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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1999
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____________ to _____________
Commission file number
0-27207
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VITRIA TECHNOLOGY, INC.
(Exact name of registrant as specified in its charter)
Delaware 77-0386311
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
945 Stewart Drive
Sunnyvale, CA 94086
(Address, including zip code, of principal executive offices)
Registrant's telephone number, includes area code: (408) 212-2700
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.001 par value per share
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Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, (or such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of January 14, 2000 was approximately: $2,613,508,319. Shares of
Common Stock held by each current executive officer and director and by each
person who is known by the registrant to own 5% or more of the outstanding
Common Stock have been excluded from this computation in that such persons may
be deemed to be affiliates of the Company. Share ownership information of
certain persons known by the Company to own greater than 5% of the outstanding
common stock for purposes of the preceding calculation is based solely on
information on Schedule 13G filed with the Commission and is as of December 31,
1999. This determination of affiliate status is not a conclusive determination
for other purposes.
Number of shares of common stock outstanding as of January 14,
2000: 61,750,992
DOCUMENTS INCORPORATED BY REFERENCE
The Registrant has incorporated by reference portions of its Proxy
Statement for its 2000 Annual Meeting of Stockholders to be filed by April 21,
2000.
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VITRIA TECHNOLOGY, INC.
TABLE OF CONTENTS
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PART I
Item 1. Business............................................................. 3
Item 2. Properties........................................................... 11
Item 3. Legal Proceedings.................................................... 11
Item 4. Submission of Matters to a Vote of Security Holders.................. 11
Executive Officers of the Registrant.........................................
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters..................................................................... 12
Item 6. Selected Financial Data.............................................. 13
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations....................................................... 14
Item 7a. Quantitative and Qualitative Disclosures About Market Risk.......... 20
Item 8. Financial Statements and Supplementary Data.......................... 29
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure........................................................ 29
PART III
Item 10. Directors and Executive Officers of the Registrant.................. 30
Item 11. Executive Compensation.............................................. 31
Item 12. Security Ownership of Certain Beneficial Owners and Management...... 32
Item 13. Certain Relationships and Related Transactions...................... 32
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.... 33
Signatures................................................................... 34
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FORWARD-LOOKING STATEMENTS
This report on Form 10-K contains forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934 which are subject to the "safe harbor" created
by those sections. These forward-looking statements include but are not limited
to: risk as related to market acceptance of Vitria's product, deployment delays
or errors associated with these products, hardware platform incompatibilities,
reliance on a limited number of customers for a majority of revenue, need to
maintain and enhance certain business relationships with system integrators and
other parties, ability to manage growth, activities by Vitria and others
regarding protection of proprietary information, release of competitive
products and other actions by competitors, Year 2000 problems and economic
downturns in either domestic or foreign markets. These forward-looking
statements are generally identified by words such as "expect," "anticipate,"
"intend," "believe," "hope," "assume," "estimate" and other similar words and
expressions. Discussions containing these forward-looking statements may be
found in "Business" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations." These forward-looking statements involve
risks and uncertainties that could cause our actual results to differ
materially from those in the forward- looking statements. We undertake no
obligation to publicly release any revisions to the forward-looking statements
or reflect events or circumstances after the date of this document. The
business risks on pages 21 through 29, among other things, should be considered
in evaluating our prospects and future financial performance.
PART I
ITEM 1. BUSINESS
Overview
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 70 companies, including American Century, CableVision,
Covad, Deutsche Bank, Duke Energy, FedEx, Fujitsu PC, Inacom, Level 3,
NorthPoint Communications, Rhythms NetConnections, 3Com, WebLink Wireless 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, Deloitte Consulting and Electronic Data Systems.
In addition, Vitria develops products targeted at specific industries and built
on BusinessWare.
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.
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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.
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.
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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,
Deloitte 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.
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.
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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. 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.
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.
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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.
Customers
We have initially targeted the telecommunications, business services,
manufacturing and financial services industries. As of December 31, 1999, over
70 customers had licensed BusinessWare, including the following representative
list of current customers who have purchased $250,000 or more of licenses and
related services:
A.B. Watley, Inc.
Advanced Radio Telecom Corp.
Allied Riser Communications Corporations
American Century Services Corporation
@Link Network, Inc.
CableVision Systems Corporation
Citizens Telecom Services Company, LLC
Covad Communications Company
Deutsche Bank AG
Digital Microwave Corporation
Duke Energy Corporation
Federal Express Corporation
FirstWorld Communications, Inc.
Fujitsu PC Corporation
Hewitt Associates LLC
ICG Communications, Inc.
Inacom Corporation
KPMG LLP
Level 3 Communications, Inc.
MVX.com
NET-tel Corporation
NextLink Communications, Inc.
NorthPoint Communications, Inc.
PSI.Net, Inc.
Rhythms NetConnections Inc.
Southern California Edison
Telstra Corporation Ltd
3Com Corporation
2-Wire, Inc.
WebLink Wireless, Inc.
Verio, Inc.
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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 December 31, 1999, our sales
force consisted of sales professionals and technical sales engineers located in
sixteen domestic locations and offices in the United Kingdom and Japan. We have
sales offices in the greater metropolitan areas of Atlanta, Austin, Boca Raton,
Boston, Burbank, Chicago, Cincinnati, Dallas, Denver, Houston, Irvine,
Minneapolis, New York City (two offices), San Jose, St. Louis, Washington D.C.,
London, England and Tokyo, Japan. 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.
System Integrators. We have established strategic relationships with a
number of leading system integrators including Andersen Consulting, Deloitte
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.
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., Portal Software, Inc., 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
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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 57 employees as of December 31, 1999.
Research and Development
As of December 31, 1999, our engineering group consisted of 92 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, $5.6 million in 1998
and $11.9 million in 1999.
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. We
believe BusinessWare's ability to address all four requirements is an important
differentiating factor. 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. Customers could extend any of these products to support
business process automation by writing custom programs. However, we believe
that none of our competitors' products offer model driven business process
automation or real-time analysis. With model driven business process
automation, business users can define and manage their business processes using
visual representations created using a graphical user interface. 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.
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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;
. 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.
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Employees
As of December 31, 1999, we had a total of 290 employees, including 92 in
research and development, 109 in sales and marketing, 57 in customer support,
professional services and training, and 32 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.
ITEM 2. PROPERTIES
Our principal sales, marketing, research and development and administrative
offices are currently located in approximately 108,000 square feet in
Sunnyvale, California. Our leases will expire in August 2003 and October 2007.
ITEM 3. LEGAL PROCEEDINGS
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock is traded on the Nasdaq National Market under the symbol
"VITR." Public trading of our common stock commenced on September 16, 1999.
The following table shows, for the periods indicated, the high and low per
share prices of our common stock, as reported by the Nasdaq National Market.
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Quarter Ended High Low
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September 30, 1999................................................ $ 25.31 15.78
December 31, 1999................................................. $136.50 19.69
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As of December 31, 1999, there were approximately 225 stockholders of
record of our common stock. 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.
Recent Sales of Unregistered Securities
We have sold and issued the following unregistered securities during the
period covered by this report:
(1) From January 1999 through December 31, 1999, we granted stock options
to purchase 6,677,200 shares to employees, consultants and directors
pursuant to our 1999 Equity Incentive Plan and 1998 Executive
Incentive Plan. Of these stock options, 655,980 shares have been
canceled without being exercised, 2,499,206 shares have been
exercised, 1,292,600 shares of common stock and 9,475 shares of Series
C preferred stock have been repurchased and 7,276,014 shares remain
outstanding.
(2) From October 1998 to January 1999, we issued an aggregate of 2,843,533
shares of Series C preferred stock to 39 purchasers at a purchase
price of $4.02 per share, for an aggregate purchase price of
$11,431,003. All shares of Series C preferred stock were converted
into shares of common stock at the rate of one share of common stock
for each share of Series C preferred stock owned upon completion of
the initial public offering.
(3) In January 1999, we issued an aggregate of 15,000 shares of common
stock to 1 purchaser at $0.35 per share, for an aggregate purchase
price of $5,250.
(4) In May 1999, we issued an aggregate of 1,003,980 shares of Series D
preferred stock to 17 purchasers at a purchase price of $4.50 per
share for an aggregate purchase price of $4,517,910. All shares of
Series D preferred stock were converted into shares of common stock at
the rate of one share of common stock for each share of Series D
preferred stock owned upon completion of the initial public offering.
All common stock numbers have been retroactively adjusted to reflect the
December 1999 stock split.
The sales and issuances of securities described in paragraph (1) above were
deemed to be exempt from registration under the Securities Act by virtue of
Rule 701 of the Securities Act in that they were offered and sold either
pursuant to a written compensatory benefit plan or pursuant to a written
contract relating to compensation, as provided by Rule 701.
The sales and issuances of securities described in paragraphs (3) through
(4) above were deemed to be exempt from registration under the Securities Act
by virtue of Rule 4(2), Regulation D or Regulation S promulgated thereunder.
With respect to the grant of stock options and restricted stock awards
described in paragraph (1), an exemption from registration was unnecessary in
that none of the transactions involved a "sale" of securities as this term is
used in Section 2(3) of the Securities Act.
Appropriate legends are affixed to the stock certificates issued in the
aforementioned transactions. Similar legends were imposed in connection with
any subsequent sales of any of these securities. All recipients either
received adequate information about us or had access, through employment or
other relationships, to the information.
12
<PAGE>
Use of Proceeds from Sales of Registered Securities
We commenced our initial public offering on September 16, 1999 pursuant to a
Registration Statement on Form S-1 (File No. 333-81297) declared effective on
September 16, 1999. The offering terminated following the sale of all
securities registered. The managing underwriters of the public offering were
Credit Suisse First Boston, Merrill Lynch & Co., Robertson Stephens and
SoundView Technology Group (the "Underwriters"). In the offering, we sold an
aggregate of 6,900,000 shares of our common stock for an initial price of $8.00
per share. The aggregate proceeds from the offering were $55.2 million. We paid
expenses of approximately $5.2 million, of which approximately $3.9 million
represented underwriting discounts and commissions and approximately $1.5
million represented expenses related to the offering. Net proceeds from the
offering were $50.0 million. As of December 31, 1999, none of the net proceeds
had been used. The net proceeds were invested in commercial paper, mutual funds
and money market funds.
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------
1995 1996 1997 1998 1999
------ ----- ------ ------- --------
(in thousands, except per share
data)
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenues:
License.............................. $ -- $ -- $ 955 $ 5,198 $ 21,790
Service.............................. 376 1,042 1,425 1,633 8,539
Government grant..................... -- 984 1,255 796 1,212
------ ----- ------ ------- --------
Total revenues....................... 376 2,026 3,635 7,627 31,541
------ ----- ------ ------- --------
Cost of revenues:
License.............................. -- -- 18 -- 407
Service.............................. 15 183 338 2,109 6,103
Government grant..................... -- 984 1,255 796 1,212
------ ----- ------ ------- --------
Total cost of revenues............... 15 1,167 1,611 2,905 7,722
------ ----- ------ ------- --------
Gross profit.......................... 361 859 2,024 4,722 23,819
------ ----- ------ ------- --------
Operating expenses:
Sales and marketing.................. -- 80 1,143 6,572 20,009
Research and development............. 575 397 841 4,794 10,736
General and administrative........... 37 147 695 1,807 3,991
Amortization of stock-based
compensation........................ -- -- -- 1,424 4,525
------ ----- ------ ------- --------
Total operating expenses............. 612 624 2,679 14,597 39,261
------ ----- ------ ------- --------
Income (loss) from operations......... (251) 235 (655) (9,875) (15,442)
Interest and other income............. 14 8 75 306 1,336
------ ----- ------ ------- --------
Net income (loss)..................... (237) 243 (580) (9,569) (14,106)
Deemed preferred stock dividend....... -- -- -- -- (1,908)
------ ----- ------ ------- --------
Net income (loss) available to common
stockholders......................... $ (237) $ 243 $ (580) $(9,569) $(16,014)
====== ===== ====== ======= ========
Net income (loss) per share available
to common stockholders:
Basic................................ $(0.02) $0.02 $(0.03) $ (0.40) $ (0.42)
Diluted.............................. $(0.02) $0.01 $(0.03) $ (0.40) $ (0.42)
</TABLE>
13
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------
1995 1996 1997 1998 1999
----- ------ ------ ------- -------
(in thousands, except per share
data)
<S> <C> <C> <C> <C> <C>
Weighted average shares used in
computation of net income (loss) per
share available to common stockholders:
Basic.................................... 9,686 14,088 19,830 24,006 37,874
Diluted.................................. 9,686 27,670 19,830 24,006 37,874
<CAPTION>
December 31,
-----------------------------------
1995 1996 1997 1998 1999
----- ------ ------ ------- -------
(in thousands)
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents................. $ 128 $ 399 $9,138 $12,792 $52,218
Working capital........................... 179 585 9,762 12,336 54,237
Total assets.............................. 252 961 11,141 20,000 86,494
Deferred revenue.......................... -- -- 223 2,874 15,627
Stockholders' equity...................... 241 636 10,099 13,391 59,450
</TABLE>
ITEM 7. 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
December 31, 1999, we had an accumulated deficit of $24.3 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
primarily from accounts in the United States, we opened an office in the United
Kingdom in June 1999 and plan to expand further into Europe and Asia. We opened
an office in Japan in January 2000.
14
<PAGE>
During 1999, we recognized approximately 3% of our revenue from customers
outside the United States. We believe international revenues will represent a
more meaningful component of our total revenues as our operations grow. To
date, we have not experienced significant seasonality of revenue. We expect
that future results may be affected by the fiscal or quarterly budget cycle 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. In 1999,
revenues from Sprint accounted for 11% 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 that makes it difficult to predict
future operating results. We believe our success requires expanding our
customer base and continuing to enhance our BusinessWare products. We intend to
continue to invest significantly in sales, marketing and research and
development and expect to incur operating losses for at least the next eighteen
months. Our operating expenses are relatively fixed and are based on
anticipated revenue trends; a delay in the recognition of revenue from one or
more license transactions could cause significant variations in operating
results from quarter to quarter and could result in unforeseen losses. Fees
from contracts that do not meet our revenue recognition policy requirements are
recorded as deferred revenues. While a small portion of our revenues each
quarter is recognized from deferred revenue, our quarterly performance will
depend primarily upon entering into new contracts to generate revenues for that
quarter. New contracts may not result in revenue during the quarter in which
the contract was signed, and we may not be able to predict accurately when
revenues from these contracts will be recognized. Our future operating results
will depend on many factors, including the following:
. size and timing of customer orders and product and service delivery;
. level of demand for our professional services;
. changes in the mix of our products and services;
. actions taken by our competitors, including new product introductions and
pricing changes;
. costs of maintaining and expanding our operations;
. timing of our development and release of new and enhanced products;
. costs and timing of hiring qualified personnel;
. success in maintaining and enhancing existing relationships and
developing new relationships with system integrators;
. technological changes in our markets, including changes in standards for
computer and networking software and hardware;
. deferrals of customer orders in anticipation of product enhancements or
new products;
. delays in our ability to recognize revenue as a result of the decision
by our customers to postpone software delivery;
. customer budget cycles and changes in these budget cycles; 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.
15
<PAGE>
Results Of Operations
The following tables set forth statement of operations data for each of the
eight quarters ended December 31, 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 annual report 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 annual report. 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, Sept. 30, Dec. 31,
-------- -------- --------- -------- -------- -------- --------- --------
1998 1998 1998 1998 1999 1999 1999 1999
-------- -------- --------- -------- -------- -------- --------- --------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Revenues:
License................ $ 139 $ 888 $ 1,643 $ 2,528 $ 3,487 $ 3,691 $ 5,209 $ 9,403
Service................ 151 111 279 1,092 1,472 2,158 2,293 2,616
Government grant....... 371 54 121 250 250 450 333 179
------- ------- ------- ------- ------- ------- ------- -------
Total revenues......... 661 1,053 2,043 3,870 5,209 6,299 7,835 12,198
------- ------- ------- ------- ------- ------- ------- -------
Cost of revenues:
License................ -- -- -- -- 62 122 101 122
Service................ 122 198 540 1,249 1,294 1,360 1,528 1,921
Government grant....... 371 54 121 250 250 450 333 179
------- ------- ------- ------- ------- ------- ------- -------
Total cost of
revenues.............. 493 252 661 1,499 1,606 1,932 1,962 2,222
------- ------- ------- ------- ------- ------- ------- -------
Gross profit............ 168 801 1,382 2,371 3,603 4,367 5,873 9,976
------- ------- ------- ------- ------- ------- ------- -------
Operating expenses:
Sales and marketing.... 701 1,653 1,585 2,633 2,889 3,890 5,089 8,141
Research and
development........... 717 1,346 1,369 1,362 1,961 1,922 2,981 3,872
General and
administrative........ 234 399 617 557 726 875 981 1,409
Amortization of stock-
based compensation.... 123 215 412 674 867 1,085 1,411 1,162
------- ------- ------- ------- ------- ------- ------- -------
Total operating
expenses.............. 1,775 3,613 3,983 5,226 6,443 7,772 10,462 14,584
------- ------- ------- ------- ------- ------- ------- -------
Loss from operations.... (1,607) (2,812) (2,601) (2,855) (2,840) (3,405) (4,589) (4,608)
Interest and other
income................. 91 69 56 90 129 105 331 771
------- ------- ------- ------- ------- ------- ------- -------
Net loss................ $(1,516) $(2,743) $(2,545) $(2,765) $(2,711) $(3,300) $(4,258) $(3,837)
======= ======= ======= ======= ======= ======= ======= =======
As a Percentage of Total
Revenues:
Revenues:
License................ 21% 84% 80% 65% 67% 59% 67% 77%
Service................ 23 11 14 28 28 34 29 22
Government grant....... 56 5 6 7 5 7 4 1
------- ------- ------- ------- ------- ------- ------- -------
Total revenues......... 100 100 100 100 100 100 100 100
------- ------- ------- ------- ------- ------- ------- -------
Cost of revenues:
License................ -- -- -- -- 1 2 1 1
Service................ 19 19 26 32 25 22 20 16
Government grant....... 56 5 6 7 5 7 4 1
------- ------- ------- ------- ------- ------- ------- -------
Total cost of
revenues.............. 75 24 32 39 31 31 25 18
------- ------- ------- ------- ------- ------- ------- -------
Gross profit............ 25 76 68 61 69 69 75 82
------- ------- ------- ------- ------- ------- ------- -------
Operating expenses:
Sales and marketing.... 106 157 78 68 55 62 65 67
Research and
development........... 108 128 67 35 38 30 38 32
General and
administrative........ 35 38 31 15 14 14 12 11
Amortization of stock-
based compensation.... 19 20 20 17 17 17 18 9
------- ------- ------- ------- ------- ------- ------- -------
Total operating
expenses.............. 268 343 195 135 124 123 133 119
------- ------- ------- ------- ------- ------- ------- -------
Loss from operations.... (243) (267) (128) (74) (55) (54) (58) (37)
Interest and other
income................. 14 7 3 3 3 2 4 6
------- ------- ------- ------- ------- ------- ------- -------
Net loss................ (229)% (260)% (125)% (71)% (52)% (52)% (54)% (31)%
======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
16
<PAGE>
Revenues
License. License revenues increased from $955,000 in 1997 to $5.2 million in
1998. License revenues increased 319% over 1998 to $21.8 million in 1999. These
increases were the result of the growth in the number of licenses to new
customers and to higher average transaction size. Our average transaction size
has increased due to larger deployments by our customers.
Service. Service revenues increased from $1.4 million in 1997, to $1.6
million in 1998, and to $8.5 million in 1999. 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. The 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 each quarter in 1999 as we supported a number of new deployments of
our product.
Government Grant. Government grant revenues were $1.3 million in 1997,
$796,000 in 1998 and $1.2 million in 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. 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 were $407,000 in 1999. Cost of license
revenues consists of royalty payments to third parties for technology
incorporated in our product. We began incurring royalty payment obligations in
the first quarter of 1999 due to the licensing to our customers of a product
that 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 were $338,000 in
1997, $2.1 million in 1998 and $6.1 million in 1999. As a percentage of our
service revenues these costs represented 24% in 1997, 129% in 1998 and 71% in
1999. 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 the
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. Our investment in additional service
personnel, which allowed decreased use of third-party service providers,
resulted in a positive gross margin in each of the four quarters of 1999. 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.
17
<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 $1.1 million in 1997, to
$6.6 million in 1998, and to $20.0 million in 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 for each
quarter in 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 $841,000 in 1997, to $4.8 million in
1998, and to $10.7 million in 1999. The increase of $4.0 million for 1998
compared to 1997 was attributable to increases of $2.9 million in personnel
expenses and $273,000 in consulting fees. In the third quarter of 1999, we
hired additional research and development personnel resulting in a
corresponding increase in expenses. 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, information
systems costs, professional service fees and allowances for doubtful accounts.
These expenses increased from $695,000 in 1997, to $1.8 million in 1998 and to
$4.0 million in 1999. The increases from 1997 to 1998 were attributable to
increases in personnel expenses, professional service fees and the allowance
for doubtful accounts in response to the broadening of our customer base and
increasing accounts receivable balances. The increases from 1998 to 1999 were
attributable to increases in personnel expenses and professional service fees.
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 $12.7 million through December 31, 1999. We amortized
employee stock-based compensation expense of $1.4 million in 1998 and $4.5
million in 1999. We expect to record employee stock-based compensation expenses
of approximately, $1.1 million for the quarter ending March 31, 2000, $943,000
for the quarter ending June 30, 2000, $754,000 for the quarter ending September
30, 2000, and $668,000 for the quarter ending December 31, 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 and $46,000
for the years ended December 31, 1998 and 1999, respectively, in connection
with stock issued for services.
18
<PAGE>
Interest and Other Income. Interest and other income increased to $1.3
million in 1999 from $306,000 in 1998, and $75,000 in 1997. The increase was
due to increased interest income and a gain on disposal of fixed assets in
1999.
Provision for Income Taxes
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, 1999, we had net operating loss carryforwards for federal
tax purposes of approximately $14.7 million and for state tax purposes of
approximately $1.1 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
We raised approximately $50.0 million in September 1999 from an initial
public offering of 6,900,000 shares of our common stock, net of underwriting
discounts, commissions and issuance costs. Prior to the offering we had
financed our operations through private sales of common and preferred stock,
with net proceeds of $27.7 million. As of December 31, 1999, we had $52.2
million in cash and cash equivalents and $54.2 million in working capital with
no outstanding long-term debts.
Net cash used in operating activities were $873,000 in 1997 and $6.8 million
in 1998. Net cash generated from operating activities was $1.6 million in 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 $431,000 in 1997, $947,000 in
1998 and $17.8 million in 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 $10.0
million in 1997, $11.4 million in 1998 and $55.6 million in 1999. Net cash
generated from financing activities consists primarily of net proceeds from the
issuance of convertible preferred and common stock.
In December 1999, we amended our Sunnyvale location lease to add an
additional building. Lease payments under the amended agreement commenced in
December 1999 and continue through 2007, resulting in aggregate lease expenses
of approximately $1.0 million per quarter through 2004 and $400,000 from 2005
to 2007.
In February 2000, we raised approximately $171.2 million from a secondary
public offering of shares of our common stock, net of underwriting discounts,
commissions and issuance costs. The aggregate proceeds from the offering of
1,500,000 shares at $120 per share were $180.0 million.
We expect to experience a significant growth in our operating expenses for
the forseeable future in order to execute our business plan. As a result, we
anticipate that operating expenses and planned capital expenditures will
constitute a material use of our cash resources. In addition, we may utilize
cash resources to fund acquisitions or investments in other businesses,
technologies or product lines. We believe that available cash and cash
equivalents including the net proceeds from the initial public offering and the
secondary offering will be sufficient to meet our working capital and operating
expense requirements for at least the next twelve
19
<PAGE>
months. Thereafter, we may require additional funds to support our working
capital and operating expense requirements of for other purposes and may seek
to raise these additional funds through public or private debt or equity
financings. There can be no assurance that this additional financing will be
available, or if available, will be on reasonable terms and not dilutive to our
stockholders.
Recently Issued Accounting Pronouncement
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivatives and Hedging Activities" ("SFAS 133"). SFAS 133 was
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 Data of FASB Statement No. 133"
("SFAS 137") SFAS 137 deferred the effective date until the first fiscal
quarter ending June 30, 2000. The Company has not engaged in hedging activities
or invested in derivative instruments.
Year 2000 Readiness
Many currently installed computer systems and software products were coded
to accept only two digit entries in the date code field. Beginning in the year
2000, these code fields needed 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.
All of our hardware and software systems successfully transitioned to the
year 2000. We have not experienced any significant problems as a result of Year
2000 Problems with our own systems or those of our vendors. However, the
potential still exists for a non-compliant system, either within Vitria or at a
vendor, to malfunction due to the Year 2000 issue and cause a disruption to our
business. Due to the uncertain nature of this issue, we can not determine at
this time whether the consequences of Year 2000 failures will have a material
impact on our results of operations and financial condition. We believe that,
with the successful transition to the year 2000, the possibility of significant
interruptions of normal operations should be minimal.
We originally estimated that total costs for our Year 2000 project, through
December 31, 1999, would be $15,000. Actual costs incurred were approximately
$9,000. The Company's expenditures consisted primarily of internal payroll
costs related to the assessment and correction of internal systems and
assessment and communication with vendors. We do not anticipate incurring
further costs related to the project.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are developing products in the United States and currently market our
product in North America, Europe and Japan. 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.
Exchange Rate Risk
We consider our exposure to foreign exchange rate fluctuations to be
minimal. Currently, all of our arrangements with third-party manufacturers
provide for pricing and payment in U.S. dollars, and, therefore, are not
subject to exchange rate fluctuations. To date, we have not engaged in any
currency hedging activities, although we may do so in the future. Fluctuations
in currency exchange rates could harm our business in the future.
20
<PAGE>
Business Risks
In addition to the risks discussed in "Business" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations," our
business is subject to the business risks set forth below.
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.
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 1999 were $14.1 million. As of December 31, 1999, we had
an accumulated deficit of $24.3 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.
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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 1999, sales to our ten largest customers accounted
for 49% 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 1999, sales
to Sprint accounted for 11% of total revenues.
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Our license agreements do not generally provide for ongoing license
payments. Therefore, we expect that revenues from a limited number of new
customers will continue to account for a large percentage of total revenues in
future quarters. Our ability to attract new customers will depend on a variety
of factors, including the performance, quality, breadth and depth of our
current and future products. The loss or delay of individual orders could have
a significant impact on revenues and operating results. Our failure to add new
customers that make significant purchases of our product and services would
reduce our future revenues.
Our markets are highly competitive and, if we do not compete effectively, we
may suffer price reductions, reduced gross margins and loss of market share.
The market for our product is intensely competitive, evolving and subject to
rapid technological change. The intensity of competition is expected to
increase in the future. Increased competition is likely to result in price
reductions, reduced gross margins and loss of market share, any one of which
could significantly reduce our future revenues. Our current competitors
include:
EAI vendors. We face competition from vendors offering Enterprise
Application Integration, or EAI, software products. These vendors include
Active Software, Inc., CrossWorlds Software, Inc., and New Era of Networks,
Inc., also known as NEON. A number of other companies are offering products
that address different aspects of our solution, including BEA Systems, Inc.,
Forte Software, Inc., Hewlett-Packard Company, IBM Corporation and Tibco
Software Inc. In the future, some of these companies may expand their products
to enhance existing, or to provide, process automation and real-time analysis
functionality.
Internal IT departments. "In house" information technology departments of
potential customers have developed or may develop systems that provide for some
or all of the functionality of our BusinessWare product. We expect that
internally developed application integration and process automation efforts
will continue to be a principal source of competition for the foreseeable
future. In particular, it can be difficult to sell our product to a potential
customer whose internal development group has already made large investments in
and progress towards completion of systems that our product is intended to
replace.
Other software vendors. We may in the future also encounter competition from
major enterprise software developers including Oracle Corporation, PeopleSoft,
Inc., and SAP AG. In addition, Microsoft Corporation has announced its
intention to introduce products which could compete with some aspects of our
product. These companies have significantly greater resources than Vitria.
Many of our competitors have more resources and broader customer
relationships than we do. In addition, many of these competitors have extensive
knowledge of our industry. Current and potential competitors have established
or may establish cooperative relationships among themselves or with third
parties to offer a single solution and increase the ability of their products
to address customer needs.
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
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significant technical review, assessment of competitive products, and approval
at a number of management levels within the customer's organization. Because of
these issues, our sales cycle has ranged from two to nine months and is
difficult to predict for any particular license transaction.
The cost and difficulties of implementing our product could significantly harm
our reputation with customers, diminishing our ability to license additional
products to our customers.
Our product is often purchased as part of large projects undertaken by our
customers. These projects are complex, time consuming and expensive. Failure by
customers to successfully deploy our product, or the failure by us or third-
party consultants to ensure customer satisfaction, could damage our reputation
with existing and future customers and reduce future revenues. In many cases,
our customers must interact with, modify, or replace significant elements of
their existing computer systems. The costs of our product and services
represent only a portion of the related hardware, software, development,
training and consulting costs. The significant involvement of third parties,
including system integrators, reduces the control we have over the
implementation of our product and the quality of customer service provided to
organizations which license our software.
Our sales are concentrated in the telecommunications and financial services
industries and if our customers in these markets decrease their information
technology spending, or we fail to penetrate other industries, our revenues may
decline.
We expect to continue to direct our sales and marketing efforts toward
companies in the telecommunications and financial services industries. Sales to
customers in the telecommunications and financial services industries accounted
for 57% of total revenues in 1998 and 81% of total revenues in 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. This presents technical challenges
and will require collaboration with system integrators and the commitment of
significant resources. 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.
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If our product does not operate with the many hardware and software platforms
used by our customers, our business may fail.
We currently serve a customer base with a wide variety of constantly
changing hardware, packaged software applications and networking platforms If
our product fails to gain broad market acceptance, due to its inability to
support a variety of these platforms, our operating results may suffer. Our
business depends, among others, on the following factors:
. our ability to integrate our product with multiple platforms and
existing, or legacy, systems and to modify our product as new versions
of packaged applications are introduced;
. the portability of our product, particularly the number of operating
systems and databases that our product can source or target;
. our ability to anticipate and support new standards, especially Internet
standards;
. the integration of additional software modules under development with
our existing product; and
. our management of software being developed by third parties for our
customers or use with our product.
If we fail to introduce new versions and releases of our product in a timely
manner, our revenues may decline.
We may fail to introduce or deliver new products on a timely basis, if at
all. In the past, we have experienced delays in the commencement of commercial
shipments of our BusinessWare product. To date, these delays have not had a
material impact on our revenues. If new releases or products are delayed or do
not achieve market acceptance, we could experience a delay or loss of revenues
and cause customer dissatisfaction. In addition, customers may delay purchases
of our product in anticipation of future releases. If customers defer material
orders in anticipation of new releases or new product introductions, our
revenues may decline.
Our product relies on third-party programming tools, like Java by Sun
Microsystems, and applications, and if we lose access to these tools and
applications, or are unable to modify our product in response to changes in
these tools and applications, our revenues could decline.
Our programs utilize Java programming technology provided by Sun
Microsystems. We also depend upon access to the interfaces, known as "APIs,"
used for communication between external software products and packaged
application software. Our access to APIs of third-party applications are
controlled by the providers of these applications. If the application provider
denies or delays our access to APIs, our business may be harmed. Some
application providers may become competitors or establish alliances with our
competitors, increasing the likelihood that we would not be granted access to
their APIs. In addition, we license technology related to the connectivity of
our product to third-party database and other applications. Loss of the ability
to use this technology, delays in upgrades, or failure of these third parties
to support these technologies, could cause our revenues to decline.
We could suffer losses and negative publicity if new versions and releases of
our product contain errors or defects.
Our product and its interactions with customers' software applications and
IT systems are complex and, accordingly, there may be undetected errors or
failures when products are introduced or as new versions are released. We have
in the past discovered software errors in our new releases and new products
after their introduction which has resulted in additional research and
development expenses. To date, these additional expenses have not been
material. For example, we discovered problems with respect to the ability of
software written in Java to run sufficiently fast to meet the needs of users in
some high performance applications. These errors have resulted in product
release delays, delayed revenues and customer dissatisfaction. We may in the
future discover errors, including Year 2000 compliance errors and additional
performance limitations, in new
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releases or new products after the commencement of commercial shipments. Since
many customers are using our product for mission-critical business operations,
any of these occurrences could seriously harm our business and generate
negative publicity.
Our growth continues to place a significant strain on our management systems
and resources and if we fail to manage our growth our ability to market and
sell our product and develop new products may be harmed.
We must plan and manage our growth effectively in order to offer our product
and services and achieve revenue growth and profitability in a rapidly evolving
market. Our growth has and will continue to place a significant strain on our
management systems and resources, and we may not be able to effectively manage
our growth in the future. We continue to increase domestically, and to a lesser
extent internationally, the scope of our operations, and have added a number of
employees. For example, the number of our employees grew from 40 at December
31, 1997 to 290 at December 31, 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.
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.
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.
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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.
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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 generated limited revenue from sales outside of the United
States. We have opened an office in the United Kingdom and intend to establish
additional offices in Europe. We have recently opened an office in Japan. 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 were coded
to accept only two digit entries in the date code field. Beginning in the year
2000, these code fields needed 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.
As of December 31, 1999, there has been no material adverse effect on our
business due to potential Year 2000 problems. If any of these events do occur
however, 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."
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 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
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:
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. 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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements required by this item are submitted as a separate
section of this Form 10-K. See Item 14.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
EXECUTIVE OFFICERS AND DIRECTORS
Our Executive Officers and Directors and information about them as of
December 31, 1999 are as follows:
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
JoMei Chang, Ph.D....... 47 President, Chief Executive Officer and Director
M. Dale Skeen, Ph.D..... 45 Chief Technology Officer and Director
Jay W. Shiveley, III.... 43 Senior Vice President, Worldwide Sales
Aleksander E.
Osadzinski............. 41 Vice President, Marketing
Paul R. Auvil, III...... 36 Vice President, Finance, Chief Financial Officer and Secretary
Frank Yu................ 35 Vice President, Engineering
Robert M. Halperin
(1)(2)................. 71 Director
John L. Walecka (1)..... 40 Director
William H. Younger, Jr.
(2).................... 50 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.
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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
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.
Frank Yu, has been our Vice President, Engineering since August 1999. From
1996 to 1999, he served as Vice President, Research and Development of Walker
Interactive Systems, Inc., a financial software company, and from 1998 to 1999
he also served as the General Manager of the Analytical Solutions Business Unit
of Walker Interactive Systems, Inc. Mr. Yu also held positions as Chief
Architect and other senior technical positions for various product divisions of
Cadence Design Systems, Inc. from 1990 to 1996. Mr. Yu holds a B.S. in Computer
and Information Sciences from the University of California, Santa Cruz.
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 is a founding partner of
Redpoint Ventures, a venture capital firm. Prior to founding Redpoint, Mr.
Walecka was a general partner with Brentwood Venture Capital, a venture capital
firm, since 1990 and was an associate there since 1984. Mr. Walecka is also a
director of Rhythms NetConnections, Inc., a provider of high speed internet
access. He 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 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.
Other information required by this item will be contained in our definitive
Proxy Statement with respect to our Annual Meeting of Stockholders, to be held
on July 21, 2000, under the captions "Election of Directors--Nominees," and
"Security Ownership of Certain Beneficial Owners and Management--Compliance
with the Reporting Requirement of Section 16(a)," and is incorporated by
reference into this report.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item will be contained in our definitive
Proxy Statement with respect to our Annual Meeting of Stockholders to be held
July 21, 2000, under the caption "Executive Compensation", and is incorporated
by reference into this report.
31
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item will be contained in our definitive
Proxy Statement with respect to our Annual Meeting of Stockholders to be held
July 21, 2000, under the caption "Security Ownership of Certain Beneficial
Owners and Management", and is incorporated by reference into this report.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item will be contained in our definitive
Proxy Statement with respect to our Annual Meeting of Stockholders to be held
July 21, 2000 under the caption "Certain Transactions", and is incorporated by
reference into this report.
32
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
<TABLE>
<CAPTION>
+
Page
----
(a) 1. Financial Statements
<S> <C>
Notes to Financial Statements.............................................. F-7
</TABLE>
(a) 2. Financial Statement Schedules
All other schedules are omitted because they are not required, or are not
applicable, or the required information is shown in the financial statements or
notes thereto.
(a) 3. Exhibits
The exhibits listed in the accompanying index to exhibits are filed or
incorporated by reference as a part of this annual report.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the fourth quarter ended December
31, 1999.
33
<PAGE>
VITRIA TECHNOLOGY, INC.
INDEX TO THE CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Accountants.......................................... F-2
Consolidated Balance Sheet................................................. F-3
Consolidated Statement of Operations....................................... F-4
Consolidated Statement of Stockholders' Equity............................. F-5
Consolidated Statement of Cash Flows....................................... F-6
Notes to the Consolidated 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 consolidated balance sheet and the related
consolidated 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, 1999 and 1998, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1999, in conformity with accounting principles generally accepted
in the United States. 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.
/s/ PricewaterhouseCoopers LLP
San Jose, California
January 21, 2000
F-2
<PAGE>
VITRIA TECHNOLOGY, INC.
CONSOLIDATED BALANCE SHEET
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
December 31,
------------------
1999 1998
-------- --------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents................................ $ 52,218 $ 12,792
Short-term investments................................... 13,231 --
Accounts receivable, net................................. 11,443 5,973
Other current assets..................................... 4,389 180
-------- --------
Total current assets................................... 81,281 18,945
Property and equipment, net................................ 4,452 967
Other assets............................................... 761 88
-------- --------
Total asset............................................ $ 86,494 $ 20,000
======== ========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable......................................... $ 401 $ 757
Accrued liabilities...................................... 11,016 2,978
Deferred revenue......................................... 15,627 2,874
-------- --------
Total current liabilities.............................. 27,044 6,609
-------- --------
Commitments and contingencies (Note 5)
Stockholders' equity:
Convertible Preferred Stock: issuable in series, $.001
par value; 5,000 shares authorized; no shares issued and
outstanding at December 31, 1999; 13,470 shares
authorized; 10,445 shares issued and outstanding at
December 31, 1998....................................... -- 11
Common Stock: $.001 par value; 250,000 shares authorized;
61,751 shares issued and outstanding at December 31,
1999; 41,000 shares authorized; 30,536 shares issued and
outstanding at December 31, 1998........................ 62 30
Additional paid-in capital............................... 91,290 29,089
Accumulated other comprehensive loss..................... (54) --
Unearned stock-based compensation........................ (7,223) (5,511)
Notes receivable......................................... (291) --
Accumulated deficit...................................... (24,334) (10,228)
-------- --------
Total stockholders' equity............................. 59,450 13,391
-------- --------
Total liabilities and stockholders' equity............. $ 86,494 $ 20,000
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
VITRIA TECHNOLOGY, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------
1999 1998 1997
-------- ------- -------
<S> <C> <C> <C>
Revenues:
License.......................................... $ 21,790 $ 5,198 $ 955
Service.......................................... 8,539 1,633 1,425
Government grant................................. 1,212 796 1,255
-------- ------- -------
Total revenues................................. 31,541 7,627 3,635
-------- ------- -------
Cost of revenues:
License.......................................... 407 -- 18
Service.......................................... 6,103 2,109 338
Government grant................................. 1,212 796 1,255
-------- ------- -------
Total cost of revenues......................... 7,722 2,905 1,611
-------- ------- -------
Gross profit....................................... 23,819 4,722 2,024
-------- ------- -------
Operating expenses:
Sales and marketing.............................. 20,009 6,572 1,143
Research and development......................... 10,736 4,794 841
General and administrative....................... 3,991 1,807 695
Amortization of stock-based compensation......... 4,525 1,424 --
-------- ------- -------
Total operating expenses....................... 39,261 14,597 2,679
-------- ------- -------
Loss from operations............................... (15,442) (9,875) (655)
Interest and other income.......................... 1,336 306 75
-------- ------- -------
Net loss........................................... (14,106) (9,569) (580)
Deemed preferred stock dividend.................... (1,908) -- --
-------- ------- -------
Net loss available to common stockholders.......... $(16,014) $(9,569) $ (580)
======== ======= =======
Basic and diluted net loss per share available to
common stockholders............................... $(0.42) $ (0.40) $(0.03)
======== ======= =======
Basic and diluted weighted average shares used in
the computation of net loss per share available to
common stockholders............................... 37,874 24,006 19,830
======== ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
VITRIA TECHNOLOGY, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(in thousands)
<TABLE>
<CAPTION>
Convertible
Preferred Accumulated
Stock Common Stock Additional Other Unearned Total
--------------- ------------- Paid-In Comprehensive Stock-Based Notes Accumulated Stockholders'
Shares Amount Shares Amount Capital Loss Compensation Receivable Deficit Equity
------- ------ ------ ------ ---------- ------------- ------------ ---------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at
December 31,
1996............ 1,520 $ 2 26,176 $ 26 $ 687 $ -- -- -- $ (79) $ 636
Issuance of
Common Stock,
net............. -- -- 322 -- 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 26,498 26 10,724 -- -- -- (659) 10,099
Issuance of
Common Stock,
net............. -- -- 4,038 4 613 -- -- -- -- 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 30,536 30 29,089 -- (5,511) -- (10,228) 13,391
Issuance of
Series C
Convertible
Preferred Stock,
net............. 107 -- -- -- 420 -- -- -- -- 420
Issuance of
Series D
Convertible
Preferred Stock,
net............. 1,004 1 -- -- 4,513 -- -- -- -- 4,514
Conversion of
Preferred to
Common Stock.... (11,556) (12) 23,112 24 (12) -- -- -- -- --
Allocation of
discount on
Preferred
Stock........... -- -- -- -- 1,908 -- -- -- -- 1,908
Deemed preferred
stock dividend.. -- -- -- -- (1,908) -- -- -- -- (1,908)
Issuance of
Common Stock,
net............. -- -- 7,970 8 50,752 -- -- -- -- 50,760
Unearned stock-
based
compensation,
net............. -- -- -- -- 6,237 -- (6,237) -- -- --
Amortization of
stock-based
compensation.... -- -- -- -- -- -- 4,525 -- -- 4,525
Notes
receivable...... -- -- 133 -- 291 -- -- (291) -- --
Foreign currency
translation..... -- -- -- -- -- (3) -- -- -- (3)
Unrealized loss
on marketable
securities...... -- -- -- -- -- (51) -- -- -- (51)
Net loss........ -- -- -- -- -- -- -- -- (14,106) (14,106)
------- ----- ------ ---- ------- ---- ------- ----- -------- --------
Balance at
December 31,
1999 ........... -- $ -- 61,751 $ 62 $91,290 $(54) $(7,223) $(291) $(24,334) $ 59,450
======= ===== ====== ==== ======= ==== ======= ===== ======== ========
<CAPTION>
Comprehensive
Loss
-------------
<S> <C>
Balance at
December 31,
1996............ $ --
Issuance of
Common Stock,
net............. --
Issuance of
Series A1
Convertible
Preferred Stock
for note
payable......... --
Issuance of
Series B
Convertible
Preferred Stock,
net............. --
Net loss........ (580)
-------------
Balance at
December 31,
1997............ $ (580)
=============
Issuance of
Common Stock,
net............. --
Issuance of
Series C
Convertible
Preferred Stock,
net............. --
Unearned stock-
based
compensation.... --
Amortization of
stock-based
compensation.... --
Net loss........ (9,569)
-------------
Balance at
December 31,
1998............ $ (9,569)
=============
Issuance of
Series C
Convertible
Preferred Stock,
net............. --
Issuance of
Series D
Convertible
Preferred Stock,
net............. --
Conversion of
Preferred to
Common Stock.... --
Allocation of
discount on
Preferred
Stock........... --
Deemed preferred
stock dividend.. --
Issuance of
Common Stock,
net............. --
Unearned stock-
based
compensation,
net............. --
Amortization of
stock-based
compensation.... --
Notes
receivable...... --
Foreign currency
translation..... (3)
Unrealized loss
on marketable
securities...... (51)
Net loss........ (14,106)
-------------
Balance at
December 31,
1999 ........... $(14,160)
=============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
VITRIA TECHNOLOGY, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------
1999 1998 1997
-------- ------- -------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss......................................... $(14,106) $(9,569) $ (580)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Gain on sale of fixed assets................... (114) -- --
Depreciation and amortization.................. 1,138 255 207
Provision for doubtful accounts................ 246 350 --
Stock-based compensation expense............... 4,571 1,424 --
Changes in assets and liabilities:
Accounts receivable.......................... (5,716) (4,723) (1,097)
Other current assets......................... (4,209) (140) (58)
Other assets................................. (673) -- (62)
Accounts payable............................. (356) 546 62
Accrued liabilities.......................... 8,038 2,370 432
Deferred revenue............................. 12,753 2,651 223
-------- ------- -------
Net cash provided by (used in) operating
activities...................................... 1,572 (6,836) (873)
-------- ------- -------
Cash flows from investing activities:
Net cash used in purchasing property and
equipment ...................................... (4,623) (947) (431)
Net cash provided from sale of property and
equipment....................................... 114 -- --
Net cash used in purchasing securities........... (13,282) -- --
-------- ------- -------
Net cash used in investing activities ........... (17,791) (947) (431)
-------- ------- -------
Cash flows from financing activities:
Issuance of convertible note..................... -- -- 560
Issuance of Convertible Preferred Stock, net..... 4,934 10,967 9,468
Issuance of Common Stock, net.................... 50,714 470 15
-------- ------- -------
Net cash provided by financing activities........ 55,648 11,437 10,043
-------- ------- -------
Effect of exchange rates on changes in cash and
cash equivalents.................................. (3) -- --
Net increase in cash and cash equivalents.......... 39,426 3,654 8,739
Cash and cash equivalents at beginning of period... 12,792 9,138 399
-------- ------- -------
Cash and cash equivalents at end of period......... $ 52,218 $12,792 $ 9,138
======== ======= =======
Supplemental non-cash financing activities:
Issuance of Convertible Preferred Stock to
founders for convertible note payable........... $ -- $ -- $ 560
======== ======= =======
Issuance of Common Stock for services............ $ 46 $ 147 $ --
======== ======= =======
Issuance of Common Stock for notes receivable.... $ 291 -- $ --
======== ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
VITRIA TECHNOLOGY, INC.
NOTES TO THE CONSOLIDATED 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. The Company reincorporated in
Delaware in September 1999.
Principles of consolidation
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiary. All significant intercompany accounts have
been eliminated.
Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Foreign currency
The functional currency of the Company's United Kingdom subsidiary is the
local currency. Balance sheet accounts are translated into United States
dollars at exchange rates prevailing at the balance sheet dates. Revenues,
costs and expenses are translated into United States dollars at average rates
for the period. Gains and losses resulting from translation are included as
other comprehensive income (loss). Net gains and losses resulting from foreign
exchange transactions are included in the consolidated statement of operations
and were not significant during any of the periods presented. To date, the
Company has not engaged in hedging activities.
Cash and cash equivalents and short-term investments
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. All
of the company's cash equivalents and short-term investments are classified as
available-for-sale and are reported at fair value with unrealized gains and
losses included in as other comprehensive income (loss). Fair values are based
upon quoted prices in an active market or if that information is not available
on quoted market prices of instruments of similar characteristics. All of
Vitria's short-term available-for-sale securities have a contractual maturity
of one year or less. Realized gains and losses and declines in value judged to
be other than temporary are included in other expense. To date, there have been
no gains or losses realized on the Company's cash equivalents or short-term
investments.
The following summarizes the Company's available-for-sale securities:
<TABLE>
<CAPTION>
Gross
Amortized Unrealized Market
Cost Losses Value
--------- ---------- ------
(in thousands)
<S> <C> <C> <C>
December 31, 1999
Commercial paper................................. 13,282 (51) 13,231
</TABLE>
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.
F-7
<PAGE>
VITRIA TECHNOLOGY, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 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.
F-8
<PAGE>
VITRIA TECHNOLOGY, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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."
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 loss per share
Basic net loss per share is computed by dividing the net loss available to
common stockholders for the period by the weighted average number of shares of
Common Stock outstanding during the period. Diluted net loss per share is
computed by dividing the net 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.
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>
Year Ended December 31,
--------------------------
1999 1998 1997
-------- ------- -------
<S> <C> <C> <C>
Numerator:
Net loss..................................... $(14,106) $(9,569) $ (580)
Deemed preferred stock dividend.............. (1,908) -- --
-------- ------- -------
Net loss available to common stockholders.... $(16,014) $(9,569) $ (580)
======== ======= =======
Denominator:
Weighted average shares...................... 42,664 27,762 26,232
Weighted average Common Stock subject to
repurchase agreements....................... (4,790) (3,756) (6,402)
-------- ------- -------
Denominator for basic and diluted
calculation................................. 37,874 24,006 19,830
-------- ------- -------
Net loss per share available to common
stockholders:
Basic and diluted............................ $ (0.42) $ (0.40) $ (0.03)
======== ======= =======
</TABLE>
F-9
<PAGE>
VITRIA TECHNOLOGY, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following table sets forth the weighted average potential shares of
Common Stock that are not included in the diluted net loss per share
calculation above because to do so would be antidilutive for the periods
indicated (in thousands):
<TABLE>
<CAPTION>
Year Ended
December 31,
--------------------
1999 1998 1997
------ ------ ------
<S> <C> <C> <C>
Weighted average effect of antidilutive securities:
Preferred Stock..................................... 13,380 16,216 4,790
Convertible debt.................................... -- -- 1,114
Employee stock options.............................. 4,781 3,248 1,054
Common Stock subject to repurchase agreements....... 4,790 3,756 6,402
------ ------ ------
22,951 23,220 13,360
====== ====== ======
</TABLE>
Comprehensive income (loss)
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 (loss) is comprised of the net loss and other
comprehensive earnings such as foreign currency transaction gain/loss and
unrealized gains or losses on available-for-sale securities.
Segment information
Effective January 1, 1998, the Company adopted the provisions of SFAS No.
131, "Disclosures about Segments of an Enterprise and Related Information."
During each of the three years ended December 31, 1999 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 primarily been located in the United States. The Company
recognized approximately 3% of its revenue from customers located outside 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, 1999 and
1998, were deposited in money market accounts with financial institutions
which management believes are of high credit quality or in commercial paper.
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.
The following table summarizes the revenue from customers in excess of 10%
of total customer revenues:
<TABLE>
<CAPTION>
Year Ended
December 31,
----------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Company A..................................................... --% --% 44%
Company B..................................................... --% 12% --%
Company C..................................................... --% 30% --%
Company F..................................................... 11% --% --%
Government grant.............................................. --% 10% 37%
</TABLE>
F-10
<PAGE>
VITRIA TECHNOLOGY, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following table summarizes receivables from customers in excess of 10%
of total accounts receivable:
<TABLE>
<CAPTION>
December 31,
---------------
1999 1998
------ ------
<S> <C> <C>
Company C.................................................. --% 49%
Company D.................................................. --% 13%
Company E.................................................. --% 10%
Company G.................................................. 18% --%
Company H.................................................. 14% --%
</TABLE>
Recent accounting pronouncements
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivatives and Hedging Activities" ("SFAS 133"). SFAS 133 was
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 has not engaged in hedging
activities or invested in derivative instruments.
Note 2--Balance Sheet Components (in thousands):
<TABLE>
<CAPTION>
December 31,
---------------
1999 1998
------- ------
<S> <C> <C>
Accounts receivable, net:
Accounts receivable....................................... $11,784 $5,884
Unbilled consulting services.............................. -- 100
Unbilled grant revenue.................................... 238 322
------- ------
12,022 6,306
Less: Allowance for doubtful accounts....................... (579) (333)
------- ------
$11,443 $5,973
======= ======
Property and equipment, net:
Computer equipment........................................ $ 1,851 $ 479
Software licenses......................................... 859 124
Furniture and fixtures.................................... 1,149 404
Leasehold improvements.................................... 1,690 263
------- ------
5,549 1,270
Less: Accumulated depreciation and amortization............. (1,097) (303)
------- ------
$ 4,452 $ 967
======= ======
Accrued liabilities:
Payroll and related expense............................... $ 5,266 $1,941
Professional services..................................... 1,191 123
Other..................................................... 4,559 914
------- ------
$11,016 $2,978
======= ======
</TABLE>
F-11
<PAGE>
VITRIA TECHNOLOGY, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 3--Income Taxes:
The tax provision is reconciled to the amount computed using the federal
statutory rate as follows (in thousands):
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------
1999 1998 1997
-------- -------- -------
<S> <C> <C> <C>
Federal statutory benefit....................... $ (4,796) $ (3,254) $ (197)
State taxes, net of federal benefit............. (635) (287) (8)
Future benefits not currently recognized........ 3,621 2,971 205
Nondeductible compensation...................... 1,810 570 --
-------- -------- ------
$ -- $ -- $ --
======== ======== ======
</TABLE>
At December 31, 1999, the Company had approximately $14,697,000 of federal
and $1,061,000 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,
----------------
1999 1998
------- -------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards......................... $ 5,059 $ 2,656
Accruals and allowances.................................. 1,338 492
Research credits......................................... 1,369 519
Capitalized expenses..................................... 673 --
------- -------
Net deferred tax assets.................................... 8,439 3,667
Valuation allowance........................................ (8,439) (3,667)
------- -------
$ -- $ --
======= =======
</TABLE>
The Company has incurred losses for the each of the three years ended
December 31, 1999. 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,
1999 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 $990,000 and $1,010,000 budgeted for the grant years ended January 25,
1998 and 1997, respectively. NIST requires the Company to comply with certain
cost accounting and reporting requirements, as applicable. For the periods
ending December 31, 1997 and 1996, the Company recognized revenue for grant-
related expenditures in the amount of $1,016,000 and $984,000, respectively. In
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
F-12
<PAGE>
VITRIA TECHNOLOGY, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
period of two years with $1,030,000 and $970,000 of the amended budget for the
grant years ending September 30, 1999 and 1998, respectively. Additionally,
NIST requires the Company to comply with certain cost accounting and reporting
requirements, as applicable. For the period ended December 31, 1999, 1998 and
1997, the Company has incurred reimbursable costs of $624,000, $822,000 and
$467,000, 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
$650,000, $650,000 and $300,000 of the amended budget for the grant years
ending December 31, 2000, 1999 and 1998, respectively. Additionally, NIST
requires the Company to comply with certain cost accounting and reporting
requirements, as applicable. For the periods ended December 31, 1999, 1998 and
1997, the Company has incurred reimbursable costs of $587,000, $297,000, and
$30,000 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 $581,000 at each of
December 31, 1999 and 1998 respectively. 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 2007. 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 $1,594,000, $546,000 and $146,000 for the years ended
December 31, 1999, 1998 and 1997.
Future net minimum lease payments, under noncancelable operating leases at
December 31, 1999, including the Company's new facility lease entered into in
December 1999 are as follows (in thousands):
<TABLE>
<CAPTION>
Year ending Operating
December 31, Leases
------------ ---------
<S> <C>
2000.............................................................. $ 3,171
2001.............................................................. 3,145
2002.............................................................. 3,176
2003.............................................................. 2,621
2004.............................................................. 1,534
2005 and thereafter............................................... 4,538
-------
Total minimum lease payments.................................... $18,185
=======
</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 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.
F-13
<PAGE>
VITRIA TECHNOLOGY, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 6--Common Stock:
In September 1999, the Company completed an initial public offering of
6,900,000 shares of Common Stock of $8 per share, proceeds were approximately
$50.0 million net of issuance costs.
The Company's Certificate of Incorporation, as amended, authorizes the
Company to issue 250,000,000 shares Common Stock. A portion of the shares sold
to employees 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, 1999 and 1998, there were approximately 3,171,000 and 6,112,000
shares, respectively, subject to repurchase.
During the years ended December 31, 1999 and 1998, the Company issued 25,200
and 105,000 shares, respectively, of Common Stock to consultants in exchange
for services. In connection with these issuances the Company recorded expenses
of $46,000 and $147,000 based on the fair value of the Common Stock on the date
of grant.
Stock split
In December 1999, the Board of Directors approved a two-for-one stock split
of the Company's Common Stock. All information presented in these financial
statements has been retroactively adjusted to reflect the stock split.
Note 7--Preferred Stock:
The Company is authorized, subject to limitations prescribed by Delaware
law, to provide for the issuance of Preferred Stock in one or more series, to
establish from time to time the number of shares included within each series,
to fix the rights, preferences and privileges of the shares of each wholly
unissued series and any qualifications, limitations or restrictions thereon,
and to increase or decrease the number of shares of any such series (but not
below the number of shares of such series then outstanding) without any further
vote or action by the stockholders. At December 31, 1999, there were 5,000,000
shares of Preferred Stock authorized for issuance, and no shares issued and
outstanding.
Immediately prior to the completion of the Company's initial public offering
all outstanding shares of Convertible Preferred Stock converted into an
aggregate of 11,555,615 shares of Common Stock.
Convertible Preferred Stock prior to the initial public offering was
composed of the following, (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 2,844 11,433 11,387
D................................ 1,200 1,004 4,518 4,514
Undesignated..................... 1,330 -- -- --
------ ------ ------- -------
16,000 11,556 $26,551 $26,455
====== ====== ======= =======
</TABLE>
F-14
<PAGE>
VITRIA TECHNOLOGY, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 8--Related Party Transactions:
In August 1999, certain employees of the Company exercised their stock
options prior to vesting by issuance of full recourse promissory notes to the
Company. The aggregate notes face value of the $291,000 bear interest at a rate
of 4% per annum and are due in August 2004. The notes are collateralized by the
133,000 shares of Common Stock issued, which are subject to the Company's right
to repurchase which lapses over time. The net amount outstanding has been
reflected as a separate component of stockholders' equity.
Note 9--Employee Benefit Plans:
Deferred Compensation
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, 1999, 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, 1999 were $182,000. Plan liabilities
included in other liabilities at December 31, 1999 were $182,000.
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
1996 and 1995, the Company sold 2,010,000 shares of Common Stock to employees
under the 1995 Equity Incentive Plan. In January 1999 and December 1998, the
Company sold 95,000 of the Series C Convertible Preferred Stock to employees
under the 1995 Equity Incentive Plan.
In June 1999, the Board of Directors adopted and, in July 1999 the
stockholders 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 24,014,000 shares of Common Stock for issuance under the Amended 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 16,000,000
options issued and available. The remaining number of authorized shares that
could be issued under the Amended Plans was 9,106,000 at December 31, 1999.
F-15
<PAGE>
VITRIA TECHNOLOGY, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 800,000 shares of the Common Stock during any calendar year.
Options are exercisable immediately subject to repurchase held by the Company.
Such repurchase rights 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,
--------------------------------------------------
1999 1998 1997
---------------- ---------------- ----------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------ -------- ------ -------- ------ --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning
of period.............. 3,754 $0.18 3,254 $0.11 978 $0.05
Granted below fair
value.................. 5,793 2.94 6,516 0.16 -- 0.13
Granted at fair value .. 884 37.92 -- -- 3,166 0.13
Exercised............... (2,499) 0.59 (4,028) 0.12 (402) 0.06
Canceled................ (656) 1.06 (1,988) 0.11 (488) 0.13
------ ------ -----
Outstanding at end of
period................. 7,276 6.74 3,754 0.18 3,254 0.11
====== ====== =====
Options vested.......... 4,580 120 --
====== ====== =====
Weighted average fair
value of options
granted during the
period................. $9.49 $0.05 $0.03
===== ===== =====
</TABLE>
The following table summarizes the information about stock options
outstanding and exercisable as of December 31, 1999 (in thousands, except per
share amounts):
<TABLE>
<CAPTION>
Options Outstanding and Exercisable
-------------------------------------------------
Number Weighted Average Weighted
Range of Outstanding Remaining Contractual Average
Exercise Price in thousands Life in years Exercise Price
-------------- ------------ --------------------- --------------
<S> <C> <C> <C>
$0.13................... 1,684 8.26 $ 0.13
0.35-0.52.............. 1,216 8.89 0.41
4.00................... 2,511 9.54 4.00
5.00-81.07............. 1,865 9.70 20.53
-----
7,276
=====
</TABLE>
F-16
<PAGE>
VITRIA TECHNOLOGY, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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, 1999, 1998 and 1997 been determined based on the fair
value at the grant dates as prescribed by SFAS No. 123, the Company's net loss
and net loss per share would have been increased to the pro forma amounts
indicated below.
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------
1999 1998 1997
-------- ------- ------
<S> <C> <C> <C>
Net loss available to common stockholders:
As reported................................... $(16,014) $(9,569) $ (580)
-------- ------- ------
Pro forma..................................... $(24,438) $(9,628) $ (636)
-------- ------- ------
Net loss per share available to common
stockholders:
As reported:
Basic and diluted........................... $ (0.42) $ (0.40) $(0.03)
-------- ------- ------
Pro forma:
Basic and diluted........................... $ (0.65) $ (0.40) $(0.03)
-------- ------- ------
</TABLE>
Because the determination of fair value of all options granted after the
time the Company became a public entity include volatility factor, the above
results may not be representative of future periods.
The Company calculated the fair value of each option grant on the date of
grant using the Black-Scholes option pricing model as prescribed by SFAS No.
123 and the following assumptions:
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Risk-free interest rates.................... 4.60-6.19% 4.13-5.46% 5.55-6.20%
Expected lives (in years)................... 5 5 5
Dividend yield.............................. 0% 0% 0%
Expected volatility......................... 230% 0% 0%
</TABLE>
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 3,000,000 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 reserved for issuance
under the Purchase Plan 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 3,000,000 shares. Such automatic
share reserve increase may not exceed 33,000,000 shares in the aggregate over a
10-year period.
F-17
<PAGE>
VITRIA TECHNOLOGY, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Unearned stock-based compensation
In connection with certain stock option grants, during the year ended
December 31, 1999 and 1998, the Company recognized unearned compensation
totaling $6,237,000 and $6,788,000, 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, 1999
and 1998 totaled approximately $4,525,000 and $1,277,000, respectively. All
stock grants resulting in such unearned compensation were made prior to the
Company's initial public offering in September 1999. 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. To date, the
Company has not made any contributions to the 401(k) Plan.
Note 10--Subsequent Events (unaudited):
Secondary Public Offering
In February 2000, the Company completed a secondary public offering, whereby
it sold 1,500,000 shares of Common Stock at $120 per share and received net
proceeds of approximately $171.2 million.
Stock Split
In March 2000, the Board of Directors approved a two-for-one stock split of
the Company's Common Stock, which is effective for all holders of the Company's
Common Stock on March 22, 2000.
F-18
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized, on March 9, 2000.
VITRIA TECHNOLOGY, INC.
/s/ JoMeiChang, Ph.D.
By: _________________________________
JoMei Chang, Ph.D.
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ JoMei Chang, Ph.D. President, Chief Executive March 9, 2000
______________________________________ Officer and Director
JoMei Chang, Ph.D. (Principal Executive
Officer)
/s/ Paul R. Auvil, III Vice President, Finance, March 9, 2000
______________________________________ Chief Financial Officer
Paul R. Auvil, III and Secretary (Principal
Financial and Accounting
Officer)
/s/ M. Dale Skeen, Ph.D. Chief Technology Officer March 9, 2000
______________________________________ and Director
M. Dale Skeen, Ph.D.
/s/ Robert M. Halperin Director March 9, 2000
______________________________________
Robert M. Halperin
/s/ William H. Younger, Jr. Director March 9, 2000
______________________________________
William H. Younger, Jr.
/s/ John L. Walecka Director March 9, 2000
______________________________________
John L. Walecka
</TABLE>
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description of Document
------- -----------------------
<C> <S>
3.1(1) Agreement and Plan of Merger, dated July 29, 1999.
3.2(1) Amended and Restated Certificate of Incorporation of the Registrant to
be effective following the closing of this offering.
3.3(1) Bylaws of the Registrant.
3.4(1) Certificate of Incorporation of the Registrant.
4.1(1) Reference is made to Exhibits 3.1 through 3.3.
4.2(1) Specimen Stock Certificate.
4.3(1) Second Amended and Restated Investor Rights Agreement, dated May 20,
1999.
10.1(1) Form of Indemnity Agreement.
10.2(2) Amended and Restated 1999 Equity Incentive Plan.
10.3(2) 1998 Executive Incentive Plan.
10.4(2) 1999 Employee Stock Purchase Plan.
10.5(1) 1998 Nonqualified Deferred Compensation Plan.
10.6(1) Standard Industrial/Commercial Single-Tenant Lease-Net by and between
Portola Land Company and the Registrant, dated January 28, 1997.
10.7(1) Sublease by and between Applied Materials, Inc. and the Registrant,
dated April 6, 1999.
10.8(3) First Amendment to Sublease by and between Applied Materials, Inc. and
the Registrant, dated December 14, 1999.
23.1 Consent of PricewaterhouseCoopers LLP.
27.1 Financial Data Schedule.
</TABLE>
- --------
(1) Filed as an exhibit to the Company's Registration Statement on Form S-1 as
amended, filed on June 22, 1999 (Registration No. 333-81297) and
incorporated herein by reference.
(2) Filed as an exhibit to the Company's Registration Statement on Form S-8
filed on November 19, 1999 (Registration No. 333-91325) and incorporated
herein by reference.
(3) Filed as an exhibit to the Company's Registration Statement on Form S-1 as
amended, filed on January 25, 1999 (Registration No. 333-95319) and
incorporated herein by reference.
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 (No. 333-91325) of Vitria Technology, Inc. of our report
dated January 21, 2000 relating to the consolidated financial statements, which
appears in this Form 10-K.
/s/ PricewaterhouseCoopers LLP
San Jose, California
March 8, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM DEC. 31,
1999 10K AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1000
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1999
<PERIOD-START> JAN-01-1999 OCT-01-1999
<PERIOD-END> DEC-31-1999 DEC-31-1999
<CASH> 52,218 52,218
<SECURITIES> 13,231 13,231
<RECEIVABLES> 12,022 12,022
<ALLOWANCES> (579) (579)
<INVENTORY> 0 0
<CURRENT-ASSETS> 81,281 81,281
<PP&E> 5,549 5,549
<DEPRECIATION> (1,097) (1,097)
<TOTAL-ASSETS> 86,494 86,494
<CURRENT-LIABILITIES> 27,044 27,044
<BONDS> 0 0
0 0
0 0
<COMMON> 62 62
<OTHER-SE> 59,388 59,388
<TOTAL-LIABILITY-AND-EQUITY> 86,494 86,494
<SALES> 31,541 12,198
<TOTAL-REVENUES> 31,541 12,198
<CGS> 7,722 2,222
<TOTAL-COSTS> 39,261 14,583
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 0 0
<INCOME-PRETAX> (16,014) (3,837)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (16,014) (3,837)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (16,014) (3,837)
<EPS-BASIC> (.42) (.07)
<EPS-DILUTED> (.42) (.07)
</TABLE>
