earnings per Share." Basic net income per share is computed using the weighted average common shares outstanding during the period. Diluted net income per share is computed using the weighted average common shares and common equivalent shares outstanding during the period. 34 35 Foreign Currency Translation The functional currency for the majority of the Company's foreign operations is the applicable local currency. The translation from the applicable foreign currency to U.S. dollars is performed for balance sheet accounts using current exchange rates in effect at the balance sheet date and for revenue and expense accounts using the weighted average exchange rate during the period. Adjustments resulting from such translation are reflected as a separate component of stockholders' equity. Gains or losses resulting from foreign currency transactions are included in the results of operations. Stock-Based Compensation Statement of Financial Accounting Standards No. 123 (SFAS 123) "Accounting for Stock-Based Compensation," encourages but does not require companies to record compensation cost for stock-based compensation plans at fair value. The Company has chosen to continue to account for employee stock options using the intrinsic value method prescribed by APB Opinion No. 25, "Accounting for Stock Issued to Employees." Accordingly, compensation cost for stock options is measured as the excess, if any, of the quoted market price of the Company's stock at the date of the grant over the amount an employee must pay to acquire the stock. 3. BUSINESS COMBINATION In April 1996, the Company acquired Metropolis Software, Inc. (Metropolis), a sales force automation software provider. The Company issued approximately 663,000 shares of its common stock in exchange for substantially all of the shares of Metropolis. The Company also assumed stock options that converted into options to purchase approximately 77,000 shares of the Company's common stock. The business combination was accounted for as a pooling of interests and the consolidated financial statements have been restated as if Metropolis had been combined for all periods presented. Revenues and net income (loss) of the separate and combined companies are as follows (in thousands):
YEAR ENDED THREE MONTHS ENDED DECEMBER 31, MARCH 31, 1995 1996 -------- -------- Revenues: The Company ....... $ 20,946 $ 7,784 Metropolis ........ 3,951 1,170 -------- -------- Combined ...... $ 24,897 $ 8,954 ======== ======== Net income (loss): The Company ....... $ 1,578 $ 959 Metropolis ........ (74) (91) -------- -------- Combined ...... $ 1,504 $ 868 ======== ========
4. INVESTMENTS Investments at December 31, 1996 and 1997 are summarized below (in thousands):
1996 1997 ------------------------------------ ------------------------------------- MARKET AMORTIZED UNREALIZED MARKET AMORTIZED UNREALIZED VALUE COST GAINS VALUE COST GAINS ------- ---------- ---------- ------ --------- ---------- Debt Securities: US Government Agency Securities .............. $ 2,984 $ 2,984 -- $ 3,002 $ 3,000 $ 2 Commercial paper ........ 491 491 -- -- -- -- Municipal Bonds ......... -- -- -- 12,616 12,596 20 ------- ---------- ---------- ------- --------- ---------- $ 3,475 $ 3,475 $ -- $15,618 $15,596 $ 22 ======= ========== ========== ======= ========= ==========
35 36 Investments classified as short-term have scheduled maturities of less than one year, while investments classified as long-term have scheduled maturities from one to three years. 5. PROPERTY AND EQUIPMENT Property and equipment consist of the following (in thousands
DECEMBER 31, ------------------------ 1996 1997 -------- --------- Leasehold improvements ...... $ 1,812 $ 2,242 Equipment ................... 8,156 9,710 Furniture and fixtures ...... 1,370 2,750 Purchased software .......... 392 967 ------------------------ 11,730 15,669 Less accumulated depreciation (3,260) (7,058) -------- -------- $ 8,470 $ 8,611 ======== ========
6. NOTES PAYABLE TO STOCKHOLDERS The notes payable to Metropolis stockholders were nonrecourse promissory notes bearing interest at 6.5%. The loans principally arose from Metropolis' obligation to pay out its net earnings in dividends to the shareholders. The principal and interest had no specified due date. On March 19, 1996, the stockholders agreed to contribute the entire balance, including principal and interest payment obligations, as capital of the Company. 7. COMMITMENTS The Company leases its principal operating facility and off-site sales offices under operating leases expiring no later than 2004. Future minimum rental payments under these leases, as of December 31, 1997 are as follows (in thousands):
YEARS ENDING DECEMBER 31, ------------------------- 1998...................................... $ 3,197 1999...................................... 2,753 2000...................................... 2,420 2001...................................... 2,289 2002...................................... 411 Thereafter................................ 705 -------- $11,775 =======
Rent expense was approximately $906,000, $1,773,000 and $4,150,000 in 1995, 1996 and 1997, respectively. 8. STOCKHOLDERS' EQUITY Stock Split On September 14, 1995, the Company effected a reverse stock split of two for three to be effective prior to the effective date of the initial public offering. All shares and per share data in the accompanying consolidated financial statements have been retroactively restated to reflect the reverse stock split. On September 18, 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 financial statements has been restated to give retroactive recognition to the stock split for all periods presented. 36 37 Initial Public Offering and Conversion of Preferred Stock In November 1995, the Company issued 4,600,000 shares of Common Stock in an initial public offering. In connection with the initial public offering, all outstanding shares of Preferred Stock were converted into an aggregate of approximately 11,117,000 shares of Common Stock and the number of authorized Preferred Stock was reduced from 10,000,000 shares to 5,000,000 shares. Additionally, approximately 155,000 shares of Common Stock were issued upon the net exercise of warrants for preferred stock. Shareholder Rights Plan In June 1997, the Company's Board of Directors adopted a Shareholder Rights Plan (the Rights Plan) in which preferred stock purchase rights will be distributed as a dividend at the rate of one Right for each share of Common Stock held as of the close of business on June 30, 1997. The Company adopted the plan to guard against partial tender offers and other abusive tactics that might be used in an attempt to gain control of the Company without paying all stockholders a fair price for their shares. The Rights Plan, which expires on June 13, 2007, will not prevent takeovers, but it is designed to deter coercive takeover tactics and to encourage anyone attempting to acquire the Company to first negotiate with the Board. Each Right will entitle stockholders to buy one-one thousandths of a newly issued share of Series A Junior Participating Preferred Stock of the Company at an exercise price of $95.00. 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 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 twice the then current exercise price. The Company's Board of Directors will generally be entitled to redeem the Rights at $.01 per Right at any time prior to a person or group acquiring 15% or more of the Company's Common Stock. Employee Stock-Based Compensation Plans 1995 Stock Option/Stock Issuance Plan At December 31, 1997, approximately 3,443,000 shares of common stock were authorized for issuance under the Company's 1995 Stock Option/Stock Issuance Plan (the "1995 Plan") which serves as the successor equity incentive program to the Company's 1991 Stock Option/Stock Issuance Plan (the "1991 Plan"). The 1995 Plan will terminate on September 13, 2005, unless sooner terminated by the Board of Directors. The 1995 Plan is divided into three separate components: (i) the Discretionary Option Grant Program under which eligible individuals may, at the discretion of the Plan Administrator, be granted incentive or non-statutory stock options to purchase shares of common stock at an exercise price not less than 85% of their fair market value on the grant date, (ii) the Stock Issuance Program under which individuals may, at the Plan Administrator's discretion, be issued shares of common stock directly either by the purchase of 37 38 such shares at a price not less than 85% of their fair market value at the time of issuance or in consideration of the past performance of services and (iii) the Automatic Option Grant program under which non-statutory stock option grants will be automatically made at periodic intervals to eligible non-employee Board members to purchase shares of common stock at an exercise price equal to 100% of their fair market value on the grant date. Options are exercisable at times and in increments as specified by the Plan Administrator and generally expire in ten years. On May 9, 1997, the compensation Committee of the Board of Directors approved the repricing of certain outstanding stock options under the Company's 1995 Stock Option/Stock Issuance Plan with an exercise price in excess of the fair market value on May 9, 1997. Each employee, officers or directors who elected prior to May 9, 1997 to participate in the repricing program received a new option with an exercise price of $13.50 per share (the fair market value on May 9, 1997). Each repriced option retained its original vesting schedule except that no portion of the option could be exercised prior to December 9, 1997 and no vesting accrued between May 9, 1997 and December 9, 1997. Certain options granted within 12 months of May 9, 1997 were subject to a longer vesting schedule. Approximately 1,008,000 stock options were repriced pursuant to this program. The share reserve for the 1995 Plan automatically increases on the first trading day in each of the 1996 (1,048,244 shares reserved), 1997 (1,158,579 shares reserved), 1998, 1999 and 2000 calendar years by the number of shares equal to five percent of the total number of shares of the Company's common and common stock equivalents outstanding on December 31 of the immediately preceding calendar year. Activity under these plans is as follows (in thousand, except per share amounts):
OPTIONS OUTSTANDING ----------------------------------------- SHARES NUMBER OF EXERCISE AVAILABLE SHARES PRICE TOTAL --------- ---------- ------------ ---------- Balances, December 31, 1994 624,919 1,949,621 $ .08-$4.30 536 Shares reserved ......... 433,334 Options granted ......... (1,050,148) 1,050,148 $ .23-$13.81 2,581 Options exercised ....... (1,024,376) $ .08-$1.13 (149) Options canceled ........ 141,989 (141,989) $ .11-$3.56 (76) --------- ---------- ---------- Balances, December 31, 1995 150,094 1,833,404 $ .08-$13.81 2,892 Shares reserved ......... 1,048,244 Options granted ......... (1,365,829) 1,365,829 $ .30-$57.00 36,138 Options exercised ....... (442,143) $ .08-$11.50 (224) Options canceled ........ 188,136 (188,136) $ .11-$48.25 (2,469) --------- ---------- ---------- Balances, December 31, 1996 20,645 2,568,954 $ .08-$57.00 36,337 Shares reserved ......... 1,158,579 Options granted ......... (2,276,729) 2,276,729 $7.00-$51.50 31,294 Options exercised ....... (305,025) $ .08-$15.00 (434) Options canceled ........ 1,351,766 (1,351,766) $ .23-$57.00 (36,244) --------- ---------- ---------- Balances, December 31, ... 254,261 3,188,892 $ .08-$34.50 $ 30,953 1997 ========= ========= ==========
At December 31, 1997, approximately 92,000 shares of common stock issued under the 1991 Plan were subject to repurchase. 38 39 Employee Stock Purchase Plan At December 31, 1997, the Company had a total of approximately 610,000 shares of common stock reserved for future issuance under its Employee Stock Purchase Plan (the ESPP). The purpose of the ESPP is to provide eligible employees of the Company with a means of acquiring common stock of the Company through payroll deductions. The plan consists of four six-month purchase periods in each two year offering period. Employees purchase stock at 85% of the market value at either the beginning of the offering period or at the end of the purchase period, whichever price is lower. No participant may purchase more than $25,000 worth of common stock in any calendar year. Employees may end their participation in the offering at any time during the offering period, and participation ends automatically on termination of employment with the Company. During 1996 and 1997 approximately 289,000 and 463,000 shares, respectively, were sold through the ESPP. Stock-Based Compensation The Company has adopted the disclosure-only provisions of Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation." If compensation cost for the 1995 Plan and the ESPP had been determined based on the fair value on the grant dates for awards in 1996 and 1995 consistent with the provisions of SFAS No. 123, the Company's net income (loss) and diluted net income (loss) per share would have been reduced to the pro forma amounts indicated below (in thousands except per share data):
1995 1996 1997 --------- --------- --------- Pro forma net income (loss)....................... $ 1,271 $ 6,398 $ (849) ========= ========= ========== Pro forma diluted net income (loss) per share ... $ 0.07 $ 0.30 $ (0.04) ========= ========= ==========
Pro forma net income (loss) reflects only options granted since January 1, 1995. Therefore, the full impact of calculating compensation cost under SFAS 123 is not reflected in the pro forma amounts presented above because compensation cost is reflected over the options' vesting period of generally four or five years and compensation cost for options granted prior to January 1, 1995 is not considered. The fair value of each option grant is estimated on the date of grant using the Black-Scholes options-pricing model with the following weighted-average assumptions used:
1995 1996 1997 ---- ---- ---- Risk free interest rate.... 6.00% 6.00% 5.74% Expected life (yrs)........ 4 4 4 Volatility................. 0.55 0.55 0.55 Dividends yield............ 0.00 0.00 0.00
For the period prior to the Company's IPO, volatility for purposes of the SFAS No. 123 computation was 0.0% The fair value of employees' stock purchase rights under the ESPP was estimated using the Black- Scholes model with the following assumptions:
1995 1996 1997 ---- ---- ---- Risk free interest rate... 6.00% 6.00% 5.74% Expected life (mths)...... 6 and 12 6 and 12 6 and 12 Volatility................ 0.55 0.55 0.55 Dividends yield........... 0.00 0.00 0.00
39 40 A summary of the status of the company's 1995 Stock Option Plan as of December 31,1995, 1996 and 1997 and changes during the years ending on those dates is presented below:
1995 1996 1997 ----------------------- -------------------------- -------------------------- Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Shares Price Shares Price Shares Price ----------- --------- ---------- ----------- ----------- ----------- Outstanding at beginning of year ... 1,949,621 $ 0.26 1,833,404 $ 1.57 2,568,954 $ 14.14 Granted ............................ 1,050,148 2.46 1,365,829 26.46 2,276,729 13.74 Exercised .......................... (1,024,376) .14 (442,143) 0.51 (305,025) 1.42 Cancelled .......................... (141,989) .55 (188,136) 13.12 (1,351,766) 26.81 --------- --------- --------- Outstanding at the end of year ..... 1,833,404 1.57 2,568,954 14.14 3,188,892 9.71 ========= ========= ========= Weighted-average fair value of options granted during the year ... $ 1.19 $ 12.82 $ 5.88
The following information applies to options outstanding at December 31, 1997:
Options Outstanding Options Currently Exercisable ------------------------------------------------------------- ----------------------------- Weighted Weighted Weighted Average Average Average Exercise Number Remaining Exercise Number Exercise Prices Outstanding Contractual Life Price Exercisable Price --------------- ----------- ---------------- -------- ----------- --------- $0.08 - $1.88 561,818 6.9 $ 0.53 561,818 $ 0.53 $3.56 - $10.88 624,394 8.3 $ 5.88 383,042 $ 4.01 $11.00 - $11.50 569,622 9.5 $ 11.20 36,361 $ 11.49 $11.75 - $13.81 1,092,425 9.3 $ 13.43 62,367 $ 13.51 $13.88 - $34.50 340,633 9.0 $ 17.41 58,864 $ 19.24 --------- --------- $0.08 - $34.50 3,188,892 8.7 $ 9.71 1,102,452 $ 3.83 ========= =========
9. INCOME TAXES The components of the provision for income taxes are as follows (in thousands):
YEAR ENDED DECEMBER 31, ----------------------------------- 1995 1996 1997 ------- ------- ---------- Federal - Current payable..................... $ 115 $ 152 $ 3,185 Federal - Deferred............................ -- 3,172 (802) State - Current payable....................... 14 5 452 State - Deferred.............................. -- 612 (142) Foreign - Deferred............................ -- -- (961) Valuation allowance........................... -- (3,001) 576 ------ ------- -------- Provision for income tax...................... $ 129 $ 940 $ 2,308 ====== ======= ========
The Company's effective tax rate differs from the 34% statutory tax rate as follows:
YEAR ENDED DECEMBER 31, --------------------------- 1995 1996 1997 ---- ---- ---- Federal statutory rate................. 34 % 34 % 34 % State tax, net of federal benefit..... 6 % 6 % 5 % Permanent differences.................. 2 % 3 % (3)% Tax credits utilized................... (6)% (4)% (4)% Utilization of net operating losses.... (42)% (19)% -- Change in valuation allowance.......... 10 % (14)% 9 % Other.................................. 4 % 4 % (4)% ---- ---- ---- 8 % 10% 37% ==== ==== ====
40 41 The significant components of deferred tax assets are as follows (in thousands):
DECEMBER 31, --------------------- 1996 1997 -------- --------- Net operating loss carryforward............... $ 1,675 $ 961 Tax credit carryforwards...................... 1,016 1,360 California capitalized research and development costs............................. 124 35 Account receivable allowance.................. 503 862 Accrued expense............................... -- 1,102 Accrued vacation.............................. 188 332 Other......................................... 278 464 Valuation allowance........................... -- 576 -------- -------- Net deferred tax asset........................ $ 3,784 $ 5,692 ======== ========
The Company has not recorded a valuation allowance for those deferred tax assets that management believes are more likely than not to be realized through taxable income in the carryback period or through future taxable income. However, at December 31, 1997, a valuation allowance of approximately $576,000 has been recorded. This valuation allowance is provided because of the uncertainty regarding realization of certain foreign tax net operating losses as a result of the limited profitable operating history in certain foreign tax jurisdictions. The Company's income taxes currently payable for both federal and state purposes have been reduced by the tax benefit derived from the disqualifying dispositions of incentive stock options and the exercise of nonqualified stock options. The benefit, which totaled $4,171,000 in 1996, and $2,301,000 in 1997 was credited directly to additional paid-in capital. At December 31, 1997 the composition of tax carryforwards is as follows (in thousands):
FEDERAL STATE FOREIGN -------- ----- ------- Net operating loss carryforward..... $ -- $ -- $ 96 R&D credit carryforward............. 1,129 231 --
The foreign net operating loss and credit carryforwards will expire between 1999 and 2012 for both federal and state income tax purposes if not used before such time to offset future taxable income or taxes payable. 10. NET INCOME PER SHARE In accordance with the disclosure requirements of SFAS 128, a reconciliation of the numerator and denominator of basic and diluted net income per share calculations is provided as follows (in thousands, except per share amounts):
YEAR ENDED DECEMBER 31, ------------------------------------ 1995 1996 1997 ---------- -------- --------- NUMERATOR - BASIC AND DILUTED Net Income ................................................... $ 1,504 $ 8,190 $ 3,930 ========== ========= ======== Net income available to common stockholders .................. $ 1,504 $ 8,190 $ 3,930 ========== ========= ======== DENOMINATOR Weighted average common shares outstanding ................... 16,250 20,143 20,909 Effect of dilutive securities common stock option ............ 1,101 1,625 1,255 ------ ----- ----- Weighted average common shares and equivalents outstanding ... 17,351 21,768 22,164 ========== ======== ========= Diluted earnings per share .................................. $ 0.09 $ 0.38 $ 0.18 ========== ======== =========
41 42 11. GEOGRAPHIC INFORMATION AND MAJOR CUSTOMER The Company operates in a single industry segment encompassing the design, development, marketing and technical support for front-office automation software. In 1995, one customer accounted for approximately 10% of total revenues. No one customer accounted for more than 10% of total revenues in 1996 and 1997. International total revenue, primarily in Europe, Canada, Mexico and the Pacific region, was insignificant in 1995. In 1996 and 1997 international revenue accounted for approximately 15% and 10% of total revenue respectively. 12. RETIREMENT PLAN Effective August 1991, the Company began a voluntary 401(k) plan covering substantially all employees. The plan provides for discretionary employer contributions. No employer contributions were made or authorized in 1995, 1996 or 1997. 13. RECENT ACCOUNTING PRONOUNCEMENTS In July 1997, the Financial Accounting Standards Board issued Statements of Accounting Standards No. 130 (SFAS 130), "Reporting Comprehensive Income" which is effective for financial statements issued for fiscal years beginning after December 15, 1997. SFAS 130 requires a separate financial statement showing changes in comprehensive income, and will require reclassification of all prior-period financial statements for comparative purpose. The company is evaluating alternative formats for presenting this information, but does not expect this pronouncement to materially impact the Company's results of operations. In July 1997, the Financial Accounting Standards Board issued Statements of Accounting Standards No. 131 (SFAS 131), "Disclosures about Segments of an Enterprise and Related Information", which requires companies to report certain information about operating segments, including certain information about their products, services, the geographic area in which they operate and their major customers. This statement supersedes FASB Statements Nos. 14, 18, 24 and 30. SFAS 131 is effective for financial statements for fiscal years beginning after December 15, 1997. The company is evaluating the requirements of SFAS 131 and the effects, if any, on the Company's current reporting and disclosures. Statement of Position (SOP) 97-2, "Software Revenue Recognition" was issued in October 1997 and amende in March 1998, and addresses software recognition matters primarily from a conceptual level and does not include specific implementation guidance. SOP 97-2 supersedes SOP 91-1 and is effective for transactions entered into by the Company after December 31, 1997. SOP 97-2 requires that if an arrangement to deliver software or a software system does not require significant production, modification, or customization of software, then revenue should be recognized when persuasive evidence of an arrangement exists, delivery has occurred, the vendor's fee is fixed or determinable, and collectibility is probable. Accordingly, upon adoption of SOP 97-2 (as amended), the Company will generally recognize license fee revenue upon product shipment provided there are no contingencies and collection is probable. 14. SUBSEQUENT EVENTS In March 1998, the Compensation Committee of the Company's Board of Directors granted a non-statutory option to purchase 400,000 shares of the Company's common stock to the Company's new President/CEO. This option was granted at fair market value and is subject to terms and conditions substantially equivalent to those applicable to options granted under the Company's 1995 Plan. Upon certain changes in control, the option will vest as if the optionee had been service an additional twelve (12) months on the date of the change in control. ITEM 9. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. Not applicable. 42 43 PART III Certain information required by Part III is omitted from this Report in that the Company will file a definitive proxy statement within 120 days after the end of this fiscal year pursuant to Regulation 14A (the "Proxy Statement") for its 1998 Annual Meeting of Stockholders proposed to be held on June 4, 1998 and the information included therein is incorporated herein by reference. ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. The information concerning the Company's directors and executive officers required by this Item is incorporated by reference from the Company's Proxy Statement for the 1998 Annual Meeting of Stockholders under the headings "Election of Directors" and "Management," respectively. ITEM 11. EXECUTIVE COMPENSATION. The information required by this Item is incorporated by reference from the Company's Proxy Statement for the 1998 Annual Meeting of Stockholders under the heading "Executive Compensation." ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The information required by this Item is incorporated by reference from the Company's Proxy Statement for the 1998 Annual Meeting of Stockholders under the heading "Election of Directors" and "Ownership of Securities." ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. The information required by this Item is incorporated by reference from the Company's Proxy Statement for the 1998 Annual Meeting of Stockholders under the heading "Certain Transactions." 43 44 PART IV ITEM 14. EXHIBITS, CONSOLIDATED FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K. (a) The following documents are filed as part of this Report: 1. Consolidated Financial Statements. The following consolidated financial statements of Clarify Inc. are included in Item 8: PAGE ---- Report of Independent Accountants...................... 28 Consolidated Balance Sheets at December 31, 1996 and 1997................................................... 29 Consolidated Statements of Operations for the years ended December 31, 1995, 1996 and 1997................. 30 Consolidated Statements of Stockholders' Equity for the years ended December 31, 1995, 1996 and 1997....... 31 Consolidated Statement of Cash Flows for the years ended December 31, 1995, 1996 and 1997................. 32 Notes to Consolidated Financial Statements............. 33 2. Consolidated Financial Statements Schedules The following consolidated financial statement schedule is included in Item 14(d): Schedule II -- Valuation and Qualifying Accounts (reference Page 47). 3. Exhibits. 3.1(1) Certificate of Incorporation of the Registrant, as amended to date 3.2(1) Bylaws of the Registrant, as amended to date 4.1(1) Specimen Common Stock certificate 4.2(1) Restated Investor Rights Agreement, dated March 7, 1994, among the Registrant and the investors and the founders named therein 10.1(1) Form of Indemnification Agreement 10.2(1) 1991 Stock Option/Stock Issuance Plan 10.3(2) 1995 Stock Option/Stock Issuance Plan 10.4(2) Employee Stock Purchase Plan 10.5(1) Loan and Security Agreement between Silicon Valley Bank and Clarify Inc. 10.6(1) Lease by and between Orchard Investment Company Number 6.9 and Clarify Inc. dated March 16, 1992, as amended by the First Amendment to Lease, dated February 28, 1995 10.7(1) Master Equipment Lease Agreement by and between Costella Kirsch/GATX Partnership No. 1 and the Registrant, dated February 18, 1992 10.8(1) Master Equipment Lease Agreement by and between Venture Leasing Assoc. and the Registrant, dated May 7, 1991 10.9(1) Master Equipment Lease Agreement by and between Phoenix Leasing Incorporated and the Registrant, dated June 30, 1993 10.10 Offer Letter dated February 23,1998 between Anthony Zingale and Clarify Inc. 10.11 Stock Option Agreement between Anthony Zingale and Clarify Inc. 21.1(1) Subsidiaries of the Registrant 24.1 Power of Attorney (reference Page 48) (1) Incorporated by reference from an Exhibit filed with the Company's Registration Statement on Form S-1 (File Number 33-97004) declared effective by the Securities and Exchange Commission on November 2, 1995. 44 45 (2) Incorporated by reference from an exhibit filed with the Company's Registration Statement on Form S-8 (File Number 33-98928) filed with the Securities and Exchange Commission on November 3, 1995. (b) Reports on Form 8-K. No reports on Form 8-K were filed by the Registrant during the fourth quarter of the fiscal year ended December 31, 1997. (c) Exhibits See (a)(3) above. (d) Financial Statement Schedule. See (a)(2) above. 45 46 INDEPENDENT ACCOUNTANTS' REPORT ON SCHEDULE Our report on the financial statement of Clarify Inc. is included on page 28 of this Form 10-K. In connection with our audits of such financial statements, we have also audited the related financial statement schedule listed in the index on page 44 of this Form 10-K. In our opinion, the financial statement schedule referred to above, when considered in relation to the basis financial statements taken as a whole, present fairly, in all material respects, the information required to be included therein. COOPERS & LYBRAND L.L.P. San Jose, California January 20, 1998 46 47 SCHEDULE II CLARIFY INC. VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997 (IN THOUSANDS)
BALANCE AT ADDITIONS, DEDUCTIONS BALANCE AT BEGINNING COSTS AND AND END OF DESCRIPTION OF PERIOD EXPENSES WRITE-OFFS PERIOD - ------------------------------------------ --------- --------- ----------- ----------- Year ended December 31, 1995 Allowance for doubtful accounts ...... $274 $135 $190 $219 ==== ==== ==== ==== Year ended December 31, 1996 Allowance for doubtful accounts ...... $219 $596 $52 $763 ==== ==== === ==== Year ended December 31, 1997 Allowance for doubtful accounts ...... $763 $874 $327 $1,310 ==== ==== ==== ======
47 48 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities and Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of San Jose, State of California, on this 26th day of March, 1998. CLARIFY INC. By:/s/ ANTHONY ZINGALE ----------------------------------------- Anthony Zingale President and Chief Executive Officer POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints David A. Stamm and Anthony Zingale and each of them, as his true and lawful attorneys-in-fact and agents, with full power of substitution and re-substitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments (including post-effective amendments) to this Report on Form 10-K, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities and Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated:
SIGNATURE TITLE DATE - ------------------------------------ --------------------------------- --------------- /s/ ANTHONY ZINGALE President, Chief Executive Officer March 26, 1998 - ------------------------------------ (Principal Executive Officer) and Anthony Zingale Director /s/ DEVIN WANDLESS Corporate Controller March 26, 1998 - ------------------------------------ (Principal Financial and Accounting Devin Wandless Officer) /s/ DAVID A. STAMM Chairman of the Board March 26, 1998 - ------------------------------------ David A. Stamm /s/ JAMES L. PATTERSON Director March 26, 1998 - ------------------------------- James L. Patterson /s/ THOMAS H. BREDT Director March 27, 1998 - ------------------------------- Thomas H. Bredt /s/ MARY JANE ELMORE Director March 26, 1998 - ------------------------------- Mary Jane Elmore /s/ FREDERICK FLUEGEL Director March 30, 1998 - ------------------------------- Frederick Fluegel
48 49 INDEX TO EXHIBITS SEQUENTIALLY NUMBERED PAGE ------------ 3.1 (1) Certificate of Incorporation of the Registrant, as amended to date 3.2 (1) Bylaws of the Registrant, as amended to date 4.1 (1) Specimen Common Stock certificate 4.2 (1) Restated Investor Rights Agreement, dated March 7, 1994, among the Registrant and the investors and the founders named therein 10.1 (1) Form of Indemnification Agreement 10.2 (1) 1991 Stock Option/Stock Issuance Plan 10.3 (2) 1995 Stock Option/Stock Issuance Plan 10.4 (2) Employee Stock Purchase Plan 10.5 (1) Loan and Security Agreement between Silicon Valley Bank and Clarify Inc 10.6 (1) Lease by and between Orchard Investment Company Number 6.9 and Clarify Inc. dated March 16, 1992, as amended by the First Amendment to Lease, dated February 28, 1995 10.7 (1) Master Equipment Lease Agreement by and between Costella Kirsch/GATX Partnership No. 1 and the Registrant, dated February 18, 1992 10.8 (1) Master Equipment Lease Agreement by and between Venture Leasing Assoc. and the Registrant, dated May 7, 1991 10.9 (1) Master Equipment Lease Agreement by and between Phoenix Leasing Incorporated and the Registrant, dated June 30, 1993 10.10 Offer Letter dated February 23,1998 between Anthony Zingale and Clarify Inc. 10.11 Stock Option Agreement between Anthony Zingale and Clarify Inc. 21.1 (1) Subsidiaries of the Registrant 50 24.1 Power of Attorney 48 27.1 Financial Data Schedule (1) Incorporated by reference from an Exhibit filed with the Company's Registration Statement on Form S-1 (file number 33-97004) declared effective by the Securities and Exchange Commission on November 2, 1995. (2) Incorporated by reference from an exhibit filed with the Company's Registration Statement on Form S-8 (file number 33-98928) filed with the Securities and Exchange Commission on November 3, 1995. 49 EX-10.10 2 OFFER LETTER DATED FEBRUARY 23, 1998 1 Exhibit 10.10 Offer Letter February 23, 1998 Anthony Zingale 22365 Regnart Road Cupertino, CA 95014 Dear Tony: I'm extremely pleased to offer you the position of President and CEO of Clarify Inc. In this role, you will have the sole authority and responsibility to make the decisions necessary to build the dominant player in this industry. 1. POSITION. You will serve in a full-time capacity as President and Chief Executive Officer of the Company. You will report to the Board of Directors. During the term of your employment, you agree to devote your full time and attention to the business and affairs of the Company. The Company agrees to take all action necessary to nominate and elect you as a director of the Company as soon as possible following your commencement of employment and to continue the directorship during the term of your employment. By signing this letter agreement, you represent and warrant to the Company that you are under no contractual commitments inconsistent with your obligations to the Company. 2. SALARY. You will be paid a salary at the annual rate of $225,000, payable in installments in accordance with the Company's standard payroll practices for salaried employees. This salary will be subject to adjustment pursuant to the Company's employee compensation policies in effect from time to time. 3. PERFORMANCE INCENTIVE. As additional compensation, you will be eligible for a bonus payable in cash following release of the Company's annual financial statements. Your bonus for on-target performance will be 60% of your base salary. Bonuses are payable pursuant to the terms of the existing executive bonus plan for the achievement of objectively quantifiable and measurable goals and objectives, which goals and objectives have been set, in advance, by the Company's Board of Directors. Determination of whether you have achieved the goals and objectives shall be in the entire discretion of the Compensation Committee of the Board of Directors. 4. STOCK OPTIONS. Subject to the approval of the Compensation Committee of the Company's Board of Directors, you will be granted an option to purchase 400,000 shares of the Company's Common Stock. The exercise price per share will be equal to the fair market value per share on the date the option is granted or on your first day of employment, whichever is later. The option will be a non-statutory option and will be subject to terms and conditions substantially equivalent to those applicable to options granted under the Company's 1995 Stock Option/Stock Issuance Plan, as described in that Plan and the standard form stock option agreement. The option will become exercisable for 25% of the option shares after 12 months of service and the balance will vest in monthly installments over the next 36 months of service, as described in the applicable stock option agreement. In the event that the Company is subject to a Corporate Transaction (as defined in the 1995 Stock Option/Stock Issuance Plan), your option will be exercisable for a number of shares as if you had been employed an additional 12 months as of the date of the transaction. You will be eligible for consideration for subsequent merit option grants beginning December 2000. 5. PROPRIETARY INFORMATION AND INVENTIONS AGREEMENT. Like all Company employees, you will be required, as a condition to your employment with the Company, to sign the Company's standard Proprietary Information and Inventions Agreement. 2 Anthony Zingale February 23, 1998 Page 2 of 3 6. BENEFITS AND VACATION. Clarify provides medical, dental & vision care insurance, life & accidental death insurance, long-term disability coverage, and a 401(k) plan. You will accrue two weeks vacation in addition to 10 paid holidays. 7. PERIOD OF EMPLOYMENT. Your employment with the Company will be "at will," meaning that either you or the Company will be entitled to terminate your employment at any time and for any reason, with or without cause. Any contrary representations that may have been made to you are superseded by this offer. This is the full and complete agreement between you and the Company on this term. Although your job duties, title, compensation and benefits, as well as the Company's personnel policies and procedures, may change from time to time, the "at will" nature of your employment may only be changed in an express written agreement signed by you and a duly authorized officer of the Company. 8. NON-SOLICITATION. During the period commencing on the date you commence employment with the Company and continuing until the second anniversary of the date your employment with the Company ceases, you shall not directly or indirectly, personally or through others, solicit or attempt to solicit (on your own behalf or on behalf of any other person or entity) either (i) the employment of any employee of the Company or any of the Company's affiliates or (ii) the business of any customer of the Company or any of the Company's affiliates. 9. OUTSIDE ACTIVITIES. While you render services to the Company, you will not engage in any other gainful employment, business or activity without the written consent of the Company. While you render services to the Company, you also will not assist any person or organization in competing with the Company, in preparing to compete with the Company or in hiring any employees of the Company. 10. WITHHOLDING TAXES. All forms of compensation referred to in this letter are subject to reduction to reflect applicable withholding and payroll taxes. 11. ENTIRE AGREEMENT. This letter and the Exhibit attached hereto contain all of the terms of your employment with the Company and supersede any prior understandings or agreements, whether oral or written, between you and the Company. 12. AMENDMENT AND GOVERNING LAW. This letter agreement may not be amended or modified except by an express written agreement signed by you and a duly authorized officer of the Company. The terms of this letter agreement and the resolution of any disputes will be governed by California law. We hope that you find the foregoing terms acceptable. You may indicate your agreement with these terms and accept this offer by signing and dating both the enclosed duplicate original of this letter and the enclosed Proprietary Information and Inventions Agreement and returning them to me. As required by law, your employment with the Company is also contingent upon your providing legal proof of your identity and authorization to work in the United States. This offer, if not accepted, will expire at the close of business on February 23, 1998. We look forward to having you join us on March 2nd, 1998. If you have any questions, please call me at (408) 573-3010. Very truly yours, CLARIFY INC. 3 Anthony Zingale February 23, 1998 Page 3 of 3 By: /s/ David A. Stamm ------------------------------------- David A. Stamm President and Chief Executive Officer I have read and accept this employment offer: /s/ Anthony Zingale Signature of Anthony Zingale Dated: February 23, 1998 EX-10.11 3 STOCK OPTION AGREEMENT 1 Exhibit 10.11 CLARIFY INC. Stock Option STOCK OPTION AGREEMENT RECITALS A. Optionee is to render valuable services to the Corporation (or a Parent or Subsidiary), and this Agreement is executed pursuant to, and is intended to carry out the purposes of the Corporation's grant of an option to Optionee. B. All capitalized terms in this Agreement shall have the meaning assigned to them in the attached Appendix. NOW, THEREFORE, it is hereby agreed as follows: 1. GRANT OF OPTION. The Corporation hereby grants to Optionee, as of the Grant Date, an option to purchase up to the number of Option Shares specified in the Grant Notice. The Option Shares shall be purchasable from time to time during the option term specified in Paragraph 2 at the Exercise Price. 2. OPTION TERM. This option shall have a term of ten (10) years measured from the Grant Date and shall accordingly expire at the close of business on the Expiration Date, unless sooner terminated in accordance with Paragraph 5 or 6. 3. LIMITED TRANSFERABILITY. This option shall be neither transferable nor assignable by Optionee other than by will or by the laws of descent and distribution following Optionee's death and may be exercised, during Optionee's lifetime, only by Optionee. However, this option may be assigned in whole or in part during Optionee's lifetime in accordance with the terms of a Qualified Domestic Relations Order. The assigned portion shall be exercisable only by the person or persons who acquire a proprietary interest in the option pursuant to such Qualified Domestic Relations Order. The terms applicable to the assigned portion shall be the same as those in effect for this option immediately prior to such assignment and shall be set forth in such documents issued to the assignee as the Board may deem appropriate. 4. DATES OF EXERCISE. This option shall become exercisable for the Option Shares in one or more installments as specified in the Grant Notice. As the option becomes exercisable for such installments, those installments shall accumulate and the option shall remain exercisable for the accumulated installments until the Expiration Date or sooner termination of the option term under Paragraph 5 or 6. 5. CESSATION OF SERVICE. The option term specified in Paragraph 2 shall terminate (and this option shall cease to be outstanding) prior to the Expiration Date should any of the following provisions become applicable: 2 (i) Should Optionee cease to remain in Service for any reason (other than death, Permanent Disability or Misconduct) while this option is outstanding, then Optionee shall have a period of twelve (12) months (commencing with the date of such cessation of Service) during which to exercise this option, but in no event shall this option be exercisable at any time after the Expiration Date. (ii) Should Optionee die while this option is outstanding, then the personal representative of Optionee's estate or the person or persons to whom the option is transferred pursuant to Optionee's will or in accordance with the laws of descent and distribution shall have the right to exercise this option. Such right shall lapse and this option shall cease to be outstanding upon the earlier of (A) the expiration of the twelve (12)- month period measured from the date of Optionee's death or (B) the Expiration Date. (iii) Should Optionee cease Service by reason of Permanent Disability while this option is outstanding, then Optionee shall have a period of twelve (12) months (commencing with the date of such cessation of Service) during which to exercise this option. In no event shall this option be exercisable at any time after the Expiration Date. (iv) Should Optionee's Service be terminated for Misconduct, then this option shall terminate immediately and cease to remain outstanding. (v) During the limited period of post-Service exercisability, this option may not be exercised in the aggregate for more than the number of vested Option Shares for which the option is exercisable at the time of Optionee's cessation of Service. Upon the expiration of such limited exercise period or (if earlier) upon the Expiration Date, this option shall terminate and cease to be outstanding for any vested Option Shares for which the option has not been exercised. To the extent Optionee is not vested in the Option Shares at the time of Optionee's cessation of Service, this option shall immediately terminate and cease to be outstanding with respect to those shares. (vi) In the event of a Corporate Transaction, the provisions of Paragraph 6 shall govern the period for which this option is to remain exercisable following Optionee's cessation of Service and shall supersede any provisions to the contrary in this paragraph. 6. SPECIAL ACCELERATION OF OPTION. (a) In the event of a Corporate Transaction, the exercisability of this option, to the extent outstanding at such time but not otherwise fully exercisable, shall automatically accelerate so that this option shall, immediately prior to the effective date of the Corporate Transaction, become exercisable for any or all of the Option Shares at the time subject 2 3 to this option as fully-vested shares of Common Stock. No such acceleration of this option, however, shall occur if and to the extent: (i) this option is, in connection with the Corporate Transaction, either to be assumed by the successor corporation (or parent thereof) or to be replaced with a comparable option to purchase shares of the capital stock of the successor corporation (or parent thereof) or (ii) this option is to be replaced with a cash incentive program of the successor corporation which preserves the spread existing on the Option Shares for which this option is not exercisable at the time of the Corporate Transaction (the excess of the Fair Market Value of such Option Shares over the aggregate Exercise Price payable for such shares) and provides for subsequent pay-out in accordance with the same exercise schedule in effect for the option pursuant to the option exercise schedule set forth in the Grant Notice. The determination of option comparability under clause (i) shall be made by the Compensation Committee of the Board, and such determination shall be final, binding and conclusive. (b) Immediately following the Corporate Transaction, this option, to the extent not previously exercised, shall terminate and cease to be outstanding, except to the extent assumed by the successor corporation (or parent thereof) in connection with the Corporate Transaction. (c) If this option is assumed in connection with a Corporate Transaction, then this option shall be appropriately adjusted, immediately after such Corporate Transaction, to apply to the number and class of securities which would have been issuable to Optionee in consummation of such Corporate Transaction had the option been exercised immediately prior to such Corporate Transaction, and appropriate adjustments shall also be made to the Exercise Price, provided the aggregate Exercise Price shall remain the same. (d) Upon an Involuntary Termination of Optionee's Service within eighteen (18) months following a Corporate Transaction in which this option is assumed or replaced, the exercisability of this option, to the extent outstanding at such time but not otherwise fully exercisable, shall automatically accelerate so that this option shall immediately become fully exercisable for all the Option Shares at the time subject to this option as fully-vested shares of Common Stock and may be exercised for any or all of those shares at any time prior to the earlier of (i) the Expiration Date or (ii) the expiration of the one (1)-year period measured from the effective date of the Involuntary Termination. (e) This Agreement shall not in any way affect the right of the Corporation to adjust, reclassify, reorganize or otherwise change its capital or business structure or to merge, consolidate, dissolve, liquidate or sell or transfer all or any part of its business or assets. 7. ADJUSTMENT IN OPTION SHARES. Should any change be made to Common Stock by reason of any stock split, stock dividend, recapitalization, combination of shares, exchange of shares or other change affecting the outstanding Common Stock as a class without the Corporation's receipt of consideration, appropriate adjustments shall be made to (i) the total number and/or class of securities subject to this option and (ii) the Exercise Price in order to reflect such change and thereby preclude a dilution or enlargement of benefits hereunder. 3 4 8. STOCKHOLDER RIGHTS. The holder of this option shall not have any stockholder rights with respect to the Option Shares until such person shall have exercised the option, paid the Exercise Price and become a holder of record of the purchased shares. 9. MANNER OF EXERCISING OPTION. (a) In order to exercise this option with respect to all or any part of the Option Shares for which this option is at the time exercisable, Optionee (or any other person or persons exercising the option) must take the following actions: (i) Execute and deliver to the Corporation a Notice of Exercise for the Option Shares for which the option is exercised. (ii) Pay the aggregate Exercise Price for the purchased shares in one or more of the following forms: (A) cash or check made payable to the Corporation; (B) a promissory note payable to the Corporation, but only to the extent authorized by the Compensation Committee of the Board in accordance with Paragraph 13; (C) shares of Common Stock held by Optionee (or any other person or persons exercising the option) for the requisite period necessary to avoid a charge to the Corporation's earnings for financial reporting purposes and valued at Fair Market Value on the Exercise Date; or (D) through a special sale and remittance procedure pursuant to which Optionee (or any other person or persons exercising the option) shall concurrently provide irrevocable written instructions (I) to a Corporation-designated brokerage firm to effect the immediate sale of the purchased shares and remit to the Corporation, out of the sale proceeds available on the settlement date, sufficient funds to cover the aggregate Exercise Price payable for the purchased shares plus all applicable Federal, state and local income and employment taxes required to be withheld by the Corporation by reason of such exercise and (II) to the Corporation to deliver the certificates for the purchased shares directly to such brokerage firm in order to complete the sale. Except to the extent the sale and remittance procedure is utilized in connection with the option exercise, payment of the Exercise Price must accompany the Notice of Exercise delivered to the Corporation in connection with the option exercise. 4 5 (iii) Furnish to the Corporation appropriate documentation that the person or persons exercising the option (if other than Optionee) have the right to exercise this option. (iv) Make appropriate arrangements with the Corporation (or Parent or Subsidiary employing or retaining Optionee) for the satisfaction of all Federal, state and local income and employment tax withholding requirements applicable to the option exercise. (b) As soon as practical after the Exercise Date, the Corporation shall issue to or on behalf of Optionee (or any other person or persons exercising this option) a certificate for the purchased Option Shares, with the appropriate legends affixed thereto. (c) In no event may this option be exercised for any shares. 10. COMPLIANCE WITH LAWS AND REGULATIONS. (a) The exercise of this option and the issuance of the Option Shares upon such exercise shall be subject to compliance by the Corporation and Optionee with all applicable requirements of law relating thereto and with all applicable regulations of any stock exchange (or the Nasdaq National Market, if applicable) on which the Common Stock may be listed for trading at the time of such exercise and issuance. (b) The inability of the Corporation to obtain approval from any regulatory body having authority deemed by the Corporation to be necessary to the lawful issuance and sale of any Common Stock pursuant to this option shall relieve the Corporation of any liability with respect to the non-issuance or sale of the Common Stock as to which such approval shall not have been obtained. The Corporation, however, shall use its best efforts to obtain all such approvals. 11. SUCCESSORS AND ASSIGNS. Except to the extent otherwise provided in Paragraphs 3 and 6, the provisions of this Agreement shall inure to the benefit of, and be binding upon, the Corporation and its successors and assigns and Optionee, Optionee's assigns and the legal representatives, heirs and legatees of Optionee's estate. 12. NOTICES. Any notice required to be given or delivered to the Corporation under the terms of this Agreement shall be in writing and addressed to the Corporation at its principal corporate offices. Any notice required to be given or delivered to Optionee shall be in writing and addressed to Optionee at the address indicated below Optionee's signature line on the Grant Notice. All notices shall be deemed effective upon personal delivery or upon deposit in the U.S. mail, postage prepaid and properly addressed to the party to be notified. 13. FINANCING. The Compensation Committee of the Board may, in its absolute discretion and without any obligation to do so, permit Optionee to pay the Exercise Price for the purchased Option Shares by delivering a promissory note. The terms of any such promissory note (including the interest rate, the requirements for collateral and the terms of 5 6 repayment) shall be established by the Compensation Committee of the Board in its sole discretion. 14. GOVERNING LAW. The interpretation, performance and enforcement of this Agreement shall be governed by the laws of the State of California without resort to that State's conflict-of-laws rules. 6 7 EXHIBIT I NOTICE OF EXERCISE I hereby notify Clarify Inc. (the "Corporation") that I elect to purchase _________ shares of the Corporation's Common Stock (the "Purchased Shares") at the option exercise price of $_________ per share (the "Exercise Price") pursuant to that certain option (the "Option") granted to me on March 2, 1998. Concurrently with the delivery of this Exercise Notice to the Corporation, I shall hereby pay to the Corporation the Exercise Price for the Purchased Shares in accordance with the provisions of my agreement with the Corporation (or other documents) evidencing the Option and shall deliver whatever additional documents may be required by such agreement as a condition for exercise. Alternatively, I may utilize the special broker-dealer sale and remittance procedure specified in my agreement to effect payment of the Exercise Price. ____________________________________, 199_ Date ___________________________________________ Optionee Address: __________________________________ ___________________________________________ Print name in exact manner it is to appear on the stock certificate: ___________________________________________ Address to which certificate is to be sent, if different from address above: ___________________________________________ ___________________________________________ Social Security Number: ___________________________________________ Employee Number: ___________________________________________ 8 APPENDIX The following definitions shall be in effect under the Agreement: A. AGREEMENT shall mean this Stock Option Agreement. B. BOARD shall mean the Corporation's Board of Directors. C. CODE shall mean the Internal Revenue Code of 1986, as amended. D. COMMON STOCK shall mean the Corporation's common stock. E. CORPORATE TRANSACTION shall mean either of the following stockholder-approved transactions to which the Corporation is a party: (i) a merger or consolidation in which securities possessing more than fifty percent (50%) of the total combined voting power of the Corporation's outstanding securities are transferred to a person or persons different from the persons holding those securities immediately prior to such transaction, or (ii) the sale, transfer or other disposition of all or substantially all of the Corporation's assets in complete liquidation or dissolution of the Corporation. F. CORPORATION shall mean Clarify Inc., a Delaware corporation. G. DOMESTIC RELATIONS ORDER shall mean any judgment, decree or order (including approval of a property settlement agreement) which provides or otherwise conveys, pursuant to applicable State domestic relations laws (including community property laws), marital property rights to any spouse or former spouse of the Optionee. H. EMPLOYEE shall mean an individual who is in the employ of the Corporation (or any Parent or Subsidiary), subject to the control and direction of the employer entity as to both the work to be performed and the manner and method of performance. I. EXERCISE DATE shall mean the date on which the option shall have been exercised in accordance with Paragraph 9 of the Agreement. J. EXERCISE PRICE shall mean the exercise price per share as specified in the Grant Notice. K. EXPIRATION DATE shall mean the date on which the option expires as specified in the Grant Notice. 9 L. FAIR MARKET VALUE per share of Common Stock on any relevant date shall be determined in accordance with the following provisions: (i) If the Common Stock is at the time traded on the Nasdaq National Market, then the Fair Market Value shall be the closing selling price per share of Common Stock on the date in question, as the price is reported by the National Association of Securities Dealers on the Nasdaq National Market or any successor system. If there is no closing selling price for the Common Stock on the date in question, then the Fair Market Value shall be the closing selling price on the last preceding date for which such quotation exists. (ii) If the Common Stock is at the time listed on any Stock Exchange, then the Fair Market Value shall be the closing selling price per share of Common Stock on the date in question on the Stock Exchange determined by the Board to be the primary market for the Common Stock, as such price is officially quoted in the composite tape of transactions on such exchange. If there is no closing selling price for the Common Stock on the date in question, then the Fair Market Value shall be the closing selling price on the last preceding date for which such quotation exists. M. GRANT DATE shall mean the date of grant of the option as specified in the Grant Notice. N. GRANT NOTICE shall mean the Notice of Grant of Stock Option accompanying the Agreement, pursuant to which Optionee has been informed of the basic terms of the option evidenced hereby. O. INVOLUNTARY TERMINATION shall mean the termination of Optionee's Service which occurs by reason of: (i) Optionee's involuntary dismissal or discharge by the Corporation for reasons other than Misconduct, or (ii) Optionee's voluntary resignation following (A) a change in Optionee's position with the Corporation (or Parent or Subsidiary employing Optionee) which materially reduces Optionee's level of responsibility, (B) a reduction in Optionee's level of compensation (including base salary, fringe benefits and participation in corporate-performance based bonus or incentive programs) by more than fifteen percent (15%) or (C) a relocation of Optionee's place of employment by more than fifty (50) miles, provided and only if such change, reduction or relocation is effected by the Corporation without Optionee's consent. P. MISCONDUCT shall mean the commission of any act of fraud, embezzlement or dishonesty by Optionee, any unauthorized use or disclosure by Optionee of confidential A - 2 10 information or trade secrets of the Corporation (or any Parent or Subsidiary), or any other intentional misconduct by Optionee adversely affecting the business or affairs of the Corporation (or any Parent or Subsidiary) in a material manner. The foregoing definition shall not be deemed to be inclusive of all the acts or omissions which the Corporation (or any Parent or Subsidiary) may consider as grounds for the dismissal or discharge of Optionee or any other individual in the Service of the Corporation (or any Parent or Subsidiary). Q. NON-STATUTORY OPTION shall mean an option not intended to satisfy the requirements of Code Section 422. R. NOTICE OF EXERCISE shall mean the notice of exercise in the form attached hereto as Exhibit I. S. OPTION SHARES shall mean the number of shares of Common Stock subject to the option as specified in the Grant Notice. T. OPTIONEE shall mean the person to whom the option is granted as specified in the Grant Notice. U. PARENT shall mean any corporation (other than the Corporation) in an unbroken chain of corporations ending with the Corporation, provided each corporation in the unbroken chain (other than the Corporation) owns, at the time of the determination, stock possessing fifty percent (50%) or more of the total combined voting power of all classes of stock in one of the other corporations in such chain. V. PERMANENT DISABILITY shall mean the inability of Optionee to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which is expected to result in death or has lasted or can be expected to last for a continuous period of twelve (12) months or more. W. QUALIFIED DOMESTIC RELATIONS ORDER shall mean a Domestic Relations Order which substantially complies with the requirements of Code Section 414(p). The Board shall have the sole discretion to determine whether a Domestic Relations Order is a Qualified Domestic Relations Order. X. SERVICE shall mean the Optionee's performance of services for the Corporation (or any Parent or Subsidiary) in the capacity of an Employee, a non-employee member of the board of directors or a consultant or independent advisor. Y. STOCK EXCHANGE shall mean the American Stock Exchange or the New York Stock Exchange. Z. SUBSIDIARY shall mean any corporation (other than the Corporation) in an unbroken chain of corporations beginning with the Corporation, provided each corporation (other than the last corporation) in the unbroken chain owns, at the time of the determination, stock A - 3 11 possessing fifty percent (50%) or more of the total combined voting power of all classes of stock in one of the other corporations in such chain. A - 4 EX-21.1 4 SUBSIDIARIES OF THE REGISTRANT 1 EXHIBIT 21.1 SUBSIDIARIES OF THE REGISTRANT 1. Clarify Limited, incorporated in the United Kingdom. 2. Clarify GmbH, incorporated in Federal Republic of Germany. 3. Clarify SARL, incorporated in France. 4. Clarify (Asia Pacific) PTY LTD, incorporated in Australia. 5. Clarify K.K., incorporated in Japan. 6. Clarify (S) PTE LTD, incorporated in Singapore. 50 EX-27.1 5 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS FINANCIAL INFORMATION EXTRACTED FROM CONSOLIDATED BALANCE SHEETS, CONSOLIDATED STATEMENTS OF OPERATIONS AND CONSOLIDATED STATEMENTS OF CASH FLOWS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FORM 10-K. 1000 YEAR YEAR YEAR DEC-31-1997 DEC-31-1997 DEC-31-1997 JAN-01-1995 JAN-01-1996 JAN-01-1997 DEC-31-1995 DEC-31-1996 DEC-31-1997 0 34477 20744 0 1486 10451 0 17977 32854 0 0 0 0 0 0 0 59325 72204 0 8470 8611 0 0 0 0 70684 86831 0 23739 29734 0 0 0 0 0 0 0 0 0 0 2 2 0 45556 51640 0 70684 86831 15749 39139 59214 24897 56322 88217 0 0 0 6473 12120 20549 16900 36716 62734 0 0 0 249 9 6 1633 9130 6238 129 940 2308 1504 8190 3930 0 0 0 0 0 0 0 0 0 1504 8190 3930 .09 .41 .19 .09 .38 .18
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