-----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, M7uuknv+hdjY7XVUNtbFs2e1w2+W2d7gpNITL2b+gI1Sz/zjeN8LMsv9L+dj4Si5 zn8NGiG8XjAb49OwvNOkcA== 0000891618-97-001524.txt : 19970401 0000891618-97-001524.hdr.sgml : 19970401 ACCESSION NUMBER: 0000891618-97-001524 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970331 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: VANTIVE CORP CENTRAL INDEX KEY: 0000947549 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PREPACKAGED SOFTWARE [7372] IRS NUMBER: 770266662 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-26592 FILM NUMBER: 97570490 BUSINESS ADDRESS: STREET 1: 2455 AUGUSTINE DR CITY: SANTA CLARA STATE: CA ZIP: 95054 BUSINESS PHONE: 4089825700 MAIL ADDRESS: STREET 1: 2455 AUGUSTINE DR CITY: SANTA CLARA STATE: CA ZIP: 95054 10-K 1 FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1996 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended December 31, 1996 Commission file number 0-26542 THE VANTIVE CORPORATION (Exact name of registrant as specified in its charter) Delaware 77-0266662 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 2455 Augustine Drive Santa Clara, California 95054 (Address of principal executive offices) (Zip code) Registrant's telephone number, including area code: (408) 982-5700 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, $0.001 Par Value (Title of class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (Section 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of the voting stock held by non-affiliates of the registrant, based upon the closing price of the Common Stock on January 31, 1997, as reported on Nasdaq National Market was approximately $396,465,962. Shares of Common Stock held by each executive officer and director and by each person who owns 5% or more of the outstanding Common Stock have been excluded in that such persons may be deemed to be affiliates. This determination of affiliates status is not necessarily a conclusive determination for other purposes. The number of shares of the registrant's $0.001 par value Common Stock outstanding on January 31, 1997, was 24, 141, 316. Part III incorporates by reference from the definitive proxy statement for the registrant's 1997 annual meeting of stockholders to be filed with the Commission pursuant to Regulation 14A not later than 120 days after the end of the fiscal year covered by this Form. 2 TABLE OF CONTENTS
Page ---- PART I . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Item 1. Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Item 2. Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 Item 3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 Item 4. Submission of Matters to a Vote of Securities Holders. . . . . . . . . . . . . . . . . . . . . . . . . . . 14 PART II . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 Item 5. Market for the Registrant's Common Stock and Related Stockholder Matters . . . . . . . . . . . . . . . . . 15 Item 6. Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations . . . . . . . . . . 18 Item 8. Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure . . . . . . . . . . . 28 PART III . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 Item 10. Directors and Executive Officers of the Registrant . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 Item 11. Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 Item 12. Security Ownership of Certain Beneficial Owners and Management . . . . . . . . . . . . . . . . . . . . . 29 Item 13. Certain Relationships and Related Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 PART IV . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . 31
i 3 PART I This report includes a number of forward-looking statements which reflect the Company's current views with respect to future events and financial performance. These forward-looking statements are subject to certain risks and uncertainties, including those discussed below, that could cause actual results to differ materially from historical results or those anticipated. In this report, the words "anticipates," "believes," "expects," "intends," "future" and similar expressions identify forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. ITEM 1. BUSINESS The Vantive Corporation ("Vantive" or the "Company") is a leading provider of Customer Asset Management applications software that enables businesses to attract, acquire, retain, and leverage customers by automating marketing and sales, customer support, defect tracking, field service and internal help desk functions. These tightly integrated Customer Asset Management applications, called the Vantive Enterprise, are based on a multi-tiered client/server architecture and a common data model. The Company's Customer Asset Management applications may also be used through a Web-based browser, thereby providing the applications directly to the end-user outside the boundaries of the business. The software can be used independently or as part of an integrated, enterprise-wide, Customer Asset Management information system. The Company believes businesses implementing a Customer Asset Management information system can better manage customer relationships by leveraging valuable customer information that is shared throughout the organization. The Company's software applications have been deployed by businesses in a broad range of industries, including software, communications, consumer products, finance, outsourcing/services, personal computer hardware, healthcare, manufacturing, medical projects, public sector/regulated industry, online services, consumer goods and retail. BACKGROUND Intensifying global competition has increased the need for businesses to focus on growth by retaining loyal, satisfied customers while acquiring new customers. As satisfied customers are more likely to become repeat and loyal customers, every state of the customer life cycle is critical to achieving total customer satisfaction. According to the Harvard Business Review March-April 1996, "U.S. corporations (now) lose half of their customers in five years." Additionally, according to Gartner Group, many businesses report that sales and marketing expenses required to attract new customers are rising. As a result of these trends, businesses are focusing more attention on attracting, acquiring, retaining and leveraging customers profitably: the Customer Asset Management strategy. Based on the axiom that customers are the most valuable asset of any business, Customer Asset Management moves beyond the traditional management organization of independent, disconnected marketing, sales, customer service and information systems to integrated systems intended to improve the entire interaction between a business and its customers through the seamless integration of people, processes and systems. Throughout the customer life cycle, a business has multiple points of customer interaction, including marketing and sales, customer support, defect tracking and field service. For example, customers may first come in contact with an organization through the marketing and sales departments when they purchase a product from the business. The customers may continue to have contact with the business as support is needed, through technical support and field service, as well as through the marketing and sales functions as the business markets to its existing customer base for the purchase of additional products. As demand has increased for packaged software applications to replace existing, in-house legacy systems, independent software vendors have emerged to provide single point solutions, or solutions targeted at specific segments of the customer interaction market, such as marketing and sales, customer support, defect tracking and field service. Businesses are demanding one cohesive approach to Customer Asset Management, however, which includes integration and sharing of information across all customer contact points. For example, businesses are often unable to adequately address customer issues or capitalize on sales opportunities when customer contacts occur in independent, disconnected departments that do not share customer information. As a result, businesses are restructuring their operations to be more customer-focused, shifting from separate marketing, sales and customer service functions to a 1 4 fully integrated Customer Asset Management approach, in which the customers effectively interact with the entire business whenever they are in contact with any part of that business. This requires that all departments within the business use a common base of customer information for all customer interactions. As the use of the World Wide Web continues to increase, significant opportunities for Customer Asset Management applications exist. The ability to access Customer Asset Management software over the Web through industry-standard browsers simplifies the installation and the maintenance of the software. Businesses are also recognizing that the Web may enable their customers to electronically request products and information directly from, or provide information directly to, the business. The growing need for Customer Asset Management software, combined with complex technology infrastructures, has resulted in a corresponding need for internal support or help desk solutions. The movement toward rapidly changing, client/server, Internet-enabled desktop computing environments, built from hardware and software from multiple vendors, has made support of this sophisticated technology increasingly difficult. Help desk solutions provide support within increasingly large, geographically distributed and technology-dependent organizations and distribute valuable problem-solving information. Internal help desks must be able to quickly and accurately process high volumes of employee requests, much like the challenges of providing to customers timely responses to sales and service information. Furthermore, as businesses continue to establish numerous, coordinated internal help desks, they seek to extend this solution to other employee support operations and organizational infrastructures, such as human resources, asset management and facilities management help desks. Internal help desks have become an important component of a Customer Asset Management solution as businesses recognize that internal employee productivity facilitates improved customer response. According to the Harvard Business Review March-April 1994: "Value is reated (for customers) by satisfied, loyal and productive employees. Employee satisfaction, in turn, results primarily from high-quality support services and policies that enable employees to deliver results to customers." In order to satisfy the wide variety of requirements of businesses for a common base of customer information, a Customer Asset Management solution must be easily customizable. In addition, a Customer Asset Management solution must be scalable to address a small number of individual users or a large number of users across departments and enterprises. To fully utilize all available customer information, businesses are also demanding that their Customer Asset Management applications integrate with back office, enterprise resource planning (ERP) systems such as finance, human resources and manufacturing. Finally, businesses are demanding ease of accessibility to Customer Asset Management applications by mobile users not on the corporate network and by all users through the Internet. With these attributes, Customer Asset Management can enable businesses to move beyond isolated, departmental views of the customer, to real-time access to all customer information held by the business. VANTIVE SOLUTION Vantive is a leading provider in the Customer Asset Management information systems market through its suite of integrated applications called Vantive Enterprise. Vantive Enterprise enables organizations to address specific needs of many aspects of customer interaction, on departmental and enterprise-wide levels. The software applications that comprise Vantive Enterprise are designed to automate and integrate sales and marketing, customer support, help desk operations, quality assurance and field service. Vantive's strategy is to provide its users with an integrated, Customer Asset Management applications solution. Complete Suite of Customer Asset Management Applications. Vantive Enterprise, a complete set of Web-enabled, client/server software applications, is the Company's integrated Customer Asset Management information system. These applications enable businesses to leverage customer information on an enterprise-wide basis, ensuring that the right customer information goes to the right person at the right time. Vantive Enterprise currently includes Vantive Sales, Vantive Support, Vantive HelpDesk, Vantive Quality, and Vantive FieldService. Each component provides easy-to-use, "best of breed" functionality for each of the respective segments of the Customer Asset Management market. Integrated Customer Asset Management Solution. Vantive Enterprise provides the customer with a single solution to help automate and manage the complete customer life cycle. In addition, Vantive Enterprise integrates help 2 5 desk operations, recognizing that employees are "internal customers" whose productivity affects interactions with external customers and partners. While Vantive's applications are designed to be implemented together, they can be deployed as a stand-alone system for each of the functional areas of Customer Asset Management: sales and marketing, customer support, field service, defect tracking and internal help desk. In addition, the Company is currently partnering with PeopleSoft, Inc. ("PeopleSoft"), an ERP vendor, with the goal of integrating Vantive Enterprise with back office inventory management and distribution systems to create a single integrated suite of applications. Customizable. Vantive Enterprise is highly customizable using Vantive Tools, a set of application-specific customization tools that allows users to modify their application on any platform without changing source code. This enables businesses to customize applications for their own business model, to tailor the user interface, to make modifications to the business rules and processes, and to extend the application. This capability allows businesses to capture customer information collected by the business to accommodate their specific business needs. Additionally, businesses can modify the applications as their business needs change. Scalable, Enterprise-Wide Solution. Vantive's products address a wide range of market needs, from departmental to enterprise-wide requirements, from single point solutions to fully integrated Customer Asset Management applications. This scaleability represents a key competitive advantage in addressing the Customer Asset Management market by allowing businesses to deploy applications for a growing number of users, while also fully maintaining system performance. Vantive Enterprise applications have been implemented at the departmental and enterprise-wide level, supporting from 10 to more than 10,000 registered or named users. Web-Enabled Functionality. The Company's VanWeb product allows access to Vantive's applications from the World Wide Web. Van Web leverages the Vantive Dynamic Dictionary, to preserve workflow rules, data integrity and permissions schemes when executing Vantive applications across the Web. Additionally, in response to an increasing demand from Web users, the Company's applications enable "self service" by a business' customers -- or electronically providing information to the business, and "assisted buying" by their customers -- or electronically requesting products and information from the business. "Self service" and "assisted buying" each occur without any necessary direct prompting by the business. By leveraging the Web, Vantive Enterprise extends its usefulness beyond the business, to its most important asset, its customers. Mobile Solution. In addition to supporting LAN, WAN and Internet access, The Vantive Enterprise also supports mobile users through Vantive-on-the-Go as well as through wireless modems and special Web enabled telephones. Mobile users may seamlessly access Vantive Sales through Vantive-On -The-Go, enabling mobile users to benefit from the same functionality, performance, real-time upgrades, and data access capabilities as individuals on the internal corporate network. Upon reconnecting with the corporate network, the Company's software will automatically synchronize any differences between the files accessed by the mobile user. The Company's applications also can be accessed through Unwired Planet, Inc.'s character-based Web browser that operates on special cellular telephones that recognize the CDPD digital standard. Using this technology, the Company has developed a product which allows Vantive Sales users to access the Vantive database via these CDPD-enabled cellular telephones, thereby further enhancing the ability of mobile users to easily access key customer information. 3 6 STRATEGY Vantive's strategy is to become the leading supplier of client/server and Web-based Customer Asset Management application software that enables businesses to improve customer acquisition and retention. The following are the key elements of the Company's strategy: Increase the Depth and Breadth of Customer Asset Management Applications. Vantive has, since its inception, focused on customer support, quality assurance and help desk applications. Recently, the Company has developed marketing and sales and field service applications to complete its initial core suite of Customer Asset Management products. In addition, the Company has regularly made many enhancements to its core suite and has recently added the following functionality: territory management, fulfillment, channel management/channel partner integration, business rules and automated workflow and advanced computer telephony integration (CTI). Vantive believes that its technology architecture and common data model provide it with a competitive advantage when adding and integrating key functionality to Vantive Enterprise. The Company's strategy also includes continuing to add new functionality to its core suite through internal development as well as through licensing "state of the art" third party technology. To qualify as "state of the art," the Company must determine that the technology has a clear future market direction, is extremely robust and is commercially supported. Expand Distribution Channels and Leverage Third Party Relationships. Vantive's strategy is simultaneously to expand its direct sales force, to develop additional relationships with third parties and to dedicate certain direct sales resources and leverage third party relationships toward expanding its presence in key "vertical" markets. By increasing the number of direct field sales representatives, the Company intends to improve its geographic reach and existing account coverage. The Company has developed relationships with several high-end integrators and resellers, including EDS, Deloitte & Touche, Price Waterhouse, KPMG Peat Marwick and HBO and Company. The Company intends to continue to develop relationships with other third party resellers in the future. In addition, the Company will focus certain field sales representatives and leverage its relationships with third parties to vertical markets that the Company believes value Vantive's general, or "horizontal," functionality as well as its and its partners' industry expertise in implementing Customer Asset Management solutions in vertical markets. Examples of such markets include healthcare, finance, telecommunications and utilities. Extend Enterprise Integration. Vantive's strategy is to enable its Customer Asset Management software applications to be easily integrated with ERP systems, such as finance, manufacturing and human resources, through strategic partnerships with ERP vendors as well as through internal development. With VanAPI, an intelligent applications program interface, the ability of a business to more easily integrate Vantive Enterprise with their other information systems is increased. In particular, Vantive has announced a development partnership with PeopleSoft with the goal of developing joint applications. Vantive is currently integrating manufacturing and distribution applications available from PeopleSoft with the Vantive FieldService application. Currently intended to be completed in 1997 or early 1998, the resulting integration of FieldService with inventory management and distribution systems will improve a business' efficiency in meeting customer needs. The Company intends, through this and other partnerships, to continue to integrate back office applications with other Customer Asset Management applications. The Company has also developed partnerships with several high-end integrators to further facilitate integration between Vantive's applications and other applications. Leverage Scaleability. The Company's strategy is to continue to develop scaleable Customer Asset Management applications that may be effectively utilized by businesses of virtually all sizes, with varying number of users, applications and levels of integration. In addition, to most effectively maintain the scaleability of its solutions, the Company's strategy is to design component based software that leverages additional transaction processing capabilities into its solutions as the industry evolves in that direction. Exploit World Wide Web. As the Web continues to increase in importance for businesses and their customers, Vantive's strategy is to continue to exploit Web-enabled functionality in its Customer Asset Management applications. Vantive plans to release VanWeb 3.0 and a set of Customer Asset Management applets in 1997 or early 1998 based on Java, a software language developed by Sun Microsystems. The Company believes these new technologies will enhance the functionality, scaleability and customizability of the Company's Web based Customer Asset 4 7 Management software applications as well as expand its "self service" and "assisted buying" application capabilities. They will also allow the Company's customers to take advantage of new network computer architectures from companies like Oracle Corporation, Sun Microsystems and Netscape Communications Corporation. Extend Mobility of User. The Company, recognizing that businesses are demanding the availability of Customer Asset Management solutions for their mobile users, recently extended the reach of its Vantive Sales product to the mobile user through Vantive-On-The-Go. Users can also access Vantive database information through a character-based Web browser developed by Unwired Planet, Inc. operating through wireless telephones enabled with CDPD, a widely adopted digital communications standard. Each of these solutions has further enhanced the ability of users to become mobile when accessing the Company's Customer Asset Management software applications. Vantive's strategy is to further benefit mobile users by applying these benefits to each of its other applications. Enable Rapid Application Deployment. Vantive's strategy is to continue to use and enhance the methodology developed for its own consultants, third parties and customers to rapidly deploy client/server applications. Vantive Enterprise applications are designed to be easily tailored. As a result, a business can deploy applications quickly, typically in a few months, and still easily refine the applications as its business needs change. The customization of an application can be done using Vantive Tools as with well as third party technology such as Visual Basic for Applications. User interface customizations are done using VanEdit as the layout tool. In 1997 or early 1998, Vantive plans to ship VanDesign, an easy to use layout facility for customizing the look and feel of an application without coding, that will be the next-generation, successor product to VanEdit. Also in 1997 or early 1998, Vantive Tools will support ActiveX, a software architecture for building software components developed by Microsoft Corporation. Through ActiveX, Vantive applications can easily incorporate third party software components developed to the ActiveX standard. The Company believes that these new technologies will enable the rapid development of more sophisticated and ergonomic software. The foregoing statements regarding the Company's strategy, expectations and intentions are forward-looking statements, and actual results may vary substantially depending upon a variety of factors, including the development of emerging markets for Customer Asset Management software, competition, technological change, changing customer needs, evolving industry standards, any product development delays, and the ability of the Company to manage any future growth and new distribution channels. There can be no assurance that any new products will be completed in a timely basis or that markets will develop for such products. See "Business Risks - Rapid Technological Change and Product Development Risks," "- Competition," "- Increased Use of Third Party Software" "- Management of Expanding Operations; Dependence upon Key Personnel" and "- Need to Expand Distribution Channels and Successfully Leverage Third Party Relationships." PRODUCTS AND TECHNOLOGY Vantive Enterprise is a suite of tightly integrated Customer Asset Management applications that enable businesses to attract, acquire, retain, and leverage customers by applying automation to marketing, sales, customer support, defect tracking, field service and internal help desk functions. The Company has designed its solution to be fully expandable through the enterprise by sharing a common database and application architecture along with common facilities for intelligent workflow routing, advanced problem solving and measurement reporting. By building the applications using a three-tier application architecture, Vantive believes its applications are more scalable and easier to maintain than competing two-tier implementations. This architecture also results in a smaller client footprint, less network traffic and more efficient use of database resources. This three-tier architecture is also well-suited for Web-based applications. Vantive Enterprise consists of the following applications, each of which can be purchased and implemented separately or integrated in any combination: Vantive Sales is a software application for automating the entire sales and marketing process. The application can automate campaign lead qualification and tracking, Web-enabled lead and opportunity management, pipeline management, scheduling and contact management, account and territory planning, distribution channel 5 8 management, sales forecasting and fulfillment. The automated campaign development feature enables a business to target specific prospects and measure the return on investment of each marketing program. Vantive Sales also can utilize a Web-based multimedia marketing encyclopedia. Using a flexible sales process model that allows sales management to track sales activities according to standard or proprietary selling methodologies, salespeople can track prospects and issues and problems reported by customers. The system is designed to help salespeople close more sales, shorten sales cycles, provide access to critical product and competitive information, better manage existing accounts, interact with distribution partners and share customer information on an enterprise-wide basis. Through Vantive On-The-Go, mobile field sales personnel have access to the corporate database to respond to customer inquiries and update information. Vantive Support is an application for automating and managing a customer support center. The application supports activities such as product support, consumer affairs and complaint management. Vantive Support manages the major aspects of the customer support process, including user access, customer entitlement, call tracking, problem diagnosis, problem resolution, user performance measurement, management reporting and service and support management. In addition to managing the customer support process, Vantive Support provides opportunities for businesses to generate incremental revenue through proactive service contract renewals, upgrades and cross-selling. When combined with VanWeb, Vantive Support also allows businesses to provide their customers with direct, electronic access to support resources via the Web. This advanced software system is built around a comprehensive database of information about customers, products and service contracts. When combined with the Vantive workflow engine, in addition to helping customer support personnel resolve customer issues quickly and accurately and manage and utilize customer information across the business, Vantive Support provides the focal point for a business' customers to interact with the entire business. To ensure accountability and responsiveness to customers, Vantive Support tracks each case, records each action that occurs relative to that case, and maintains a complete audit trail of the case. Vantive FieldService is an application for managing the allocation, scheduling and dispatching of resources, including parts and materials, to perform services or complete work orders to solve customer problems at their site. Vantive FieldService helps service personnel track installed base configurations, proactively model work plans, notify and dispatch technicians, track and manage service events, request parts, track billing and RMA information, and schedule the coordination of all these activities. Vantive FieldService helps retain customer relationships with efficient, cost-effective, on-site services. The application provides a field technician with a complete view of the customer relationship, including which products are under service contracts and whether there is an active sales opportunity with the customer. With information from other departments, field technicians can help leverage the overall customer relationship. Vantive Quality is an application for collecting, distributing, tracking and maintaining information about products. Vantive Quality manages the complete product quality process, maintains multilevel product build models, integrates with source code control systems and monitors processes for ISO 9000 compliance. Vantive Quality helps organizations listen to their customers and meet future customer needs by improving product quality and customer service by tracking product failures, enhancement requests and changes to products. With Vantive Quality, organizations can manage the workflow between customer support, customer service, quality assurance, and engineering groups more easily. This facilitates more consistent customer feedback and higher customer satisfaction. Vantive HelpDesk is an internal help desk application that logs, tracks and assists in handling employee problems, issues, complaints, suggestions and requests for assistance with technology, human resources and facilities. Vantive HelpDesk solves the increasing need for internal help desk solutions as the underpinning to support the sophisticated technology required for a Customer Asset Management information system. Vantive HelpDesk offers problem resolution and escalation capabilities similar to those in Vantive Support. In addition, Vantive HelpDesk addresses unique requirements of enterprise support management such as automatic case creation from network management systems, asset tracking, change management, integration with network management systems and access to pre-packaged experience or knowledge bases such as those provided by ServiceWare Inc. and Knowledge Brokers Inc. These features help ensure that a business' employees are as satisfied as its customers. The Company also offers several other software products and tools that enhance the functionality and facilitate the integration and modification of Vantive Enterprise applications: 6 9 VanWeb enables anyone with an industry-standard Web browser to interact dynamically with a Vantive Enterprise application from any platform anywhere in the world. Combined with Vantive Enterprise applications, VanWeb allows businesses to capture information from various sources, thereby enabling the information to be properly distributed and utilized. VanWeb is the vehicle for "self-service" and "assisted buying" application uses. This improves customer sales and support effectiveness, while providing information useful in developing goods and services for that customer. From customers requiring 24-hour access to support resolution databases or product marketing databases, to field sales representatives who log customer site visits, to international distributors who inquire about product availability, VanWeb supports the entire enterprise. VanWeb leverages existing Vantive technologies, such as the Vantive API and Vantive Dynamic Dictionary, to preserve workflow rules, data integrity and permission schemes. In contrast to static, read-only hypertext pages, VanWeb provides dynamic information generated directly from a Vantive database. As a result, VanWeb enables businesses to communicate updated information among diverse networks of customers, employees, business partners and suppliers, while providing customers direct access to self-service options. Vantive On-The-Go is Vantive's mobile computing product. Vantive On-The-Go seamlessly accesses corporate database information, enabling mobile users to experience the same functionality, performance, real-time upgrades and data access capabilities as individuals working on the internal corporate network. Vantive On-The-Go handles complex data synchronization and conflict management, ensuring accurate and complete customer data. Designed with the industry leading mobile database technology, SQLAnywhere, instead of proprietary data synchronization engines, Vantive On-The-Go provides significantly faster data synchronization than competing mobile applications. Vantive Development Environment, which includes Vantive Tools, allows a business to tailor the user interface, make modifications to business processes and extend the application, all without changing the source code of the Vantive Enterprise applications. Vantive Development Environment also includes Visual Basic for Applications, a third party scripting tool that further facilitates tailoring the user interface. The Company also has developed VanAPI, an applications program interface that can be used to link Vantive Enterprise software applications to corporate data in legacy or client/server applications such as finance, human resources and manufacturing. SALES AND MARKETING The Company markets and sells its software and services in the United States primarily through a direct sales organization. To support its sales force, the Company conducts comprehensive marketing programs which include direct mail, public relations, Web-based lead generation, advertising, trade shows, seminars, ongoing customer communications programs and an annual, international user group conference. Marketing also coordinates the Company's participation in industry programs and forums and establishes and maintains close relationships with recognized industry analysts. The sales cycle begins with the generation of a sales lead, which is followed by qualification of the lead, an analysis of the customer's needs, multiple presentations and/or product demonstrations to the prospective customer, and ends with contract negotiation and commitment. Due to the importance of the Company's client/server applications to businesses, the Company focuses initial sales efforts on senior personnel in the business' information technology department and line management executives in the functional areas relevant to the application. While the sales cycle varies substantially from customer to customer, it typically requires six to nine months. The Company markets its products outside of the United States through wholly owned subsidiaries and independent distributors, and as of December 31, 1996, had wholly owned subsidiaries in Australia. Canada, France, Germany, the Netherlands, Singapore and the United Kingdom, and distributors in Argentina, Brazil, Chile, Columbia, Israel, Japan, Mexico, New Zealand, Scandinavia, South Korea, Spain and Venezuela. In addition to marketing and selling the Company's products, the distributors are required to provide technical support to their customers. The sales and marketing organization consists of 129 employees, including 51 quota-carrying salespeople, as of December 31, 1996. The domestic sales staff is based at the Company's corporate headquarters in 7 10 Santa Clara, California and 13 field sales offices located in Atlanta, Boston, Boulder Colorado, Brentwood California, Chicago, Dallas, Edison New Jersey, Irvine California, New York, Portland, San Diego, Seattle and Washington, D.C. An important element of the Company's distribution strategy is to expand its direct sales force, to create additional relationships with third parties and to dedicate certain direct sales resources and leverage third party relationships toward key vertical markets. The ability of the Company to achieve significant revenue growth in the future will depend on its success in executing this strategy. The Company is currently investing, and intends to continue to invest, significant resources to develop its sales strategy, which could adversely affect the Company's operating margins. In this regard, the Company has recently hired and continues to hire significant numbers of direct sales personnel and has developed relationships with several high-end integrators and resellers, including EDS, Deloitte & Touche, Price Waterhouse, KPMG Peat Marwick and HBO and Company. Competition for sales personnel is intense, and there can be no assurance that the Company can retain its existing sales personnel or that it can attract, assimilate and retain additional highly qualified sales personnel in the future. The strategy also depends, in large part, on attracting and retaining appropriate third party relationships. There also can be no assurance that the Company will be able to attract and retain appropriate high-end integrators, resellers and other third party distributors to market the Company's products effectively. In addition, the Company's agreements with these third parties are not exclusive and in many cases may be terminated by either party without cause. In addition, many of these third parties sell or co-market competing product lines. Therefore, there can be no assurance that any of these parties will continue to represent or recommend the Company's products. There also can be no assurance that the Company will effectively identify key vertical markets. The inability to recruit, or the loss of, important direct sales personnel, high-end integrators, resellers or other third party distributors, or the failure to effectively identify key vertical markets could have a material adverse effect on the Company's business, results of operations and financial condition. The foregoing statements regarding the Company's intention to expand its distribution channels are forward-looking statements, and actual results may vary substantially depending upon a variety of factors, including but not limited to, those contained in this paragraph. PRODUCT DEVELOPMENT The Company has historically developed and expects to continue to develop its products in conjunction with its existing and potential customers. Several products are currently in development. Vantive Version 7.0, scheduled for release in 1997 or early 1998, is expected to include updates to the Vantive Sales application, a more flexible user interface model, improved reports for each application and a new release of the Vantive client that functions as a container for ActiveX. Vantive Version 7.0 is also expected to include VanDesign, a simple, visual layout facility for customizing the look and feel of an application without coding. Vantive Version 7.0 applications are expected to integrate with several third party technologies such as marketing encyclopedia technology to manage and distribute information and configuration technology to configure complex orders and quotes as part of the sales process. Vantive Version 7.1, scheduled for release in 1997 or early 1998, is expected to include updates to the Sales application, a next generation version of the FieldService application, and Web applets for use over the Internet. VanWeb 3.0, scheduled for release in 1997 or early 1998, is expected to provide better scaleability due to a multi- threaded Java implementation, full customization of applets using leading HTML editors and increased functionality. The evolution to component based software will also significantly influence Vantive's future product direction. The Company believes businesses will expect to be able to utilize portions of the Company's integrated software solution and effectively integrate them with software objects developed by other software vendors. As of December 31, 1996, there were 54 employees on the Company's product development staff. In addition, the Company regularly supplements its workforce with consultants. As of December 31, 1996, there were 20 full-time equivalent consultants on the Company's product development staff. The Company's research and development expenditures in 1994, 1995 and 1996 were $2.1 million, $3.3 million and $7.3 million, respectively, and represented 20.3%, 13.2% and 11.3% of revenues, respectively. The Company expects that it will continue to commit substantial resources to product development in the future. The foregoing statements regarding scheduled introductions of the Company's products under development and proposed enhancements and the features included in such products or enhancements are forward-looking statements, and the actual release dates for such products or enhancements could differ materially from those projected 8 11 as a result of a variety of factors, including but not limited to, those contained in the following paragraphs. The Customer Asset Management software market is subject to rapid technological change, changing customer needs, frequent new product introductions and evolving industry standards that may render existing products and services obsolete. As a result, the Company's position in its existing markets or other markets that it may enter could be eroded rapidly by product advances. The life cycles of the Company's products are difficult to estimate. The Company's growth and future financial performance will depend in part upon its ability to enhance existing applications, develop and introduce new applications that keep pace with technological advances, meet changing customer requirements, respond to competitive products and achieve market acceptance. For example, the Company's customers have adopted a wide variety of hardware, software, database, Internet-based and networking platforms, and as a result, to gain broad market acceptance, the Company must continue to support and maintain its products on a variety of such platforms. The Company's future success will depend on its ability to address the increasingly sophisticated needs of its customers by supporting existing and emerging hardware, software, database, Internet-based and networking platforms and by developing and introducing enhancements to its products and new products on a timely basis that keep pace with technological developments, evolving industry standards and changing customer requirements. The success of the Company's products may also depend, in part, on the ability of the Company to effectively distribute its products through the Internet. There can be no assurance that the Company will be able to successfully change other aspects of its business, such as its distribution channels or cost structure, if technological changes in its market, including distribution through the Internet, require such change. The Company's product development efforts are expected to require, from time to time, substantial investments by the Company in product development and testing. There can be no assurance that the Company will have sufficient resources to make the necessary investments. The Company has in the past experienced development delays, and there can be no assurance that the Company will not experience such delays in the future. There can be no assurance that the Company will not experience difficulties that could delay or prevent the successful development, introduction or marketing of new or enhanced products, including but not limited to Vantive Version 7.0, Vantive Version 7.1 and VanWeb 3.0. In addition, there can be no assurance that such products will meet the requirements of the marketplace and achieve market acceptance or that the Company's current or future products will conform to industry requirements. If the Company is unable, for technological reasons, to develop and introduce new and enhanced products in a timely manner, the Company's business, results of operations and financial condition could be materially adversely affected. Software products as complex as those offered by the Company may contain errors that may be detected at any point in the products' life cycles. The Company has in the past discovered software errors in certain of its products and has experienced delays in shipment of products during the period required to correct these errors. There can be no assurance that, despite testing by the Company and by current and potential customers, errors will not be found, resulting in loss of, or delay in, market acceptance and sales, diversion of development resources, injury to the Company's reputation, or increased service and warranty costs, any of which could have a material adverse effect on the Company's business, results of operations and financial condition. COMPETITION The Customer Asset Management market is intensely competitive, highly fragmented and subject to rapid change. Because the Company offers multiple applications that can be purchased separately or integrated as part of Vantive Enterprise, the Company competes with a variety of other businesses depending on the target market for their applications software products. These competitors include a select number of businesses targeting the enterprise-level and department-level Customer Asset Management markets, such as Astea International, Inc., Aurum Software, Inc., Clarify, Inc., Onyx Software, Scopus Technology, Inc. and Siebel Systems, Inc. The Company also competes with a substantial number of businesses that offer products targeted at one or more specific markets, including the customer support market, the help desk market, the quality assurance market and the sales and marketing automation market, such as Remedy Corporation and Software Artistry, Inc. The Company believes that such point solution providers may expand their suite, which could provide increased competition for the company across its market segments. The Company also competes with third party professional service organizations that develop custom software and with internal information technology departments of customers that develop customer interaction applications. Among the Company's current and potential competitors are also a number of large hardware and software businesses that may develop or acquire products that compete with the Company's products. In this regard, SAP AG, Oracle Corporation ("Oracle") and The Baan Company have each introduced sales automation and/or customer support modules as part of 9 12 their application suites. In addition, Oracle has recently announced the creation of a network of third party dealers that will sell Oracle's application suites exclusively to medium-sized businesses. The Company expects large software vendors in the ERP market may enter the Customer Asset Management market. These competitors have significantly greater financial, technical, marketing and other resources than the Company. The Company also expects that competition will increase as a result of software industry consolidations. Current and potential competitors have established or may establish cooperative relationships among themselves or with third parties to increase the ability of their products to address the needs of the Company's prospective customers. Accordingly, it is possible that new competitors or alliances among competitors may emerge and rapidly acquire significant market share. The Company also expects that competition may increase as a result of both new software start ups entering the market as well as existing software industry vendors which may be planning to enter the market for Customer Asset Management applications. Increased competition is likely to result in price reductions, reduced operating margins and loss of market share, any of which could materially adversely affect the Company's business, results of operations and financial condition. Many of the Company's current and potential competitors have significantly greater financial, technical, marketing and other resources than the Company. As a result, they may be able to respond more quickly to new or emerging technologies and changes in customer requirements, or to devote greater resources to the development, promotion and sale of their products than can the Company. There can be no assurance that the Company will be able to compete successfully against current and future competitors or that competitive pressures faced by the Company will not materially adversely affect its business, results of operations and financial condition. The Company believes that the principal competitive factors affecting its market include product features such as adaptability, scaleability, ability to integrate with products produced by other vendors, functionality, ease of use, product reputation, quality, performance, price, customer service and support, the effectiveness of sales and marketing efforts and company reputation. Although the Company believes that its products currently compete favorably with respect to such factors, there can be no assurance that the Company can maintain its competitive position against current and potential competitors, especially those with significantly greater financial, marketing, service, support, technical and other resources. INTELLECTUAL PROPERTY AND OTHER PROPRIETARY RIGHTS The Company's success is heavily dependent upon proprietary technology. The company relies primarily on a combination of copyright, trademark and trade secrets laws, as well as confidentiality procedures and contractual provisions to protect its proprietary rights. There can be no assurance that such measures will be adequate to protect the Company from infringement of its technology. The Company presently has no patents or patent applications pending. Despite the Company's efforts to protect its proprietary rights, attempts may be made to copy aspects of the Company's products or to obtain and use information that the Company regards as proprietary. In particular, as the Company provides its licensees with access to the data model and other proprietary information underlying the Company's licensed applications, there can be no assurance that licensees or others will not develop products which infringe the Company's proprietary rights. Policing unauthorized use of the Company's products is difficult, and while the Company is unable to determine the extent to which piracy of its software products exists, software piracy can be expected to be a persistent problem. In addition, the laws of some foreign countries do not protect the Company's proprietary rights to as great an extent as do the laws of the United States. There can be no assurance that the Company's means of protecting its proprietary rights will be adequate or that the Company's competitors will not independently develop similar technology. The Company believes that competitors regularly evaluate and try to emulate its products. The Company is not aware that any of its products infringe the proprietary rights of third parties, although the Company has in the past, and may in the future, receive communications alleging possible infringement of third party intellectual property rights. The Company expects that software product developers will increasingly be subject to infringement claims as the number of products and competitors in the Company's target markets grows and the functionality of products in such markets overlaps. Any such claims, with or without merit, could be time-consuming, result in costly litigation, cause product shipment delays or require the Company to enter into royalty or licensing agreements. Such royalty or licensing agreements, if required, may not be available on terms acceptable to the Company or at all, which could have a material adverse effect upon the Company's business, results of operations and financial condition. 10 13 EMPLOYEES As of December 31, 1996, the Company had 254 employees, including 129 in sales and marketing, 20 in consulting, 54 in research and development, 33 in general and administration and 18 in client services. Of these employees, ten employees are located in the United Kingdom, eight in France, four in the Netherlands, two in Australia, two in Canada and two in Germany. The remaining employees are located in the United States. None of the Company's employees is represented by a labor union. The Company has experienced no work stoppages and believes its relationship with its employees is good. In addition, the Company regularly supplements its workforce with consultants. As of December 31, 1996, the Company employed 33 full-time equivalent consultants. Competition for qualified personnel in the Company's industry is intense. The Company believes that its future success will depend in part on its continued ability to hire, assimilate and retain qualified personnel. 11 14 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT As of January 31, 1997, the Company's directors and executive officers were as follows:
Name Age Position Director or ---- --- -------- Officer Since ------------- John R. Luongo 47 President, Chief Executive Officer and 1993 Director Roger J. Sippl 42 Chairman of the Board of Directors 1990 Aneel Bhusri 31 Director 1996 William H. Davidow 61 Director 1991 Kevin G. Hall 38 Director 1994 Raymond L. Ocampo Jr. 44 Director 1997 Peter A. Roshko 38 Director 1991 John M. Jack 42 Chief Operating Officer 1995 Christopher W. Lochhead 31 Executive Vice President of Strategic 1996 Marketing Garry Hallee 36 Senior Vice President of Engineering 1996 Kathleen A. Murphy 50 Chief Financial Officer 1995 Michael M. Loo 40 Vice President, Finance 1993
John R. Luongo has been President, Chief Executive Officer and a director of the Company since June 1993. He was an independent consultant from November 1992 to June 1993, President, Chief Executive Officer and Chairman of the Board of Trifox, Inc., a software company, from September 1991 to November 1992, Senior Consultant at Merrill, Pickard, Anderson and Eyre, a venture capital firm, from September 1990 to June 1991 and Senior Vice President International Division, at Oracle Corporation from July 1982 to July 1990. Roger J. Sippl is a co-founder of the Company and has served as a director of the Company since December 1990 and as Chairman of the Board since 1996. Mr. Sippl is the founder of Visigenic Software, Inc., where he has served as Chief Executive Officer since January 1993. Prior to his relationship with Visigenic Software, Inc., Mr. Sippl founded Informix Software in 1980 and served as that company's Chairman of the Board until 1992. Aneel Bhusri has served as a director of the Company since December 1996. He has served in several capacities with PeopleSoft, Inc. since August 1993, currently as its Senior Vice President of Product Strategy. From June 1992 to March 1993, Mr. Bhusri served as an associate at Norwest Venture Capital. From 1988 to 1991 he was a financial analyst in Morgan Stanley's Corporate Finance Department. William H. Davidow has served as a director of the Company since July 1991. He has been a General Partner at Mohr, Davidow Ventures since May 1985. 12 15 Kevin G. Hall has served as a director of the Company since May 1994. He has served as a General Partner of Norwest Equity Partners, IV since August 1993. Prior to his relationship with Norwest Equity Partners, IV, he served as a principal in Brentwood Associates, a venture capital firm, from June 1988 to August 1993. Raymond L. Ocampo Jr. has served as a director of the Company since January 1997. He served in several capacities with Oracle Corporation from July 1986 to November 1996, primarily and most recently as its Senior Vice President, General Counsel and Corporate Secretary. Peter A. Roshko has served as a director of the Company since July 1991. Mr. Roshko co-founded and has been a co-member of Granite Investments, an investment company, since August 1995. From December 1993 to August 1995, Mr. Roshko was a General Partner at Cottonwood Ventures, a venture capital firm. From June 1993 to December 1993, Mr. Roshko was an independent investor and consultant in the venture capital industry. Mr. Roshko was a General Partner at Mohr, Davidow Ventures from March 1987 to June 1993. John M. Jack has served as Chief Operating Officer since January 1997 and as Vice President, Worldwide Sales of the Company from May 1995 to January 1997. He served as Vice President, Western Regional Sales at Sybase Corporation, a client/server software company, from April 1991 to April 1995. From November 1986 to April 1991, he held various sales management and sales positions at Sybase Corporation. Christopher W. Lochhead has served as Executive Vice President of Strategic Marketing of the Company since June 1996. He served as President and Chief Executive Officer of Always An Adventure, a strategy consulting company, from November 1993 to June 1996. From September 1991 to November 1993, he was Director of Canada at Platinum Software Corporation, a software company. Garry Hallee has served as Senior Vice President of Engineering of the Company since October 1996. He served as Vice President and General Manager at Platinum Technology, a software company, from December 1995 to October 1996. From July 1992 to December 1995, he served as Director, Product Development at Trinzic, a software company. From May 1984 to July 1992, he served as Chief Technology Officer and Development Manager at Aion, a software company. Kathleen A. Murphy has served as Chief Financial Officer of the Company since August 1995. She served as Chief Financial Officer at The Imagination Network, an entertainment software company from April 1994 to August 1995 and as Chief Financial Officer of Verity, Inc., an information retrieval software company, from April 1989 to March 1994. Michael M. Loo has served as Vice President, Finance of the Company since May 1995. He initially served as its Director of Finance and Administration from October 1993 to May 1995. Previously, he served in various financial and accounting positions, most recently as Controller, Worldwide Field Operations, at Sybase Corporation, a client/server software company, from January 1990 to October 1993. ITEM 2. PROPERTIES The Company's principal administrative, engineering, manufacturing, marketing and sales facilities total approximately 32,859 square feet and are located in a single building in Santa Clara, California under a lease which expires in May 2001. In addition, in September 1996, the Company leased an additional 24,000 square feet in another building in Santa Clara, California, under a lease which expires in 2003. The Company also leases offices in the metropolitan areas of Amsterdam, Atlanta, Chicago, Dallas, Denver, London, Los Angeles, New Jersey, New York, Seattle, Toronto and Washington, D.C. 13 16 ITEM 3. LEGAL PROCEEDINGS None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS. None. 14 17 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS The Company's stock has been traded on the Nasdaq National Market since the Company's initial public offering on August 14, 1995 under the Nasdaq symbol VNTV. The following table sets forth, for the periods indicated, the high and low closing sales prices for the Company's common stock as reported by Nasdaq:
Year Ended December 31, 1995 High Low ---------------------------- ---- --- Third Quarter (since August 14, 1995) $ 9.13 $6.44 Fourth Quarter $14.38 $6.75 Year Ended December 31, 1996 ---------------------------- First Quarter $12.25 $9.50 Second Quarter $19.75 $11.00 Third Quarter $32.38 $12.75 Fourth Quarter $42.25 $24.75
All sales prices have been adjusted for a two-for-one stock split paid in the form of a 100% stock dividend in October 1996. As of December 31, 1996, there were approximately 305 holders of record of the Company's common stock. The Company has never paid cash dividends on its common stock. The Company currently intends to retain earnings, if any, for use in its business and does not anticipate paying any cash dividends in the foreseeable future. 15 18 ITEM 6. SELECTED FINANCIAL DATA THE VANTIVE CORPORATION SELECTED CONSOLIDATED FINANCIAL DATA (In thousands, except per share data)
For the Years Ended December 31, ---------------------------------------------------- 1992 1993 1994 1995 1996 ---- ---- ---- ---- ---- CONSOLIDATED STATEMENT OF OPERATIONS DATA: Revenues: License . . . . . . . . . . . . . . $ 14 $ 1,900 $7,141 $16,631 $41,513 Service . . . . . . . . . . . . . . -- 613 3,073 8,404 22,761 ------- ------- ------ ------- ------- Total revenues . . . . . . 14 2,513 10,214 25,035 64,274 Cost of Revenues: License . . . . . . . . . . . . . . -- 50 110 163 392 Service . . . . . . . . . . . . . . -- 1,227 2,383 5,968 12,263 ------- ------- ------- ------- ------- Total cost of revenues . . -- 1,277 2,493 6,131 12,655 ------- ------- ------- ------- ------- Gross margin . . . . . . . . . . . . . . . . 14 1,236 7,721 18,904 51,619 Operating Expenses: Sales and marketing . . . . . . . . 917 2,142 5,068 11,582 24,676 Research and development . . . . . 1,016 1,726 2,072 3,319 7,261 General and administrative . . . . . 361 908 1,099 2,167 5,389 ------- ------- ------- ------- ------- Total operating expenses . 2,294 4,776 8,239 17,068 37,326 ------- ------- ------- ------- ------- Income/(loss) from operations . . . . . . . (2,280) (3,540) (518) 1,836 14,293 ------- ------- ------- ------- ------- Other income/(expense), net . . . . . . . . 46 (92) (30) 439 1,286 ------- ------- ------- ------- ------- Income/(loss) before provision for income taxes. . . . . . . . . . . . . . . . . . . (2,234) (3,632) (548) 2,275 15,579 Provision for income taxes . . . . . . . . . -- -- -- 232 4,674 ------- ------- ------- ------- ------- Net income/(loss) . . . . . . . . . . . . . $(2,234) $(3,632) $ (548) $ 2,043 $10,905 ======= ======= ======= ======= ======= Pro forma net loss per share . . . . . . . . $ (0.03) ======= Net income per share . . . . . . . . . . . . $ 0.09 $ 0.42 ====== ====== Shares used in per share computation . . . . 17,570 23,012 25,847 ====== ====== ======
December 31, ----------------------------------------------------- 1992 1993 1994 1995 1996 ---- ---- ---- ---- ---- CONSOLIDATED BALANCE SHEET DATA: Working capital . . . . . . . . . . . . . . $ 2,541 $ 1,553 $ 3,438 $24,463 $32,959 Total assets . . . . . . . . . . . . . . . . 3,130 3,365 7,457 34,587 58,364 Long-term liabilities . . . . . . . . . . . -- 294 415 650 755 Mandatorily redeemable convertible preferred stock. . . . . . . . . . . . . . 5,522 8,244 10,801 -- -- Stockholders' equity/(accumulated deficit) . $(2,580) $(6,204) $(6,665) $26,657 $39,431
16 19 THE VANTIVE CORPORATION QUARTERLY FINANCIAL DATA
Quarter Ended ------------------------------------------------------------------------ Mar. June Sept. Dec. Mar. June Sept. Dec. 31, 30, 30, 31, 31, 30, 30, 31, 1995 1995 1995 1995 1996 1996 1996 1996 ---- ---- ---- ---- ---- ---- ---- ---- Revenues: License . . . . . . . . . . . $ 3,053 $ 3,634 $ 4,289 $ 5,655 $ 7,088 $ 9,914 $11,102 $13,409 Service . . . . . . . . . . . 1,134 1,883 2,320 3,067 3,725 5,287 6,147 7,602 ------- ------- ------- ------- ------- ------- ------- ------- Total revenues . . . . . . 4,187 5,517 6,609 8,722 10,813 15,201 17,249 21,011 Cost of Revenues: License . . . . . . . . . . . 35 47 51 31 56 97 113 126 Service . . . . . . . . . . . 1,053 1,477 1,510 1,928 2,322 2,769 3,316 3,856 ------- ------- ------- ------- ------- ------- ------- ------- Total cost of revenues . . 1,088 1,524 1,561 1,959 2,378 2,866 3,429 3,982 ------- ------- ------- ------- ------- ------- ------- ------- Gross margin . . . . . . . . . . 3,099 3,993 5,048 6,763 8,435 12,335 13,820 17,029 Operating Expenses: Sales and marketing . . . . . 1,876 2,390 2,946 4,370 4,826 5,100 6,462 8,288 Research and development . . 707 761 890 960 1,102 1,403 1,694 3,062 General and administrative . 414 459 641 654 1,079 1,136 1,511 1,663 ------- ------- ------- ------- ------- ------- ------- ------- Total operating expenses . 2,997 3,610 4,477 5,984 7,007 7,639 9,667 13,013 ------- ------- ------- ------- ------- ------- ------- ------- Income from operations . . . . . 102 383 571 779 1,428 4,696 4,153 4,016 Other income/(expense), net . . . 9 (4) 131 302 272 287 370 357 ------- ------- ------- ------- ------- ------- ------- ------- Income before provision for income taxes . . . . . . . . . 111 379 702 1,081 1,700 4,983 4,523 4,373 Provision for income taxes . . . 11 38 70 112 340 1,665 1,357 1,312 ------- ------- ------- ------- ------- ------- ------- ------- Net income . . . . . . . . . . . $ 100 $ 341 $ 632 $ 969 $ 1,360 $ 3,318 $ 3,166 $ 3,061 ======= ======= ======= ======= ======= ======= ======= =======
As a Percentage of Total Revenues -------------------------------------------------------------------------- Revenues: License . . . . . . . . . . . 72.9% 65.9% 64.9% 64.8% 65.6% 65.2% 64.4% 63.8% Service . . . . . . . . . . . 27.1 34.1 35.1 35.2 34.4 34.8 35.6 36.2 ----- ------ ------ ------ ------ ------ ------ ------ Total revenues . . . . . . 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 Cost of Revenues: License . . . . . . . . . . . 0.8 0.8 0.8 0.4 0.5 0.7 0.7 0.6 Service . . . . . . . . . . . 25.2 26.8 22.8 22.1 21.5 18.2 19.2 18.4 ---- ---- ---- ---- ---- ---- ---- ---- Total cost of revenues . . 26.0 27.6 23.6 22.5 22.0 18.9 19.9 19.0 ---- ---- ---- ---- ---- ---- ---- ---- Gross margin . . . . . . . . . . 74.0 72.4 76.4 77.5 78.0 81.1 80.1 81.0 Operating Expenses: Sales and marketing . . . . . 44.8 43.3 44.6 50.1 44.6 33.6 37.5 39.4 Research and development . . 16.9 13.8 13.5 11.0 10.2 9.2 9.8 14.6 General and administrative . 9.9 8.4 9.7 7.5 10.0 7.5 8.8 7.9 ---- ---- ---- ---- ---- ---- ---- ---- Total operating expenses . 71.6 65.5 67.8 68.6 64.8 50.3 56.1 61.9 ---- ---- ---- ---- ---- ---- ---- ---- Income from operations . . . . . 2.4 6.9 8.6 8.9 13.2 30.8 24.0 19.1 Other income/(expense), net . . . 0.3 -- 2.0 3.5 2.5 1.9 2.1 1.7 ---- ---- ---- ---- ---- ---- ---- ---- Income before provision for income taxes . . . . . . . . . 2.7 6.9 10.6 12.4 15.7 32.7 26.1 20.8 Provision for income taxes . . . 0.3 0.7 1.1 1.3 3.1 10.9 7.8 6.2 ---- ---- ---- ---- ---- ---- ---- ---- Net income . . . . . . . . . . . 2.4% 6.2% 9.5% 11.1% 12.6% 21.8% 18.3% 14.6% ==== ==== ==== ==== ==== ==== ==== ====
17 20 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW The Company was founded in October 1990 to develop software to enable businesses to improve their customer service. The Company was engaged principally in research and development from inception through December 31, 1992. The Company introduced its first product, Vantive Support, in July 1992, and introduced Vantive Quality and the Oracle version of Vantive Support in the fall of 1993. The Company introduced Vantive HelpDesk in August 1994, Vantive Sales in early 1995, and Vantive FieldService in early 1996. License fees for the Company's software products consist of (i) a per server fee based on the specific Vantive Enterprise application(s) licensed and (ii) a fee based on the maximum number of concurrent or named users allowed to access those applications. Most of the Company's revenues to date have resulted from non- recurring license fees based on sales of concurrent user licenses. The remaining revenues are primarily attributable to service revenues, which include post-contract support, consulting and training revenue. Of these service revenues, only post-contract support revenues are expected to be recurring. Post-contract support revenues accounted for approximately 12.1% of total revenues in 1996. Because concurrent user fees are not application specific, the breakdown of revenues attributable to specific applications for customers that have purchased more than one application cannot be precisely determined by the Company. However, the Company believes that most of its revenues have been derived from fees associated with Vantive Support and, to a lesser degree, Vantive HelpDesk. In any period, a significant portion of the Company's revenues may be derived from large sales to a limited number of customers. However, no customer accounted for 10% or more of total revenues in 1995 or 1996. As significant sales to a particular customer are typically non-recurring, the Company does not believe its future results are dependent on recurring revenues from any particular customer. The Company's revenues are derived from software license fees and fees for its services. License revenues consist of license fees for the Company's products as well as fees from sublicensing third-party software products. The Company generally recognizes license fees upon shipment of software products if there are no significant post-delivery obligations, if collection is probable and if the license agreement requires payment within one year. If significant post-delivery obligations exist or if a product is subject to customer acceptance, revenues are deferred until no significant obligations remain or acceptance has occurred. Revenues from services have to date consisted primarily of consulting revenues, post-contract support revenues and, to a lesser extent, training revenues. Consulting and training revenues generally are recognized as services are performed. Post-contract support revenues are recognized ratably over the term of the support period, which is typically one year. If post-contract support services are included free or at a discount in a license agreement, such amounts are allocated out of the license fee at their fair market value based on the value established by independent sale of such post-contract support services to customers. If a transaction includes both license and service elements, license fee revenue is recognized upon shipment of the software, provided services do not include significant customization or modification of the base product and the payment terms for licenses are not subject to acceptance criteria. In cases where license fee payments are contingent upon the acceptance of services, revenues from both the license and the service elements are deferred until the acceptance criteria are met. See Note 2 of Notes to Condensed Consolidated Financial Statements. International revenues, or revenues derived from sales to customers in foreign countries, accounted for approximately 19.0%, 9.8% and 9.3% of the Company's revenue in 1994, 1995 and 1996, respectively. The Company believes that its continued growth and profitability will require further expansion of its international operations. To successfully expand international sales, the Company must establish additional foreign operations, hire additional personnel and recruit additional international resellers. To the extent that the Company is unable to do so in a timely manner, the Company's growth in international sales, if any, will be limited, and the Company's business, results of operations and financial condition could be materially adversely affected. As the Company continues to expand its international operations, significant costs may be incurred ahead of any anticipated international revenues, which could have a material adverse effect on the Company's business, results of operations and financial condition. In addition, future increases in the value of the U.S. dollar could make the Company's products less competitive in foreign markets. As the Company increases its foreign sales, it may be materially and adversely affected by fluctuations in 18 21 currency exchange rates, increases in duty rates, exchange or price controls or other restrictions on foreign currencies. Additional risks inherent in the Company's international business activities generally include unexpected changes in regulatory requirements, tariffs and other trade barriers, costs of localizing products for foreign countries, lack of acceptance of localized products in foreign countries, longer accounts receivable payment cycles, difficulties in managing international operations, potentially adverse tax consequences including restrictions on the repatriation of earnings and the burdens of complying with a wide variety of foreign laws. There can be no assurance that such factors will not have a material adverse effect on the Company's future international sales and, consequently, the Company's business, results of operations and financial condition. This Management's Discussion and Analysis of Financial Condition and Results of Operations includes a number of forward-looking statements which reflect the Company's current views with respect to future events and financial performance. These forward-looking statements are subject to certain risks and uncertainties, including those discussed below that could cause actual results to differ materially from historical results or those anticipated. In this report, the words "anticipate," "believes," "expects," "future," "intends," and similar expressions identify forward-looking statements. RESULTS OF OPERATIONS The following table sets forth the percentages that income statement items are to total revenues for the years ended December 31, 1994, 1995 and 1996:
Year Ended December 31, --------------------------------- 1994 1995 1996 ---- ---- ---- Revenues: License . . . . . . . . . . . . . . . . . . . . . . . . . . 69.9% 66.4% 64.6% Service . . . . . . . . . . . . . . . . . . . . . . . . . . 30.1 33.6 35.4 ---- ---- ---- Total revenues . . . . . . . . . . . . . . . . . . . . . 100.0 100.0 100.0 Cost of Revenues: License . . . . . . . . . . . . . . . . . . . . . . . . . . 1.1 0.7 0.6 Service . . . . . . . . . . . . . . . . . . . . . . . . . . 23.3 23.8 19.1 ---- ---- ---- Total cost of revenues . . . . . . . . . . . . . . . . . 24.4 24.5 19.7 ---- ---- ---- Gross margin . . . . . . . . . . . . . . . . . . . . . . . . . . 75.6 75.5 80.3 Operating Expenses: Sales and marketing . . . . . . . . . . . . . . . . . . . . 49.6 46.3 38.4 Research and development . . . . . . . . . . . . . . . . . . 20.3 13.2 11.3 General and administrative . . . . . . . . . . . . . . . . . 10.8 8.7 8.4 ---- ---- ---- Total operating expenses . . . . . . . . . . . . . . . . 80.7 68.2 58.1 ---- ---- ---- Operating income/(loss) . . . . . . . . . . . . . . . . . . . . . (5.1) 7.3 22.2 Other income/(expense) . . . . . . . . . . . . . . . . . . . . . (0.3) 1.8 2.0 ---- ---- ---- Income/(loss) before provision for income taxes . . . . . . . . . (5.4) 9.1 24.2 Provision for income taxes . . . . . . . . . . . . . . . . . . . -- 0.9 7.3 ---- ---- ---- Net income/(loss) . . . . . . . . . . . . . . . . . . . . . . . (5.4%) 8.2% 16.9% ==== ==== ====
Revenues License. The Company increased its license revenues by 132.9% from $7.1 million in 1994 to $16.6 million in 1995, and by 149.6% to $41.5 million in 1996. These increases were due to the market's growing acceptance of the Company's products, in particular Vantive Support and Vantive HelpDesk, the introduction of the Company's products using the Microsoft SQL server relational database management system and the Microsoft NT operating systems, and increased sales as a result of the expansion of the Company's direct sales force. The Company does not believe that the historical growth rates of license revenues will be sustainable or are indicative of future results. 19 22 Service. Service revenues are primarily comprised of fees from consulting, post-contract support and, to a lesser extent, training services. Service revenues increased by 173.5% from $3.1 million in 1994 to $8.4 million in 1995 and by 170.8% to $22.8 million in 1996. The increase in service revenues was primarily due to the increase in consulting, post-contract support and, to a lesser extent, training services associated with increased sales of the Company's applications. As the Company implements its strategy of encouraging third party organizations such as systems integrators to become proficient in implementing the Company's products, consulting revenues as a percentage of total revenues may decrease. Cost of Revenues License. Cost of license revenues includes the costs of product media, product duplication and manuals. Cost of license revenues increased from $110,000, or 1.5% of related license revenues, in 1994, to $163,000, or 1.0% of related license revenues, in 1995 and to $392,000, or 0.9% of related license revenues, in 1996. The increase in absolute dollars in cost of license revenues was primarily due to the increase in volume shipments of the Company's software applications and the cost of sublicensing third-party software. The decrease in cost of license revenues as a percentage of the related license revenues was primarily due to economies of scale realized as a result of shipping greater quantities of product during the year ended December 31, 1996. Service. Cost of service revenues is primarily comprised of employee-related costs and fees for third-party consultants incurred in providing consulting, post-contract support and training services. Cost of service revenues increased from $2.4 million, or 77.5% of related service revenues, in 1994, to $6.0 million, or 71.0% of related service revenues, in 1995 and to $12.3 million, or 53.9% of related service revenues, in 1996. These increases in absolute dollars were due primarily to increases in consulting, support and training personnel, and third-party service providers during these periods. The decrease in cost of service revenues as a percentage of the related service revenues from 1995 to 1996 was primarily due to economies of scale realized as a result of a higher level of service activity and due post-contract support revenues constituting a higher proportion of total service revenues. The cost of services as a percentage of service revenues may vary between periods due to mix of services provided by the Company and the resources used to provide these services. Operating expenses Sales and marketing. Sales and marketing expenses increased from $5.1 million, or 49.6% of revenues, in 1994 to $11.6 million, or 46.3% of revenues, in 1995 and to $24.7 million, or 38.4% of revenues, in 1996. These increases in absolute dollars were primarily related to the expansion of the Company's sales and marketing resources, increased commissions expenses as a result of higher sales levels and increased marketing activities, including direct mail, trade shows and other promotional expenses. The Company plans to continue to invest heavily in expanding its sales and marketing activities. Accordingly, sales and marketing expenses are anticipated to increase both in absolute dollars and as a percent of revenues over the coming year. Research and development. Research and development expenses increased from $2.1 million, or 20.3% of revenues, in 1994 to $3.3 million, or 13.2% of revenues, in 1995 and to $7.3 million, or 11.3% of revenues in 1996. Research and development expenses increased in absolute dollars primarily as a result of an increase in personnel and outside contractors to support the Company's product development activities. Over the coming years, the Company plans to continue to invest heavily in research and development. As a result, research and development expenses are anticipated to increase both in absolute dollars and as a percent of revenues. Research and development expenses are generally charged to operations as incurred. In accordance with Statement of Financial Accounting Standards No. 86, costs which were eligible for capitalization for these periods were insignificant, and the Company charged its software development costs to research and development expense. General and administrative. General and administrative expenses increased from $1.1 million, or 10.8% of revenues, in 1994 to $2.2 million, or 8.7% of revenues, in 1995 and to $5.4 million, or 8.4% of revenues in 1996. General and administrative expenses increased in absolute dollars during these periods primarily due to the addition of 20 23 staff and information system investments to support the growth of the Company's business during these periods. The Company expects general and administrative expenses will increase in absolute dollars. Provision for income taxes. The Company's provision for state and federal income taxes in 1994 was immaterial due to cumulative operating losses. The provision for income taxes for 1995 was $232,000 and $4,674,000 in 1996, based upon an estimated effective tax rate of approximately 10% and 30%, respectively, resulting primarily from state and federal alternate minimum and foreign taxes. See Note 10 of the Notes to Consolidated Financial Statements. The Company expects its effective tax rate to increase in 1997. FINANCIAL CONDITION Total assets as of December 31, 1996 increased $23.8 million from December 31, 1995. The increase was primarily due to increases in cash and cash equivalents, accounts receivable, prepaid expenses and other current assets, and property and equipment. Cash, cash equivalents and short-term investments increased by $6.4 million, primarily due to increased net income. Net accounts receivable increased $9.7 million primarily due to increased sales activity. Net property and equipment increased $4.1 million primarily due to equipment purchases associated with supporting the growth of the Company's business during this period. Current liabilities as of December 31, 1996 increased $10.9 million from December 31, 1995. The increase was due to increases in accounts payable, accrued liabilities and deferred revenues of $2.6 million, $4.6 million and $3.9 million, respectively. These increases were primarily due to increased expense levels and accruals associated with a higher transaction volume and deferrals of revenues related to post- contract support. LIQUIDITY AND CAPITAL RESOURCES Operating activities provided $10.3 million in 1996. The primary source of these funds was net income and increases in accounts payable, accrued liabilities and deferred revenues, partially offset by increases in accounts receivable and prepaid expenses and other current assets. Operating activities provided $4.7 million in 1995. The primary source of these funds was net income, increases in accounts payable, accrued liabilities and deferred revenues, partially offset by increases in accounts receivable. Investing activities used cash of $3.2 million in 1996, primarily for the purchase of capital equipment. Investing activities used cash of $10.3 million in 1995, primarily for the purchase of short-term, interest-bearing, investment-grade securities and, to a lesser extent, for the purchase of capital equipment. The Company does not currently have any material commitments for capital equipment acquisitions. Financing activities provided cash of $1.3 million in 1996. The primary source of these funds was proceeds from issuance of common stock pursuant to the exercise of outstanding stock options, partially offset by payments on capital lease obligations. Financing activities provided $20.1 million in 1995, principally due to proceeds from the Company's initial public offering completed in August 1995. At December 31, 1996, the Company's principal sources of liquidity were its cash, cash equivalents and short-term investments of $32.9 million. The Company believes that existing cash and short-term investments balances and potential cash flow from operations will be sufficient to meet its cash requirements for the next twelve months. While operating activities may provide cash in certain periods to the extent the Company experiences growth in the future, operating and investing activities may use cash, and consequently, such growth may require the Company to obtain additional sources of financing. 21 24 BUSINESS RISKS This report includes a number of forward-looking statements which reflect the Company's current views with respect to future events and financial performance. These forward-looking statements are subject to certain risks and uncertainties, including those discussed below that could cause actual results to differ materially from historical results or those anticipated. In this report, the words "anticipates," "believes," "expects," "intends," "future" and similar expressions identify forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. Future Operating Results Uncertain. The Company has experienced significant growth in revenues in recent periods. The Company does not believe that the historical growth rates of revenues, or the corresponding general declines of operating expenses as a percentage of revenues, will be sustainable or are indicative of future results. In addition, the Company's limited operating history makes the prediction of future operating results difficult or impossible. The Company's future operating results will depend on many factors, including demand for the Company's products, the level of product and price competition, the ability of the Company to develop and market new products and to control costs, the ability of the Company to expand its direct sales force and indirect distribution channels and the ability to attract and retain key personnel. The Company is currently investing, and intends to continue to invest, significant resources to develop its sales strategy, which could adversely affect the Company's operating margins. In this regard, the Company has recently hired and continues to hire significant numbers of direct sales personnel and has developed relationships with several high-end integrators and resellers, including EDS, Deloitte & Touche, Price Waterhouse, KPMG Peat Marwick, and HBO and Company. Competition for sales personnel is intense, and there can be no assurance that the Company can retain its existing sales personnel or that it can attract, assimilate and retain additional highly qualified sales personnel in the future. The strategy also depends, in large part, on attracting and retaining appropriate third party relationships. There also can be no assurance that the Company will be able to attract and retain appropriate high-end integrators, resellers and other third party distributors to market the Company's products effectively. Further, the Company believes, based on interactions with its customers and potential customers, that the purchase of its products is relatively discretionary and generally involves a significant commitment of capital. As a result, in the event of any downturn in any potential customer's business or the economy in general, purchases of the Company's products may be deferred or canceled, which could have a material adverse effect on the Company's business, results of operations and financial condition. The Company was not profitable prior to 1995, and there can be no assurance that the Company will remain profitable on a quarterly or annual basis. Fluctuations in Quarterly Operating Results. The Company's quarterly operating results have in the past varied and may in the future vary significantly depending on factors such as the size, timing and recognition of revenue from significant orders, increased competition, the timing of new product releases by the Company and its competitors, market acceptance of the Company's products, changes in the Company's and its competitors' pricing policies, the mix of license and service revenue, budgeting cycles of its customers, seasonality, the mix of direct and indirect sales, changes in operating expenses, changes in Company strategy, personnel changes, foreign currency exchange rates and general economic factors. The Company is currently investing, and intends to continue to invest, significant resources to develop its sales strategy, which could adversely affect the Company's operating margins. In this regard, the Company has recently hired and continues to hire significant numbers of direct sales personnel and has developed relationships with several high-end integrators and resellers, including EDS, Deloitte & Touche, Price Waterhouse, KPMG Peat Marwick and HBO and Company. Competition for sales personnel is intense, and there can be no assurance that the Company can retain its existing sales personnel or that it can attract, assimilate and retain additional highly qualified sales personnel in the future. The strategy also depends, in large part, on attracting and retaining appropriate third party relationships. There also can be no assurance that the Company will be able to attract and retain appropriate high-end integrators, resellers and other third party distributors to market the Company's products effectively. Further, the Company believes, based on interactions with its customers and potential customers, that the purchase of its products is relatively discretionary and generally involves a significant commitment of capital. As a result, in the event of any downturn in any potential customer's business or the economy in general, purchases of the Company's products may be deferred or canceled. A significant portion of the Company's revenues in any quarter are typically derived from non-recurring sales to a limited number of customers. Accordingly, revenues in any one quarter are not indicative of revenues in any future 22 25 period. In addition, like many software applications businesses, the Company has generally recognized a substantial portion of its revenues in the last month of each quarter, with these revenues concentrated in the last weeks of the quarter. Any significant deferral of purchases of the Company's products could have a material adverse effect on the Company's business, results of operations and financial condition in any particular quarter, and to the extent that significant sales occur earlier than expected, operating results for subsequent quarters may be adversely affected. Product revenues are also difficult to forecast because the market for Customer Asset Management software products is rapidly evolving. The Company's sales cycle is typically six to nine months and varies substantially from customer to customer. The Company expects that sales derived through indirect channels, which are harder to predict and may have lower margins than direct sales, will increase as a percentage of total revenues. The Company operates with little order backlog because its products are typically shipped shortly after orders are received. As a result of these factors, quarterly revenues for any future quarter are not predictable with any significant degree of certainty. The Company's expense levels are based, in part, on its expectations as to future revenues. In particular, the Company is currently investing, and intends to continue to invest, significant resources to develop its sales strategy, which includes hiring significant numbers of direct sales personnel, and developing relationships with high-end integrators and resellers. If revenues are below expectations, operating results are likely to be adversely affected. Net income may be disproportionately affected by a reduction in revenues, because a significant portion of the Company's expenses do not vary with revenues. The Company may also choose to reduce prices or increase spending in response to competition or to pursue new market opportunities. In particular, if new competitors, technological advances by existing competitors, or other competitive factors require the Company to invest significantly greater resources in research and development efforts, the Company's operating margins in the future may be adversely affected. The foregoing statements regarding the Company's future revenues and net income are forward-looking statements, and actual results may vary substantially depending upon a variety of factors described in this paragraph and elsewhere in this report. Because of these factors, the Company believes that period-to-period comparisons of its results of operations are not necessarily meaningful and that such comparisons should not be relied upon as indications of future performance. Due to all of the foregoing factors, it is likely that in some future quarter the Company's operating results will be below the expectations of public market analysts and investors. In such event, the price of the Company's Common Stock would likely be materially adversely affected. Rapid Technological Change and Product Development Risks. The customer asset management market is subject to rapid technological change, changing customer needs, frequent new product introductions and evolving industry standards that may render existing products and services obsolete. As a result, the Company's position in its existing markets or other markets that it may enter could be eroded rapidly by product advances. The life cycles of the Company's products are difficult to estimate. The Company's growth and future financial performance will depend in part upon its ability to enhance existing applications, develop and introduce new applications that keep pace with technological advances, meet changing customer requirements, respond to competitive products and achieve market acceptance. For example, the Company's customers have adopted a wide variety of hardware, software, database, Internet-based and networking platforms, and as a result, to gain broad market acceptance, the Company must continue to support and maintain its products on a variety of such platforms. The Company's future success will depend on its ability to address the increasingly sophisticated needs of its customers by supporting existing and emerging hardware, software, database, Internet-based and networking platforms and by developing and introducing enhancements to its products and new products on a timely basis that keep pace with technological developments, evolving industry standards and changing customer requirements. The success of the Company's products may also depend, in part, on the ability of the Company to effectively distribute its products through the Internet. There can be no assurance that the Company will be able to successfully change other aspects of its business, such as its distribution channels or cost structure, if technological changes in its market require such change. The Company's product development efforts are expected to require, from time to time, substantial investments by the Company in product development and testing. There can be no assurance that the Company will have sufficient resources to make the necessary investments. The Company has in the past experienced development delays, and there can be no assurance that the Company will not experience such delays in the future. There can be no assurance that the Company will not experience difficulties that could delay or prevent the successful development, introduction or marketing of new or enhanced products, including but not limited to, Vantive Version 7.0, Vantive Version 7.1 and VanWeb 3.0. In addition, there can be no assurance that such products will meet the requirements of the marketplace and achieve market acceptance or that the Company's current or future products will conform to industry requirements. If the Company is unable, for technological reasons, 23 26 to develop and introduce new and enhanced products in a timely manner, the Company's business, results of operations and financial condition could be materially adversely affected. Software products as complex as those offered by the Company may contain errors that may be detected at any point in the products' life cycles. The Company has in the past discovered software errors in certain of its products and has experienced delays in shipment of products during the period required to correct these errors. There can be no assurance that, despite testing by the Company and by current and potential customers, errors will not be found, resulting in loss of, or delay in, market acceptance and sales, diversion of development resources, injury to the Company's reputation, or increased service and warranty costs, any of which could have a material adverse effect on the Company's business, results of operations and financial condition. See "Business-Product Development" on page 8 of this report. International Operations, Foreign Currency Fluctuations. International revenue, or revenue derived from sales to customers in foreign countries, accounted for approximately 19.0%, 9.8% and 9.3% of the Company's revenue in 1994, 1995 and 1996, respectively. The Company believes that its continued growth and profitability will require further expansion of its international operations. To successfully expand international sales, the Company must establish additional foreign operations, hire additional personnel and recruit additional international resellers. To the extent that the Company is unable to do so in a timely manner, the Company's growth in international sales, if any, will be limited, and the Company's business, results of operations and financial condition could be materially adversely affected. As the Company continues to expand its international operations, significant costs may be incurred ahead of any anticipated international revenues, which could have a material adverse effect on the Company's business, results of operations and financial condition. In addition, future increases in the value of the U.S. dollar could make the Company's products less competitive in foreign markets. As the Company increases its foreign sales, it may be materially and adversely affected by fluctuations in currency exchange rates, increases in duty rates, exchange or price controls or other restrictions on foreign currencies. Additional risks inherent in the Company's international business activities generally include unexpected changes in regulatory requirements, tariffs and other trade barriers, costs of localizing products for foreign countries, lack of acceptance of localized products in foreign countries, longer accounts receivable payment cycles, difficulties in managing international operations, potentially adverse tax consequences including restrictions on the repatriation of earnings and the burdens of complying with a wide variety of foreign laws. There can be no assurance that such factors will not have a material adverse effect on the Company's future international sales and, consequently, the Company's business, results of operations and financial condition. Competition. The Customer Asset Management software market is intensely competitive, highly fragmented and subject to rapid change. Because the Company offers multiple software applications which can be purchased separately or integrated as part of Vantive Enterprise, the Company competes with a variety of other businesses depending on the target market for their applications software products. These competitors include a select number of businesses targeting the enterprise level and department level Customer Asset Management markets, such as Aurum Software, Inc., Clarify, Inc., Onyx Software, Scopus Technology and Siebel Systems, Inc. some of which have only recently entered these markets. The Company also competes with a substantial number of small private businesses and certain public businesses which offer products targeted at one or more specific markets, including the customer support market, the help desk market, the quality assurance market and the sales and marketing automation market, such as Remedy Corporation and Software Artistry, Inc. In addition, the Company believes that existing competitors and new market entrants will attempt to develop fully integrated customer asset management information systems. The Company also competes with third party professional service organizations that develop custom software and with internal information technology departments of customers which develop customer interaction applications. Among the Company's current and potential competitors are also a number of large hardware and software businesses that may develop or acquire products that compete with the Company's products. In this regard, SAP AG, the Baan Company and Oracle have each introduced a customer support module as part of their application suites. In addition, Oracle has recently announced the creation of a network of third party dealers that will sell Oracle's application suites exclusively to medium-sized businesses. The Company expects large software vendors in the ERP market may enter the Customer Asset Management market. These competitors have significantly greater financial, technical, marketing and other resources than the Company. 24 27 The Company also expects that competition will increase as a result of software industry consolidations. Current and potential competitors have established or may establish cooperative relationships among themselves or with third parties to increase the ability of their products to address the needs of the Company's prospective customers. Accordingly, it is possible that new competitors or alliances among competitors may emerge and rapidly acquire significant market share. The Company also expects that competition may increase as a result of both new software start ups entering the market as well as existing software industry vendors which may be planning to enter the market for Customer Asset Management applications. Increased competition is likely to result in price reductions, reduced operating margins and loss of market share, any of which could materially adversely affect the Company's business, results of operations and financial condition. Many of the Company's current and potential competitors have significantly greater financial, technical, marketing and other resources than the Company. As a result, they may be able to respond more quickly to new or emerging technologies and changes in customer requirements, or to devote greater resources to the development, promotion and sale of their products than can the Company. There can be no assurance that the Company will be able to compete successfully against current and future competitors or that competitive pressures faced by the Company will not materially adversely affect its business, results of operations and financial condition. The Company believes that the principal competitive factors affecting its market include product features such as adaptability, scaleability, ability to integrate with products produced by other vendors, functionality, ease of use, product reputation, quality, performance, price, customer service and support, the effectiveness of sales and marketing efforts and company reputation. Although the Company believes that its products currently compete favorably with respect to such factors, there can be no assurance that the Company can maintain its competitive position against current and potential competitors, especially those with significantly greater financial, marketing, service, support, technical and other resources. Management of Expanding Operations; Dependence Upon Key Personnel. The Company's ability to compete effectively and to manage future growth, if any, will require the Company to continue to improve its financial and management controls, reporting systems and procedures on a timely basis and expand, train and manage its employee workforce. There can be no assurance that the Company will be able to do so successfully. The Company's failure to do so could have a material adverse effect upon the Company's business, results of operations and financial condition. The Company has recently hired a significant number of employees, including senior sales, marketing, research and development, and finance personnel, and in order to maintain its ability to grow in the future, the Company will be required to significantly increase its total headcount. In addition, the Company's future performance depends in significant part upon attracting and retaining key technical, sales, senior management and financial personnel. In particular, delays in hiring sales or research and development personnel may have a material adverse effect on the Company's business, results of operations and financial condition. The loss of the services of one or more of the Company's executive officers or the inability to recruit other additional senior management could have a material adverse effect on the Company's business, results of operations and financial condition. Competition for such personnel is intense, and the inability to retain its key technical, sales, senior management and financial personnel or to attract, assimilate or retain other highly qualified technical, sales, senior management and financial personnel in the future on a timely basis could have a material adverse effect on the Company's business, results of operations and financial condition. Increased Use of Third Party Software. The Company currently markets a proprietary application development environment for its customers to tailor its applications. This application development environment is also used by the Company to build and modify its applications products. While the Company believes, based on interactions with its customers and potential customers, that it currently derives significant competitive advantage from this proprietary application development environment, it believes that competitive pressures, technological changes demanded by customers, and significant advances in the sophistication of third party application development tools such as Visual Basic for Applications will require the Company to make greater use of third party software in the future. In particular, the Company has recently announced that Vantive Encyclopedia, a Web-based marketing encyclopedia based on FirstFloor's Java-based server, and configuration capabilities, based on Calico Technology's configuration engine, will be available with Vantive Version 7.0. The Company has also announced that it has entered into a development partnership with PeopleSoft with the goal of developing joint applications. Vantive is currently integrating manufacturing and distribution applications available from PeopleSoft with the Vantive FieldService 25 28 application. The greater use of third party software could require the Company to invest significant resources in rewriting some or all of its software applications products utilizing third party software and/or to enter into license arrangements with third parties which could result in higher royalty payments and a loss of product differentiation. There can be no assurance that the Company would be able to successfully rewrite its applications or enter into commercially reasonable licenses, and the costs of, or inability or delays in, doing so could have a material adverse effect on the Company's business, results of operations and financial condition. A recently defeated ballot initiative in California would have subjected corporations and their directors and officers to increased risk of suit and may prohibit corporations from indemnifying officers and directors and expose directors and officers of corporations to increased risk of personal liability. Such a law could increase litigation expenses and the cost of related insurance and adversely affect the financial position and results of operations of the Company. In addition, the increased risk of personal liability could interfere with the ability of the Company to attract and retain directors and officers, which in turn could adversely affect the Company's competitive position. Dependence on Emerging Markets for Customer Asset Management Software; Product Concentration. The Company's future financial performance will depend in large part on the growth in demand for individual Customer Asset Management applications as well as the number of organizations adopting comprehensive Customer Asset Management software information systems for their client/server and Web computing environments. To date, much of the Company's license revenues have resulted from sales of individual applications, particularly Vantive Support and Vantive HelpDesk. The markets for these applications are relatively new and undeveloped, and failure of these markets to develop would have a material adverse effect on the Company's business, results of operations and financial condition. Additionally, the Company is investing in the sales, field service and quality automation markets. Should these markets fail to develop, not accept the Company's products, or cause the company to lose new business and or customers in its traditional markets, the Company would experience an adverse effect on the Company's business, results of operations and financial condition. The Company believes that an important competitive advantage for its software applications is their ability to be integrated with one another and with other back office applications software into a Customer Asset Management information system. If the demand for integrated suites of Customer Asset Management applications fails to develop, or develops more slowly than the Company currently anticipates, it could have a material adverse effect on the demand for the Company's applications and on its business, results of operations and financial condition. In addition, any other factor adversely affecting the demand for the Company's existing applications, particularly Vantive Support, Vantive HelpDesk and Vantive Quality, or newer applications such as Vantive-On-The-Go, Vantive Sales or Vantive FieldService could have a material adverse effect on the Company's business, results of operations and financial condition. Need to Expand Distribution Channels and Successfully Leverage Third- Party Relationships. An important element of the Company's distribution strategy is to expand its direct sales force, to create additional relationships with third parties and to dedicate certain direct sales resources and leverage third party relationships toward key vertical markets. An important element of the Company's product development strategy is to integrate with applications from ERP vendors. The Company is currently investing, and intends to continue to invest, significant resources toward these strategies, which could adversely affect the Company's operating margins. In this regard, the Company has recently hired and continues to hire significant numbers of direct sales personnel. Competition for sales personnel is intense, and there can be no assurance that the Company can retain its existing sales personnel or that it can attract, assimilate and retain additional highly qualified sales personnel in the future. The strategy also depends, in large part, on attracting and retaining beneficial third party relationships. In this regard, the Company has developed relationships with several high-end integrators and resellers, including EDS, Deloitte & Touche, Price Waterhouse, KPMG Peat Marwick and HBO and Company, and announced a partnership with PeopleSoft, an ERP vendor. There also can be no assurance that the Company will be able to attract and retain appropriate high-end integrators, resellers, other third party distributors or ERP vendors. The Company's agreements with these third parties are not exclusive and, in many cases, may be terminated by either party without cause. In addition, many of these third parties sell or co-market competing product lines. Therefore, there can be no assurance that any of these parties will continue to represent or recommend the Company's products. There also can be no assurance that the Company will effectively identify key vertical markets. The inability to recruit, or the loss of, important direct sales personnel, high-end integrators, resellers, other 26 29 third party distributors or ERP vendors, or the failure to effectively identify key vertical markets, could have a material adverse effect on the Company's business, results of operations and financial condition. Possible Volatility of Stock Price. Future announcements concerning the Company or its competitors, quarterly variations in operating results, announcements of technological innovations, the introduction of new products or changes in product pricing policies by the Company or its competitors, proprietary rights or other litigation, changes in earnings estimates by analysts or other factors could cause the market price of the Common Stock to fluctuate substantially, particularly on a quarterly basis. In addition, stock prices for many technology companies fluctuate widely for reasons which may be unrelated to operating results of such companies. These fluctuations, as well as general economic, market and political conditions such as recessions or military conflicts, may materially and adversely affect the market price of the Company's Common Stock. In the past, following periods of volatility in the market price of a company's securities, securities class action litigation has often been instituted against such companies. Such litigation could result in substantial costs and a diversion of management's attention and resources, which could have a material adverse effect on the Company's business, results of operations and financial condition. Dependence on Licensed Technology. Vantive licenses technology on a non-exclusive basis from several businesses for use with its products and anticipates that it will continue to do so in the future. The inability of the Company to continue to license these products or to license other necessary products for use with its products or substantial increases in royalty payments under third party licenses could have a material adverse effect on its business, results of operations and financial condition. In addition, the effective implementation of the Company's products depends upon the successful operation of these licensed products in conjunction with the Company's products, and therefore any undetected errors in such licensed products may prevent the implementation or impair the functionality of the Company's products, delay new product introductions and/or injure the Company's reputation. Such problems could have a material adverse effect on the Company's business, results of operations and financial condition. Dependence on Proprietary Technology; Risks of Infringement. The Company's success is heavily dependent upon proprietary technology. The Company relies primarily on a combination of copyright, trademark and trade secrets laws, as well as confidentiality procedures and contractual provisions to protect its proprietary rights. There can be no assurance that such measures will be adequate to protect the Company from infringement of its technology. The Company presently has no patents or patent applications pending. Despite the Company's efforts to protect its proprietary rights, attempts may be made to copy aspects of the Company's products or to obtain and use information that the Company regards as proprietary. In particular, as the Company provides its licensees with access to the data model and other proprietary information underlying the Company's licensed applications, there can be no assurance that licensees or others will not develop products which infringe the Company's proprietary rights. Policing unauthorized use of the Company's products is difficult, and while the Company is unable to determine the extent to which piracy of its software products exists, software piracy can be expected to be a persistent problem. In addition, the laws of some foreign countries do not protect the Company's proprietary rights to as great an extent as do the laws of the United States. There can be no assurance that the Company's means of protecting its proprietary rights will be adequate or that the Company's competitors will not independently develop similar technology. The Company is not aware that any of its products infringe the proprietary rights of third parties, although the Company has in the past, and may in the future, receive communications alleging possible infringement of third party intellectual property rights. The Company expects that software product developers will increasingly be subject to infringement claims as the number of products and competitors in the Company's target markets grows and the functionality of products in such markets overlaps. Any such claims, with or without merit, could be time-consuming, result in costly litigation, cause product shipment delays or require the Company to enter into royalty or licensing agreements. Such royalty or licensing agreements, if required, may not be available on terms acceptable to the Company or at all, which could have a material adverse effect upon the Company's business, results of operations and financial condition. See "Business-Intellectual Property and Other Proprietary Rights" on page 10 of this report. Product Liability. The Company's license agreements with its customers typically contain provisions intended to limit the Company's exposure to potential product liability claims. It is possible that the limitation of liability provisions contained in the Company's agreements may not be effective. Although the Company has not experienced any product liability claims to date, the sale and support of products by the Company and the incorporation of products from other businesses may entail the risk of such claims. A successful product liability action brought against the 27 30 Company could have a material adverse effect upon the Company's business, results of operations and financial condition. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The Financial Statements and supplemental data of the Company required by this item are set forth at the pages indicated at Item 14(a). ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 28 31 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information relating to the directors and executive officers of the Company is set forth in Part I of this report under the caption "Directors and Executive Officers of the Registrant." Information required by this item with respect to compliance with Section 16(a) of the Securities Exchange Act of 1934 is incorporated by reference from the definitive proxy statement for the Company's 1997 annual meeting of stockholders to be filed with the Commission pursuant to Regulation 14A not later than 120 days after the end of the fiscal year covered by this Form (the "Proxy Statement") under the caption "EXECUTIVE COMPENSATION AND OTHER MATTERS". ITEM 11. EXECUTIVE COMPENSATION The information required by this Item is incorporated by reference from the Proxy Statement under the caption "EXECUTIVE COMPENSATION AND OTHER MATTERS". ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this Item is incorporated by reference from the Proxy Statement under the captions "STOCK OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT." ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this Item is incorporated by reference from the Proxy Statement under the caption "EXECUTIVE COMPENSATION AND OTHER MATTERS". 29 32 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) The following documents are filed as a part of this Form: Page Number ----------- 1. Financial Statements: Report of Independent Public Accountants F-1 Consolidated Balance Sheets - As of December 31, 1996 and 1995 F-2 Consolidated Statements of Operations - For the Three Years Ended December 31, 1996 F-3 Consolidated Statements of Stockholders' Equity/(Accumulated Deficit)- For the Three Years Ended December 31, 1996 F-4 Consolidated Statements of Cash Flows - For the Three Years Ended December 31, 1996 F-5 Notes to Consolidated Financial Statements F-6 2. Computation of Net Income Per Share - For years ended December 31, 1996, 1995 and 1994: S-1 List of Subsidiaries S-2 Consent of Independent Public Accountants S-3 Valuation and Qualifying Accounts S-4 All other schedules are omitted because they are not applicable or the required information is shown in the consolidated financial statements or notes thereto. 3. Exhibits: See Index to Exhibits. The Exhibits listed in the accompanying Index to Exhibits are filed or incorporated by reference as part of this report.
(b) Reports on Form 8-K: None. 30 33 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To The Vantive Corporation: We have audited the accompanying consolidated balance sheets of The Vantive Corporation, (a Delaware corporation) and subsidiaries as of December 31, 1996 and 1995, and the related consolidated statements of operations, stockholders' equity/(accumulated deficit) and cash flows for each of the three years in the period ended December 31, 1996. These consolidated financial statements and the schedule referred to below are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of The Vantive Corporation and subsidiaries as of December 31, 1996 and 1995, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1996 in conformity with generally accepted accounting principles. Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedule listed under Item 14(a)2. is presented for purposes of complying with the Securities and Exchange Commission's rules and is not a part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in our audits of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. ARTHUR ANDERSEN LLP San Jose, California January 20, 1997 F-1 34 THE VANTIVE CORPORATION CONSOLIDATED BALANCE SHEETS (In thousands, except share and per share amounts)
December 31, --------------------------- 1996 1995 ------- ------- ASSETS CURRENT ASSETS: Cash and cash equivalents...................... $26,017 $17,614 Short-term investments......................... 6,853 8,815 Accounts receivable, net of allowance for doubtful accounts of $780 and $325 in 1996 and 1995, respectively....................... 13,775 4,049 Prepaid expenses and other current assets...... 4,492 1,265 ------- ------- Total current assets.................. 51,137 31,743 Property and equipment, net.................... 6,764 2,628 Other assets................................... 463 216 ------- ------- TOTAL ASSETS............................................ $58,364 $34,587 ======= ======= LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable............................... $ 3,230 $ 619 Accrued liabilities............................ 7,760 3,179 Current portion of capital lease obligations... 377 530 Deferred revenues.............................. 6,811 2,952 ------- ------- Total current liabilities............. 18,178 7,280 Capital lease obligations, net of current portion...................................... 346 571 Other.......................................... 409 79 STOCKHOLDERS' EQUITY Preferred Stock: $.001 par value, 2,000,000 shares authorized; no shares issued and outstanding at December 31, 1996............. -- -- Common Stock: $.001 par value, 50,000,000 shares authorized; 24,140,441 and 23,895,238 shares issued and outstanding at December 31, 1996 and 1995, respectively.................. 24 12 Additional paid-in-capital..................... 33,410 31,538 Cumulative translation adjustment.............. (25) (22) Retained earnings/(accumulated deficit)........ 6,022 (4,871) ------- ------- Total stockholders' equity............ 39,431 26,657 ------- ------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.............. $58,364 $34,587 ======= =======
The accompanying notes are an integral part of these consolidated financial statements. F-2 35 THE VANTIVE CORPORATION CONSOLIDATED STATEMENT OF OPERATIONS (In thousands, except per share amounts)
For the Years Ended December 31, ----------------------------------------------- 1996 1995 1994 ------- ------- -------- REVENUES: License ................................ $41,513 $16,631 $ 7,141 Service ................................ 22,761 8,404 3,073 ------- ------- ------- Total revenues.......................... 64,274 25,035 10,214 COST OF REVENUES................................. License................................. 392 163 110 Service................................. 12,263 5,968 2,383 ------- ------- ------- Total cost of revenues......... 12,655 6,131 2,493 ------- ------- ------- GROSS MARGIN..................................... 51,619 18,904 7,721 OPERATING EXPENSES: Sales and marketing..................... 24,676 11,582 5,068 Research and development................ 7,261 3,319 2,072 General and administrative ............. 5,389 2,167 1,099 ------- ------- ------- Total operating expenses....... 37,326 17,068 8,239 ------- ------- ------- INCOME/(LOSS) FROM OPERATIONS.................... 14,293 1,836 (518) ------- ------- ------- OTHER INCOME/(EXPENSE): Interest income ........................ 1,445 534 60 Interest expense ....................... (159) (95) (90) ------- ------- ------- Total other income/(expense) .. 1,286 439 (30) ------- ------- ------- INCOME/(LOSS) BEFORE PROVISION FOR INCOME TAXES 15,579 2,275 (548) PROVISION FOR INCOME TAXES....................... 4,674 232 - ------- ------- ------- NET INCOME/(LOSS)................................ $10,905 $ 2,043 $ (548) ======= ======= ======= NET INCOME PER SHARE ............................ $0.42 $0.09 ======= ======= PRO FORMA NET LOSS PER SHARE .................... $ (0.03) ======= SHARES USED IN PER SHARE COMPUTATION ............ 25,847 23,012 17,570 ======= ======= =======
The accompanying notes are an integral part of these consolidated financial statements. F-3 36 THE VANTIVE CORPORATION CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY/(ACCUMULATED DEFICIT) (In thousands, except share and per share amounts)
Total Common Stock Retained Stockholders ----------------- Additional Cumulative Earnings/ Equity/ Par Paid-in Translation (Accumulated (Accumulated Shares Value Capital Adjustment Deficit) Deficit) --------- ----- ---------- ----------- ------------ ------------ BALANCE AT DECEMBER 31, 1993 3,241,670 $1 $ 161 $ -- $(6,366) $(6,204) Exercise of stock options at $0.04 to $0.12 per share.......... 1,377,376 1 103 -- -- 104 Repurchase of common stock at $0.09 per share................... (100,000) -- (9) -- -- (9) Translation adjustment.............. -- -- -- (8) -- (8) Net loss............................ -- -- -- -- 548) (548) --------- -- ------ ---- ------- ------ BALANCE AT DECEMBER 31, 1994 4,519,046 2 255 (8) (6,914) (6,665) Exercise of stock options at $0.04 to $2.00 per share.......... 1,414,068 1 288 -- -- 289 Repurchase of common stock at $0.09 to $0.50 per share....... (14,628) -- (3) -- -- (3) Conversion of mandatorily redeemable convertible preferred stock into common stock: Series A................... 3,523,106 2 1,487 -- -- 1,489 Series B................... 6,101,538 3 4,822 -- -- 4,825 Series C................... 2,381,718 1 2,067 -- -- 2,068 Series D................... 2,083,334 1 2,468 -- -- 2,469 Common stock issued in initial public offering at $6.00 per share, net of insurance costs of $2,644......................... 3,800,000 2 20,154 -- -- 20,156 Warrant exercised for common stock (Note 6)................... 87,056 -- -- -- -- - Translation adjustment.............. -- -- -- (14) -- (14) Net income.......................... -- -- -- -- 2,043 2,043 ---------- --- ------ ----- ------- ------- BALANCE AT DECEMBER 31, 1995................. 23,895,238 12 31,538 (22) (4,871) 26,657 Exercise of stock options at $0.02 to $6.38 per share................ 246,854 -- 498 -- -- 498 Repurchase of common stock at $0.04 to $0.75 per share................ (44,452) -- (20) -- -- (20) Common stock issued under employee stock purchase plan............... 42,801 -- 324 -- -- 324 Translation adjustment.............. -- -- -- (3) -- (3) Stock dividend (2-for-1 stock split)...................... -- 12 -- -- (12) - Disqualifying disposition of stock options..................... -- -- 1,070 -- -- 1,070 Net income.......................... -- -- -- -- 10,905 10,905 ---------- --- ------- ----- -------- ------- BALANCE AT DECEMBER 31, 1996................. 24,140,441 $24 $33,410 $ (25) $ 6,022 $39,431 ========== === ======= ===== ======== =======
The accompanying notes are an integral part of these consolidated financial statements. F-4 37 THE VANTIVE CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)
For the Years Ended December 31, ------------------------------------------ 1996 1995 1994 ------- ------- ------ CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss).................................................. $10,905 $2,043 $(548) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization...................................... 1,388 637 347 Provision for sales allowances and doubtful accounts............... 455 325 -- Changes in net assets and liabilities - Increase in accounts receivable................................. (10,181) (1,600) (1,607) Increase in prepaid expenses and other current assets........... (3,377) (840) (361) Increase in other assets........................................ (247) (120) (48) Increase/(decrease) in accounts payable......................... 2,611 (442) 887 Increase in accrued liabilities................................. 4,581 2,321 280 Increase in long-term liabilities............................... 330 70 -- Increase in deferred revenues................................... 3,859 2,261 559 ------- ------- ------- Net cash provided by (used in) operating activities. 10,324 4,655 (491) ------- ------- ------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of short-term investments................................ (36,363) (8,815) -- Maturities of short-term investments............................... 38,325 -- -- Purchases of property and equipment................................ (5,180) (1,483) (172) ------- ------- ------- Net cash used in investing activities............... (3,218) (10,298) (172) ------- ------- ------- CASH FLOWS FROM FINANCING ACTIVITIES: Net proceeds from sale of mandatorily redeemable convertible preferred stock................................................ -- -- 2,557 Net proceeds from issuance of common stock......................... 1,892 20,445 104 Repurchase of common stock......................................... (20) (3) (9) Payments on capital lease obligations.............................. (572) (325) (189) ------- ------- ------- Net cash provided by financing activities........... 1,300 20,117 2,463 ------- ------- ------- NET INCREASE IN CASH AND CASH EQUIVALENTS.............................. 8,406 14,474 1,800 EFFECT OF EXCHANGE RATE CHANGES ON CASH................................ (3) (14) (8) CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD......................... 17,614 3,154 1,362 ------- ------- ------- CASH AND CASH EQUIVALENTS, END OF PERIOD............................... $26,017 $17,614 $ 3,154 ======= ======= ======= SUPPLEMENTAL DISCLOSURE OF CASH FLOW ACTIVITY Cash paid for interest............................................. $159 $101 $80 ------- ------- ------- Cash paid for income taxes......................................... $4,375 $80 $- ======= ======= =======
The accompanying notes are an integral part of these consolidated financial statements. F-5 38 THE VANTIVE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996 1. THE COMPANY: The Vantive Corporation (formerly ProActive Software, Inc.) was incorporated on October 25, 1990. During 1994, The Vantive Corporation established two wholly-owned subsidiaries: one in the United Kingdom and one in Canada. During 1995, the Vantive Corporation established a wholly-owned subsidiary in the Netherlands and in 1996 established wholly owned subsidiaries; France, Germany, Australia and Singapore. The Vantive Corporation and subsidiaries (the "Company") operate in a single industry segment and are involved in the design, marketing and support of a suite of client/server customer interaction software applications including marketing and sales, customer support, defect tracking, field service and internal help desk functions. In September 1996, the Company declared a two-for-one stock split in the form of a 100% stock dividend paid in October 1996. All common and common equivalent shares and per share amounts in the accompanying consolidated financial statements have been restated to reflect the stock split. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: Principles of Consolidation The consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany accounts and transactions are eliminated in consolidation. Foreign Currency Translation The functional currency of the Company's subsidiaries is the local currency. Accordingly, the Company applies the current rate method to translate the subsidiaries' financial statements into U.S. dollars. Translation adjustments are included as a separate component of stockholders' equity/(accumulated deficit) in the accompanying consolidated financial statements. Revenue Recognition The Company generates revenues from licensing the rights to use its software products directly to end-users and indirectly through sublicense fees from resellers. The Company also generates revenues from sales of post-contract support, consulting and training services performed for customers who license its products. Revenues from perpetual software license agreements are recognized as revenues upon shipment of the software if there are no significant post-delivery obligations, if collection is probable and if payment is due within one year. If an acceptance period is required, revenues are recognized upon the earlier of customer acceptance or the expiration of the acceptance period. The Company enters into reseller arrangements that typically provide for sublicense fees payable to the Company based on a percent of the Company's list price. Sublicense fees are generally recognized as reported by the reseller in relicensing the Company's products to end-users. F-6 39 THE VANTIVE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1996 Revenues from post-contract support services are recognized ratably over the term of the support period. If post-contract support services are included free or at a discount in a license agreement, such amounts are allocated out of the license fee at their fair market value based on the value established by independent sale of such post-contract support services to customers. Consulting revenues are primarily related to implementation services performed on a time and materials basis under separate service arrangements related to the installation of the Company's software products. Revenues from consulting and training services are recognized as services are performed. If a transaction includes both license and service elements, license fee revenue is recognized upon shipment of the software, provided services do not include significant customization or modification of the base product and the payment terms for licenses are not subject to acceptance criteria. In cases where license fee payments are contingent upon the acceptance of services, revenues from both the license and the service elements are deferred until the acceptance criteria are met. Cost of license revenues consists of the cost of media on which product is delivered. Cost of service revenues consists primarily of salaries, benefits and allocated overhead costs related to consulting training and the customer support persons. Deferred revenues primarily relate to post-contract support which has been paid by the customers prior to the performance of these services. Major Customers During 1994, 1995 and 1996, no customer accounted for 10% or more of total revenues. Export Sales Export sales, which consist of domestic sales to customers in foreign countries, were as follows:
For the Year December 31, 1994 ----------------- Europe 14% Australia 1% Canada and other 4%
For 1995 and 1996, export sales were less than 10% of total revenues. Cash and Cash Equivalents For purposes of the Statement of Cash Flows, the Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents. The Company's cash investments have consisted of certificates of deposit, treasury bills and commercial paper with a maturity of three months or less and money market accounts. F-7 40 THE VANTIVE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1996 Statement of Cash Flows For purposes of the Statement of Cash Flows, non-cash transactions for the years ended December 31, 1994, 1995 and 1996 include capital lease additions of approximately $458,000, $781,000 and $194,000, respectively. Investments The Company accounts for its investments under the provision of Statement of Financial Accounting Standards No. 115 (FAS 115), "Accounting for Certain Investments in Debt and Equity Securities." All investments purchased during 1995 and 1996 were debt securities which the Company has the intent and ability to hold until maturity, therefore all such investments are classified as held to maturity investments and carried at amortized cost in the accompanying financial statements. As of December 31, 1996, the Company's investments consisted of the following (in thousands):
Maturity of Securities ----------------------- Amortized Cost Basis Within One Year ---------- --------------- Debt securities by the U.S. Treasury and other U.S. government agencies $ 973 $ 973 Corporate debt securities 5,880 5,880 ------ ------ $6,853 $6,853 ====== ======
As of December 31, 1995, the Company's investments consisted of the following (in thousands):
Maturity of Securities ----------------------- Amortized Cost Basis Within One Year ---------- --------------- Debt securities by the U.S. Treasury and other U.S. government agencies $4,893 $4,893 Corporate debt securities 3,922 3,922 ------ ------ $8,815 $8,815 ====== ======
At December 31, 1995 and 1996, the estimated fair value of these securities approximated cost, and the amount of gross unrealized gains or gross unrealized losses was not significant. Concentration of Credit Risk Financial instruments which potentially subject the Company to a concentration of credit risk principally consist of accounts receivable. The Company generally does not require collateral on accounts receivable as a majority of the Company's customers are large, well established companies. The Company provides reserves for credit losses and such losses have been insignificant. F-8 41 THE VANTIVE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1996 Property and Equipment Property and equipment are carried at cost and depreciated or amortized using the straight-line method over the estimated useful lives of the related assets (or over the lease term if it is shorter for leasehold improvements) which range from two to seven years. The Company was required to adopt Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of," for its fiscal year beginning January 1, 1996. The impact of the adoption did not have a material effect on the Company's consolidated financial condition or results of operations. Software Development Costs The Company capitalizes eligible computer software development costs upon the establishment of technological feasibility, which the Company has defined as completion of a working model. For 1994, 1995 and 1996, costs which were eligible for capitalization were insignificant and, thus, the Company has charged its software development costs to research and development expense in the accompanying consolidated statements of operations. Net Income Per Share and Pro Forma Net Loss Per Share For periods after the Company's initial public offering in August 1995, net income per share has been computed using the weighted average number of common and common equivalent shares (using the treasury stock method for outstanding stock options). For the year ended December 31, 1994 and for the portion of 1995 preceding the initial public offering, net income per share was computed on a pro forma basis. Pro forma net loss per share was computed using the weighted average number of common and common equivalent shares outstanding during the period. Common equivalent shares consisted of Mandatorily redeemable convertible preferred stock (using the if converted method) and stock options and warrants (using the treasury stock method). Common equivalent shares were excluded from the computation if their effect was antidilutive except that pursuant to the Securities and Exchange Commission Staff Accounting Bulletins and staff policy, such computations included all common and common equivalent shares issued within the twelve months preceding the filing date as if they were outstanding for all periods presented (using the treasury stock method and the initial public offering price of $6.00 per share). Mandatorily redeemable convertible preferred stock and warrants outstanding during the period were included (using the if converted method) in the computation as common equivalent shares even though the effect was anti-dilutive. Use of Estimates The preparation of consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. F-9 42 THE VANTIVE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1996 3. PROPERTY AND EQUIPMENT: Property and equipment, at cost, consist of the following (in thousands):
December 31, ----------------- 1996 1995 ---- ---- Computer and office equipment . . . . . . . . . . . . . . . $5,726 $2,762 Furniture and fixtures . . . . . . . . . . . . . . . . . . 1,899 191 Leasehold improvements . . . . . . . . . . . . . . . . . . 366 279 Purchased software . . . . . . . . . . . . . . . . . . . . 1,158 499 ------ ---- 9,149 3,731 Less accumulated depreciation and amortization . . . . . . (2,385) (1,103) ------ ------ $6,764 $2,628 ====== ======
Included in property and equipment are assets acquired under capital lease obligations with an original cost of approximately $1,703,000 and $1,897,000 as of December 31, 1995 and 1996, respectively. Accumulated amortization on the leased assets was approximately $731,000 and $1,272,000 as of December 31, 1995 and 1996, respectively. 4. ACCRUED LIABILITIES: Accrued liabilities consist of the following (in thousands):
December 31, --------------- 1996 1995 ---- ---- Employee compensation . . . . . . . . . . . . . . . . . . $1,427 $ 800 Commissions . . . . . . . . . . . . . . . . . . . . . . . 2,395 1,273 Other . . . . . . . . . . . . . . . . . . . . . . . . . . 3,938 1,106 ------ ------ Total . . . . . . . . . . . . . . . . . . . . . . . . . . $7,760 $3,179 ====== ======
5. COMMITMENTS AND CAPITAL LEASE OBLIGATIONS: The Company leases its facilities under noncancelable operating lease agreements which expire on various dates through December of 2003. Borrowings are secured by the purchased equipment. As of December 31, 1996, the Company had acquired approximately $880,000 of equipment under an equipment lease line which expired in March 1996. F-10 43 THE VANTIVE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1996 Minimum future lease payments under noncancelable capital and operating leases as of December 31, 1996 are summarized as follows (in thousands):
Capital Operating Leases Leases ------ ------ 1997 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 513 $ 2,210 1998 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 252 1,917 1999 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 1,697 2000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- 1,535 2001 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- 1,566 Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . -- 1,224 ------- ------- Total minimum lease payments . . . . . . . . . . . . . . . . . 784 $10,149 ======= Less: Amount representing interest at 10.0% - 11.2% . . . . . . (61) ------- Present value of lease payments . . . . . . . . . . . . . . . . . 723 Less: Current portion . . . . . . . . . . . . . . . . . . . . . (377) ------- Long-term portion . . . . . . . . . . . . . . . . . . . . . . . . $ 346 =======
Rental expense was approximately $419,000, $740,000 and $1,447,000 in 1994, 1995 and 1996, respectively. 6. MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK AND WARRANTS: Mandatorily Redeemable Preferred Stock In conjunction with the initial public offering of the Company's Common Stock in 1995, all outstanding shares of Mandatorily Redeemable Convertible Preferred Stock were automatically converted into Common Stock upon the closing of the Offering. Additionally, 104,562 shares of Common Stock were issued upon the exercise of certain warrants for Preferred Stock upon the closing of the Offering. Warrants In connection with several financing and leasing transactions in 1992 through 1994, the Company issued three series of warrants to purchase an aggregate of 63,804 shares of Series B preferred stock at $0.80 per share, 62,894 shares of Series C preferred stock at $0.88 per share and 41,668 shares of Series D preferred stock at $1.20 per share. During June 1995, the Series B warrant holders exercised their warrants. All other warrants were exercised upon the closing of the initial public offering and immediately converted to shares of Common Stock. The value of the warrants at the date of issuance was nominal; therefore, no value was assigned to the warrants for accounting purposes. Holders of warrants for 104,562 shares of Series C and D agreed to receive a lesser number of shares of common stock (87,056 shares) upon exercise and conversion of their warrants, the difference representing an amount of shares that would have been sold at the initial public offering price to pay for the common stock exercise under the warrant. 7. COMMON STOCK AND PREFERRED STOCK The Company is authorized to issue 50,000,000 shares of Common Stock and 2,000,000 shares of undesignated Preferred Stock and the Board of Directors has the authority to issue the undesignated Preferred Stock in one or more series and to fix the rights, preferences, privileges and restrictions thereof. F-11 44 THE VANTIVE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1996 All shares of common stock issued by the Company as a result of the exercise of stock options under the 1991 Stock Option Plan are subject to stock repurchase agreements whereby the Company has the option to repurchase unvested shares upon termination of employment at the original price paid for the shares (See Note 8). As of December 31, 1996, 486,860 shares of common stock at $0.08 to $4.50 per share are subject to repurchase. 8. STOCK OPTION AND EMPLOYEE STOCK PURCHASE PLANS: Under the Company's 1991 Stock Option Plan (the "Option Plan"), the Board of Directors may grant incentive and nonqualified stock options to employees, directors and consultants. The exercise price per share for an incentive stock option cannot be less than the market price on the date of grant. The exercise price per share for a nonqualified stock option cannot be less than 85% of the market price on the date of grant. Options granted under the Option Plan are immediately exercisable, subject to a right of repurchase in favor of the Company for all unvested shares. Option grants under the Option Plan generally expire ten years after the date of grant and generally vest over a four year period. In addition, in the event of a Change in Control (as defined) of the Company's ownership, the Company has agreed with the President and other officers that they will be credited with 12 months of service for purposes of option vesting. As of December 31, 1996, a total of 7,000,000 shares of common stock have been authorized by the Company's stockholders for grant under the plan. Option activity under the 1991 Stock Option Plan is as follows:
Options Outstanding --------------------------- Shares Number of Weighted Average for Grant Shares Exercise Price -------- --------- ---------------- Balance, December 31, 1993 . . . . . . . . . . . 670,482 2,463,204 $0.08 Granted . . . . . . . . . . . . . . . . . . . . . (685,500) 685,500 $0.11 Exercised . . . . . . . . . . . . . . . . . . . . -- (1,377,376) $0.08 Canceled . . . . . . . . . . . . . . . . . . . . 189,076 (189,076) $0.08 ---------- ---------- Balance, December 31, 1994 . . . . . . . . . . . 174,058 1,582,252 $0.09 Authorized . . . . . . . . . . . . . . . . . . . 3,707,262 -- -- Granted . . . . . . . . . . . . . . . . . . . . . (2,095,100) 2,095,100 $3.12 Exercised . . . . . . . . . . . . . . . . . . . -- (1,413,818) $0.20 Canceled . . . . . . . . . . . . . . . . . . . . 94,880 (94,880) $0.78 Unvested shares repurchased . . . . . . . . . . . 14,628 -- $0.81 ---------- ---------- Balance, December 31, 1995 . . . . . . . . . . . 1,895,728 2,168,654 $2.91 Authorized . . . . . . . . . . . . . . . . . . . -- -- -- Granted . . . . . . . . . . . . . . . . . . . . . (1,652,975) 1,652,975 $18.82 Exercised . . . . . . . . . . . . . . . . . . . . -- (246,854) $2.08 Canceled . . . . . . . . . . . . . . . . . . . . 498,251 (498,251) $9.99 Unvested shares repurchased . . . . . . . . . . . 44,452 -- $8.79 ---------- ---------- Balance, December 31, 1996 . . . . . . . . . . . 785,456 3,076,524 $10.81 ========== ==========
As of December 31, 1996, all of the outstanding options were immediately exercisable in full on the date of grant subject to repurchase of unvested shares by the Company at cost and at the option of the Company if employment is terminated. The Company's 1995 Outside Directors Stock Option Plan (the "Directors Plan") was adopted in July 1995. A total of 400,000 shares of Common Stock has been reserved for issuance under the Directors Plan. The Directors Plan provides for the grant of nonstatutory stock options to future nonemployee directors of the Company including F-12 45 THE VANTIVE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1996 an option to purchase 30,000 shares of Common Stock on the date on which the optionee first becomes a nonemployee director of the Company and an additional option to purchase 10,000 shares of Common Stock on the next anniversary. The exercise price per share of all options granted under the Directors Plan shall be equal to the market price of the Company's Common Stock on the date of grant of the option. As of December 31, 1996, 180,000 option shares have been granted of which 30,000 shares have been canceled. Of these, 150,000 shares were outstanding as December 31, 1996 and no options have been exercised. Such shares vest over four years. The Company's 1995 Employee Stock Purchase Plan (the "Purchase Plan") was adopted in July 1995. A total of 700,000 shares of Common Stock has been reserved for issuance under the Purchase Plan. The Purchase Plan will enable eligible employees to purchase Common Stock at 85% of the lower of the fair market value of the Company's Common Stock on the first day or the last day of each six-month purchase period. During 1996, 42,801 shares were purchased under the Purchase Plan. In October 1995, the Financial Accounting Standards Board issued Statement No. 123 (SFAS No. 123), "Accounting for Stock-Based Compensation," which establishes a fair value based method of accounting for stock-based compensation plans and requires additional disclosures for those companies who elect not to adopt the new method of accounting. The Company has adopted SFAS No. 123 in fiscal 1996, and in accordance with the provisions of SFAS No. 123, the Company applies APB Opinion 25 and related interpretations in accounting for its stock option and stock purchase plans. Had compensation cost for these plans been determined consistent with FASB Statement No. 123, the Company's net income and earnings per share would have been reduced to the following pro forma amounts indicated in the table below (in thousands, except per share amounts):
1996 1995 ------------------------------------------------------------- Net income - as reported $10,905 $2,043 Net income - pro forma $ 7,904 $1,483 Primary earnings per share - as reported $ 0.42 $ 0.09 Primary earnings per share - pro forma $ 0.31 $ 0.06
Because the FASB Statement No. 123 method of accounting has not been applied to options granted prior to January 1, 1995, the resulting pro forma compensation cost may not be representative of that to be expected in future years. The weighted average fair values of options granted during 1995 and 1996 were $1.63 and $9.78, respectively. The options outstanding at December 31, 1996, have exercise prices between $0.04 and $34.63, with a weighted average exercise price of $10.81 and a weighted average remaining contractual life of 8.84 years. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions used for grants in 1996 and 1995: risk-free interest rates ranged from 5 to 7 percent; expected dividend yields of 0%; expected lives of 0.22 years beyond vest date; and expected volatility of 85%. F-13 46 THE VANTIVE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1996
OUTSTANDING AND EXERCISABLE BY PRICE RANGE AS OF DECEMBER 31, 1996 OPTIONS OUTSTANDING OPTIONS EXERCISABLE ------------------------------------------------------------------------------ -------------------------------------------- Weighted Range of Number Outstanding Remaining Weighted Number Exercisable Weighted Average Exercise Prices As of December 31, 1996 Contractual Exercise Price As of December 31, 1996 Exercise Price ------------------ ----------------------- ----------- -------------- ----------------------- ---------------- $ 0.040 - $ 1.500 860,705 7.88 $ 0.9053 860,705 $ 0.9053 $ 2.000 - $ 7.000 650,314 8.48 $ 3.2298 650,314 $ 3.2298 $ 7.250 - $12.750 977,729 9.27 $11.6749 977,729 $11.6749 $17.500 - $34.250 721,150 9.71 $27.7435 588,650 $29.5587 $34.625 - $34.625 16,626 9.91 $34.6250 16,626 $34.6250 --------- ---- -------- --------- -------- $ 0.040 - $34.625 3,226,524 8.84 $10.8096 3,094,024 $10.4297
The table above includes options outstanding under the 1991 Employee and 1995 Outside Directors Stock Option Plans. As of December 31, 1996, the Company has reserved 3,226,524 shares of common stock for future issuance upon the exercise of currently outstanding stock options. 9. THE VANTIVE CORPORATION 401(k) PLAN: During 1993, the Company adopted the Vantive Corporation 401(k) Plan (the "401(k) Plan"). The 401(k) Plan is administered by the Company. All employees who are 21 years of age or older are entitled to participate on their first day of employment. Under the 401(k) Plan, eligible employees are entitled to make tax-deferred contributions and the Company may, at its discretion, make matching or discretionary contributions to the 401(k) Plan. For the years ended December 31, 1994, 1995 and 1996, no matching or discretionary contributions were made by the Company. 10. INCOME TAXES: The Company has accounted for income taxes pursuant to Statement of Financial Accounting Standards No. 109 (SFAS No. 109), "Accounting for Income Taxes," since its inception. SFAS No. 109 provides for an asset and liability approach to accounting for income taxes under which deferred income taxes are provided based upon enacted tax laws and rates applicable to the periods in which taxes become payable. F-14 47 THE VANTIVE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1996 The provision for income taxes consists of the following (in thousands):
December 31, ---------------------------------------------- 1996 1995 1994 ---- ---- ---- Current: Federal . . . . . . . . . $3,729 $133 $-- State . . . . . . . . . . 748 99 -- Foreign . . . . . . . . . 197 -- -- ------ ---- --- $4,674 $232 $-- ------ ---- --- Deferred: Federal . . . . . . . . . -- -- -- State . . . . . . . . . . -- -- -- Foreign . . . . . . . . . -- -- -- ------ ---- --- $ -- $ -- $-- ------ ---- ---
The provision for income taxes is net of the benefit of a net operating loss carryforward of $2.3 million for the year ended December 31, 1996. The provision for income taxes was based upon income before taxes as follows (in thousands):
December 31, ---------------------------------------------- 1996 1995 1994 ------ ------ ----- Domestic . . . . . . . . . . . . . $15,495 $2,934 $(461) Foreign . . . . . . . . . . . . . . 84 (659) (87) ------- ------ ----- Total . . . . . . . . . . . . $15,579 $2,275 $(548) ======= ====== =====
The provision for income taxes differs from the statutory U.S. federal income tax rate due to the following:
1996 1995 ----- ------ Provision at U.S. statutory rate . . . . . . . . . . . . . . 35.00% 35.00% State income taxes, net of federal benefit . . . . . . . . . 5.47 1.45 Change in valuation allowance . . . . . . . . . . . . . . . (8.42) (32.27) Other . . . . . . . . . . . . . . . . . . . . . . . . . . . (2.05) 5.82 ----- ----- 30.00% 10.00% ===== =====
F-15 48 THE VANTIVE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1996 The components of the net deferred tax assets are as follows (in thousands):
December 31, ---------------------- 1996 1995 ------ ------- Deferred tax assets: Net operating loss carryforwards . . $ 224 $ 1,169 Capitalized start-up costs . . . . . 28 77 Tax credit carryforwards . . . . . . -- 513 Accruals not currently deductible . 1,239 145 Other . . . . . . . . . . . . . . . (186) 165 ----- ------- 1,305 2,069 Valuation allowance . . . . . . . . (754) (2,069) ------ ------- Net deferred tax asset . . . . . $ 551 $ -- ====== =======
As of December 31, 1996, the Company had net operating loss carryforwards of approximately $659,000. These net operating loss carryforwards expire in various periods from 2000 to 2002. The change in the valuation allowance in 1996 primarily relates to realization of net operating loss carryforwards. The net deferred tax asset is included as a component of prepaid expenses and other current assets on the accompanying balance sheet. F-16 49 SIGNATURES pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. The Vantive Corporation (Registrant) /s/ Kathleen A. Murphy -------------------------------------- Kathleen A. Murphy Chief Financial Officer (Principal Financial Officer) Date: March 28, 1997 31 50 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints John R. Luongo and/or Kathleen A. Murphy as his or her attorney-in-fact, with the power of substitution, for him or her in any and all capacities, to sign any amendments to this Report on Form 10-K, and to file same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below on March 28, 1997 by the following persons on behalf of the registrant and in the capacities and on the date indicated.
Signature Title --------- ----- /s/ John R. Luongo President, Chief Executive Officer and Director - ---------------------------------------------- (Principal Executive Officer) (John R. Luongo) /s/ Kathleen A. Murphy Vice President, Finance and Administration, Chief - ---------------------------------------------- Financial Officer (Principal Financial Officer) (Kathleen A. Murphy) /s/ Michael M. Loo Vice President, Finance (Principal Accounting - ---------------------------------------------- Officer) (Michael M. Loo) /s/ Roger J. Sippl Chairman of the Board of Directors - ---------------------------------------------- (Roger J. Sippl) /s/ Aneel Bhusri Director - ---------------------------------------------- (Aneel Bhusri) /s/ William H. Davidow Director - ---------------------------------------------- (William H. Davidow) /s/ Kevin G. Hall Director - ---------------------------------------------- (Kevin G. Hall) /s/ Raymond L. Ocampo Jr Director - ---------------------------------------------- (Raymond L. Ocampo Jr.) /s/ Peter A. Roshko Director - ---------------------------------------------- (Peter A. Roshko)
32 51 EXHIBIT 11.1 THE VANTIVE CORPORATION COMPUTATION OF NET INCOME PER SHARE (In thousands, except per share data)
Year Ended December 31, ------------------------------------- PRIMARY 1996 1995 1994 ---- ---- ---- Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . $10,905 $ 2,043 $ (548) ======= ======= ======= Weighted average common shares outstanding . . . . . . . . . . . 24,002 21,034 4,038 Weighted average common equivalent shares: Weighted average preferred stock outstanding . . . . . . . . . -- -- 11,842 Weighted average preferred stock warrants outstanding . . . . -- -- 156 Common stock option grants . . . . . . . . . . . . . . . . . . 1,845 1,212 -- Adjustments to reflect requirements of the Securities and Exchange Commission's Staff Accounting Bulletin No. 83: Common stock issuances . . . . . . . . . . . . . . . . . . . . -- -- -- Preferred stock issuances . . . . . . . . . . . . . . . . . . -- -- -- Common stock option grants . . . . . . . . . . . . . . . . . . -- 766 1,532 ------- ------- ------- Pro forma total weighted average common shares and equivalents. . 17,568 ------- Pro forma net loss per share . . . . . . . . . . . . . . . . . . $ (0.03) ======= Total weighted average common shares and equivalents . . . . . . 25,847 23,012 ====== ====== Net income per share . . . . . . . . . . . . . . . . . . . . . . $ 0.42 $ 0.09 ====== ====== Year Ended December 31, -------------------------------------- FULLY DILUTED 1996 1995 1994 ---- ---- ---- Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . $10,905 $ 2,043 $ (548) ======= ======= ======== Weighted average common shares outstanding . . . . . . . . . . . . 24,002 21,034 4,038 Weighted average common equivalent shares: Weighted average preferred stock outstanding . . . . . . . . . -- -- 11,842 Weighted average preferred stock warrants outstanding . . . . . -- -- 156 Common stock option grants . . . . . . . . . . . . . . . . . . 1,936 1,282 -- Adjustments to reflect requirements of the Securities and Exchange and Commission's Staff Accounting Bulletin No. 83: Common stock issuances . . . . . . . . . . . . . . . . . . . . -- -- -- Preferred stock issuances . . . . . . . . . . . . . . . . . . . -- -- -- Common stock option grants . . . . . . . . . . . . . . . . . . -- 766 1,532 ------- ------- -------- Pro forma total weighted average common shares and equivalents . . 17,568 -------- Pro forma net loss per share . . . . . . . . . . . . . . . . . . $ (0.03) ======== Total weighted average common shares and equivalents . . . . . . . 25,938 23,082 ====== ====== Net income per share . . . . . . . . . . . . . . . . . . . . . . $ 0.42 $ 0.09 ====== ======
S-1 52 EXHIBIT 21.1 THE VANTIVE CORPORATION LIST OF SUBSIDIARIES
Jurisdiction of Ownership Name of Subsidiary Incorporation Percentage - ------------------ ------------- ---------- Always An Adventure International, Inc. Canada 100% Vantive Australia PTY Limited Australia 100% Vantive B.V. The Netherlands 100% Vantive Canada PTE Ltd. Canada 100% Vantive France, SARL France 100% Vantive Germany, GmbH Germany 100% Vantive Singapore, Inc. Singapore 100% Vantive UK Limited United Kingdom 100%
S-2 53 EXHIBIT 23.1 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our report included in this Form 10-K, into the Company's previously filed Registration Statement File No. 333-960 on Form S-8. ARTHUR ANDERSEN LLP San Jose, California March 28, 1997 S-3 54 SCHEDULE I THE VANTIVE CORPORATION AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS (IN THOUSANDS)
AMOUNTS BALANCE AT CHARGED TO BALANCE BEGINNING PROFIT AND AT END OF DESCRIPTION OF YEAR LOSS DEDUCTIONS YEAR ----------- ------- ---- ---------- ---- Year ended December 31, 1994 Allowance for doubtful accounts . . . . . . . . . . $ ---- $ ---- $ ---- $ ---- Year ended December 31, 1995 Allowance for doubtful accounts . . . . . . . . . . $ ---- $ 325 $ ---- $ 325 Year ended December 31, 1996 Allowance for doubtful accounts . . . . . . . . . . $ 325 $ 455 $ ---- $ 780
S-4 55 INDEX TO EXHIBITS FILED TOGETHER WITH THIS ANNUAL REPORT * 3.1 Form of Agreement and Plan of Merger between The Vantive Corporation, a California corporation, and The Vantive Corporation, a Delaware corporation. * 3.2 Bylaws. * 10.1 Form of Indemnity Agreement for officers and directors. * 10.2 1991 Stock Option Plan, as amended. * 10.3 1995 Outside Directors Stock Option Plan. * 10.4 1995 Employee Stock Purchase Plan. * 10.5 Offer Letter dated May 21, 1993 between the Company and John R. Luongo. * 10.6 Offer Letter dated April 6, 1995 between the Company and John M. Jack. *+ 10.7 Value Added Reseller License Agreement dated October 5, 1993 by and between Inference Corporation and the Company. *+ 10.8 Basicscript License Agreement dated October 4, 1994 by and between Henneberry Hill Technologies Corporation doing business as Summit Software Company and the Company. *+ 10.9 International VAR Agreement dated March 26, 1992 between Oracle Corporation and the Company, as amended. *+ 10.10 Value Added Remarketer Agreement dated December 20, 1991 between Sybase, Inc. and the Company, as amended. * 10.11 Security and Loan Agreement dated May 12, 1995 between the Company and Imperial Bank. *+ 10.12 Application Bridge API VAR License Agreement dated January 22, 1993 between the Company and Prospect Software, Inc. *+ 10.13 Compensation Letter dated May 10, 1995 between the Company and John R. Luongo. *+ 10.14 Compensation Letter dated May 10, 1995 between the Company and Steven M. Goldsworthy. * 10.15 Lease Agreement dated January 13, 1995 between John Arrillaga, Trustee, or his Successor Trustee, UTA dated July 20, 1977 (John Arrillaga Separate Property Trust) as amended, and Richard T. Peery, Trustee, or his Successor Trustee, UTA dated July 20, 1977 (Richard T. Peery Separate Property Trust) as amended, and the Company. 10.16 Lease Agreement dated September 4, 1996 between John Arrillaga, Trustee, or his Successor Trustee, UTA dated July 20, 1977 (Arrillaga Family Trust) as amended and Richard T. Peery, Trustee, or his Successor Trustee, UTA July 20, 1977 (Richard T. Peery Separate Trust) as amended, and the Company. 11.1 Computation of Net Income Per Share (See page S-1). 21.1 List of Subsidiaries (See page S-2). 23.1 Consent of Arthur Andersen LLP, Independent Public Accountants (See page S-3). 24.1 Power of Attorney (See page 32). 27.1 Financial Data Schedule.
____________________________ * Incorporated by reference from the Company's Registration Statement (No. 33-94244), declared effective on August 14, 1995. + Confidential Treatment has been granted for portions of this exhibit. EX-10.16 2 LEASE AGREEMENT 1 EXHIBIT 10.16 LEASE AGREEMENT BLDG: PSII-2 OWNER: 500 PROP: 322 UNIT: 101 TENANT: 32208 THIS LEASE, made this 4th day of September, 1996 between JOHN ARRILLAGA, Trustee, or his Successor Trustee, UTA dated 7/20/77 (ARRILLAGA FAMILY TRUST) as amended and RICHARD T. PEERY, Trustee, or his Successor Trustee, UTA dated 7/20/77 (RICHARD T. PEERY SEPARATE PROPERTY TRUST) as amended, hereinafter called Landlord, and THE VANTIVE CORPORATION, a California corporation, hereinafter called Tenant. WITNESSETH: Landlord hereby leases to Tenant and Tenant hereby hires and takes from Landlord those certain premises (the "Premises") outlined in red on Exhibit "A", attached hereto and incorporated herein by this reference thereto more particularly described as follows: All of that certain 24,000(plus or minus) square foot, one-story building located at 3333 Octavius Drive, Santa Clara, California 95054. Said Premises is more particularly shown within the area outlined in Red on Exhibit A. The entire parcel, of which the Premises is a part, is shown within the area outlined in Green on Exhibit A attached hereto. The Premises is leased on an "as-is" basis, in its present condition, and in the configuration as shown in Red on Exhibit B attached hereto. As used herein the Complex shall mean and include all of the land outlined in Green and described in Exhibit "A", attached hereto, and all of the buildings, improvements, fixtures and equipment now or hereafter situated on said land. Said letting and hiring is upon and subject to the terms, covenants and conditions hereinafter set forth and Tenant covenants as a material part of the consideration for this Lease to perform and observe each and all of said terms, covenants and conditions. This Lease is made upon the conditions of such performance and observance. 1. USE Tenant shall use the Premises only in conformance with applicable governmental laws, regulations, rules and ordinances for the purpose of general office, light manufacturing, research and development, and storage and other uses necessary for Tenant to conduct Tenant's business, provided that such uses shall be in accordance with all applicable governmental laws and ordinances and for no other purpose. Tenant shall not do or permit to be done in or about the Premises or the Complex nor bring or keep or permit to be brought or kept in or about the Premises or the Complex anything which is prohibited by or will in any way increase the existing rate of (or otherwise affect) fire or any insurance covering the Complex or any part thereof (unless Tenant agrees to pay any increased portion of any premium for such insurance), or any of its contents, or will cause a cancellation of any insurance covering the Complex or any part thereof, or any of its contents. Tenant shall not do or permit to be done anything in, on or about the Premises or the Complex which will in any way obstruct or interfere with the rights of other tenants or occupants of the Complex or injure or annoy them, or use or allow the Premises to be used for any unlawful purpose, nor shall Tenant cause, maintain or permit any nuisance in, on or about the Premises or the Complex. No sale by auction shall be permitted on the Premises. Tenant shall not place any loads upon the floors, walls, or ceiling, which endanger the structure, or place any harmful fluids or other materials in the drainage system of the building, or overload existing electrical or other mechanical systems. No waste materials or refuse shall be dumped upon or permitted to remain upon any part of the Premises or outside of the building in which the Premises are a part, except in trash containers placed inside exterior enclosures designated by Landlord for that purpose or inside of the building proper where designated by Landlord. No materials, supplies, equipment, finished products or semi-finished products, raw materials or articles of any nature shall be stored upon or permitted to remain outside the Premises or on any portion of common area of the Complex. No loudspeaker or other device, system or apparatus which can be heard outside the Premises shall be used in or at the Premises without the prior written consent of Landlord. Tenant shall not commit or suffer to be committed any waste in or upon the Premises. Tenant shall indemnify, defend and hold Landlord harmless against any loss, expense, damage, attorneys' fees, or liability arising out of failure of Tenant to comply with any applicable law governing Tenant's use of the Premises. Tenant shall comply with any covenant, condition, or restriction ("CC&R's") affecting the Premises of which Tenant has notice. The provisions of this paragraph are for the benefit of Landlord only and shall not be construed to be for the benefit of any tenant or occupant of the Complex. 2. TERM * A. The term of this Lease shall be for a period of SEVEN (7) years (unless sooner terminated as hereinafter provided) and, subject to Paragraphs 2(B) and 3, shall commence on the 1st day of January, 1997 and end on the 31st day December of 2003. B. Possession of the Premises shall be deemed tendered and the term of this Lease shall commence on January 1, 1997, or (d) As otherwise agreed in writing. 3. POSSESSION If Landlord, for any reason whatsoever, cannot deliver possession of said premises to Tenant at the XXXXXX specified, this Lease shall not be void or voidable; no obligation of Tenant shall be XXXXXX in that event the commencement and termination dates of the Lease, and all other dates affected thereby shall be revised to conform to the date of Landlord's delivery of possession, as specified in Paragraph 2(b), above. The above is, however, subject to the provision that the period of delay, of delivery of the premises shall not exceed 30 days from the commencement date herein (except those delays caused by Acts of God, strikes, war, utilities, governmental bodies, weather, unavailable materials, and delays beyond Landlord's control shall be excluded in calculating such period) in which instance Tenant, at its option, may, by written notice to Landlord, terminate this Lease. * It is agreed in the event said Lease commences on a date other than the first day of the month the term of the Lease will be extended to account for the number of days in the partial month. The Basic Rent during the resulting partial month will be pro-rated (for the number of days in the partial month) at the Basic Rent scheduled for the projected commencement date as shown in Paragraph 43. [INITIAL STAMP] /s/ XXXX page 1 of 8 2 4. RENT A. Basic Rent. Tenant agrees to pay to Landlord at such place as Landlord may designate without deduction, affect, prior notice, or demand, and Landlord agrees to accept as Basic Rent for the leased Premises the total sum of FOUR MILLION THIRTY TWO THOUSAND AND NO/100----------($4,032,000.00) Dollars in lawful money of the United States of America payable as follows: See Paragraph 43 for Basic Rent Schedule B. Time for Payment. In the event that the term of this Lease commences on a date other than the first day of a calendar month, on the date of commencement of the term hereof Tenant shall pay to Landlord as rent for the period from such date of commencement to the first day of the next succeeding calendar month that proportion of the monthly rent hereunder which the number of days between such date of commencement and the first day of the next succeeding calendar month bears to thirty (30). In the event that the term of this Lease for any reason ends on a date other than the last day of a calendar month, on the first day of the last calendar month of the term hereof Tenant shall pay to Landlord as rent for the period from said first day of said last calendar month to and including the last day of the term hereof that proportion of the monthly rent hereunder which the number of days between said first day of said last calendar month and the last day of the term hereof bears to thirty (30). C. Late Charge. Notwithstanding any other provision of this Lease, if Tenant is in default in the payment of rent as set forth in this Paragraph 4 when due, or any part thereof. Tenant agrees to pay Landlord, in addition to the delinquent rental due, a late charge for each rental payment in default ten (10) days. Said late charge shall equal ten (10%) percent of each rental payment so in default. D. Additional Rent. Beginning with the commencement date of the term of this Lease, Tenant shall pay to Landlord in addition to the Basic Rent and as Additional Rent the following: (a) Tenant's proportionate share of all Taxes relating to the Complex as set forth in Paragraph 12, and (b) Tenant's proportionate share of all insurance premiums relating to the Complex, as set forth in Paragraph 15, and (c) Tenant's proportionate share of expenses for the operation, management, maintenance and repair of the Building (including common areas of the Building) and Common Areas of the Complex in which the Premises are located as set forth in Paragraph 7, and (d) All charges, costs and expenses, which Tenant is required to pay hereunder, together with all interest and penalties, costs and expenses including attorneys' fees and legal expenses, that may accrue thereto in the event of Tenant's failure to pay such amounts, and all damages, reasonable costs and expenses which Landlord may incur by reason of default of Tenant or failure on Tenant's part to comply with the terms of this Lease. In the event of nonpayment by Tenant of Additional Rent Landlord shall have all the rights and remedies with respect thereto as Landlord has for nonpayment of rent. The Additional Rent due hereunder shall be paid to Landlord or Landlord's agent (i) within five days for taxes and insurance and within thirty (30) days for all other Additional Rent items after presentation of invoice from Landlord or Landlord's agent setting forth such Additional Rent and/or (ii) at the option of Landlord, Tenant shall pay to Landlord monthly, in advance, Tenant's prorata share of an amount estimated by Landlord to be Landlord's approximate average monthly expenditure for such Additional Rent items, which estimated rent items shall be reconciled within 120 days of the end of each calendar year or more frequently if Landlord so elects to do so at Landlord's sole and absolute discretion, as compared to Landlord's actual expenditure for said Additional Rent items, with Tenant paying to Landlord, upon demand any amount of actual expenses expended by Landlord in excess of said estimated amount, or Landlord refunding to Tenant (providing Tenant is not in default in the performance of any of the terms, covenants and conditions of this Lease) any amount of estimated payments made by Tenant in excess of Landlord's actual expenditures for said Additional Rent items. The respective obligations of Landlord and Tenant under this paragraph shall survive the expiration or other termination of the term of this Lease, and if the term hereof shall expire or shall otherwise terminate on a day other than the last day of a calendar year, the actual Additional Rent XXXXXX calendar year in which the term hereof expires or otherwise terminates shall be determined and settled on the basis of the statement of actual Additional Rent for such calendar year and shall be prorated in the proportion which the number of days in such calendar year preceding such expiration or termination bears to 365. See Paragraph 54 E. Fixed Management Fee. Beginning with the Commencement Date of the Term of this Lease, Tenant shall pay to Landlord, in addition to the Basic Rent and Additional Rent, a fixed monthly management fee equal to 2% of the Basic Rent due for each month during the Lease Term ("Management Fee"). F. Place of Payment of Rent and Additional Rent. All Basic Rent hereunder and all payments hereunder for Additional Rent shall be paid to Landlord at the office of Landlord at Peery/Arrillaga, File 1504, Box 60000, San Francisco, CA 94160 or to such other person or to such other place as Landlord may from time to time designate in writing. G. Security Deposit. Concurrently with Tenant's execution of this Lease, Tenant shall deposit with Landlord the sum of ONE HUNDRED THREE THOUSAND TWO HUNDRED AND NO/100 ($103,200.00) Dollars. Said sum shall be held by Landlord as a Security Deposit for the faithful performance by Tenant of all of the terms, covenants, and conditions of this Lease to be kept and performed by Tenant during the term hereof. If Tenant defaults with respect to any provision of this Lease, including, but not limited to, the provisions relating to the payment of rent and any of the monetary sums due herewith, Landlord may (but shall not be required to) use, apply or retain all or any part of this Security Deposit for the payment of any other amount which Landlord may spend by reason of Tenant's default or to compensate Landlord for any other loss or damage which Landlord may suffer by reason of Tenant's default. If any portion of said Deposit is so used or applied Tenant shall, within ten(10) days after written demand therefor, deposit cash with Landlord in the amount sufficient to restore the Security Deposit to its original amount. Tenant's failure to do so shall be a material breach of this Lease. Landlord shall not be required to keep this Security Deposit separate from its general funds, and Tenant shall not be entitled to interest on such Deposit. If Tenant fully and faithfully performs every provision of this Lease to be performed by it, the Security Deposit or any balance thereof shall be returned to Tenant (or at Landlord's option, to the last assignee of Tenant's interest hereunder) within thirty (30) days following the expiration of the Lease term and after Tenant has vacated the Premises. In the event of termination of Landlord's interest in this Lease, Landlord shall transfer said Deposit to Landlord's successor in interest whereupon Tenant agrees to release Landlord from liability for the return of such Deposit or the accounting therefor. 5. RULES AND REGULATIONS AND COMMON AREA XXXX XXXX XXXX XXXX XXXX XXXX as Landlord may from time to time prescribe, Tenant and Tenant's employees, invitees and customers shall, in common with other occupants of the Complex in which the Premises are located, and their respective employees, invitees and customers, and others entitled to the use thereof, have the non-exclusive right to use the access roads, parking areas, and facilities provided and designated by Landlord for the general use and convenience of the occupants of the Complex in which the Premises are located, which areas and facilities are referred to herein as "Common Area". This right shall terminate upon the termination of this Lease. Landlord reserves the right from time to time to make changes in the shape, size, location, amount and extent of Common Area. Landlord further reserves the right to promulgate such reasonable rules and regulations relating to the use of the Common Area, and any part or parts thereof, as Landlord may deem appropriate for the best interests of the occupants of the Complex. The Rules and Regulations shall be binding upon Tenant upon delivery of a copy of them to Tenant, and Tenant shall abide by them and cooperate in their observance. Such Rules and Regulations may be amended by Landlord from time to time, with or without advance notice, and all amendments shall be effective upon delivery of a copy to Tenant. Landlord shall not be responsible to Tenant for the non-performance by any other tenant or occupant of the Complex of any of said Rules and Regulations. Landlord shall operate, manage and maintain the Common Area. The manner in which the Common Area shall be maintained and the expenditures for such maintenance shall be at the discretion of Landlord. [INITIAL STAMP] /s/ XXXX -------------------------- page 2 of 8 3 6. PARKING Tenant shall have the right to use with other tenants or occupants of the Complex 96 parking spaces in the common parking areas of the Complex. Tenant agrees, that Tenant, Tenant's employees, agents, representatives and/or invitees shall not use parking spaces in excess of said 96 spaces allocated to Tenant hereunder. Landlord shall have the right, at Landlord's sole discretion, to specifically designate the location of Tenant's parking spaces within the common parking areas of the Complex in the event of a dispute among the tenants occupying the building and/or Complex referred to herein, in which event Tenant agrees that Tenant, Tenant's employees, agents, representatives and/or invitees shall not use any parking spaces other than those parking spaces specifically designated by Landlord for Tenant's use. Said parking spaces, if specifically designated by Landlord to Tenant, may be relocated by Landlord at any time, and from time to time. Landlord reserves the right, at Landlord's sole discretion, to rescind any specific designation of parking spaces, thereby returning Tenant's parking spaces to the common parking area. Landlord shall give Tenant written notice of any change in Tenant's parking spaces. Tenant shall not, at any time, park, or permit to be parked, any trucks or vehicles adjacent to the loading areas so as to interfere in any way with the use of such areas, nor shall Tenant at any time park, or permit the parking of Tenant's trucks or other vehicles or the trucks and vehicles of Tenant's suppliers or others, in any portion of the common area not designated by Landlord for such use by Tenant. Tenant shall not park nor permit to be parked, any inoperative vehicles or equipment on any portion of the common parking area or other common areas of the Complex. Tenant agrees to assume responsibility for compliance by its employees with the parking provision contained herein. If Tenant or its employees park in other than such designated parking areas, then Landlord may charge Tenant, at an additional charge, and Tenant agrees to pay, ten ($10.00) Dollars per day for each day or partial day each such vehicle is parked in any area other than that designated. Tenant hereby authorizes Landlord at Tenant's sole expense to tow away from the Complex any vehicle belonging to Tenant or Tenant's employees parked in violation of these provisions, or to attach violation stickers or notices to such vehicles. Tenant shall use the parking areas for vehicle parking only, and shall not use the parking areas for storage. 7. EXPENSES OF OPERATION, MANAGEMENT, AND MAINTENANCE OF THE COMMON AREAS OF THE COMPLEX As Additional Rent and in accordance with Paragraph 4 D of this Lease, Tenant shall pay to Landlord Tenant's proportionate share (calculated on a square footage or other equitable basis as calculated by Landlord) of all expenses of operation, management, maintenance and repair of the Common Areas of the Complex including, but not limited to, license, permit, and inspection fees; security; utility charges associated with exterior landscaping and lighting (including water and sewer charges); all charges incurred in the maintenance of landscaped areas, lakes, parking lots, sidewalks, driveways; maintenance, repair and replacement of all fixtures and electrical, mechanical, and plumbing systems; structural elements and exterior surfaces of the buildings; salaries and employee benefits of personnel and payroll taxes applicable thereto; supplies, materials, equipment and tools; the amortized cost of capital expenditures which have the effect of reducing operating expenses, provided, however, that in the event Landlord makes such capital improvements, Landlord shall amortize its investment in said improvements over the useful life thereof (together with interest at the rate of fifteen (15%) percent per annum on the unamortized balance) as an operating expense in accordance with standard accounting practices, provided, that such amortization is not at a rate greater than the reasonably anticipated savings in the operating expenses. "Additional Rent" as used herein shall not include Landlord's debt repayments; interest on charges; expenses directly or indirectly incurred by Landlord for the benefit of any other tenant; cost for the installation of partitioning or any other tenant improvements; cost of attracting tenants; depreciation; interest, or executive salaries. 8. ACCEPTANCE AND SURRENDER OF PREMISES Subject to Paragraphs 44, 51 and 53, and by entry hereunder, Tenant accepts the Premises as being in good and sanitary order, condition and repair and accepts the building and improvements included in the Premises in their present condition and without representation or warranty by Landlord as to the condition of such building or as to the use or occupancy which may be made thereof. Any exceptions to the foregoing must be by written agreement executed by Landlord and Tenant. Tenant agrees on the last day of the Lease term, or on the sooner termination of this Lease, to surrender the Premises promptly and XXXXXX to Landlord in good condition and repair (damage by Acts of God, fire, normal wear and tear excepted), with all interior walls painted, or cleaned so that they appear freshly painted, and repaired and replaced, if damaged; all floors cleaned and waxed; all carpets cleaned and shampooed; the airconditioning and heating equipment serviced by a reputable and licensed service firm and in good operating condition (provided the maintenance of such equipment has been Tenant's responsibility to pay for during the term of this Lease) together with all alterations, additions, and improvements which may have been made in, to, or on the Premises (except movable trade fixtures installed at the expense of Tenant) except that Tenant shall ascertain from Landlord within thirty (30) days before the end of the term of this Lease whether Landlord desires to have the Premises or any part or parts thereof restored to their condition and configuration as when the Premises were delivered to Tenant and if Landlord shall so desire, then Tenant shall restore said Premises or such part or parts thereof before the end of this Lease at Tenant's sole cost and expense. Tenant, on or before the end of the term or sooner termination of this Lease, shall remove all of Tenant's personal property and trade fixtures from the Premises, and all property not so removed on or before the end of the term or sooner termination of this Lease shall be deemed abandoned by Tenant and title to same shall thereupon pass to Landlord without compensation to Tenant. Landlord may, upon termination of this Lease, remove all moveable furniture and equipment so abandoned by Tenant, at Tenant's sole cost, and repair any damage caused by such removal at Tenant's sole cost. If the Premises be not surrendered at the end of the term or sooner termination of this Lease, Tenant shall indemnify Landlord against loss or liability resulting from the delay by Tenant in so surrendering the Premises including, without limitation, any claims made by any succeeding tenant founded on such delay. Nothing contained herein shall be construed as an extension of the term hereof or as a consent of Landlord to any holding over by Tenant. The voluntary or other surrender of this Lease or the Premises by Tenant or a mutual cancellation of this Lease shall not work as a merger and, at the option of Landlord, shall either terminate all or any existing subleases or subtenancies or operate as an assignment to Landlord of all or any such subleases or subtenancies. 9. ALTERATIONS AND ADDITIONS Tenant shall not make, or suffer to be made, any alteration or addition to the Premises, or any part thereof, without the written consent of Landlord (not to be unreasonably withheld) first had and obtained by Tenant, but at the cost of Tenant, and any addition to, or alteration of, the Premises, except moveable furniture and trade fixtures, shall at once become a part of the Premises and belong to Landlord. Landlord reserves the right to reasonably approve all contractors and mechanics proposed by Tenant to make such alterations and additions. Tenant shall retain title to all moveable furniture and trade fixtures placed in the Premises. All heating, lighting, electrical, airconditioning, floor to ceiling partitioning, drapery, carpeting, and floor installations made by Tenant, together with all property that has become an integral part of the Premises, shall not be deemed trade fixtures. Tenant agrees that it will not proceed to make such alteration or additions, without having obtained consent from Landlord to do so, and until five (5) days from the receipt of such comment, in order that Landlord may post appropriate notices to avoid any liability to contractors or material suppliers for payment for Tenant's improvements. Tenant will at all times permit such notices to be posted and to remain posted until the completion of work. Tenant shall, if required by Landlord, secure at Tenant's own cost and expense, a completion and lien indemnity bond, satisfactory to Landlord, for such work. Tenant further covenants and agrees that any mechanic's lien filed against the Premises or against the Complex for work claimed to have been done for, or materials claimed to have been furnished to Tenant, will be discharged by Tenant, by bond or otherwise, within ten (10) days after the filing thereof, at the cost and expense of Tenant. Any exceptions to the foregoing must be made in writing and executed by both Landlord and Tenant. 10. TENANT MAINTENANCE Tenant shall, at its sole cost and expense, keep and maintain the Premises (including appurtenances) and every part thereof in a high standard of maintenance and repair, and in good and sanitary condition. Tenant's maintenance and repair responsibilities herein referred to include, but are not limited to, all windows, window frames, plate glass, glazing, truck doors, plumbing systems (such as water and drain lines, sinks, toilets, faucets, drains, showers and water fountains), electrical systems (such as panels, conduits, outlets, lighting fixtures, lamps, bulbs, tubes, ballasts), heating and air-conditioning systems (such as compressors, fans, air handlers, ducts, mixing boxes, thermostats, time clocks, boilers, heaters, supply and return grills), store fronts, roofs, downspouts, all interior improvements within the premises including but not limited to wall coverings, window coverings, carpet, floor coverings, partitioning, ceilings, doors (both interior and exterior, including closing mechanisms, latches, locks, skylights (if any), automatic fire extinguishing systems, and elevators and all other interior improvements of any nature whatsoever. Tenant agrees to provide carpet shields under all rolling chairs or to otherwise be responsible for wear and tear of the carpet caused by such rolling chairs if such wear and tear exceeds that caused by normal foot traffic in surrounding areas. Areas of excessive wear shall be replaced at Tenant's sole expense upon Lease termination. Tenant hereby waives all rights under, and benefits of, subsection 1 of Section 1932 and Section 1941 and 1942 of the California XXXXXX or ordinance now or hereafter in effect. 11. UTILITIES Tenant shall pay promptly, as the same becomes due, all charges for water, gas, electricity, telephone, telex and other electronic communications service, sewer service, waste pick-up and any other utilities, materials or services furnished directly to or used by Tenant on or about the Premises during the term of this Lease, including, without limitation, any temporary or permanent utility surcharge or other exactions whether or not hereinafter imposed. Landlord shall not be liable for and Tenant shall not be entitled to any abatement or reduction of rent by reason of any interruption or failure of utility services to the Premises when such interruption or failure is caused by accident, breakage, repair, strikes, lockouts, or other labor disturbances or labor disputes of any nature, or by any other cause, similar or dissimilar, beyond the reasonable control of Landlord. 12. TAXES A. As Additional Rent and in accordance with Paragraph 4 D of this Lease, Tenant shall pay to Landlord Tenant's proportionate share of all Real Property Taxes, which prorata share shall be allocated to the leased Premises by square footage or other equitable basis, as calculated by Landlord. The term "Real Property Taxes", as used herein, shall mean (i) all taxes, assessments, levies and other charges of any kind or nature whatsoever, general and special, foreseen and unforeseen (including all installments of principal and interest required to pay any general or special assessments for public improvements and any increases resulting from reassessments caused by [INITIAL STAMP] /s/ XXXX page 3 of 8 4 any change in ownership of the Complex) now or hereafter imposed by any governmental or quasi-governmental authority or special district having the direct or indirect power to tax or levy assessments, which are levied or assessed against, or with respect to the value, occupancy or use of, all or any portion of the Complex (as now constructed or as may at any time hereafter be constructed, altered, or otherwise changed) or Landlord's interest therein, any improvements located within the Complex (regardless of ownership); the fixtures, equipment and other property of Landlord, real or personal, that are an integral part of and located in the Complex; or parking areas, public utilities, or energy within the Complex; (ii) all charges, levies or fees imposed by reason of environmental regulation or other governmental control of the Complex; and (iii) all costs and fees (including reasonable attorneys' fees) incurred by Landlord in contesting any Real Property Tax and in negotiating with public authorities as to any Real Property Tax. If at any time during the term of this Lease the taxation or assessment of the Complex prevailing as of the commencement date of this Lease shall be altered so that in lieu of or in addition to any Real Property Tax described above there shall be levied, assessed or imposed (whether by reason of a change in the method of taxation or assessment, creation of a new tax or charge, or any other cause) an alternate or additional tax or charge (i) on the value, use of occupancy of the Complex or Landlord's interest therein or (ii) on or measured by the gross receipts, income or rentals from the Complex, on Landlord's business of leasing the Complex, or computed in any manner with respect to the operation of the Complex, then any such tax or charge, however designated, shall be included within the meaning of the term "Real Property Taxes" for purposes of this Lease. If any Real Property Tax is based upon property or rents unrelated to the Complex, then only that part of such real Property Tax that is fairly allocable to the Complex shall be included within the meaning of the term "Real Property Taxes". Notwithstanding the foregoing, the term "Real Property Taxes" shall not include estate, inheritance, gift or franchise taxes of Landlord or the federal or state net income tax imposed on Landlord's income from all sources, or interest charges or other penalties or fines for Landlord's late payment or Property Taxes, provided Tenant has paid its Taxes by the due dated as stated herein. B. Taxes on Tenant's Property (a) Tenant shall be liable for and shall pay ten days before delinquency, taxes levied against any personal property or trade fixtures placed by Tenant in or about the Premises. If any such taxes on Tenant's personal property or trade fixtures are levied against Landlord or Landlord's property or if the assessed value of the Premises is increased by the inclusion therein of a value placed upon such personal property or trade fixtures of Tenant and if Landlord, after written notice to Tenant, pays the taxes based on such increased assessment, which Landlord shall have the right to do regardless of the validity thereof, but only under proper protest if requested by Tenant, Tenant shall upon demand, as the case may be, repay to Landlord the taxes so levied against Landlord, or the proportion of such taxes resulting from such increase in the assessment; provided that in any such event Tenant shall have the right, in the name of Landlord and with Landlord's full cooperation, to bring suit in any court of competent jurisdiction to recover the amount of any such taxes so paid under protest, and any amount so recovered shall belong to Tenant. (b) if the Tenant improvements in the Premises, whether installed, and/or paid for by Landlord or Tenant and whether or not affixed to the real property so as to become a part thereof, are assessed for real property tax purposes at a valuation higher than the valuation at which standard office improvements in other space in the Complex are assessed, then the real property taxes and assessments levied against Landlord or the Complex by reason of such excess assessed valuation shall be deemed to be taxes levied against personal property of Tenant and shall be governed by the provisions of 12Ba above. If the records of the County Assessor are available and sufficiently detailed to serve as a basis for determining whether said Tenant improvements are assessed at a higher valuation than standard office improvements in other space in the Complex, such records shall be binding on both the Landlord and the Tenant. If the records of the County Assessor are not available or sufficiently detailed to serve as a basis for making said determination, the actual cost of construction shall be used. 13. LIABILITY INSURANCE Tenant at Tenant's expense, agrees to keep in force during the term of this Lease a policy of commercial general liability insurance with combined single limit coverage of not less than Two Million Dollars ($2,000,000) for injuries to or death of persons occurring in, on or about the Premises or the Complex, and property damage insurance with limits of $500,000. The policy or policies affecting such insurance, certificates of insurance of which shall be furnished to Landlord, shall name Landlord as additional insureds, and shall insure any liability of Landlord, contingent or otherwise, as respects acts or omissions of Tenant, its agents, employees or invitees or otherwise by any conduct or transactions of any of said persons in or about or concerning the Premises, including any failure of Tenant to observe or perform any of its obligations hereunder, shall be issued by an insurance company admitted to transact business in the State of California; and shall provide that the insurance effected thereby shall not be canceled, except upon thirty (30) days' prior written notice to Landlord. If, during the term of this Lease, in the considered opinion of Landlord's Lender or insurance advisor, the amount of insurance described in this paragraph 13 is not adequate, Tenant agrees to increase said coverage to such reasonable amount as Landlord's Lender, insurance advisor, or counsel shall deem adequate. Landlord agrees that such adjustments shall not take place more than one time in any twelve (12) month period. 14. TENANT'S PERSONAL PROPERTY INSURANCE AND WORKMAN'S COMPENSATION INSURANCE Tenant shall maintain a policy or policies of fire and property damage insurance in "all risk" form with a sprinkler leakage endorsement insuring the personal property, inventory, trade fixtures, and leasehold improvements within the leased Premises for the full replacement value thereof. The proceeds from any of such policies shall be used for the repair or replacement of such items so insured. Tenant shall also maintain a policy or policies of workman's compensation insurance and any other employee benefit insurance sufficient to comply with all laws. 15. PROPERTY INSURANCE Landlord shall purchase and keep in force and as Additional Rent and in accordance with Paragraph 4D of this Lease, Tenant shall pay to Landlord, (or Landlord's agent if so directed by Landlord) Tenant's proportionate share (calculated on a square footage or other equitable basis as calculated by Landlord) the deductibles on insurance claims and the cost of policy or policies of insurance covering loss or damage to the Premises and Complex in the amount of the full replacement value thereof, providing protection against those perils included within the classification of "all risks" insurance and flood and/or earthquake insurance, if available, plus a policy of rental income insurance in the amount of one hundred (100%) percent of twelve (12) months Basic Rent, plus sums paid as Additional Rent and any deductibles related thereto. If such insurance cost is increased solely due to Tenant's use of the Premises or the Complex, Tenant agrees to pay to Landlord the full cost of such increase or its pro rata share if the increase results from two or more tenants' use. Tenant shall have no interest in nor any right to the proceeds of any insurance procured by Landlord for the Complex. Any other provision of this Lease to the contrary notwithstanding, Landlord and Tenant do each hereby respectively release the other, to the extent of insurance coverage of the releasing party, from any liability for loss or damage caused by fire or any of the extended coverage casualties included in the releasing party's insurance policies, irrespective of the cause of such fire or casualty; provided, however, that if the insurance policy of either releasing party prohibits such waiver, then this waiver shall not take effect until consent to such waiver is obtained. If such waiver is so prohibited, the insured party affected shall promptly notify the other party thereof. 16. INDEMNIFICATION Landlord shall not be liable to Tenant and Tenant hereby waives all claims against Landlord for any injury to or death of any person or damage to or destruction of property in or about the Premises or the Complex by or from any cause whatsoever, including, without limitation, gas, fire, oil, electricity or leakage of any character from the roof, walls, basement or other portion of the Premises or the Complex but excluding, however, the willful misconduct or negligence of Landlord, its agents, servants, employees, invitees, or contractors of which negligence Landlord has knowledge and reasonable time to correct. Except as to injury to persons or damage to property to the extent arising from the willful misconduct or the negligence of Landlord, its agents, servants, employees, invitees, or contractors, Tenant shall hold Landlord harmless from and defend Landlord against any and all expenses, including reasonable attorneys' fees, in connection therewith, arising out of any injury to or death of any person or damage to or destruction of property occurring in, on or about the Premises, or any part thereof, from any cause whatsoever. 17. COMPLIANCE Tenant, at its sole cost and expense, shall promptly comply with all laws, statutes, ordinances and governmental rules, regulations or requirements now or hereafter in effect; with the requirements of any board of fire underwriters or other similar body now or hereafter constituted; and with any direction or occupancy certificate issued pursuant to law by any public officer; provided, however, that no such failure shall be deemed a breach of the provisions if Tenant, immediately upon notification, commences to remedy or rectify said failure. The judgment of any court of competent jurisdiction or the admission of Tenant in any action against Tenant, whether Landlord be a party thereto or not, that Tenant has violated any such law, statute, ordinance or governmental rule, regulation, requirement, direction or provision, shall be conclusive of that fact as between Landlord and Tenant. This paragraph shall not be interpreted as requiring Tenant to make structural changes or improvements, except to the extent such changes or improvements are required as a result of Tenant's particular use of the Premises. Tenant shall, at its sole cost and expense, comply with any and all requirements pertaining to said Premises of any insurance organization or maintenance of reasonable fire and public liability insurance covering the Premises. See Paragraph 53. 18. LIENS Tenant shall keep the Premises and the Complex free from any liens arising out of any work performed, materials furnished or obligation incurred by Tenant. In the event that Tenant shall not, within ten (10) days following the imposition of such lien, cause the same to be released of record, Landlord shall have, in addition to all other remedies provided herein and by law, the right, but no obligation, to cause the same to be released by such means as it shall deem proper, including payment of the claim giving rise to such lien. All sums paid by Landlord for such purpose, and all expenses incurred by it in connection therewith, shall be payable to Landlord by Tenant on demand with interest at the prime rate of interest as quoted by the Bank of America. [INITIAL STAMP] /s/ XXXX --------------------- 5 19. ASSIGNMENT AND SUBLETTING See Paragraph 49 20. SUBORDINATION AND MORTGAGES In the event Landlord's XXXXXX or leasehold XXXXXX is now or hereafter encumbered by a deed of trust, upon the interest of Landlord in the land and buildings in which the demised Premises are located, to secure a loan from a lender (hereinafter referred to as "Lender") to Landlord, Tenant shall, at the request of Landlord or Lender, execute in writing an agreement subordinating its rights under this Lease to the lien of such deed of trust, or, if so requested, agreeing that the lien of Lender's deed of trust shall be or remain subject and subordinate to the rights of Tenant under this Lease. Notwithstanding any such subordination, Tenant's possession under this Lease shall not be disturbed if Tenant is not in default and so long as Tenant shall pay all cost and observe and perform all of the provisions set forth in this Lease. See Paragraph 56 21. ENTRY BY LANDLORD Landlord reserves, and shall at all reasonable times after at least 24 hours notice (except in emergencies) have, the right to enter the Premises to inspect them; to perform any services to be provided by Landlord hereunder; to submit the Premises to prospective purchasers, mortgagers or (during the last eighteen (18) months of the Term of this Lease) XXXXXX; to post notices of nonresponsibility; and to alter, improve or repair the Premises and any portion of the Complex, all without abatement of rent; and may erect scaffolding and other necessary structures in or through the Premises where reasonably required by the character of the work to be performed; provided, however that the business of Tenant shall be interfered with to the least extent that is reasonably practical. For each of the foregoing purposes, Landlord shall at all times have and retain a key with which to unlock all of the doors in an emergency in order to obtain entry to the Premises, and any entry to the Premises obtained by Landlord by any of said means, or otherwise, shall not under any circumstances be construed or deemed to be a forcible or unlawful entry into or a detainer of the Premises or an eviction, actual or constructive, of Tenant from the Premises or any portion thereof, Landlord shall also have the right at any time to change the arrangement or location of entrances or passageways, doors and doorways, and corridors, elevators, stairs, toilets or other public parts of the Complex and to change the name, number or designation by which the Complex is commonly known, and none of the foregoing shall be deemed an actual or constructive eviction of Tenant, or shall entitle Tenant to any reduction of rent hereunder. See Paragraph 57 22. BANKRUPTCY AND DEFAULT The commencement of a bankruptcy action or liquidation action or reorganization action or insolvency action or an assignment of or by Tenant for the benefit of creditors, or any similar action undertaken by Tenant, or the insolvency of Tenant, shall, at Landlord's option, constitute a breach of this Lease by Tenant. If the trustee or receiver appointed to serve during a bankruptcy, liquidation, reorganization, insolvency or similar action elects to reject Tenant's unexpired Lease, the trustee or receiver shall notify Landlord in writing of its election within thirty (30) days after an order for relief in a liquidation action or within thirty (30) days after the commencement of any action. Within thirty (30) days after court approval of the assumption of this Lease, the trustee or receiver shall cure (or provide adequate assurance to the reasonable satisfaction of Landlord that the trustee or receiver shall cure) any and all previous defaults under the unexpired Lease and shall compensate Landlord for all actual pecuniary loss and shall provide adequate assurance of future performance under said Lease to the reasonable satisfaction of Landlord. Adequate assurance of future performance, as used herein, includes, but shall not be limited to: (i) assurance of source and payment of rent, and other consideration due under this Lease; (ii) XXXXXX that the assumption or assignment of this Lease will not breach substantially any provision, such as radius, location, use, or exclusivity provision, in any agreement relating to the above described Premises. Nothing contained in this section shall affect the existing right of Landlord to refuse to accept an assignment upon commencement of or in connection with a bankruptcy, liquidation, reorganization or insolvency action or an assignment of Tenant for the benefit of creditors or other similar act. Nothing contained in this Lease shall be construed as giving or granting or creating an equity in the demised Premises to Tenant, in no event shall the leasehold estate under this Lease, or any XXXXXX therein, be assigned by voluntary or involuntary bankruptcy proceeding without the prior written consent of Landlord. In no event shall this Lease or any rights or privileges hereunder be an asset of Tenant under any bankruptcy, insolvency or reorganization proceedings. The failure to perform or honor any covenant, condition or representation made under this Lease shall constitute a default hereunder by Tenant upon expiration of the appropriate grace period hereinafter provided. Tenant shall have a period of five (5) days from the date of written notice from Landlord within which to cure any default in the payment of rental or adjustment thereto. Tenant shall have a period of thirty (30) days from the date of written notice from Landlord within which to cure any other default under this Lease; provided, however, that if the nature of Tenant's failure is such that more than thirty (30) days is reasonably required to cure the same, Tenant shall not be in default so long as Tenant commences performance within such thirty (30) day period and thereafter prosecutes the same to completion. Upon an incurred default of this Lease by Tenant, Landlord shall have the following rights and remedies in addition to any other rights or remedies available to Landlord at law or in equity: (a). The rights and remedies provided for by California Civil Code Section XXXXXX including but not limited to, recovery of the worth at the time of award of the amount by which the unpaid rent for the balance of the term after the time of award XXXXXX the amount of rental loss for the same period that Tenant XXXXXX be reasonably avoided, as computed pursuant to subsection (b) of said Section 1951.2. Any proof by Tenant under subparagraphs (2) and (3) of Section 1951.2 of the California Civil Code of the amount of rental loss that could be reasonably avoided shall be made in the following manner: Landlord and Tenant shall each select a licensed real estate broker in the business of renting property of the same type and use as the Premises and in the same geographic vicinity. Such two real estate brokers shall select a third licensed real estate broker, and the three licensed real estate brokers so selected shall determine the amount of the rental loss that could be reasonably avoided from the balance of the term of this Lease after the time of award. The decision of the majority of said licensed real estate brokers shall be final and binding upon the parties hereto. (b). The rights and remedies provided by California Civil Code Section which allows Landlord to continue the Lease in effect and to enforce all of its rights and remedies under this Lease, including the right to recover rent as it becomes due, for as long as Landlord does not terminate Tenant's right to possession, acts of maintenance or preservation, efforts to relet the Premises, or the appointment of a receiver upon Landlord's initiative to protect its interest under this Lease shall not constitute a termination of Tenant's right to possession. (c). The right to terminate this Lease by giving notice to Tenant in accordance with applicable law. (d). To the extent permitted by law the right and power to enter the Premises and remove therefrom all persons and property, to store such property in a public warehouse or elsewhere at the cost of and for the account of Tenant, and to sell such property and supply such proceeds therefrom pursuant to applicable California law, Landlord, may from time to time sublet the Premises or XXXXXX terms (which may extend beyond the term of this Lease) and as such rent and such other XXXXXX alterations and repairs to the Premises. Upon each subletting, (i) Tenant shall be immediately liable to pay Landlord, in addition to indebtedness other than rent due hereunder, the cost of such subletting, including, but not limited to, reasonable attorneys' fees, and any real estate commissions actually paid, and the cost of such alterations and repairs incurred by Landlord and the amount, if any, by which the rent hereunder for the period of such subletting (to the extent such period does not exceed the term hereof) exceeds the amount to be paid as rent for the Premises for such period or (ii) at the option of Landlord, rents received from such subletting shall be applied first to payment of indebtedness other than rent due hereunder from Tenant to Landlord; second, to the payment of any costs of such subletting and of such alterations and repairs; third to payment of rent due and unpaid hereunder, and the residue, if any, shall be held by Landlord and applied in payment of future rent as the same becomes due hereunder. If Tenant has been credited with any rent to be received by such subletting under option (i) and such rent shall not be promptly paid to Landlord by the subtenant(s), or if such rentals received from such subletting under option (ii) during any month be less than that to be paid during that month by Tenant hereunder, Tenant shall pay any such deficiency to Landlord. Such deficiency shall be calculated and paid monthly. No taking possession of the Premises by Landlord, shall be construed as an election on its part to terminate this Lease unless a written notice of such [INITIAL STAMP] /s/ XXXX page 5 of 8 6 intention be given to Tenant. Notwithstanding any such subletting without termination. Landlord may at any time hereafter elect to terminate this Lease for such previous breach. (e). The right to have a receiver appointed for Tenant upon application by Landlord, to take possession of the Premises and to apply any rental collected from the Premises and to exercise all other rights and remedies granted to Landlord pursuant to subparagraph d. above. 23. ABANDONMENT Tenant shall not vacate or abandon the Premises at any time during the term of this Lease (except that Tenant may vacate so long as it pays rent, provides an on-site security guard during normal business hours from Monday through Friday, and otherwise performs its obligations hereunder) and if Tenant shall abandon, vacate or surrender said Premises, or be dispossessed by the process of law, or otherwise, any personal property belonging to Tenant and left on the Premises shall be deemed to be abandoned, at the option of Landlord, except such property as may be mortgaged to Landlord. 24. DESTRUCTION In the event the Premises are destroyed in whole or in part from any cause, except for routine maintenance and repairs and incidental damage and destruction caused from vandalism and accidents for which Tenant is responsible for under Paragraph 10, Landlord may, at its option: (a) Rebuild or restore the Premises to their condition prior to the damage or destruction, or (b) Terminate this Lease. (providing that the Premises is damaged to the extent of 33 1/3% of the replacement cost) If Landlord does not give Tenant notice in writing within thirty (30) days from the destruction of the Premises of its election to either rebuild and restore them and the estimated time required to rebuild or restore or to terminate this Lease, Landlord shall be deemed to have elected to rebuild or restore them, in which event Landlord agrees, at its expense, promptly to rebuild or restore the Premises to their condition prior to the damage or destruction. Tenant shall be entitled to a reduction in rent while such repair is being made in the proportion that the area of the Premises rendered untenantable by such damage bears to the total area of the Premises if Landlord initially estimates that the building or restoration will exceed 180 days or if Landlord does not complete the rebuilding or restoration within one hundred eighty (180) days following the date of destruction (such period of time to be extended for delays caused by the fault or neglect of Tenant, or because of Acts of God, acts of public agencies, labor disputes, strikes, fires, freight embargoes, rainy or stormy weather, inability to obtain materials, supplies or fuels, acts of contractors or subcontractors, or delay of the contractors or subcontractors due to such causes or other contingencies beyond the control of Landlord, then Tenant shall have the right to terminate this Lease by giving fifteen (15) days prior written notice to Landlord. Notwithstanding anything herein to the contrary, Landlord's obligation to rebuild or restore shall be limited to the building and interior improvements constructed by Landlord as they existed as of the commencement date of the Lease and shall not include restoration of Tenant's trade fixtures, equipment, merchandise, or any improvements, alterations or additions made by Tenant to the Premises, which Tenant shall forthwith replace or fully repair at Tenant's sole cost and expense provided this Lease is not cancelled according to the provisions above. Unless this Lease is terminated pursuant to the foregoing provisions, this Lease shall remain in full force and effect. Tenant hereby expressly waives the provisions of Section 1932, Subdivision 2, in Section 1933, Subdivision 4 of the California Civil Code. In the event that the building in which the Premises are situated is damaged or destroyed to the extent of not less than 33 1/3% of the replacement cost thereof, Landlord may elect to terminate this Lease, whether the Premises be injured or not. 25. EMINENT DOMAIN If all or any part of the Premises shall be taken by any public or quasi-public authority under the power of eminent domain or conveyance in lieu thereof, this Lease shall terminate as to any portion of the Premises so taken or conveyed on the date when title vests in the condemnor, and Landlord shall be entitled to any and all payment, income, rent, award, or any interest therein whatsoever which may be paid or made in connection with such taking or conveyance, and Tenant shall have no claim against Landlord or otherwise for the value of any unexpired term of this Lease. Notwithstanding the foregoing paragraph, any compensation specifically awarded Tenant for loss of business, Tenant's personal property, moving cost or loss of goodwill, shall be and remain the property of Tenant. If (i) any action or proceeding is commenced for such taking of the Premises or any part thereof, or if Landlord is advised in writing by any entity or body having the right or power of condemnation of its intention to condemn the premises or any portion thereof, or (ii) any of the foregoing events occur with respect to the taking of any space in the Complex not leased hereby, or if any such spaces so taken or conveyed in lieu of such taking and Landlord shall decide to discontinue the use and operation of the Complex, or decide to demolish, alter or rebuild the Complex, then, in any of such events Landlord shall have the right to terminate this Lease by giving Tenant written notice thereof within sixty (60) days of the date of receipt of said written advice, or commencement of said action or proceeding, or taking conveyance, which termination shall take place as of the first to occur of the last day of the calendar month next following the month in which such notice is given or the date on which title to the Premises shall vest in the condemnor. In the event of such a partial taking or conveyance of the Premises, if the portion of the Premises taken or conveyed is so substantial that the Tenant can no longer reasonably conduct its business, Tenant shall have the privilege of terminating this Lease within sixty (60) days from the date of such taking or conveyance, upon written notice to Landlord of its intention so to do, and upon giving of such notice this Lease shall terminate on the last day of the calendar month next following the month in which such notice is given, upon payment by Tenant of the rent from the date of such taking or conveyance to the date of termination. If a portion of the Premises be taken by condemnation or conveyance in lieu thereof and neither Landlord nor Tenant shall terminate this Lease as provided herein, this Lease shall continue in full force and effect as to the part of the Premises not so taken or conveyed, and the rent herein shall be apportioned as of the date of such taking or conveyance so that thereafter the rent to be paid by Tenant shall be in the ratio that the area of the portion of the Premises not so taken or conveyed bears to the total area of the Premises prior to such taking. 26. SALE OR CONVEYANCE BY LANDLORD In the event of a sale or conveyance of the Complex or any interest therein, by any owner of the reversion then constituting Landlord, the transferor shall thereby be released from any further liability upon any of the terms, covenants or conditions (express or implied) herein contained in favor of Tenant, and in such event, insofar as such transfer is concerned, Tenant agrees to look solely to the responsibility of the successor in interest of such transferor in and to the Complex and this Lease. This Lease shall not be affected by any such sale or conveyance, and Tenant agrees to attorn to the successor in interest of such transferor. See Paragraph 58. 27. ATTORNMENT TO LENDER OR THIRD PARTY In the event the interest of Landlord in the land and buildings in which the leased Premises are located (whether such interest of Landlord is a fee title interest or a leasehold interest) is encumbered by deed of trust, and such interest is acquired by the lender or any third party through judicial foreclosure or by exercise of a power of sale at private trustee's foreclosure sale, Tenant hereby agrees to attorn to the purchaser in any such foreclosure sale and to recognize such purchaser as the Landlord under this Lease. In the event the lien of the deed of trust securing the loan from Lender to Landlord is prior and paramount to the Lease, this Lease shall nonetheless continue in full force and effect for the remainder of the unexpired term hereof, at the same rental herein reserved and upon all the other terms, conditions and covenants herein contained. 28. HOLDING OVER Any holding over by Tenant after expiration or other termination of the term of this Lease with the written consent of Landlord delivered to Tenant shall not constitute a renewal or extension of the Lease or give Tenant any rights in or to the leased Premises except as expressly provided in this Lease. Any holding over after the expiration or other termination of the term of this Lease, with the consent of Landlord, shall be construed to be a tenancy from month to month, on the same terms and conditions herein specified insofar as applicable except that the monthly Basic Rent shall be increased to an amount equal to one hundred fifty (150%) percent of the monthly Basic Rent required during the last month of the Lease term. 29. CERTIFICATE OF ESTOPPEL Either party shall at any time upon not less than ten (10) days' prior written notice from the other party exercise, acknowledge and deliver to the requesting party a statement in writing (i) certifying that this Lease is unmodified and in full force and effect (or, if modified, stating the nature of such modification and certifying that this Lease, as so modified, is in full force and effect) and the date to which the rent and other charges are paid in advance, if any, and (ii) acknowledging that there are not, to the best of such party's knowledge, any uncured defaults on the part of the other party hereunder, or specifying such defaults, if any, are claimed. Any such statement may be conclusively relied upon by any prospective purchaser or encumbrancer of the Premises. The party receiving such request's failure to deliver such statement within such time shall be conclusive upon the other party that this Lease is in full force and effect, without modification except as may be requested by Landlord; that there are no uncured defaults in the requesting party's performance, and that no more than one month's XXXXXX 30. CONSTRUCTION CHANGES It is understood that the description of the Premises and the location of ductwork, plumbing and other facilities therein are subject to such minor changes as Landlord or Landlord's architect determines to be desirable in the course of construction of the Premises, and no such changes, or any changes in plans for any other portions of the Complex shall affect this Lease or entitle Tenant to any reduction of rent hereunder or result in any liability of Landlord to Tenant. Landlord does not guarantee the accuracy of any drawings supplied to Tenant and verification of the accuracy of such drawings rests with Tenant. 31. RIGHT OF LANDLORD TO PERFORM All terms, covenants and conditions of this Lease to be performed or observed by Tenant shall be performed or observed by Tenant at Tenant's sole cost and expense and without any reduction of rent. If Tenant shall fail to pay any sum of money, or other rent, required to be paid by it hereunder or shall fail to perform any other term or covenant hereunder on its part to be performed, and such failure shall continue for five (5) days after written notice thereof by Landlord, Landlord, without waiving or releasing Tenant from any obligation of Tenant hereunder, may, but shall not be obligated to, make any such payment or perform [INITIAL STAMP] /s/ XXXX page 6 of 8 7 any such other term or covenant on Tenant's part to be performed. All sums so paid by Landlord and all necessary costs of such performance by Landlord together with interest thereon at the rate of the prime rate of interest per annum as quoted by the Bank of America from the date of such payment or performance by Landlord, shall be paid (and Tenant covenants to make such payment) to Landlord on demand by Landlord, and Landlord shall have (in addition to any other right or remedy of Landlord) the same rights and remedies in the event of nonpayment by Tenant as in the case of failure by Tenant in the payment of rent hereunder. 32. ATTORNEYS' FEES. (A) In the event that either Landlord or Tenant should bring suit for the possession of the Premises, for the recovery of any sum due under this Lease, or because of the breach of any provision of this Lease, or for any other relief against the other party hereunder, then all costs and expenses, including reasonable attorneys' fees, incurred by the prevailing party therein shall be paid by the other party, which obligation on the part of the other party shall be deemed to have accrued on the date of the commencement of such action and shall be enforceable whether or not the action is prosecuted to judgement. (B) Should Landlord be named as a defendant in any suit brought against Tenant in connection with or arising out of Tenant's occupancy hereunder, Tenant shall pay to Landlord its costs and expenses incurred in such suit, including a reasonable attorney's fee. 33. WAIVER. The waiver by either party of the other party's failure to perform or observe any term, covenant or condition herein contained to be performed or observed by such waiving party shall not be deemed to be a waiver of such term, covenant or condition or of any subsequent failure of the party failing to perform or observe the same or any other such term, covenant or condition therein contained, and no custom or practice which may develop between the parties hereto during the term hereof shall be deemed a waiver of, or in any way affect, the right of either party to insist upon performance and observance by the other party in strict accordance with the terms hereof. 34. NOTICES. All notices, demands, requests, advices or designations which may be or are required to be given by either party to the other hereunder shall be in writing. All notices, demands, requests, advices or designations by Landlord to Tenant shall be sufficiently given, made or delivered if personally served on Tenant by leaving the same at the Premises or if sent by United States certified or registered mail, postage prepaid, addressed to Tenant at the Premises. All notices, demands, requests, advices or designations by Tenant to Landlord shall be sent by United States certified or registered mail, postage prepaid, addressed to Landlord at its offices at Peery/Arrillaga, 2560 Mission College Blvd., Suite 101, Santa Clara, CA 95054. Each notice, request, demand, advice or designation referred to in this paragraph shall be deemed received on the date of the personal service or the date of actual receipt or refusal of delivery, as the case may be. 35. EXAMINATION OF LEASE. Submission of this instrument for examination or signature by Tenant does not constitute a reservation of or option for a lease, and this instrument is not effective as a lease or otherwise until its execution and delivery by both Landlord and Tenant. 36. DEFAULT BY LANDLORD. Landlord shall not be in default unless Landlord fails to perform obligations required of Landlord within a reasonable time, but in no event earlier than thirty (30) days after written notice by Tenant to Landlord and to the holder of any first mortgage or deed of trust covering the Premises whose name and address shall have heretofore been furnished to Tenant in writing, specifying wherein Landlord has failed to perform such obligations; provided, however, that if the nature of Landlord's obligations is such that more than thirty (30) days are required for performance, then Landlord shall not be in default if Landlord commences performance within such thirty (30) day period and thereafter diligently prosecutes the same to completion. 37. CORPORATE AUTHORITY. If Tenant is a corporation, (or a partnership) each individual executing this Lease on behalf of said corporation (or partnership) represents and warrants that he is duly authorized to execute and deliver this Lease on behalf of said corporation (or partnership) in accordance with the by-laws of said corporation (or partnership in accordance with the partnership agreement) and that this Lease is binding upon said corporation (or partnership) in accordance with its terms. If Tenant is a corporation, Tenant shall, within thirty (30) days after execution of this Lease, deliver to Landlord a certified copy of the resolution of the Board of Directors of said corporation authorizing or ratifying the execution of this Lease. 39. LIMITATION OF LIABILITY. In consideration of the benefits accruing hereunder, Tenant and all successors and assigns covenant and agree that, in the event of any actual or alleged failure, breach or default hereunder by Landlord: (i) the sole and exclusive remedy shall be against Landlord's interest in the Premises leased herein; (ii) no partner of Landlord shall be sued or named as a party in any suit or action (except as may be necessary to secure jurisdiction of the partnership) (iii) no service of process shall be made against any partner of Landlord (except as may be necessary to secure jurisdiction of the partnership) (iv) no partner of Landlord shall be required to answer or otherwise plead to any service of process; (v) no judgment will be taken against any partner of Landlord; (vi) any judgment taken against any partner of Landlord may be vacated and set aside at any time without hearing; (vii) no writ of execution will ever be leveled against the assets of any partner of Landlord; (viii) these covenants and agreements are enforceable both by Landlord and also by any partner of Landlord. Tenant agrees that each of the foregoing covenants and agreements shall be applicable to any covenant or agreement either expressly contained in this Lease or imposed by statute or at common law. 40. MISCELLANEOUS AND GENERAL PROVISIONS a. Tenant shall not, without the written consent of Landlord, use the name of the building for any purpose other than as the address of the business conducted by Tenant in the Premises. b. This lease shall in all respects be governed by and construed in accordance with the laws of the State of California. If any provision of this Lease shall be invalid, unenforceable or ineffective for any reason whatsoever, all other provisions hereof shall be and remain in full force and effect. c. The term "Premises" includes the space leased hereby and any improvements now or hereafter installed therein or attached thereto. The term "Landlord" or any pronoun used in place thereof includes the plural as well as the singular and the successors and assigns of Landlord. The term "Tenant" or any pronoun used in place thereof includes the plural as well as the singular and individuals, firms, associations, partnerships and corporations, and their and each of their respective heirs, executors, administrators, successors and permitted assigns, according to the context hereof, and the provisions of this Lease shall inure to the benefit of and bind such heirs, executors, administrators, successors and permitted assigns. The term "person" includes the plural as well as the singular and individuals, firms, associations, partnerships and corporations. Words used in any gender include other genders. If there be more than one Tenant the obligations of Tenant hereunder are joint and several. The paragraph headings of this Lease are for convenience of reference only and shall have no effect upon the construction or interpretation of any provision hereof. d. Time is of the essence of this Lease and of each and all of its provisions. [INITIAL STAMP] /s/ XXXXXX page 7 of 8 8 e. At the expiration or earlier termination of this Lease, Tenant shall execute, acknowledge and deliver to Landlord, within ten (10) days after written demand from Landlord to Tenant, any quitclaim deed or other document required by any reputable title company, licensed to operate in the State of California, to remove the cloud or encumbrance created by this Lease from the real property of which Tenant's premises are a part. f. This instrument along with any exhibits and attachments hereto constitutes the entire agreement between Landlord and Tenant relative to the Premises and this agreement and the exhibits and attachments may be altered, amended or revoked only by an instrument in writing signed by both Landlord and Tenant. Landlord and Tenant agree hereby that all prior or contemporaneous oral agreements between and among themselves and their agents or representatives relative to the leasing of the Premises are merged in or revoked by this agreement. g. Neither Landlord nor Tenant shall record this Lease or a short form memorandum hereof without the consent of the other. h. Tenant further agrees to execute any amendments required by a lender to enable Landlord to obtain financing, so long as Tenant's rights hereunder are not substantially affected. i. Paragraphs 43 through 60 are added hereto and are included as a part of this lease. j. Clauses, plats and riders, if any, signed by Landlord and Tenant and endorsed on or affixed to this Lease are a part hereof. k. Tenant covenants and agrees that no diminution or shutting off of light, air or view by any structure which may be hereafter erected (whether or not by Landlord) shall in any way affect his Lease, entitle Tenant to any reduction of rent hereunder or result in any liability of Landlord to Tenant. 41. BROKERS Tenant warrants that it had dealings with only the following real estate brokers or agents in connection with the negotiation of this Lease: none ---- and that it knows of no other real estate broker or agent who is entitled to a commission in connection with this Lease. 42. SIGNS No sign, placard, picture, advertisement, name or notice shall be inscribed, displayed or printed or affixed on or to any part of the outside of the Premises or any exterior windows of the Premises without the written consent of Landlord first had and obtained (such consent not be unreasonably withheld) and Landlord shall have the right to remove any such sign, placard, picture, advertisement, name or notice without notice to and at the expense of Tenant. If Tenant is allowed to print or affix or in any way place a sign in, on, or about the Premises, upon expiration or other sooner termination of this Lease, Tenant at Tenant's sole cost and expense shall both remove such sign and repair all damage in such a manner as to restore all aspects of the appearance of the Premises to the condition prior to the placement of said sign. All approved signs or lettering on outside doors shall be printed, painted, affixed or inscribed at the expense of Tenant by a person approved of by Landlord. Tenant shall not place anything or allow anything to be placed near the glass of any window, door partition or wall which may appear unsightly from outside the Premises. During the Term of this Lease in which Tenant is the sole occupant of said Premises, Tenant shall be entitled to use the entire monument sign designated for said Building. IN WITNESS WHEREOF, Landlord and Tenant have executed and delivered this Lease as of the day and year last written below. LANDLORD: TENANT: ARRILLAGA FAMILY TRUST THE VANTIVE CORPORATION a California corporation By /s/ John Arrillaga By /s/ Michael Loo ----------------------------------- ----------------------------------- John Arrillaga, Trustee Michael Loo, Director of Finance Date: 12/2/96 Date: 28-OCT-96 -------------------------------- -------------------------------- RICHARD T. PEERY SEPARATE PROPERTY TRUST By /s/ Richard T. Peery ----------------------------------- Richard T. Peery, Trustee Date: -------------------------------- page 8 of 8 9 Paragraphs 43 through 60 to Lease Agreement Dated September 4, 1996, By and Between the Arrillaga Family Trust and the Richard T. Peery Separate Property Trust, as Landlord, and THE VANTIVE CORPORATION, a California corporation, as Tenant for 24,000 plus/minus Square Feet of Space Located at 3333 Octavius Drive, Santa Clara, California. 43. BASIC RENT: In accordance with Paragraph 4A herein, the total aggregate sum of FOUR MILLION THIRTY TWO THOUSAND AND NO/100 DOLLARS ($4,032,000.00), shall be payable as follows: On January 1, 1997, the sum of FORTY FOUR THOUSAND FOUR HUNDRED AND NO/100 DOLLARS ($44,400.00) shall be due, and a like sum due on the first day of each month thereafter, through and including December 1, 1997. On January 1, 1998, the sum of FORTY FIVE THOUSAND SIX HUNDRED AND NO/100 DOLLARS ($45,600.00) shall be due, and a like sum due on the first day of each month thereafter, through and including December 1, 1998. On January 1, 1999, the sum of FORTY SIX THOUSAND EIGHT HUNDRED AND NO/100 DOLLARS ($46,800.00) shall be due, and a like sum due on the first day of each month thereafter, through and including December 1, 1999. On January 1, 2000, the sum of FORTY EIGHT THOUSAND AND NO/100 DOLLARS ($48,000.00) shall be due, and a like sum due on the first day of each month thereafter, through and including December 1, 2000. On January 1, 2001, the sum of FORTY NINE THOUSAND TWO HUNDRED AND NO/100 DOLLARS ($49,200.00) shall be due, and a like sum due on the first day of each month thereafter, through and including December 1, 2001. On January 1, 2002, the sum of FIFTY THOUSAND FOUR HUNDRED AND NO/100 DOLLARS ($50,400.00) shall be due, and a like sum due on the first day of each month thereafter, through and including December 1, 2002. On January 1, 2003 the sum of FIFTY ONE THOUSAND SIX HUNDRED AND NO/100 DOLLARS ($51,600.00) shall be due, and a like sum due on the first day of each month thereafter, through and including December 1, 2003; or until the entire aggregate sum of FOUR MILLION THIRTY TWO THOUSAND AND NO/100 DOLLARS ($4,032,000.0) has been paid. 44. "AS-IS" BASIS: Subject only to Paragraphs 51, 52, 53 and 55, it is hereby agreed that the Premises leased hereunder is leased strictly on an "as-is" basis and in its present condition, and in the configuration as shown on Exhibit B attached hereto, and by reference made a part hereof. Except as specifically noted herein, it is specifically agreed between the parties that Landlord shall not be required to make, nor be responsible for any cost, in connection with any repair, restoration, and/or improvement to the Premises in order for this Lease to commence, or thereafter, throughout the Term of this Lease. Landlord makes no warranty or representation of any kind or nature whatsoever as to the condition or repair of the Premises, nor as to the use or occupancy which may be made thereof. 45. CONSENT: Whenever the consent of one party to the other is required hereunder, such consent shall not be unreasonably withheld. 46. CHOICE OF LAW: SEVERABILITY. This Lease shall in all respects be governed by and construed in accordance with the XXXXXX. If any provisions of this Lease shall be invalid, unenforceable, or ineffective for any reason whatsoever, all other provisions hereof shall be and remain in full force and effect. 47. AUTHORITY TO EXECUTE. The parties executing this Lease Agreement hereby warrant and represent that they are properly authorized to execute this Lease Agreement and bind the parties on behalf of whom they execute this Lease Agreement and to all of the terms, covenants and conditions of this Lease Agreement as they relate to the respective parties hereto. [INITIAL STAMP] /s/ XXXXXX Page 9 10 48. ASSESSMENT CREDITS: The demised property herein may be subject to a special assessment levied by the City of Santa Clara as part of an Improvement District. As a part of said special assessment proceedings (if any), additional bonds were or may be sold and assessments were or may be levied to provide for construction contingencies and reserve funds. Interest shall be earned on such funds created for contingencies and on reserve funds which will be credited for the benefit of said assessment district. To the extent surpluses are created in said district through unused contingency funds, interest earnings or reserve funds, such surpluses shall be deemed the property of Landlord. Notwithstanding that such surpluses may be credited on assessments otherwise due against the Leased Premises, Tenant shall pay to Landlord, as additional rent if, and at the time of any such credit of surpluses, an amount equal to all such surpluses so credited. For example: if (i) the property is subject to an annual assessment of $1,000.00, and (ii) a surplus of $200.00 is credited towards the current year's assessment which reduces the assessment amount shown on the property tax bill from $1,000.00 to $800.00, Tenant shall, upon receipt of notice from Landlord, pay to Landlord said $200.00 credit as Additional Rent. 49. ASSIGNMENT AND SUBLETTING: A. Subject to Paragraph 49B below, Tenant shall not assign, transfer, or hypothecate the leasehold estate under this Lease, or any interest therein, and shall not sublet the Premises, or any part thereof, or any right or privilege appurtenant thereto, or suffer any other person or entity to occupy or use the Premises, or any portion thereof, without, in each case, the prior written consent of Landlord which consent shall not be unreasonably withheld. As a condition for granting this consent to any assignment, transfer, subletting or sub-subletting, Landlord may require that Tenant agrees to pay to Landlord, as Additional Rent, fifty percent (50%) of all rents or additional consideration (net of reasonable third party broker fees) received by Tenant from its assignees, transferees, subtenants, and/or sub-subtenants (if any, which in any and all cases require the written approval of Landlord) in excess of the rent payable by Tenant to Landlord hereunder. Tenant shall, by thirty (30) days written notice, advise Landlord of its intent to assign or transfer Tenant's interest in the Lease or sublet the Premises or any portion thereof for any part of the term hereof. Within two (2) weeks after receipt of said written notice, Landlord may, at its sole discretion, elect to terminate this Lease as to the portion of the Premises described in Tenant's notice on the date specified in Tenant's notice by giving written notice of such election to terminate; however, Tenant may, within three (3) business days after receipt of such election by Landlord, rescind its request to assign or transfer Tenant's interest in the Lease by providing Landlord written notice thereof, in which event Landlord's election to terminate shall be null and void. If no such notice to terminate is given to Tenant within said two (2) week period, Tenant may proceed to locate an acceptable sublessee, assignee, or other transferee for presentment to Landlord for Landlord's approval, all in accordance with the terms, covenants and conditions of this Paragraph. If Tenant intents to sublet the entire Premises and Landlord elects to terminate this Lease, this Lease shall be terminated on the date specified in Tenant's notice. If, however, this Lease shall terminate pursuant to the foregoing with respect to less than all the Premises, the rent, as defined and reserved hereinabove shall be adjusted on a pro rata basis to the number of square feet retained by Tenant, and this Lease as so amended shall continue in full force and effect. In the event Tenant is allowed to assign, transfer or sublet the whole or any part of the Premises, with the prior written consent of Landlord, which consent shall not be unreasonably withheld, no assignee, transferee, subtenant or sub-subtenant shall assign or transfer this Lease, either in whole or in part, or sublet the whole or any part of the Premises, without also having obtained the prior written consent of Landlord, which consent shall not be unreasonably withheld. A consent of Landlord to one assignment, transfer, hypothecation, subletting, sub-subletting, occupation or use by any other person shall not release Tenant from any of Tenant's obligations hereunder or be deemed to be a consent to any subsequent similar or dissimilar assignment, transfer, hypothecation, subletting, sub-subletting, occupation or use by any other person. Any such assignment, transfer, hypothecation, subletting, sub-subletting, occupation or use without such consent shall be void and shall constitute a breach of this Lease by Tenant and shall, at the option of Landlord exercised by written notice to Tenant, terminate this Lease. The leasehold estate under this Lease shall not, nor shall any interest therein, be assignable for any purpose by operation of law without the written consent of Landlord, which consent shall not be unreasonably withheld. As a condition XXXX may require Tenant to pay all expenses in connection with the assignment, and Landlord may require Tenant's assignee or transferee (or other assignees or transferees) to assume in writing all of the obligations under this Lease and for Tenant to remain liable to Landlord under the Lease. B. In addition to and notwithstanding anything to the contrary in Paragraph 49A above, Tenant shall be entitled to assign or sublet without Landlord's consent (but shall still give Landlord notice thereof) to: (i) any parent or subsidiary corporation, or corporation with which Tenant merges or consolidates, or (ii) any third party or entity to whom Tenant sells all or substantially all of its assets; provided, that the net worth of the resulting or acquiring corporation has a net worth after the merger. [INITIAL STAMP] /s/ XXXXXX --------------- Page 10 11 consolidation or acquisition equal to or greater than the net worth of Tenant at the time of such merger, consolidation or acquisition. No such assignment or subletting will release the Tenant from its liability and responsibility under this Lease to the extent Tenant continues in existence following such transaction. C. Any and all sublease agreement(s) between Tenant and any and all subtenant(s) (which agreements must be consented to by Landlord, pursuant to the requirements of this Lease) shall contain the following language: "If Landlord and Tenant jointly and voluntarily elect, for any reason whatsoever, to terminate the Master Lease prior to the scheduled Master Lease termination date, then this Sublease (if then still in effect) shall terminate concurrently with the termination of the Master Lease. Subtenant expressly acknowledges and agrees that (1) the voluntary termination of the Master Lease by Landlord and Tenant and the resulting termination of this Sublease shall not give Subtenant any right or power to make any legal or equitable claim against Landlord, including without limitation any claim for interference with contract or interference with prospective economic advantage, and (2) Subtenant hereby waives any and all rights it may have under law or at equity against Landlord to challenge such an early termination of the Sublease, and unconditionally releases and relieves Landlord, and its officers, directors, employees and agents, from any and all claims, demands, and/or causes of action whatsoever (collectively, "Claims"), whether such matters are known or unknown, latent or apparent, suspected or unsuspected, foreseeable or unforeseeable, which Subtenant may have arising out of or in connection with any such early termination of this Sublease. Subtenant knowingly and intentionally waives any and all protection which is or may be given by Section 1542 of the California Civil Code which provides as follows: "A general release does not extend to claims which the creditor does not know or suspect to exist in his favor at the time of executing the release, which if known by him must have materially affected his settlement with debtor. The term of this Sublease is therefore subject to early termination. Subtenant's initials here below evidence (a) Subtenant's consideration of and agreement to this early termination provision, (b) Subtenant's acknowledgment that, in determining the net benefits to be derived by Subtenant under the terms of this Sublease, Subtenant has anticipated the potential for early termination, and (c) Subtenant's agreement to the general waiver and release of Claims above. Initials: Initials: " ----------- ----------- Subtenant Tenant 50. HAZARDOUS MATERIALS: Landlord and Tenant agree as follows with respect to the existence or use of "Hazardous Materials" (as defined herein) on, in, under or about the Premises and real property located beneath said Premises (hereinafter collectively referred to as the "Property") and the Complex: A. As used herein, the term "Hazardous Materials" shall mean any hazardous or toxic substance, material or waste which is or becomes subject to or regulated by any local governmental authority, the State of California, or the United States Government. The term "Hazardous Materials" includes, without limitation any material or hazardous substance which is (i) listed under Article 9 or defined as "hazardous" or "extremely hazardous" pursuant to Article 11 of Title 22 of the California Administrative Code, Division 4, Chapter 30, (ii) listed or defined as a "hazardous waste" pursuant to the Federal Reserve Resource Conservation and Recovery Act, Section 42 U.S.C. Section 6901 et. seq., (iii) listed or defined as a "hazardous substance" pursuant to the Comprehensive Environmental Response, Compensation and Liability Act, 42 U.S.C. Section 9601 et. seq. (42 U.S.C. Section 9601), (iv) petroleum or any derivative of petroleum, or (v) asbestos. B. Subject to the terms of this Paragraph 50, Tenant shall have no obligation to "clean up", reimburse, release indemnify [xxxx] respect to any Hazardous Materials or wastes which Tenant (prior to and during the term of the Lease) or other parties on the Property (during the term of this Lease) did not store, dispose, or transport in, use, or cause to be on the Property in violation of applicable law. C. Tenant will be 100 percent liable and responsible for: (i) any and all "cleanup" of said Hazardous Materials contamination which Tenant, its agents, employees, contractors, invitees or its future subtenants and/or assignees (if any), or other parties (other than Landlord or Landlord's employees, agents, contractors or invitees) on the Property, does store, dispose, or transport in, use or cause to be on the Property and which Tenant, its agents, employees, contractors, invitees or its future [INITIAL STAMP] Page 11 /s/ XXXXX -------- 12 subtenants and/or assignees (if any), or other parties on the Property, does store, dispose, or transport in, use or cause to be on the Property, and (ii) any claims, including third party claims, resulting from such Hazardous Materials contamination described in clause (i) above. Tenant shall indemnify Landlord and hold Landlord harmless from any liabilities, demands, costs, expenses and damages, including, without limitation, attorney fees incurred as a result of any claims resulting from such Hazardous Materials contamination described in clause (i) above. D. Tenant also agrees not to use or dispose of any Hazardous Materials on the Property or the Complex without first obtaining Landlord's written consent, except for the normal use in day-to-day operations of substances which are substances which in certain strengths or quantities would be deemed hazardous Materials, but which are typical for office use (e.g., so-called "liquid paper", copier toner, etc.). In the event consent is granted by Landlord, Tenant agrees to complete compliance with governmental regulations, and prior to the termination of said Lease Tenant agrees to follow the proper closure procedures and will obtain a clearance from the local fire department and/or the appropriate city agency. If Tenant uses Hazardous Materials, Tenant also agrees: (i) to install, at Tenant's expense, such Hazardous Materials monitoring devices as Landlord reasonably deems necessary and (ii) at Tenant's sole cost and expense, each year upon the anniversary of the Commencement Date of the Lease Term ("Anniversary Date"), to hire a qualified environmental consultant, acceptable to Landlord, to evaluate whether Tenant is in compliance with all applicable Governmental Regulations pertaining to Hazardous Materials. Tenant shall submit to Landlord a report from such environmental consultant which discusses the environmental consultant's findings within two (2) months of each Anniversary Date. Tenant shall promptly take all steps necessary to correct any and all problems identified by the environmental consultant and provide Landlord with documentation of all such corrections. It is agreed that the Parties' responsibilities related to Hazardous Materials will survive the Termination Date of the Lease and that Landlord may obtain specific performance of Tenant's responsibilities under this Paragraph 50. 51. MAINTENANCE OF THE PREMISES: A. Roof: In addition to, and notwithstanding anything to the contrary in Paragraphs 10, 44, and 55 Landlord shall, during the first six (6) months of the Term of this Lease, be responsible for any costs for repair or damage (but not maintenance) to the roof membrane covering the Leased Premises; provided that if Tenant has caused such damage, Tenant shall be responsible for one hundred (100%) percent of any such costs for repair or damage to the roof membrane so caused by Tenant. Following the expiration of such six (6) month period Tenant shall be responsible for paying one hundred percent (100%) of the cost of repairs, maintenance and the replacement of the roof membrane throughout the Term of the Lease as described in Paragraphs 4(D) and 7 above. B. Building Systems: In addition to, and notwithstanding anything to the contrary contained in Paragraphs 10 and 45, Landlord shall repair or cause to be repaired, at Landlord's expense, any necessary repairs, as reasonably determined by Landlord, (excluding maintenance) to the HVAC system, plumbing and standard electrical wiring during the first six (6) month period in the initial Lease Term, provided however, any repair resulting from Tenant's use will be paid for one hundred (100%) percent by Tenant. Tenant shall notify Landlord of any such necessary repairs and Landlord will approve such repairs and the related cost before such repairs are made. 52. AMORTIZATION OF CAPITAL IMPROVEMENTS: Notwithstanding anything to the contrary in Paragraphs 7 and 10, Landlord shall amortize the cost of capital improvements (if any) as an operating expense in accordance with standard accounting practices and Tenant shall pay its pro rata share of said capital improvement cost based on the remaining Term (and/or extended Term, if any) of the Lease. For example: (i) Landlord incurs capital improvement costs of $10,000 one year prior to Lease Termination Date, and (ii) said capital improvement's life is ten (10) years; Tenant shall pay upon receipt of invoice from Landlord its pro rata share of $1,000.00). In the event the Term of the Lease is extended XXXXXX pro rata share of the capital improvement cost shall be increased to include the additional amount payable to Landlord due to the Extended Term of the Lease. For Example: In the event: (i) Landlord incurred capital improvement costs illustrated above; and (ii) this Lease is extended for an additional three year period, Tenant would be liable for an additional payment to Landlord of $3,000.00 as Additional Rent. Said payment would be due in full immediately upon Tenant's execution of Lease documentation related to said Lease extension. Page 12 13 53. COMPLIANCE (CONTINUED): Any non-conformance of the Tenant Improvements installed and paid for by Landlord as set forth on Exhibit B, required to be corrected by a governing agency, shall be corrected at the cost and expense of Landlord if such non-conformance exists as of the Commencement Date of the Lease and further provided that such governing agency's requirement to correct the non-conformance is not initiated as a result of: (i) any future improvements made by Tenant; or (ii) any permit request made to a governing agency by Tenant. Any non-conformance of the Premises occurring after the Commencement Date of this Lease Agreement shall be the responsibility of Tenant to correct at Tenant's cost and expense. 54. ADDITIONAL RENT (CONTINUED): Notwithstanding anything to the contrary in Paragraph 4D, Landlord shall provide a written reconciliation in reasonable detail of the foregoing expenses within one hundred twenty (120) days after the end of each calendar year, or more frequently if Landlord elects to do so, at Landlord's sole and absolute discretion. Within thirty (30) days after receipt of Landlord's reconciliation, Tenant shall have the right, at Tenant's sole expense, to audit, at a mutually convenient time at Landlord's office, Landlord's records relating to the foregoing expenses. Such audit must be conducted by Tenant or an independent nationally recognized accounting firm that is not being compensated by Tenant or other third party on a contingency fee basis. If such audit reveals that Landlord has overcharged Tenant, the amount overcharged shall be credited to Tenant's account within thirty (30) days after the audit is concluded. If the audit reveals Tenant has been undercharged, Tenant shall pay the amount of the undercharge within thirty (30) days of receipt of a statement from Landlord. The following items shall be excluded from "Additional Rent": A. Any expense reasonably allocable to a particular building in the Complex, rather than to the Complex as a whole; provided however, that any expense incurred by Landlord for Tenant's Leased Premises shall be included as Additional Rent. B. Leasing commissions, attorney's fees, costs, disbursements, and other expenses incurred in connection with negotiations with other tenants, or disputes between Landlord and other tenants, or in connection with marketing, leasing, renovating, or improving space for other current or prospective tenants or other current or prospective occupants of the Complex. C. The cost of any service sold to any other tenant or other occupant for which Landlord is entitled to be reimbursed as an additional charge or rental over and above the basic rent and additional rent payable under the lease agreement with said other tenant or other occupant (including, without limitation, after-hours HVAC costs or over-standard electrical consumption costs incurred by other tenants or occupants). D. Any costs for which Landlord is reimbursed by others. E. Any costs, fines, or penalties incurred due to violations by Landlord of any governmental rule or authority. F. Management costs to the extent they exceed two percent (2%) of the monthly Basic Rent due under the Lease. G. Wages, salaries, or other compensation paid to executive employees above the grade of Property Manager. H. The cost of correcting any building code or other violations which are violations prior to the Lease Commencement Date and which violations were not caused by or contributed to by Tenant. I. Repairs or other works XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX casualty or hazard, to the extent that Landlord shall receive proceeds of such insurance or would have received such proceeds had Landlord maintained the insurance coverage required under this Lease. J. Repairs or building necessitated by condemnation. K. Depreciation and amortization, other than as permitted pursuant to this Lease. L. Except as otherwise noted in this Lease, debt service payments on any indebtedness 14 applicable to the Complex or any portion thereof, including any mortgage debt, or ground rents or any other amounts payable under any ground lease for the Property. M. Space planning fees and commissions. N. Any amounts paid to any person, firm, or corporation related or otherwise affiliated with Landlord or any general partner, officer, or director of Landlord or any general partners, to the extent same exceeds arms-length competitive prices paid in the Santa Clara, California metropolitan area for the services or goods provided. 55. COMMON AREA MAINTENANCE: Subject to Paragraph 5, ("Rules and Regulations and Common Area") and Paragraph 7, ("Expenses of Operation, Management, and Maintenance of the Common Areas of the Complex and Building in Which the Premises are Located"), Landlord shall maintain or cause to be maintained and repaired the Common Areas of the Complex (such as Common Area elevators, stairs, corridors, restrooms and sidewalks), all landscaping, parking areas and all portions of the Complex, the maintenance of which is not the express obligation of Tenant or other occupants of the Complex, and Tenant shall pay its pro rata share of said costs and expenses for said maintenance and repairs. 56. SUBORDINATION AND MORTGAGES (CONTINUED): Notwithstanding anything to the contrary contained in Paragraph 20 of this Lease, Tenant's agreement to subordinate to any existing or future lender shall be conditional upon the receipt by Tenant of a non-disturbance agreement on such lender's commercially reasonable form, executed by Landlord and such lender. 57. ENTRY BY LANDLORD (CONTINUED): Notwithstanding anything to the contrary contained in Paragraph 21 of this Lease. Tenant shall have the right to require that Landlord be accompanied by a representative of Tenant during any entry of the Premises pursuant to the provisions of Paragraph 21 of the Lease (except in the case of emergency). 58. SALE OR CONVEYANCE BY LANDLORD (CONTINUED): Notwithstanding anything to the contrary in the Lease, if Landlord sells or otherwise conveys its interest in the Premises, Landlord shall not be relieved of its obligation under the Lease, unless and until Landlord transfers the balance of Tenant's Security Deposit (if any) to its successor and the successor assumes in writing Landlord's obligations under the Lease. 59. OPTION TO EXTEND LEASE FOR FIVE (5) YEARS: Provided Tenant is not in default (pursuant to Paragraph 22 of the Lease, i.e., Tenant has received notice and any applicable cure period has expired without cure) of any of the terms, covenants, and conditions of this Lease Agreement, Landlord hereby grants to Tenant an Option to Extend this Lease Agreement for an additional five (5) year period (the "Extended Term") upon the following terms and conditions: A. Tenant shall give Landlord written notice of Tenant's exercise of this Option to Extend not later than twelve (12) months prior to the scheduled Lease Termination Date, which date is currently projected to be December 31, 2003, in which event the Lease shall be considered extended for an additional five (5) years subject to the Basic Rental set forth below and with: (i) the terms and conditions subject to amendment by Landlord (Landlord, in its sole and absolute discretion, may, but is not required to, incorporate its current Lease provisions that are standard in Landlord's leases as of the date of Tenant's exercise of its Option to Extend) and (ii) this Paragraph 59 deleted. In the event that Tenant fails to timely exercise Tenant's option as set forth herein in writing. Tenant shall have no further Option to extend this lease OEL, and this lease shall continue in full force and effect for the full remaining term hereof, absent this Paragraph 59. B. The following summarizes the Basic Monthly Rental and the related per square foot charge by period under the Lease Agreement that would be applied to the Extended Term: Page 14 [INITIAL STAMP] /s/ XXXXX --------- 15
Monthly Period PSF Rate Basic Rental 01/01/04 - 12/31/04 $2.20 $52,800.00 01/01/05 - 12/31/05 $2.25 $54,000.00 01/01/06 - 12/31/06 $2.30 $55,200.00 01/01/07 - 12/31/07 $2.35 $56,400.00 01/01/08 - 12/31/08 $2.40 $57,600.00
C. The option rights of Tenant under this Paragraph 59, and the Extended Term thereunder, are granted for Tenant's personal benefit and may not be assigned or transferred by Tenant, (except to a parent or subsidiary corporation, or corporation with which Tenant merges or consolidates or to whom Tenant sells all or substantially all of its assets as provided for in Paragraph 49), either voluntarily or by operation of law, in any manner whatsoever. In the event that Landlord consents to a sublease or assignment under Paragraph 49, the option granted herein and any Extended Term thereunder shall be void and of no force and effect, whether or not Tenant shall have purported to exercise such option prior to such assignment or sublease. D. INCREASED SECURITY DEPOSIT: In the event the term of Tenant's Lease is extended pursuant to this Paragraph 59, Tenant's Security Deposit shall be increased to equal twice the Basic Rental due for the last month of the extended term (i.e., $57,600.00 per month X 2 = $115,200.00). 60. MAINTENANCE OF THE PREMISES: Notwithstanding anything to the contrary in Paragraph 10, Landlord shall repair damage to the structural shell, foundation, and roof structure (but not the interior improvements, roof membrane, or glazing) of the building leased hereunder at Landlord's cost and expense provided Tenant has not caused such damage, in which event Tenant shall be responsible for 100 percent of any such costs for repair or damage so caused by the Tenant. Notwithstanding the foregoing, a crack in the foundation, or exterior walls that does not endanger the structural integrity of the building, or which is not life-threatening, shall not be considered material, and shall not require either Landlord or Tenant to repair the same (unless Tenant has caused the damage, in which case Tenant shall be responsible for the cost of said repair(s) regardless of how minor said repair(s) may be). [INITIALS] 16 PARK SQUARE - PHASE 2 BUILDINGS 1-6 SANTA CLARA, CALIFORNIA 95051 PEERY/LANDLORD EXHIBIT A TO LEASE AGREEMENT DATED SEPTEMBER 4, 1996 BY AND BETWEEN THE ARRILLAGA FAMILY TRUST AND THE RICHARD T. PEERY SEPARATE PROPERTY TRUST, AS LANDLORD AND VANTIVE CORPORATION, AS TENANT. [SITE PLAN DIAGRAM] [INITIAL STAMP] /s/ XXXXX 17 [FLOOR PLAN 3333 OCTAVIUS ST. SANTA CLARA, CA] EXHIBIT B TO LEASE AGREEMENT DATED SEPTEMBER 4, 1996 BY AND BETWEEN THE ARRILLAGA FAMILY TRUST AND THE RICHARD T. PEERY SEPARATE PROPERTY TRUST, AS LANDLORD AND THE VANTIVE CORPORATION, AS TENANT. [INITIAL STAMP] /s/ XXXXX EX-27.1 3 FINANCIAL DATA SCHEDULE
5 1,000 U.S. DOLLARS YEAR DEC-31-1996 JAN-01-1996 DEC-31-1996 1 26,017,000 6,853,000 14,555,000 780,000 0 51,137,000 9,149,000 2,385,000 58,364,000 18,178,000 0 0 0 24,000 0 58,364,000 41,513,000 64,274,000 392,000 12,655,000 0 455,000 159,000 15,579,000 4,674,000 10,905,000 0 0 0 10,905,000 0.42 0.42
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