<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus is not complete and may be changed. We may +
+not sell these securities until the registration statement filed with the +
+Securities and Exchange Commission is effective. This prospectus is not an +
+offer to sell these securities and it is not soliciting an offer to buy these +
+securities in any state where the offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
Filed Pursuant to Rule 424(a)
Registration Number 333-81297
SUBJECT TO COMPLETION, DATED AUGUST 27, 1999
3,000,000 Shares
[LOGO OF VITRIA TECHNOLOGY, INC.]
Common Stock
---------
Prior to this offering, there has been no public market for the common stock.
The initial public offering price of the common stock is expected to be between
$10.00 and $12.00 per share. We have applied to list the common stock on The
Nasdaq Stock Market's National Market under the symbol "VITR."
The underwriters have an option to purchase a maximum of 450,000 additional
shares to cover over-allotments of shares.
Investing in our common stock involves risks. See "Risk Factors" on page 6.
<TABLE>
<CAPTION>
Underwriting
Price to Discounts and Proceeds to Vitria
Public Commissions Technology
------------ ------------- ------------------
<S> <C> <C> <C>
Per Share.................................. $ $ $
Total...................................... $ $ $
</TABLE>
Delivery of the shares of common stock will be made on or about ,
1999.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if
this prospectus is truthful or complete. Any representation to the contrary is
a criminal offense.
Credit Suisse First Boston Merrill Lynch & Co.
BancBoston Robertson Stephens
SoundView Technology Group
The date of this prospectus is , 1999.
<PAGE>
[DESCRIPTION OF GRAPHICS:
Inside cover artwork
At the top left of the page is the "Vitria Technology, Inc." corporate logo.
On the right hand side is the phrase "A Leading Provider of eBusiness
Infrastructure Software."
Centered on the page below this header is a diagram. This diagram is a
three-dimensional disc rotated slightly towards the reader so that the top of
the disc is visible. The disc represents Vitria's product labeled "Vitria
BusinessWare(TM)." On the top there are six independent clusters of buildings:
Production Partners, Suppliers, Distribution Partners, Business Customers,
Consumers and the Enterprise. The cluster of buildings which symbolize the
Enterprise itself is at the center of the disc. A series of dotted lines
connect the Enterprise with each of the other clusters of buildings. These
lines represent the Internet through which information is shared between the
Enterprise and its Production Partners, Suppliers and other constituents. The
side of the disc reads "Vitria BusinessWare(TM)."
Below the disc is the caption "Vitria BusinessWare provides the software
infrastructure that enables companies to conduct business electronically across
corporate networks and over the Internet."]
<PAGE>
------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary....................................................... 3
Risk Factors............................................................. 6
Special Note Regarding Forward-Looking Statements........................ 16
Use of Proceeds.......................................................... 17
Dividend Policy.......................................................... 17
Capitalization........................................................... 18
Dilution................................................................. 19
Selected Financial Data.................................................. 20
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 21
Business................................................................. 30
</TABLE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
Management................................................................. 42
Certain Transactions....................................................... 52
Principal Stockholders..................................................... 53
Description of Capital Stock............................................... 55
Shares Eligible for Future Sale............................................ 58
Underwriting............................................................... 60
Notice to Canadian Residents............................................... 62
Legal Matters.............................................................. 63
Experts.................................................................... 63
Where You Can Find More Information........................................ 63
Index to Financial Statements.............................................. F-1
</TABLE>
------------
You should rely only on the information contained in this document or to
which we have referred you. We have not authorized anyone to provide you with
information that is different. This document may only be used where it is
legal to sell these securities. The information in this document may only be
accurate on the date of this document.
------------
Except as otherwise indicated, information in this prospectus is based on
the following assumptions:
. the conversion of all our outstanding shares of preferred stock into
shares of common stock upon the closing of this offering;
. no exercise of the underwriters' over-allotment option; and
. the filing of our amended and restated certificate of incorporation prior
to the closing of this offering.
"Vitria," "BusinessWare" and the Vitria logo are registered trademarks of
Vitria. This prospectus also includes trademarks owned by other parties.
------------
Dealer Prospectus Delivery Obligation
Until , 1999 (25 days after the commencement of this offering), all
dealers that effect transactions in these securities, whether or not
participating in this offering, may be required to deliver a prospectus. This
is in addition to the dealer's obligation to deliver a prospectus when acting
as an underwriter and with respect to unsold allotments or subscriptions.
<PAGE>
PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this prospectus.
This summary does not contain all the information you should consider before
buying shares in the offering. You should read the entire prospectus carefully.
Vitria Technology, Inc.
Our Business
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 using phone,
facsimile or mail. For the six months ended June 30, 1999, sales of the
BusinessWare product accounted for approximately 62% of our total revenues. We
have designed BusinessWare to give our customers complete control and
visibility of their business operations across an "extended enterprise" that
includes their customers and partners. BusinessWare allows our customers to
improve the efficiency of their business operations, reduce time to market for
new products and services, develop closer relationships with their customers
and partners, and rapidly respond to changing business conditions. To date, we
have licensed BusinessWare to over 30 companies, including CableVision, Covad,
Deutsche Bank, Duke Energy, FedEx, Fujitsu PC, Inacom, Level 3, PageMart
Wireless, SBC, Sprint and Verio.
Our Market Opportunity
eBusiness is fundamentally changing the speed and nature of business. To
compete in this new environment, companies must be able to communicate
instantly with customers and partners over the Internet, using a clearly
defined set of business processes that can be continuously analyzed and rapidly
changed. This is what we refer to as "real-time eBusiness." Companies that
engage in real-time eBusiness can bring new products and services to market
faster, form new partnerships more easily, and respond to changing business
conditions more rapidly. To conduct business at this accelerated pace, we
believe that companies must address four key requirements:
(1) Business Process Automation. Business processes describe, step-by-step, how
a company conducts its business operations across their extended
enterprise. For example, a company may define its order fulfillment process
as follows: receive an order, allocate inventory, request product shipment
from a distribution partner, and bill the customer. These business
processes define how information should flow across internal IT systems and
across the Internet to the IT systems of customers and partners. In many
companies today, this information flow is not automated.
(2) Internet-Based Communications. As companies extend their business processes
to directly include their customers and partners, they need a way to
communicate business information over the Internet in a secure and reliable
fashion. In the prior example, the interactions between the company, its
distribution partners and the customer could take place over the Internet.
These exchanges of information would take place through the exchange of
electronic messages over the Internet.
(3) Application Integration. To automate business processes, companies must
exchange information between IT systems. For example, the fulfillment of
customer orders might require that a company's order management, shipping
and billing systems exchange data to ensure that the order is correctly
received, requested products are shipped, and the customer is appropriately
billed. As a result, companies need a way to automatically access
information in one system and translate it into standard formats so that it
can be shared with and understood by other systems.
3
<PAGE>
(4) Real-Time Analysis. Business managers need to continuously monitor and
analyze automated business processes to identify and respond to problems as
they occur. Analysis software typically requires information to be
accumulated in the database before it can be analyzed. The resulting delay
reduces a company's ability to respond to a problem in a timely manner.
Real-time analysis allows information to be analyzed as soon as it is
captured. In the prior example, the company can monitor and analyze orders
from customers and adjust inventories on a continuous basis, rather than
waiting until the end of the day to extract the information from the
database.
We do not believe that other competitors adequately address all four of
these requirements. For example, enterprise application integration vendors
focus on integrating IT systems. Messaging software vendors focus on inter-
application communications. We believe that no approach adequately addresses
process automation or real-time analysis, and that there is a significant
market opportunity for infrastructure software that addresses all four
requirements for real-time eBusiness.
Our Solution
BusinessWare addresses the four eBusiness requirements in a single
comprehensive software product. Business users can use BusinessWare to create
visual diagrams of their business processes, called "process models," using a
graphical user interface. This eliminates the need for expensive custom
programming. BusinessWare then uses these process models to automatically
coordinate the flow of information across a company's internal IT systems and
across the Internet to the systems of its customers and partners. Once
BusinessWare has automated a business process, it selectively gathers and
analyzes key performance statistics and allows business managers to identify
and respond to business problems the moment they occur.
BusinessWare provides the following key benefits to customers:
. Provides Complete Control and Visibility of Business Operations Across the
Extended Enterprise. Companies can increase the efficiency of their
operations and lower operating costs by automating and analyzing the
performance of their business processes in real-time.
. Reduces Time to Market. Business users can quickly automate new processes
that accelerate the delivery of new products and services.
. Enables Rapid Response to Change. Business users can revise and continuously
refine processes by changing process models.
. Enables Tighter Relationships with Customers and Partners. Companies can
quickly establish sophisticated and highly automated relationships with
partners or customers that support shared business processes.
Our Strategy
We intend to establish BusinessWare as the leading infrastructure software
product for eBusiness. As part of this strategy, we have developed strong
working relationships with leading system integrators, including Andersen
Consulting and Electronic Data Systems, or EDS. These system integrators help
our customers install and deploy our product and in many cases these
integrators have existing relationships with our targeted customers. In
addition, we are working to develop market-focused eBusiness solutions that are
built on BusinessWare and targeted to the needs of specific industries. These
solutions will include pre-defined, customizable process models that reflect
the business processes of the target industry. We expect our first industry-
specific product to be made available to customers by December 1999. As of June
30, 1999, we had an accumulated deficit of $16.2 million.
Other Information
We were incorporated in California in October 1994 and reincorporated in
Delaware in July 1999. Our principal executive offices are located at 945
Stewart Drive, Sunnyvale, California 94086, and our telephone number is (408)
212-2700. Our Internet address is www.vitria.com. The information on our
website is not incorporated by reference into this prospectus.
4
<PAGE>
The Offering
<TABLE>
<S> <C>
Common stock offered........................ 3,000,000 shares
Common stock to be outstanding after this
offering................................... 30,265,722 shares
Use of proceeds ............................ General corporate purposes, including
relocation of our principal offices,
expansion of our sales and marketing
capabilities, product development, and
other working capital requirements. See
"Use of Proceeds."
Proposed Nasdaq National Market symbol ..... VITR
</TABLE>
The number of shares of common stock to be outstanding after this offering
is based on the number of shares outstanding as of June 30, 1999, and excludes:
. 1,992,073 shares subject to options outstanding as of June 30, 1999, at a
weighted average exercise price of $1.25 per share;
. 3,708,792 additional shares that we could issue under our stock option
plans, of which options to purchase 1,414,500 shares of common stock were
granted in July and August 1999; and
. 1,500,000 shares that we could issue under our employee stock purchase
plan.
Summary Financial Information
(in thousands, except per share data)
<TABLE>
<CAPTION>
Year Ended Six Months
December 31, Ended June 30,
---------------------- ----------------
1996 1997 1998 1998 1999
------ ------ ------- ------- -------
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenues:
License............................ $ -- $ 955 $ 5,198 $ 1,027 $ 7,178
Service............................ 1,042 1,425 1,633 262 3,630
Government grant................... 984 1,255 796 425 700
------ ------ ------- ------- -------
Total revenues.................... 2,026 3,635 7,627 1,714 11,508
Cost of revenues..................... 1,167 1,611 2,905 745 3,538
------ ------ ------- ------- -------
Gross profit......................... 859 2,024 4,722 969 7,970
Income (loss) from operations........ 235 (655) (9,875) (4,419) (6,245)
Net income (loss).................... 243 (580) (9,569) (4,259) (6,011)
====== ====== ======= ======= =======
Net income (loss) per share available
to common stockholders:
Basic.............................. $ 0.03 $(0.06) $ (0.80) $ (0.40) $ (0.60)
Diluted............................ $ 0.02 $(0.06) $ (0.80) $ (0.40) $ (0.60)
Weighted average shares used in
computation of net income (loss) per
share available to common
stockholders:
Basic.............................. 7,044 9,915 12,003 10,643 13,098
Diluted............................ 13,835 9,915 12,003 10,643 13,098
Pro forma basic and diluted net loss
per share........................... $ (0.48) $ (0.33)
Pro forma basic and diluted weighted
average shares...................... 20,111 23,883
</TABLE>
<TABLE>
<CAPTION>
June 30, 1999
-------------------
Actual As Adjusted
------- -----------
<S> <C> <C>
Balance Sheet Data:
Cash and cash equivalents................................... $16,525 $46,290
Working capital............................................. 11,941 41,706
Total assets................................................ 28,870 58,635
Deferred revenue............................................ 8,680 8,680
Stockholders' equity........................................ 14,727 44,492
</TABLE>
- --------
See Note 1 of Notes to Financial Statements for an explanation of the
determination of the number of shares used in computing per share data.
The as adjusted balance sheet data gives effect to the net proceeds from the
sale of the 3,000,000 shares of common stock offered hereby at an assumed
public offering price of $11.00 per share after deducting the estimated
underwriting discounts and commissions and estimated offering expenses. See
"Use of Proceeds" and "Capitalization."
5
<PAGE>
RISK FACTORS
You should carefully consider the risks described below before purchasing
our shares. Additional risks and uncertainties not presently known to us or
that we currently see as immaterial may also impair our business operations. If
any of the following risks actually occur, our business could be harmed, the
trading price of our common stock could decline, and you may lose all or part
of your investment.
Risks Related to Vitria
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 six months ended June 30, 1999 were $6.0
million. As of June 30, 1999, we had an accumulated deficit of $16.2 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.
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.
6
<PAGE>
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.
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 six
month period ended June 30, 1999, sales to Sprint and Qwest accounted for 16%
and 10% 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
7
<PAGE>
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.
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.
8
<PAGE>
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 68% of total revenues in the six months
ended June 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 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
and applications 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
9
<PAGE>
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;
. access to the interfaces, known as "APIs," used for communication between
external software products and packaged application software;
. 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.
Our access to APIs of third-party applications are controlled by the
provider 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.
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.
Our product relies on third-party programming tools 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. 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 or offer technology compatible with emerging
industry standards, 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.
10
<PAGE>
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 example, the number of our employees grew from 34 at December
31, 1997 to 178 at June 30, 1999. In particular, our sales force grew from four
people at December 31, 1997 to 51 people at June 30, 1999. 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. In addition, in August 1999 we moved our primary offices to a larger
facility in Sunnyvale, California. This move may disrupt our sales and
marketing and research and development activities and increase expenses or
reduce revenues.
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.
If we fail to attract and retain qualified personnel, our ability to compete
will be harmed.
We depend on the continued service of our key technical, sales and senior
management personnel. None of these persons are bound by an employment
agreement. The loss of any of our senior management or other key research,
development, sales and marketing personnel could have a material adverse effect
on our future operating results. In particular Dr. JoMei Chang, our President
and Chief Executive Officer, and Dr. M. Dale Skeen, our Chief Technology
Officer, would be difficult to replace.
In addition, we must attract, retain and motivate highly skilled employees.
In particular, we are actively seeking a vice president of engineering. We face
significant competition for individuals with the skills required to develop,
market and support our products and services. We cannot assure that we will be
able to recruit and retain sufficient numbers of these highly skilled
employees.
11
<PAGE>
Risks Related to Our Industry
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.
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.
12
<PAGE>
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."
Risks Related to Our Offering
The substantial number of shares that will be eligible for sale in the near
future may cause the market price for our common stock to decline.
Sales of substantial number of shares of our common stock in the public
market following this offering could cause the market price of our common stock
to decline. The number of shares of common stock available for sale in the
public market is limited by restrictions under federal securities law and under
some agreements that our stockholders have entered into with the underwriters
and with us. Those lockup agreements restrict our stockholders from selling,
pledging our otherwise disposing of their shares for a period of 180 days after
the date of this prospectus without the prior written consent of Credit Suisse
First Boston Corporation. However, Credit Suisse First Boston Corporation may,
in its sole discretion, release all or any portion of the common stock from the
restrictions of the lockup agreements. The following table indicates
approximately when the 27,265,722 shares of our common stock that are not being
sold in the offering but which were outstanding as of June 30, 1999 will be
eligible for sale into the public market:
<TABLE>
<CAPTION>
Eligibility of Restricted
Shares for Sale in Public
Market
-------------------------
<S> <C>
On the date of this prospectus................. 0
180 days after the date of this prospectus..... 24,909,632
At various times after the date of this
prospectus.................................... 2,356,090
</TABLE>
13
<PAGE>
Additionally, of the 1,992,073 shares issuable upon exercise of options to
purchase our common stock outstanding as of June 30, 1999, approximately
245,084 shares will be vested and eligible for sale 180 days after the date of
this prospectus. For a further description of the eligibility of shares for
sale into the public market following the offering. See "Shares Eligible for
Future Sale."
Failure to raise additional capital or generate the significant capital
necessary to expand our operations and invest in new products could reduce our
ability to compete and result in lower revenues.
We expect that the net proceeds from this offering will be sufficient to
meet our working capital and capital expenditure needs for at least the next
twelve months. After that, we may need to raise additional funds, and we cannot
be certain that we will be able to obtain additional financing on favorable
terms, or at all. If we need additional capital and cannot raise it on
acceptable terms, we may not be able to, among other things:
. develop or enhance our products and services;
. acquire technologies, products or businesses;
. expand operations, in the United States or internationally;
. hire, train and retain employees; or
. respond to competitive pressures or unanticipated capital requirements.
Our failure to do any of these things could result in lower revenues and could
seriously harm our business.
New investors in our common stock will experience immediate and substantial
dilution.
The initial public offering price is substantially higher than the book
value per share of our common stock. Investors purchasing common stock in this
offering will, therefore, incur immediate dilution of $9.53 in net tangible
book value per share of common stock, based on an assumed public offering price
of $11.00 per share. In addition, the number of shares available for issuance
under our stock option and employee stock purchase plans will automatically
increase without stockholder approval. Investors will incur additional dilution
upon the exercise of outstanding stock options.
Our stock price may be volatile because our shares have not been publicly
traded before, and you may lose all or a part of your investment.
Prior to this offering, you could not buy or sell our common stock publicly.
The price of the common stock that will prevail in the market after this
offering may be higher or lower than the price you pay.
An active public market for our common stock may not develop or be sustained
after the offering and therefore we cannot predict the extent to how liquid
this market will become. We will negotiate and determine the initial public
offering price with the representatives of the underwriters and this price may
not be indicative of prices that will prevail in the trading market.
As a result you may be unable to sell your shares of common stock at or
above the offering price. The market price of the common stock may fluctuate
significantly in response to the following factors, most of which are beyond
our control:
. variations in our quarterly operating results;
. changes in securities analysts' estimates of our financial performance;
. changes in market valuations of similar companies;
. announcements by us or our competitors of significant contracts,
acquisitions, strategic partnerships, joint ventures or capital
commitments;
. loss of a major customer or failure to complete significant license
transactions;
14
<PAGE>
. additions or departures of key personnel; and
. fluctuations in stock market price and volume, which are particularly
common among securities of software and Internet-oriented companies.
We are at risk of securities class action litigation due to our expected stock
price volatility.
In the past, securities class action litigation has often been brought
against a company following a decline in the market price of its securities.
This risk is especially acute for us because technology companies have
experienced greater than average stock price volatility in recent years and, as
a result, have been subject to, on average, a greater number of securities
class action claims than companies in other industries. We may in the future be
the target of similar litigation. Securities litigation could result in
substantial costs and divert management's attention and resources, and could
seriously harm our business.
We have implemented anti-takeover provisions which could discourage or prevent
a takeover, even if an acquisition would be beneficial to our stockholders.
Provisions of our amended and restated certificate of incorporation and
bylaws, as well as provisions of Delaware law, could make it more difficult for
a third party to acquire us, even if doing so would be beneficial to our
stockholders. These provisions include:
. establishment of a classified board of directors requiring that not all
members of the board may be elected at one time;
. authorizing the issuance of "blank check" preferred stock that could be
issued by our board of directors to increase the number of outstanding
shares and thwart a takeover attempt;
. prohibiting cumulative voting in the election of directors, which would
otherwise allow less than a majority of stockholders to elect director
candidates;
. limitations on the ability of stockholders to call special meetings of
stockholders;
. prohibiting stockholder action by written consent, thereby requiring all
stockholder actions to be taken at a meeting of our stockholders; and
. establishing advance notice requirements for nominations for election to
the board of directors or for proposing matters that can be acted upon by
stockholders at stockholder meetings.
In addition, Section 203 of the Delaware General Corporations Law and the
terms of our stock option plans may discourage, delay or prevent a change in
control of Vitria.
Concentration of ownership among our existing executive officers, directors and
principal stockholders may prevent new investors from influencing significant
corporate decisions.
Upon completion of this offering, our executive officers, directors and
principal stockholders will beneficially own, in the aggregate, approximately
76.03% of our outstanding common stock. As a result, these stockholders will be
able to exercise control over all matters requiring stockholder approval,
including the election of directors and approval of significant corporate
transactions. This could have the effect of delaying or preventing a change of
control of Vitria and will make some transactions difficult or impossible
without the support of these stockholders. See "Principal Stockholders."
15
<PAGE>
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements. 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 "Risk Factors," 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. Moreover, neither we nor any other
person assumes responsibility for the accuracy and completeness of these
statements. We are under no duty to update any of the forward-looking
statements after the date of this prospectus to conform these statements to
actual results, unless required by law.
16
<PAGE>
USE OF PROCEEDS
We estimate that the net proceeds to us from the sale of the 3,000,000
shares of our common stock to be approximately $29.8 million, approximately
$34.4 million if the underwriters' over-allotment option is exercised in full,
at an assumed initial public offering price of $11.00 per share, after
deducting the estimated underwriting discounts and commissions and estimated
offering expenses.
We intend to use the net proceeds of this offering primarily for additional
working capital and other general corporate purposes, including increased
research and development expenditures, sales and marketing expenditures, and
general and administrative expenditures. We have not yet determined our
expected use of these proceeds, but we currently estimate that we will incur at
least $45 million in operating expenses during the next 12 months to expand our
investments in research and development, sales and marketing, and general and
administrative operations. These operating expenses will be partially offset by
the degree to which we continue to garner revenues from the ongoing licensing
of our BusinessWare product.
The amounts and timing of these expenditures will vary depending on a number
of factors, including the amount of cash generated by our operations,
competitive and technological developments and the rate of growth, if any, of
our business. We may also use a portion of the net proceeds to acquire
additional businesses, products and technologies, to lease additional
facilities, or to establish joint ventures that we believe will complement our
current or future business. However, we have no specific plans, agreements or
commitments to do so and are not currently engaged in any negotiations for any
acquisition or joint venture.
The amounts that we actually expend for working capital and other general
corporate purposes will vary significantly depending on a number of factors,
including future revenue growth, if any, and the amount of cash we generate
from operations. As a result, we will retain broad discretion in the allocation
of the net proceeds of this offering. Pending the uses described above, we will
invest the net proceeds of this offering in short term interest bearing,
investment-grade securities. We cannot predict whether the proceeds will be
invested to yield a favorable return. We believe that our available cash,
together with the net proceeds of this offering, will be sufficient to meet our
capital requirements for at least the next 12 months.
DIVIDEND POLICY
We have never paid or declared any cash dividends. We currently expect to
retain earnings for use in the operation and expansion of our business, and
therefore do not anticipate paying any cash dividends. See "Description of
Capital Stock."
17
<PAGE>
CAPITALIZATION
The following table sets forth the following information:
. Our actual capitalization as of June 30, 1999;
. Our pro forma capitalization after giving effect to the conversion of all
outstanding shares of preferred stock upon the closing of this offering;
and
. Our pro forma as adjusted capitalization to give effect to the sale of
the 3,000,000 shares of common stock at an assumed initial public
offering price of $11.00 per share in this offering, less the estimated
underwriting discounts and commissions and estimated offering expenses.
<TABLE>
<CAPTION>
June 30, 1999
-------------------------------
Pro Pro Forma
Actual Forma As Adjusted
-------- -------- -----------
(in thousands, except share
data)
<S> <C> <C> <C>
Stockholders' equity:
Convertible Preferred Stock: issuable in
series, $0.001 par value; 16,000,000 shares
authorized, 11,555,615 actual shares issued
and outstanding; no shares issued and
outstanding, pro forma; 5,000,000 shares
authorized; no shares issued and
outstanding, pro forma as adjusted.......... $ 12 $ -- $ --
Common Stock: $0.001 par value; 51,000,000
shares authorized, 15,710,107 actual shares
issued and outstanding; 27,265,722 shares
issued and outstanding, pro forma;
250,000,000 shares authorized; 30,265,722
shares issued and outstanding, pro forma as
adjusted.................................... 16 28 31
Additional paid-in capital................... 38,835 38,835 68,597
Unearned stock-based compensation............ (7,897) (7,897) (7,897)
Accumulated deficit.......................... (16,239) (16,239) (16,239)
-------- -------- --------
Total stockholders' equity................. 14,727 14,727 44,492
-------- -------- --------
Total capitalization..................... $ 14,727 $ 14,727 $ 44,492
======== ======== ========
</TABLE>
This table excludes the following shares:
. 1,992,073 shares of common stock issuable upon the exercise of stock
options outstanding under our stock option plans, and 3,708,792
additional shares of common stock available for issuance under these
stock option plans, of which options to purchase 1,414,500 shares of
common stock were granted in July and August 1999; and
. 1,500,000 shares of common stock available for issuance under our
employee stock purchase plan.
18
<PAGE>
DILUTION
The pro forma net tangible book value of our common stock, on June 30, 1999,
after giving effect to the conversion of all outstanding shares of preferred
stock upon the closing of the offering was approximately $14.7 million, or
approximately $0.54 per share. Pro forma net tangible book value per share
represents the amount of our total tangible assets less total liabilities
divided by the number of shares of common stock outstanding. Dilution in pro
forma net tangible book value per share represents the difference between the
amount per share paid by purchasers of shares of common stock in this offering
and the net tangible book value per share of our common stock immediately
afterwards. Assuming our sale of 3,000,000 shares of common stock offered by
this prospectus at an assumed initial public offering price of $11.00 per
share, and after deducting estimated underwriting discounts and commissions and
estimated offering expenses, our net tangible book value at June 30, 1999 would
have been approximately $44.5 million or $1.47 per share. This represents an
immediate decrease in net tangible book value of $0.93 per share to new
investors purchasing shares of common stock in this offering. The following
table illustrates this dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share................... $11.00
Pro forma net tangible book value per share at June 30, 1999.... $0.54
Increase per share attributable to new investors................ 0.93
-----
Pro forma net tangible book value per share after this offering... 1.47
------
Dilution per share to new investors............................... $ 9.53
======
</TABLE>
The following table summarizes, on a pro forma basis, as of June 30, 1999,
the differences between the number of shares of common stock purchased from us,
the total consideration paid and the average price per share paid by existing
stockholders and by the new investors purchasing shares in this offering. We
have assumed an initial public offering price of $11.00 per share, and we have
not deducted estimated underwriting discounts and commissions and estimated
offering expenses in our calculations.
<TABLE>
<CAPTION>
Shares Purchased Total Consideration Average
------------------ ------------------- Price
Number Percent Amount Percent Per Share
---------- ------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders.......... 27,265,722 90.1% $27,737,000 45.7% $ 1.02
New investors.................. 3,000,000 9.9 33,000,000 54.3 11.00
---------- ---- ----------- ----
Total........................ 30,265,722 100% $60,737,000 100%
========== ==== =========== ====
</TABLE>
The foregoing discussion and tables assume no exercise of any outstanding
stock options. The exercise of options outstanding under our stock option plans
having an exercise price less than the offering price would increase the
dilutive effect to new investors. See "Capitalization" and "Management--
Employee Stock Plans."
If the underwriters exercise their over-allotment in full, the following
will occur:
. the number of shares of common stock held by existing stockholders will
decrease to approximately 88.8% of the total number of shares of our
common stock outstanding; and
. the number of shares held by new investors will increase to 3,450,000, or
approximately 11.2% of the total number of our common stock outstanding
after this offering.
19
<PAGE>
SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with
Vitria's financial statements and related notes included elsewhere in this
prospectus and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" included elsewhere herein. The statement of operations
data for the years ended December 31, 1996, 1997 and 1998, and the balance
sheet data as of December 31, 1997 and 1998, are derived from the audited
financial statements included elsewhere in this prospectus. The statement of
operations data for the period from inception (October 17, 1994) to December
31, 1994 and for the year ended December 31, 1995, and the balance sheet data
as of December 31, 1994, 1995 and 1996, are derived from the audited financial
statements not included elsewhere in this prospectus. The statement of
operations data for the six months ended June 30, 1998 and 1999 and the balance
sheet data as of June 30, 1999 are derived from the unaudited financial
statements included elsewhere in this prospectus. The historical results are
not necessarily indicative of results to be expected for future periods.
<TABLE>
<CAPTION>
Six Months Ended
Period from Inception Year Ended December 31, June 30,
(October 17, 1994) to ------------------------------ ------------------
December 31, 1994 1995 1996 1997 1998 1998 1999
--------------------- ------ ------ ------ ------- -------- --------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Revenues:
License................ $ -- $ -- $ -- $ 955 $ 5,198 $ 1,027 $ 7,178
Service................ 67 376 1,042 1,425 1,633 262 3,630
Government grant....... -- -- 984 1,255 796 425 700
---- ------ ------ ------ ------- -------- --------
Total revenues....... 67 376 2,026 3,635 7,627 1,714 11,508
---- ------ ------ ------ ------- -------- --------
Cost of revenues:
License................ -- -- -- 18 -- -- 184
Service................ -- 15 183 338 2,109 320 2,654
Government grant....... -- -- 984 1,255 796 425 700
---- ------ ------ ------ ------- -------- --------
Total cost of
revenues............ -- 15 1,167 1,611 2,905 745 3,538
---- ------ ------ ------ ------- -------- --------
Gross profit............ 67 361 859 2,024 4,722 969 7,970
---- ------ ------ ------ ------- -------- --------
Operating expenses:
Sales and marketing.... -- -- 80 1,143 6,572 2,354 6,779
Research and
development........... 124 575 397 841 4,794 2,063 3,883
General and
administrative........ 28 37 147 695 1,807 633 1,601
Amortization of stock-
based compensation.... -- -- -- -- 1,424 338 1,952
---- ------ ------ ------ ------- -------- --------
Total operating
expenses............ 152 612 624 2,679 14,597 5,388 14,215
---- ------ ------ ------ ------- -------- --------
Income (loss) from
operations............. (85) (251) 235 (655) (9,875) (4,419) (6,245)
Interest income......... -- 14 8 75 306 160 234
---- ------ ------ ------ ------- -------- --------
Net income (loss)....... (85) (237) 243 (580) (9,569) (4,259) (6,011)
Deemed preferred stock
dividend............... -- -- -- -- -- -- (1,908)
---- ------ ------ ------ ------- -------- --------
Net income (loss)
available to common
stockholders........... $(85) $ (237) $ 243 $ (580) $(9,569) $ (4,259) $ (7,919)
==== ====== ====== ====== ======= ======== ========
Net income (loss) per
share available to
common stockholders:
Basic.................. $ -- $(0.05) $ 0.03 $(0.06) $ (0.80) $ (0.40) $ (0.60)
Diluted................ $ -- $(0.05) $ 0.02 $(0.06) $ (0.80) $ (0.40) $ (0.60)
Weighted average shares
used in computation of
net income (loss) per
share available to
common stockholders:
Basic.................. -- 4,843 7,044 9,915 12,003 10,643 13,098
Diluted................ -- 4,843 13,835 9,915 12,003 10,643 13,098
Pro forma basic and
diluted net loss per
share.................. $ (0.48) $ (0.33)
Pro forma basic and
diluted weighted
average shares......... 20,111 23,883
</TABLE>
<TABLE>
<CAPTION>
December 31,
------------------------------- June 30,
1994 1995 1996 1997 1998 1999
---- ---- ---- ------- ------- --------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents............. $ 33 $128 $399 $ 9,138 $12,792 $16,525
Working capital....................... (92) 179 585 9,762 12,336 11,941
Total assets.......................... 136 252 961 11,141 20,000 28,870
Deferred revenue...................... -- -- -- 223 2,874 8,680
Stockholders' equity (deficit)........ (85) 241 636 10,099 13,391 14,727
</TABLE>
20
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
Vitria was incorporated in October 1994. We initially generated revenues
exclusively through consulting contracts with third parties and government
grants from the National Institute of Standards and Technology, or NIST. In
June 1997, we commercially released our first product. With the initial release
of this product, we accelerated the development of our sales and marketing
organizations. We have incurred significant losses since inception, and as of
June 30, 1999, we had an accumulated deficit of $16.2 million.
We derive revenues from three sources: licenses, services, and government
grants. Since the introduction of our product in 1997, licenses have become our
primary source of revenue. 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, which is typically twelve months. Maintenance contracts
are usually paid in advance, and revenues from these contracts are recognized
ratably over the term of the contract. A majority of our customers use third-
party system integrators to implement our products. Customers typically
purchase additional consulting services from us to support their implementation
activities. These consulting services are generally sold on a time and
materials basis and recognized as the services are performed. We also offer
training services which are sold on a per student basis and recognized as the
classes are attended.
We have received government grants to conduct research and development on
emerging technologies. These grants permit us to be reimbursed for costs
related to these activities. We recognize revenues from these grants as the
research is performed and qualifying costs are incurred.
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. We believe international revenues will represent a
more meaningful component of our total revenues as we grow. To date, we have
not experienced significant seasonality of revenues. We expect that future
results may be affected by the fiscal or quarterly budget cycles of our
customers.
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. In 1998, sales to our ten largest
customers accounted for 86% of total revenues. In 1998, revenues from Level 3,
KPMG and NIST accounted for 30%, 12% and 10% of total revenues. For the six
month period ended June 30, 1999, revenues from Sprint and Qwest accounted for
16% and 10% of total 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.
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
21
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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.
As a result of these factors, we believe that period-to-period comparisons of
our results of operations are not necessarily meaningful and should not be
relied upon as indications of future performance. It is likely that in some
future quarter our operating results will be below the expectations of public
market analysts and investors. In this event, the price of our common stock
would likely decline.
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Results Of Operations
The following tables set forth statement of operations data for each of the
six quarters ended June 30, 1999, as well as the percentage of our total
revenues represented by each item. This information has been derived from our
unaudited financial statements. The unaudited financial statements have been
prepared on the same basis as the audited financial statements contained in
this prospectus and include all adjustments, consisting only of normal
recurring adjustments, that we consider necessary for a fair presentation of
this information. You should read this information in conjunction with our
annual audited financial statements and related notes appearing elsewhere in
this prospectus. Our quarterly operating results are expected to vary
significantly from quarter to quarter and you should not draw any conclusions
about our future results from the results of operations for any quarter.
<TABLE>
<CAPTION>
Mar. 31, June 30, Sept. 30, Dec. 31, Mar. 31, June 30,
1998 1998 1998 1998 1999 1999
-------- -------- --------- -------- -------- --------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Revenues:
License............... $ 139 $ 888 $ 1,643 $ 2,528 $ 3,487 $ 3,691
Service............... 151 111 279 1,092 1,472 2,158
Government grant...... 371 54 121 250 250 450
------- ------- ------- ------- ------- -------
Total revenues....... 661 1,053 2,043 3,870 5,209 6,299
------- ------- ------- ------- ------- -------
Cost of revenues:
License............... -- -- -- -- 62 122
Service............... 122 198 540 1,249 1,294 1,360
Government grant...... 371 54 121 250 250 450
------- ------- ------- ------- ------- -------
Total cost of
revenues............ 493 252 661 1,499 1,606 1,932
------- ------- ------- ------- ------- -------
Gross profit............ 168 801 1,382 2,371 3,603 4,367
------- ------- ------- ------- ------- -------
Operating expenses:
Sales and marketing... 701 1,653 1,585 2,633 2,889 3,890
Research and
development.......... 717 1,346 1,369 1,362 1,961 1,922
General and
administrative....... 234 399 617 557 726 875
Amortization of stock-
based compensation... 123 215 412 674 867 1,085
------- ------- ------- ------- ------- -------
Total operating
expenses............ 1,775 3,613 3,983 5,226 6,443 7,772
------- ------- ------- ------- ------- -------
Loss from operations.... (1,607) (2,812) (2,601) (2,855) (2,840) (3,405)
Interest income......... 91 69 56 90 129 105
------- ------- ------- ------- ------- -------
Net loss................ $(1,516) $(2,743) $(2,545) $(2,765) $(2,711) $(3,300)
======= ======= ======= ======= ======= =======
As a Percentage of Total Revenues:
Revenues:
License............... 21 % 84 % 80 % 65 % 67 % 59 %
Service............... 23 11 14 28 28 34
Government grant...... 56 5 6 7 5 7
------- ------- ------- ------- ------- -------
Total revenues....... 100 100 100 100 100 100
------- ------- ------- ------- ------- -------
Cost of revenues:
License............... -- -- -- -- 1 2
Service............... 19 19 26 32 25 22
Government grant...... 56 5 6 7 5 7
------- ------- ------- ------- ------- -------
Total cost of
revenues............ 75 24 32 39 31 31
------- ------- ------- ------- ------- -------
Gross profit............ 25 76 68 61 69 69
------- ------- ------- ------- ------- -------
Operating expenses:
Sales and marketing... 106 157 78 68 56 62
Research and
development.......... 108 128 67 35 38 30
General and
administrative....... 35 38 30 15 14 14
Amortization of stock-
based compensation... 19 20 20 17 16 17
------- ------- ------- ------- ------- -------
Total operating
expenses............ 268 343 195 135 124 123
------- ------- ------- ------- ------- -------
Loss from operations.... (243) (267) (128) (74) (55) (54)
Interest income......... 14 7 3 3 3 2
------- ------- ------- ------- ------- -------
Net loss................ (229)% (260)% (125)% (71)% (52)% (52)%
======= ======= ======= ======= ======= =======
</TABLE>
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Revenues
License. We recognized no license revenue in 1996. License revenues
increased from $955,000 in 1997 to $5.2 million in 1998 due to the growth in
the number of licenses to new customers. Comparing the six months ended June
30, 1998 to the six months ended June 30, 1999, license revenues increased from
$1.0 million to $7.2 million due to the growth in the number of licenses to new
customers and higher average transaction size. Our average transaction size has
increased due to larger deployments by our customers.
Service. Service revenues increased from $1.0 million in 1996, to $1.4
million in 1997, to $1.6 million in 1998. Prior to the introduction of our
product in 1997, we partially funded our operations through the provision of
custom design services. Throughout 1998, resources were redeployed from custom
design services to product support services in support of the newly introduced
product. This redeployment resulted in a volatile revenue stream and slower
overall growth in service revenues in 1998, as illustrated by the drop in
service related revenues in the second quarter of 1998. Comparing the six
months ended June 30, 1998 to the six months ended June 30, 1999, service
revenues grew from $262,000 to $3.6 million. This substantial increase in
service revenues began in the fourth quarter of 1998 due to the growth of
maintenance, support and consulting revenues associated with license agreements
signed in earlier periods. These service revenues continued to increase in the
first and second quarters of 1999 as we supported a number of new deployments
of our product.
Government grant. Government grant revenues were $984,000 in 1996, $1.3
million in 1997 and $796,000 in 1998. Government grant revenues were $425,000
in the six months ended June 30, 1998 and $700,000 in the six months ended June
30, 1999. 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. Based on our current awards, we can conduct research
activities and intend to seek reimbursement for up to an additional $1.1
million of associated costs. In order to receive reimbursement we must conduct
research in accordance with the terms of the grant. We do not expect to receive
future government grant revenues other than from existing grants. For a further
discussion of these grants, see "Business--Government Grants".
Cost of Revenues
License. Cost of license revenues consists of royalty payments to third
parties for technology incorporated in our product, as well as packaging and
distribution costs. We began incurring royalty payment obligations in the first
quarter of 1999 due to the licensing to our customers of a product which
incorporated third-party technology.
Service. Cost of service revenues consists of salaries, facility costs, and
payments to third party consultants incurred in providing customer support,
training, and implementation services. Cost of service revenues was $183,000 in
1996, $338,000 in 1997 and $2.1 million in 1998. As a percentage of our service
revenues, these costs represented 18% in 1996, 24% in 1997 and 129% in 1998. In
the six months ended June 30, 1998, cost of service revenues was $320,000, or
122% of service revenues and, in the six months ended June 30, 1999,
$2.7 million, or 73% of service revenues. In the last three quarters of 1998,
we hired additional service personnel in anticipation of supporting a larger
customer base in future periods. This increased investment, combined with
slower service revenue growth during this period, resulted in a substantial
increase in the cost of services measured as a percentage of service revenues.
Our cost of service revenues increased significantly in dollar amounts,
beginning in the fourth quarter of 1998, due to our engagement of a third-party
service provider to support our significantly 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. The employees who work on the grant activities are members of our
research and development team. Our work related to these grants varies from
quarter to quarter depending on the priorities in the research and development
organization. As eligible work is performed by the research and development
team, the allowable costs are reclassified from research and development to
cost of government grant revenues. Consistent with the grant provisions these
charged costs are exactly equal to the grant revenues recognized.
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<PAGE>
Operating Expenses
Sales and marketing. Sales and marketing expenses consist of salaries,
commissions, field office expenses, travel and entertainment and promotional
expenses. Sales and marketing expenses increased from $80,000 in 1996, to $1.1
million in 1997, to $6.6 million in 1998, and were $2.4 million in the six
months ended June 30, 1998 and $6.8 million in the six months ended June 30,
1999. These expenses decreased as a percentage of total revenues from
approximately 137% in the six months ended June 30, 1998 to approximately 59%
in the six months ended June 30, 1999. Comparing first quarter 1998 with second
quarter 1998, sales and marketing costs increased by $952,000. Of this increase
$600,000 was attributable to the expansion of our direct sales force, and
$280,000 was due to increased spending on promotional activities. The decrease
in sales and marketing expenses of $68,000 from the second quarter to the third
quarter of 1998 resulted from a $60,000 decrease in marketing personnel
expenses due to the departure of several marketing employees and a $168,000
decrease in promotional spending, partially offset by a $170,000 increase in
sales personnel expenses. The increase in sales and marketing expenses in
dollar amount and as a percentage of total revenues from the first quarter to
the second quarter 1999 resulted from hiring additional sales and marketing
personnel. 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. Research and development expenses include costs
associated with the development of new products, enhancements to existing
products, and quality assurance activities. These costs consist primarily of
employee salaries, benefits, and the cost of consulting resources that
supplement the internal development team. We have not capitalized any software
development costs and have expensed all of these costs as incurred. Research
and development expenses increased from $397,000 in 1996, to $841,000 in 1997,
to $4.8 million in 1998, and were $2.1 million in the six months ended June 30,
1998 and $3.9 million in the six months ended June 30, 1999. The increases in
the dollar amounts of research and development expenses during these comparison
periods were attributable to costs related to the hiring of additional
personnel and consulting fees. Our total research and development expenses,
which are calculated by combining research and development expenses with cost
of government grant revenues, consistently increased on a quarterly basis. 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. General and administrative expenses consist of
salaries for administrative, executive and finance personnel, recruiting costs,
information systems costs, professional service fees and allowances for
doubtful accounts. These expenses increased from $147,000 in 1996, to $695,000
in 1997, to $1.8 million in 1998 and were $633,000 in the six months ended June
30, 1998 and $1.6 million in the six months ended June 30, 1999. The increase
of $968,000 for the six months ended June 30, 1998 compared to June 30, 1999
was attributable to increases of $700,000 in personnel expenses, $110,000 of
professional service fees and $150,000 in the allowance for doubtful accounts
in response to the broadening of our customer base and increasing accounts
receivable balances. 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. Amortization of stock-based
compensation includes the amortization of unearned employee stock-based
compensation and expenses for stock granted to consultants in exchange for
services. Employee stock-based compensation expense is amortized over a five-
year vesting period using the multiple option approach. In connection with the
grant of some employee stock options, we recorded aggregate unearned stock-
based compensation of $11.1 million through June 30, 1999. In July and August
1999 we will record an additional $2.4 million in unearned stock-based
compensation. We amortized employee stock-based compensation expense of $1.3
million in 1998 and $2.0 million for the six months ended June 30, 1999. We
expect to record employee stock-based compensation expenses of approximately,
$1.4 million for the quarter ending September 30, 1999, $1.2 million for the
quarter ending December 31, 1999,
25
<PAGE>
$1.1 million for the quarter ending March 31, 2000 and $993,000 for the quarter
ending June 30, 2000. We anticipate this expense to decrease consistently in
future periods. Unearned compensation expense will be reduced for future
periods to the extent that options are terminated prior to full vesting. We
recorded expenses of $147,000 for the year ended December 31, 1998 in
connection with stock issued for services.
Interest Income
Interest income is primarily comprised of income earned on our cash and cash
equivalent balances.
Provision For Income Taxes
We incurred operating losses for all periods with the exception of 1996,
when we had net income of $243,000. Our 1996 tax liability, however, was
reduced due to the utilization of net operating loss carryforwards. Our
deferred tax assets primarily consist of net operating loss carryforwards,
nondeductible allowances and research and development tax credits. We have
recorded a valuation allowance for the full amount of our net deferred tax
assets, as the future realization of the tax benefit is not currently likely.
As of December 31, 1998, we had net operating loss carryforwards for federal
tax purposes of approximately $7.2 million and for state tax purposes of
approximately $3.3 million. These federal and state tax loss carryforwards are
available to reduce future taxable income and expire at various dates through
fiscal 2013. Under the provisions of the Internal Revenue Code, some
substantial changes in our ownership may limit the amount of net operating loss
carryforwards that could be utilized annually in the future to offset taxable
income.
Liquidity and Capital Resources
Since inception, we have financed our operations through private sales of
common and preferred stock, with net proceeds totaling $27.7 million. As of
June 30, 1999, we had $16.5 million in cash and cash equivalents, and $11.9
million in working capital with no outstanding debt.
Net cash generated in operating activities was $223,000 in 1996. Net cash
used in operating activities was $873,000 in 1997 and $6.8 million in 1998. Net
cash generated in operating activities was $107,000 for the six months ended
June 30, 1999. Net cash used to fund operating activities in each of these
periods reflect net losses, offset in part by increases in deferred revenues.
Our historical business practice is to provide payment terms that range from
thirty to ninety days from the invoice date. Payment terms that exceed ninety
days are not considered fixed and determinable and revenue is recognized as
payments become due. Net cash used in investing activities was $104,000 in
1996, $431,000 in 1997, $947,000 in 1998 and $1.8 million for the six months
ended June 30, 1999. Investing activities consist primarily of purchases of
computer hardware and software, office furniture and equipment and leasehold
improvements. Net cash generated from financing activities was $152,000 in
1996, $10.0 million in 1997, $11.4 million in 1998 and $5.4 million for the six
months ended June 30, 1999. Net cash generated from financing activities
consists primarily of net proceeds from the issuance of convertible preferred
stock.
We signed a lease for a new principal facility in April 1999. Lease payments
under the agreement commence in August 1999 and continue for forty-nine months,
resulting in aggregate lease expenses of approximately $500,000 per quarter. We
have commitments for capital expenditures in 1999 of $1.8 million related to
the establishment of this facility, which we moved into in August 1999.
We expect to experience significant growth in our operating expenses for the
foreseeable future in order to execute our business plan. As a result, we
anticipate that operating expenses and planned capital expenditures will
constitute a 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 and the net proceeds from the sale of the common stock in this
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 or 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.
26
<PAGE>
Recently Issued Accounting Pronouncements
Our revenue recognition policies are in accordance with Statement of
Position or SOP 97-2, "Software Revenue Recognition" which we adopted on
January 1, 1998, with the exception of the provision deferred by SOP 98-4,
"Deferral of the Effective Date of a Provision of SOP 97-2." The adoption of
SOP 97-2 resulted, for some agreements, in the deferral of software license
revenues that would have been recognized upon delivery of the related software
under prior accounting standards. Prior to January 1, 1998, we recorded revenue
in accordance with the provisions of SOP 91-1, "Software Revenue Recognition".
In December 1998, SOP 98-9, "Modification of SOP 97-2, Software Revenue
Recognition" was issued. We adopted SOP 98-9 for all transactions entered into
in fiscal 1999. The adoption of this statement did not have a material impact
on our operating results, financial position or cash flow.
In March 1998, SOP, 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use" was issued. SOP 98-1 establishes the
accounting for costs of software products developed or purchased for internal
use, including when these costs should be capitalized. We adopted SOP 98-1 in
fiscal 1999. The adoption of this statement did not have a material effect on
our financial position, results of operations or cash flow.
In June 1998, SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities," was issued. SFAS No. 133 establishes accounting and
reporting standards for derivative financial instruments and hedging activities
related to those instruments, as well as other hedging activities. Because we
do not currently hold any derivative instruments and do not engage in hedging
activities, we expect the adoption of SFAS No. 133 will not have a material
impact on our financial position, results of operations or cash flow. In July
1999, SFAS No. 137, "Accounting for Derivative Instruments and Hedging
Activities--Deferral of the Effective Date of FASB Statement No. 133" was
issued. We will be required to adopt SFAS No. 133 in fiscal 2000.
Qualitative and Quantitative Disclosures About Market Risk
We are developing products in the United States and currently market our
product in North America. We anticipate marketing our product in Europe in the
second half of 1999. As a result, our financial results could be affected by
factors including changes in foreign currency exchange rates or weak economic
conditions in foreign markets. As all sales are currently made in U.S. dollars,
a strengthening of the dollar could make our product less competitive in
foreign markets. Our interest income is sensitive to changes in the general
level of U.S. interest rates, particularly since the majority of our
investments are in short-term instruments. Due to the short-term nature of our
investments, we believe that there is no material risk exposure. Therefore, no
quantitative tabular disclosures are required.
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;
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<PAGE>
. 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 are seeking assurances from our vendors that 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 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 initiated 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 our assessment and
testing and perform any needed remediation of these systems by December 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.
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<PAGE>
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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<PAGE>
BUSINESS
This prospectus contains forward-looking statements that involve risks and
uncertainties. Our actual results may differ significantly from the results
discussed in these forward-looking statements. Factors that may cause
differences include, but are not limited to, those discussed in "Risk Factors."
We are a leading provider of eBusiness infrastructure software. Our product,
BusinessWare, provides the infrastructure which 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 using phone,
facsimile or mail. BusinessWare is designed to provide business managers with a
software infrastructure that gives them complete control and visibility of
their business operations, enabling them to reduce time to market, rapidly
respond to change, and manage the growing complexity of business interactions
with partners and customers.
We have initially targeted the telecommunications, business services,
manufacturing and financial services industries. To date, we have licensed
BusinessWare to over 30 companies, including CableVision, Covad, Deutsche Bank,
Duke Energy, FedEx, Fujitsu PC, Inacom, Level 3, PageMart Wireless, SBC, Sprint
and Verio. We intend to expand our position in our current markets and leverage
this position to penetrate other markets. As part of our strategy to establish
BusinessWare as the leading software infrastucture product for eBusiness, we
have developed strong working relationships with leading system integrators,
including Andersen Consulting and EDS. In addition, Vitria is developing
products targeted at specific industries and built on BusinessWare.
Industry Background
The use of the Internet to conduct business, often referred to as
"eBusiness," is fundamentally changing business-to-business, business-to-
consumer and business-to-employee interactions. Many companies are exploring
innovative business models to capitalize on this eBusiness opportunity. These
eBusiness participants include established companies transitioning to new
Internet-enabled business models, new companies formed specifically to deliver
products and services over the Internet, and providers of Internet hardware and
software, including networking and telecommunications companies. These
companies operate in an environment characterized by rapid change and
increasingly complex business interactions with partners and customers. The
business processes that define these complex interactions often span an
"extended enterprise" that links companies with an Internet-enabled network of
partners and customers.
To compete in this new environment, companies must conduct business in
"real-time" by communicating instantly with customers and partners over the
Internet, using a clearly defined set of business processes that can be
continuously analyzed and rapidly changed. From order fulfillment to customer
service, the benefits of automating business processes across the extended
enterprise are significant. For example, telecommunications service providers
that automate the transmission of customer orders between themselves and local
network providers can reduce service activation times, resulting in increased
customer satisfaction. Similarly, companies that allow their customers to place
and track their orders using applications accessible via the Internet can
increase revenue opportunities while reducing order management and customer
service costs.
Deploying software solutions that deliver these business benefits is a
significant challenge. Companies need to define and manage the business
processes that implement these solutions. Once defined, these business
processes must be tied into the underlying information technology, or IT,
systems that support them so that information can flow smoothly from the first
step of the process to the last. Business processes must often coordinate the
flow of information between several IT systems which operate separately. These
systems may utilize packaged software applications or custom software
applications developed by a company for internal use. These stand-alone systems
add additional complexity to the effort because they typically are not designed
to work with each other.
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The following diagram illustrates the complexity of conducting business
over the Internet. The diagram depicts the order fulfillment process for a
company that allows customers to place orders directly, using a Web-based
order entry system application, and outsources its inventory management and
shipping processes to a distribution partner. The diagram shows how each step
in the order fulfillment process directs the flow of information across
internal and external IT systems, and how these systems must be integrated to
smoothly process the customer order from initial placement to final product
delivery and customer billing.
[Graphic shows the flow of an order from a customer to a Web browser to an
order entry system to an order fulfillment system to an inventory management
system to a billing system.]
We believe companies must address the following requirements in order to
capitalize on the eBusiness opportunity:
. define, manage and automate their business processes;
. exchange business information between a company and its partners and
customers in a secure and reliable fashion using Internet standards;
. integrate the internal and external IT systems that implement business
process steps; and
. gather and analyze, in real time, key business and process information,
and use the results to automatically change business processes.
Current software products generally focus on just one or two of these
requirements. For example, enterprise application integration, or EAI, vendors
focus on integrating IT systems. Messaging software vendors focus on inter-
application communications. In particular, EAI products suffer from the
following limitations:
Weak Process Automation and Real-Time Analysis Functionality. EAI products
address the application integration aspect of an eBusiness infrastructure.
However, they do not generally provide the functionality to manage and
automate the business processes that define eBusiness solutions. In
addition, EAI products typically support analysis of business and process
information that is done only after the process is complete, as compared
to "real-time" analysis that occurs concurrently with the process.
Require Extensive IT Involvement. EAI products generally require multiple
custom software programs to define and implement business processes. As a
result, the design, implementation and modification of business processes
require extensive involvement by IT personnel. This makes it is difficult
for business managers to manage their business processes.
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Lack of Support for Internet Standards. Ideally, companies need to
seamlessly exchange information between their corporate networks and the
Internet. EAI products typically do not use Internet standards, for
example XML and HTTP, to describe and exchange information between IT
systems. This makes it difficult for companies to deploy eBusiness
solutions that link them with their partners and customers over the
Internet.
Limited Scalability. EAI products are typically built on "hub-and-spoke"
architectures that are designed for single site deployment. Generally,
solutions based on these architectures can neither be incrementally
expanded, or scaled, to support high transaction volumes nor distributed
across multiple locations without incurring significant administrative
overhead.
We believe that there is a significant market opportunity for an
infrastructure software product that addresses these limitations and enables
companies to rapidly capitalize on the eBusiness opportunity. The independent
research firm, International Data Corporation, identified this opportunity as
the "Businessware Management System" market in a May 1999 report. IDC
estimates that the market will grow from $313 million in 1998 to more than $5
billion by 2003.
Vitria Solution
Vitria is a leading provider of eBusiness infrastructure software.
BusinessWare enables companies to automate business processes across the
extended enterprise and integrates the underlying IT systems that must work
together to support these processes.
BusinessWare combines in a single solution the four elements that we
believe are essential for eBusiness infrastructure software:
(1) Business Process Automation--Empowers business users to define, manage
and automate business processes through a graphical modeling
environment;
(2) Internet-Based Communications--Exchanges business information between a
company and its partners and customers in a secure and reliable fashion
using Internet standards;
(3) Application Integration--Integrates the internal and external IT
systems that implement business process steps across the extended
enterprise; and
(4) Real-Time Analysis--Gathers key business and process information in
real time, analyzes the data in real time, and selectively uses the
results to automatically change business processes.
Once customers use BusinessWare to define their business process models and
integrate the underlying IT systems, BusinessWare automatically controls the
flow of information across the IT systems as specified by the process models.
BusinessWare continuously analyzes the customer's business processes and can
automatically change the processes in response to this analysis. This
capability allows companies to transform the information flowing through their
IT systems into "actionable intelligence" that enables business managers to
optimize their business operations.
BusinessWare allows customers to solve their eBusiness problems using
graphical models rather than developing custom programs. Rather than writing
software programs, business managers can create visual diagrams of business
processes, called "process models," using a point-and-click user interface.
BusinessWare then translates these process models into software programs that
automate the flow of information across a company's underlying IT systems. Our
graphical process models are "directly executable," which means that they can
be deployed immediately, without programming by IT personnel.
We believe that BusinessWare provides the following benefits to customers:
Easy for Business Managers to Use. The combination of our graphical process
modeling and automation functionality with our robust application integration
foundation, allows customers to focus on the business objectives of eBusiness
rather than the mechanics of solution implementation.
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Reduces Time to Market. We enable customers to reduce their time to market
by allowing them to graphically define and automate new business processes to
support the delivery of new products and services.
Leverages IT Investment. We help companies to preserve and leverage the
substantial IT investment they have made by allowing them to assemble eBusiness
solutions using their existing IT systems.
Allows Rapid Response to Change. We enable customers to graphically model
their existing business processes, and then continuously refine and optimize
them as business conditions change over time. To change a business process,
managers simply change the associated graphical model.
Provides a Comprehensive Solution. BusinessWare combines the four elements
of an eBusiness infrastructure software product in a single comprehensive
solution. This eliminates the need for our customers to purchase and integrate
separate solution components from multiple vendors.
Scales to Support High Transaction Volumes and Distributed Deployment. Our
product features an architecture that uses the same distributed processing
principles as those used on the Web. Unlike alternative "hub-and-spoke"
architectures that are optimized for single site deployment, our "federated"
architecture allows customers to incrementally add servers to support
increasing loads, without adding administrative complexity.
Enables Mission-Critical Deployments. The importance of our customers'
eBusiness initiatives demand that our software meets high standards for
performance, security and reliability. BusinessWare has been designed for
superior performance to accommodate the high transaction volumes enabled by the
Internet. In addition, our solution was designed to ensure secure communication
of business information across the extended enterprise using rigorous
authentication and data encryption technologies. BusinessWare provides high
availability through multiple server redundancy and automatic failover to
backup systems.
Strategy
Our objective is to establish BusinessWare as the leading infrastructure
software product for real-time eBusiness. Key elements of our strategy to
achieve this objective include:
Leverage and Expand Strategic Alliances. We intend to leverage our
relationships with leading system integrators, including Andersen Consulting
and EDS, to extend our reach and provide comprehensive solutions to our
customers. System integrators help our customers deploy and install our
product. We have established a group to focus exclusively on strengthening and
expanding these relationships. We believe these firm's relationships with the
most senior levels of management facilitate access to strategic projects which
often generate large commitments from our customers and can reduce the length
of our sales cycles. In addition, we believe the software deployment expertise
and industry knowledge of system integrators shortens the implementation time
of our product and helps us to secure add-on business.
Develop Market-Focused Solutions. We are developing packaged eBusiness
solutions built on BusinessWare which capture and automate business processes
used widely in specific industries. We intend to leverage the industry
expertise of our system integrator partners and our customers to rapidly build
these market-focused solutions. We believe customers and partners will derive
significant time-to-market benefits and reduce their implementation and
maintenance costs by deploying these out-of-the-box business solutions. This
strategy also provides us with additional revenue opportunities while reducing
our internal development costs.
Expand Product and Technology Leadership. We have established an
infrastructure software product that combines business process automation,
Internet-based communications, application integration, and real-time analysis
in a single unified environment. We intend to continue to introduce innovative
products which enable our customers to rapidly deploy complex business
solutions and extend their enterprise easily and cost-effectively. We also
intend to extend our technological leadership by continuing to invest
significantly in research and development. We have assembled a team of
prominent developers and engineers with expertise in Internet communication
protocols, messaging technologies, and enterprise software and have established
a corporate culture which fosters continuous product innovation. In addition,
by promoting and embracing emerging Internet standards, we intend to facilitate
the broad acceptance of our product.
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Target Fast-Growing Vertical Markets. To date, we have targeted the
telecommunications, business services, manufacturing and financial services
industries. These markets are characterized by high rates of growth, dynamic
business processes and rapid adoption of eBusiness solutions. We intend to
expand our position in these markets and leverage this position to target other
markets.
Extend Relationships with Customers. The strategic importance of
BusinessWare to our customers allows us to develop relationships with their
senior decision makers. This visibility to senior management and a focused
implementation approach facilitate the rapid adoption and deployment of
BusinessWare throughout the organization. We intend to leverage these
relationships as we introduce new products and services. Additionally, because
BusinessWare is used by companies to automate and manage their interactions
across their extended enterprise, we are introduced to opportunities with our
customers' business partners.
Products
BusinessWare is an eBusiness infrastructure software product designed to
provide customers with a comprehensive infrastructure for rapidly capitalizing
on the eBusiness opportunity. The BusinessWare product is illustrated and
summarized below:
[Graphic: Depicts the components of the Vitria product including the following:
.BusinessWare Modeler
.BusinessWare Administrator
.BusinessWare Server
.BusinessWare Automator
.BusinessWare Analyzer
.BusinessWare Communicator
.BusinessWare Connectors and Transformers
.BusinessWare Common Services
.Customer's IT systems]
BusinessWare Modeler. The Modeler is BusinessWare's process modeling
component. Business managers use the Modeler to create graphical models of
their business processes using a point-and-click interface. These process
models provide an intuitive visual representation of interdependent processing
steps. Users can add business rules to each processing step to provide
additional modeling flexibility. Once specified and saved in the BusinessWare
Repository, process models can be directly executed by the BusinessWare
Automator. The Modeler supports advanced modeling constructs that allow users
to define and manage complex, real-world business processes. The Modeler
supports Unified Modeling Language, the industry standard for business process
modeling and automation.
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BusinessWare Server. The BusinessWare Server provides the host environment
for five functional components: Automator, Analyzer, Communicator, Connector
and Transformer. The BusinessWare Server is designed to provide a set of common
services that are shared by each of these components:
. Security: provides rigorous support for authentication, data encryption
and access control.
. Transaction management: ensures the integrity of business processes and
related updates to underlying IT systems.
. Persistence: provides automatic recovery in the event of system or
network failures.
. Repository: stores and manages all BusinessWare metadata, such as process
models.
BusinessWare Automator. Automator is BusinessWare's process automation
component. It executes the business process models defined by users in the
Modeler and stored in the BusinessWare Repository. Automator automates business
processes by coordinating the flow of information among the underlying IT
systems.
BusinessWare Analyzer. Analyzer selectively gathers and analyzes business
and process information throughout the extended enterprise. Analyzer provides
business managers rapid access to key statistics, such as the number of on-time
shipments, which they use to manage their business. Analyzer also helps
companies to rapidly identify processing bottlenecks, thus providing them with
the information they need to support their continuous process improvement
efforts. Analyzer's results can be automatically fed back into Automator to
change business processes in real time.
BusinessWare Communicator. Communicator provides the communications backbone
that ties together all of the BusinessWare components and the IT systems that
they integrate. Communicator provides fast and secure information delivery and
allows the customer to choose between multiple quality of service options such
as guaranteed delivery or best effort. Communicator supports Internet
standards, including HTTP and XML. Communicator is designed to interoperate
with third-party messaging products.
BusinessWare Connectors and Transformers. Connectors and Transformers
together provide BusinessWare's application integration functionality, enabling
heterogeneous IT systems to exchange information.
. Connectors translate business information to Internet standards, such as
XML. We provide off-the-shelf Connectors for a number of popular packaged
applications, messaging systems and databases. We also provide a toolkit
that enables customers to rapidly develop Connectors for custom or legacy
systems.
. Transformers map data structures from one IT system to another. In
addition to our own transformation components, customers have the option
to augment their BusinessWare solution with transformation products from
third parties.
BusinessWare Administrator. Administrator is BusinessWare's graphical
systems management and monitoring component. Administrator allows systems
administrators to perform local and remote administration from any BusinessWare
server.
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Customers and Case Studies
We have initially targeted the telecommunications, business services,
manufacturing and financial services industries. As of June 30, 1999, over 30
customers had licensed BusinessWare, including the following representative
list of current customers who have purchased $250,000 or more of licenses and
related services:
<TABLE>
<S> <C>
A.B. Watley, Inc. Hewitt Associates LLC
Advanced Radio Telecom Corp. ICG Communications, Inc.
American Century Services
Corporation Inacom Corporation
CableVision Systems Corporation KPMG LLP
Covad Communications Company Level 3 Communications, Inc.
Deutsche Bank AG PageMart Wireless, Inc.
Digital Microwave Corporation Rhythms NetConnections Inc.
Duke Energy Corporation SBC Communications, Inc.
Sprint Communications
Federal Express Corporation Company, L.P.
FirstWorld Communications, Inc. Verio, Inc.
Fujitsu PC Corporation
</TABLE>
The following case studies illustrate how some of our customers are using
BusinessWare:
Covad Communications Group, Inc.
Covad is a leading high-speed Internet and network access provider offering
high speed Internet access through Internet Service Providers, or ISPs. Covad
sells its service indirectly to small and medium businesses and consumers
through ISPs and sells directly to large enterprise customers.
Opportunity: As a new player in the fiercely competitive
telecommunications market, Covad needed to make it simple and inexpensive
for ISPs to resell Covad's high-speed Internet access service.
Specifically, they wanted to create an eBusiness link with ISPs that would
automate the ordering process for high-speed Internet access, improve
service levels and lower operating costs.
Solution: Covad is using BusinessWare to build an eBusiness solution
designed to enable ISPs to automate their business interactions with Covad.
The solution will automate the ordering process for Internet access and
integrate each ISP's order entry system with Covad's order management
system. Covad expects the solution to have significant business benefits
for both themselves and their ISP partners. Covad believes that major
benefits for ISPs will include faster time to market with a DSL-based
Internet access service, automatic access to order status information, and
lower administration costs. Major benefits for Covad are expected to
include faster and more extensive communications with their ISP partners,
lower operating costs, and the ability to make it easier for ISPs to do
business with Covad than with competing providers of high-speed Internet
access.
Fujitsu PC Corporation
Fujitsu PC Corporation, or FPC, is a subsidiary of Fujitsu Limited, a
leading provider of information technology products and solutions for the
global marketplace. FPC delivers high-performance mobile computing solutions
for the North American market.
Opportunity: Faced with growing competitive pressures, FPC needed to
automate their order fulfillment process for custom-configured notebook
computers. This required FPC to integrate disparate IT systems, including a
Web-based order configuration system, an enterprise resource planning
system, and a manufacturing execution system. FPC's goal is to reduce the
time required to ship orders and improve customer satisfaction.
Solution: FPC is using BusinessWare to link the IT systems that support
their order fulfillment process. This will eventually automate the entire
fulfillment process for custom-configured notebook
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computers. The BusinessWare solution is expected to provide end-to-end
visibility and control of the process, significantly reducing the time
required to take customer orders, and assemble and ship custom-configured
notebook computers. FPC also expects to lower costs and increase customer
satisfaction.
Inacom Corporation
Inacom Corp. is a global Fortune 500 technology services leader. The company
designs, implements and manages distributed technology infrastructure solutions
that optimize clients' return on IT investments.
Opportunity: One of Inacom's services is to provide an outsourced PC
service and support operation to meet the needs of Fortune 500 companies
and major PC hardware vendors. This service is designed to reduce PC
service and support costs. Inacom needed a solution that would allow them
to automate these processes, tailor them to the unique requirements of each
client, and proactively manage them to best-in-industry service levels.
Solution: Inacom is using BusinessWare to automate their PC service and
support processes and to integrate their internal IT systems, including a
legacy system for managing service dispatch requests, with their customers'
systems. The system is designed to allow Inacom's clients to send PC
service dispatch requests over the Internet, using standard protocols, to
Inacom's PC repair technicians. The solution is also expected to allow
clients to receive automatic status updates on all open service requests.
Each of the customers listed above has completed their analysis and design
of an eBusiness solution using BusinessWare and is currently implementing our
product.
Technology
We have assembled a team of software engineers with expertise in distributed
computing, model-driven business process automation, and real-time query
processing. Our founders, Dr. JoMei Chang and Dr. M. Dale Skeen, have
established reputations as technology innovators. Dr. Chang is the principal
patent author for one of the first "reliable multicast" protocols. Multicast
protocols reduce traffic congestion over the Internet. Dr. Skeen is the
principal author of multiple patents for "publish-and-subscribe" communication,
which is the preferred communication method for enterprise application
integration. Publish-and-subscribe is a communication method that allows IT
systems to exchange information anonymously. Following an open competition, the
National Institute of Standards and Technology's Advanced Technology Program
awarded us three prestigious, multi-million dollar research grants to address
complex business integration and supply chain management problems. For a
description of these awards, see "Government Grants."
Model-Driven Business Process Automation. We have pioneered and
commercialized the concept of direct manipulation and execution of business
processes through graphical models. This powerful concept combines visual
process modeling with business rules to express and automate complex business
scenarios using terminology and concepts familiar to business users. Advanced
modeling functions, including nested and concurrent processes, are designed to
provide users with the sophisticated modeling power they need to express the
real-world complexity of today's business operations. In addition, our product
allows companies to define business processes that can automatically select
alternate processing steps based on current business conditions.
Real-Time Analysis. We have pioneered and commercialized the concept of a
general purpose real-time query tool. This tool allows users to define queries
that continuously monitor and analyze, in real time, information flowing across
their business processes and IT systems. Real-time query processing is
fundamentally different from more traditional query processing. Whereas
traditional query processing optimizes the one-time, bulk evaluation of a
single query across a large number of records, Vitria's technology is designed
to optimize the incremental evaluation of a single new message against a large
number of outstanding queries. Since it is possible to have thousands of real-
time queries concurrently active, we have developed patent-pending algorithms
for optimizing the processing of a large number of concurrent queries.
Vitria has also pioneered technology to perform complex real-time queries
that join two or more real-time information streams together, or that join a
real-time information stream to information stored in a database.
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This capability significantly increases the power of real-time querying. We
have developed patent-pending algorithms to execute and optimize these complex,
real-time queries.
Scalability and Reliability. BusinessWare implements an architecture and a
naming scheme modeled after that used by the Web. This architecture partitions
workload among an unlimited number of servers and supports incremental
expansion, as needed. Additional servers can be added in a manner that is
transparent to end users and system administrators, resulting in scalability to
high orders of magnitude without unnecessary administrative overhead.
BusinessWare is also designed to support the caching and replication of
information across multiple servers to provide faster information access and
robust failover and recovery support in the event of system or network
failures. BusinessWare supports the option to use a reliable multicast protocol
that is built on top of the Internet-based IP multicast protocol. Multicast
protocols provide a particularly efficient method for disseminating real-time
information to a large number of users. The combination of our architecture,
extensive use of duplicated information stored in multiple locations, and
support for multicast protocols is designed to enable our solutions to
communicate business information across the extended enterprise with little
latency, and high scalability and reliability.
Security. Security is essential for business-critical applications operating
over extranets and the Internet. BusinessWare provides a security framework
based on the widely accepted Secure Socket Layers, or SSL, standard. Our
security framework supports unique "digital signatures" for each user, as well
as multiple means of verifying a user's identity and encrypting computer data.
The framework is designed to be easily extended to support additional user
verification and encryption services. All BusinessWare components provide
discretionary authorization of users through the use of a list of authorized
users of the IT system. In addition, BusinessWare can support multiple security
domains and provide secure communication between domains. Security domains
allow the selective and secure sharing of information among business partners,
while allowing each partner to retain control over their own security policies.
Sales and Marketing
We license our product and sell services primarily through our direct sales
organization, complemented by the selling and support efforts of our system
integrators and other strategic partners. As of June 30, 1999, our sales force
consisted of 51 sales professionals and technical sales engineers located in
nine domestic locations and an office in the United Kingdom. We have sales
offices in the greater metropolitan areas of Boston, Chicago, Dallas, Denver,
Irvine, New York City (two offices), San Jose, Washington D.C., and London,
England. System engineers who provide pre-sales support to potential customers
on product information and deployment capabilities complement our direct sales
professionals. We plan to significantly expand the size of our direct sales
organization and to establish additional sales offices domestically and
internationally.
Our sales process requires that we work closely with targeted customers to
identify short-term technical needs and long-term goals. Our sales team, which
includes both sales and technical professionals, then works with the customer
to develop a proposal to address these needs. In many cases, we collaborate
with our customers' senior management team, including the chief executive
officer, chief information officer and chief financial officer, to develop
mission-critical applications. The level of customer analysis and financial
commitment required for many of our product implementations has caused our
sales cycle to range from two to nine months.
We focus our marketing efforts on educating potential customers, generating
new sales opportunities, and creating awareness of our product and their
applications. We conduct a variety of marketing programs to educate our target
market, including seminars, trade shows, direct mail campaigns, press
relations, and industry analyst programs.
Strategic Relationships
To enhance the productivity of our sales and service organizations, we have
established relationships with system integrators, value-added resellers and
complementary technology vendors.
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System Integrators. We have established strategic relationships with a
number of leading system integrators including Andersen Consulting and EDS.
Many of our system integrators have deep relationships across a broad range of
enterprise customers and our relationships with these system integrators often
enable us to reach key decision makers within these enterprises more quickly,
thus reducing sales cycles. Working with system integrators enables us to
leverage our service organization and shorten solution implementation time. In
addition, by leveraging our partners' domain expertise, we can more
effectively and rapidly build custom templates which codify business process
solutions for vertical markets.
Value-Added Resellers. We also market BusinessWare through value-added
resellers or "VARs." VARs enable us to seed the market with specific pre-
packaged solutions built on the BusinessWare platform. Many of these VARs
specialize in providing solutions to particular industries including
telecommunications and financial services. We intend to leverage our VARs'
industry expertise to deliver solutions that accelerate our penetration in key
markets. To date, there have been no transactions involving licenses with VARs
that allow subsequent resale to end-user customers.
Complementary Technology Vendors. We also work with leading application
software, database and hardware vendors to ensure compatibility of
BusinessWare with their software and hardware. We have relationships with
leading companies including Clarify, Inc., Hewlett-Packard Company, IBM,
Informix Corp., Microsoft Corporation, Oracle Corp., Siebel Systems, Inc., Sun
Microsystems Inc., Sybase Inc. and The Vantive Corporation.
Service and Support
The primary function of our professional services organization is to
facilitate the implementation of our product by system integrators. We provide
services directly to our customers and to system integrators for BusinessWare
project planning, implementation and performance. Our professional services
organization works closely with system integrators to train their personnel in
the design and implementation of our product.
Customer support is available by telephone and over the Internet seven days
a week, 24 hours a day. Our education services group delivers education and
product training to our customers and strategic partners, concerning the
design of business solutions using BusinessWare, as well as the technical
aspects of deployment, use and maintenance. Our professional service and
customer support organizations consisted of 31 employees as of June 30, 1999.
Research and Development
As of June 30, 1999, our engineering group consisted of 65 employees,
divided into the following groups:
Product Development. Our product development teams are organized around
components of BusinessWare. Each component is developed independently in
order to speed design and testing. Development of the customer interface
is centralized, with the goal of creating a consistent and unified product
look and feel.
Advanced Research. Our advanced research group works independently from
our product development teams to research and develop advanced
architectures and technologies. This group also closely monitors
developments in industry standards related to eBusiness, Internet
technologies, operating systems, networks and software applications.
Quality Assurance and Platform Support. This group designs and manages a
process designed to identify and prevent software defects throughout the
development cycle.
Documentation. This group is responsible for creating and maintaining
customer and system integrator documentation for our products.
Research and development expenses, together with expenditures under NIST
grants, were $1.4 million in 1996, $2.1 million in 1997 and $5.6 million in
1998.
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Government Grants
We have received three governmental research grants that have funded, and
continue to fund, portions of our research and development. We were awarded our
first grant in January 1996 by the National Institute of Standards and
Technology, commonly referred to as NIST, under its advanced technology
program. This NIST program is a partnership between government and private
industry to encourage commercially promising, but highly challenging research.
We used this grant to fund research and development of model-driven
technologies for integrating IT systems. We received an additional grant from
NIST in October 1997 to conduct further research and development into these
technologies. Under the terms of these grants, we retain all intellectual
property rights to all research results except that the federal government has
a non-exclusive, non-transferable, paid-up license to any patents arising from
this research. In addition, the NIST grants require us to commercially license
the research results. We are fulfilling this obligation by incorporating our
results into our BusinessWare software products.
Our third grant was awarded to us as a member of the Extended Enterprise
Coalition for Integrated Collaborative Manufacturing Systems, also known as
EECOMS. EECOMS is a consortium of vendors, customers and providers of enabling
technologies, whose goal is to develop new frameworks to improve supply chain
logistics, product delivery to customers, product inventories and the
competitive ability of U.S. manufacturers in the global marketplace. We were
awarded this grant in January 1998 and the grant is scheduled to conclude in
December 2000. Funds under this grant have been used to develop supply chain
scenarios for the extended enterprise. Research results from this grant are
jointly owned by EECOMS and the federal government is granted a non-exclusive
license to these research results and related intellectual property rights. We
have not used these funds for technology development.
Competition
The market for our product is competitive, evolving and subject to rapid
technological change. The intensity of competition is expected to increase in
the future. We believe that eBusiness infrastructure software must address four
requirements: (1) business process automation, (2) Internet-based
communications, (3) application integration, and (4) real-time analysis. Most
competitive products focus on either application integration or communications.
Enterprise application integration software from companies such as Active
Software, Inc., CrossWorlds Software, Inc. and New Era of Networks, Inc.
focuses on integrating IT systems. Messaging software from companies such as
IBM and Tibco Software Inc. focuses on inter-application communications. We
believe BusinessWare's ability to address all four requirements is an important
differentiating factor. In the future, these companies may expand the breadth
of their product offerings, including business process automation and real-time
analysis. In this event, we could face greater competition and our business
could be seriously harmed. In addition, "in house" information technology
departments of potential customers have developed or may develop systems that
substitute 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. We may in the future also encounter competition from major
enterprise software developers including Oracle Corporation, PeopleSoft, Inc.,
SAP AG, and Microsoft Corporation.
We believe that the principal competitive factors in our market include:
. the breadth and depth of solutions;
. product quality and performance;
. ability of products to operate with multiple software applications;
. ability to implement solutions;
. customer service;
. relationship with system integrators;
40
<PAGE>
. establishment of a significant base of reference customers;
. strength of core technology; and
. product price.
Although we believe that our solutions 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.
Intellectual Property and Other Property Rights
Our success is dependent upon our ability to develop and protect our
proprietary technology and intellectual proprietary rights. We rely primarily
on a combination of contractual provisions, confidentiality procedures, trade
secrets, and patent, copyright and trademark laws to accomplish these goals.
We license BusinessWare pursuant to non-exclusive license agreements which
impose restrictions on customers' ability to utilize the software. In addition,
we seek to avoid disclosure of our trade secrets, including but not limited to,
requiring employees, customers and others with access to our proprietary
information to execute confidentiality agreements with us and restricting
access to our source code. We also seek to protect our software, documentation
and other written materials under trade secret and copyright laws.
We have four U.S. patent applications pending. It is possible that the
patents that we have applied for, if issued, or our potential future patents
may be successfully challenged or that no patent will be issued from our patent
application. It is also possible that we may not develop proprietary products
or technologies that are patentable, that any patent issued to us may not
provide us with any competitive advantages, or that the patents of others will
seriously harm our ability to do business.
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.
Use by others of our proprietary rights could materially harm our business.
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.
It is also possible that third parties will claim that we have infringed
their current or future products. We expect that eBusiness developers will
increasingly be subject to infringement claims as the number of products in
different industry segments overlap. Any claims, with or without merit, could
be time-consuming, result in costly litigation, prevent product shipment, 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 was successful and we could not obtain a license on acceptable terms
or license a substitute technology or redesign to avoid infringement, our
business would be harmed.
Employees
As of June 30, 1999, we had a total of 178 employees, including 65 in
research and development, 61 in sales and marketing, 31 in customer support,
professional services and training, and 21 in administration and finance. None
of our employees is represented by a collective bargaining agreement, nor have
we experienced any work stoppage. We consider our relations with our employees
to be good.
Facilities
Our principal sales, marketing, research and development and administrative
offices are currently located in approximately 63,000 square feet in Sunnyvale,
California. This lease will expire in August 2003.
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<PAGE>
MANAGEMENT
Executive Officers and Directors
Our executive officers and directors and information about them as of July
31, 1999 are as follows:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<C> <C> <S>
JoMei Chang, Ph.D. .......... 46 President, Chief Executive Officer and
Director
M. Dale Skeen, Ph.D. ........ 44 Chief Technology Officer and Director
Jay W. Shiveley, III......... 42 Senior Vice President, Worldwide Sales
Aleksander E. Osadzinski..... 41 Vice President, Marketing
Paul R. Auvil, III........... 35 Vice President, Finance, Chief Financial
Officer and Secretary
Robert M. Halperin (1)(2).... 71 Director
John L. Walecka (1).......... 39 Director
William H. Younger, Jr. (2).. 49 Director
</TABLE>
- ---------------------
(1) Member of the Audit Committee.
(2) Member of the Compensation Committee.
JoMei Chang, Ph.D., co-founded Vitria in 1994 and has been our President,
Chief Executive Officer and a Director since Vitria's inception. Prior to
founding Vitria, Dr. Chang was Vice President and General Manager, Trader
Workstation and General Manager, Emerging Technologies from 1986 to 1994 at
Teknekron Software Systems, now TIBCO, Inc., a software company. From 1984 to
1986 she served as a senior engineer in the Network File System group at Sun
Microsystems. Dr. Chang holds a B.S. in Computer Science from National
ChiaoTung University, Taiwan and a Ph.D. in Electrical Engineering on Database
Management Systems from Purdue University.
M. Dale Skeen, Ph.D., co-founded Vitria in 1994 and has been our Chief
Technology Officer and a Director since Vitria's inception. Prior to founding
Vitria, Dr. Skeen worked at TIBCO where he served as Chief Scientist from 1986
to 1994. Dr. Skeen was a research scientist at IBM's Almaden Research Center
from 1984 to 1986. Dr. Skeen was on the faculty at Cornell University from 1981
to 1984. Dr. Skeen holds a B.S. in Computer Science from North Carolina State
University and a Ph.D. in Computer Science on Distributed Database Systems from
the University of California, Berkeley.
Jay W. Shiveley, III, has been our Senior Vice President, Worldwide Sales
since 1997. He was Senior Vice President of Operations of Forte Software, Inc.,
a software company, from 1991 to 1997. From 1984 to 1991, he worked at Oracle
Corporation and was a principal at Lawson Associates, a financial software
company, from 1981 to 1984. Mr. Shiveley holds a B.S. in Finance and Accounting
from Mankato State University.
Aleksander E. Osadzinski, has been our Vice President, Marketing since 1998.
From 1996 to 1998 he was Vice President of Sales and Marketing at Be, Inc., a
company specializing in computer operating systems. From 1994 to 1996,
Mr. Osadzinski held a number of management positions at Grass Valley Group, a
producer of digital video production equipment, most recently as General
Manager of the Telecommunications Unit. Mr. Osadzinski has also held a number
of management positions in both the United States and Europe at
Sun Microsystems, including Vice President, Markets and Product Strategy from
1986 to 1994. Mr. Osadzinski attended Dulwich College and Bristol University in
the United Kingdom.
Paul R. Auvil, III, has been our Vice President, Finance and Chief Financial
Officer since 1998, and Secretary since 1999. From 1997 to 1998, he served as
Vice President and General Manager of the Internet Products Division of VLSI
Technology Inc., a semiconductor company, and as its General Manager, PC
42
<PAGE>
Products Strategic Business Unit from 1996 to 1997. Mr. Auvil also held various
other positions at VLSI, including European Controller in 1992 and Director of
Financial Planning from 1993 to 1995. Mr. Auvil holds a Bachelor of Engineering
from Dartmouth College and Master of Management from the Kellogg Graduate
School of Management at Northwestern University.
Robert M. Halperin, has been a Director since 1994. Mr. Halperin has been an
advisor to Greylock Management, a venture capital firm, since 1990. Mr.
Halperin was also Vice Chairman of the Board of Raychem Corporation, a
materials science company, from 1990 to 1994, and previous to that served as
its President. Mr. Halperin is also a director of Avid Technology Inc., a
digital media systems company, theGlobe.com, an online community website
operator, as well as several privately-held companies. In addition, Mr.
Halperin serves on the Board of Directors of the Associates of Harvard Business
School, the Harvard Business School Publishing Co. and Stanford Health Services
and also is a Life Trustee of the University of Chicago. Mr. Halperin holds a
Ph.B. in Liberal Arts from the University of Chicago, a Bachelor of Mechanical
Engineering from Cornell University and an M.B.A. from Harvard Business School.
John L. Walecka, has been a Director since 1997. He has been a general
partner of venture capital funds associated with Brentwood Associates since
1990. From 1984 to 1990, Mr. Walecka was an associate with Brentwood
Associates. He is also a director of Rhythms NetConnections Inc., a provider of
high-speed Internet access. Mr. Walecka holds a B.S and M.S. in Engineering and
an M.B.A. from Stanford University.
William H. Younger, Jr., has been a Director since 1997. Mr. Younger is a
managing director and a general partner of Sutter Hill Ventures, a California
Limited Partnership, a venture capital firm, where he has been employed since
1981. Mr. Younger currently serves as a director of Forte Software, Inc., a
software company, and several privately-held companies. Mr. Younger holds a
B.S.E.E. degree from the University of Michigan and an M.B.A. from Stanford
University.
JoMei Chang, Ph.D. our President, Chief Executive Officer and a Director and
M. Dale Skeen, Ph.D., our Chief Technology Officer and a Director, are married
to each other. There are no other family relationships between any of our
directors or executive officers.
Board Committees
Audit committee. Our audit committee currently consists of Messrs. Halperin
and Walecka. The audit committee reviews our internal accounting procedures and
consults with and reviews the services provided by our independent accountants.
Compensation committee. Our compensation committee currently consists of
Messrs. Younger and Halperin. The compensation committee administers our stock
option plans, reviews and approves the compensation and benefits of all our
officers and establishes and reviews general policies relating to compensation
and benefits of our employees.
Director Compensation
Directors currently receive no cash compensation from us for their services
as members of the board or for attendance at committee meetings.
Compensation Committee Interlocks and Insider Participation
None of our executive officers serve as a member of the board of directors
or compensation committee of any entity that has one or more executive officers
serving as a member of our board of directors or compensation committee.
Messrs. Younger and Halperin serve as members of the compensation committee.
Individuals and investment entities affiliated with Messrs. Younger and
Halperin have purchased shares of common stock and preferred stock. See
"Certain Transactions."
43
<PAGE>
Board Composition
Upon the closing of this offering, we will have authorized five directors.
In accordance with the terms of our certificate of incorporation, the terms of
office of the board of directors will be divided into three classes. As a
result, a portion of our board of directors will be elected each year. The
division of the three classes and their respective election dates are as
follows:
. the class I directors' term will expire at the annual meeting of
stockholders to be held in 2000;
. the class II directors' term will expire at the annual meeting of
stockholders to be held in 2001; and
. the class III director's term will expire at the annual meeting of
stockholders to be held in 2002.
Our class I directors will be Dr. Skeen and Mr. Younger. Our class II
directors will be Messrs. Halperin and Walecka. Our class III director will be
Dr. Chang. At each annual meeting of stockholders after the initial
classification, the successors to directors whose terms will then expire will
be elected to serve from the time of election and qualification until the third
annual meeting following election. Any additional directorships resulting from
an increase in the number of directors will be distributed among the three
classes so that, as nearly as possible, each class will consist of one-third of
the directors. This classification of the board of directors may have the
effect of delaying or preventing changes in control or management of Vitria.
Executive Compensation
The following table sets forth summary information concerning the
compensation paid to our Chief Executive Officer and four most highly
compensated executive officers for services during the year ended December 31,
1998.
Summary Compensation Table
<TABLE>
<CAPTION>
Annual Compensation
----------------------------
Number of
Securities
Underlying Other
Name and Principal Position Salary Bonus Options Compensation
- --------------------------- -------- -------- ---------- ------------
<S> <C> <C> <C> <C>
JoMei Chang, Ph.D.(1)............... $175,000 $ 75,000 -- --
President and Chief Executive
Officer
M. Dale Skeen, Ph.D.(2)............. 150,000 60,000 -- --
Chief Technology Officer
Jay W. Shiveley, III................ 140,000 210,000 150,000 --
Senior Vice President, Worldwide
Sales
Aleksander E. Osadzinski(3)......... 39,965 -- 300,000 --
Vice President, Marketing
Paul R. Auvil, III(4)............... 130,517 33,781 250,000 --
Vice President, Finance, Chief
Financial
Officer and Secretary
</TABLE>
- ---------------------
(1) Dr. Chang's salary figure includes $9,798 in non-qualified deferred
compensation.
(2) Dr. Skeen's salary figure includes $8,592 in non-qualified deferred
compensation.
(3) Mr. Osadzinski joined our company in October 1998. His current annual
salary is $185,000.
(4) Mr. Auvil joined our company in April 1998. His current salary is $160,000.
Mr. Auvil's salary figure includes a $4,302 payment for reimbursement of
relocation expenses.
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<PAGE>
Option Grants in Fiscal Year 1998
The following table sets forth each grant of stock options during the fiscal
year ended December 31, 1998, to each of the individuals listed on the previous
table.
The exercise price of each option was equal to the fair market value of our
common stock as valued by the board of directors on the date of grant. The
exercise price may be paid in cash, in shares of our common stock valued at
fair market value on the exercise date or through a cashless exercise procedure
involving a same-day sale of the purchased shares.
The potential realizable value is calculated based on the ten-year term of
the option at the time of grant. Stock price appreciation of 5% and 10% is
assumed pursuant to rules promulgated by the Securities and Exchange Commission
and does not represent our prediction of our stock price performance. The
potential realizable values at 5% and 10% appreciation are calculated by
. multiplying the number of shares of common stock subject to a given
option by the assumed initial public offering price of $11.00 per share;
. assuming that the aggregate stock value derived from that calculation
compounds at the annual 5% or 10% rate shown in the table until the
expiration of the options; and
. subtracting from that result the aggregate option exercise price.
The initial public offering price may be higher than the estimated fair
market value on the date of grant, and the potential realizable value of the
option grants could be significantly higher than the numbers shown in the table
if future stock prices were projected to the end of the option term by applying
the same annual rates of stock price appreciation to the initial public
offering price.
The shares listed in the following table under "Number of Securities
Underlying Options Granted" are subject to vesting. Upon completion of 12
months of service from the vesting start date, 20% of the option shares vest
and the balance vest in a series of equal monthly installments over the next
four years of service. Each of the options has a ten-year term, subject to
earlier termination if the optionee's service with us ceases. See "Employee
Stock Plans" for a description of the material terms of these options.
Percentages shown under "Percent of Total Options Granted to Employees in
Fiscal Year" are based on an aggregate of 3,257,740 options granted to
employees of Vitria under our stock option plans during the fiscal year ended
December 31, 1998.
<TABLE>
<CAPTION>
Potential Realizable Value
at Assumed Annual
Number of Percent of Rates of Stock Price
Securities Total Options Appreciation for
Underlying Granted to Exercise Option Term
Options Employees in Price Per Expiration ---------------------------
Name Granted Fiscal 1998 Share Date 5% 10%
- ---- ---------- ------------- --------- ---------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
JoMei Chang, Ph.D. ..... -- -- -- -- -- --
M. Dale Skeen, Ph.D. ... -- -- -- -- -- --
Jay W. Shiveley, III.... 150,000 4.60% $0.25 10/15/08 $2,522,191 $3,853,113
Aleksander E.
Osadzinski............. 300,000 9.21 0.25 10/15/08 5,044,383 7,706,227
Paul R. Auvil, III...... 250,000 7.67 0.25 5/18/08 4,100,838 6,120,091
</TABLE>
45
<PAGE>
Fiscal Year-End Option Values
The following table sets forth the number and value of securities underlying
unexercised options that are held by each of the individuals listed on the
previous page as of December 31, 1998.
Amounts shown under the columns "Value Realized" and "Value of Unexercised
In-the-Money Options at December 31, 1998" are based on the assumed initial
public offering price of $11.00, without taking into account any taxes that may
be payable in connection with the transaction, multiplied by the number of
shares underlying the option, less the exercise price payable for these shares.
Vitria's stock option plans allow for the early exercise of options granted to
employees. All options exercised early are subject to repurchase by Vitria at
the original exercise price, upon the optionee's cessation of service prior to
the vesting of the shares.
<TABLE>
<CAPTION>
Number of Securities
Underlying Unexercised Value of Unexercised
Options at In-the-Money Options at
December 31, 1998 December 31, 1998
Shares Acquired Value ------------------------- -------------------------
Name on Exercise Realized Exercisable/Unexercisable Exercisable/Unexercisable
- ---- --------------- ---------- ------------------------- -------------------------
<S> <C> <C> <C> <C>
JoMei Chang, Ph.D. ..... -- -- -- --
M. Dale Skeen, Ph.D. ... -- -- -- --
Jay W. Shiveley, III.... 200,000(1) $2,150,000 550,000/0 $5,912,500/$0
Aleksander E.
Osadzinski............. 112,500(2) 1,209,375 187,500/0 2,015,625/0
Paul R. Auvil, III...... 250,000(3) 2,687,500 0/0 0/0
</TABLE>
- ---------------------
(1) Includes 50,000 shares subject to repurchase as of December 31, 1998.
(2) Includes 112,500 shares subject to repurchase as of December 31, 1998.
(3) Includes 250,000 shares subject to repurchase as of December 31, 1998.
Employment and Change of Control Agreements
In March 1998, we entered into an employment agreement with Paul R. Auvil,
III, our Vice President, Finance, Chief Financial Officer and Secretary. The
agreement provides that Mr. Auvil is employed "at-will," and the employment
relationship may be terminated for any reason at any time, but if after a
change of control due to a merger or acquisition, Mr. Auvil is not offered a
position with the successor company, Mr. Auvil will be entitled to severance
pay equal to six months of his base salary at the time of termination.
46
<PAGE>
Employee Stock Plans
1999 Equity Incentive Plan
We adopted the equity incentive plan in June 1999. The incentive plan is an
amendment and restatement of the equity incentive plan we adopted in 1995.
Share Reserve. We have currently reserved 10,000,000 shares for issuance
under the incentive plan, less shares issued or issuable under Vitria's
executive incentive plan. On December 31 of each year for 10 years, starting
with the year 1999, the number of shares in this reserve shared by the
incentive plan and the executive plan will automatically increase by 6.5% of
the outstanding common stock on a fully-diluted basis. However, no more than
8,000,000 shares may be used for incentive stock options under both the
executive plan and the incentive plan. If stock awards granted under the
incentive plan expire or otherwise terminate without being exercised, the
shares not acquired pursuant to the stock awards again become available for
issuance under the incentive plan.
Administration. The board administers the incentive plan unless it has
delegated administration to a committee. The board has the authority to
construe, interpret and amend the incentive plan as well as to determine:
. the grant recipients;
. the grant dates;
. the number of shares subject to the award;
. the exercisability of the award;
. the exercise price;
. the type of consideration; and
. the other terms of the award.
Eligibility. The board may grant incentive stock options that qualify under
Section 422 of the Internal Revenue Code, to employees, including officers, of
Vitria or an affiliate of Vitria. The board may grant nonstatutory stock
options, stock bonuses, restricted stock purchase awards and stock appreciation
rights to employees, including officers, or directors of and consultants to
Vitria or an affiliate of Vitria. A restricted stock purchase award is an offer
to purchase our shares at a price either at or near the fair market value of
the shares. A stock bonus, on the other hand, is a grant of our shares at no
cost to the recipient in consideration for past services rendered. Vitria may
reacquire the shares under either type of award at the original purchase price,
which is zero in the case of a stock bonus, if the recipient's service to
Vitria or an affiliate is terminated before the shares vest. A stock
appreciation right is a right that allows a recipient to elect to receive cash
or stock of a value equal to the appreciation of optioned rights.
The board may not grant an incentive stock option to any person who, at the
time of the grant, owns (or is deemed to own) stock possessing more than 10% of
the total combined voting power of Vitria or any affiliate of Vitria, unless
the exercise price is at least 110% of the fair market value of the stock on
the grant date and the option term is five years or less. In addition, the
aggregate fair market value, determined at the grant date, of incentive stock
option shares that are exercisable for the first time during a calendar year,
under the incentive plan and all other stock plans of Vitria and its
affiliates, may not exceed $100,000.
Section 162(m) of the Internal Revenue Code, among other things, denies a
deduction to publicly held corporations to some compensation paid to specific
employees in a taxable year to the extent that the compensation exceeds
$1,000,000. When we become subject to Section 162(m), the board may not grant
options and stock appreciation rights under the incentive plan to an employee
covering an aggregate of more than 1,200,000 shares in any calendar year.
47
<PAGE>
Options and Stock Appreciation Rights. The board may grant incentive stock
options and stock appreciation rights with an exercise price of 100% or more of
the fair market value of a share of our common stock on the grant date. It may
grant nonstatutory stock options with an exercise price as low as 85% of the
fair market value of a share on the grant date.
Option Terms. The maximum option term is 10 years. The board may provide for
exercise periods of any length in individual option grants, subject to
limitations. However, generally an option terminates three months after the
optionholder's service terminates. If the termination is due to the
optionholder's disability, the exercise period generally is extended to 12
months. If the termination is due to the optionholder's death or if the
optionholder dies within three months after his or her service terminates, the
exercise period generally is extended to 18 months following death.
Other Provisions. The optionholder may designate a beneficiary to exercise
the option following the optionholder's death. Nonstatutory stock options may
be transferable. Otherwise, the option exercise rights will pass by the
optionholder's will or by the laws of descent and distribution.
The board determines the purchase price of other stock awards, but the
purchase price may not be less than 85% of the fair market value of Vitria's
common stock on the grant date. However, the board may award stock bonuses in
consideration of past services without a purchase payment. Shares sold or
awarded under the incentive plan may, but need not be, restricted and subject
to a repurchase option in favor of Vitria in accordance with a vesting schedule
that the board determines. The board, however, may accelerate the vesting of
the restricted stock.
Transactions not involving receipt of consideration by Vitria, including a
merger, consolidation, reorganization, stock dividend, or stock split, may
change the class and number of shares subject to the incentive plan and to
outstanding awards. In that event, the board will appropriately adjust the
incentive plan as to the class and the maximum number of shares subject to the
incentive plan, to the incentive stock option limitation and to the Section
162(m) limitation. It also will adjust outstanding awards as to the class,
number of shares and price per share subject to the awards.
Upon a change in control of Vitria the surviving entity will either assume
or substitute outstanding awards under the incentive plan. Otherwise, the
vesting and exercisability of awards generally will accelerate.
Options Issued. As of June 30, 1999, Vitria has issued 3,136,859 shares upon
the exercise of options under the incentive plan, 598,000 shares of which have
been repurchased and 1,743,969 shares of which are subject to repurchase;
options to purchase 1,729,573 shares were outstanding; and 3,708,792 shares,
less shares issued or issuable pursuant to the exercise or award of stock
awards under Vitria's 1998 Executive Incentive Plan, remained available for
future grant. As of July 1, 1999, the board has granted 1,005,000 restricted
stock awards under the incentive plan, 30,000 shares of which have been
repurchased. The incentive plan will terminate in 2009 unless the board
terminates it sooner.
1998 Executive Incentive Plan
We adopted the executive incentive plan in October 1998 and amended it in
December 1998. We again amended the executive plan in June 1999.
Share Reserve. We have currently reserved 10,000,000 shares for issuance
under the executive plan less shares issued or issuable under Vitria's equity
incentive plan. On December 31 of each year for 10 years, starting with the
year 1999, the number of shares in this reserve shared by the incentive plan
and the executive plan will automatically increase by 6.5% of the outstanding
common stock on a fully-diluted basis. However, no more than 8,000,000 shares
may be used for incentive stock options under both the executive plan and the
incentive plan. If options granted under the executive plan expire or otherwise
terminate without being exercised, the shares not acquired pursuant to the
options again become available for issuance under the executive plan.
48
<PAGE>
Administration. The board administers the executive plan unless it has
delegated administration to a committee. The board has the authority to
construe, interpret and amend the executive plan as well as to determine:
. the grant recipients;
. the grant dates;
. the number of shares subject to the option;
. the exercisability of the option;
. the exercise price;
. the type of consideration; and
. the other terms of the option.
Eligibility. The board may grant incentive stock options that qualify under
Section 422 of the Internal Revenue Code to employees, including officers, of
Vitria or an affiliate of Vitria. The board may grant nonstatutory stock
options to employees, including officers, or directors of and consultants to
Vitria or an affiliate of Vitria.
The board may not grant an incentive stock option to any person who, at the
time of the grant, owns (or is deemed to own) stock possessing more than 10% of
the total combined voting power of Vitria or an affiliate of Vitria, unless the
exercise price is at least 110% of the fair market value of the stock on the
grant date and the option term is five years or less. In addition, the
aggregate fair market value, determined at the grant date, of incentive stock
option shares that are exercisable for the first time during a calendar year,
under the executive plan and all other stock plans of Vitria and its
affiliates, may not exceed $100,000.
Section 162(m) of the Internal Revenue Code, among other things, denies a
deduction to publicly held corporations to compensation paid to specific
employees in a taxable year to the extent that the compensation exceeds
$1,000,000. When we become subject to Section 162(m), the board may not grant
options under the executive plan to an employee covering an aggregate of more
than 1,200,000 shares in any calendar year.
Options Rights. The board may grant incentive stock options with an exercise
price of 100% or more of the fair market value of a share of our common stock
on the grant date. It may grant nonstatutory stock options with any exercise
price it determines.
Option Terms. The maximum incentive stock option term is 10 years. The board
may provide for exercise periods of any length in individual option grants.
However, generally an option terminates three months after the optionholder's
service terminates. If the termination is due to the optionholder's disability,
the exercise period generally is extended to 12 months. If the termination is
due to the optionholder's death or if the optionholder dies within three months
after his or her service terminates, the exercise period generally is extended
to 18 months following death.
Other Provisions. The optionholder may designate a beneficiary to exercise
the option following the optionholder's death. Nonstatutory stock option rights
may be transferable. Otherwise, the option exercise rights will pass by the
optionholder's will or by the laws of descent and distribution.
Transactions not involving receipt of consideration by Vitria, such as a
merger, consolidation, reorganization, stock dividend, or stock split, may
change the class and number of shares subject to the executive plan and to
outstanding options. In that event, the board will appropriately adjust the
executive plan as to the class and the maximum number of shares subject to the
executive plan and to the Section 162(m) limitation. It also will adjust
outstanding options as to the class, number of shares and price per share
subject to the options.
49
<PAGE>
Upon a change in control of Vitria the surviving entity will either assume
or substitute all outstanding options under the executive plan. Otherwise, the
vesting and exercisability of the options generally will accelerate.
Options Issued. As of June 30, 1999, Vitria has issued 62,500 shares upon
the exercise of options under the executive plan, 25,000 of which have been
repurchased and 37,500 of which are subject to repurchase; options to purchase
262,500 shares were outstanding; and 3,708,792 shares less shares issued or
issuable pursuant to the exercise or award of stock awards under Vitria's 1999
Equity Incentive Plan, remained available for future grant. The executive plan
will terminate in 2008 unless the board terminates it sooner.
1999 Employee Stock Purchase Plan
We adopted the employee stock purchase plan in June 1999.
Share Reserve. We authorized the issuance of 1,500,000 shares of our common
stock pursuant to purchase rights granted to employees of Vitria and to
employees of designated affiliates of Vitria. On August 14 of each year for
10 years, beginning in 2000, the number of shares in the reserve automatically
will be increased by the greater of:
. 2% of our outstanding shares on a fully-diluted basis, or
. that number of shares so that the share reserve is 1,500,000 shares.
The automatic share reserve increase in the aggregate may not exceed 16,500,000
shares over the 10-year period.
Eligibility. The purchase plan is intended to qualify as an employee stock
purchase plan within the meaning of Section 423 of the Internal Revenue Code.
The purchase plan provides a means by which employees may purchase our common
stock through payroll deductions. We implement this purchase plan by offerings
of purchase rights to eligible employees. Generally, all employees of Vitria
and any United States affiliate may participate in the purchase plan, excluding
part-time and seasonal employees. However, no employee may participate in the
purchase plan if immediately after we grant the employee a purchase right, the
employee has voting power over 5% or more of our outstanding capital stock. As
of the date of this prospectus, no shares of common stock have been purchased
under the purchase plan.
Administration. Under the purchase plan, the board may specify offerings of
up to 27 months. The first offering will begin on the effective date of this
initial public offering. Unless the board otherwise determines, our common
stock is purchased for accounts of participating employees at a price per share
equal to the lower of:
. 85% of the fair market value of a share on the first day of the offering,
or
. 85% of the fair market value of a share on the purchase date.
The board may provide that employees who become eligible to participate
after the offering period begins nevertheless may enroll in the offering. These
employees will purchase our stock at the lower of:
. 85% of the fair market value of a share on the day they began
participating in the purchase plan, or
. 85% of the fair market value of a share on the purchase date.
Under the current offering, employees may authorize payroll deductions of up
to 10% of their base compensation, not including sales commissions or bonuses,
for the purchase of stock under the purchase plan and may end their
participation in the offering at any time up to 10 days before a purchase date.
Participation ends automatically on termination of employment with Vitria or
its affiliate.
Other Provisions. The board may grant eligible employees purchase rights
under the purchase plan only if the purchase rights together with any other
purchase rights granted under other employee stock purchase
50
<PAGE>
plans established by Vitria or its affiliate, if any, do not permit the
employee's rights to purchase our stock to accrue at a rate that exceeds
$25,000 of the fair market value of our stock for each calendar year in which
the purchase rights are outstanding. The board also may limit the number of
shares that an employee may purchase on any purchase date.
Upon a change of control of Vitria the board may provide that the successor
corporation will assume or substitute outstanding purchase rights.
Alternatively, the board may shorten the offering and provide that shares will
be purchased for participants immediately before the change in control.
401(k) Plan
The Company maintains a 401(k) Plan for eligible employees. An employee
participant may contribute up to 20% of his or her total annual compensation to
the 401(k) Plan, up to a legal annual limit. The annual limit for calendar year
1999 is $10,000. Each participant is fully vested in his or her deferred salary
contributions. Participant contributions are held and invested by the 401(k)
Plan's trustee. We may make discretionary contributions as a percentage of
participant contributions, subject to established limits. To date, we have made
no contributions to the 401(k) Plan on behalf of the participants. The 401(k)
Plan is intended to qualify under Section 401 of the Internal Revenue Code, so
that contributions by employees or by Vitria to the 401(k) Plan, and income
earned on the 401(k) Plan contributions, are not taxable to employees until
withdrawn from the 401(k) Plan, and so that contributions by Vitria, if any,
will be deductible when made.
1998 Nonqualified Deferred Compensation Plan
In December 1998, we established a nonqualified, unfunded deferred
compensation plan for executive officers providing for payments upon
retirement, death or disability. Under the plan, these employees receive
payments equal to the employee's entire accrued benefit, the sum of all
deferred amounts and any discretionary corporate contributions credited to the
plan and due and owing to the employee, together with earning adjustments,
minus any distributions. These employees may elect to defer up to 70% of their
salary compensation and 100% of their bonus compensation. As of June 30, 1999,
we have not made any contributions to the plan. Amounts, if any, deferred by
executive officers during 1998 are included in the Summary Compensation Table
above.
Limitation of Liability and Indemnification
Our certificate of incorporation and bylaws contain provisions permitted
under Delaware law relating to the liability of directors. These provisions
eliminate a director's personal liability for monetary damages resulting from a
breach of fiduciary duty, except in circumstances involving wrongful acts,
including:
. for any breach of the director's duty of loyalty to Vitria or our
stockholders;
. for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
. for any acts under Section 174 of the Delaware General Corporation Law;
or
. for any transaction from which the director derives an improper personal
benefit.
These provisions do not limit or eliminate our rights or any stockholder's
rights to seek non-monetary relief including an injunction or rescission, in
the event of a breach of director's fiduciary duty. These provisions will not
alter a director's liability under federal securities laws. In addition, we
intend to enter into separate indemnification agreements with our directors and
executive officers that provide each of them indemnification protection in the
event the amended and restated certificate of incorporation and amended and
restated bylaws are subsequently amended. We believe that these provisions and
agreements will assist us in attracting and retaining qualified individuals to
serve as directors and officers.
51
<PAGE>
CERTAIN TRANSACTIONS
The following executive officers, directors or holders of more than five
percent of our voting securities purchased securities in the amounts as of the
date set forth below.
<TABLE>
<CAPTION>
Shares of Preferred Stock
----------------------------------------------------------
Common Stock Series A Series A1 Series B Series C Series D
-------------- ------------- --------- --------- ------------- --------
<S> <C> <C> <C> <C> <C> <C>
Directors and Executive
Officers
JoMei Chang, Ph.D....... 4,276,878 421,875 -- -- -- --
M. Dale Skeen, Ph.D..... 5,458,125 421,875 -- -- -- --
Robert M. Halperin(1)... 687,498 675,832 271,475 -- -- --
William H. Younger,
Jr..................... -- -- -- -- 11,885 21,146
Entities Affiliated with
Directors
Brentwood
Associates(2).......... -- -- -- 2,481,327 248,756 444,444
Sutter Hill
Ventures(3)............ -- -- -- 2,481,327 248,756 444,444
Other 5% Stockholders
Weston Presidio Capital
II, L.P................ -- -- -- -- 1,430,349 105,880
The Chang Family Trust,
Michael W. Taylor,
Trustee(4)............. 1,691,247 -- 678,688 -- -- --
Price Per Share......... $0.004-$0.25 $0.36 $0.61 $1.81 $4.02 $4.50
Date(s) of Purchase..... 12/94 to 09/98 1/95 and 8/96 5/96(5) 10/97 10/98 to 1/99 5/99
</TABLE>
- --------
(1) Includes shares held by Mr. Halperin's children and trusts for his
grandchildren.
(2) John L. Walecka, one of our directors, is a general partner of venture
funds associated with Brentwood Associates.
(3) William H. Younger, Jr., one of our directors, is a general partner of
Sutter Hill Ventures.
(4) The Chang Family Trust is a trust for the benefit of family members of Dr.
JoMei Chang.
(5) Notes convertible into Series A1 preferred stock were issued in May 1996.
The conversion of these notes occurred in December 1997.
Investor Rights Agreement. Vitria and the preferred stockholders described
above have entered into an agreement, pursuant to which these and other
preferred stockholders will have registration rights with respect to their
shares of common stock following this offering. Upon the completion of this
offering, all shares of our outstanding preferred stock will be automatically
converted into an equal number of shares of common stock.
We intend to enter into indemnification agreements with our directors and
officers for the indemnification of and advancement of expenses to these
persons to the full extent permitted by law. We also intend to execute these
agreements with our future directors and officers.
We believe that all of the transactions set forth above were made on terms
no less favorable to Vitria than could have been obtained from unaffiliated
third parties. All future transactions, including loans, between Vitria and its
officers, directors, principal stockholders and their affiliates will be
approved by a majority of the board of directors, including a majority of the
independent and disinterested directors, and will continue to be on terms no
less favorable to Vitria than could be obtained from unaffiliated third
parties.
52
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of our common stock as of June 30, 1999, and as adjusted to reflect
the sale of our common stock offered by this prospectus, by:
. each of the individuals listed on the "Summary Compensation Table" above;
. each of our directors;
. each person (or group of affiliated persons) who is known by us to own
beneficially 5% or more of our common stock; and
. all current directors and executive officers as a group.
Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission. In computing the number of shares
beneficially owned by a person and the percentage ownership of that person,
shares of common stock subject to options held by that person that are
currently exercisable or exercisable within 60 days of June 30, 1999 are deemed
outstanding. These shares, however, are not deemed outstanding for the purposes
of computing the percentage ownership of each other person.
Except as indicated in the footnotes to this table and pursuant to
applicable community property laws, each stockholder named in the table has
sole voting and investment power with respect to the shares shown as
beneficially owned by them. Percentage of ownership is based on 27,265,722
shares of common stock outstanding on June 30, 1999 and 30,265,722 shares of
common stock outstanding after completion of this offering. This table assumes
no exercise of the underwriters' over-allotment option. Unless otherwise
indicated, the address of each of the individuals named below is: c/o Vitria
Technology, Inc., 945 Stewart Drive, Sunnyvale, California 94086.
<TABLE>
<CAPTION>
Beneficial Ownership Prior to
Offering
--------------------------------
Percent
Shares Issuable Beneficially
Number of pursuant to Owned
Shares Options Exercisable -----------------
Name and Address of Beneficially within 60 days of Before After
Beneficial Owner Owned June 30, 1999 Offering Offering
- ------------------- ------------ ------------------- -------- --------
<S> <C> <C> <C> <C>
Directors and Executive
Officers
JoMei Chang, Ph.D.(1)...... 4,820,587 -- 17.68% 15.93%
M. Dale Skeen, Ph.D.(1).... 6,002,835 -- 22.02 19.83
William H. Younger,
Jr.(2).................... 3,174,527 -- 11.64 10.49
John L. Walecka(3)......... 3,174,527 -- 11.64 10.49
Robert M. Halperin(4)...... 1,451,213 -- 5.32 4.79
Jay W. Shiveley, III(5).... 400,000 350,000 2.72 2.45
Paul R. Auvil, III(6)...... 254,975 -- * *
Aleksander E.
Osadzinski(7)............. 112,500 187,500 1.09 1.00
5% Stockholders
The Chang Family Trust,
Michael W. Taylor,
Trustee(8)................ 2,369,935 -- 8.69 7.83
Entities affiliated with
Brentwood Associates(9)... 3,174,527 -- 11.64 10.49
3000 Sand Hill Road
Building 1, Suite 260
Menlo Park, CA 94025
Entities affiliated with
Sutter Hill Ventures(10).. 3,174,527 -- 11.64 10.49
755 Page Mill Road
Suite A200
Palo Alto, CA 94304
Weston Presidio Capital II,
L.P....................... 1,536,229 -- 5.63 5.08
343 Sansome Street
Suite 1210
San Francisco, CA 94104
All directors and executive
officers as a group
(8 persons)(11)........... 18,974,495 537,500 70.18% 63.34%
</TABLE>
53
<PAGE>
- ---------------------
*Less than 1%
(1) Includes 416,669 shares held by Skeen/Chang Investments, L.P., of which
Drs. JoMei Chang and M. Dale Skeen are general partners.
(2) Includes 2,380,896 shares held by Sutter Hill Ventures, a California
Limited Partnership, 793,631 shares held by parties affiliated with Sutter
Hill Ventures, including 33,031 shares held by William H. Younger, Jr.,
Trustee, The Younger Living Trust. Mr. Younger is a general partner of
Sutter Hill Ventures and disclaims beneficial ownership of the shares held
by these entities except to the extent of his proportionate partnership
interest therein.
(3) Includes 3,047,546 shares held by Brentwood Associates VIII, L.P., and
126,981 shares held by Brentwood Affiliates Fund, L.P. Mr. Walecka is a
general partner of Brentwood Associates and disclaims beneficial ownership
of the shares held by these entities except to the extent of his
proportionate partnership interest therein.
(4) Includes 550,780 shares held by Mr. Halperin's children for which he has
power of attorney but as to which he does not have dispositive power over
and disclaims beneficial ownership of the shares held by his children.
Excludes 183,592 shares of common stock held in trust for Mr. Halperin's
grandchildren. Mr. Halperin does not have voting or dispositive power and
disclaims beneficial ownership of the shares held by his grandchildren's
trusts.
(5) Includes 170,000 shares subject to repurchase by Vitria within 60 days of
June 30, 1999.
(6) Includes 187,500 shares subject to repurchase by Vitria within 60 days of
June 30, 1999.
(7) Includes 112,500 shares subject to repurchase by Vitria within 60 days of
June 30, 1999.
(8) The Chang Family Trust is a trust for the benefit of family members of Dr.
JoMei Chang. Dr. Chang does not have voting or dispositive power over and
disclaims beneficial ownership of the shares held by the trust.
(9) Includes 3,047,546 shares held by Brentwood Associates VIII, L.P., and
126,981 shares held by Brentwood Affiliates Fund, L.P.
(10) Includes 2,380,896 shares held by and Sutter Hill Ventures, a California
Limited Partnership, and 793,631 shares held by parties affiliated with
Sutter Hill Ventures. Sutter Hill Ventures disclaims voting power and
beneficial ownership to the shares held by its affiliated parties.
(11) Includes 470,000 shares subject to repurchase by Vitria within 60 days of
June 30, 1999. See footnotes (5) through (7).
54
<PAGE>
DESCRIPTION OF CAPITAL STOCK
Upon the closing of this offering, our authorized capital stock will consist
of 250 million shares of common stock, $0.001 par value, and five million
shares of preferred stock, $0.001 par value.
Common Stock
As of June 30, 1999, there were 27,265,722 shares of common stock
outstanding that were held of record by approximately 142 stockholders after
giving effect to the conversion of our preferred stock into common stock at a
one-to-one ratio. There will be 30,265,722 shares of common stock outstanding,
assuming no exercise of the underwriters' over-allotment option and no exercise
of outstanding options, after giving effect to the sale of the shares of common
stock offered by this prospectus.
The holders of common stock are entitled to one vote per share on all
matters submitted to a vote of our stockholders. Subject to preferences that
may be applicable to any preferred stock outstanding at the time, the holders
of outstanding shares of common stock are entitled to receive ratably any
dividends out of assets legally available therefor as our board of directors
may from time to time determine. Upon liquidation, dissolution or winding up of
Vitria, holders of our common stock are entitled to share ratably in all assets
remaining after payment of liabilities and the liquidation preference of any
then outstanding shares of preferred stock. Holders of common stock have no
preemptive or conversion rights or other subscription rights. There are no
redemption or sinking fund provisions applicable to the common stock. All
outstanding shares of common stock are fully paid and nonassessable.
Preferred Stock
Our certificate of incorporation provides that our board of directors will
have the authority, without further action by the stockholders, to issue up to
five million shares of preferred stock in one or more series. The board will be
able to fix the rights, preferences, privileges and restrictions of the
preferred stock, including dividend rights, conversion rights, voting rights,
terms of redemption, liquidation preferences, sinking fund terms and the number
of shares constituting any series or the designation of this series. The
issuance of preferred stock could adversely affect the voting power of holders
of common stock, and the likelihood that holders of preferred stock will
receive dividend payments and payments upon liquidation may have the effect of
delaying, deferring or preventing a change in control of Vitria, which could
depress the market price of our common stock. We have no present plan to issue
any shares of preferred stock.
Registration Rights of Stockholders
Upon completion of this offering, the holders of 11,460,839 shares of common
stock or their transferees will be entitled to rights to register these shares
under the Securities Act of 1933. If we propose to register any of our
securities under the Securities Act, either for our own account or for the
account of other securityholders, the holders of these shares will be entitled
to notice of the registration and will be entitled to include, at our expense,
their shares of common stock. In addition, the holders of these shares may
require us, at our expense and on not more than two occasions at any time
beginning approximately six months from the date of the closing of this
offering, to file a registration statement under the Securities Act with
respect to their shares of common stock, and we will be required to use our
best efforts to effect the registration. Further, the holders may require us at
our expense to register their shares on Form S-3 when this form becomes
available. These rights shall terminate on the earlier of four years after the
effective date of this offering, or when a holder is able to sell all its
shares pursuant to Rule 144 under the Securities Act in any 90-day period.
Anti-Takeover Provisions of Delaware Law and Charter Provisions
We are subject to Section 203 of the Delaware General Corporation Law. In
general, the statute prohibits a publicly held Delaware corporation from
engaging in any business combination with any
55
<PAGE>
interested stockholder for a period of three years following the date that the
stockholder became an interested stockholder unless:
. prior to the date, the board of directors of the corporation approved
either the business combination or the transaction that resulted in the
stockholder becoming an interested stockholder;
. upon consummation of the transaction that resulted in the stockholder's
becoming an interested stockholder, the interested stockholder owned at
least 85% of the voting stock of the corporation outstanding at the time
the transaction commenced, excluding those shares owned by persons who
are directors and also officers, and employee stock plans in which
employee participants do not have the right to determine confidentially
whether shares held subject to the plan will be tendered in a tender or
exchange offer; or
. on or subsequent to the date, the business combination is approved by the
board of directors and authorized at an annual or special meeting of
stockholders, and not by written consent, by the affirmative vote of at
least two-thirds of the outstanding voting stock that is not owned by the
interested stockholder.
Section 203 defines "business combination" to include:
. any merger or consolidation involving the corporation and the interested
stockholder;
. any sale, transfer, pledge or other disposition involving the interested
stockholder of 10% or more of the assets of the corporation;
. subject to exceptions, any transaction that results in the issuance or
transfer by the corporation of any stock of the corporation to the
interested stockholder; or
. the receipt by the interested stockholder of the benefit of any loans,
advances, guarantees, pledges or other financial benefits provided by or
through the corporation.
In general, Section 203 defines an interested stockholder as any entity or
person beneficially owning 15% or more of the outstanding voting stock of the
corporation and any entity or person affiliated with or controlling or
controlled by the entity or person.
Our bylaws provide that candidates for director may be nominated only by the
board of directors or by a stockholder who gives written notice to us no later
than 60 days prior nor earlier than 90 days prior to the first anniversary of
the last annual meeting of stockholders. The board may consist of one or more
members to be determined from time to time by the board. The board currently
consists of five members divided into three different classes. As a result,
only one class of directors will be elected at each annual meeting of
stockholders of Vitria, with the other classes continuing for the remainder of
their respective terms. Between stockholder meetings, the board may appoint new
directors to fill vacancies or newly created directorships.
Our certificate of incorporation requires that upon completion of the
offering, any action required or permitted to be taken by our stockholders must
be effected at a duly called annual or special meeting of stockholders and may
not be effected by a consent in writing. Our certificate of incorporation also
provides that the authorized number of directors may be changed only by
resolution of the board of directors. Delaware law and these charter provisions
may have the effect of deterring hostile takeovers or delaying changes in
control or our management, which could depress the market price of our common
stock.
Section 2115
We are currently subject to Section 2115 of the California Corporations
Code. Section 2115 provides that, regardless of a company's legal domicile,
provisions of California corporate law relating to shareholder rights,
56
<PAGE>
election and removal of directors and distributions to shareholders will apply
to that company if the company meets the requirements of Section 2115. We will
not be subject to Section 2115 if:
. we are qualified for trading as a national market security on The Nasdaq
National Market, and we have at least 800 stockholders of record as of
the record date of our most recent annual meeting, or
. during any income year less than 50% of our outstanding voting securities
are held of record by persons having addresses in California.
The following table sets forth some of the effects on our corporate
governance of California Corporations Code Section 2115:
<TABLE>
<CAPTION>
Section 2115 Non-Section 2115
------------ ----------------
<S> <C> <C>
Election of Cumulative voting is allowed, No cumulative voting is allowed;
Directors which allows each shareholder to accordingly a holder of 50% or
vote the number of votes equal to more of voting stock controls
the number of candidates election of all directors.
multiplied by the number of votes
to which the shareholders' shares
are normally entitled in favor of
one candidate. This potentially
allows minority stockholders to
elect some members of the board.
Removal of Directors Removal with or without cause by If the board is classified,
the affirmative vote of the removal is only allowed for cause
holders of a majority of upon the affirmative vote of a
outstanding voting stock is majority of the outstanding
allowed. voting stock entitled to vote in
the election of directors.
Supermajority Vote
Requirement In order to institute a Simple majority may adopt
supermajority provision, the amendment providing for
amendment must be approved by at supermajority.
least as large a proportion as
would be required under the
amendment.
Dividend Dividends are only payable out of Dividends are payable out of
Distribution the surplus of retained earnings either the surplus of retained
and if, immediately after the earnings or out of its net
distribution, a company's assets profits for the year the
are at least equal to its distribution takes place, or the
liabilities. preceding year.
Dissenters' Rights Generally available in any type Generally only available in a
of reorganization, including a merger. No rights so long as our
merger, sale of assets or common stock is quoted on The
sale/exchange of shares. If the Nasdaq National Market or traded
shares are listed on an exchange, on an exchange.
5% of the shareholders must
assert their right for any
shareholder to have these rights.
</TABLE>
In addition to these differences, Section 2115 also provides for information
rights and required filings in the event a company effects a sale of assets or
completes a merger.
Transfer Agent
The transfer agent and registrar for our common stock is BankBoston, N.A.
Its phone number is (781) 575-3120.
57
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no public market for our common
stock. Future sales of substantial amounts of our common stock in the public
market could adversely affect prevailing market prices. Furthermore, since no
shares will be available for sale shortly after this offering because of
contractual and legal restrictions on resale as described below, sales of
substantial amounts of our common stock in the public market after these
restrictions lapse could adversely affect the prevailing market price and our
ability to raise equity capital in the future.
Upon completion of this offering, we will have outstanding an aggregate of
30,323,322 shares of common stock, assuming no exercise of the underwriters'
over-allotment option and no exercise of outstanding options. Of these shares,
all of the shares sold in this offering will be freely tradable without
restriction or further registration under the Securities Act, unless these
shares are purchased by affiliates. The remaining 27,323,322 shares of common
stock held by existing stockholders are restricted securities. Restricted
securities may be sold in the public market only if registered or if they
qualify for an exemption from registration described below under Rules 144,
144(k) or 701 promulgated under the Securities Act.
As a result of the contractual restrictions described below and the
provisions of Rules 144, 144(k) and 701, the restricted shares will be
available for sale in the public market as follows:
. no shares will be eligible for immediate sale on the date the
registration statement of which this prospectus is a part is declared
effective;
. no shares will be eligible for sale prior to 180 days from the date the
registration statement of which this prospectus is a part is declared
effective;
. 24,967,232 shares will be eligible for sale upon the expiration of the
lock-up agreements, described below, 180 days after the date this
offering is declared effective;
. 2,356,090 shares will be eligible for sale at various times after the
date of this offering is declared effective; and
. 296,313 shares will be eligible for sale upon the exercise of vested
options 180 days after the date this offering is declared effective.
Lock-Up Agreements. All of our officers, directors, stockholders and option
holders have agreed not to transfer or dispose of, directly or indirectly, any
shares of our common stock or any securities convertible into or exercisable or
exchangeable for shares of our common stock, for a period of 180 days after the
date the registration statement of which this prospectus is a part is declared
effective. Transfers or dispositions can be made sooner with the prior written
consent of Credit Suisse First Boston Corporation.
Rule 144. In general, under Rule 144 as currently in effect, beginning 90
days after the date the registration statement of which this prospectus is a
part is declared effective, a person or persons whose shares are aggregated,
who his beneficially owned restricted securities for at least one year,
including the holding period of any prior owner except an affiliate, would be
entitled to sell within any three-month period a number of shares that does not
exceed the greater of:
. 1% of the number of shares of our common stock then outstanding which
will equal approximately 303,233 shares immediately after this offering;
or
. the average weekly trading volume of our common stock on the Nasdaq
National Market during the four calendar weeks preceding the filing of a
notice on Form 144 with respect to the sale.
Sales under Rule 144 are also subject to manner of sale provisions and
notice requirements and to the availability of current public information about
Vitria.
Rule 144(k). Under Rule 144(k), a person who is not deemed to have been one
of our affiliates at any time during the 90 days preceding a sale, and who has
beneficially owned the shares proposed to be sold for at
58
<PAGE>
least two years, including the holding period of any prior owner except an
affiliate, is entitled to sell these shares without complying with the manner
of sale, public information, volume limitation or notice provisions of Rule
144. No shares will qualify as "144(k) shares" within 180 days after the date
the registration statement, of which this prospectus is a part, is declared
effective.
Rule 701. In general, under Rule 701 of the Securities Act as currently in
effect, any of our employees, consultants or advisors, other than affiliates,
who purchases or receives shares from us in connection with a compensatory
stock purchase plan or option plan or other written agreement will be eligible
to resell their shares beginning 90 days after the effective date of the
registration statement of which this prospectus is a part, subject only to the
manner of sale provisions of Rule 144, and by affiliates under Rule 144 without
compliance with its holding period requirements.
Registration Rights. Upon completion of this offering, the holders of
11,460,839 shares of our common stock, or their transferees, will be entitled
to rights with respect to the registration of their shares under the Securities
Act. Registration of their shares under the Securities Act would result in the
shares becoming freely tradable without restriction under the Securities Act,
except for shares purchased by affiliates, immediately upon the effectiveness
of this registration.
Stock Options. Immediately after this offering, we intend to file a
registration statement under the Securities Act covering the shares of common
stock reserved for issuance under our 1999 Equity Incentive Plan and 1998
Executive Incentive Plan and the 1999 Employee Stock Purchase Plan. The
registration statement is expected to be filed and become effective as soon as
practicable after the closing of this offering. Accordingly, shares registered
under the registration statements will, subject to Rule 144 volume limitations
applicable to affiliates, be available for sale in the open market, beginning
180 days after the effective date of the registration statement of which this
prospectus is a part.
59
<PAGE>
UNDERWRITING
Under the terms and subject to the conditions contained in the underwriting
agreement dated , we have agreed to sell to the underwriters named below,
for whom Credit Suisse First Boston Corporation, Merrill Lynch, Pierce, Fenner
& Smith Incorporated, BancBoston Robertson Stephens Inc. and SoundView
Technology Group, Inc. are acting as representatives, the following respective
number of shares of common stock:
<TABLE>
<CAPTION>
Number of
Underwriter Shares
----------- ---------
<S> <C>
Credit Suisse First Boston Corporation.............................
Merrill Lynch, Pierce, Fenner & Smith
Incorporated.................................................
BancBoston Robertson Stephens Inc. ................................
SoundView Technology Group, Inc. ..................................
---------
Total............................................................ 3,000,000
=========
</TABLE>
The underwriting agreement provides that the underwriters are obligated to
purchase all the shares of common stock in the offering if any are purchased,
other than those shares covered by the over-allotment option described below.
The underwriting agreement also provides that if an underwriter defaults the
purchase commitments of non-defaulting underwriters may be increased or the
offering of common stock may be terminated.
We have granted to the underwriters a 30-day option to purchase on a pro
rata basis up to additional shares from us at the initial public
offering price less the underwriting discounts and commissions. This option may
be exercised only to cover any over-allotments of common stock.
The underwriters propose to offer the shares of common stock to the public
initially at the public offering price on the cover page of this prospectus and
to selling group members at that price less a concession of $ per
share. The underwriters and selling group members may allow a discount of
$ per share on sales to other broker/dealers. After the initial public
offering, the public offering price and concession and discount to dealers may
be changed by the representatives.
The following table summarizes the compensation and estimated expenses we
will pay.
<TABLE>
<CAPTION>
Per Share Total
----------------------------- -----------------------------
Without With Without With
Over-allotment Over-allotment Over-allotment Over-allotment
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Underwriting discounts
and commissions
paid by us............. $ $ $ $
Expenses payable by us.. $ $ $ $
</TABLE>
The underwriters have informed us that they do not expect discretionary
sales to exceed 5% of the shares of common stock being offered.
We, our directors, officers and our stockholders have agreed that we and
they will not offer, sell, contract to sell, announce our intention to sell,
pledge or otherwise dispose of, directly or indirectly, or file with the
Securities and Exchange Commission a registration statement under the
Securities Act of 1933 relating to, any additional shares of our common stock
or securities convertible into or exchangeable or exercisable for any of our
common stock without the prior consent of Credit Suisse First Boston
Corporation for a period of 180 days
60
<PAGE>
after the date of this prospectus, except in connection with our stock option
and employee stock purchase plans.
The underwriters have reserved for sale, at the initial public offering
price, up to 150,000 shares of the common stock for employees, directors and
other persons associated with us who have expressed an interest in purchasing
common stock in the offering. The number of shares available for sale to the
general public in the offering will be reduced to the extent these persons
purchase these reserved shares. Any reserved shares not so purchased will be
offered by the underwriters to the general public on the same terms as the
other shares.
We have agreed to indemnify the underwriters against liabilities under the
Securities Act of 1933 or to contribute to payments which the underwriters may
be required to make in that respect.
We have applied to list our shares of common stock on The Nasdaq Stock
Market's National Market under the symbol "VITR."
ML IBK Positions, Inc., an affiliate of Merrill Lynch, Pierce, Fenner &
Smith Incorporated, one of the representatives of the underwriters, holds
shares of preferred stock of Vitria that will convert into 746,269 shares of
common stock upon the closing of the offering.
Prior to this offering, there has been no public market for our common
stock. The initial public offering price will be determined by negotiation
between us and the underwriters. The principal factors to be considered in
determining the public offering price include: the information set forth in
this prospectus and otherwise available to the underwriters; the history and
the prospects for the industry in which we will compete; the ability of our
management; the prospects for our future earnings; the present state of our
development and our current financial condition; the general condition of the
securities markets at the time of this offering; and the recent market prices
of, and the demand for, publicly traded common stock of generally comparable
companies.
The representatives may engage in over-allotment, stabilizing transactions,
syndicate covering transactions and penalty bids in accordance with Regulation
M under the Securities Exchange Act of 1934.
. Over-allotment involves syndicate sales in excess of the offering size,
which creates a syndicate short position.
. Stabilizing transactions permit bids to purchase the underlying security
so long as the stabilizing bids do not exceed a specified maximum.
. Syndicate covering transactions involve purchases of the common stock in
the open market after the distribution has been completed in order to
cover syndicate short positions.
. Penalty bids permit the representatives to reclaim a selling concession
from a syndicate member when the common stock originally sold by the
syndicate member are purchased in a syndicate covering transaction to
cover syndicate short positions.
These stabilizing transactions, syndicate covering transactions and penalty
bids may cause the price of the common stock to be higher than it would
otherwise be in the absence of these transactions. These transactions may be
effected on The Nasdaq Stock Market's National Market or otherwise and, if
commenced, may be discontinued at any time.
61
<PAGE>
NOTICE TO CANADIAN RESIDENTS
Resale Restrictions
The distribution of the common stock in Canada is being made only on a
private placement basis exempt from the requirement that we prepare and file a
prospectus with the securities regulatory authorities in each province where
trades of common stock are effected. Accordingly, any resale of the common
stock in Canada must be made in accordance with applicable securities laws
which will vary depending on the relevant jurisdiction, and which may require
resales to be made in accordance with available statutory exemptions or
pursuant to a discretionary exemption granted by the applicable Canadian
securities regulatory authority. Purchasers are advised to seek legal advice
prior to any resale of the common stock.
Representations of Purchasers
Each purchaser of common stock in Canada who receives a purchase
confirmation will be deemed to represent to us and the dealer from whom the
purchase confirmation is received that (i) the purchaser is entitled under
applicable provincial securities laws to purchase the common stock without the
benefit of a prospectus qualified under these securities laws, (ii) where
required by law, that the purchaser is purchasing as principal and not as
agent, and (iii) the purchaser has reviewed the text above under "Resale
Restrictions".
Rights of Action (Ontario Purchasers)
The securities being offered are those of a foreign issuer and Ontario
purchasers will not receive the contractual right of action prescribed by
Ontario securities law. As a result, Ontario purchasers must rely on other
remedies that may be available, including common law rights of action for
damages or recission or rights of action under the civil liability provisions
of the U.S. federal securities laws.
Enforcement of Legal Rights
All of the issuer's directors and officers as well as the experts named
herein may be located outside of Canada and, as a result, it may not be
possible for Canadian purchasers to effect service of process within Canada
upon the issuer or these persons. All or a substantial portion of the assets of
the issuer and these persons may be located outside of Canada and, as a result,
it may not be possible to satisfy a judgment against the issuer or these
persons in Canada or to enforce a judgment obtained in Canadian courts against
the issuer or these persons outside of Canada.
Notice to British Columbia Residents
A purchaser of common stock to whom the Securities Act (British Columbia)
applies is advised that the purchaser is required to file with the British
Columbia Securities Commission a report within ten days of the sale of any
common stock acquired by the purchaser in this offering. This report must be in
the form attached to British Columbia Securities Commission Blanket Order BOR
#95/17, a copy of which may be obtained from Vitria. Only one report must be
filed in respect of common stock acquired on the same date and under the same
prospectus exemption.
Taxation and Eligibility for Investment
Canadian purchasers of common stock should consult their own legal and tax
advisors with respect to the tax consequences of an investment in the common
stock in their particular circumstances and with respect to the eligibility of
the common stock for investment by the purchaser under relevant Canadian
legislation.
62
<PAGE>
LEGAL MATTERS
The validity of the common stock offered by this prospectus will be passed
upon for us by Cooley Godward LLP, Palo Alto, California. As of the date of
this prospectus, partners and associates of Cooley Godward LLP own an aggregate
of approximately 12,437 shares of common stock through an investment
partnership. The underwriters have been represented by Wilson Sonsini Goodrich
& Rosati, Professional Corporation, Palo Alto, California.
EXPERTS
The balance sheet of Vitria Technology, Inc. as of December 31, 1997 and
1998, and the statements of operations, stockholders' equity and cash flows for
each of the three years in the period ended December 31, 1998, included in this
prospectus, have been included herein in reliance upon the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
that firm as experts in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Securities and Exchange Commission a registration
statement, which term shall include any amendment to the registration
statement, on Form S-1 under the Securities Act of 1933 with respect to the
shares of common stock offered by our company. This prospectus, which
constitutes a part of the registration statement, does not contain all of the
information set forth in the Registration Statement, some items of which are
contained in exhibits to the registration statement as permitted by the rules
and regulations of the Commission. For further information with respect to
Vitria and the common stock offered, reference is made to the registration
statement, including the exhibits, and the financial statements and notes filed
as a part of the registration statement. A copy of the registration statement,
including the exhibits and the financial statements and notes filed as a part
of it, may be inspected without charge at the public reference facilities
maintained by the Commission in Room 1024, 450 Fifth Street, N.W., Washington,
D.C. 20549, and the Commission's regional offices located at the Northwestern
Atrium Center, 500 West Madison Street, Suite 1400, Chicago Illinois 60661 and
Seven World Trade Center, 13th Floor, New York, New York 10048, and copies of
all or any part of the registration statement may be obtained from the
Securities and Exchange Commission upon the payment of fees prescribed by it.
The Securities and Exchange Commission maintains a Web site at
http://www.sec.gov that contains reports, proxy and information statements and
other information regarding companies that file electronically with it.
63
<PAGE>
VITRIA TECHNOLOGY, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Accountants.......................................... F-2
Balance Sheet.............................................................. F-3
Statement of Operations.................................................... F-4
Statement of Stockholders' Equity.......................................... F-5
Statement of Cash Flows.................................................... F-6
Notes to Financial Statements.............................................. F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of Vitria Technology, Inc.
In our opinion, the accompanying balance sheet and the related statements of
operations, of stockholders' equity and of cash flows present fairly, in all
material respects, the financial position of Vitria Technology, Inc. at
December 31, 1997 and 1998, and the results of its operations and its cash
flows for each of the three years ended December 31, 1998, in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the 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, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
San Jose, California
June 22, 1999, except for Note 9,
which is as of August 2, 1999
F-2
<PAGE>
VITRIA TECHNOLOGY, INC.
BALANCE SHEET
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Pro Forma
December 31, Stockholders'
---------------- June 30, Equity at
1997 1998 1999 June 30, 1999
------- ------- -------- -------------
(unaudited)
<S> <C> <C> <C> <C>
Assets
Current assets:
Cash and cash equivalents.......... $ 9,138 $12,792 $ 16,525
Accounts receivable, net........... 1,600 5,973 7,740
Other current assets............... 66 180 1,819
------- ------- --------
Total current assets............. 10,804 18,945 26,084
Property and equipment, net.......... 275 967 2,316
Other assets......................... 62 88 470
------- ------- --------
$11,141 $20,000 $ 28,870
======= ======= ========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable................... $ 211 $ 757 $ 27
Accrued liabilities................ 608 2,978 5,436
Deferred revenue................... 223 2,874 8,680
------- ------- --------
Total current liabilities........ 1,042 6,609 14,143
------- ------- --------
Commitments and contingencies (Note
5)
Stockholders' equity:
Convertible Preferred Stock:
issuable in series, $0.001 par
value; 8,470, 13,470 and 16,000
shares authorized, respectively;
7,708, 10,445, and 11,556
(unaudited) actual shares issued
and outstanding, respectively;
5,000 shares authorized; no shares
issued and outstanding,
pro forma (unaudited) (Liquidation
value at June 30, 1999 of $26,549
(unaudited)....................... 8 11 12 $ --
Common Stock: $0.001 par value;
40,000, 41,000 and 51,000 shares
authorized, respectively; 13,249,
15,268 and 15,710 (unaudited)
actual shares issued and
outstanding, respectively; 250,000
shares authorized; 27,266
(unaudited) shares issued and
outstanding,
pro forma......................... 13 15 16 28
Additional paid-in capital........... 10,737 29,104 38,835 38,835
Unearned stock-based compensation.... -- (5,511) (7,897) (7,897)
Accumulated deficit.................. (659) (10,228) (16,239) (16,239)
------- ------- -------- -------
Total stockholders' equity....... 10,099 13,391 14,727 $14,727
------- ------- -------- =======
$11,141 $20,000 $ 28,870
======= ======= ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
VITRIA TECHNOLOGY, INC.
STATEMENT OF OPERATIONS
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Year Ended December Six Months
31, Ended June 30,
---------------------- ----------------
1996 1997 1998 1998 1999
------ ------ ------- ------- -------
(unaudited)
<S> <C> <C> <C> <C> <C>
Revenues:
License........................... $ -- $ 955 $ 5,198 $ 1,027 $ 7,178
Service........................... 1,042 1,425 1,633 262 3,630
Government grant.................. 984 1,255 796 425 700
------ ------ ------- ------- -------
Total revenues.................. 2,026 3,635 7,627 1,714 11,508
------ ------ ------- ------- -------
Cost of revenues:
License........................... -- 18 -- -- 184
Service........................... 183 338 2,109 320 2,654
Government grant.................. 984 1,255 796 425 700
------ ------ ------- ------- -------
Total cost of revenues.......... 1,167 1,611 2,905 745 3,538
------ ------ ------- ------- -------
Gross profit........................ 859 2,024 4,722 969 7,970
------ ------ ------- ------- -------
Operating expenses:
Sales and marketing............... 80 1,143 6,572 2,354 6,779
Research and development.......... 397 841 4,794 2,063 3,883
General and administrative........ 147 695 1,807 633 1,601
Amortization of stock-based
compensation..................... -- -- 1,424 338 1,952
------ ------ ------- ------- -------
Total operating expenses........ 624 2,679 14,597 5,388 14,215
------ ------ ------- ------- -------
Income (loss) from operations....... 235 (655) (9,875) (4,419) (6,245)
Interest income..................... 8 75 306 160 234
------ ------ ------- ------- -------
Net income (loss)................... 243 (580) (9,569) (4,259) (6,011)
Deemed preferred stock dividend..... -- -- -- -- (1,908)
------ ------ ------- ------- -------
Net income (loss) available to
common stockholders................ $ 243 $ (580) $(9,569) $(4,259) $(7,919)
====== ====== ======= ======= =======
Net income (loss) per share
available to common stockholders:
Basic............................. $ 0.03 $(0.06) $ (0.80) $(0.40) $(0.60)
====== ====== ======= ======= =======
Diluted........................... $ 0.02 $(0.06) $ (0.80) $(0.40) $(0.60)
====== ====== ======= ======= =======
Weighted average shares used in
computation of net income (loss)
per share available to common
stockholders:
Basic............................. 7,044 9,915 12,003 10,643 13,098
====== ====== ======= ======= =======
Diluted........................... 13,835 9,915 12,003 10,643 13,098
====== ====== ======= ======= =======
Pro forma basic and diluted net loss
per share (unaudited).............. $ (0.48) $(0.33)
======= =======
Pro forma basic and diluted weighted
average shares (unaudited)......... 20,111 23,883
======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
VITRIA TECHNOLOGY, INC.
STATEMENT OF STOCKHOLDERS' EQUITY
(in thousands)
<TABLE>
<CAPTION>
Convertible
Preferred
Stock Common Stock Additional Unearned Total
------------- ------------- Paid-In Stock-Based Accumulated Stockholders'
Shares Amount Shares Amount Capital Compensation Deficit Equity
------ ------ ------ ------ ---------- ------------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1995................... 1,406 $ 1 11,918 $12 $ 550 $ -- $ (322) $ 241
Issuance of Series A
Convertible Preferred
Stock, net............ 114 1 -- -- 39 -- -- 40
Issuance of Common
Stock, net............ -- -- 1,170 1 111 -- -- 112
Net income............. -- -- -- -- -- -- 243 243
------ --- ------ --- ------- ------- -------- -------
Balance at December 31,
1996................... 1,520 2 13,088 13 700 -- (79) 636
Issuance of Common
Stock, net............ -- -- 161 -- 15 -- -- 15
Issuance of Series A1
Convertible Preferred
Stock for note
payable............... 950 1 -- -- 559 -- -- 560
Issuance of Series B
Convertible Preferred
Stock, net............ 5,238 5 -- -- 9,463 -- -- 9,468
Net loss............... -- -- -- -- -- -- (580) (580)
------ --- ------ --- ------- ------- -------- -------
Balance at December 31,
1997................... 7,708 8 13,249 13 10,737 -- (659) 10,099
Issuance of Common
Stock, net............ -- -- 2,019 2 615 -- -- 617
Issuance of Series C
Convertible Preferred
Stock, net............ 2,737 3 -- -- 10,964 -- -- 10,967
Unearned stock-based
compensation.......... -- -- -- -- 6,788 (6,788) -- --
Amortization of stock-
based compensation.... -- -- -- -- -- 1,277 -- 1,277
Net loss............... -- -- -- -- -- -- (9,569) (9,569)
------ --- ------ --- ------- ------- -------- -------
Balance at December 31,
1998................... 10,445 11 15,268 15 29,104 (5,511) (10,228) 13,391
Issuance of Common
Stock, net
(unaudited)........... -- -- 442 1 460 -- -- 461
Issuance of Series C
Convertible Preferred
Stock, net
(unaudited)........... 107 -- -- -- 420 -- -- 420
Issuance of Series D
Convertible Preferred
Stock, net
(unaudited)........... 1,004 1 -- -- 4,513 -- -- 4,514
Allocation of discount
on Preferred Stock.... -- -- -- -- 1,908 -- -- 1,908
Deemed preferred stock
dividend (unaudited).. -- -- -- -- (1,908) -- -- (1,908)
Unearned stock-based
compensation, net
(unaudited)........... -- -- -- -- 4,338 (4,338) -- --
Amortization of stock-
based compensation
(unaudited)........... -- -- -- -- -- 1,952 -- 1,952
Net loss (unaudited)... -- -- -- -- -- -- (6,011) (6,011)
------ --- ------ --- ------- ------- -------- -------
Balance at June 30, 1999
(unaudited)............ 11,556 $12 15,710 $16 $38,835 $(7,897) $(16,239) $14,727
====== === ====== === ======= ======= ======== =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
VITRIA TECHNOLOGY, INC.
STATEMENT OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Year Ended December Six Months
31, Ended June 30,
----------------------- ----------------
1996 1997 1998 1998 1999
----- ------- ------- ------- -------
(unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows from operating
activities:
Net income (loss)................. $ 243 $ (580) $(9,569) $(4,259) $(6,011)
Adjustments to reconcile net
income (loss) to net cash
provided by (used in) operating
activities:
Depreciation and amortization... 115 207 255 98 420
Provision for doubtful
accounts....................... 25 -- 350 50 199
Amortization of stock-based
compensation................... -- -- 1,424 338 1,952
Changes in assets and
liabilities:
Accounts receivable........... (474) (1,097) (4,723) (1,575) (1,966)
Other current assets.......... -- (58) (140) (53) (1,639)
Other assets.................. -- (62) -- (7) (382)
Accounts payable.............. 139 62 546 70 (730)
Accrued liabilities........... 175 432 2,370 552 2,458
Deferred revenue.............. -- 223 2,651 1,307 5,806
----- ------- ------- ------- -------
Net cash provided by (used in)
operating activities............. 223 (873) (6,836) (3,479) 107
----- ------- ------- ------- -------
Cash flows from investing
activities:
Net cash used in purchasing
property and equipment .......... (104) (431) (947) (322) (1,769)
----- ------- ------- ------- -------
Cash flows from financing
activities:
Issuance of Convertible note...... -- 560 -- -- --
Issuance of Convertible Preferred
Stock, net....................... 40 9,468 10,967 -- 4,934
Issuance of Common Stock, net..... 112 15 470 28 461
----- ------- ------- ------- -------
Net cash provided by financing
activities....................... 152 10,043 11,437 28 5,395
----- ------- ------- ------- -------
Net increase (decrease) in cash and
cash equivalents................... 271 8,739 3,654 (3,773) 3,733
Cash and cash equivalents at
beginning of period................ 128 399 9,138 9,138 12,792
----- ------- ------- ------- -------
Cash and cash equivalents at end of
period............................. $ 399 $ 9,138 $12,792 $ 5,365 $16,525
===== ======= ======= ======= =======
Supplemental noncash financing
activities:
Issuance of Convertible Preferred
Stock to founders for convertible
note payable..................... $ -- $ 560 $ -- $ -- $ --
===== ======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
VITRIA TECHNOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS
Note 1--The Company and Summary of Significant Accounting Policies:
The Company
Vitria Technology, Inc. (the "Company"), develops, markets and supports a
software product, BusinessWare, which enables customers to deploy sophisticated
eBusiness solutions across the extended enterprise. The Company was
incorporated in California in October 1994.
Unaudited interim results
The interim financial statements as of June 30, 1999 and for the six months
ended June 30, 1998 and 1999 are unaudited. In the opinion of management,
interim financial statements have been prepared on the same basis as the
audited financial statements and reflect all adjustments, consisting only of
normal recurring adjustments, necessary for the fair presentation of the
results of interim periods. The financial data and other information disclosed
in these notes to financial statements for the related periods are unaudited.
The results of operations for the interim periods are not necessarily
indicative of the results to be expected for any future periods.
Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Cash and cash equivalents
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents and investments with
original maturities greater than three months to be short-term investments.
Property and equipment
Property and equipment are stated at cost less accumulated depreciation.
Depreciation is computed using the straight-line method over the estimated
useful lives of the related assets of three years. Leasehold improvements are
amortized using the straight-line method over the term of the lease or
estimated useful lives, whichever is shorter.
Revenue recognition
The Company derives revenues from software licenses to end users for its
BusinessWare product and related services, which include maintenance and
support, consulting and training services. To date, there have been no
transactions involving licenses with VARs or system integrations that allow
subsequent resale to end-user customers. Effective January 1, 1998, the Company
adopted Statement of Position ("SOP") 97-2, "Software Revenue Recognition" with
the exception of the provision deferred by SOP 98-4, "Deferral of the Effective
Date of a Provision of SOP 97-2." In accordance with the adopted provisions of
SOP 97-2, the Company records revenue from software licenses when a license
agreement is signed by both parties, the fee is fixed and determinable,
collection of the fee is probable and delivery of the product has occurred. For
electronic delivery, the product is considered to have been delivered when the
access code to download the software from the Internet has been provided to the
customer. If an element of the license agreement has not been delivered,
revenue for the element is deferred based on vendor-specific objective evidence
of fair value. If vendor-specific objective evidence of fair value does not
exist, all revenue is deferred until sufficient objective
F-7
<PAGE>
VITRIA TECHNOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
evidence exists or all elements have been delivered. Payments received in
advance of revenue recognition are recorded as deferred revenue. The adoption
of SOP 97-2 resulted in the deferral of software license revenues in certain
agreements that would have been recognized upon delivery of the related
software under prior accounting standards. Revenues from maintenance and
support are deferred and recognized ratably over the term of the contract.
Revenues from consulting and training are deferred and recognized when the
services are performed and collectibility is deemed probable. Prior to January
1, 1998, the Company recorded revenue in accordance with the provisions of SOP
91-1, "Software Revenue Recognition."
In December 1998, the American Institute of Certified Public Accountants
issued SOP 98-9 "Modification of SOP 97-2, "Software Revenue Recognition" and
the Company adopted the statement for all transactions entered into in fiscal
1999. The adoption of this statement did not have a material impact on the
Company's operating results, financial position or cash flows.
A portion of the Company's revenues are also derived from government grants.
Government grant revenue is recognized as the research is performed and
allowable costs are incurred. Unbilled grant revenue is composed of allowable
reimbursable costs for the period in which a reimbursement application has yet
to be filed with the government.
Fair value of financial instruments
The Company's financial instruments, including cash and cash equivalents,
accounts receivables and accounts payable, are carried at cost, which
approximates their fair value because of the short-term maturity of these
financial instruments.
Research and development
Research and development expenses include costs incurred by the Company to
develop and enhance the Company's software. Research and development costs are
charged to expense as incurred.
Software development costs
Software development costs incurred prior to the establishment of
technological feasibility are charged to research and development expense as
incurred. Material software development costs incurred subsequent to the time a
product's technological feasibility has been established using the working
model approach, through the time the product is available for general release
to customers, are capitalized. Amortization of capitalized software development
costs begins when the product is available for general release to customers,
and is computed as the greater of (1) the ratio of current gross revenues for a
product to the total of current and anticipated future gross revenues for the
product, or (2) the straight-line method over the estimated economic life of
the product. To date, development costs qualifying for capitalization have been
insignificant and therefore have been expensed as incurred.
Stock-based compensation
The Company accounts for stock-based employee compensation arrangements in
accordance with provisions of Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB No. 25") and complies with the
disclosure provisions of Statement of Financial Accounting Standards ("SFAS")
No. 123, "Accounting for Stock-Based Compensation" ("SFAS No. 123"). Under APB
No. 25, unearned compensation is based on the difference, if any, on the date
of the grant, between the fair value of the Company's stock and the exercise
price. Unearned compensation is amortized and expensed in accordance with
Financial Accounting Standards Board Interpretation No. 28 using the multiple
option approach. The Company accounts for stock-based compensation issued to
non-employees in accordance with the provisions of SFAS No. 123 and Emerging
Issues Task Force No. 96-18, "Accounting for Equity Instruments That Are Issued
to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or
Services."
F-8
<PAGE>
VITRIA TECHNOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Pro forma stockholders' equity (unaudited)
Effective upon the closing of the Company's initial public offering (the
"Offering"), the outstanding shares of Convertible Preferred Stock will
automatically convert into approximately 11,556,000 shares of Common Stock.
Also effective upon the closing of this offering 250,000,000 shares of Common
Stock and 5,000,000 shares of undesignated Convertible Preferred Stock will be
authorized. The pro forma effects of these transactions are unaudited and have
been reflected in the accompanying pro forma Stockholders' Equity as of June
30, 1999.
Income taxes
Income taxes are accounted for using an asset and liability approach that
requires the recognition of taxes payable or refundable for the current year
and deferred tax liabilities and assets for the future tax consequences of
events that have been recognized in the Company's financial statements or tax
returns. The measurement of current and deferred tax liabilities and assets are
based on provisions of the enacted tax law; the effects of future changes in
tax laws or rates are not anticipated. The measurement of deferred tax assets
is reduced, if necessary, by the amount of any tax benefits that, based on
available evidence, are not expected to be realized.
Net income and net loss per share
Basic net income (loss) per share is computed by dividing the net income
(loss) available to common stockholders for the period by the weighted average
number of shares of Common Stock outstanding during the period. Diluted net
income per share is computed by dividing the net income (loss) for the period
by the weighted average number of common and potential common equivalent shares
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,
upon conversion of Preferred Stock and conversion of debt. For the six months
ended June 30, 1999 (unaudited), net loss available to common stockholders
includes a charge of $1,908,000 to reflect the deemed preferred stock dividend
recorded in connection with the Series D Preferred Stock financing.
F-9
<PAGE>
VITRIA TECHNOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
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):
<TABLE>
<CAPTION>
Six Months
Year Ended December 31, Ended June 30,
------------------------- ----------------
1996 1997 1998 1998 1999
------- ------- ------- ------- -------
(unaudited)
<S> <C> <C> <C> <C> <C>
Numerator:
Net income (loss)........... $ 243 $ (580) $(9,569) $(4,259) $(6,011)
Deemed preferred stock
dividend................... -- -- -- -- (1,908)
------- ------- ------- ------- -------
Net income (loss) available
to common stockholders..... $ 243 $ (580) $(9,569) $(4,259) $(7,919)
======= ======= ======= ======= =======
Denominator:
Weighted average shares..... 12,315 13,116 13,881 13,295 15,415
Weighted average Common
Stock subject to repurchase
agreements................. (5,271) (3,201) (1,878) (2,652) (2,317)
------- ------- ------- ------- -------
Denominator for basic
calculation................ 7,044 9,915 12,003 10,643 13,098
------- ------- ------- ------- -------
Weighted average effect of
diluted securities:
Series A Preferred Stock.... 1,520 -- -- -- --
Common Stock subject to
repurchase agreements...... 5,271 -- -- -- --
------- ------- ------- ------- -------
Denominator for diluted
calculation................ 13,835 9,915 12,003 10,643 13,098
------- ------- ------- ------- -------
Net income (loss) per share
available to common
stockholders:
Basic....................... $ 0.03 $ (0.06) $ (0.80) $ (0.40) $ (0.60)
======= ======= ======= ======= =======
Diluted..................... $ 0.02 $ (0.06) $ (0.80) $ (0.40) $ (0.60)
======= ======= ======= ======= =======
</TABLE>
The following table sets forth the weighted average potential shares of
Common Stock that are not included in the diluted net income (loss) per share
calculation above because to do so would be antidilutive for the periods
indicated (in thousands):
<TABLE>
<CAPTION>
Six Months
Year Ended Ended June
December 31, 30,
----------------- -------------
1996 1997 1998 1998 1999
---- ----- ------ ------ ------
(unaudited)
<S> <C> <C> <C> <C> <C>
Weighted average effect of antidilutive
securities:
Series A Preferred Stock................ -- 1,520 1,520 1,520 1,520
Series A-1 Preferred Stock.............. -- -- 950 950 950
Series B Preferred Stock................ -- 875 5,238 5,238 5,238
Series C Preferred Stock................ -- -- 400 -- 2,843
Series D Preferred Stock -- -- -- -- 234
Convertible debt........................ -- 557 -- -- --
Employee stock options.................. -- 527 1,624 1,541 1,888
Common Stock subject to repurchase
agreements............................. -- 3,201 1,878 2,652 2,317
---- ----- ------ ------ ------
-- 6,680 11,610 11,901 14,990
==== ===== ====== ====== ======
</TABLE>
F-10
<PAGE>
VITRIA TECHNOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Pro forma net loss per share (unaudited)
Pro forma net loss per share available to common stockholders for the year
ended December 31, 1998 and the six months ended June 30, 1999 (unaudited) is
computed using the weighted average number of common shares outstanding,
including the conversion of the Company's Convertible Preferred Stock into
shares of the Company's Common Stock effective upon the closing of the
Company's initial public offering, as if such conversion occurred on January 1,
1998 or at date of original issuance, if later. The resulting unaudited pro
forma adjustment includes an increase in the weighted average shares used to
compute basic and diluted net loss per share of 8,108,000 and 10,785,000 for
the year ended December 31, 1998 and the six months ended June 30, 1999,
respectively. The calculation of pro forma diluted net loss per share excludes
other potential shares of Common Stock as the effect would be antidilutive. Pro
forma potential shares of Common Stock are composed of Common Stock subject to
repurchase rights and incremental Common Stock issuable upon the exercise of
stock options and upon conversion of debt.
Comprehensive income
Effective January 1, 1998, the Company adopted the provisions of SFAS No.
130, "Reporting Comprehensive Income." SFAS No. 130 establishes standards for
reporting comprehensive income and its components in financial statements.
Comprehensive income, as defined, includes all changes in equity (net assets)
during a period from non-owner sources. During each of the three years ended
December 31, 1998, and the six months ended June 30, 1998 and 1999 (unaudited)
the Company has not had any significant transactions that are required to be
reported in comprehensive income.
Segment information
Effective January 1, 1998, the Company adopted the provisions of SFAS No.
131, "Disclosures about Segments of Enterprise and Related Information." During
each of the three years ended December 31, 1998 and the six months ended June
30, 1998 and 1999 (unaudited) the Company's management considers its business
activities to be focused on the license of its product and related services to
end-user customers. Since management's primary form of internal reporting is
aligned with the offering of products and services the Company believes it
operates in one segment. The Company's customers have all been located in the
United States.
Concentration of credit risks
Financial instruments that potentially subject the Company to a
concentration of credit risk consist of cash and cash equivalents and accounts
receivable. All of the Company's available funds at December 31, 1997 and 1998
and June 30, 1999 (unaudited), were deposited in money market accounts with
financial institutions which management believes are of high credit quality.
The Company's accounts receivable are derived from transactions with clients
located in the United States. The Company performs ongoing credit evaluations
of its client's financial condition and generally requires no collateral from
its clients. The Company maintains an allowance for doubtful accounts
receivable based upon the expected collectibility of accounts receivable.
F-11
<PAGE>
VITRIA TECHNOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
The following table summarizes the revenue from customers in excess of 10%
of total customer revenues:
<TABLE>
<CAPTION>
Six Months
Year Ended Ended
December 31, June 30,
---------------- -------------
1996 1997 1998 1998 1999
---- ---- ---- ----- -----
(unaudited)
<S> <C> <C> <C> <C> <C>
Company A..................................... 27% 44% --% --% --%
Company C..................................... --% --% 12% 44% --%
Company D..................................... 23% --% --% --% --%
Company E..................................... --% --% 30% --% --%
Company F..................................... --% --% --% --% 10%
Company H..................................... --% --% --% --% 16%
Government grant.............................. 49% 37% 10% 25% --%
</TABLE>
The following table summarizes receivables from customers in excess of 10%
of total accounts receivable:
<TABLE>
<CAPTION>
Six Months
Year Ended Ended
December 31, June 30,
---------------- -------------
1996 1997 1998 1998 1999
---- ---- ---- ----- -----
(unaudited)
<S> <C> <C> <C> <C> <C>
Company A..................................... 46% 37% --% --% --%
Company B..................................... --% 18% --% --% --%
Company C..................................... --% 16% --% 30% --%
Company D..................................... 28% --% --% --% --%
Company E..................................... --% --% 49% --% --%
Company F..................................... --% --% 13% --% 21%
Company G..................................... --% --% 10% --% --%
Company I..................................... --% --% --% 16% --%
Company J..................................... --% --% --% --% 17%
Government grant.............................. 24% 26% --% 19% 10%
</TABLE>
Stock split
In 1996, the Board of Directors approved a one and a half-for-one stock
split of the Company's Preferred and Common Stock. All information presented
in these financial statements has been retroactively adjusted to reflect the
stock split.
Recent accounting pronouncements
In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-1, "Accounting for the Cost of Computer
Software Developed or Obtained for Internal Use" ("SOP 98-1"). SOP 98-1 is
effective for financial statements for years beginning after December 15,
1998. SOP 98-1 provides guidance over accounting for computer software
developed or obtained for internal use including the requirement to capitalize
specified costs and amortization of such costs. The Company has adopted the
provisions of SOP 98-1 in its fiscal year beginning January 1, 1999, and does
not expect such adoption to have a material effect on the Company's financial
statements.
F-12
<PAGE>
VITRIA TECHNOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
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 ending June 30,
1999. SFAS 133 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 fiscal
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.
Note 2--Balance Sheet Components:
<TABLE>
<CAPTION>
December 31,
-------------- June 30,
1997 1998 1999
------ ------ -----------
(unaudited)
<S> <C> <C> <C>
Accounts receivable, net:
Accounts receivable.......................... $1,139 $5,884 $6,574
Unbilled consulting services................. -- 100 1,697
Unbilled grant revenue....................... 496 322 --
------ ------ ------
1,635 6,306 8,271
Less: Allowance for doubtful accounts.......... (35) (333) (531)
------ ------ ------
$1,600 $5,973 $7,740
====== ====== ======
Other current assets:
Prepaid items................................ $ 66 $ 180 $1,274
Short-term deposits.......................... -- -- 545
------ ------ ------
$ 66 $ 180 $1,819
====== ====== ======
Property and equipment, net:
Computer equipment........................... $ 66 $ 479 $1,039
Software licenses............................ 20 124 527
Furniture and fixtures....................... 198 404 612
Leasehold improvements....................... 92 263 862
------ ------ ------
376 1,270 3,040
Less: Accumulated depreciation and
amortization.................................. (101) (303) (724)
------ ------ ------
$ 275 $ 967 $2,316
====== ====== ======
Accrued liabilities:
Payroll and related expense.................. $ 232 $1,916 $2,845
Deferred grant awards........................ 258 581 581
Sales taxes.................................. -- 86 289
Other........................................ 118 395 1,721
------ ------ ------
$ 608 $2,978 $5,436
====== ====== ======
</TABLE>
F-13
<PAGE>
VITRIA TECHNOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Note 3--Income Taxes:
For the year ended December 31, 1996, the Company's current tax provison was
reduced by the utilization of available net operating loss carryforwards. The
tax provision (benefit) is reconciled to the amount computed using the federal
statutory rate as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------
1996 1997 1998
------- ------- ---------
<S> <C> <C> <C>
Federal statutory provision (benefit)......... $ 87 $ (197) $ (3,254)
State taxes, net of federal provision
(benefit).................................... 15 (8) (287)
Future benefits not currently recognized...... -- 205 2,971
Nondeductible compensation.................... -- -- 570
Utilization of net loss carryforwards......... (102) -- --
------- ------- ---------
$ -- $ -- $ --
======= ======= =========
</TABLE>
At December 31, 1998, the Company had approximately $7,200,000 of federal
and $3,300,000 of state net operating loss carryforwards available to offset
future taxable income which expire at various dates through 2013. Under the Tax
Reform Act of 1986, the amounts of and benefits from net operating loss
carryforwards may be impaired or limited in certain circumstances. Events which
cause limitations in the amount of net operating losses that the Company may
utilize in any one year include, but are not limited to, a cumulative ownership
change of more than 50%, as defined, over a three year period.
Deferred tax assets and liabilities consist of the following (in thousands):
<TABLE>
<CAPTION>
December 31,
--------------
1997 1998
----- -------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards........................... $ 197 $ 2,656
Accruals and allowances.................................... 34 492
Research credits........................................... 74 519
----- -------
Net deferred tax assets...................................... 305 3,667
Valuation allowance.......................................... (305) (3,667)
----- -------
$ -- $ --
===== =======
</TABLE>
The Company has incurred losses for the years ended December 31, 1997 and
1998. Management believes that, based on the history of such losses and other
factors, the weight of available evidence indicates that it is more likely than
not that the Company will not be able to realize its deferred tax assets and
thus a full valuation reserve has been recorded at December 31, 1997 and 1998.
Note 4--Government Grants:
During January 1996, the Company received a grant award from the National
Institute of Standards and Technology ("NIST") totaling $2,000,000 to conduct
research and provide technical and business reports on a project to create a
highly flexible technology to simplify the task of integrating and sharing
real-time data among many different planning, tracking and control systems. The
grant reimburses the Company's allowable expenses over a period of two years
with $1,010,000 and $990,000 budgeted for the grant years ended January 25,
1997 and 1998, respectively. NIST requires the Company to comply with certain
cost accounting and reporting requirements, as applicable. For the period
ending December 31, 1996 and 1997, the Company recognized revenue for grant-
related expenditures in the amount of $984,000 and $1,016,000, respectively. In
F-14
<PAGE>
VITRIA TECHNOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
October 1997, the Company received an additional NIST grant totaling $2,000,000
to investigate at least three categories of Model-Driven Components. The grant
reimburses the Company's allowable expenses over a period of two years with
$970,000 and $1,030,000 of the amended budget for the grant years ending
September 30, 1998 and 1999, respectively. Additionally, NIST requires the
Company to comply with certain cost accounting and reporting requirements, as
applicable. For the period ended December 31, 1997 and 1998 and the six months
ended June 30, 1999 (unaudited), the Company has incurred reimbursable costs of
$467,000, $822,000 and $516,000, respectively, in grant-related expenditures.
Also in November 1997, the Company received a joint-venture NIST grant totaling
$1,600,000 to help develop technology to enable the building of integrated
manufacturing applications for multi-company supply chain planning and
execution. The grant reimburses the Company's allowable expenses over a period
of three years with $300,000, $650,000 and $650,000 of the amended budget for
the grant years ending December 31, 1998, 1999 and 2000, respectively.
Additionally, NIST requires the Company to comply with certain cost accounting
and reporting requirements, as applicable. For the periods ended December 31,
1997 and 1998 and the six months ended June 30, 1999 (unaudited), the Company
has incurred reimbursable costs of $30,000, $297,000, and $334,000
respectively, in reimbursable expenditures.
The Company incurs costs in connection with the NIST grants and in some
cases, additional approval by the grant officer is required. Amounts received
subject to NIST grant approval are accrued, which totaled $258,000, $581,000
and $581,000, respectively, at December 31, 1997 and 1998 and June 30, 1999
(unaudited). Such amounts will be recognized as revenue or refunded, depending
upon the outcome of the approval process.
Note 5--Commitments and Contingencies:
Leases
The Company leases office space under noncancelable operating leases with
various expiration dates through 2003. The leases require payment of property
taxes, insurance, maintenance and utilities. The terms of the facility leases
provide for rental payments on a graduated scale. The Company recognizes rent
expense on a straight-line basis over the lease period, and has recognized
prepaid expense for rent expenditures not incurred but paid. Rent expense under
these leases are $158,000, $146,000, $546,000, $285,000 and $411,000 for the
years ended December 31, 1996, 1997 and 1998, and for the six months ended June
30, 1998 and 1999 (unaudited), respectively.
Future net minimum lease payments, under noncancelable operating leases at
December 31, 1998, including the Company's new facility lease entered into in
April 1999 are as follows (in thousands):
<TABLE>
<CAPTION>
Year ending Operating
December 31, Leases
------------ ---------
<S> <C>
1999.............................................................. $1,277
2000.............................................................. 1,986
2001.............................................................. 2,029
2002.............................................................. 2,072
2003.............................................................. 1,258
------
Total minimum lease payments.................................... $8,622
======
</TABLE>
Contingencies
From time to time, the Company may have certain contingent liabilities that
arise in the ordinary course of its business activities. The Company accrues
contingent liabilities when it is probable that future expenditures
F-15
<PAGE>
VITRIA TECHNOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
will be made and such expenditures can be reasonably estimated. In the opinion
of management, there are no pending claims of which the outcome is expected to
result in a material adverse effect on the financial position or results of
operations or cash flows of the Company.
Employee benefits
In December 1998, the Company established a nonqualified, unfunded deferred
compensation plan for certain key executives providing for payments upon
retirement, death or disability. Under the plan, certain employees receive
payments equal to the sum of all amounts deferred at the election of the
employee and any corporate contributions credited to the plan and due and owing
to the employee, together with earning adjustments, minus any distributions.
Through December 31, 1998 and June 30, 1999 (unaudited), the Company did not
make any contributions to the plan.
The Company has recorded the assets and liabilities for the deferred
compensation at gross amounts in the accompanying balance sheet because such
assets are not protected from the Company's general creditors and, as such,
these assets could be used to meet the obligations of the Company in the event
of bankruptcy. The assets are recorded at fair value. Any changes in fair value
are recognized as a reduction or increase in compensation expense. Plan assets
included in other assets at December 31, 1998 and June 30, 1999 (unaudited)
were $5,000 and $102,000, respectively. Plan liabilities included in other
liabilities at December 31, 1998 and June 30, 1999 (unaudited) were $5,000 and
$102,000, respectively.
Note 6--Convertible Preferred Stock:
Convertible Preferred Stock ("Convertible Preferred") at December 31, 1998,
consist of the following, except for shares authorized, which reflect the
Articles of Incorporation as amended in May 1999 (in thousands):
<TABLE>
<CAPTION>
Proceeds
Net of
Shares Liquidation Issuance
Series Authorized Outstanding Amount Costs
------ ---------- ----------- ----------- --------
<S> <C> <C> <C> <C>
A................................ 1,520 1,520 $ 540 $ 526
A1............................... 950 950 560 560
B................................ 6,000 5,238 9,500 9,468
C................................ 5,000 2,737 11,000 10,967
D................................ 1,200 -- -- --
Undesignated..................... 1,330 -- -- --
------ ------ ------- -------
16,000 10,445 $21,600 $21,521
====== ====== ======= =======
</TABLE>
In January 1999, the Company issued 107,213 shares of $0.001 par value
Series C Convertible Preferred Stock and received proceeds net of issuance
costs totaling $420,000. In May 1999, the Company issued 1,003,980 shares of
$0.001 par value Series D Convertible Preferred Stock and received proceeds net
of issuance costs totaling $4,514,000.
The holders of Convertible Preferred have various rights and preferences as
follows:
Voting
Each share of Convertible Preferred has voting rights equal to an equivalent
number of shares of Common Stock into which it is convertible and votes
together as one class with the Common Stock.
F-16
<PAGE>
VITRIA TECHNOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
As long as 150,000 shares of Convertible Preferred remain outstanding, the
Company must obtain approval from the holders of a majority of the shares of
Convertible Preferred in order to alter the Articles of Incorporation as
related to Convertible Preferred, change the authorized number of shares of
Common Stock or Convertible Preferred, create a new class of stock with rights
and preferences above those of Convertible Preferred, repurchase any shares of
Common Stock other than shares subject to the right of repurchase by the
Company, authorize a dividend on Common Stock or Convertible Preferred or
effect a merger, corporate reorganization, sale of control or any other
transaction in which all or substantially all of the assets of the Company are
sold, or increase the maximum authorized number of directors to greater than
seven.
Dividends
The holders of the Series C Convertible Preferred are entitled to receive
noncumulative dividends, in preference to any dividends on the Company's
outstanding Series A, A1, B and D Convertible Preferred and Common Stock, at
the per annum rate of 8% of the "Original Issue Price," when and as declared by
the Board of Directors. The holders of the Series A, A1, B and D Convertible
Preferred are entitled to receive, in preference to the holders of the Common
Stock, noncumulative dividends at the per annum rate of 8% of the original
issue price, when and as declared by the Board of Directors. The Original Issue
Price of Series A, Series A1, Series B, Series C and Series D is $0.3555,
$0.6101, $1.8135, $4.02 and $4.50 per share, respectively. The holders of
Convertible Preferred will also be entitled to participate in dividends on
Common Stock, when and if declared by the Board of Directors, based on the
number of shares of Common Stock held on an as-if converted basis. No dividends
on Convertible Preferred or Common Stock have been declared by the Board from
inception through June 30, 1999 (unaudited).
Liquidation
In the event of any liquidation or winding up of the Company, the holders of
Series C Convertible Preferred are entitled to receive, in preference to the
holders of the Common Stock and the other holder of Convertible Preferred, a
per share amount equal to the Original Issue Price, plus any declared but
unpaid dividends. The holders of Series A, A1, B and D Convertible Preferred
then receive their Original Issue Prices plus any declared but unpaid
dividends.
The holders of Series C Convertible Preferred then receive an additional
amount equal to the difference between two times its Original Issue Price less
the dollar amount received above. Then the remaining assets shall be
distributed ratably to the holders of all Common Stock and Convertible
Preferred on a common equivalent basis until each series has received three
times the Original Issue Price for such series. The additional dollar amount
which Series C receives from its distribution of the remaining assets shall be
reduced by its previously received dollar amount equal to two times its
Original Issue Price. A merger, acquisition, sale of voting control or sale of
substantially all of the assets of the Company in which the shareholders of the
Company do not own a majority (50% or more) of the outstanding shares of the
surviving corporation is deemed to be a liquidation.
Conversion
Each share of Convertible Preferred is convertible at the option of the
holder into shares of Common Stock by multiplying the appropriate conversion
rate in effect by the number of Convertible Preferred being converted. The
conversion rate is the quotient obtained by dividing the Original Issue Price
by the conversion price (which is initially the respective Original Issue
Price, until it is adjusted). Additionally, each share of Convertible Preferred
shall automatically be converted upon (i) an initial public offering of the
Company equal to or exceeding $8.04 per share with aggregate proceeds not less
than $20,000,000, or (ii) the written consent of a majority of the Convertible
Preferred holders then outstanding.
F-17
<PAGE>
VITRIA TECHNOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Note 7--Common Stock:
At December 31, 1997 and 1998, there were 13,249,000 and 15,268,000 shares
outstanding, respectively, of Common Stock issued to the founders of the
Company, affiliates and other nonrelated parties. At June 30, 1999 (unaudited)
there were 15,710,000 shares outstanding of Common Stock. A portion of the
shares sold are subject to a right of repurchase by the Company subject to
vesting, which is generally over a five year period from the earlier of grant
date or employee hire date, as applicable, until vesting is complete. At
December 31, 1997 and 1998 and June 30, 1999 (unaudited), there were
approximately 3,320,000, 3,056,000 and 2,303,000 shares, respectively, subject
to repurchase.
During the year ended December 31, 1998, the Company issued 52,500 shares of
Common Stock to consultants in exchange for services. In connection with these
issuances the Company recorded expenses of $147,000 based on the fair value of
the Common Stock on the date of grant.
The Company had reserved shares of Common Stock for future issuance as
follows (in thousands):
<TABLE>
<CAPTION>
June 30,
1999
-----------
(unaudited)
<S> <C>
Conversion of Series A........................................... 1,520
Conversion of Series A1.......................................... 950
Conversion of Series B........................................... 5,238
Conversion of Series C........................................... 4,000
Conversion of Series D........................................... 1,004
Common Stock issued.............................................. 15,710
Exercise of options under the Equity Incentive Plans............. 5,701
Undesignated..................................................... 16,877
------
51,000
======
</TABLE>
Note 8--Employee Benefit Plans:
Equity Incentive Plans
In March 1995, the Company adopted the 1995 Equity Incentive Plan, which
provides for the granting of stock options, stock appreciation rights, stock
bonuses and restricted stock to employees, directors and consultants of the
Company. In October 1998, the Company adopted the 1998 Executive Incentive Plan
which provides for the granting of stock options to employees, directors and
consultants. Options granted under the 1995 Equity Incentive Plan and the 1998
Executive Incentive Plan (the "Plans") may be either incentive stock options
("ISO") or nonqualified stock options ("NSO"). ISO may be granted only to
employees (including officers and directors who are also employees) of the
Company. NSO may be granted to employees and consultants of the Company. In
1995 and 1996, the Company sold 1,005,000 shares of Common Stock to employees
under the 1995 Equity Incentive Plan. In December 1998 and January 1999, the
Company sold 95,000 of the Series C Convertible Preferred Stock to employees
under the 1995 Equity Incentive Plan. For the year ended December 31, 1998, the
Company has reserved 4,992,000 of Common Stock for issuance under the Plans.
In June 1999, the Board of Directors adopted and, in July 1999 the
stockholder approved, the 1999 Equity Incentive Plan, which amended the 1995
Equity Incentive Plan, and amended the 1998 Executive Incentive Plan (the
"Amended Plans"). The Amended Plans provide for the granting of stock options,
stock appreciation rights, stock bonuses, and restricted stock purchase awards
to employees, including officers, directors or consultants. The Company has
reserved 10,000,000 shares of Common Stock for issuance under the Amended
F-18
<PAGE>
VITRIA TECHNOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Plans and on December 31 of each year for 10 years, starting with the year
1999, the number of shares reserved will automatically increases by 6.5% of the
outstanding Common Stock on a fully-diluted basis, with the number of options
granted which qualify as incentive stock options, never to exceed 8,000,000
shares issued and available. The remaining number of authorized shares that
could be issued under the Amended Plans was 3,708,792 at June 30, 1999
(unaudited).
Options under the Amended Plans may be granted for periods of up to ten
years and at prices no less than 85% of the estimated fair value of the shares
on the date of grant as determined by the Board of Directors, provided,
however, that (i) the exercise price of an ISO and NSO shall not be less than
100% and 85% of the estimated fair value of the shares on the date of grant,
respectively, and (ii) the exercise price of an ISO and NSO granted to a 10%
shareholder shall not be less than 110% of the estimated fair value of the
shares on the date of grant, respectively. Furthermore, under the 1998
Executive Incentive Plan, no employee shall be eligible to be granted options
covering more than 400,000 shares of the Common Stock during any calendar year.
Options are exercisable immediately subject to repurchase options held by the
Company which lapse over a maximum period of five years at such times and under
such conditions as determined by the Board of Directors. To date, options
granted generally vest over five years.
The following table summarizes information about stock option transactions
under the Plans (in thousands, except per share amounts):
<TABLE>
<CAPTION>
Year Ended December 31, Six Months
------------------------------------------------- Ended June 30,
1996 1997 1998 1999
--------------- ---------------- ---------------- ----------------
Weighted Weighted Weighted Weighted
Average Average Average Average
Exercise Exercise Exercise Exercise
Shares Price Shares Price Shares Price Shares Price
------ -------- ------ -------- ------ -------- ------ --------
(unaudited)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Outstanding at beginning
of period.............. -- $ -- 489 $0.10 1,627 $0.22 1,877 $0.36
Granted below fair
value.................. -- -- -- 0.25 3,258 0.31 1,017 0.88
Granted at fair value .. 489 0.10 1,583 0.25 -- -- 200 8.00
Exercised............... -- -- (201) 0.11 (2,014) 0.24 (984) 0.63
Canceled................ -- -- (244) 0.25 (994) 0.22 (118) 0.53
--- ----- ------ -----
Outstanding at end
of period.............. 489 0.10 1,627 0.22 1,877 0.36 1,992 1.25
=== ===== ====== =====
Options vested.......... -- -- 60 30
=== ===== ====== =====
Weighted average fair
value of options
granted during the
period................. $0.03 $0.06 $0.10 $0.50
===== ===== ===== =====
</TABLE>
F-19
<PAGE>
VITRIA TECHNOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
The following table summarizes the information about stock options
outstanding and exercisable as of December 31, 1998 (in thousands, except per
share amounts):
<TABLE>
<CAPTION>
Options Outstanding and
Exercisable
--------------------------------
Weighted
Average Weighted
Remaining Average
Range of Number Contractual Exercise
Exercise Price Outstanding Life Price
-------------- ----------- ----------- --------
<S> <C> <C> <C>
$ 0.10................................... 10 7.67 $ 0.10
0.25................................... 1,431 9.30 0.25
0.70................................... 436 9.92 0.70
-----
1,877
=====
</TABLE>
The following table summarizes the information about stock options
outstanding and exercisable as of June 30, 1999 (unaudited) (in thousands,
except per share amounts):
<TABLE>
<CAPTION>
Options Outstanding and
Exercisable
--------------------------------
Weighted
Average Weighted
Remaining Average
Range of Number Contractual Exercise
Exercise Price Outstanding Life Price
-------------- ----------- ----------- --------
<S> <C> <C> <C>
$ 0.10................................... 10 7.17 $ 0.10
0.25................................... 984 8.88 0.25
0.70................................... 566 9.27 0.70
1.04................................... 232 9.87 1.04
8.00................................... 200 9.98 8.00
-----
1,992
=====
</TABLE>
Fair value disclosures
The Company applies the measurement principles of APB No. 25 in accounting
for its stock option plan. Had compensation expense for options granted for the
years ended December 31, 1996, 1997 and 1998 and the six months ended June 30,
1998 and 1999 (unaudited) been determined based on the fair value at the grant
dates as prescribed by SFAS No. 123, the Company's net income (loss) and net
income (loss) per share would have been increased or decreased to the pro forma
amounts indicated below.
<TABLE>
<CAPTION>
Six Months
Year Ended December 31, Ended June 30,
------------------------ ----------------
1996 1997 1998 1998 1999
-------------- -------- ------- -------
(unaudited)
<S> <C> <C> <C> <C> <C>
Net income (loss) available to
common stockholders:
As reported.................. $ 243 $ (580) $ (9,569) $(4,259) $(7,919)
------ ------- -------- ------- -------
Pro forma.................... $ 243 $ (636) $ (9,628) $(4,285) $(8,108)
------ ------- -------- ------- -------
Net income (loss) per share
available to common
stockholders:
As reported:
Basic...................... $ 0.03 $ (0.06) $ (0.80) $ (0.40) $ (0.60)
------ ------- -------- ------- -------
Diluted.................... $ 0.02 $ (0.06) $ (0.80) $ (0.40) $ (0.60)
------ ------- -------- ------- -------
Pro forma:
Basic...................... $ 0.03 $ (0.06) $ (0.80) $ (0.40) $ (0.62)
------ ------- -------- ------- -------
Diluted.................... $ 0.02 $ (0.06) $ (0.80) $ (0.40) $ (0.62)
------ ------- -------- ------- -------
</TABLE>
F-20
<PAGE>
VITRIA TECHNOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
The Company calculated the minimum fair value of each option grant on the
date of grant using the Black-Scholes option pricing model as prescribed by
SFAS No. 123 using the following assumptions:
<TABLE>
<CAPTION>
Six Months Ended
Year Ended December 31, June 30,
-------------------------- --------------------
1996 1997 1998 1998 1999
---- --------- --------- --------- ---------
(unaudited)
<S> <C> <C> <C> <C> <C>
Risk-free interest
rates................... 6.51% 5.55-6.20% 4.13-5.46% 5.38-5.64% 4.55-5.81%
Expected lives (in
years).................. 5 5 5 5 5
Dividend yield........... 0% 0% 0% 0% 0%
Expected volatility...... 0% 0% 0% 0% 0%
</TABLE>
Because the determination of fair value of all options granted after such
time as the Company becomes a public entity will include an expected volatility
factor in addition to the factors described in the preceding paragraph, the
above results may not be preventative of future periods.
Unearned stock-based compensation
In connection with certain stock option grants, during the year ended
December 31, 1998 and the six months ended June 30, 1999 (unaudited), the
Company recognized unearned compensation totaling $6,788,000 and $4,338,000,
respectively, which is being amortized over the five year vesting periods of
the related options using the multiple option approach. Amortization expense
recognized for the year ended December 31, 1998 and the six months ended June
30, 1999 (unaudited) totaled approximately $1,277,000 and $1,952,000,
respectively. In determining the fair market value on each grant date, the
Company considered, among other things, the relative level of revenues and
other operating results, the absence of a public trading market for the
Company's securities and the competitive nature of the Company's market.
401(k) Plan
In May 1996, the Board of Directors adopted an employee savings and
retirement plan (the "401(k) Plan") covering substantially all of the Company's
employees. Pursuant to the 401(k) Plan, eligible employees may elect to reduce
their current compensation by up to the statutory prescribed limit and have the
amount of such reduction contributed to the 401(k) Plan. The Company may make
contributions to the 401(k) Plan on behalf of eligible employees. The Company
has not made any contributions to the 401(k) Plan.
1999 Employee Stock Purchase Plan
In June 1999, the Board of Directors adopted, and in July 1999 the
stockholders approved, the 1999 Employee Stock Purchase Plan ("Purchase Plan")
which provides for the issuance of 1,500,000 shares of Common Stock pursuant to
purchase rights granted to employees. Under the plan, eligible employees can
have up to 10% of their earnings withheld to be used to purchase shares of
Common Stock on specified dates determined by the Board of Directors. The price
of Common Stock purchased under the Purchase Plan will be equal to 85% of the
lower of the fair market value of the Common Stock on the commencement date of
each offering period or the specified purchase date. The Board of Directors may
specify a look-back period of up to 27 months. On August 14 of each year for 10
years, starting with the year 2000, the number of shares in the reserve
automatically increases by the greater of (i) 2% of the outstanding shares on a
fully-diluted basis, or (ii) the number of shares that have been issued under
the Purchase Plan during the prior 12-month period, so that the reserve
automatically is restored to 1,500,000 shares; never to exceed 16,500,000
shares issued and available.
F-21
<PAGE>
VITRIA TECHNOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS--(Concluded)
Note 9--Subsequent Events:
Reincorporation
In July 1999, the Company's Board of Directors authorized the
reincorporation of the Company in the state of Delaware. Following the
reincorporation, the Company will be authorized to issue 51,000,000 shares of
$0.001 par value Common Stock and 16,000,000 shares of $0.001 par value
Preferred Stock. 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.
Stock option grants
During July 1999, the Company granted options to purchase 1,414,500 shares
of common stock to existing and new employees at a weighted average price of
$8.33. In connection with the stock option grants, the Company recognized $2.4
million in unearned compensation that will be recognized over the related
vesting period.
F-22
<PAGE>
[LOGO OF VITRIA TECHNOLOGY, INC.]
