-----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, ULpIcvgdVRa7ixHtdn9Gug7J8sNW0qNYJxsYPjZ5kUySzQsnc+TVxv8lRkp2m49A hsPV+Pax0p3V24SHnvOyvA== 0000891618-99-001314.txt : 19990402 0000891618-99-001314.hdr.sgml : 19990402 ACCESSION NUMBER: 0000891618-99-001314 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990331 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: 99582530 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 FOR THE YEAR ENDED DECEMBER 31, 1998 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 FOR THE CALENDAR YEAR ENDED DECEMBER 31, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 COMMISSION FILE NUMBER 0-26776 CLARIFY, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 77-0259235 (STATE OF 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 SERIES A JUNIOR PARTICIPATING PREFERRED STOCK PURCHASE RIGHTS, NO 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 voting and non-voting common equity held by nonaffiliates of the Registrant (based on the closing sales price of such stock as reported in the NASDAQ Stock Market) on February 26, 1999 was $511,406,341. Excludes shares of Common Stock held by directors, officers and each person who holds 5% or more of the outstanding Common Stock at February 26, 1999 because such persons may be deemed to be affiliates. This exclusion is not a conclusive determination of such status for other purposes. The number of shares of Common Stock, $0.0001 par value, outstanding as of February 26, 1999 was 22,405,171. DOCUMENTS INCORPORATED BY REFERENCE PART III -- PORTIONS OF THE REGISTRANT'S DEFINITIVE PROXY STATEMENT TO BE ISSUED IN CONJUNCTION WITH THE REGISTRANT'S ANNUAL MEETING OF STOCKHOLDERS TO BE HELD ON JUNE 10, 1999. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 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 from those projected. 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 1999. 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 release publicly any updates to the forward-looking statements included herein 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 enterprise-scale, Internet-ready front office applications for managing the quality and life of customer relationships. Clarify helps companies build service into every customer interaction across a variety of media with integrated 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, including suppliers and partners who help meet customer needs, Clarify helps companies attract, acquire and retain customers at significantly reduced costs. Clarify markets its software and services primarily through its direct sales organization. Clarify maintains sales and support offices throughout North America, Europe, and the Asia/Pacific region. A variety of industries employ Clarify's solutions, including telecommunications, high technology, financial services, healthcare, consumer products, and travel and entertainment. Clarify has approximately 650 customers including Automatic Data Processing, Inc., BP Amoco, Cisco Systems, Inc., General Electric Company, Georgia Pacific, The Gillette Company, Hewlett-Packard Company, Microsoft Corporation, and Sprint PCS. Clarify maintains its executive offices at 2125 O'Nel Drive, San Jose, California 95131. INDUSTRY BACKGROUND Globalization, fierce competition, and a networked economy are significantly changing business dynamics. The opening of previously closed markets, the explosion of the Internet, and partnerships and alliances are all driven by a growing demand for better products and services in all areas of the world. Adding to these factors are industry deregulation, the growing number of mergers and acquisitions, and the continued flow of new capital to fund new business ventures. In addition, the Internet has spawned a virtual free flow of information around the globe affecting business models everywhere. The result is fierce competition in practically all markets. In today's highly competitive, fast-paced economy, businesses are finding that winning and keeping customers is an increasingly difficult challenge, a trend that poses a very real threat to a business's bottom line, while concurrently driving up the cost of acquiring new customers. Today's customers want more personalized service, and faster, unfettered access to products and services, as well as anytime, anywhere access to businesses across a variety of mediums, including the phone, fax, email, and the Web. Companies that cannot 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 on support solutions in order to retain existing customers, often at the expense of acquiring new ones. However, 1 3 neither of these strategies has provided companies with an integrated, long-term solution for effectively managing customer relationships across the entire customer life cycle. Businesses increasingly view customer loyalty as the key to maintaining long-term profitability, and they seek technology solutions that can directly improve the quality and life of customer relationships. In 1998, recognizing the need for an integrated solution across all customer-facing organizations, Clarify introduced the industry's first fully integrated front office solution. Clarify's front office solution integrates and automates marketing, sales, and service operations and provides a centralized database that maintains all customer information. By uniting the enterprise's approach to customers, Clarify's solutions promote collaboration that nurtures customer loyalty while serving the unique business needs of each organization within the business enterprise. PRODUCTS Clarify's business solutions are designed for enterprises that place a premium on customer relationships. Clarify's solutions enable a company's customer-facing organizations to work together to provide superior customer service. For example, because of the power of Clarify's workflow management engine, Clarify customers can make commitments to certain business standards via Clarify business rules, such as responding to customer requests within 24 hours. Accountable managers are automatically notified when these commitments are not met. In 1998, Clarify adapted its business initiatives to address the emerging market for front office applications by introducing new products and enhancements of existing products. A key initiative in 1998 was Clarify's announcement of a major new release of its integrated suite of sales and service applications, Clarify FrontOffice 98(TM). With Clarify FrontOffice 98, Clarify delivered a mobile solution for field sales and service organizations. In addition, Clarify FrontOffice 98 addresses the needs of global enterprises by running in other operating system environments, supporting entry of data in other languages, and offering language localization for the Japanese market. Clarify FrontOffice 98 Clarify FrontOffice 98 serves as the front line for customer interactions as well as the centralized resource for all customer information. Clarify FrontOffice 98 does this by integrating the efforts of a business's customer-facing organizations and unifying information about customers in a central database that is updated in real time. Clarify's Call Center Solution, Sales and Marketing Solution, Customer Service Solution, Field Service Solution, and Help Desk Solution leverage the latest database, Web, mobile, and intelligent software agent technology to help businesses make customer interaction consistent, knowledge-based, personalized, and shared across organizations. Clarify's Call Center Solution Industries such as telecommunications, financial services, insurance, and utilities are transforming the traditional roles of their call centers from sales-only 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 from customers calling for general information or requesting simple service to submitting an order via fax, email, 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. In 1997, Clarify introduced ClearCallCenter(TM), a comprehensive solution that supports both inbound/outbound sales and service. In 1998, Clarify introduced an advanced scripting module with the latest release of ClearCallCenter called Script Manager. Script Manager features point-and-click tools to help call center managers design, test, and modify scripts to meet changing business needs. This capability promotes appropriate follow-up actions and initiates a wide range of actions, such as creating an order, launching another application, or sending an email. 2 4 Clarify's Sales and Marketing Solution In 1998, Clarify also announced a major new release of its sales force automation system, Clarify ClearSales(R). Clarify ClearSales provides field sales teams with personalized customer and prospect information to maximize sales effectiveness. This application automates the entire sales process from opportunity and territory management to revenue forecasting, configuration, and quote generation. The new release includes mobile data synchronization and supports Target Account Selling (TAS), a popular sales methodology. TAS methodology leverages findings from empirical research and best practices gleaned from actual sales experiences to help sales people focus on the right issues, plan for sales opportunities, and communicate more effectively with other members of the sales team. Clarify's Customer Service Solution Clarify's customer service solution turns every customer interaction into an opportunity to capture valuable information which, in turn, can be utilized to create new programs, services, products, and enhancements, all custom designed to meet specific customer needs. The customer service solution ensures that customers have consistent access and results and closed-loop problem resolution. Clarify ClearContracts(TM) provides comprehensive out-of-the-box functionality for managing service contracts, by automating key contract information and processes. With ClearContracts, services marketing and sales representatives can quickly quote and sell complex offerings, and support representatives have entitlement information at their fingertips, ensuring service level agreement compliance and accurate billing. Clarify ClearSupport(R) utilizes features like configuration control, workflow, problem resolution, and ownership and commitment tracking to manage information flow within a service organization, By automating the entire customer service relationship, ClearSupport ensures that individual customer needs are addressed quickly and efficiently. Clarify ClearQuality(R) identifies, traces, catalogs, and verifies repairs on a continuous basis. Clarify Field Service Solution Clarify's field service solution is also comprised of ClearContracts and ClearSupport, in addition to, ClearLogistics(R) and ClearEnterprise Traveler(TM). ClearLogistics is a comprehensive, easy-to-use field service and logistics management system that consists of three components: Field Operation, Order Operation, and Spares Manager. Together, they provide functionality for dispatching field technicians and managing spare parts and inventory. A key component of Clarify's field service and logistics solutions, ClearLogistics 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. In 1998, Clarify announced the next generation of its field service solution and its incorporation of ClearEnterprise Traveler, Clarify's highly scalable data synchronization module for mobile field service users. Clarify Help Desk Solution For internal support needs, Clarify's ClearHelpdesk(TM) enables businesses to quickly handle employee inquiries regarding a wide variety of issues such as 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). In 1998, additional functionality that automated the fulfillment of recurring change requests was introduced. Widely adopted by large corporations with enterprise help desks, including Transamerica Corporation, The Gillette Company, Hewlett Packard Company, BP Amoco, Georgia Pacific, and Corning Clinical Labs, ClearHelpdesk was honored with a "product of the year" award from CTI Magazine in 1998. 3 5 Telecommunications An industry in evolution, the telecommunications market is moving towards the concept of integrated carriers, with service providers seeking broader portfolios and initiating mergers and partnerships with other industry players. As competition increases and technologies converge, service becomes the best and sometimes the only differentiator among telecommunications providers. Clarify's solution for the telecommunications marketplace, Clarify CommCenter(TM), is an enterprise-scale, Internet-ready suite of operations support systems (OSS) applications. Clarify CommCenter uniquely links the sales and service sides of the telecommunications business. Within the same application, providers can create orders, answer questions, process trouble tickets, and update the status as problems move towards resolution. Because it spans both the sales and service sides of telecommunications, Clarify CommCenter streamlines the communication of critical customer and problem information across the enterprise. Clarify CommCenter also allows service providers with disparate customer care systems to communicate service orders, trouble-ticket information, and resolutions automatically across organizational boundaries. Clarify entered the telecommunications market in 1996, and today telecommunications comprises approximately 25% of Clarify's total global business. Clarify is a leading provider of end-to-end solutions in the telecommunications industry with customers in every segment of the market: Competitive Local Exchange Carriers (CLEC's) , Incumbent Local Exchange Carriers (ILEC's). Internet Service Providers (ISP's), networking vendors, Telecom Equipment providers, wireless providers, direct broadcast satellite companies, and Interexchange Carriers (ISC's)/global carriers. 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 application functionality to organizations, regardless of how the customer chooses to deploy Clarify's products, i.e. over LANs, WANs, the Internet, or mobile connections. Clarify devotes substantial resources to develop technologies that enable front office organizations to ensure internal accountability and unique treatment of customers, which Clarify believes provides it with a 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" by a single individual, 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 Full-Text Search product helps support specialists solve problems for the first time and build the business'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 describe the problem and solution accurately. Together, these products enable support representatives to identify previously solved problems efficiently and provide customers rapidly with consistent, high-quality solutions. Tasks can even be "subcontracted" to other specialists to complete, enabling enterprise-wide teams to collaborate on customer requests. 4 6 World Wide Web Access. Clarify's ClearExpress(TM) products enable customers and employees to help themselves by putting them in direct contact with a business'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 business'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. In 1998 Clarify introduced its next-generation architecture: Clarify Business Object architecture. This is an advanced multi-tier, object-oriented technology infrastructure that will serve as the foundation for all new Clarify products as well as upgrades to the existing product line. Clarify's new architecture moves beyond the capabilities of traditional client/server and three-tier architectures to provide increased flexibility to meet changing business needs. Clarify customers will be able to customize applications with a single tool and deploy them via LANs, WANs, and the Internet on a wide variety of desktop platforms. As a result, Clarify customers will be able to customize and distribute functionality quickly based on business needs rather than technological constraints. Benchmarks of Clarify's front office suite demonstrated Clarify's ability to support up to 5,000 concurrent users with sub-second average response times on Microsoft's Windows NT Server and SQL Server platforms and up to 30,000 concurrent users with sub-second average response times on an HP-UX server and Oracle database. These record-setting benchmarks more than double existing benchmark results of other enterprise front office solutions and demonstrate both the exceptional performance and scalability of Clarify's product suite. SALES AND MARKETING Clarify 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 marketing, direct mail, trade shows, product seminars, user group conferences, and ongoing customer communication programs. Field sales professionals and sales engineers are located throughout the United States, the United Kingdom, Germany, France, Japan, Australia, Canada, and Singapore. Clarify announced reseller agreements with Hewlett Packard Co., Fujitsu, and NEC in 1998, which are in addition to its existing reseller agreements with Ernst & Young Technologies, Inc. (EYT) and Compaq Computer Corporation. NEC will resell the Japanese version of the Clarify front office suite. An integral part of Clarify's strategy is to expand its direct sales internationally. International revenue amounted to 25% of Clarify's total revenues in 1998, up from 14% of total revenues in 1996 and 10% of total revenues in 1997. There can be no assurance that Clarify can retain its existing sales personnel or that it can attract, assimilate and retain highly qualified sales personnel in the future. If Clarify 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 Clarify'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 Clarify's solutions approach to this marketplace is uniquely focused on driving business results. After installation and deployment, Clarify offers its customers dedicated services for improving the effectiveness of their Clarify applications with a focus on achieving specific business goals. Clarify's shift to a solutions focus began in 1997, when Clarify began to expand its professional consulting service offerings as well as its service and support staff and revamp the service delivery model to increase accessibility and speed resolution time. A CustomerCARE call center introduced in 1997 provided Clarify customers with a single point of contact where they could get answers to a sales or service question across a 5 7 variety of media, including phone, fax, email, or Web interactions. The new service model included comprehensive system administration courses and project team training programs for applications, customization tools, and data models. Clarify's emphasis on a solutions approach to this marketplace continued in 1998. During 1998, the Company implemented proactive internal training programs to improve the quality of customer service and established new laboratories for testing and improving customer responsiveness. Today Clarify delivers services through a variety of programs. Clarify's professional services organization focuses on rapid deployment, knowledge transfer, and customer self-sufficiency. Clarify's network of software and system integration alliance partners extend those services globally. Clarify University provides a complete portfolio of education for customer knowledge and productivity with Clarify software. On-site training services are also provided to customers upon request at a higher cost. Exceptional technical and non-technical customer service is enabled by improved CustomerCARE services. ClearEdge services help Clarify customers maintain the competitive advantage gained through Clarify solutions with programs for continuous improvement. Supplementing its training and technical support services, Clarify's consultants and third-party consulting organizations, such as Andersen Consulting, Ernst & Young, Technology Solutions, and Cambridge Technology Partners, support Clarify's customers and provide customization, interface specification, and implementation and integration services. To help deploy Clarify solutions more quickly and more smoothly, in 1998, Clarify developed several service packages for use by its internal staff, system integrators, and consultants. The Company also developed a single, globally deployed service delivery methodology to support its growth as a provider of global solutions. In addition, Clarify expanded its training centers worldwide, ending 1998 with training centers throughout North America, Europe, and Australia. 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. Clarify 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 technological competitiveness, and meet an expanding range of customer requirements. There can be no assurance, however, that Clarify will be successful in developing and marketing product enhancements or new products that respond to technological change or evolving industry standards, or that Clarify 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 Clarify is unable, for technological or other reasons, to develop and introduce new products or enhancements successfully, Clarify'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, complex software products as complex such as those offered by Clarify may contain undetected errors or failures when first introduced or when new versions are released. Clarify 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 Clarify 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 6 8 will be developed internally, the Company may, based on timing and cost considerations, acquire technology and products from third parties. Clarify's total expenses for research and product development for fiscal years, 1996, 1997, and 1998 were $10.4 million, $16.8 million, and $20.3 million, respectively. Clarify 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. More and more companies are entering this market as technologies converge and awareness of the importance of managing customer relationships heightens. Clarify 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. Clarify 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, Clarify expects additional competition from other established and emerging companies as the front office solutions market continues to develop and expand. Among the most notable are the dominant vendors of back office solutions who, as their market matures, see the potential of the front office space. Increased competition could result in price reductions, lower sales, reduced gross margins, and loss of market share, any of which could materially adversely affect Clarify's business, operating results, and financial condition. Among software companies competing with Clarify, principal competitors include Siebel Systems, Inc. and The Vantive Corporation. In addition, a number of Enterprise Resource Planning vendors, including Oracle Corporation and SAP, have announced front office offerings. Some of Clarify's current competitors, and many of Clarify's potential competitors, have significantly greater financial, technical, product development, marketing and other resources than Clarify. Some companies, particularly those perceived to have businesses devoted to the internet and e-commerce spaces, may be able to raise substantial amounts of capital in the public or private equity markets to fund additional expenditures and growth. 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 Clarify. In addition, many competitors and potential competitors have significant established distribution networks and large customer installed bases. The Company also expects that competition may increase as a result of software industry consolidations. 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 7 9 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. Furthermore, 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. 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 afford only limited protection. Despite the Company's efforts to protect its proprietary rights, unauthorized parties may attempt to copy or infringe proprietary aspects of the Company's products or engage in the unauthorized use of 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 countries do not protect the Company's proprietary rights to the same 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 its 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 in the Company's industry segment 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 effect upon the Company's business, operating results and financial condition. EMPLOYEES As of December 31, 1998, the Company had approximately 630 employees. 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 8 10 presented elsewhere in this report and in the Company's periodic filings with the Securities and Exchange Commission. Limited Operating History; Limited and Variable Profitability The Company was founded in August 1990 and began shipping products in 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 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 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 often 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 revenue losses. In addition, 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; 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 effect 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, for example, the Company has generally had weaker demand in the first quarter. The foregoing factors make estimating quarterly revenues 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 substantial portion of the Company's expenses are relatively fixed in any given quarter. 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 expansion of international operations, a larger worldwide direct and indirect sales and marketing staff and related marketing expenditures, development of 9 11 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 operating 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 quarters the Company's operating results will be below the expectations of public market analysts and investors. In such event, the market price of the Company's common stock would likely be materially adversely affected. Continued Volatility of Stock Price In the past, the price of the Company's common stock has been volatile. 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 or purchase recommendations 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 international currency and stock market volatility, 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 brought against the Company could result in substantial costs and a diversion of management's attention and resources, which could have a material adverse effect on the Company's business, results of operations and financial condition. 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 have 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 securing 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 effect on the Company's business, results of operations and financial condition. Integration of Acquired Businesses or Technologies The Company may acquire or make investments in complementary businesses, products, services or technologies. From time to time, we have had discussions with companies regarding the acquisition of, or investment in, their businesses, products, services or technologies. There can be no assurance that the Company will be able to identify suitable acquisition or investment candidates. Even if the Company identifies suitable candidates, there can be no assurance that the Company will be able to make sure acquisitions or investments on commercially acceptable terms, if at all. The Company may have difficulty in assimilating the personnel and operations of any company that the Company may acquire. In addition, the key personnel of the acquired company may decide not to work for the Company. Furthermore, the Company may have difficulty in converting the business strategy of any acquired company into one that is consistent with the Company's strategic goals, or assimilating the products, services or technologies of companies we may acquire into our operations. These difficulties could disrupt the Company's ongoing business, distract management and employees, increase expenses and adversely affect results of operations due to accounting requirements such as 10 12 goodwill. Furthermore, we may incur debt or issue equity securities to pay for any future acquisitions. The issuance of equity securities could be dilutive to our existing stockholders. 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 in advance 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 such international 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. International expansion has placed, and is 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 abroad could make the Company's products less competitive in international markets. As the Company increases its international operations, it may be materially adversely affected by fluctuations in international currency exchange rates, increases in duty rates, exchange or price controls or other restrictions on foreign currencies. While the Company's efforts to hedge foreign currency denominated intercompany balances are designed to limit its exposure to fluctuations in foreign currency exchange rates, there can be no assurance that its efforts will have such an effect. To the extent that any exchange rate fluctuations would have had a positive impact on the Company's financial performance, the effect of such hedging transactions could be to eliminate or reduce the gains that would have otherwise accrued to the Company. Furthermore, the Company is subject to foreign exchange rate fluctuations as the financial results of its international subsidiaries are translated into U.S. dollars in consolidation. 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 other 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 other laws. There can be no assurance that such factors will not have a material adverse effect on the Company's future international sales and, consequently, the Company's results of operations and financial condition. 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 the attendant complexity, larger implementations can involve multiple-quarter implementation cycles. 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 disputes regarding payment in the future, 11 13 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 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 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 delays in development, 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 Dependence Upon Key Personnel The loss of the services of one or more of the Company's executive officers could have a material adverse effect 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, the Company has experienced there has been turnover in certain key personnel, including resignations by the Vice-President of Marketing and Vice-President of Customer Service and Support in February 1998, and the Chief Financial Officer in August 1997. In March 1998, the Company's President and Chief Executive Officer, Dave Stamm, assumed the position of Chairman of the Board and the current President and Chief Executive Officer was appointed, and in April 1998, the current Chief Financial Officer was appointed. Furthermore, in July 1998, the current Senior Vice-President of Worldwide Professional Services and a Vice-President of Worldwide Marketing were appointed. Additions of new, and departures of existing, personnel, particularly in key positions, could have a material adverse effect upon the Company's business, operating results, and financial condition. The 12 14 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 increase the total number of employees significantly in the future. Competition for such personnel is intense, and there can be no assurance that the Company will be able to retain its key technical, sales, financial and managerial employees or that it will be able to 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 Clarify FrontOffice 98 suite of products. As a result, factors adversely affecting the pricing of or demand for Clarify FrontOffice 98, such as competition or technological change, could have a material adverse effect on the Company's business, operating result, and financial condition. Clarify's future financial performance will depend, in significant part, on the successful development, introduction and customer acceptance of new and enhanced versions of Clarify FrontOffice 98. There can be no assurance that the Company will continue to be successful in marketing Clarify FrontOffice 98 or other products. 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 effect 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 effect 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 Compliance As is true for most companies, the Year 2000 computer issue creates a risk for the Company. If systems do not correctly recognize date information when the year changes to 2000, there could be an adverse impact on the Company's operations. For example, software with date-sensitive functions that is not Year 2000 compliant may not be able to distinguish whether "00" means 1900 or 2000, which may result in failures or the creation of erroneous results. The Company is aware of the issues associated with the programming code in existing computer systems as the year 2000 approaches and has formed a task force to address its Year 2000 readiness. 13 15 Project The Company's Year 2000 project is divided into four major sections -- Information Technology (including both hardware systems and application software), Product (including embedded software), Facilities (such as security system and building equipment), and Suppliers. The general phases common to all sections are (1) inventorying Year 2000 items; (2) assigning risks to identified items as fatal, critical or marginal; (3) assessing the Year 2000 compliance of items; (4) testing of items; and (5) repairing, renovating or replacing fatal or critical items that are determined not to be Year 2000 compliant. Product The Company has completed all phases of the Product section. The Company's products have been developed from inception with consideration to the following Year 2000 issues: (1) General integrity -- no value for current date will cause interruptions in desired operations. (2) Data integrity -- all manipulations of time-related data will produce desired results for all valid date values within the application domain. (3) Implicit century -- for any date element represented without century, the correct century is unambiguous for all manipulations involving that element. (4) Leap year -- the product recognizes Year 2000 as a leap year. The Company's current products meet all the requirements for general integrity, data integrity, implicit century and recognize Year 2000 as a leap year. As an added measure of security, the Company is negotiating a contract with an independent third-party for certification of compliancy for its Clarify FrontOffice 98 suite. The estimated completion of the results of the third-party certification is April, 1999. Information Technology The Company has completed the first three phases of the Information Technology section. A hardware and software inventory has been conducted and relevant suppliers have been rated fatal, critical or marginal. Based on the rating and other factors, a certification completion date has been assigned to each item. Available vendors' statements of compliance have also been reviewed. Internal testing plans have been developed for the Company's core business systems. The Company has completed testing of its critical business systems and is in the process of determining what, if any, remediation is required for such systems. The Company expects to complete its testing of ancillary systems by May 31, 1999. Since the systems and technologies used internally have been developed in the late 1980's and 1990's, the Company does not anticipate having major Year 2000 issues in its Information Technology section. Facilities and Suppliers The Company did not test and therefore does not warranty any third party elements or applications distributed as part of Clarify FrontOffice 98 (CFO98) Bill of Materials, when such elements or applications are run in standalone mode. Clarify has tested, and therefore certifies to be Year 2000 complaint, only the custom implementations of third party elements or applications, accessible only from within the CFO98 application and only when CFO98 is properly installed, properly used and unmodified by clients. The Company is, however, seeking assurances from all its vendors that licensed software contained within the CFO98 distribution is Year 2000 compliant. The Company is moving its headquarters' facilities in May 1999 and is requiring all products and facilities vendors participating in the new facility to warranty their products as well as their company status as being Year 2000 ready. Also, the Company has completed approximately 90% of the inventorying, prioritizing and assessing phases and approximately 50% of the testing and repairing, renovating and replacing phases of the Suppliers section, respectively. The Company does not believe it is in high risk with regard to these two sections and plans to complete all phases by April 30, 1999. 14 16 The total cost associated with required modifications to become Year 2000 compliant is not expected to be material to the Company's financial position. The estimated cost of the Year 2000 project is approximately $400,000. The use of internal resources or existing infrastructure is not accounted for in this estimate. The total amount expended through December 31, 1998 was approximately $45,000 to purchase lab testing equipment. The estimated future cost of completing the Year 2000 project is estimated to be approximately an additional $105,000 to augment staff and to purchase additional testing equipment and approximately an additional $250,000 to obtain independent third-party compliance certification on the company's current products. The Company's has and plans to fund its Year 2000 project from its operating cash flows. The estimated cost of the Company's Year 2000 project does not represent a percentage of the Company's planned 1999 budget for computer hardware and software. The Company does not anticipate that any existing Information Technology projects will need to be deferred as of part of its Year 2000 efforts. Though the Company's Year 2000 project is expected to reduce the Company's level of uncertainty about Year 2000 problems significantly, failure to correct known or unknown material Year 2000 problems could result in delay or loss of revenues, diversion of development resources, damage to the Company's reputation, or increased service and warranty costs, any of which could materially adversely effect the Company's business, operating results, or financial condition. The Company does not currently have any information concerning the Year 2000 compliance status of its customers' business operations, beyond compliance with respect to Clarify products. As is the case with other similarly situated software companies, if the Company's current or future customers fail to achieve Year 2000 compliance or if they divert technology expenditures to address Year 2000 compliance problems, the Company's business, results of operations, or financial condition could be materially adversely affected. In addition, some commentators have predicted significant litigation regarding Year 2000 compliance issues. Due to the unprecedented nature of such litigation, the Company is uncertain whether or to what extent it may be affected by it. The Company is in the process of assessing compliance on plans to develop a contingency plan which is expected to be complete during the third quarter of fiscal 1999. This contingency plan will be for all core business functions to protect against a potential break in continuity of operations in any of its critical operational areas. The cost of developing and implementing such plans is not projected to be material. The Company is also developing replacement and renovation plans as necessary as a result of its internal tests. Euro Conversion The Company is aware of the issues associated with the forthcoming changes in Europe aimed at forming an European economic and monetary union (the "EMU"). One of the changes resulting from this union required EMU member states to irrevocably fix their respective currencies to a new currency, the "Euro", on January 1, 1999. On that day, the Euro became 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 French Franc or Deutschemark, 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 dedicated to properly addressing issues associated with EMU. The Company recognizes that by January 1, 2002, all its customers in the participating countries in Europe will need to have converted all the values in their databases to the Euro, having previously reflected all values in the appropriate local currencies. Furthermore, the Company will ensure that its internal systems will be able to deal with the changes that will be taking place. At this time, it is not possible to say what the costs associated with addressing the issue will be and there can be no assurance that this issue and its related costs will not have a materially adverse effect 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, 15 17 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. Furthermore, certain provisions of the Company's Certificate of Incorporation, Bylaws, Stockholder Rights Plan, 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. However, the Company has signed a lease for a new facility and is planning to move its principal offices to another location in San Jose, California consisting of four buildings totaling 258,048 square feet of space each with a separate lease. The leases for these facilities commence upon substantial completion of the leasehold improvements to each facility with estimated completion dates ranging from May 1999 to August 2000. Each lease term is seven years with three successive five-year renewal options. The lease on the current facility will effectively be terminated upon moving to the new facility. 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, 1998. 16 18 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 Stock Market System under the symbol CLFY. The table below sets forth the high and low closing prices per share of the Company's Common Stock for each quarterly period during the past two fiscal years as reported by the National Association of Securities Dealers, Inc.
QUARTERS ENDED ------------------------------------------------------------------------------- 1997 1998 -------------------------------------- -------------------------------------- MAR. 31 JUNE 30 SEPT. 30 DEC. 31 MAR. 31 JUNE 30 SEPT. 30 DEC. 31 ------- ------- -------- ------- ------- ------- -------- ------- Closing Price: High......................... $52.75 $26.75 $19.13 $15.88 $15.00 $15.19 $14.81 $24.44 Low.......................... $18.75 $ 6.50 $ 9.38 $10.06 $11.63 $11.00 $ 8.25 $ 7.38
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 or purchase recommendations 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 February 26, 1999, the approximate number of common stockholders of record was 149. 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. Furthermore, certain provisions of the Company's Certificate of Incorporation, Bylaws, Stockholder Rights Plan, and of Delaware law, could delay or make more difficult a merger, tender offer or proxy contest involving the Company. 17 19 ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
YEARS ENDED DECEMBER 31, ---------------------------------------------------- 1994 1995 1996 1997 1998 ------- ------- ------- ------- -------- (IN THOUSANDS, EXCEPT PER SHARE DATA) Statements of Operations Data: Revenues: License fees....................... $ 7,001 $15,749 $39,139 $59,214 $ 84,874 Services........................... 5,526 9,148 17,183 29,003 45,636 ------- ------- ------- ------- -------- Total revenues................ 12,527 24,897 56,322 88,217 130,510 ------- ------- ------- ------- -------- Cost of revenues: License fees....................... 400 759 1,409 2,400 2,424 Services........................... 3,419 5,714 10,711 18,149 26,165 ------- ------- ------- ------- -------- Total cost of revenues........ 3,819 6,473 12,120 20,549 28,589 ------- ------- ------- ------- -------- Gross margin.......................... 8,708 18,424 44,202 67,668 101,921 Operating expenses: Product development and engineering...................... 3,951 5,547 10,384 16,777 20,329 Sales and marketing................ 4,162 9,017 20,351 38,054 61,389 General and administrative......... 1,632 2,336 4,920 7,903 10,094 Merger costs....................... -- -- 1,061 -- -- ------- ------- ------- ------- -------- Total operating expenses...... 9,745 16,900 36,716 62,734 91,812 ------- ------- ------- ------- -------- Operating income (loss)............... (1,037) 1,524 7,486 4,934 10,109 Interest and other income (expense), net................................ (57) 109 1,644 1,304 1,507 ------- ------- ------- ------- -------- Income (loss) before income taxes..... (1,094) 1,633 9,130 6,238 11,616 Provision for income taxes............ -- 129 940 2,308 4,298 ------- ------- ------- ------- -------- Net income (loss)..................... $(1,094) $ 1,504 $ 8,190 $ 3,930 $ 7,318 ======= ======= ======= ======= ======== Basic net income (loss) per share..... $ (0.28) $ 0.09 $ 0.41 $ 0.19 $ 0.34 ======= ======= ======= ======= ======== Diluted net income (loss) per share... $ (0.28) $ 0.09 $ 0.38 $ 0.18 $ 0.32 ======= ======= ======= ======= ======== Shares used in per share computations:(1) Basic.............................. 3,975 16,250 20,143 20,909 21,683 ======= ======= ======= ======= ======== Diluted............................ 3,975 17,351 21,768 22,164 22,592 ======= ======= ======= ======= ========
DECEMBER 31, --------------------------------------------------- 1994 1995 1996 1997 1998 ------ ------- ------- ------- -------- (IN THOUSANDS) Balance Sheets Data: Working capital........................ $3,908 $30,129 $35,586 $40,911 $ 58,669 Total assets........................... 9,884 42,283 70,684 86,831 122,600 Long-term obligations.................. 654 1,047 -- -- -- Retained earnings (accumulated deficit)............................ (7,950) (7,672) 1,565 5,492 12,810 Total stockholders' equity............. $4,368 $31,482 $46,945 $57,097 $ 71,319
- --------------- (1) See Note (2) to Consolidated Financial Statements. 18 20 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 from those projected. 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 1999. 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 release publicly any updates to the forward-looking statements included herein after the date of this document. The following table sets forth the percentage of total revenues for certain items in the Company's Consolidated Statements of Income data for the years ended December 31, 1996, 1997 and 1998. PERCENT OF TOTAL REVENUES
YEARS ENDED DECEMBER 31, -------------------------- 1996 1997 1998 ------ ------ ------ Revenues: License fees.............................................. 69.5% 67.1% 65.0% Services.................................................. 30.5 32.9 35.0 ----- ----- ----- Total revenues.................................... 100.0 100.0 100.0 ----- ----- ----- Cost of revenues: License fees.............................................. 2.5 2.7 1.9 Services.................................................. 19.0 20.6 20.0 ----- ----- ----- Total cost of revenues............................ 21.5 23.3 21.9 ----- ----- ----- Gross margin................................................ 78.5 76.7 78.1 Operating expenses: Product development and engineering....................... 18.4 19.0 15.6 Sales and marketing....................................... 36.1 43.1 47.0 General and administrative................................ 8.8 9.0 7.7 Merger costs.............................................. 1.9 -- -- ----- ----- ----- Total operating expenses.......................... 65.2 71.1 70.3 ----- ----- ----- Operating income............................................ 13.3 5.6 7.8 Interest and other income, net.............................. 2.9 1.5 1.1 ----- ----- ----- Income before income taxes.................................. 16.2 7.1 8.9 Provision for income taxes.................................. 1.7 2.6 3.3 ----- ----- ----- Net income.................................................. 14.5% 4.5% 5.6% ===== ===== =====
RESULTS OF OPERATIONS REVENUES Total revenues increased from $56.3 million in 1996 to $88.2 million in 1997 to $130.5 million in 1998, representing year over year increases of 57% and 48%, respectively. The Company does not believe that the percentage increases in revenues achieved in prior periods should necessarily be anticipated in future periods. International revenue accounted for approximately 14%, 10% and 25% of total revenues in 1996, 1997, and 19 21 1998 respectively. No one customer accounted for more than 10% of total revenues in 1996, 1997 or 1998. The Company's revenues are derived primarily from license fees and charges for services, including maintenance, consulting and training. 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. Service revenues consist primarily of maintenance, consulting and training revenues. Consulting services consist primarily of implementation services related to the installation of the Company's software and do not include significant customization to or development of the underlying software code. License Fees. License fee revenues increased from $39.1 million in 1996 to $59.2 million in 1997 to $84.9 million in 1998, representing year over year increases of 51% and 43%, respectively. The increase in license fee revenues was due to further market acceptance of the Company's existing products, continued enhancement of such products and increased breadth of the Company's product offerings. Additionally, the growth was also attributable to 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. The Company expects that license revenues will fluctuate as a percentage of total revenues in the future depending on the timing of new product introductions, customer buying patterns, the Company's pricing actions, competition, and other factors. Further, the Company does not believe that license fee revenues in any one period are indicative of license fee revenues in any future period. Services. Revenues from services increased from $17.2 million in 1996 to $29.0 million in 1997 to $45.6 million in 1998, representing year over year increases of 69% and 57%, respectively. The growth in service revenues was due to an increase in maintenance and maintenance renewals, and to a lesser extent, 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. COST 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 $1.4 million in 1996 to $2.4 million in 1997 and remained at $2.4 million in 1998, representing 4%, 4% and 3% of license fee revenues for 1996, 1997 and 1998, respectively. 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 and related negotiations for such royalty agreements. The dollar amount remained flat for 1998 compared to 1997 due to lower royalties paid to third party software suppliers as a result of renegotiated royalty agreements 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 $10.7 million in 1996 to $18.1 million in 1997 to $26.2 million in 1998, representing 62%, 63% and 57%, respectively, of the related service revenues in 1996, 1997, and 1998. Cost of services consists primarily of costs incurred in providing telephone support, consulting services, shipment of product upgrades and training of customers. 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. 20 22 Operating Expenses Product Development and Engineering. Product development and engineering expenses increased from $10.4 million in 1996 to $16.8 million in 1997 to $20.3 million in 1998, representing 18%, 19% and 16% of total revenues in 1996, 1997 and 1998, respectively. Product development and engineering expenses include expenses associated with the development of new products, enhancements of existing products and quality assurance activities. These expenses 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 $20.4 million in 1996 to $38.1 million in 1997 to $61.4 million in 1998, representing 36%, 43% and 47% of total revenues in 1996, 1997 and 1998, respectively. 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 further expansion of the Company's worldwide sales and marketing organization and 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 1998 compared to 1997 reflects the continuing investment that the Company made during 1998 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 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 $4.9 million in 1996 to $7.9 million in 1997 to $10.1 million in 1998, representing 9% of total revenues in 1996 and 1997 and 8% of total revenues in 1998. General and administrative expenses consist primarily of salaries and benefits, travel expenses, and related overhead costs for the finance, human resources, and executive and administrative personnel of the Company. 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 investments, as well as other items including foreign exchange gains and losses. The Company earned net interest income of $1.6 million, $1.4 million and $1.5 million in 1996, 1997 and 1998 respectively. Interest income earned on excess cash balances decreased from $1.7 million in 1996 to $1.4 million in 1997 and increased to $1.5 million in 1998. Provision for Income Taxes. The Company's effective tax rate for 1996 was 10% and 37% for both 1997 and 1998. The Company's effective tax rate increased to 37% in 1997 compared to 1996 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 21 23 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 often 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 revenue losses. In addition, 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; 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 effect 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, for example, the Company has generally had weaker demand in the first quarter. The foregoing factors make estimating quarterly revenues 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 substantial portion of the Company's expenses are relatively fixed in any given quarter. 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 expansion of international operations, a larger worldwide direct and indirect sales and marketing staff and related marketing expenditures, 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 operating 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 quarters the Company's operating results will be below the expectations of public market analysts and investors. In such event, the market price of the Company's common stock would likely be materially adversely affected. 22 24 The following table sets forth unaudited consolidated statements of income data for each of the eight quarters beginning January 1, 1997 and ending December 31, 1998. 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 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, 1997 1997 1997 1997 1998 1998 1998 1998 -------- -------- --------- -------- -------- -------- --------- -------- (IN THOUSANDS EXCEPT PER SHARE DATA) Statements of Income Data: Revenues................ $19,360 $19,429 $21,891 $27,537 $24,899 $29,826 $34,457 $41,328 Gross Margin............ $14,863 $14,784 $16,553 $21,468 $19,214 $22,978 $27,006 $32,723 Net Income.............. $ 1,953 $ 1,018 $ 293 $ 666 $ 700 $ 1,101 $ 2,008 $ 3,509 Basic Net Income per share................. $ 0.09 $ 0.05 $ 0.01 $ 0.03 $ 0.03 $ 0.05 $ 0.09 $ 0.16 Diluted Net Income per share................. $ 0.09 $ 0.05 $ 0.01 $ 0.03 $ 0.03 $ 0.05 $ 0.09 $ 0.15 Shares used in per share Computations: Basic................... 20,668 20,776 21,084 21,265 21,371 21,602 21,739 22,008 Diluted................. 22,071 21,744 22,269 22,167 22,447 22,462 22,108 23,419
BUSINESS ENVIRONMENT AND RISK FACTORS RECOVERABILITY OF DEFERRED TAX ASSETS Realization of the net deferred tax assets is dependent upon generating sufficient taxable income prior to the expiration of loss carryforwards. Although realization is not assured, management believes that it is more likely than not that all of the net deferred tax assets will be realized. In the event that the Company does not show profitability in the subsequent fiscal quarters, the Company may be required to write off portions of the net deferred tax assets previously recognized up to the entire amount of $5.7 million. YEAR 2000 COMPLIANCE As is true for most companies, the Year 2000 computer issue creates a risk for the Company. If systems do not correctly recognize date information when the year changes to 2000, there could be an adverse impact on the Company's operations. For example, software with date-sensitive functions that is not Year 2000 compliant may not be able to distinguish whether "00" means 1900 or 2000, which may result in failures or the creation of erroneous results. The Company is aware of the issues associated with the programming code in existing computer systems as the year 2000 approaches and has formed a task force to address its Year 2000 readiness. Project The Company's Year 2000 project is divided into four major sections -- Information Technology (including both hardware systems and application software), Product (including embedded software), Facilities (such as security system and building equipment), and Suppliers. The general phases common to all sections are (1) inventorying Year 2000 items; (2) assigning risks to identified items as fatal, critical or marginal; (3) assessing the Year 2000 compliance of items; (4) testing of items; and (5) repairing, renovating or replacing fatal or critical items that are determined not to be Year 2000 compliant. 23 25 Product The Company has completed all phases of the Product section. The Company's products have been developed from inception with consideration to the following Year 2000 issues: (1) General integrity -- no value for current date will cause interruptions in desired operations. (2) Data integrity -- all manipulations of time-related data will produce desired results for all valid date values within the application domain. (3) Implicit century -- for any date element represented without century, the correct century is unambiguous for all manipulations involving that element. (4) Leap year -- the product recognizes Year 2000 as a leap year. The Company's current products meet all the requirements for general integrity, data integrity, implicit century and recognize Year 2000 as a leap year. As an added measure of security, the Company is negotiating a contract with an independent third-party for certification of compliancy for its Clarify FrontOffice 98(TM) suite. The estimated completion of the results of the third-party certification is April, 1999. Information Technology The Company has completed the first three phases of the Information Technology section. A hardware and software inventory has been conducted and relevant suppliers have been rated fatal, critical or marginal. Based on the rating and other factors, a certification completion date has been assigned to each item. Available vendors' statements of compliance have also been reviewed. Internal testing plans have been developed for the Company's core business systems. The Company has completed testing of its critical business systems and is in the process of determining what, if any, remediation is required for such systems. The Company expects to complete its testing of ancillary systems by May 31, 1999. Since the systems and technologies used internally have been developed in the late 1980's and 1990's, the Company does not anticipate having major Year 2000 issues in its Information Technology section. Facilities and Suppliers The Company did not test and therefore does not warranty any third party elements or applications distributed as part of Clarify FrontOffice 98 (CFO98) Bill of Materials, when such elements or applications are run in standalone mode. Clarify has tested, and therefore certifies to be Year 2000 complaint, only the custom implementations of third party elements or applications, accessible only from within the CFO98 application and only when CFO98 is properly installed, properly used and unmodified by clients. The Company is, however, seeking assurances from all its vendors that licensed software contained within the CFO98 distribution is Year 2000 compliant. The Company is moving its facilities in May 1999 and is requiring all products and facilities vendors participating in the new facility to warranty their products as well as their company status as being Year 2000 ready. Also, the Company has completed approximately 90% of the inventorying, prioritizing and assessing phases and approximately 50% of the testing and repairing, renovating and replacing phases of the Suppliers section, respectively. The Company does not believe it is in high risk with regard to these two sections and plans to complete all phases by April 30, 1999. The total cost associated with required modifications to become Year 2000 compliant is not expected to be material to the Company's financial position. The estimated cost of the Year 2000 project is approximately $400,000. The use of internal resources or existing infrastructure is not accounted for in this estimate. The total amount expended through December 31, 1998 was approximately $45,000 to purchase lab testing equipment. The estimated future cost of completing the Year 2000 project is estimated to be approximately an additional $105,000 to augment staff and to purchase additional testing equipment and approximately an additional $250,000 to obtain independent third-party compliance certification on the company's current products. The Company's has and plans to fund its Year 2000 project from its operating cash flows. The estimated cost of the Company's Year 2000 project does not represent a percentage of the Company's planned 24 26 1999 budget for computer hardware and software. The Company does not anticipate that any existing Information Technology projects will need to be deferred as of part of its Year 2000 efforts. Though the Company's Year 2000 project is expected to reduce the Company's level of uncertainty about Year 2000 problems significantly, failure to correct known or unknown material Year 2000 problems could result in delay or loss of revenues, diversion of development resources, damage to the Company's reputation, or increased service and warranty costs, any of which could materially adversely effect the Company's business, operating results, or financial condition. The Company does not currently have any information concerning the Year 2000 compliance status of its customers' business operations, beyond compliance with respect to Clarify products. As is the case with other similarly situated software companies, if the Company's current or future customers fail to achieve Year 2000 compliance or if they divert technology expenditures to address Year 2000 compliance problems, the Company's business, results of operations, or financial condition could be materially adversely affected. In addition, some commentators have predicted significant litigation regarding Year 2000 compliance issues. Due to the unprecedented nature of such litigation, the Company is uncertain whether or to what extent it may be affected by it. The Company is in the process of assessing compliance on plans to develop a contingency plan which is expected to be complete during the third quarter of fiscal 1999. This contingency plan will be for all core business functions to protect against a potential break in continuity of operations in any of its critical operational areas. The case of developing and implementing such plans is not projected to be material. The Company is also developing replacement and renovation plans as necessary as a result of its internal tests. EURO CONVERSION The Company is aware of the issues associated with the forthcoming changes in Europe aimed at forming an European economic and monetary union (the "EMU"). One of the changes resulting from this union required EMU member states to irrevocably fix their respective currencies to a new currency, the "Euro", on January 1, 1999. On that day, the Euro became 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 French Franc or Deutschemark, 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 dedicated to properly addressing issues associated with EMU. The Company recognizes that by January 1, 2002, all its customers in the participating countries in Europe will need to have converted all the values in their databases to the Euro, having previously reflected all values in the appropriate local currencies. Furthermore, the Company will ensure that its internal systems will be able to deal with the changes that will be taking place. At this time, it is not possible to say what the costs associated with addressing the issue will be and there can be no assurance that this issue and its related costs will not have a materially adverse effect on the Company's business, operating results, and financial condition. FINANCIAL CONDITION LIQUIDITY AND CAPITAL RESOURCES At December 31, 1998, the Company's primary sources of liquidity are cash, cash equivalents and investments totaled $57.7 million representing approximately 47% 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". 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 25 27 the event that cash generated from operating activities are not 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. CHANGES IN FINANCIAL CONDITION Cash, cash equivalents and investments at December 31, 1998 totaled $57.7 million representing an increase of 59% from December 31, 1997. Operations and changes in exchange rates generated $20.5 million. Investing activities used $8.6 million including a net increase in investments of $2.1 million, $5.5 million was used to acquire property and equipment (net of proceeds from disposition of property and equipment) and $1.0 million was used for other, net. Financing activities generated $7.5 million from sales of shares under employee benefit plans. Net cash of $13.2 million was provided by operating activities in 1996, net cash of $2.7 million was used for operating activities in 1997 and net cash provided by operating activities in 1998 was $21.2 million. In 1996, net cash provided by operating activities consisted primarily of net income, depreciation and amortization and increases in accounts payable, accrued liabilities and unearned revenue, which was partially offset by increases in accounts receivable and deferred income taxes. Net cash used in operating activities in 1997 resulted primarily from increases in accounts receivable and deferred income taxes partially offset by net income, depreciation and amortization, and increases in accounts payable, payroll related accruals, and other accrued liabilities. Net cash provided by operating activities in 1998 consisted primarily of net income, depreciation and amortization, increases in unearned revenue, payroll related accruals and other liabilities, partially offset by increases in accounts receivable and deferred income taxes. The increases in accounts receivable for all three years is primarily due to the overall growth in customer licensing activity, more of the Company's contracting activity concentrated toward the end of each quarter and extended payment terms to certain creditworthy customers. The increases in unearned revenue for all three years is due primarily due to increased sales of maintenance contracts associated with increased sales volumes. Net cash used for investing activities was $12.3 million, $26.1 million and $8.6 million in 1996, 1997 and 1998, respectively primarily resulting from net purchases of investments and purchases of property and equipment. Net cash provided by financing activities was $1.8 million, $6.1 million and $7.5 million in 1996, 1997 and 1998, respectively. The net cash provided by financing activities in all three years 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. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The following discussion about the Company's risk-management activities includes "forward looking statements" that involve risk and uncertainties. Actual results could differ materially from those projected in the forward-looking statements. The following tables summarize the financial instruments and derivative commodity instruments held by the Company at December 31, 1998, which are sensitive to changes in interest rates and foreign exchange rates. The Company uses forward foreign exchange contracts to manage these primary market exposures associated with underlying assets, liabilities and anticipated transactions. The Company uses these instruments to reduce risk by essentially creating offsetting market exposures. The instruments held by the Company are not leveraged and are held for purposes other than trading. 26 28 In the normal course of business, the Company also faces risks that are either nonfinancial or nonquantifiable. Such risks principally included country risk, credit risk, and legal risk, and are not represented in the following tables. INTEREST RATE SENSITIVITY This table presents descriptions of the maturity dates of the financial instruments that were held by the company at December 31, 1998 and which are sensitive to changes in interest rates.
DECEMBER 31, ----------------------------------- 1999 2000 TOTAL FAIR VALUE (IN THOUSANDS) ------- ---- ---------------- State and municipal securities...................... $21,652 $516 $22,168 US Government Agency securities..................... 2,065 -- 2,065 Corporate debt securities........................... 2,200 -- 2,200 ------- ---- ------- Total..................................... $25,917 $516 $26,433 ======= ==== ======= Average interest rate............................... 3.79% 4.99%
FOREIGN CURRENCY EXCHANGE RISK The Company has foreign subsidiaries through which the Company's products are sold in various global markets. As a result, the Company's earnings and cash flows are exposed to fluctuations in foreign currency exchange rates. The Company attempts to limit these exposures through operational strategies and financial market instruments. The Company utilizes hedge instruments, primarily forward contracts with maturities of approximately 30 days, to manage its exposure associated with firm intercompany positions denominated in nonfunctional currencies. The Company does not use derivative financial instruments for trading purposes. The Company had $10.3 million of short-term forward exchange contracts, denominated in major foreign currencies, which approximated the fair value of such contracts and their underlying transactions at December 31, 1998. Gains and losses related to these instruments at December 31, 1998 were not material. The Company does not anticipate any material adverse effect on its consolidated financial position, results of operations, or cash flows resulting from the use of these instruments. There can be no assurance that these strategies will be effective or that transaction losses can be minimized or forecasted accurately. The following table provides information about the Company's foreign exchange forward contracts at December 31, 1998. The table presents the value of the contracts in U.S. dollars at the contract exchange rate as of the contract maturity date. Due to the short-term nature of these contracts, the fair value approximates the weighted average contractual foreign currency exchange rate value of the contracts at December 31, 1998. Forward contracts to sell foreign currencies for U.S. dollars: (IN THOUSANDS, EXCEPT CONTRACT RATES)
AVERAGE U.S. CONTRACT NOTIONAL FAIR RATE AMOUNT VALUE -------- -------- ------ Japanese Yen........................................... 117.3500 $5,198 $5,336 German Deutschemark.................................... 1.6661 2,024 2,023 British Pound Sterling................................. 1.6497 1,815 1,843 French Franc........................................... 5.5892 1,109 1,103
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The Consolidated Balance Sheets of the Company as of December 31, 1997 and 1998 and the Consolidated Statements of Income, Stockholders' Equity and Cash Flows for each of the three years in the period ended December 31, 1998, together with the related notes and the report of PricewaterhouseCoopers LLP, 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. 27 29 CLARIFY INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE ---- Report of Independent Accountants........................... 29 Consolidated Financial Statements: Consolidated Balance Sheets as of December 31, 1997 and 1998................................................... 30 Consolidated Statements of Income for each of the three years in the period ended December 31, 1998............ 31 Consolidated Statements of Stockholders' Equity for each of the three years in the period ended December 31, 1998................................................... 32 Consolidated Statements of Cash Flows for each of the three years in the period ended December 31, 1998...... 33 Notes to Consolidated Financial Statements.................. 34
28 30 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of Clarify, Inc.: In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income, of stockholders' equity and of cash flows present fairly, in all material respects, the financial position of Clarify, Inc. and its subsidiaries at December 31, 1997 and 1998, and the results of their operations and their cash flows in each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. 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 of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audits 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, assessing the accounting principles used and significant estimates made by management and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. PricewaterhouseCoopers LLP San Jose, California January 19, 1999, except for Note 11 for which the date is March 12, 1999 29 31 CLARIFY INC. CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT PER SHARE DATA) ASSETS
DECEMBER 31, ------------------- 1997 1998 ------- -------- Current assets: Cash and cash equivalents................................. $11,956 $ 31,271 Short-term investments.................................... 19,239 25,917 Accounts receivable, net of allowances of $1,310 in 1997 and $2,757 in 1998..................................... 32,854 45,224 Prepaid expenses and other current assets................. 2,463 2,604 Deferred tax assets....................................... 4,133 4,934 ------- -------- Total current assets.............................. 70,645 109,950 Property and equipment, net................................. 8,611 8,437 Long-term investments....................................... 5,167 516 Non-current deferred tax assets............................. 1,559 1,860 Other non-current assets.................................... 849 1,837 ------- -------- Total Assets...................................... $86,831 $122,600 ======= ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable.......................................... $ 5,047 $ 5,826 Payroll related accruals.................................. 6,833 9,589 Other accrued liabilities................................. 4,269 8,800 Income taxes payable...................................... 1,851 1,980 Unearned revenue.......................................... 11,734 25,086 ------- -------- Total current liabilities......................... 29,734 51,281 ------- -------- Commitments (Note 6) Stockholders' equity: Preferred stock, $.0001 par value, 5,000 shares authorized; none outstanding Common stock, $.0001 par value, 55,000 shares authorized; shares issued and outstanding: 21,335 in 1997 and 22,168 in 1998............ 2 2 Additional paid-in-capital................................ 51,640 59,127 Accumulated other comprehensive income.................... 28 (602) Deferred compensation..................................... (65) (18) Retained earnings......................................... 5,492 12,810 ------- -------- Total stockholders' equity........................ 57,097 71,319 ------- -------- Total Liabilities and Stockholders' Equity........ $86,831 $122,600 ======= ========
The accompanying notes are an integral part of these consolidated financial statements. 30 32 CLARIFY INC. CONSOLIDATED STATEMENTS OF INCOME (IN THOUSANDS, EXCEPT PER SHARE DATA)
YEARS ENDED DECEMBER 31, --------------------------- 1996 1997 1998 ------- ------- ------- Revenues: License fees.............................................. $39,139 $59,214 $84,874 Services.................................................. 17,183 29,003 45,636 ------- ------- ------- Total revenues.................................... 56,322 88,217 130,510 ------- ------- ------- Cost of revenues: License fees.............................................. 1,409 2,400 2,424 Services.................................................. 10,711 18,149 26,165 ------- ------- ------- Total cost of revenues............................ 12,120 20,549 28,589 ------- ------- ------- Gross margin................................................ 44,202 67,668 101,921 Operating expenses: Product development and engineering....................... 10,384 16,777 20,329 Sales and marketing....................................... 20,351 38,054 61,389 General and administrative................................ 4,920 7,903 10,094 Merger costs.............................................. 1,061 -- -- ------- ------- ------- Total operating expenses.......................... 36,716 62,734 91,812 ------- ------- ------- Operating income............................................ 7,486 4,934 10,109 Interest income............................................. 1,653 1,437 1,536 Interest expense............................................ (9) (6) (31) Other income (expense), net................................. -- (127) 2 ------- ------- ------- Income before income taxes.................................. 9,130 6,238 11,616 Provision for income taxes.................................. 940 2,308 4,298 ------- ------- ------- Net income.................................................. $ 8,190 $ 3,930 $ 7,318 ======= ======= ======= Basic net income per share.................................. $ 0.41 $ 0.19 $ 0.34 ======= ======= ======= Shares used in per share computation -- basic............... 20,143 20,909 21,683 ======= ======= ======= Diluted net income per share................................ $ 0.38 $ 0.18 $ 0.32 ======= ======= ======= Shares used in per share computation -- diluted............. 21,768 22,164 22,592 ======= ======= =======
The accompanying notes are an integral part of these consolidated financial statements. 31 33 CLARIFY INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (IN THOUSANDS)
ACCUMULATED RETAINED COMMON STOCK ADDITIONAL OTHER DEFERRED EARNINGS TOTAL --------------- PAID-IN- COMPREHENSIVE STOCK ACCUMULATED COMPREHENSIVE SHARES AMOUNT CAPITAL INCOME COMPENSATION (DEFICIT) TOTAL INCOME ------ ------ ---------- ------------- ------------ ----------- ------- ------------- Balances, January 1, 1996... 19,869 $2 $39,316 $ (5) $(159) $(7,672) $31,482 Net income.................. 8,190 8,190 $8,190 Other comprehensive income, net of tax Translation adjustment................ (61) (61) (61) ------ Total comprehensive income............ $8,129 ====== Exercise of stock options... 442 224 224 Employee stock purchases.... 289 1,845 1,845 Amortization of deferred stock option compensation.............. 47 47 Forgiveness of notes payable to stockholders........... 1,047 1,047 Tax benefit from exercise of nonqualified stock options................... 4,171 4,171 ------ -- ------- ----- ----- ------- ------- Balances, December 31, 1996...................... 20,600 2 45,556 (66) (112) 1,565 46,945 Net income.................. 3,930 3,930 $3,930 Other comprehensive income, net of tax Translation adjustment................ 72 72 72 Change in unrealized gain on investment........... 22 22 22 ------ Total comprehensive income............ $4,024 ====== Exercise of stock options... 305 436 436 Employee stock purchases.... 463 3,370 3,370 Amortization of deferred stock option compensation.............. 47 47 Common stock repurchased for cash...................... (33) (23) (23) Tax benefit from exercise of nonqualified stock options................... 2,301 2,301 Cumulative translation adjustment................ (3) (3) ------ -- ------- ----- ----- ------- ------- Balances, December 31, 1997...................... 21,335 2 51.640 28 (65) 5,492 57,097 Net income.................. 7,318 7,318 $7,318 Other comprehensive income, net of tax Translation adjustment................ (618) (618) (618) Change in unrealized gain on investment........... (12) (12) (12) ------ Total comprehensive income............ $6,688 ====== Exercise of stock options... 369 1,383 1,383 Employee stock purchases.... 477 4,348 4,348 Amortization of deferred stock option compensation.............. 47 47 Common stock repurchased for cash...................... (13) (3) (3) Tax benefit from exercise of nonqualified stock options................... 1,621 1,621 Fair value of options for services.................. 138 138 ------ -- ------- ----- ----- ------- ------- Balances, December 31, 1998...................... 22,168 $2 $59,127 $(602) $ (18) $12,810 $71,319 ====== == ======= ===== ===== ======= =======
The accompanying notes are an integral part of these consolidated financial statements. 32 34 CLARIFY INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
YEARS ENDED DECEMBER 31, -------------------------------- 1996 1997 1998 -------- -------- -------- Cash flows from operating activities: Net income............................................... $ 8,190 $ 3,930 $ 7,318 Adjustments to reconcile net income to net cash provided by (used for) operating activities: Depreciation and amortization......................... 1,750 4,666 5,689 Provision for doubtful accounts....................... 596 874 2,285 Deferred income taxes................................. (801) (1,909) (1,101) Loss on disposal of assets............................ 133 271 -- Other................................................. (61) 67 94 Changes in assets and liabilities: Accounts receivable................................. (11,441) (15,913) (13,570) Prepaid and other current assets.................... (663) (707) (25) Accounts payable.................................... 2,811 1,157 765 Payroll related accruals............................ 2,777 2,085 2,693 Other accrued liabilities........................... 2,419 3,702 4,530 Unearned revenue.................................... 7,462 (955) 12,489 -------- -------- -------- Net cash provided by (used for) operating activities.......................................... 13,172 (2,732) 21,167 -------- -------- -------- Cash flows from investing activities: Purchase of property and equipment....................... (8,048) (5,092) (5,521) Purchase of investments.................................. (5,470) (31,483) (21,823) Sale and maturities of investments....................... 1,995 10,519 19,690 Increase in other assets................................. (758) (9) (972) -------- -------- -------- Net cash used for investing activities................ (12,281) (26,065) (8,626) -------- -------- -------- Cash flows from financing activities: Payments of capital lease obligations.................... (81) -- -- Proceeds from issuance of common stock, net.............. 2,069 6,084 7,487 Borrowings under (payments of) notes payable............. (215) -- -- -------- -------- -------- Net cash provided by financing activities............. 1,773 6,084 7,487 -------- -------- -------- Net increase in cash and cash equivalents.................. 2,664 (22,713) 20,028 Effect of foreign exchange rate changes on cash............ -- 192 (713) Cash and cash equivalents, beginning of year............... 31,813 34,477 11,956 -------- -------- -------- Cash and cash equivalents, end of year................... $ 34,477 $ 11,956 $ 31,271 ======== ======== ======== Supplemental disclosure of cash flow information: Cash paid during the year for interest................... $ 9 $ 6 $ 31 ======== ======== ======== Cash paid during the year for taxes...................... $ 464 $ 233 $ 3,819 ======== ======== ======== Supplemental disclosure of noncash investing and financing activities: Change in unrealized holding gains on investments.......... $ 22 $ (12) ======== ======== Tax benefit from exercise of nonqualified stock options.... $ 4,171 $ 2,301 $ 1,621 ======== ======== ======== Forgiveness of notes payable to stockholders............... $ 1,047 ========
The accompanying notes are an integral part of these consolidated financial statements. 33 35 CLARIFY INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. BUSINESS OF THE COMPANY Clarify, Inc. (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. 2. SIGNIFICANT ACCOUNTING POLICIES Principles 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. 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 in accumulated other comprehensive income. Gains or losses resulting from foreign currency transactions are included in the results of operations. 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. Financial Instruments 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. Short-term and long-term investments are classified as available-for-sale and are carried at fair market value. Unrealized holding gains and losses on such investments are reported, net of related taxes, as a part of accumulated other comprehensive income. Realized gains and losses on sales of such investments are reported in earnings and computed using the specific identification cost method. The amounts reported for cash equivalents, accounts receivables and other financial instruments are considered to approximate fair values based upon comparable market information available at the respective balance sheet dates. The financial instruments that potentially subject the Company to concentrations of credit risk comprise principally cash investments and trade accounts receivable. Cash and cash equivalents and investments are, for the most part, custodied with three 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. 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. In the normal course of business, the Company has exposures to foreign currency fluctuations arising from foreign currency sales and purchases and intercompany transactions, among other things. The Company 34 36 CLARIFY INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) uses foreign exchange forward contracts to limit its exposure to foreign exchange losses arising from foreign currency payables and receivables. The Company evaluates its net exposure therefrom and enters into forward contracts to hedge the net exposure over a specified amount. These contracts are executed with credit-worthy financial institutions and are denominated in currencies of major industrial nations. Gains and losses on these contracts serve as hedges in that they offset fluctuations that would otherwise impact the Company's financial results. Costs associated with entering into such contracts are generally amortized over the life of the instruments and are not material to the Company's financial results. At December 31, 1998, the Company had foreign currency forward contracts outstanding to hedge foreign currency intercompany accounts receivable and accounts payable. These contracts typically have 30 day maturities and are intended to reduce exposure to foreign currency exchange risk. The total aggregate fair value of and the net unrealized loss on foreign exchange contracts were $10.3 million and $0.2 million, respectively. Revenue Recognition The Company's revenue is derived from primarily two sources, across many industries: (i) product license revenue, derived primarily from product sales to customers, including large scale enterprises; and (ii) service and support revenue, derived primarily from providing software updates, support, training and consulting services to customers. The Company adopted the provisions of Statement of Position (SOP) 97-2 "Software Revenue Recognition", as amended by SOP 98-4 "Deferral of the Effective Date of Certain Provisions of SOP 97-2", effective January 1, 1998. SOP 97-2 supersedes SOP 91-1 "Software Revenue Recognition", and delineates the accounting for software product and maintenance revenue. Under SOP 97-2, the Company recognizes product revenue upon shipment if a signed contract exists, the fee is fixed and determinable and collection of resulting receivables is probable. In 1997 and 1996, the Company's revenue recognition policy was the same as set forth above. For contracts with multiple obligations (e.g. deliverable and undeliverable products, maintenance and other services), the Company allocates revenue to each component of the contract based on objective evidence of its fair value, which is specific to the Company, or for products not being sold separately, the price established by management. The Company recognizes revenue allocated to undelivered products when the criteria for product revenue set forth above are met. The Company recognizes revenue allocated to maintenance fees for ongoing customer support and product updates ratably over the period of the maintenance contract. Payments for maintenance fees are generally made in advance and are non-refundable. For revenue allocated to training and consulting services, the Company recognizes revenue as the related services are performed. Comprehensive Income In accordance with Statement of Financial Accounting Standards (SFAS) No. 130 "Reporting Comprehensive Income", the Company has elected to display the total nonowner changes in equity as "Accumulated Other Comprehensive Income" on the Consolidated Balance Sheets and in the Consolidated Statements of Stockholders' Equity. Comprehensive income is the change in equity of a business enterprise 35 37 CLARIFY INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) resulting from transactions from nonowner sources. The components of accumulated other comprehensive income for the two years ended December 31, 1998 are as follows (in thousands):
1997 1998 ---- ----- Unrealized net holding gain on investments.................. $22 $ 10 Cumulative translation adjustment........................... 6 (612) --- ----- Accumulated other comprehensive income...................... $28 $(602) === =====
Earnings per share The Company calculates earnings per share in accordance with the requirements of Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings per Share". Basic earnings per share is computed based on the weighted average number of shares outstanding during the period. Diluted earnings per share is computed based on the weighted average number of shares outstanding during the period increased by the effect of dilutive stock options and stock purchase contracts, using the treasury stock method. The following table presents information necessary to calculate basic and diluted earnings per common and common equivalent share:
1996 1997 1998 ------- ------- ------- (IN THOUSANDS) Weighted average shares outstanding -- Basic.......... 20,143 20,909 21,683 Dilutive common stock equivalents..................... 1,625 1,255 909 ------- ------- ------- Weighted average shares and equivalents -- Diluted.... 21,768 22,164 22,592 ======= ======= ======= Net income for basic and diluted earnings per share computation......................................... $ 8,190 $ 3,930 $ 7,318 ======= ======= =======
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 income. 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. 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. 36 38 CLARIFY INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Advertising Costs Advertising costs are expensed as incurred and totaled $258,000, $690,000, and $972,000 during the years ended December 31, 1996, 1997 and 1998, respectively. 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 stockholders 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. 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. Recently Issued Accounting Standards In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," which establishes accounting and reporting standards for derivative instruments and hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. Management has not yet evaluated the effects of this change on its operations. SFAS No. 133 will be effective for the Company's fiscal year 2000. Management believes that this statement will not have a significant impact on the Company. Reclassifications Certain prior year amounts have been reclassified to conform with the current year presentation. Such reclassifications had no impact on net income or stockholders' equity for any year presented. 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 outstanding capital stock 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. 37 39 CLARIFY INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Revenues and net income (loss) of the separate and combined companies are as follows (in thousands): Three months ended March 31, 1996: Revenues: The Company............................................... $7,784 Metropolis................................................ 1,170 ------ Combined.................................................. $8,954 ====== Net income (loss) The Company............................................... $ 959 Metropolis................................................ (91) ------ Combined.................................................. $ 868 ======
4. INVESTMENTS Investments at December 31, 1997 and 1998 are summarized below:
GROSS GROSS AMORTIZED UNREALIZED UNREALIZED ESTIMATED COST GAINS LOSSES FAIR VALUE --------- ---------- ---------- ---------- (IN THOUSANDS) DECEMBER 31, 1997: State and municipal securities.......... $19,346 $20 $-- $19,366 US Gov't. Agency securities............. 4,038 2 -- 4,040 Corporate debt securities............... 1,000 -- -- 1,000 ------- --- --- ------- $24,384 $22 $-- $24,406 ======= === === ======= DECEMBER 31, 1998: State and municipal securities.......... $22,160 $10 $(2) $22,168 US Gov't. Agency securities............. 2,063 2 -- 2,065 Corporate debt securities............... 2,200 -- -- 2,200 ------- --- --- ------- $26,423 $12 $(2) $26,433 ======= === === =======
At December 31, 1998, investments with maturity dates of 90 days or less totaled $20.5 million, investments with maturity dates ranging from 91 days to one year totaled $5.4 million, and investments with maturity dates ranging from one to three years totaled $0.5 million. 5. PROPERTY AND EQUIPMENT Property and equipment consist of the following (in thousands):
DECEMBER 31, ------------------- 1997 1998 ------- -------- Leasehold improvements.......................... $ 2,242 $ 2,395 Equipment....................................... 9,710 13,077 Furniture and fixtures.......................... 2,750 3,278 Purchased software.............................. 967 2,203 ------- -------- 15,669 20,953 Less accumulated depreciation................... (7,058) (12,516) ------- -------- Property and equipment, net..................... $ 8,611 $ 8,437 ======= ========
38 40 CLARIFY INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 6. COMMITMENTS The Company leases its principal operating facility and off-site sales offices under operating leases expiring no later than 2006. Future minimum lease payments under these leases, as of December 31, 1998, are as follows (in thousands): 1999............................................... $ 5,753 2000............................................... 7,533 2001............................................... 7,436 2002............................................... 7,134 2003............................................... 7,224 Thereafter......................................... 18,905 ------- $53,985 =======
Rent expense was approximately $1,773,000, $4,150,000 and $4,790,000 in 1996, 1997 and 1998, respectively. 7. STOCKHOLDERS' EQUITY Stockholder Rights Plan In June 1997, the Company's Board of Directors adopted a Stockholder Rights Plan (the "Rights Plan") in which preferred stock purchase rights were 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 each stockholder to buy one-one thousandth 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 then 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, 1998, approximately 5,315,300 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 39 41 CLARIFY INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 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 100% or 85%, respectively, 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 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 ten years after grant. 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 Plan with exercise prices in excess of the fair market value on May 9, 1997. Each employee or officer 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 shares subject to stock options were repriced pursuant to this program. 1999 Non-Employee Directors' Option Plan In October 1998, the Board of Directors approved the new Non-Employee Directors' Option Plan (subject to stockholder approval) to include an initial pool of 300,000 shares available for issuance under the plan. This plan will replace the automatic grant program of the 1995 Stock Option/Stock Issuance Plan. Options are exercisable at times and in increments as specified by the Plan Administrator and generally expire 10 years after grant date. The new plan has a term of 10 years. There were no repricings of outstanding stock options during the year ended December 31, 1998. The share reserve for the 1995 Plan automatically increases on the first trading day in each of the 1996 (1,048,200 shares reserved), 1997 (1,158,600 shares reserved), 1998 (1,226,200 shares reserved), and 1999 (1,351,400 shares reserved) 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. 40 42 CLARIFY INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Option activity for all plans is summarized as follows:
OUTSTANDING OPTIONS ------------------------------------- NUMBER OF WEIGHTED AVERAGE SHARES EXERCISE PRICE PER SHARE ---------- ------------------------ Outstanding, January 1, 1996 (1,744,700 exercisable at a weighted average price of $1.35).................. 1,833,400 $ 1.57 Options granted....................................... 1,365,800 26.46 Options exercised..................................... (442,100) 0.51 Options cancelled..................................... (188,100) 13.12 ---------- ------ Outstanding, December 31, 1996 (1,296,100 exercisable at a weighted average price of $2.06)............... 2,569,000 14.14 Options granted....................................... 2,276,700 13.74 Options exercised..................................... (305,000) 1.42 Options cancelled..................................... (1,351,800) 26.81 ---------- ------ Outstanding, December 31, 1997 (1,120,500 exercisable at a weighted average price of $4.02)............... 3,188,900 9.71 Options granted....................................... 2,635,300 12.88 Options exercised..................................... (369,100) 3.88 Options cancelled..................................... (597,500) 11.99 ---------- ------ Outstanding, December 31, 1998 (1,343,100 exercisable at a weighted average price of $8.30)............... 4,857,600 $11.59 ========== ======
The weighted average fair value of options granted for 1996, 1997, and 1998 was $12.82, $5.88, and $7.75, respectively. At December 31, 1998, approximately 10,000 shares of common stock issued under the 1991 Plan were subject to repurchase. At December 31, 1998, an aggregate of approximately 455,100 shares were available for future grant under the 1991 and 1995 plans. The following information applies to options outstanding at December 31, 1998:
OPTIONS OUTSTANDING ------------------------------------------- WEIGHTED OPTIONS EXERCISABLE AVERAGE ---------------------------- REMAINING WEIGHTED WEIGHTED RANGE OF NUMBER CONTRACTUAL AVERAGE NUMBER AVERAGE EXERCISE PRICES OUTSTANDING LIFE (YEARS) EXERCISE PRICE EXERCISABLE EXERCISE PRICE - --------------- ----------- ------------ -------------- ----------- -------------- $0.11 - 3.56.. 510,700 6.23 $ 1.67 510,700 $1.67 4.00 - 8.69... 563,100 8.81 7.77 149,300 6.31 9.22 - 11.25... 510,100 8.84 10.87 124,100 11.04 11.31 - 12.25... 623,600 9.07 11.87 89,600 11.61 12.31 - 13.44... 651,400 9.21 13.05 25,400 12.95 13.50 - 13.50... 695,900 8.28 13.50 283,200 13.50 13.56 - 14.81... 556,300 9.15 14.17 48,500 14.32 14.88 - 16.88... 508,900 8.96 15.00 35,900 15.45 17.00 - 24.13... 236,600 8.75 19.73 75,900 20.08 34.50 - 34.50... 1,000 8.07 34.50 500 34.50 - -------------- --------- ---- ------ --------- ----- $0.11 - 34.50.. 4,857,600 8.60 $11.59 1,343,100 $8.30 ============== ========= ==== ====== ========= =====
41 43 CLARIFY INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Employee Stock Purchase Plan At December 31, 1998, the Company had a total of approximately 642,000 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, 1997 and 1998, approximately 289,000, 463,000 and 477,000 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 all awards since January 1, 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):
1996 1997 1998 ------ ------ ----- Pro forma net income (loss)....................... $6,398 $ (849) $ 434 ====== ====== ===== Pro forma basic net income (loss) per share....... $ 0.32 $(0.04) $0.02 ====== ====== ===== Pro forma diluted net income (loss) per share..... $ 0.29 $(0.04) $0.02 ====== ====== =====
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:
1996 1997 1998 ---- ---- ---- Risk free interest rate................................ 6.00% 5.74% 5.15% Expected life (years).................................. 4 4 4 Volatility............................................. 0.55 0.55 0.77 Dividends yield........................................ 0.00 0.00 0.00
The fair value of employees' stock purchase rights under the ESPP was estimated using the Black-Scholes model with the following assumptions:
1996 1997 1998 -------- -------- ---- Risk free interest rate........................ 6.00% 5.74% 5.50% Expect life (months)........................... 6 and 12 6 and 12 6 Volatility..................................... 0.55 0.55 0.77 Dividends yield................................ 0.00 0.00 0.00
42 44 CLARIFY INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 8. INCOME TAXES The components of the provision for income taxes are as follows (in thousands):
1996 1997 1998 ------- ------ ------ Federal -- current payable...................... $ 152 $3,185 $5,284 Federal -- deferred............................. 3,172 (802) (735) State -- current payable........................ 5 452 686 State -- deferred............................... 612 (142) 61 Foreign -- deferred............................. -- (961) (1,385) Valuation allowance............................. (3,001) 576 387 ------- ------ ------ Provision for income tax........................ $ 940 $2,308 $4,298 ======= ====== ======
The reconciliation of the statutory federal income tax rate to the effective rate is as follows (as a percent of pretax income):
1996 1997 1998 ---- ---- ---- Federal statutory tax rate.............................. 34% 34% 35% State tax, net of federal tax benefit................... 6 5 4 Permanent differences................................... 3 (3) 1 Tax credits utilized.................................... (4) (4) (5) Utilization of net operating losses..................... (19) 0 0 Change in valuation allowance........................... (14) 9 3 Other................................................... 4 (4) (1) --- -- -- Provision for income tax................................ 10% 37% 37% === == ==
The significant components of deferred tax assets are as follows (in thousands):
1997 1998 ------ ------ Foreign loss carryforwards................................. $ 961 $2,124 Tax credit carryforwards................................... 1,360 600 Reserves................................................... 862 1,525 Accrued expenses........................................... 1,798 1,367 Deferred revenue........................................... 788 2,232 Other...................................................... 499 (91) Valuation allowance........................................ (576) (963) ------ ------ Net deferred tax assets.................................... $5,692 $6,794 ====== ====== Current deferred tax assets................................ $4,133 $4,934 Non-current deferred tax assets............................ 1,559 1,860 ------ ------ Net deferred tax assets.................................... $5,692 $6,794 ====== ======
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, 1998, a valuation allowance of approximately $963,000 has been recorded 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. At December 31, 1998, the Company had a foreign loss carryforwards of $6,069,000 and state tax credit carryforwards totalling $923,000. The carryforwards will expire between 2001 and 2008. 43 45 CLARIFY INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 9. SEGMENT INFORMATION AND MAJOR CUSTOMERS In accordance with Statement of Financial Accounting Standards (SFAS) No. 131, "Disclosures about Segments of an Enterprise and Related Information", the Company is required to disclose information about its products, services, the geographic area in which it operates and major customers. The Company operates in a single industry segment encompassing the design, development, marketing and technical support for front-office automation software. The following are revenues and long-lived assets by geographic area as of and for the years ended December 31 (in thousands):
REVENUES LONG-LIVED ASSETS ------------------------------ ------------------ 1996 1997 1998 1997 1998 ------- ------- -------- ------- ------- U.S. ............................. $48,620 $79,121 $ 97,928 $7,639 $7,257 International..................... 7,702 9,096 32,582 972 1,180 ------- ------- -------- ------ ------ Total................... $56,322 $88,217 $130,510 $8,611 $8,437 ======= ======= ======== ====== ======
No one customer accounted for more than 10% of total revenues in 1996, 1997 and 1998. 10. 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 1996, 1997 or 1998. 11. SUBSEQUENT EVENT On March 12, 1999, the Board of Directors approved an amendment to the current ESPP. The Company anticipates that the shares available for future purchase under the current plan will be depleted on or before April 30, 2000. The Board approved the following amendment to include one final six-month offering period commencing May 1, 1999 and ending October 31, 1999. All other terms for participation by employees will remain the same. The current plan will terminate after this final purchase period. Additionally, the Board approved the new 1999 Employee Stock Purchase Plan (subject to stockholder approval) to include an initial pool of 1,000,000 shares available for purchase under the Plan plus an annual increase to the shares reserved under the Plan on the first day of each fiscal year in 2000,2001,2002, 2003 and 2004 equal to the lesser of (i) 500,000, (ii) 5% of the Company's Common Stock outstanding on the last day of the preceding fiscal year, or (iii) a lesser number of shares as determined by the Board, for stock purchases. The new Plan has a term of 20 years. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable 44 46 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 1999 Annual Meeting of Stockholders proposed to be held on June 10, 1999 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 "Executive Compensation and Related Information," respectively. ITEM 11. EXECUTIVE COMPENSATION The information required by this Item is incorporated by reference from the Company's Proxy Statement for the 1999 Annual Meeting of Stockholders under the heading "Executive Compensation and Related Information." 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 1999 Annual Meeting of Stockholders under the heading "Stock Ownership of Certain Beneficial Owners and Management." ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this Item is incorporated by reference from the Company's Proxy Statement for the 1999 Annual Meeting of Stockholders under the heading "Executive Compensation and Related Information". 45 47 PART IV ITEM 14. EXHIBITS, CONSOLIDATED FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
PAGE ---- (a) THE FOLLOWING DOCUMENTS ARE FILED AS PART OF THIS REPORT: 1. Consolidated Financial Statements The consolidated financial statements of Clarify, Inc. are included in Item 8........................ 27 2. Consolidated Financial Statements Schedules Independent Accountants' Report on Schedule......... 48 Schedule II -- Valuation and Qualifying Accounts.... 49 Schedules not listed above have been omitted because the matter or conditions are not present or the information required to be set forth therein is included in the Consolidated Financial Statements hereto.
(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, 1998. (c) EXHIBITS
EXHIBIT NUMBER DESCRIPTION -------- ----------- 1.0(5) Rights Agreement, dated as of June 13, 1997, between the Company and Harris Trust Company of California, including the Certificate of Designation of Series A Junior Participating Preferred Stock, Form of Right Certificate and Summary of Rights to Purchase Preferred Shares 3.1(1) Certificate of Incorporation of the Registrant, as amended to date 3.2(6) Amended and Restated Bylaws of the Company 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 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 Second 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(3) Offer Letter dated February 23,1998 between Anthony Zingale and Clarify, Inc. 10.11(3) Stock Option Agreement between Anthony Zingale and Clarify, Inc. 10.12(4) Lease by and between CarrAmerica Realty Corporation and Clarify, Inc. dated June 23, 1998.
46 48
EXHIBIT NUMBER DESCRIPTION -------- ----------- 10.13(4) Stock Option Agreement between Jan A. Praisner and Clarify, Inc. 10.14(4) Stock Option Agreement between Kisten Berg-Painter and Clarify, Inc. 10.15(4) Stock Option Agreement between Jeanne Urich and Clarify, Inc. 10.16 Proposed 1999 Non-Employee Directors' Option Plan. 10.17 Proposed 1999 Employee Stock Purchase Plan. 21.1 Subsidiaries of the Registrant. 23.1(1) Consent of Independent Accountants. 24.1(1) Power of Attorney.
- --------------- (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. (3) Incorporated by reference from an exhibit filed with the Company's Annual Report on Form 10-K filed (File Number 000-26776) with the Securities and Exchange Commission on March 31, 1998. (4) Incorporated by reference from an exhibit filed with the Company's Quarterly Report on Form 10-Q filed (File Number 000-26776) with the Securities and Exchange Commission on November 10, 1998. (5) Incorporated by reference from an exhibit filed with the Company's Registration Statement on Form 8-A (File Number 000-26776) with the Securities and Exchange Commission on June 24, 1997. (6) Incorporated by reference from an exhibit filed with the Company's Registration Statement on Form 8-K (File Number 000-26776) with the Securities and Exchange Commission on June 25, 1997. (d) Financial Statement Schedule. See (a)(2) above. 47 49 INDEPENDENT ACCOUNTANTS' REPORT ON SCHEDULE Our report on the consolidated financial statements of Clarify, Inc. is included on page 29 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 51 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. PricewaterhouseCoopers LLP San Jose, California January 19, 1999 48 50 SCHEDULE II CLARIFY INC. VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998 (IN THOUSANDS)
BALANCE AT ADDITIONS, DEDUCTIONS BALANCE AT BEGINNING COSTS AND AND END OF OF PERIOD EXPENSES WRITE-OFFS PERIOD ---------- ---------- ---------- ---------- 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 ====== ====== ==== ====== YEAR ENDED DECEMBER 31, 1998 Allowance for doubtful accounts............... $1,310 $2,285 $838 $2,757 ====== ====== ==== ======
49 51 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 March 31, 1999. 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 March 31, 1999 - -------------------------------------------------------- Officer (Principal Executive Anthony Zingale Officer) and Director /s/ JAN A. PRAISNER Vice President and Chief March 31, 1999 - -------------------------------------------------------- Financial Officer (Principal Jan A. Praisner Financial and Accounting Officer) /s/ DAVID A. STAMM Chairman of the Board March 31, 1999 - -------------------------------------------------------- David A. Stamm /s/ THOMAS H. BREDT Director March 31, 1999 - -------------------------------------------------------- Thomas H. Bredt /s/ MARY JANE ELMORE Director March 31, 1999 - -------------------------------------------------------- Mary Jane Elmore /s/ CHRISTOPHER H. GREENDALE Director March 31, 1999 - -------------------------------------------------------- Christopher H. Greendale /s/ JOSEPH B. COSTELLO Director March 31, 1999 - -------------------------------------------------------- Joseph B. Costello
50 52 INDEX TO EXHIBITS
SEQUENTIALLY EXHIBIT NUMBERED NUMBER EXHIBIT PAGE - ------- ------- ------------ 10.16 Proposed 1999 Non-Employee Director's Plan.................. 10.17 Proposed 1999 Employee Stock Purchase Plan.................. 21.1 Subsidiaries of the Registrant.............................. 23.1 Consent of Independent Accountants.......................... 24.1 Power of Attorney........................................... 27.1 Financial Data Schedule.....................................
All other exhibits required to be filed as part of this report have been incorporated by reference. See item 14(c) for a complete index of such exhibits. 51 EX-10.16 2 NON-EMPLOYEE DIRECTORS OPTION PLAN 1 EXHIBIT 10.16 CLARIFY INC. NON-EMPLOYEE DIRECTORS OPTION PLAN ARTICLE 1. PURPOSE OF THE PLAN The Plan is intended to promote the interests of the Corporation by providing the non-employee members of the Board with the opportunity to acquire a proprietary interest, or otherwise increase their proprietary interest, in the Corporation as an incentive for them to remain in the service of the Corporation. ARTICLE 2. ADMINISTRATION The terms and conditions of each automatic option grant (including the timing and pricing of the option grant) shall be determined by the express terms and conditions of the Plan, and neither the Board nor any committee of the Board shall exercise any discretionary functions with respect to option grants made pursuant to the Plan. ARTICLE 3. STOCK SUBJECT TO THE PLAN A. Shares of Common Stock shall be available for issuance under the Plan and shall be drawn from either the Corporation's authorized but unissued shares of Common Stock or from reacquired shares of Common Stock, including shares repurchased by the Corporation on the open market. The number of shares of Common Stock reserved for issuance over the term of the Plan shall be fixed at 300,000 shares. B. Should one or more outstanding options under this Plan expire or terminate for any reason prior to exercise in full, then the shares subject to the portion of each option not so exercised shall be available for subsequent option grant under the Plan. In addition, should the exercise price of an outstanding option under the Plan be paid with shares of Common Stock, then the number of shares of Common Stock available for issuance under the Plan shall be reduced by the net number of shares of Common Stock actually issued to the holder of such option. C. Should any change be made to the Common Stock issuable under the Plan 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, then appropriate adjustments shall be made to (i) the maximum number and/or class of securities issuable under the Plan, (ii) the number and/or class of securities for which automatic option grants are to be subsequently made to each newly-elected or continuing non-employee Board member under the Plan, and (iii) the number and/or class of securities and price per share in effect under each option outstanding under the Plan. The adjustments to the outstanding options shall be made by the Board in a manner which shall preclude the enlargement or dilution of rights and benefits under such options and shall be final, binding and conclusive. 2 ARTICLE 4. ELIGIBILITY The individuals eligible to receive automatic option grants pursuant to the provisions of this Plan shall be limited to (i) those individuals serving as non-employee Board members on the Effective Date and (ii) those individuals who are first elected or appointed as non-employee Board members after the Effective Date, whether through appointment by the Board or election by the Corporation's stockholders. A non-employee Board member shall not be eligible to receive the initial automatic option grant if such individual has previously been in the employ of the Corporation (or any parent or subsidiary). However, a non-employee Board member shall be eligible to receive one or more annual option grants, whether or not he or she has previously been in the employ of the Corporation (or any parent or subsidiary). Each non-employee Board member eligible to participate in the Plan pursuant to the foregoing criteria is hereby designated an Eligible Director. ARTICLE 5. TERMS AND CONDITIONS OF AUTOMATIC OPTION GRANTS A. Grant Date. Option grants shall be made on the dates specified below: - Each individual who first becomes an Eligible Director on or after the Effective Date, whether through election by the Corporation's stockholders or appointment by the Board, shall automatically be granted, at the time of such initial election or appointment, a non-statutory option to purchase 20,000 shares of Common Stock (an "Initial Option"). - On the date of each Annual Meeting, beginning with the 1999 Annual Meeting, each Eligible Director who serves on the Board at the time of that Annual Meeting, whether or not standing for re-election, shall automatically be granted a non-statutory option to purchase 10,000 shares of Common Stock (an "Annual Option"). An Eligible Director who resigns effective at an Annual Meeting shall not be eligible to be granted a non-statutory option at that time to purchase an additional 10,000 shares of Common Stock. There shall be no limit on the number of Annual Option grants any one Eligible Director may receive over his or her period of continued Board service. B. Exercise Price. The exercise price per share of Common Stock subject to each automatic option grant shall be equal to one hundred percent (100%) of the Fair Market Value per share of Common Stock on the automatic grant date. C. Payment. The exercise price shall become immediately due upon exercise of the option and shall be payable in one of the alternative forms specified below; (i) full payment in cash or check made payable to the Corporation's order; or (ii) full payment in shares of Common Stock held for the requisite period necessary to avoid a charge to the Corporation's earnings for financial-reporting purposes and -3- 3 valued at Fair Market Value on the Exercise Date (as such term is defined below); or (iii) full payment in a combination of shares of Common Stock held 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 and cash or check payable to the Corporation's order; or (iv) full payment through a broker-dealer sale and remittance procedure pursuant to which the non-employee Board member (i) shall provide irrevocable written instructions 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 and (ii) shall concurrently provide written directives to the Corporation to deliver the certificates for the purchased shares directly to such brokerage firm in order to complete the sale transaction. For purposes of this Section 5.C, the Exercise Date shall be the date on which written notice of the option exercise is delivered to the Corporation. Except to the extent the sale and remittance procedure specified above is used, payment of the exercise price for the purchased shares must accompany the exercise notice. D. Exercisability/Vesting. Each automatic grant shall be immediately exercisable for all of the option shares. However, any shares purchased under the option shall be subject to repurchase by the Corporation, at the exercise price paid per share, upon the Optionee's cessation of Board service prior to vesting in those shares. Each Initial Option Grant shall vest, and the Corporation's repurchase right shall lapse, in a series of three (3) equal annual installments over the Optionee's period of continued service as a Board Member, with each installment to vest upon each of the successive anniversaries of the Initial Option Grant date. Each Annual Option grant shall vest, and the Corporation's repurchase right shall lapse, in a series of three (3) equal annual installments over the Optionee's period of continued service as a Board member, with each installment to vest on the day preceding the Annual Meeting date on each of the following three (3) years. Exercisability of the option shall be subject to acceleration as provided in Section 5.G and Article 6. In no event, however, shall the option become exercisable for any additional option shares after the Optionee's cessation of Board service. E. Option Term. Each automatic grant under the Plan shall have a maximum term of ten (10) years measured from the automatic grant date. F. Non-Transferability. During the lifetime of the Optionee, each automatic option grant shall be exercisable only by the Optionee and shall not be assignable or transferable by the Optionee other than a transfer of the option effected by will or by the laws of descent and distribution following Optionee's death. G. Effective of Termination of Board Service. -4- 4 1. The Optionee (or, in the event of Optionee's death, the personal representative of the Optionee's estate or the person or persons to whom the option is transferred pursuant to the Optionee's will or in accordance with the laws of descent and distribution) shall have a twelve (12)-month period following the date of such cessation of Board service in which to exercise each such option. 2. During the twelve (12)-month exercise period, the option may not be exercised in the aggregate for more than the number of vested shares of Common Stock for which the option is exercisable at the time of the Optionee's cessation of Board service. 3. Should the Optionee cease to serve as a Board member by reason of death or Permanent Disability, then all shares at the time subject to the option shall immediately vest so that such option may, during the twelve (12)-month exercise period following such cessation of Board service, be exercised for all or any portion of such shares as fully-vested shares of Common Stock. 4. In no event shall the option remain exercisable after the expiration of the option term. Upon the expiration of the twelve (12)-month exercise period or (if earlier) upon the expiration of the option term, the option shall terminate and cease to be outstanding for any vested shares for which the option has not been exercised. However, the option shall, immediately upon the Optionee's cessation of Board service, terminate and cease to be outstanding to the extent it is not exercisable for vested shares on the date of such cessation of Board service. H. Stockholder Rights. The holder of an automatic option grant shall have none of the rights of a stockholder with respect to any shares subject to such option until such individual shall have exercised the option and paid the exercise price for the purchased shares. I. Remaining Terms. The remaining terms and conditions of each automatic option grant shall be as set forth in the form Stock Option Agreement approved for use under the Plan. ARTICLE 6. SPECIAL ACCELERATION EVENTS A. In the event of any Change in Control, the shares of Common Stock at the time subject to each outstanding option but not otherwise fully exercisable shall automatically accelerate in full so that each such option shall, immediately prior to the specified effective date for the Change in Control, become fully exercisable for all of the shares of Common Stock at the time subject to that option. Immediately following the consummation of the Change in Control, each automatic option grant under the Plan shall terminate and cease to be outstanding, except to the extent assumed by the successor corporation or its parent company. B. The automatic option grants outstanding under the Plan shall in no 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. -5- 5 ARTICLE 7. AMENDMENT OF THE PLAN AND AWARDS The Board has complete and exclusive power and authority to amend or modify the Plan (or any component thereof) in any or all respects whatsoever. However, no such amendment or modification shall adversely affect rights and obligations with respect to options at the time outstanding under the Plan, unless the affected Optionee's consent to such amendment. Stockholder approval shall be obtained to the extent required by applicable law. ARTICLE 8. EFFECTIVE DATE AND TERM OF PLAN A. The Plan shall become effective on the Effective Date. One or more automatic option grants shall be made in accordance with the terms of the Plan after the Effective Date. B. The Plan shall terminate upon the earlier of (i) __________, 2009 or (ii) the date on which all shares available for issuance under the Plan shall have been issued pursuant to the exercise of the options granted under the Plan. If the date of termination is determined under clause (i) above, then all option grants outstanding on such date shall thereafter continue to have force and effect in accordance with the provisions of the agreements evidencing those option grants. ARTICLE 9. USE OF PROCEEDS Any cash proceeds received by the Corporation from the sale of shares pursuant to option grants under the Plan shall be used for general corporate purposes. ARTICLE 10. REGULATORY APPROVALS A. The implementation of the Plan, the granting of any option under the Plan and the issuance of Common Stock upon the exercise of the option grants made hereunder shall be subject to the Corporation's procurement of all approvals and permits required by regulatory authorities having jurisdiction over the Plan, the options granted under it, and the Common Stock issued pursuant to it. B. No shares of Common Stock or other assets shall be issued or delivered under this Plan unless and until there shall have been compliance with all applicable requirements of Federal and state securities laws, including the filing and effectiveness of the Form S-8 registration statement for the shares of Common Stock issuable under the Plan, and all applicable listing requirements of the Nasdaq National Market or any Stock Exchange on which the Common Stock is then listed for trading. ARTICLE 11. NO IMPAIRMENT OF RIGHTS Neither the action of the Corporation in establishing the Plan nor any provision of the Plan shall be construed or interpreted so as to affect adversely or otherwise impair the right of the Corporation or the stockholders to remove any individual from the Board at any time in accordance with the provisions of applicable law. -6- 6 ARTICLE 12. MISCELLANEOUS PROVISIONS A. The right to acquire Common Stock or other assets under the Plan may not be assigned, encumbered or otherwise transferred by any Optionee. B. The provisions of the Plan relating to the exercise of options shall be governed by the laws of the State of California, as such laws are applied to contracts entered into and performed in such State. C. The provisions of the Plan shall inure to the benefit of, and be binding upon, the Corporation and its successors or assigns, whether by Change in Control or otherwise, and the Optionees, the legal representatives of their respective estates, their respective heirs or legatees and their permitted assignees. ARTICLE 13. DEFINITIONS ANNUAL MEETING: the annual meeting of the Corporation's stockholders. BOARD: the Corporation's Board of Directors. CODE: the Internal Revenue Code of 1986, as amended. COMMON STOCK: shares of the Corporation's common stock. CORPORATION: Clarify Inc., a Delaware corporation. CHANGE IN CONTROL: a change in ownership or control of the Corporation effected through any of the following transactions: a. the consummation of a merger or consolidation of the Corporation with or into another entity or any other corporate reorganization, if more than 50% of the combined voting power of the continuing or surviving entity's securities outstanding immediately after such merger, consolidation or other reorganization is owned by persons who were not stockholders of the Corporation immediately prior to such merger, consolidation or other reorganization; b. the sale, transfer or other disposition of all or substantially all of the Corporation's assets; c. a change in the composition of the Board, as a result of which fewer than one-third of the incumbent directors are directors who either (i) had been directors of the Corporation on the date 24 months prior to the date of the event that may constitute a Change in Control (the "original directors") or (ii) were appointed to the Board to fill an existing vacancy or were nominated for election to the Board with the affirmative votes of at least a majority of the aggregate of the original directors who were still in office at the time of the appointment or nomination and the directors whose appointment or nomination was previously so approved; or -7- 7 d. any transaction as a result of which any person is the "beneficial owner" (as defined in Rule 13d-3 under the 1934 Act), directly or indirectly, of securities of the Corporation representing at least 50% of the total voting power represented by the Corporation's then outstanding voting securities. For purposes of this Paragraph (d), the term "person" shall have the same meaning as when used in sections 13(d) and 14(d) of the 1934 Act but shall exclude (i) a trustee or other fiduciary holding securities under an employee benefit plan of the Corporation or of a Parent or Subsidiary and (ii) a corporation owned directly or indirectly by the stockholders of the Corporation in substantially the same proportions as their ownership of the Common Stock of the Corporation. e. A transaction shall not constitute a Change in Control if its sole purpose is to change the state of the Corporation's incorporation or to create a holding company that will be owned in substantially the same proportions by the persons who held the Corporation's securities immediately before such transaction. EFFECTIVE DATE: __________, 1999. ELIGIBLE DIRECTOR: shall have the meaning assigned to such term in Article 4. FAIR MARKET VALUE: the Fair Market Value per share of Common Stock determined in accordance with the following provisions: a. If the Common Stock is at the time traded on The Nasdaq Stock Market, then the Fair Market Value shall be the closing selling price per share of Common Stock on the date in question, as such price is reported by the National Association of Securities Dealers on The Nasdaq Stock 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. b. 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 Plan Administrator 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. 1934 ACT: the Securities Exchange Act of 1934, as amended. OPTIONEE: any person to whom an option is granted under the Plan. PERMANENT DISABILITY: the inability of the Optionee to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment expected to result in death or to be of continuous duration of twelve (12) months or more. PLAN: this Clarify Inc. Non-Employee Directors Option Plan. -8- 8 STOCK EXCHANGE: either The American Stock Exchange or the New York Stock Exchange. -9- EX-10.17 3 1999 EMPLOYEE STOCK PURCHASE PLAN 1 EXHIBIT 10.17 CLARIFY, INC. 1999 EMPLOYEE STOCK PURCHASE PLAN The following constitute the provisions of the 1999 Employee Stock Purchase Plan of Clarify, Inc. 1. PURPOSE. The purpose of the Plan is to provide employees of the Company and its Designated Subsidiaries with an opportunity to purchase Common Stock of the Company. It is the intention of the Company to have the Plan qualify as an "Employee Stock Purchase Plan" under Section 423 of the Code. The provisions of the Plan shall, accordingly, be construed so as to extend and limit participation in a manner consistent with the requirements of that section of the Code. 2. DEFINITIONS. (a) "BOARD" means the Board of Directors of the Company. (b) "CODE" means the Internal Revenue Code of 1986, as amended. (c) "COMMON STOCK" means the Common Stock of the Company. (d) "COMPANY" means Clarify, Inc., a Delaware corporation. (e) "COMPENSATION" means all cash compensation paid to an Employee plus any pre-tax contributions made by an Employee to any Code Section 401(k) salary deferral plan or any Code Section 125 cafeteria program now or hereafter established by the Company or any Designated Subsidiary. (f) "CONTINUOUS STATUS AS AN EMPLOYEE" means the absence of any interruption or termination of service as an Employee. Continuous Status as an Employee shall not be considered interrupted in the case of (i) sick leave; (ii) military leave; (iii) any other leave of absence approved by the Administrator, provided that such leave is for a period of not more than 90 days, unless reemployment upon the expiration of such leave is guaranteed by contract or statute, or unless provided otherwise pursuant to Company policy adopted from time to time; or (iv) in the case of transfers between locations of the Company or between the Company and its Designated Subsidiaries. (g) "CONTRIBUTIONS" means all amounts credited to the account of a participant pursuant to the Plan. (h) "CORPORATE TRANSACTION" means a sale of all or substantially all of the Company's assets, or a merger, consolidation or other capital reorganization of the Company with or into another corporation. (i) "DESIGNATED SUBSIDIARIES" means the Subsidiaries which have been designated by the Board from time to time in its sole discretion as eligible to participate in the -1- 2 Plan; provided however that the Board shall only have the discretion to designate Subsidiaries if the issuance of options to such Subsidiary's Employees pursuant to the Plan would not cause the Company to incur adverse accounting charges. (j) "EMPLOYEE" means any person, including an Officer, who is customarily employed for at least twenty (20) hours per week and more than five (5) months in a calendar year by the Company or one of its Designated Subsidiaries. (k) "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended. (l) "OFFERING DATE" means the first business day of each Offering Period of the Plan. (m) "OFFERING PERIOD" means a period of twenty-four (24) months commencing on November 1 and May 1 of each year. (n) "OFFICER" means a person who is an officer of the Company within the meaning of Section 16 of the Exchange Act and the rules and regulations promulgated thereunder. (o) "PLAN" means this Employee Stock Purchase Plan. (p) "PURCHASE DATE" means the last day of each Purchase Period of the Plan. (q) "PURCHASE PERIOD" means a period of six (6) months within an Offering Period. (r) "PURCHASE PRICE" means with respect to a Purchase Period an amount equal to 85% of the Fair Market Value (as defined in Section 7(b) below) of a Share of Common Stock on the Offering Date or on the Purchase Date, whichever is lower; provided, however, that in the event (i) of any increase in the number of Shares available for issuance under the Plan as a result of a stockholder-approved amendment to the Plan, and (ii) all or a portion of such additional Shares are to be issued with respect to one or more Offering Periods that are underway at the time of such increase ("Additional Shares"), and (iii) the Fair Market Value of a Share of Common Stock on the date of such increase (the "Approval Date Fair Market Value") is higher than the Fair Market Value on the Offering Date for any such Offering Period, then in such instance the Purchase Price with respect to Additional Shares shall be 85% of the Approval Date Fair Market Value or the Fair Market Value of a Share of Common Stock on the Purchase Date, whichever is lower. (s) "SHARE" means a share of Common Stock, as adjusted in accordance with Section 19 of the Plan. (t) "SUBSIDIARY" means a corporation, domestic or foreign, of which not less than 50% of the voting shares are held by the Company or a Subsidiary, whether or not such corporation now exists or is hereafter organized or acquired by the Company or a Subsidiary. -2- 3 3. ELIGIBILITY. (a) Any person who is an Employee as of the Offering Date of a given Offering Period shall be eligible to participate in such Offering Period under the Plan, subject to the requirements of Section 5(a) and the limitations imposed by Section 423(b) of the Code; provided however that eligible Employees may not participate in more than one Offering Period at a time. (b) Any provisions of the Plan to the contrary notwithstanding, no Employee shall be granted an option under the Plan (i) if, immediately after the grant, such Employee (or any other person whose stock would be attributed to such Employee pursuant to Section 424(d) of the Code) would own capital stock of the Company and/or hold outstanding options to purchase stock possessing five percent (5%) or more of the total combined voting power or value of all classes of stock of the Company or of any subsidiary of the Company, or (ii) if such option would permit his or her rights to purchase stock under all employee stock purchase plans (described in Section 423 of the Code) of the Company and its Subsidiaries to accrue at a rate which exceeds Twenty-Five Thousand Dollars ($25,000) of the Fair Market Value (as defined in Section 7(b) below) of such stock (determined at the time such option is granted) for each calendar year in which such option is outstanding at any time. 4. OFFERING PERIODS AND PURCHASE PERIODS. (a) OFFERING PERIODS. The Plan shall be implemented by a series of Offering Periods of twenty-four (24) months' duration, with new Offering Periods commencing on or about November 1 and May 1 of each year (or at such other time or times as may be determined by the Board of Directors). The first Offering Period shall commence on November 1, 1999 and continue until October 31, 2001. The Plan shall continue until terminated in accordance with Section 19 hereof. The Board of Directors of the Company shall have the power to change the duration and/or the frequency of Offering Periods with respect to future offerings without stockholder approval if such change is announced at least five (5) days prior to the scheduled beginning of the first Offering Period to be affected. (b) PURCHASE PERIODS. Each Offering Period shall consist of four (4) consecutive purchase periods of six (6) months' duration. The last day of each Purchase Period shall be the "Purchase Date" for such Purchase Period. A Purchase Period commencing on November 1 shall end on the next April 30. A Purchase Period commencing on May 1 shall end on the next October 31. The first Purchase Period shall commence on November 1, 1999 and shall end on April 30, 2000. The Board of Directors of the Company shall have the power to change the duration and/or frequency of Purchase Periods with respect to future purchases without stockholder approval if such change is announced at least five (5) days prior to the scheduled beginning of the first Purchase Period to be affected. 5. PARTICIPATION. (a) An eligible Employee may become a participant in the Plan by completing a subscription agreement on the form provided by the Company and filing it with the Company's -3- 4 payroll office prior to the applicable Offering Date, unless a later time for filing the subscription agreement is set by the Board for all eligible Employees with respect to a given Offering Period. The subscription agreement shall set forth the percentage of the participant's Compensation (subject to Section 6(a) below) to be paid as Contributions pursuant to the Plan. (b) Payroll deductions shall commence on the first payroll following the Offering Date and shall end on the last payroll paid on or prior to the last Purchase Period of the Offering Period to which the subscription agreement is applicable, unless sooner terminated by the participant as provided in Section 10. 6. METHOD OF PAYMENT OF CONTRIBUTIONS. (a) A participant shall elect to have payroll deductions made on each payday during the Offering Period in an amount not less than one percent (1%) and not more than twenty percent (20%) (or such greater percentage as the Board may establish from time to time before an Offering Date). All payroll deductions made by a participant shall be credited to his or her account under the Plan. A participant may not make any additional payments into such account. (b) A participant may discontinue his or her participation in the Plan as provided in Section 10, or, on one occasion only during a Purchase Period may increase and on one occasion only during a Purchase Period may decrease the rate of his or her Contributions with respect to the Offering Period by completing and filing with the Company a new subscription agreement authorizing a change in the payroll deduction rate. A change increasing the payroll deduction rate shall be effective as of the beginning of the next Purchase Period following the date of filing of the new subscription agreement. A change decreasing the payroll deduction rate shall be effective as soon as possible following the date of filing of the new subscription agreement. (c) Notwithstanding the foregoing, to the extent necessary to comply with Section 423(b)(8) of the Code and Section 3(b) herein, a participant's payroll deductions may be decreased to zero percent (0%) at any time during a Purchase Period. Payroll deductions shall re-commence at Purchase Offering Period which is scheduled to end in the following calendar year, unless terminated by the participant as provided in Section 10. 7. GRANT OF OPTION. (a) On the Offering Date of each Offering Period, each eligible Employee participating in such Offering Period shall be granted an option to purchase on each Purchase Date a number of Shares of the Company's Common Stock determined by dividing such Employee's Contributions accumulated prior to such Purchase Date and retained in the participant's account as of the Purchase Date by the applicable Purchase Price; provided however that the maximum number of Shares an Employee may purchase during each Purchase Period shall be 2,000 Shares (subject to any adjustment pursuant to Section 19 below), and provided further that such purchase shall be subject to the limitations set forth in Sections 3(b) and 13. (b) The fair market value of the Company's Common Stock on a given date -4- 5 (the "Fair Market Value") shall be determined by the Board in its discretion based on the closing sales price of the Common Stock for such date (or, in the event that the Common Stock is not traded on such date, on the immediately preceding trading date), as reported by the National Association of Securities Dealers Automated Quotation (Nasdaq) National Market or, if such price is not reported, the mean of the bid and asked prices per share of the Common Stock as reported by Nasdaq or, in the event the Common Stock is listed on a stock exchange, the Fair Market Value per share shall be the closing sales price on such exchange on such date (or, in the event that the Common Stock is not traded on such date, on the immediately preceding trading date), as reported in The Wall Street Journal. 8. EXERCISE OF OPTION. Unless a participant withdraws from the Plan as provided in Section 10, his or her option for the purchase of Shares will be exercised automatically on each Purchase Date of an Offering Period, and the maximum number of full Shares subject to the option will be purchased at the applicable Purchase Price with the accumulated Contributions in his or her account. No fractional Shares shall be issued. The Shares purchased upon exercise of an option hereunder shall be deemed to be transferred to the participant on the Purchase Date. During his or her lifetime, a participant's option to purchase Shares hereunder is exercisable only by him or her. 9. DELIVERY. As promptly as practicable after each Purchase Date of each Offering Period, the Company shall deposit the Shares purchased upon exercise of a participant's option into the participant's account with the broker selected by the Company for administration of Plan stock purchases. Any payroll deductions accumulated in a participant's account which are not sufficient to purchase a full Share shall be retained in the participant's account for the subsequent Purchase Period or Offering Period, subject to earlier withdrawal by the participant as provided in Section 10 below. Any other amounts left over in a participant's account after a Purchase Date shall be returned to the participant. 10. VOLUNTARY WITHDRAWAL; TERMINATION OF EMPLOYMENT. (a) A participant may withdraw all but not less than all the Contributions credited to his or her account under the Plan at any time prior to each Purchase Date by giving written notice to the Company. All of the participant's Contributions credited to his or her account will be paid to him or her promptly after receipt of his or her notice of withdrawal and his or her option for the current period will be automatically terminated, and no further Contributions for the purchase of Shares will be made during the Offering Period. (b) Upon termination of the participant's Continuous Status as an Employee prior to the Purchase Date of an Offering Period for any reason, including retirement or death, the Contributions credited to his or her account will be returned to him or her or, in the case of his or her death, to the person or persons entitled thereto, and his or her option will be automatically terminated. (c) In the event an Employee fails to remain in Continuous Status as an Employee of the Company for at least twenty (20) hours per week during the Offering Period in which the employee is a participant, he or she will be deemed to have elected to withdraw from -5- 6 the Plan and the Contributions credited to his or her account will be returned to him or her and his or her option terminated. (d) A participant's withdrawal from an offering will not have any effect upon his or her eligibility to participate in a succeeding offering or in any similar plan which may hereafter be adopted by the Company. 11. AUTOMATIC WITHDRAWAL. If the Fair Market Value of the Shares on any Purchase Date of an Offering Period is less than the Fair Market Value of the Shares on the Offering Date for such Offering Period, then every participant shall automatically (i) be withdrawn from such Offering Period at the close of such Purchase Date and after the acquisition of Shares for such Purchase Period, and (ii) be enrolled in the Offering Period commencing on the first business day subsequent to such Purchase Period. 12. INTEREST. No interest shall accrue on the Contributions of a participant in the Plan. 13. STOCK. (a) Subject to adjustment as provided in Section 19, the maximum number of Shares which shall be made available for sale under the Plan shall be 1,000,000 Shares, plus an annual increase on the first day of each of the Company's fiscal years beginning in 2000, 2001, 2002, 2003 and 2004 equal to the lesser of (i) 500,000 Shares, (ii) five percent (5%) of the Shares outstanding on the last day of the immediately preceding fiscal year, or (iii) such lesser number of Shares as is determined by the Board. If the Board determines that, on a given Purchase Date, the number of shares with respect to which options are to be exercised may exceed (i) the number of shares of Common Stock that were available for sale under the Plan on the Offering Date of the applicable Offering Period, or (ii) the number of shares available for sale under the Plan on such Purchase Date, the Board may in its sole discretion provide (x) that the Company shall make a pro rata allocation of the Shares of Common Stock available for purchase on such Offering Date or Purchase Date, as applicable, in as uniform a manner as shall be practicable and as it shall determine in its sole discretion to be equitable among all participants exercising options to purchase Common Stock on such Purchase Date, and continue all Offering Periods then in effect, or (y) that the Company shall make a pro rata allocation of the shares available for purchase on such Offering Date or Purchase Date, as applicable, in as uniform a manner as shall be practicable and as it shall determine in its sole discretion to be equitable among all participants exercising options to purchase Common Stock on such Purchase Date, and terminate any or all Offering Periods then in effect pursuant to Section 20 below. The Company may make pro rata allocation of the Shares available on the Offering Date of any applicable Offering Period pursuant to the preceding sentence, notwithstanding any authorization of additional Shares for issuance under the Plan by the Company's stockholders subsequent to such Offering Date. (b) The participant shall have no interest or voting right in Shares covered by his or her option until such option has been exercised. (c) Shares to be delivered to a participant under the Plan will be registered in -6- 7 the name of the participant or in the name of the participant and his or her spouse. 14. ADMINISTRATION. The Board, or a committee named by the Board, shall supervise and administer the Plan and shall have full power to adopt, amend and rescind any rules deemed desirable and appropriate for the administration of the Plan and not inconsistent with the Plan, to construe and interpret the Plan, and to make all other determinations necessary or advisable for the administration of the Plan. 15. TRANSFERABILITY. Neither Contributions credited to a participant's account nor any rights with regard to the exercise of an option or to receive Shares under the Plan may be assigned, transferred, pledged or otherwise disposed of in any way (other than by will, the laws of descent and distribution, or as provided in Section 15) by the participant. Any such attempt at assignment, transfer, pledge or other disposition shall be without effect, except that the Company may treat such act as an election to withdraw funds in accordance with Section 10. 16. USE OF FUNDS. All Contributions received or held by the Company under the Plan may be used by the Company for any corporate purpose, and the Company shall not be obligated to segregate such Contributions. 17. REPORTS. Individual accounts will be maintained for each participant in the Plan. Statements of account will be given to participating Employees at least annually, which statements will set forth the amounts of Contributions, the per Share Purchase Price, the number of Shares purchased and the remaining cash balance, if any. 18. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION; CORPORATE TRANSACTIONS. (a) ADJUSTMENT. Subject to any required action by the stockholders of the Company, the number of Shares covered by each option under the Plan which has not yet been exercised and the number of Shares which have been authorized for issuance under the Plan but have not yet been placed under option (collectively, the "Reserves"), as well as the maximum number of shares of Common Stock which may be purchased by a participant in a Purchase Period, the number of shares of Common Stock set forth in Section 13(a)(i) above, and the price per Share of Common Stock covered by each option under the Plan which has not yet been exercised, shall be proportionately adjusted for any increase or decrease in the number of issued Shares resulting from a stock split, reverse stock split, stock dividend, combination or reclassification of the Common Stock (including any such change in the number of Shares of Common Stock effected in connection with a change in domicile of the Company), or any other increase or decrease in the number of Shares effected without receipt of consideration by the Company; provided however that conversion of any convertible securities of the Company shall not be deemed to have been "effected without receipt of consideration." Such adjustment shall be made by the Board, whose determination in that respect shall be final, binding and conclusive. Except as expressly provided herein, no issue by the Company of shares of stock of any class, or securities convertible into shares of stock of any class, shall affect, and no adjustment by reason thereof shall be made with respect to, the number or price of Shares subject to an option. (b) CORPORATE TRANSACTIONS. In the event of a dissolution or liquidation of -7- 8 the Company, any Purchase Period and Offering Period then in progress will terminate immediately prior to the consummation of such action, unless otherwise provided by the Board. In the event of a Corporate Transaction, each option outstanding under the Plan shall be assumed or an equivalent option shall be substituted by the successor corporation or a parent or Subsidiary of such successor corporation. In the event that the successor corporation refuses to assume or substitute for outstanding options, each Purchase Period and Offering Period then in progress shall be shortened and a new Purchase Date shall be set (the "New Purchase Date"), as of which date any Purchase Period and Offering Period then in progress will terminate. The New Purchase Date shall be on or before the date of consummation of the transaction and the Board shall notify each participant in writing, at least ten (10) days prior to the New Purchase Date, that the Purchase Date for his or her option has been changed to the New Purchase Date and that his or her option will be exercised automatically on the New Purchase Date, unless prior to such date he or she has withdrawn from the Offering Period as provided in Section 10. For purposes of this Section 19, an option granted under the Plan shall be deemed to be assumed, without limitation, if, at the time of issuance of the stock or other consideration upon a Corporate Transaction, each holder of an option under the Plan would be entitled to receive upon exercise of the option the same number and kind of shares of stock or the same amount of property, cash or securities as such holder would have been entitled to receive upon the occurrence of the transaction if the holder had been, immediately prior to the transaction, the holder of the number of Shares of Common Stock covered by the option at such time (after giving effect to any adjustments in the number of Shares covered by the option as provided for in this Section 19); provided however that if the consideration received in the transaction is not solely common stock of the successor corporation or its parent (as defined in Section 424(e) of the Code), the Board may, with the consent of the successor corporation, provide for the consideration to be received upon exercise of the option to be solely common stock of the successor corporation or its parent equal in Fair Market Value to the per Share consideration received by holders of Common Stock in the transaction. The Board may, if it so determines in the exercise of its sole discretion, also make provision for adjusting the Reserves, as well as the price per Share of Common Stock covered by each outstanding option, in the event that the Company effects one or more reorganizations, recapitalizations, rights offerings or other increases or reductions of Shares of its outstanding Common Stock, and in the event of the Company's being consolidated with or merged into any other corporation. 19. AMENDMENT OR TERMINATION. (a) The Board may at any time and for any reason terminate or amend the Plan. Except as provided in Section 19, no such termination of the Plan may affect options previously granted, provided that the Plan or an Offering Period may be terminated by the Board on a Purchase Date or by the Board's setting a new Purchase Date with respect to an Offering Period and Purchase Period then in progress if the Board determines that termination of the Plan and/or the Offering Period is in the best interests of the Company and the stockholders or if continuation of the Plan and/or the Offering Period would cause the Company to incur adverse accounting charges as a result of a change after the effective date of the Plan in the generally -8- 9 accepted accounting rules applicable to the Plan. Except as provided in Section 19 and in this Section 20, no amendment to the Plan shall make any change in any option previously granted which adversely affects the rights of any participant. In addition, to the extent necessary to comply with Rule 16b-3 under the Exchange Act, or under Section 423 of the Code (or any successor rule or provision or any applicable law or regulation), the Company shall obtain stockholder approval in such a manner and to such a degree as so required. (b) Without stockholder consent and without regard to whether any participant rights may be considered to have been adversely affected, the Board (or its committee) shall be entitled to change the Offering Periods and Purchase Periods, limit the frequency and/or number of changes in the amount withheld during an Offering Period, establish the exchange ratio applicable to amounts withheld in a currency other than U.S. dollars, permit payroll withholding in excess of the amount designated by a participant in order to adjust for delays or mistakes in the Company's processing of properly completed withholding elections, establish reasonable waiting and adjustment periods and/or accounting and crediting procedures to ensure that amounts applied toward the purchase of Common Stock for each participant properly correspond with amounts withheld from the participant's Compensation, and establish such other limitations or procedures as the Board (or its committee) determines in its sole discretion advisable which are consistent with the Plan. 20. NOTICES. All notices or other communications by a participant to the Company under or in connection with the Plan shall be deemed to have been duly given when received in the form specified by the Company at the location, or by the person, designated by the Company for the receipt thereof. 21. CONDITIONS UPON ISSUANCE OF SHARES. Shares shall not be issued with respect to an option unless the exercise of such option and the issuance and delivery of such Shares pursuant thereto shall comply with all applicable provisions of law, domestic or foreign, including, without limitation, the Securities Act of 1933, as amended, the Exchange Act, the rules and regulations promulgated thereunder, applicable state securities laws and the requirements of any stock exchange upon which the Shares may then be listed, and shall be further subject to the approval of counsel for the Company with respect to such compliance. As a condition to the exercise of an option, the Company may require the person exercising such option to represent and warrant at the time of any such exercise that the Shares are being purchased only for investment and without any present intention to sell or distribute such Shares if, in the opinion of counsel for the Company, such a representation is required by any of the aforementioned applicable provisions of law. 22. TERM OF PLAN; EFFECTIVE DATE. The Plan shall become effective upon its approval by the Company's stockholders. It shall continue in effect for a term of twenty (20) years unless sooner terminated under Section 20. 23. ADDITIONAL RESTRICTIONS OF RULE 16B-3. The terms and conditions of options granted hereunder to, and the purchase of Shares by, persons subject to Section 16 of the Exchange Act shall comply with the applicable provisions of Rule 16b-3. This Plan shall be -9- 10 deemed to contain, and such options shall contain, and the Shares issued upon exercise thereof shall be subject to, such additional conditions and restrictions as may be required by Rule 16b-3 to qualify for the maximum exemption from Section 16 of the Exchange Act with respect to Plan transactions. -10- 11 CLARIFY, INC. 1999 EMPLOYEE STOCK PURCHASE PLAN SUBSCRIPTION AGREEMENT New Election ______ Change of Election ______ 1. I, ________________________, hereby elect to participate in the Clarify, Inc. 1999 Employee Stock Purchase Plan (the "Plan") for the Offering Period ______________, ____ to _______________, ____, and subscribe to purchase shares of the Company's Common Stock in accordance with this Subscription Agreement and the Plan. 2. I elect to have Contributions in the amount of ____% of my Compensation, as those terms are defined in the Plan, applied to this purchase. I understand that this amount must not be less than 1% and not more than 20% of my Compensation during the Offering Period. (Please note that no fractional percentages are permitted). 3. I hereby authorize payroll deductions from each paycheck during the Offering Period at the rate stated in Item 2 of this Subscription Agreement. I understand that all payroll deductions made by me shall be credited to my account under the Plan and that I may not make any additional payments into such account. I understand that all payments made by me shall be accumulated for the purchase of shares of Common Stock at the applicable purchase price determined in accordance with the Plan. I further understand that, except as otherwise set forth in the Plan, shares will be purchased for me automatically on the Purchase Date of each Offering Period unless I otherwise withdraw from the Plan by giving written notice to the Company for such purpose. 4. I understand that I may discontinue at any time prior to the Purchase Date my participation in the Plan as provided in Section 10 of the Plan. I also understand that I can increase or decrease the rate of my Contributions on one occasion only with respect to any increase and one occasion only with respect to any decrease during any Purchase Period by completing and filing a new Subscription Agreement with any such increase taking effect as of the beginning of the Purchase Period following the date of filing of the new Subscription Agreement and any such decrease taking effect as soon as possible following the date of filing of the new Subscription. Further, I may change the rate of deductions for future Offering Periods by filing a new Subscription Agreement, and any such change will be effective as of the beginning of the next Offering Period. In addition, I acknowledge that, unless I discontinue my participation in the Plan as provided in Section 10 of the Plan, my election will continue to be effective for each successive Offering Period. 5. I have received a copy of the Company's most recent description of the Plan and a -11- 12 copy of the complete "Clarify, Inc. 1999 Employee Stock Purchase Plan." I understand that my participation in the Plan is in all respects subject to the terms of the Plan. 6. Shares purchased for me under the Plan should be issued in the name(s) of (name of employee or employee and spouse only): ---------------------------------- ---------------------------------- 7. I understand that if I dispose of any shares received by me pursuant to the Plan within 2 years after the Offering Date (the first day of the Offering Period during which I purchased such shares) or within 1 year after the Purchase Date, I will be treated for federal income tax purposes as having received ordinary compensation income at the time of such disposition in an amount equal to the excess of the fair market value of the shares on the Purchase Date over the price which I paid for the shares, regardless of whether I disposed of the shares at a price less than their fair market value at the Purchase Date. The remainder of the gain or loss, if any, recognized on such disposition will be treated as capital gain or loss. I hereby agree to notify the Company in writing within 30 days after the date of any such disposition, and I will make adequate provision for federal, state or other tax withholding obligations, if any, which arise upon the disposition of the Common Stock. The Company may, but will not be obligated to, withhold from my compensation the amount necessary to meet any applicable withholding obligation including any withholding necessary to make available to the Company any tax deductions or benefits attributable to the sale or early disposition of Common Stock by me. 8. If I dispose of such shares at any time after expiration of the 2-year and 1-year holding periods, I understand that I will be treated for federal income tax purposes as having received compensation income only to the extent of an amount equal to the lesser of (1) the excess of the fair market value of the shares at the time of such disposition over the purchase price which I paid for the shares under the option, or (2) 15% of the fair market value of the shares on the Offering Date. The remainder of the gain or loss, if any, recognized on such disposition will be treated as capital gain or loss. I understand that this tax summary is only a summary and is subject to change. I further understand that I should consult a tax advisor concerning the tax implications of the purchase and sale of stock under the Plan. -12- 13 9. I hereby agree to be bound by the terms of the Plan. The effectiveness of this Subscription Agreement is dependent upon my eligibility to participate in the Plan. SIGNATURE: SOCIAL SECURITY #: DATE: -13- 14 CLARIFY, INC. 1999 EMPLOYEE STOCK PURCHASE PLAN NOTICE OF WITHDRAWAL I, __________________________, hereby elect to withdraw my participation in the Clarify, Inc. 1999 Employee Stock Purchase Plan (the "Plan") for the Offering Period that began on _________ ___, _____. This withdrawal covers all Contributions credited to my account and is effective on the date designated below. I understand that all Contributions credited to my account will be paid to me within ten (10) business days of receipt by the Company of this Notice of Withdrawal and that my option for the current period will automatically terminate, and that no further Contributions for the purchase of shares can be made by me during the Offering Period. The undersigned further understands and agrees that he or she shall be eligible to participate in succeeding offering periods only by delivering to the Company a new Subscription Agreement. Dated:___________________ Signature of Employee Social Security Number -14- 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 the 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. 52 EX-23.1 5 CONSENT OF INDEPENDENT ACCOUNTANTS 1 EXHIBIT 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the incorporation by reference in the registration statement of Clarify, Inc. on Form S-8 (File No. 333-66135) of our report dated January 19, 1999, except for Note 11 for which the date is March 12, 1999, on our audit of the consolidated financial statements of Clarify, Inc. as of December 31, 1998 and 1997, and for the years ended December 31, 1998, 1997 and 1996, and our report dated January 19, 1999, on our audit of the financial statement schedule, which reports are included in this Form 10-K. PricewaterhouseCoopers LLP San Jose, California March 30, 1999 53 EX-27 6 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. 1,000 YEAR YEAR YEAR DEC-31-1996 DEC-31-1997 DEC-31-1998 JAN-01-1996 JAN-01-1997 JAN-01-1998 DEC-31-1996 DEC-31-1997 DEC-31-1998 0 11,956 31,271 0 19,239 25,917 0 32,854 45,224 0 0 0 0 0 0 0 70,645 109,950 0 8,611 8,437 0 0 0 0 86,831 122,600 0 29,734 51,281 0 0 0 0 2 2 0 0 0 0 0 0 0 51,640 59,127 0 86,831 122,600 39,139 59,214 84,874 56,322 88,217 130,510 0 0 0 12,120 20,549 28,589 36,716 62,734 91,812 0 0 0 9 6 31 9,130 6,238 11,616 940 2,308 4,298 8,190 3,930 7,318 0 0 0 0 0 0 0 0 0 8,190 3,930 7,318 0.41 0.19 0.34 0.38 0.18 0.32 For Purposes of This Exhibit, Primary means Basic.
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