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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
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(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
For the quarterly period ended September 30, 1999
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
For the transition period from ____________ to ____________.
Commission file number: 333-81297
VITRIA TECHNOLOGY, INC.
(Exact Name of Registrant as Specified in Its Charter)
Delaware 77-0386311
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
945 Stewart Drive
Sunnyvale, California 94086
(408) 212-2700
(Address, including Zip Code, of Registrant's Principal Executive Offices
and Registrant's Telephone Number, including Area Code)
----------------
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 [ ]
The number of shares of the Registrant's Common Stock, $.001 par value,
outstanding as of November 10, 1999 was 30,958,591 shares.
<PAGE>
VITRIA TECHNOLOGY, INC.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Index Page
<S> <C>
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheet at September 30, 1999 and September 30, 1998 3
Statement of Operations for the three and nine months ended September 30, 1999 and
September 30, 1998 4
Statement of Cash Flows for the three and nine months ended September 30, 1999 and
September 30, 1998 5
Notes to the Condensed Consolidated Financial Statements 6
Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations 8
Item 3: Quantitative and Qualitative Disclosures About Market Risk 16
PART II: Other Information
Item 1: Legal Proceedings 24
Item 2: Changes in Securities and Uses of Proceeds 24
Item 3: Defaults Upon Senior Securities 24
Item 4: Submission of Matters to a Vote of Security Holders 24
Item 5: Other Information 25
Item 6: Exhibits and Reports on Form 8-K 25
Signature 26
</TABLE>
2
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PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
Vitria Technology Inc.
Condensed Consolidated Balance Sheet
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
(unaudited)
------------- ------------
<S> <C> <C>
Assets
Current Assets:
Cash and cash equivalents $ 65,929 $ 12,792
Accounts receivable, net 7,491 5,973
Other current assets 1,791 180
-------- --------
Total current assets 75,211 18,945
Property and equipment, net 4,191 967
Other assets 515 88
-------- --------
$ 79,917 $ 20,000
======== ========
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable $ 516 $ 757
Accrued liabilities 7,357 2,978
Deferred revenue 9,784 2,874
-------- --------
Total current liabilities 17,657 6,609
-------- --------
Stockholders' Equity:
Convertible preferred stock: issuable in series, $.001
par value; 5,000 shares authorized; no shares issued and
outstanding; 13,470 shares authorized; 10,445 shares
issued and outstanding - 11
Common stock: $.001 par value; 250,000 shares
authorized; 30,925 shares issued and outstanding;
41,000 shares authorized; 15,268 shares issued
and outstanding 31 15
Additional paid-in capital 92,029 29,104
Accumulated other comprehensive loss (2) -
Unearned stock-based compensation (9,010) (5,511)
Notes receivable (291) -
Accumulate deficit (20,497) (10,228)
-------- --------
Total stockholders' equity 62,260 13,391
$ 79,917 $ 20,000
======== ========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
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Vitria Technology, Inc.
Statement of Operations
(in thousands, except per share amounts)
(unaudited)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
------------------ -----------------
1999 1998 1999 1998
---- ---- ---- ----
<S>
Revenues: <C> <C> <C> <C>
License $ 5,209 $ 1,643 $ 12,387 $ 2,670
Service 2,293 279 5,923 541
Government grant 333 121 1,033 546
-------- -------- --------- --------
Total revenues 7,835 2,043 19,343 3,757
-------- -------- --------- --------
Cost of Sales:
License 101 - 285 -
Service 1,528 540 4,182 860
Government grant 333 121 1,033 546
-------- -------- --------- --------
Total Cost of Sales 1,962 661 5,500 1,406
-------- -------- --------- --------
Gross profit 5,873 1,382 13,843 2,351
-------- -------- --------- --------
Operating expenses:
Sales and marketing 5,089 1,585 11,868 3,939
Research and development 2,981 1,369 6,864 3,432
General and administrative 981 617 2,582 1,250
Amortization of stock-based compensation 1,411 412 3,363 750
-------- -------- --------- --------
Total operating expenses 10,462 3,983 24,677 9,371
-------- -------- --------- --------
Loss from operations (4,589) (2,601) (10,834) (7,020)
Other income, net 331 56 565 216
-------- -------- --------- --------
Net loss (4,258) (2,545) (10,269) (6,804)
Deemed preferred stock dividend - - (1,908) -
-------- -------- --------- --------
Net loss available to common stockholders $ (4,258) $ (2,545) $ (12,177) $ (6,804)
======== ======== ========= ========
Basic and diluted net loss per share
available to common stockholders $ (0.26) $ (0.23) $ (0.86) $ (0.61)
======== ======== ========= ========
Weighted average shares used in computing basic
and diluted net loss per share 16,175 11,310 14,112 11,074
======== ======== ========= ========
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
4
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Vitria Technology, Inc.
Statement of Cash Flows
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Nine months ended
September 30, September 30,
1999 1998
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(10,269) $(6,804)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Gain on sale of fixed assets (114) -
Depreciation and amortization 766 126
Amortization of deferred stock compensation 3,363 750
Provision for doubtful accounts 198 250
Changes in assets & liabilities:
Accounts receivable (1,716) (1,589)
Other current assets (1,611) (57)
Other assets (426) (7)
Accounts payable (241) 79
Accrued liabilities 4,380 998
Deferred revenue 6,909 1,903
-------- -------
Net cash provided by (used in) operating activities: 1,239 (4,351)
-------- -------
Cash flows from investing activities:
Net cash used in purchasing property and equipment (3,990) (458)
Net cash provided from sale of property and equipment 114 -
-------- -------
Net cash used in investing activities (3,876) (458)
-------- -------
Cash flows from financing activities
Proceeds from issuance of Convertible Preferred Stock, net (21,521) -
Proceeds from issuance of Common Stock, net 77,297 205
-------- -------
Net cash provided by financing activities 55,776 205
Foreign currency translation adjustment (2) -
-------- -------
Net increase(decrease) in cash and cash equivalents 53,137 (4,604)
Cash and cash equivalents at beginning of period 12,792 9,138
-------- -------
Cash and cash equivalents at end of period $ 65,929 $ 4,534
======== =======
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
5
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NOTES TO INTERIM FINANCIAL STATEMENTS (UNAUDITED)
1) Basis of Presentation
The accompanying financial statements for the three and nine months ended
September 30, 1999 and 1998 are unaudited and reflect all normal recurring
adjustments which are, in the opinion of management, necessary for their fair
presentation. These financial statements should be read in conjunction with the
Company's financial statements and notes thereto included in the Company's
Registration Statement on Form S-1, dated September 16, 1999. These results of
operations for the interim period ended September 30, 1999 are not necessarily
indicative of results to be expected for the full year or any other period.
2) Net Loss Per Share
The Company computes net loss per share in accordance with SFAS No. 128,
Earnings Per Share, and SEC Staff Accounting Bulletin No. 98, ("SAB 98"). Under
the provisions of SFAS No. 128 and SAB 98, basic and diluted net loss per share
is computed by dividing the net loss available to common stockholders for the
period by the weighted average number of shares of Common Stock outstanding
during the period. The calculation of diluted net loss per share excludes
potential common shares if the effect is antidilutive. Potential common shares
are composed of Common Stock subject to repurchase rights and incremental shares
of Common Stock issuable upon the exercise of stock options and warrants. For
the three and nine months ended September 30, 1999 potential common shares
totalled 13,937,000 and 14,721,000, respectively, and are excluded from the
determination of diluted net loss per share as the effect of such shares on a
weighted average basis is antidilutive.
The following table sets forth the computation of basic and diluted net loss per
share for the periods indicated (in thousands, except per share amounts):
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
------------------ -----------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net loss $(4,258) $(2,545) $(12,177) $(6,804)
------- ------- -------- -------
Basic and diluted
Weighted average shares of common stock
outstanding 18,364 13,883 16,685 13,901
Less: weighted average common shares subject to
subject to repurchase (2,189) (2,573) (2,573) (2,827)
------- ------- -------- -------
Weighted average shares used in computing
basic and diluted net loss per common share 16,175 11,310 14,112 11,074
------- ------- -------- -------
Basic and diluted net loss per share $ (0.26) $ (0.23) $ (0.86) $ (0.61)
</TABLE>
6
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3) Comprehensive Net Income
Comprehensive income is comprised of net income (loss) and other comprehensive
earnings such as foreign currency translation gain/loss and unrealized gains or
losses on available-for-sale marketable securities. The company has not had any
unrealized gains or losses on available for sale marketable securities for all
periods presented. Vitria's total comprehensive earnings (losses) were as
follows (in thousands):
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
------------------- -----------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net loss $(4,258) $(2,545) $(12,177) $(6,804)
Other comprehensive income:
Foreign translation adjustment (2) - (2) -
------- ------- -------- -------
Comprehensive net income (loss) $(4,260) $(2,545) $(12,179) $(6,804)
</TABLE>
4) Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivatives and Hedging Activities" ("SFAS 133"). SFAS 133 is
effective for all fiscal quarters beginning with the quarter ended June 30,
1999. SFAS establishes accounting and reporting standards of derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. In July 1999, the Financial Accounting
Standards Board issued SFAS No. 137 "Accounting for Derivative Instruments and
Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133"
("SFAS 137"). SFAS 137 deferred the effective date until the first quarter
ending June 30, 2000. The Company will adopt SFAS 133 in its quarter ending
June 30, 2000 and does not expect such adoption to have an impact on the
Company's results of operations, financial position or cash flows.
5) Initial Public Offering
In September 1999, the Company completed its initial public offering of
3,450,000 shares of Common Stock (including the exercise of the underwriters
overallotment option) and realized proceeds, net of underwriting discounts,
commissions and issuance costs, of $50.0 million.
7
<PAGE>
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The information in this discussion contains forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. These statements relate to future events or
our future financial performance. In some cases, you can identify forward-
looking statements by terminology including "anticipates," "believes,"
"continue," "could," "estimates," "expects," "intends," "may," "plans,"
"potential," "predicts," "should" or "will" or the negative of these terms or
other comparable terminology. These statements are only predictions and involve
known and unknown risks, uncertainties and other factors, including the risks
outlined under "Business Risks," that may cause our or our industry's actual
results, levels of activity, performance or achievements to be materially
different from any future results, levels or activity, performance or
achievements expressed or implied by these forward-looking statements.
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements.
OVERVIEW
We are a leading provider of eBusiness infrastructure software. eBusiness
refers to the use of the Internet to conduct business with customers and
partners. Our product, BusinessWare, provides the infrastructure that enables
incompatible information technology systems to exchange information over
corporate networks and the Internet. BusinessWare enables this exchange to take
place automatically, without human intervention. This eliminates manual entry
of information into multiple IT systems and eliminates the need to manually
exchange information with customers and business partners.
Our revenues are derived primarily from license fees and services. Our product
is typically licensed directly to customers for a perpetual term, with pricing
based on the number of systems or applications managed. We record license
revenues when a license agreement has been signed by both parties, the fee is
fixed and determinable, collection of the fee is probable, and delivery of our
product has occurred. For electronic transmissions, we consider our product to
have been delivered when the access code to download the software from the
Internet has been provided to the customer. Payments received in advance of
revenue recognition are recorded as deferred revenue.
Service revenues include product maintenance, consulting and training. Customers
who license BusinessWare normally purchase maintenance contracts. These
contracts provide unspecified software upgrades and technical support over a
specified term, typically twelve months. Maintenance contracts are usually paid
in advance, and revenues from these contracts are recognized ratably over the
term of the contract.
We market our product through our direct sales force, and augment our marketing
efforts through relationships with system integrators, value-added resellers and
technology vendors. While our revenues to date have been derived exclusively
from accounts in the United States, we opened an office in the United Kingdom in
June 1999 and plan to expand further into Europe and Japan.
A relatively small number of customers account for a significant portion of our
total revenues. As a result, the loss or delay of individual orders can have a
significant impact on our revenues. We expect that revenues from a limited
number of customers will continue to account for a large percentage of total
revenues in future quarters. Our ability to attract new customers will depend on
a variety of factors, including the reliability, security, scalability and cost-
effectiveness of our products.
8
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We have a limited operating history which makes it difficult to predict future
operating results. We believe our success requires expanding our customer base
and continuing to enhance our BusinessWare products. We intend to continue to
invest significantly in sales, marketing and research and development and expect
to incur operating losses for at least the next eighteen months. Our operating
expenses are relatively fixed and are based on anticipated revenue trends; a
delay in the recognition of revenue from one or more license transactions could
cause significant variations in operating results from quarter to quarter and
could result in unforeseen losses. Fees from contracts that do not meet our
revenue recognition policy requirements are recorded as deferred revenues. While
a small portion of our revenues each quarter is recognized from deferred
revenue, our quarterly performance will depend primarily upon entering into new
contracts to generate revenues for that quarter. New contracts may not result in
revenue during the quarter in which the contract was signed, and we may not be
able to predict accurately when revenues from these contracts will be
recognized. Our future operating results will depend on many factors, including
the following:
. size and timing of customer orders and product and service delivery;
. level of demand for our professional services;
. changes in the mix of our products and services;
. actions taken by our competitors, including new product introductions and
pricing changes;
. costs of maintaining and expanding our operations;
. timing of our development and release of new and enhanced products;
. costs and timing of hiring qualified personnel;
. success in maintaining and enhancing existing relationships and
developing new relationships with system integrators;
. technological changes in our markets, including changes in standards for
computer and networking software and hardware;
. deferrals of customer orders in anticipation of product enhancements or
new products;
. delays in our ability to recognize revenue as a result of the decision by
our customers to postpone software delivery;
. customer budget cycles and changes in these budget cycles;
. delays or reductions in spending for, or the implementation of,
application software by our potential customers as companies attempt to
stabilize their computer systems prior to January 1, 2000 in order to
reduce the risk of computer system problems associated with the
occurrence of the Year 2000; and
. costs related to acquisition of technologies or businesses.
9
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth the results of operations for the three months
and nine months ended September 30, 1999 and 1998 expressed as a percentage of
total revenues.
Results of Operations Table
As a percent of revenues
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
------------------ -----------------
1999 1998 1999 1998
----- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues
License 67% 80% 64% 71%
Service 29% 14% 31% 14%
Government grant 4% 6% 5% 15%
---- ---- ---- ----
Total revenues 100% 100% 100% 100%
Cost of Sales
License 1% 0% 1% 0%
Service 20% 26% 22% 22%
Government grant 4% 6% 5% 15%
---- ---- ---- ----
Total Cost of Sales 25% 32% 28% 37%
---- ---- ---- ----
Gross profit 75% 68% 72% 63%
Operating expense
Sales and marketing 65% 78% 62% 105%
Research and development 38% 67% 36% 91%
General and administrative 13% 30% 13% 33%
Amortization of stock-based compensation 18% 20% 17% 20%
---- ---- ---- ----
Total operating expenses 134% 195% 128% 249%
Loss from operations -59% -127% -56% -186%
Other income, net 4% 3% 3% 6%
---- ---- ---- ----
Net loss -55% -124% -53% -180%
==== ==== ==== ====
</TABLE>
Results of Operations
For the three months ended September 30, 1999 and 1998
REVENUES
LICENSE. License revenues increased 217% to $5.2 million in the third quarter
ended September 30, 1999 from $1.6 million in the third quarter ended September
30, 1998. This increase was the result of the growth in the number of licenses
to new customers and to higher average transaction size. For the three month
period ended September 30, 1999, revenues from PageMart Wireless and ICG
accounted for 15% and 12% of total revenues, respectively. We expect that
license revenues from a limited number of customers will continue to account for
a large percentage of total revenues in future quarters.
SERVICE. Service revenues increased 722% to $2.3 million in the third quarter
ended September 30, 1999 from $279,000 in third quarter ended September 30,
1998. This increase is due to the growth of maintenance, support and consulting
revenues associated with license agreements signed in earlier periods.
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GOVERNMENT GRANT. Government grant revenues increased 175% to $333,000 in the
third quarter ended September 30, 1999 from $121,000 in the third quarter ended
September 30, 1998. Government grant revenues vary from quarter to quarter
based upon the extent to which our internal development resources are deployed
to work on activities covered under the grants. We do not expect to receive
future government grant revenues other than from existing grants.
COST OF REVENUES
LICENSE. Cost of license revenues consist of royalty payments to third parties
for technology incorporated into our product. Cost of license revenues were
$101,000 in the third quarter ended September 30, 1999. There were no cost of
license revenues for the third quarter ended September 30, 1998. The increase
in cost of license revenues was attributable to royalty payments to third
parties for technology incorporated into our products, which we began selling in
the current fiscal year. We expect these costs to increase in future quarters
as license volume increases.
SERVICE. Cost of service revenues consist of salaries, facility costs, and
payments to third party consultants incurred in providing customer support,
training and implementation services. Cost of service revenues were $1.5
million in the third quarter ended September 30, 1999, an increase of 183% over
cost of service revenues of $540,000 for the third quarter ended September 30,
1998. The increase in the cost of service revenues was attributable to the
hiring of additional service personnel in anticipation of supporting a larger
customer base in future periods and due to the engagement of a third party
service provider to support our increased activity. We expect that cost of
service revenues will continue to increase in dollar amount as we continue to
expand our customer support organization to meet anticipated customer demand.
GOVERNMENT GRANT. Under the terms of the government grants, we receive
reimbursements only for costs incurred in connection with related research
activities. Consistent with the grant provisions, these charged costs are
exactly equal to the grant revenue recognized.
OPERATING EXPENSES
SALES AND MARKETING EXPENSES. During the third quarter ended September 30,
1999, sales and marketing expenses were $5.1 million, an increase of 221% over
sales and marketing expenses of $1.6 million for the three months ended
September 30, 1998. The increase was attributable to the expansion of our
direct sales force and increased promotional activity. We expect that sales and
marketing expenses will continue to increase in dollar amounts as we continue to
expand our sales and marketing efforts, establish additional U.S. and
international sales offices and increase promotional activities.
RESEARCH AND DEVELOPMENT. During the third quarter ended September 30, 1999,
research and development expenses were $3.0 million, an increase of 118% over
research and development expenses of $1.4 million for the three months ended
September 30, 1998. The increase was attributable to an increase in the number
of research and development personnel. To date, all software development costs
have been expensed in the period incurred. We anticipate that we will continue
to devote substantial resources to research and development and that these
expenses will continue to increase in dollar amounts.
GENERAL AND ADMINISTRATIVE. During the third quarter ended September 30,
1999, general and administrative expenses were $981,000, an increase of 59% over
general and administrative expenses of $617,000 for the three months ended
September 30, 1998. The increase was attributable to an increase in personnel
expenses, an increase in fees paid to outside professional service providers,
and an increase in our allowance for doubtful accounts.
11
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We believe that our general and administrative expenses will continue to
increase in dollar amounts as a result of our growing operations and the
expenses associated with operating as a public company.
AMORTIZATION OF STOCK-BASED COMPENSATION. During the third quarter ended
September 30, 1999, amortization of stock-based compensation expenses were $1.4
million, an increase of 242% over amortization of stock-based compensation
expenses of $412,000 for the three months ended September 30, 1998. Deferred
stock based compensation primarily represents the difference between the
exercise price and the deemed fair value of our common stock on the date certain
stock options were granted while we were a private company. The increase is due
to additional options granted over the past twelve months. This cost is being
amortized over the next five years.
OTHER INCOME, NET. Other income, net increased by 491% to $331,000 in the third
quarter ended September 30, 1999 from $56,000 in the third quarter ended
September 30, 1998. The increase was due primarily to increased interest income
and a gain on disposal of fixed assets.
Results of Operations
For the nine months ended September 30, 1999 and 1998
LICENSE. License revenues increased 364% to $12.4 million in the nine months
ended September 30, 1999 from $2.7 million in the nine months ended September
30, 1998. This increase was the result of the growth in the number of licenses
to new customers and to higher average transaction size.
SERVICE. Service revenues increased 955% to $5.9 million in the nine months
ended September 30, 1999 from $541,000 in the nine months ended September 30,
1998. This increase was attributable to growth of maintenance, support and
consulting revenues associated with license agreements signed in earlier
periods.
GOVERNMENT GRANT. Government revenues increase 89% to $1.0 million in the
nine months ended September 30, 1999 from $546,000 in the nine months ended
September 30, 1998. Revenues vary from quarter to quarter based upon the extent
to which our internal development resources are deployed to work on activities
covered under the grants.
COST OF REVENUES
LICENSE. Cost of license revenues were $285,000 in the nine months ended
September 30, 1999. There were no cost of license revenues for the nine months
ended September 30, 1998. The increase in cost of license revenues was
attributable to royalty payments to third parties for technology incorporated
into our products, which we began selling in the current fiscal year.
SERVICE. Cost of service revenues were $4.2 million in the nine months ended
September 30, 1999, an increase of 386% over cost of service revenues of
$860,000 for the nine months ended September 30, 1998. The increase in the cost
of service revenues was attributable to the hiring of additional service
personnel in anticipation of supporting a larger customer base in future periods
and due to the engagement of a third party service provider to support our
increased activity.
GOVERNMENT GRANT. Under the terms of the government grants, we receive
reimbursements only for costs incurred in connection with related research
activities. Consistent with the grant provisions, these charged costs are
exactly equal to the grant revenue recognized.
OPERATING EXPENSES
SALES AND MARKETING EXPENSES. During the nine months ended September 30,
1999, sales and marketing expenses were $11.9 million, an increase of 201% over
sales and marketing expenses of $3.9 million for
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the nine months ended September 30, 1998. The increase was attributable to the
expansion of our direct sales force and increased promotional activity.
RESEARCH AND DEVELOPMENT. During the nine months ended September 30, 1999,
research and development expenses were $6.9 million, an increase of 100% over
research and development expenses of $3.4 million for the nine months ended
September 30, 1998. The increase was attributable to an increase in the number
of research and development personnel.
GENERAL AND ADMINISTRATIVE. During the nine months ended September 30,
1999, general and administrative expenses were $2.6 million, an increase of 107%
over general and administrative expenses of $1.3 million for the nine months
ended September 30, 1998. The increase was primarily attributable to an
increase in personnel expenses, an increase in fees paid to outside professional
service providers, and an increase in our allowance for doubtful accounts.
AMORTIZATION OF STOCK-BASED COMPENSATION. During the nine months ended
September 30, 1999, amortization of stock-based compensation expenses were $3.4
million, an increase of 348% over amortization of stock-based compensation
expenses of $750,000 for the nine months ended September 30, 1998. Deferred
stock based compensation primarily represents the difference between the
exercise price and the deemed fair value of our common stock on the date certain
stock options were granted while we were a private company. The increase is due
to additional options granted over the past twelve months. The cost is being
amortized over the next five years.
OTHER INCOME, NET. Other income, net increased by 162% to $565,000 in nine
months ended September 30, 1999 from $216,000 in the nine months ended September
30, 1998. The increase was due to increased interest income and a gain on
disposal of fixed assets.
LIQUIDITY AND CAPITAL RESOURCES
We raised approximately $50.0 million in September 1999 from an initial public
offering of 3,450,000 shares of our common stock, net of underwriting discounts,
commissions and issuance costs. Prior to the offering we had financed our
operations through private sales of common and preferred stock, with net
proceeds of $27.7 million. As of September 30, 1999, we had $65.9 million in
cash and cash equivalents and $57.6 million in working capital with no
outstanding long-term debts.
Net cash generated in operating activities was $1.2 million for the nine months
ended September 30, 1999. Net cash used in operating activities was $4.3
million for the nine months ended September 30, 1998. Compared with the same
period a year ago, net cash flows generated in operating activities in 1999
reflects an increase in deferred revenue, accrued liabilities and amortization
of stock-based compensation, which compensated for an increase in net losses.
Net cash generated in investing activities was $3.9 million in the nine months
ended September 30, 1999 and $458,000 in the nine months ended September 30,
1998. Investing activities consist primarily of purchases of computer hardware
and software, office furniture and equipment and leasehold improvements. We
expect that capital expenditures will continue to increase to the extent we
continue to increase the number of people we employ and expand our operations.
Net cash generated from financing activities was $55.8 million in the nine
months ended September 30, 1999, primarily from the net proceeds of our initial
public offering. Net cash provided by financing activities was $205,000 in the
nine months ended September 30, 1998, primarily from net proceeds from the
issuance of convertible preferred stock.
We expect to experience a significant growth in our operating expenses for the
forseeable future in order to execute our business plan. As a result, we
anticipate that operating expenses and planned capital expenditures will
constitute a
13
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material use of our cash resources. In addition, we may utilize cash resources
to fund acquisitions or investments in other businesses, technologies or product
lines. We believe that available cash and cash equivalents including the net
proceeds from the initial public offering will be sufficient to meet our working
capital and operating expense requirements for at least the next twelve months.
Thereafter, we may require additional funds to support our working capital and
operating expense requirements of for other purposes and may seek to raise these
additional funds through public or private debt or equity financings. There can
be no assurance that this additional financing will be available, or if
available, will be on reasonable terms and not dilutive to our stockholders.
YEAR 2000 READINESS
The "Year 2000 issue" refers generally to the problems that some software may
have in determining the correct century for the year. For example, software with
date-sensitive functions that is not Year 2000 compliant may not be able to
distinguish whether "00" means 1900 or 2000, which may result in failures or the
creation of erroneous results.
We designed our product to be Year 2000 compliant when configured and used in
accordance with the related documentation, and provided that the underlying
operating system of the host machine and any other software used with or in the
host machine or our product are Year 2000 compliant. However, we have not
exhaustively tested our product for Year 2000 compliance. We continue to respond
to customer questions about prior versions of our product on a case-by-case
basis.
We have defined Year 2000 compliant as the ability to:
. Correctly handle date information needed for the December 31, 1999 to
January 1, 2000 date change;
. Function according to the product documentation provided for this date
change, without changes in operation resulting from the advent of a new
century, assuming correct configuration;
. Respond to two-digit date input in a way that resolves the ambiguity as
to century in a disclosed, defined and predetermined manner;
. Store and provide output of date information in ways that are unambiguous
as to century if the date elements in interfaces and data storage specify
the century; and
. Recognize year 2000 as a leap year.
We have assurances from our vendors that their licensed software is Year 2000
compliant. To date, we have received assurances from a subset of the vendors of
our enterprise resource planning software, and technology support software as to
their Year 2000 compliance. Despite testing by us and current and potential
customers, and assurances from developers of product incorporated into our
product, our product may contain undetected errors or defects associated with
Year 2000 date functions. Known or unknown errors or defects in our product
could result in delay or loss of revenues, diversion of development resources,
damage to our reputation, increased service and warranty costs, or liability
from our customers, any of which could seriously harm our business.
As a specific example, older versions of Vitria's BusinessWare product were
designed to work with Sun Microsystem's Java Developer Kit version 1.1.5. Sun
Microsystems has announced that this version and earlier versions of the Java
Developer Kit are not Year 2000 compliant. Vitria customers who are still using
these older versions of the BusinessWare product are thus subject to Year 2000
operating risk due to this Java Developer Kit
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compliance problem. We have notified and are currently working with each of the
affected customers to migrate them to newer versions of the BusinessWare product
which use Sun Microsystem's Java Developer Kit version 1.1.7. Sun Microsystems
claims that version 1.1.7 is Year 2000 compliant. We have not made any
representations to our customers concerning the Year 2000 readiness of this
development kit. To the extent one or more of these customers fail to migrate to
the newer Vitria BusinessWare product, these customers could potentially suffer
operating difficulties in systems using Vitria's BusinessWare product. Vitria
could be exposed to an indirect liability in this event.
Some commentators have predicted significant litigation regarding Year 2000
compliance issues, and we are aware of these lawsuits against other software
vendors. Because of the unprecedented nature of this litigation, it is uncertain
whether or to what extent we may be affected by it. Congress recently passed a
law that is intended to limit liability for some failures to achieve Year 2000
compliance. There can be no assurance that this bill will provide us with any
protection.
We have completed an assessment of our material internal information
technology systems, including both our own software products and third-party
software and hardware technology. We are in the process of assessing our non-
information technology systems. We expect to complete the non-information
technology assessment, testing and remediation of these systems by November 30,
1999. To the extent that we are not able to test the technology provided by
third- party vendors, we are seeking assurances from these vendors that their
systems are Year 2000 compliant. We are not currently aware of any material
operational issues or costs associated with preparing our internal information
technology and non-information technology systems for the Year 2000. However, we
may experience material unanticipated problems and costs caused by undetected
errors or defects in the technology used in our internal information technology
and non-information technology systems.
We do not currently have any information concerning the Year 2000 compliance
status of our customers. Our current or future customers may incur significant
expenses to achieve Year 2000 compliance. If our customers are not Year 2000
compliant, they may experience material costs to remedy problems, or they may
face litigation costs. In either case, Year 2000 issues could reduce or
eliminate the budgets that current or potential customers could have for or
delay purchases of our product and services. As a result, our business could be
seriously harmed.
We have funded our Year 2000 plan from operating cash flows and have not
separately accounted for these costs in the past. To date, these costs have not
been material. We will incur additional costs related to the Year 2000 plan for
administrative personnel to manage the project, outside contractor assistance,
technical support for our products, product engineering and customer
satisfaction. In addition, we may experience material problems and costs with
Year 2000 compliance that could seriously harm our business.
We do not have a contingency plan to address situations that may result if our
critical operations are not Year 2000 ready, and we do not anticipate the need
to do so. The cost of developing and implementing the plan may itself be
material. Finally, we are also subject to external forces that might generally
affect industry and commerce, including utility or transportation company Year
2000 compliance failure interruptions.
Year 2000 issues affecting our business, if not adequately addressed by us,
our third party vendors or suppliers or our customers, could have a number of
"worst case" consequences. These include:
. claims from our customers asserting liability, including liability for
breach of warranties related to the failure of our product and services
to function properly, and any resulting settlements or judgments; and
. our inability to manage our own business.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Our interest income is sensitive to changes in the general level of U.S.
interest rates, since the majority of our investments are in cash and cash
equivalents. Due to the short-term nature of our cash equivalents, we believe
that there is no material risk exposure. Therefore, no quantitative tabular
disclosures are required.
Business Risks
SINCE OUR SHORT OPERATING HISTORY MAKES IT DIFFICULT TO EVALUATE OUR
PROSPECTS, OUR FUTURE FINANCIAL PERFORMANCE MAY DISAPPOINT SECURITIES ANALYSTS
OR INVESTORS AND RESULT IN A DECLINE IN OUR STOCK PRICE.
We were incorporated in October 1994. Until November 1997, we were engaged
primarily in research and development of our initial product. We licensed our
first product in November 1997 and have only recently established sales and
service organizations. Because of our limited operating history, we have limited
insight into trends that may emerge in our market and affect our business. The
revenue and income potential of our market are unproven. As a result of our
limited operating history, we have limited financial data that you can use to
evaluate our business. You must consider our prospects in light of the risks,
expenses and challenges we might encounter because we are at an early stage of
development in a new and rapidly evolving market.
WE HAVE A LARGE ACCUMULATED DEFICIT, WE EXPECT FUTURE LOSSES, AND WE MAY NOT
ACHIEVE OR MAINTAIN PROFITABILITY.
We have incurred substantial losses since inception as we funded the
development of our product and technologies, and through our efforts to expand
our sales and marketing organization. Our net losses for 1998 were $9.6 million,
and our net losses for the nine months ended September 30, 1999 were $10.3
million. As of September 30, 1999, we had an accumulated deficit of $20.5
million. We intend to continue to invest heavily in sales, marketing and
research and development. As a result, we will need to significantly increase
our quarterly revenues to achieve profitability. We cannot predict when we will
operate profitably, if at all.
OUR OPERATING RESULTS FLUCTUATE SIGNIFICANTLY AND AN UNANTICIPATED DECLINE IN
REVENUE MAY DISAPPOINT SECURITIES ANALYSTS OR INVESTORS AND RESULT IN A DECLINE
IN OUR STOCK PRICE.
Although we have had significant revenue growth in recent quarters, our growth
rates may not be sustainable and prospective investors should not use these past
results to predict future operating margins or results. Our quarterly operating
results have fluctuated significantly in the past and may vary significantly in
the future. If our operating results are below the expectations of securities
analysts or investors, our stock price is likely to decline. We believe that
period-to-period comparisons of our historical results of operations are not a
good predictor of our future performance.
Our revenues and operating results depend upon the volume and timing of
customer orders and payments and the date of product delivery. Historically, a
substantial portion of revenues in a given quarter have been recorded in the
third month of that quarter, with a concentration of these revenues in the last
two weeks of the third month. We expect this trend to continue and, therefore,
any failure or delay in the closing of orders would have a material adverse
effect on our quarterly operating results. Since our operating expenses are
based on anticipated revenues and because a high percentage of these expenses
are relatively fixed, a delay in the recognition of revenue from one or more
license transactions could cause significant variations in operating results
from quarter to quarter and cause unexpected results.
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We record as deferred revenues payments from customers that do not meet our
revenue recognition policy requirements. Since only a small portion of our
revenues each quarter is recognized from deferred revenues, our quarterly
results will depend primarily upon entering into new contracts to generate
revenues for that quarter. New contracts may not result in revenue in the
quarter in which the contract was signed, and we may not be able to predict
accurately when revenues from these contracts will be recognized.
OUR PRODUCT MAY NOT ACHIEVE MARKET ACCEPTANCE, WHICH COULD CAUSE OUR
REVENUES TO DECLINE.
The limited sales and deployment of our product, and limited acceptance of
process automation technology, makes our prospects difficult to predict. In
addition, we have only licensed our product to a small number of customers, and
only a portion of these customers have commenced commercial deployment. The
deployment of our product requires interoperability with a variety of software
applications and systems and, in some cases, to process a high number of
transactions per second. If our product fails to satisfy these demanding
technological objectives, our customers will be dissatisfied and we may be
unable to generate future sales. Failure to establish a significant base of
customer references will significantly reduce our ability to license our product
to additional customers.
OUR REVENUES WILL LIKELY DECLINE IF WE DO NOT DEVELOP AND MAINTAIN SUCCESSFUL
RELATIONSHIPS WITH SYSTEM INTEGRATORS.
System integrators install and deploy our products and those of our
competitors, and perform custom integration of systems and applications. Some
system integrators engage in joint marketing and sales efforts with us. If these
relationships fail, we will have to devote substantially more resources to the
sales and marketing, and implementation and support of our product than we would
otherwise, and our efforts may not be as effective as those of the system
integrators. In many cases, these parties have extensive relationships with our
existing and potential customers and influence the decisions of these customers.
We rely upon these firms for recommendations of our product during the
evaluation stage of the purchasing process, as well as for implementation and
customer support services. A number of our competitors have stronger
relationships with these system integrators and, as a result, these system
integrators may be more likely to recommend competitors' products and services.
In addition, a number of our competitors have relationships with a greater
number of these system integrators and, therefore, have access to a broader base
of enterprise customers. Our failure to establish or maintain these
relationships would significantly harm our ability to license and successfully
implement our software product. In addition, we rely on the industry expertise
and reach of these firms. Therefore, this failure would also harm our ability to
develop industry-specific products. We are currently investing, and plan to
continue to invest, significant resources to develop these relationships. Our
operating results could be adversely affected if these efforts do not generate
license and service revenues necessary to offset this investment.
WE MAY SUFFER PRODUCT DEPLOYMENT DELAYS, A LOWER QUALITY OF CUSTOMER
SERVICE AND INCREASED EXPENSES IF SUFFICIENT SYSTEM INTEGRATOR IMPLEMENTATION
TEAMS ARE NOT AVAILABLE.
System integrators help our customers install and deploy our product. These
system integrators are not contractually required to implement our product, and
competition for these resources may preclude us from obtaining sufficient
resources to provide the necessary implementation services to support our needs.
If the number of installations of our product exceeds our access to the
resources provided by these system integrators, we will be required to provide
these services internally, which would significantly limit our ability to meet
our customers' implementation needs and increase our expenses. In addition, we
cannot control the level and quality of service provided by our current and
future implementation partners.
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BECAUSE A SMALL NUMBER OF CUSTOMERS HAVE AND ARE LIKELY TO CONTINUE TO
ACCOUNT FOR A SUBSTANTIAL PORTION OF OUR REVENUES, OUR REVENUES COULD
DECLINE DUE TO THE LOSS OR DELAY OF A SINGLE CUSTOMER ORDER.
A relatively small number of customers account for a significant portion of
our total revenues. In 1998, sales to our ten largest customers accounted for
86% of total revenues. In 1998, sales to Level 3 accounted for 30% of total
revenues, and sales to KPMG accounted for 12% of total revenues. In the nine
months ended September 30, 1999, sales to our ten largest customers accounts
for 58% of total revenues. In the nine month period ended September 30, 1999,
sales to Sprint accounted for 11% of total revenues.
Our license agreements do not generally provide for ongoing license payments.
Therefore, we expect that revenues from a limited number of new customers will
continue to account for a large percentage of total revenues in future quarters.
Our ability to attract new customers will depend on a variety of factors,
including the performance, quality, breadth and depth of our current and future
products. The loss or delay of individual orders could have a significant impact
on revenues and operating results. Our failure to add new customers that make
significant purchases of our product and services would reduce our future
revenues.
OUR MARKETS ARE HIGHLY COMPETITIVE AND, IF WE DO NOT COMPETE EFFECTIVELY, WE
MAY SUFFER PRICE REDUCTIONS, REDUCED GROSS MARGINS AND LOSS OF MARKET SHARE.
The market for our product is intensely competitive, evolving and subject to
rapid technological change. The intensity of competition is expected to increase
in the future. Increased competition is likely to result in price reductions,
reduced gross margins and loss of market share, any one of which could
significantly reduce our future revenues. Our current competitors include:
EAI VENDORS. We face competition from vendors offering Enterprise Application
Integration, or EAI, software products. These vendors include Active Software,
Inc., CrossWorlds Software, Inc., and New Era of Networks, Inc., also known as
NEON. A number of other companies are offering products that address different
aspects of our solution, including BEA Systems, Inc., Forte Software, Inc.,
Hewlett-Packard Company, IBM Corporation and Tibco Software Inc. In the future,
some of these companies may expand their products to enhance existing, or to
provide, process automation and real-time analysis functionality.
INTERNAL IT DEPARTMENTS. "In house" information technology departments of
potential customers have developed or may develop systems that provide for some
or all of the functionality of our BusinessWare product. We expect that
internally developed application integration and process automation efforts will
continue to be a principal source of competition for the foreseeable future. In
particular, it can be difficult to sell our product to a potential customer
whose internal development group has already made large investments in and
progress towards completion of systems that our product is intended to replace.
OTHER SOFTWARE VENDORS. We may in the future also encounter competition from
major enterprise software developers including Oracle Corporation, PeopleSoft,
Inc., and SAP AG. In addition, Microsoft Corporation has announced its intention
to introduce products which could compete with some aspects of our product.
These companies have significantly greater resources than Vitria.
Many of our competitors have more resources and broader customer relationships
than we do. In addition, many of these competitors have extensive knowledge of
our industry. Current and potential competitors have established or may
establish cooperative relationships among themselves or with third parties to
offer a single solution and increase the ability of their products to address
customer needs.
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Although we believe that our solutions generally compete favorably with
respect to these factors, our market is relatively new and is evolving rapidly.
We may not be able to maintain our competitive position against current and
potential competitors, especially those with significantly greater resources.
WE EXPERIENCE LONG AND VARIABLE SALES CYCLES, WHICH COULD HAVE A NEGATIVE
IMPACT ON OUR RESULTS OF OPERATIONS FOR ANY GIVEN QUARTER.
Our product is often used by our customers to deploy mission-critical
solutions used throughout their organization. Customers generally consider a
wide range of issues before committing to purchase our product, including
product benefits, ability to operate with existing and future computer systems,
ability to accommodate increased transaction volume and product reliability.
Many customers will be addressing these issues for the first time. As a result,
we or other parties, including system integrators, must educate potential
customers on the use and benefits of our product and services. In addition, the
purchase of our product generally involves a significant commitment of capital
and other resources by a customer. This commitment often requires significant
technical review, assessment of competitive products, and approval at a number
of management levels within the customer's organization. Because of these
issues, our sales cycle has ranged from two to nine months and is difficult to
predict for any particular license transaction.
THE COST AND DIFFICULTIES OF IMPLEMENTING OUR PRODUCT COULD SIGNIFICANTLY
HARM OUR REPUTATION WITH CUSTOMERS, DIMINISHING OUR ABILITY TO LICENSE
ADDITIONAL PRODUCTS TO OUR CUSTOMERS.
Our product is often purchased as part of large projects undertaken by our
customers. These projects are complex, time consuming and expensive. Failure by
customers to successfully deploy our product, or the failure by us or third-
party consultants to ensure customer satisfaction, could damage our reputation
with existing and future customers and reduce future revenues. In many cases,
our customers must interact with, modify, or replace significant elements of
their existing computer systems. The costs of our product and services represent
only a portion of the related hardware, software, development, training and
consulting costs. The significant involvement of third parties, including system
integrators, reduces the control we have over the implementation of our product
and the quality of customer service provided to organizations which license our
software.
OUR SALES ARE CONCENTRATED IN THE TELECOMMUNICATIONS AND FINANCIAL SERVICES
INDUSTRIES AND IF OUR CUSTOMERS IN THESE MARKETS DECREASE THEIR INFORMATION
TECHNOLOGY SPENDING, OR WE FAIL TO PENETRATE OTHER INDUSTRIES, OUR REVENUES
MAY DECLINE.
We expect to continue to direct our sales and marketing efforts toward
companies in the telecommunications and financial services industries. Sales to
customers in the telecommunications and financial services industries accounted
for 57% of total revenues in 1998 and 78% of total revenues in the nine months
ended September 30, 1999. If we fail to penetrate these vertical markets our
operating results may suffer. Given our limited market penetration, the high
degree of competition and the rapidly changing environment in these industries,
there is no assurance that we will be able to continue sales in these industries
at current levels. In addition, we intend to market our product in new vertical
markets. Customers in these new vertical markets are likely to have different
requirements and may require us to change our product design or features, sales
methods, support capabilities or pricing policies. If we fail to successfully
address these new vertical markets we may experience decreased sales in future
periods.
IF WE ARE NOT SUCCESSFUL IN DEVELOPING PACKAGED VERSIONS OF OUR PRODUCT, OUR
ABILITY TO INCREASE FUTURE REVENUES COULD BE HARMED.
We intend to develop packaged versions of our product which incorporate
business processes of specific industries, including telecommunications and
financial services. This presents technical challenges and will require
collaboration with system integrators and the commitment of significant
resources. We do not expect to release any product with
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these attributes prior to December 1999. If we are not successful in developing
these targeted products or these products do not achieve market acceptance, our
ability to increase future revenues could be harmed.
OUR OPERATING RESULTS ARE SUBSTANTIALLY DEPENDENT ON LICENSE REVENUES FROM
ONE PRODUCT AND OUR BUSINESS COULD BE MATERIALLY HARMED BY FACTORS THAT
ADVERSELY AFFECT THE PRICING AND DEMAND FOR OUR PRODUCT.
Since 1998 a majority of our total revenues has been, and is expected to be,
derived from the license of our BusinessWare product. Accordingly, our future
operating results will depend on the demand for BusinessWare by future
customers, including new and enhanced releases that are subsequently introduced.
If our competitors release new products that are superior to BusinessWare in
performance or price, or we fail to enhance BusinessWare and introduce new
products in a timely manner, demand for our product may decline. A decline in
demand for BusinessWare as a result of competition, technological change or
other factors would significantly reduce our revenues.
IF OUR PRODUCT DOES NOT OPERATE WITH THE MANY HARDWARE AND SOFTWARE
PLATFORMS USED BY OUR CUSTOMERS, OUR BUSINESS MAY FAIL.
We currently serve a customer base with a wide variety of constantly changing
hardware, packaged software applications and networking platforms. If our
product fails to gain broad market acceptance, due to its inability to support a
variety of these platforms, our operating results may suffer. Our business
depends, among others, on the following factors:
. our ability to integrate our product with multiple platforms and
existing, or legacy, systems and to modify our product as new versions of
packaged applications are introduced;
. the portability of our product, particularly the number of operating
systems and databases that our product can source or target;
. our ability to anticipate and support new standards, especially Internet
standards;
. the integration of additional software modules under development with our
existing product; and
. our management of software being developed by third parties for our
customers or use with our product.
IF WE FAIL TO INTRODUCE NEW VERSIONS AND RELEASES OF OUR PRODUCT IN A TIMELY
MANNER, OUR REVENUES MAY DECLINE.
We may fail to introduce or deliver new products on a timely basis, if at all.
In the past, we have experienced delays in the commencement of commercial
shipments of our BusinessWare product. To date, these delays have not had a
material impact on our revenues. If new releases or products are delayed or do
not achieve market acceptance, we could experience a delay or loss of revenues
and cause customer dissatisfaction. In addition, customers may delay purchases
of our product in anticipation of future releases. If customers defer material
orders in anticipation of new releases or new product introductions, our
revenues may decline.
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OUR PRODUCT RELIES ON THIRD-PARTY PROGRAMMING TOOLS, LIKE JAVA BY SUN
MICROSYSTEMS, AND APPLICATIONS, AND IF WE LOSE ACCESS TO THESE TOOLS AND
APPLICATIONS, OR ARE UNABLE TO MODIFY OUR PRODUCT IN RESPONSE TO CHANGES IN
THESE TOOLS AND APPLICATIONS, OUR REVENUES COULD DECLINE.
Our programs utilize Java programming technology provided by Sun Microsystems.
We also depend upon access to the interfaces, known as "APIs," used for
communication between external software products and packaged application
software. Our access to APIs of third-party applications are controlled by the
providers of these applications. If the application provider denies or delays
our access to APIs, our business may be harmed. Some application providers may
become competitors or establish alliances with our competitors, increasing the
likelihood that we would not be granted access to their APIs. In addition, we
license technology related to the connectivity of our product to third-party
database and other applications. Loss of the ability to use this technology,
delays in upgrades, or failure of these third parties to support these
technologies, could cause our revenues to decline.
WE COULD SUFFER LOSSES AND NEGATIVE PUBLICITY IF NEW VERSIONS AND RELEASES OF
OUR PRODUCT CONTAIN ERRORS OR DEFECTS.
Our product and its interactions with customers' software applications and IT
systems are complex and, accordingly, there may be undetected errors or failures
when products are introduced or as new versions are released. We have in the
past discovered software errors in our new releases and new products after their
introduction which has resulted in additional research and development expenses.
To date, these additional expenses have not been material. For example, we
discovered problems with respect to the ability of software written in Java to
run sufficiently fast to meet the needs of users in some high performance
applications. These errors have resulted in product release delays, delayed
revenues and customer dissatisfaction. We may in the future discover errors,
including Year 2000 compliance errors and additional performance limitations, in
new releases or new products after the commencement of commercial shipments.
Since many customers are using our product for mission-critical business
operations, any of these occurrences could seriously harm our business and
generate negative publicity.
OUR GROWTH CONTINUES TO PLACE A SIGNIFICANT STRAIN ON OUR MANAGEMENT
SYSTEMS AND RESOURCES AND IF WE FAIL TO MANAGE OUR GROWTH OUR ABILITY TO
MARKET AND SELL OUR PRODUCT AND DEVELOP NEW PRODUCTS MAY BE HARMED.
We must plan and manage our growth effectively in order to offer our product
and services and achieve revenue growth and profitability in a rapidly evolving
market. Our growth has and will continue to place a significant strain on our
management systems and resources, and we may not be able to effectively manage
our growth in the future. We continue to increase domestically, and to a lesser
extent internationally, the scope of our operations, and have added a number of
employees. For us to effectively manage our growth, we must continue to do the
following:
. improve our operational, financial and management controls;
. improve our reporting systems and procedures;
. install new management and information control systems; and
. expand, train and motivate our workforce.
In particular, we are currently migrating to a new accounting software package
designed to allow greater flexibility in reporting and tracking results. In
addition, we are implementing new management information systems, including
sales and marketing management and human resources management software. If we
fail to install this software in an efficient and timely manner, or if the new
systems fail to adequately support our level of operations, then we could incur
substantial additional expenses to remedy these failures.
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IF WE DO NOT KEEP PACE WITH TECHNOLOGICAL CHANGE, OUR PRODUCT MAY BE
RENDERED OBSOLETE AND OUR OPERATING RESULTS MAY SUFFER.
Our industry is characterized by very rapid technological change, frequent new
product introductions and enhancements, changes in customer demands and evolving
industry standards. Our existing product will be rendered obsolete if we fail to
introduce new products or product enhancements that meet new customer demands,
support new standards or integrate with new or upgraded versions of packaged
applications. We have also found that the technological life cycle of our
product is difficult to estimate. We believe that we must continue to enhance
our current product while we concurrently develop and introduce new products
that anticipate emerging technology standards and keep pace with competitive and
technological developments. Failure to do so will harm our ability to compete.
As a result, we are required to continue to make substantial product development
investments.
WE DEPEND ON THE INCREASING USE OF THE INTERNET AND ON THE GROWTH OF
ELECTRONIC COMMERCE. IF THE USE OF THE INTERNET AND ELECTRONIC COMMERCE DOES
NOT GROW AS ANTICIPATED, OUR REVENUES COULD DECLINE AND OUR BUSINESS WILL BE
SERIOUSLY HARMED.
We depend on the increased acceptance and use of the Internet as a medium for
electronic commerce and the adoption by businesses of eBusiness solutions. Rapid
growth in the use of the Internet is a recent occurrence. As a result,
acceptance and use may not continue to develop at historical rates and a
sufficiently broad base of business customers may not adopt or continue to use
the Internet as a medium of commerce. Demand and market acceptance for recently
introduced services and products over the Internet are subject to a high level
of uncertainty, and there exist few proven services and products.
IF WE FAIL TO ADEQUATELY PROTECT OUR PROPRIETARY RIGHTS, WE MAY LOSE THESE
RIGHTS AND OUR BUSINESS MAY BE SERIOUSLY HARMED.
We depend upon our ability to develop and protect our proprietary technology
and intellectual property rights to distinguish our product from our
competitor's products. The use by others of our proprietary rights could
materially harm our business. We rely on a combination of copyright, trademark
and trade secret laws, as well as confidentiality agreements and licensing
arrangements, to establish and protect our proprietary rights. We have no issued
patents. Despite our efforts to protect our proprietary rights, existing laws
afford only limited protection. Attempts may be made to copy or reverse engineer
aspects of our product or to obtain and use information that we regard as
proprietary. Accordingly, there can be no assurance that we will be able to
protect our proprietary rights against unauthorized third-party copying or use.
Furthermore, policing the unauthorized use of our product is difficult, and
expensive litigation may be necessary in the future to enforce our intellectual
property rights.
IF OUR SOURCE CODE IS RELEASED TO OUR CUSTOMERS, OUR ABILITY TO PROTECT OUR
PROPRIETARY RIGHTS COULD BE JEOPARDIZED AND OUR REVENUES COULD DECLINE.
Some of our license agreements require us to place the source code for our
product in escrow. These agreements generally provide these customers with a
limited, non-exclusive license to use this code if:
. we fail to provide the product or maintenance and support;
. we cease to do business without a successor; or
. there is a bankruptcy proceeding by or against Vitria.
Our revenues could decline and our business could be seriously harmed if
customers were granted this access.
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OUR PRODUCT COULD INFRINGE THE INTELLECTUAL PROPERTY RIGHTS OF OTHERS
CAUSING COSTLY LITIGATION AND THE LOSS OF SIGNIFICANT RIGHTS.
We expect that third parties may claim that we have infringed their current or
future intellectual property rights. We expect that software developers in our
market will increasingly be subject to infringement claims as the number of
products in different software industry segments overlap. Any claims, with or
without merit, could be time-consuming, result in costly litigation, prevent
product shipment or cause delays, or require us to enter into royalty or
licensing agreements, any of which could harm our business. Patent litigation in
particular has complex technical issues and inherent uncertainties. In the event
an infringement claim against us is successful and we cannot obtain a license on
acceptable terms or license a substitute technology or redesign our product to
avoid infringement, our business would be harmed. Furthermore, former employers
of our current and future employees may assert that our employees have
improperly disclosed to us or are using confidential or proprietary information.
WE MAY NOT SUCCESSFULLY ENTER INTERNATIONAL MARKETS OR GENERATE SIGNIFICANT
PRODUCT REVENUES ABROAD, WHICH COULD RESULT IN SLOWER REVENUE GROWTH AND
HARM OUR BUSINESS.
To date, we have not generated any revenue from sales outside of the United
States. We have recently opened an office in the United Kingdom and intend to
establish additional offices in Europe. If we fail to sell our product in
international markets, we could experience slower revenue growth and our
business could be harmed. We anticipate devoting significant resources and
management attention to expanding international opportunities. There are a
number of challenges to establishing operations outside of the United States and
we may be unable to successfully establish international operations.
POTENTIAL YEAR 2000 PROBLEMS WITH OUR SOFTWARE, THIRD-PARTY EQUIPMENT OR OUR
INTERNAL OPERATING SYSTEMS COULD REDUCE OUR FUTURE REVENUES AND INCREASE
OUR EXPENSES.
Many currently installed computer systems and software products are coded to
accept only two digit entries in the date code field. Beginning in the year
2000, these code fields will need to accept four digit entries to distinguish
21st century dates from 20th century dates, and the failure to do so could
result in the loss of revenues. The Year 2000 computer issue creates the
following risks for us:
. our product could fail due to processing errors caused by unanticipated
inaccurate calculations with respect to the Year 2000;
. third party hardware and software used with our product could experience
Year 2000 compliance problems which are wrongly attributed to us;
. our customers, partners or suppliers could experience Year 2000 problems;
and
. our current customers could reevaluate their current system needs and, as
a result, consider switching to other systems and suppliers.
If any of these events occur, it could reduce our future revenues and increase
our expenses. For a further discussion of Year 2000 issues, see "Management's
Discussion and Analysis of Financial Condition and Results of Operations--Year
2000 Readiness."
23
<PAGE>
PART II
OTHER INFORMATION
1. Legal Proceedings.
None.
2. Changes in Securities and Use of Proceeds
On September 16, 1999, Vitria commenced the initial public offering, at $16.00
per share, of 3,450,000 shares of common stock, including 450,000 shares subject
to the underwriters overallotment option pursuant to a registration statement on
Form S-1 (Commission File No. 333-81297) declared effective on September 16,
1999. The offering terminated following the sale of all securities registered.
The managing underwriters of the public offering were Credit Suisse First
Boston, Merrill Lynch, Pierce, Fenner & Smith Incorporated, BancBoston Robertson
Stephens Inc., and SoundView Technology Group. The aggregate offering price of
the shares offered by Vitria was $55,200,000, less underwriting discounts and
commissions of $3,864,000 and expenses of approximately $1,359,000. The proceeds
are to be used for general corporate purposes, principally working capital,
capital expenditures, potential acquisitions and additional research and
development, sales and marketing efforts.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders
By written consent dated as of June 22, 1999 our stockholders approved
the following proposals:
- - A proposal to approve our reincorporation in the State of Delaware;
- - A proposal to approve amendment of our Certificate of Incorporation
to amend the authorized capital of Vitria to consist of 250,000,000
shares of common stock and 5,000,000 of preferred stock at the closing of the
initial public offering;
- - A proposal to amend and restate our 1995 Equity Incentive Plan as
the 1999 Equity Incentive Plan to provide for annual increases to the number
of shares of common stock reserved for issuance thereunder;
- - A proposal to approve the amendment of our 1998 Executive Incentive
Plan to provide for annual increases to the number of shares of common stock
reserved for issuance thereunder;
- - A proposal to approve the adoption of our 1999 Employee Stock
Purchase Plan; and
- - A proposal to approve the form of Indemnity Agreement for use as an agreement
between Vitria and each of our executive officers and directors.
Shares Voting:
For: 26,187,627
Against: 0
Abstaining: 1,136,695
24
<PAGE>
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K.
a) Exhibits:
27.1. Financial Data Schedule
b) No reports on Form 8-K have been filed with the Securities and Exchange
Commission during the three months ended September 30, 1999.
25
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
November 15, 1999 Vitria Technology, Inc.
By /s/ Paul R. Auvil, III
-------------------
Paul R. Auvil, III
Vice President, Finance, Chief Financial Officer and
Secretary
26
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