<PAGE>
As filed with the Securities and Exchange Commission on February 8, 2000
Registration No. 333-95319
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
Amendment No. 2
to
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
VITRIA TECHNOLOGY, INC.
(Exact name of Registrant as specified in its charter)
---------------
<TABLE>
<S> <C> <C>
Delaware 7372 77-0386311
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
</TABLE>
945 Stewart Drive
Sunnyvale, CA 94086
(408) 212-2700
(Address, including zip code, and telephone number, including area code, of
Registrant's principal executive office)
---------------
JOMEI CHANG, Ph.D.
Vitria Technology, Inc.
President and Chief Executive Officer
945 Stewart Drive
Sunnyvale, CA 94086
(408) 212-2700
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
---------------
Copies to:
Eric C. Jensen, Esq. Jose F. Macias, Esq.
Cooley Godward LLP Wilson Sonsini Goodrich & Rosati
Five Palo Alto Square Professional Corporation
3000 El Camino Real 650 Page Mill Road
Palo Alto, CA 94306 Palo Alto, CA 94304
(650) 843-5000 --------------- (650) 493-9300
Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 145 under the Securities Act of
1933, other than securities offered only in connection with dividend or
interest reinvestment plans, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration number of the earlier effective
registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the
same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this
Registration Statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933, as amended, or until the
Registration Statement shall become effective on such date as the Securities
and Exchange Commission, acting pursuant to such Section 8(a), may determine.
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<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus is not complete and may be changed. We may +
+not sell these securities until the registration statement filed with the +
+Securities and Exchange Commission is effective. This prospectus is not an +
+offer to sell these securities and it is not soliciting offers to buy these +
+securities in any state where the offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED FEBRUARY 8, 2000
5,000,000 Shares
[LOGO OF VITRIA TECHNOLOGY, INC.]
Common Stock
--------
We are selling 1,500,000 shares of common stock and the selling stockholders
are selling 3,500,000 shares of common stock. We will not receive any of the
proceeds from the shares of common stock sold by the selling stockholders.
The underwriters have an option to purchase a maximum of 750,000 additional
shares to cover over-allotments of shares.
Our common stock is listed on The Nasdaq Stock Market's National Market under
the symbol "VITR." On February 7, 2000, the last reported sale price for our
common stock was $113.75 per share.
Investing in our common stock involves risks. See "Risk Factors" on page 6.
<TABLE>
<CAPTION>
Underwriting Proceeds to
Price to Discounts and Proceeds to Selling
Public Commissions Vitria Technology Stockholders
------------- ------------- ----------------- -------------
<S> <C> <C> <C> <C>
Per Share......... $ $ $ $
Total............. $ $ $ $
</TABLE>
Delivery of the shares of common stock will be made on or about , 2000.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if
this prospectus is truthful or complete. Any representation to the contrary is
a criminal offense.
Credit Suisse First Boston
Merrill Lynch & Co.
Robertson Stephens
Wit SoundView
The date of this prospectus is , 2000.
<PAGE>
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TABLE OF CONTENTS
<TABLE>
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Page
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<S> <C>
Prospectus Summary....................................................... 3
Risk Factors............................................................. 6
Special Note Regarding Forward-Looking Statements........................ 16
Use of Proceeds.......................................................... 17
Dividend Policy.......................................................... 17
Price Range of Common Stock.............................................. 17
Capitalization........................................................... 18
Dilution................................................................. 19
Selected Financial Data.................................................. 20
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 21
Business................................................................. 29
</TABLE>
<TABLE>
<CAPTION>
Page
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<S> <C>
Management................................................................. 40
Certain Transactions....................................................... 50
Principal and Selling Stockholders......................................... 51
Description of Capital Stock............................................... 53
Shares Eligible for Future Sale............................................ 56
Underwriting............................................................... 58
Notice to Canadian Residents............................................... 60
Legal Matters.............................................................. 61
Experts.................................................................... 61
Where You Can Find More Information........................................ 61
Index to Financial Statements.............................................. F-1
</TABLE>
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You should rely only on the information contained in this document or to
which we have referred you. We have not authorized anyone to provide you with
information that is different. This document may only be used where it is
legal to sell these securities. The information in this document may only be
accurate on the date of this document.
------------
Except as otherwise indicated, information in this prospectus is based on
the assumption that there is no exercise of the underwriters' over-allotment
option.
"Vitria" and "BusinessWare" are registered trademarks and the Vitria logo
is a trademark of Vitria. This prospectus also includes trademarks owned by
other parties.
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<PAGE>
PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this prospectus.
This summary does not contain all the information you should consider before
buying shares in the offering. You should read the entire prospectus carefully.
Vitria Technology, Inc.
Our Business
We are a leading provider of eBusiness infrastructure software. eBusiness
refers to the use of the Internet to conduct business with customers and
partners. Our product, BusinessWare, provides the infrastructure that enables
incompatible information technology systems to exchange information over
corporate networks and the Internet. BusinessWare enables this exchange to take
place automatically, without human intervention. This eliminates manual entry
of information into multiple IT systems, and eliminates the need to manually
exchange information with customers and business partners using phone,
facsimile or mail. We have designed BusinessWare to give our customers complete
control and visibility of their business operations across an "extended
enterprise" that includes their customers and partners. BusinessWare allows our
customers to improve the efficiency of their business operations, reduce time
to market for new products and services, develop closer relationships with
their customers and partners, and rapidly respond to changing business
conditions. To date, we have licensed BusinessWare to over 70 companies,
including American Century, CableVision, Covad, Deutsche Bank, Duke Energy,
FedEx, Fujitsu PC, Inacom, Level 3, NorthPoint Communications, Rhythms
NetConnections, 3Com, Verio and Weblink Wireless. In 1999, sales of the
BusinessWare product accounted for approximately 69% of our total revenues.
Our Market Opportunity
eBusiness is fundamentally changing the speed and nature of business. To
compete in this new environment, companies must be able to communicate
instantly with customers and partners over the Internet, using a clearly
defined set of business processes that can be continuously analyzed and rapidly
changed. This is what we refer to as "real-time eBusiness." Companies that
engage in real-time eBusiness can bring new products and services to market
faster, form new partnerships more easily, and respond to changing business
conditions more rapidly. To conduct business at this accelerated pace, we
believe that companies must address four key requirements:
(1) Business Process Automation. Business processes describe, step-by-step, how
a company conducts its business operations across their extended
enterprise. For example, a company may define its order fulfillment process
as follows: receive an order, allocate inventory, request product shipment
from a distribution partner, and bill the customer. These business
processes define how information should flow across internal IT systems and
across the Internet to the IT systems of customers and partners. In many
companies today, this information flow is not automated.
(2) Internet-Based Communications. As companies extend their business processes
to directly include their customers and partners, they need a way to
communicate business information over the Internet in a secure and reliable
fashion. In the prior example, the interactions between the company, its
distribution partners and the customer could take place over the Internet.
These exchanges of information would take place through the exchange of
electronic messages over the Internet.
(3) Application Integration. To automate business processes, companies must
exchange information between IT systems. For example, the fulfillment of
customer orders might require that a company's order management, shipping
and billing systems exchange data to ensure that the order is correctly
received, requested products are shipped, and the customer is appropriately
billed. As a result, companies need a way to automatically access
information in one system and translate it into standard formats so that it
can be shared with and understood by other systems.
3
<PAGE>
(4) Real-Time Analysis. Business managers need to continuously monitor and
analyze automated business processes to identify and respond to problems as
they occur. Analysis software typically requires information to be
accumulated in the database before it can be analyzed. The resulting delay
reduces a company's ability to respond to a problem in a timely manner.
Real-time analysis allows information to be analyzed as soon as it is
captured. In the prior example, the company can monitor and analyze orders
from customers and adjust inventories on a continuous basis, rather than
waiting until the end of the day to extract the information from the
database.
We do not believe that other competitors adequately address all four of
these requirements. For example, enterprise application integration vendors
focus on integrating IT systems. Messaging software vendors focus on inter-
application communications. We believe that no approach adequately addresses
process automation or real-time analysis, and that there is a significant
market opportunity for infrastructure software that addresses all four
requirements for real-time eBusiness.
Our Solution
BusinessWare addresses the four eBusiness requirements in a single
comprehensive software product. Business users can use BusinessWare to create
visual diagrams of their business processes, called "process models," using a
graphical user interface. This eliminates the need for expensive custom
programming. BusinessWare then uses these process models to automatically
coordinate the flow of information across a company's internal IT systems and
across the Internet to the systems of its customers and partners. Once
BusinessWare has automated a business process, it selectively gathers and
analyzes key performance statistics and allows business managers to identify
and respond to business problems the moment they occur.
BusinessWare provides the following key benefits to customers:
. Provides Complete Control and Visibility of Business Operations Across the
Extended Enterprise. Companies can increase the efficiency of their
operations and lower operating costs by automating and analyzing the
performance of their business processes in real-time.
. Reduces Time to Market. Business users can quickly automate new processes
that accelerate the delivery of new products and services.
. Enables Rapid Response to Change. Business users can revise and continuously
refine processes by changing process models.
. Enables Tighter Relationships with Customers and Partners. Companies can
quickly establish sophisticated and highly automated relationships with
partners or customers that support shared business processes.
Our Strategy
We intend to establish BusinessWare as the leading infrastructure software
product for eBusiness. As part of this strategy, we have developed strong
working relationships with leading system integrators, including Andersen
Consulting, Deloitte Consulting and Electronic Data Systems, or EDS. These
system integrators help our customers install and deploy our product and in
many cases these integrators have existing relationships with our targeted
customers. In addition, we are working to develop market-focused eBusiness
solutions that are built on BusinessWare and targeted to the needs of specific
industries. These solutions include pre-defined, customizable process models
that reflect the business processes of the target industry. Our first industry-
specific product was made available to customers in December 1999. As of
December 31, 1999, we had an accumulated deficit of $24.3 million.
Other Information
We were incorporated in California in October 1994 and reincorporated in
Delaware in July 1999. Our principal executive offices are located at 945
Stewart Drive, Sunnyvale, California 94086, and our telephone number is (408)
212-2700. Our Internet address is www.vitria.com. The information on our
website is not incorporated by reference into this prospectus.
4
<PAGE>
The Offering
<TABLE>
<S> <C>
Common stock offered by Vitria.............. 1,500,000 shares
Common stock offered by selling
stockholders............................... 3,500,000 shares
Common stock to be outstanding after this
offering................................... 63,250,992 shares
Use of proceeds ............................ General corporate purposes, including
expansion of our sales and marketing
capabilities, product development, and
other working capital requirements. We will
not receive any proceeds from the shares
sold by selling stockholders. See "Use of
Proceeds."
Nasdaq National Market symbol .............. VITR
</TABLE>
The number of shares of common stock to be outstanding after this offering
is based on the number of shares outstanding as of December 31, 1999, and
excludes:
. 7,276,014 shares subject to options outstanding as of December 31, 1999,
at a weighted average exercise price of $6.74 per share;
. 9,106,248 additional shares that we could issue under our stock option
plans; and
. 3,000,000 shares that we could issue under our employee stock purchase
plan.
Summary Financial Information
(in thousands, except per share data)
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------
1997 1998 1999
-------- ------- --------
<S> <C> <C> <C>
Statement of Operations Data:
Revenues:
License......................................... $ 955 $ 5,198 $ 21,790
Service......................................... 1,425 1,633 8,539
Government grant................................ 1,255 796 1,212
-------- ------- --------
Total revenues................................. 3,635 7,627 31,541
Cost of revenues.................................. 1,611 2,905 7,722
-------- ------- --------
Gross profit...................................... 2,024 4,722 23,819
Loss from operations.............................. (655) (9,875) (15,442)
Net loss.......................................... (580) (9,569) (14,106)
======== ======= ========
Basic and diluted net loss per share available to
common stockholders.............................. $ (0.03) $ (0.40) $ (0.42)
Basic and diluted weighted average shares used in
the computation of net loss per share available
to common stockholders........................... 19,830 24,006 37,874
</TABLE>
<TABLE>
<CAPTION>
December 31, 1999
-------------------
Actual As Adjusted
------- -----------
<S> <C> <C>
Balance Sheet Data:
Cash and cash equivalents................................... $52,218 $214,013
Working capital............................................. 54,237 216,032
Total assets................................................ 86,494 248,289
Deferred revenue............................................ 15,627 15,627
Stockholders' equity........................................ 59,450 221,245
</TABLE>
- --------
See Note 1 of Notes to Consolidated Financial Statements for an explanation
of the determination of the number of shares used in computing per share data.
The as adjusted balance sheet data gives effect to the net proceeds from the
sale of the 1,500,000 shares of common stock offered by Vitria in this offering
at an assumed offering price of $113.75 per share after deducting the
underwriting discounts and commissions and estimated offering expenses. See
"Use of Proceeds" and "Capitalization."
5
<PAGE>
RISK FACTORS
You should carefully consider the risks described below before purchasing
our shares. Additional risks and uncertainties not presently known to us or
that we currently see as immaterial may also impair our business operations. If
any of the following risks actually occur, our business could be harmed, the
trading price of our common stock could decline, and you may lose all or part
of your investment.
Risks Related to Vitria
Since our short operating history makes it difficult to evaluate our prospects,
our future financial performance may disappoint securities analysts or
investors and result in a decline in our stock price.
We were incorporated in October 1994. Until November 1997, we were engaged
primarily in research and development of our initial product. We licensed our
first product in November 1997 and have only recently established sales and
service organizations. Because of our limited operating history, we have
limited insight into trends that may emerge in our market and affect our
business. The revenue and income potential of our market are unproven. As a
result of our limited operating history, we have limited financial data that
you can use to evaluate our business. You must consider our prospects in light
of the risks, expenses and challenges we might encounter because we are at an
early stage of development in a new and rapidly evolving market.
We have a large accumulated deficit, we expect future losses, and we may not
achieve or maintain profitability.
We have incurred substantial losses since inception as we funded the
development of our product and technologies, and through our efforts to expand
our sales and marketing organization. Our net losses for 1998 were $9.6 million
and our net losses for 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.
6
<PAGE>
Our product may not achieve market acceptance, which could cause our revenues
to decline.
The limited sales and deployment of our product, and limited acceptance of
process automation technology, makes our prospects difficult to predict. In
addition, we have only licensed our product to a small number of customers, and
only a portion of these customers have commenced commercial deployment. The
deployment of our product requires interoperability with a variety of software
applications and systems and, in some cases, to process a high number of
transactions per second. If our product fails to satisfy these demanding
technological objectives, our customers will be dissatisfied and we may be
unable to generate future sales. Failure to establish a significant base of
customer references will significantly reduce our ability to license our
product to additional customers.
Our revenues will likely decline if we do not develop and maintain successful
relationships with system integrators.
System integrators install and deploy our products and those of our
competitors, and perform custom integration of systems and applications. Some
system integrators engage in joint marketing and sales efforts with us. If
these relationships fail, we will have to devote substantially more resources
to the sales and marketing, and implementation and support of our product than
we would otherwise, and our efforts may not be as effective as those of the
system integrators. In many cases, these parties have extensive relationships
with our existing and potential customers and influence the decisions of these
customers. We rely upon these firms for recommendations of our product during
the evaluation stage of the purchasing process, as well as for implementation
and customer support services. A number of our competitors have stronger
relationships with these system integrators and, as a result, these system
integrators may be more likely to recommend competitors' products and services.
In addition, a number of our competitors have relationships with a greater
number of these system integrators and, therefore, have access to a broader
base of enterprise customers. Our failure to establish or maintain these
relationships would significantly harm our ability to license and successfully
implement our software product. In addition, we rely on the industry expertise
and reach of these firms. Therefore, this failure would also harm our ability
to develop industry-specific products. We are currently investing, and plan to
continue to invest, significant resources to develop these relationships. Our
operating results could be adversely affected if these efforts do not generate
license and service revenues necessary to offset this investment.
We may suffer product deployment delays, a lower quality of customer service
and increased expenses if sufficient system integrator implementation teams are
not available.
System integrators help our customers install and deploy our product. These
system integrators are not contractually required to implement our product, and
competition for these resources may preclude us from obtaining sufficient
resources to provide the necessary implementation services to support our
needs. If the number of installations of our product exceeds our access to the
resources provided by these system integrators, we will be required to provide
these services internally, which would significantly limit our ability to meet
our customers' implementation needs and increase our expenses. In addition, we
cannot control the level and quality of service provided by our current and
future implementation partners.
Because a small number of customers have and are likely to continue to account
for a substantial portion of our revenues, our revenues could decline due to
the loss or delay of a single customer order.
A relatively small number of customers account for a significant portion of
our total revenues. In 1998, sales to our ten largest customers accounted for
86% of total revenues. In 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.
Our license agreements do not generally provide for ongoing license
payments. Therefore, we expect that revenues from a limited number of new
customers will continue to account for a large percentage of total revenues in
future quarters. Our ability to attract new customers will depend on a variety
of factors, including
7
<PAGE>
the performance, quality, breadth and depth of our current and future products.
The loss or delay of individual orders could have a significant impact on
revenues and operating results. Our failure to add new customers that make
significant purchases of our product and services would reduce our future
revenues.
Our markets are highly competitive and, if we do not compete effectively, we
may suffer price reductions, reduced gross margins and loss of market share.
The market for our product is intensely competitive, evolving and subject to
rapid technological change. The intensity of competition is expected to
increase in the future. Increased competition is likely to result in price
reductions, reduced gross margins and loss of market share, any one of which
could significantly reduce our future revenues. Our current competitors
include:
EAI vendors. We face competition from vendors offering Enterprise
Application Integration, or EAI, software products. These vendors include
Active Software, Inc., CrossWorlds Software, Inc., and New Era of
Networks, Inc., also known as NEON. A number of other companies are offering
products that address different aspects of our solution, including BEA Systems,
Inc., Forte Software, Inc., Hewlett-Packard Company, IBM Corporation and Tibco
Software Inc. In the future, some of these companies may expand their products
to enhance existing, or to provide, process automation and real-time analysis
functionality.
Internal IT departments. "In house" information technology departments of
potential customers have developed or may develop systems that provide for some
or all of the functionality of our BusinessWare product. We expect that
internally developed application integration and process automation efforts
will continue to be a principal source of competition for the foreseeable
future. In particular, it can be difficult to sell our product to a potential
customer whose internal development group has already made large investments in
and progress towards completion of systems that our product is intended to
replace.
Other software vendors. We may in the future also encounter competition from
major enterprise software developers including Oracle Corporation, PeopleSoft,
Inc., and SAP AG. In addition, Microsoft Corporation has announced its
intention to introduce products which could compete with some aspects of our
product. These companies have significantly greater resources than Vitria.
Many of our competitors have more resources and broader customer
relationships than we do. In addition, many of these competitors have extensive
knowledge of our industry. Current and potential competitors have established
or may establish cooperative relationships among themselves or with third
parties to offer a single solution and increase the ability of their products
to address customer needs.
Although we believe that our solutions generally compete favorably with
respect to these factors, our market is relatively new and is evolving rapidly.
We may not be able to maintain our competitive position against current and
potential competitors, especially those with significantly greater resources.
We experience long and variable sales cycles, which could have a negative
impact on our results of operations for any given quarter.
Our product is often used by our customers to deploy mission-critical
solutions used throughout their organization. Customers generally consider a
wide range of issues before committing to purchase our product, including
product benefits, ability to operate with existing and future computer systems,
ability to accommodate increased transaction volume and product reliability.
Many customers will be addressing these issues for the first time. As a result,
we or other parties, including system integrators, must educate potential
customers on the use and benefits of our product and services. In addition, the
purchase of our product generally involves a significant commitment of capital
and other resources by a customer. This commitment often requires significant
technical review, assessment of competitive products, and approval at a number
of management levels within the customer's organization. Because of these
issues, our sales cycle has ranged from two to nine months and is difficult to
predict for any particular license transaction.
8
<PAGE>
The cost and difficulties of implementing our product could significantly harm
our reputation with customers, diminishing our ability to license additional
products to our customers.
Our product is often purchased as part of large projects undertaken by our
customers. These projects are complex, time consuming and expensive. Failure by
customers to successfully deploy our product, or the failure by us or third-
party consultants to ensure customer satisfaction, could damage our reputation
with existing and future customers and reduce future revenues. In many cases,
our customers must interact with, modify, or replace significant elements of
their existing computer systems. The costs of our product and services
represent only a portion of the related hardware, software, development,
training and consulting costs. The significant involvement of third parties,
including system integrators, reduces the control we have over the
implementation of our product and the quality of customer service provided to
organizations which license our software.
Our sales are concentrated in the telecommunications and financial services
industries and if our customers in these markets decrease their information
technology spending, or we fail to penetrate other industries, our revenues may
decline.
We expect to continue to direct our sales and marketing efforts toward
companies in the telecommunications and financial services industries. Sales to
customers in the telecommunications and financial services industries accounted
for 57% of total revenues in 1998 and 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.
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
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<PAGE>
support a variety of these platforms, our operating results may suffer. Our
business depends, among others, on the following factors:
. our ability to integrate our product with multiple platforms and
existing, or legacy, systems and to modify our product as new versions of
packaged applications are introduced;
. 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 releases or new products after the commencement
of commercial shipments. Since many customers are using our product for
mission-critical business operations, any of these occurrences could seriously
harm our business and generate negative publicity.
10
<PAGE>
Our growth continues to place a significant strain on our management systems
and resources and if we fail to manage our growth our ability to market and
sell our product and develop new products may be harmed.
We must plan and manage our growth effectively in order to offer our product
and services and achieve revenue growth and profitability in a rapidly evolving
market. Our growth has and will continue to place a significant strain on our
management systems and resources, and we may not be able to effectively manage
our growth in the future. We continue to increase domestically, and to a lesser
extent internationally, the scope of our operations, and have added a number of
employees. For example, the number of our employees grew from 40 at December
31, 1997 to 290 at December 31, 1999. In particular, our sales force grew from
four people at December 31, 1997 to 98 people 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.
11
<PAGE>
Risks Related to Our Industry
We depend on the increasing use of the Internet and on the growth of electronic
commerce. If the use of the Internet and electronic commerce does not grow as
anticipated, our revenues could decline and our business will be seriously
harmed.
We depend on the increased acceptance and use of the Internet as a medium
for electronic commerce and the adoption by businesses of eBusiness solutions.
Rapid growth in the use of the Internet is a recent occurrence. As a result,
acceptance and use may not continue to develop at historical rates and a
sufficiently broad base of business customers may not adopt or continue to use
the Internet as a medium of commerce. Demand and market acceptance for recently
introduced services and products over the Internet are subject to a high level
of uncertainty, and there exist few proven services and products.
If we fail to adequately protect our proprietary rights, we may lose these
rights and our business may be seriously harmed.
We depend upon our ability to develop and protect our proprietary technology
and intellectual property rights to distinguish our product from our
competitor's products. The use by others of our proprietary rights could
materially harm our business. We rely on a combination of copyright, trademark
and trade secret laws, as well as confidentiality agreements and licensing
arrangements, to establish and protect our proprietary rights. We have no
issued patents. Despite our efforts to protect our proprietary rights, existing
laws afford only limited protection. Attempts may be made to copy or reverse
engineer aspects of our product or to obtain and use information that we regard
as proprietary. Accordingly, there can be no assurance that we will be able to
protect our proprietary rights against unauthorized third-party copying or use.
Furthermore, policing the unauthorized use of our product is difficult, and
expensive litigation may be necessary in the future to enforce our intellectual
property rights.
If our source code is released to our customers, our ability to protect our
proprietary rights could be jeopardized and our revenues could decline.
Some of our license agreements require us to place the source code for our
product in escrow. These agreements generally provide these customers with a
limited, non-exclusive license to use this code if:
. we fail to provide the product or maintenance and support;
. we cease to do business without a successor; or
. there is a bankruptcy proceeding by or against Vitria.
Our revenues could decline and our business could be seriously harmed if
customers were granted this access.
Our product could infringe the intellectual property rights of others causing
costly litigation and the loss of significant rights.
We expect that third parties may claim that we have infringed their current
or future intellectual property rights. We expect that software developers in
our market will increasingly be subject to infringement claims as the number of
products in different software industry segments overlap. Any claims, with or
without merit, could be time-consuming, result in costly litigation, prevent
product shipment or cause delays, or require us to enter into royalty or
licensing agreements, any of which could harm our business. Patent litigation
in particular has complex technical issues and inherent uncertainties. In the
event an infringement claim against us is successful and we cannot obtain a
license on acceptable terms or license a substitute technology or redesign our
product to avoid infringement, our business would be harmed. Furthermore,
former employers of our current and future employees may assert that our
employees have improperly disclosed to us or are using confidential or
proprietary information.
12
<PAGE>
We may not successfully enter international markets or generate significant
product revenues abroad, which could result in slower revenue growth and harm
our business.
To date, we have 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 are coded to
accept only two digit entries in the date code field. Beginning in the year
2000, these code fields will need to accept four digit entries to distinguish
21st century dates from 20th century dates, and the failure to do so could
result in the loss of revenues. The Year 2000 computer issue creates the
following risks for us:
. our product could fail due to processing errors caused by unanticipated
inaccurate calculations with respect to the year 2000;
. third party hardware and software used with our product could experience
Year 2000 compliance problems which are wrongly attributed to us;
. our customers, partners or suppliers could experience Year 2000 problems;
and
. our current customers could reevaluate their current system needs and, as
a result, consider switching to other systems and suppliers.
As of the date of this prospectus, 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."
Risks Related to Our Offering
The substantial number of shares that will be eligible for sale in the near
future may cause the market price for our common stock to decline.
If our stockholders sell substantial amounts of our common stock, including
shares issued upon the exercise of outstanding options and warrants, in the
public market during a short period of time, our stock price may decline
significantly. These sales also might make it more difficult for us to sell
equity or equity-related securities in the future at a time and price that we
deem appropriate. After completion of this offering, we will have outstanding
63,250,992 shares of common stock. All of the shares sold in this offering and
our initial public offering, unless held by our affiliates, will be freely
tradeable. The remaining 51,350,992 shares of common stock held by existing
stockholders are restricted securities and will be available for sale as
follows:
<TABLE>
<CAPTION>
Approximate Number of
Shares Eligible for
Date Future Sale Comment
---- --------------------- -------
<C> <C> <S>
March 15, 2000 5,981,355 Underwriters' lock-up in connection
with our initial public offering
released. These shares may be sold
under Rules 144, 144(k) or 701
April 25, 2000 10,454,490 Underwriters' lock-up with respect
to 25% of the shares held by each
stockholder that entered into a
lock-up in connection with this
offering released. These shares may
be sold under Rules 144, 144(k) or
701
, 2000 32,511,352 These shares may be sold under
Rules 144, 144(k) or 701
At various times thereafter 2,403,795 These shares may be sold under
Rules 144, 144(k) or 701
</TABLE>
13
<PAGE>
In addition, we filed a registration statement on Form S-8 with the
Securities and Exchange Commission covering 15,277,348 shares reserved for
issuance under our 1999 Equity Incentive Plan, our 1998 Executive Incentive
Plan and our 1999 Employee Stock Purchase Plan. We intend to file another
registration statement on Form S-8 covering additional shares reserved for
issuance under our plans. Sales of a large number of these shares could have an
adverse effect on the market price for our common stock. For a detailed
discussion of the shares eligible for future sale, see "Shares Eligible for
Future Sales."
Failure to raise additional capital or generate the significant capital
necessary to expand our operations and invest in new products could reduce our
ability to compete and result in lower revenues.
We expect that the net proceeds from this offering will be sufficient to
meet our working capital and capital expenditure needs for at least the next
twelve months. After that, we may need to raise additional funds, and we cannot
be certain that we will be able to obtain additional financing on favorable
terms, or at all. If we need additional capital and cannot raise it on
acceptable terms, we may not be able to, among other things:
. develop or enhance our products and services;
. acquire technologies, products or businesses;
. expand operations, in the United States or internationally;
. hire, train and retain employees; or
. respond to competitive pressures or unanticipated capital requirements.
Our failure to do any of these things could result in lower revenues and could
seriously harm our business.
New investors in our common stock will experience immediate and substantial
dilution.
The offering price is substantially higher than the book value per share of
our common stock. Investors purchasing common stock in this offering will,
therefore, incur immediate dilution of $110.25 in net tangible book value per
share of common stock, based on an assumed offering price of $113.75 per share.
In addition, the number of shares available for issuance under our stock option
and employee stock purchase plans will automatically increase without
stockholder approval. Investors will incur additional dilution upon the
exercise of outstanding stock options.
Our stock price is volatile and you may lose all or a part of your investment.
The trading price of our common stock has fluctuated significantly since our
initial public offering in September 1999. As a result you may be unable to
sell your shares of common stock at or above the offering price. The market
price of the common stock may fluctuate significantly in response to the
following factors, most of which are beyond our control:
. variations in our quarterly operating results;
. changes in securities analysts' estimates of our financial performance;
. changes in market valuations of similar companies;
. announcements by us or our competitors of significant contracts,
acquisitions, strategic partnerships, joint ventures or capital
commitments;
. loss of a major customer or failure to complete significant license
transactions;
. additions or departures of key personnel; and
. fluctuations in stock market price and volume, which are particularly
common among securities of software and Internet-oriented companies.
14
<PAGE>
We are at risk of securities class action litigation due to our expected stock
price volatility.
In the past, securities class action litigation has often been brought
against a company following a decline in the market price of its securities.
This risk is especially acute for us because technology companies have
experienced greater than average stock price volatility in recent years and, as
a result, have been subject to, on average, a greater number of securities
class action claims than companies in other industries. We may in the future be
the target of similar litigation. Securities litigation could result in
substantial costs and divert management's attention and resources, and could
seriously harm our business.
We have implemented anti-takeover provisions which could discourage or prevent
a takeover, even if an acquisition would be beneficial to our stockholders.
Provisions of our amended and restated certificate of incorporation and
bylaws, as well as provisions of Delaware law, could make it more difficult for
a third party to acquire us, even if doing so would be beneficial to our
stockholders. These provisions include:
. establishment of a classified board of directors requiring that not all
members of the board may be elected at one time;
. authorizing the issuance of "blank check" preferred stock that could be
issued by our board of directors to increase the number of outstanding
shares and thwart a takeover attempt;
. prohibiting cumulative voting in the election of directors, which would
otherwise allow less than a majority of stockholders to elect director
candidates;
. limitations on the ability of stockholders to call special meetings of
stockholders;
. prohibiting stockholder action by written consent, thereby requiring all
stockholder actions to be taken at a meeting of our stockholders; and
. establishing advance notice requirements for nominations for election to
the board of directors or for proposing matters that can be acted upon by
stockholders at stockholder meetings.
In addition, Section 203 of the Delaware General Corporations Law and the
terms of our stock option plans may discourage, delay or prevent a change in
control of Vitria.
Concentration of ownership among our existing executive officers, directors and
principal stockholders may prevent new investors from influencing significant
corporate decisions.
Upon completion of this offering, our executive officers, directors and
principal stockholders will beneficially own, in the aggregate, approximately
57.21% of our outstanding common stock. As a result, these stockholders will be
able to exercise control over all matters requiring stockholder approval,
including the election of directors and approval of significant corporate
transactions. This could have the effect of delaying or preventing a change of
control of Vitria and will make some transactions difficult or impossible
without the support of these stockholders. See "Principal and Selling
Stockholders."
15
<PAGE>
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements. These statements relate
to future events or our future financial performance. In some cases, you can
identify forward-looking statements by terminology including "anticipates,"
"believes," "continue," "could," "estimates," "expects," "intends," "may,"
"plans," "potential," "predicts," "should" or "will" or the negative of these
terms or other comparable terminology. These statements are only predictions
and involve known and unknown risks, uncertainties and other factors, including
the risks outlined under "Risk Factors," that may cause our or our industry's
actual results, levels of activity, performance or achievements to be
materially different from any future results, levels or activity, performance
or achievements expressed or implied by these forward-looking statements.
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements. Moreover, neither we nor any other
person assumes responsibility for the accuracy and completeness of these
statements. We are under no duty to update any of the forward-looking
statements after the date of this prospectus to conform these statements to
actual results, unless required by law.
16
<PAGE>
USE OF PROCEEDS
We will not receive any proceeds from the shares sold by the selling
stockholders in this offering. We estimate that the net proceeds to us from the
sale of the 1,500,000 shares of our common stock will be approximately $161.8
million, at an assumed public offering price of $113.75 per share, after
deducting the underwriting discounts and commissions and estimated offering
expenses.
We intend to use the net proceeds of this offering primarily for additional
working capital and other general corporate purposes, including increased
research and development expenditures, sales and marketing expenditures, and
general and administrative expenditures. The amounts and timing of these
expenditures will vary depending on a number of factors, including the amount
of cash generated by our operations, competitive and technological developments
and the rate of growth, if any, of our business. We may also use a portion of
the net proceeds to acquire additional businesses, products and technologies,
to lease additional facilities, or to establish joint ventures that we believe
will complement our current or future business.
The amounts that we actually expend for working capital and other general
corporate purposes will vary significantly depending on a number of factors,
including future revenue growth, if any, and the amount of cash we generate
from operations. As a result, we will retain broad discretion in the allocation
of the net proceeds of this offering. Pending the uses described above, we will
invest the net proceeds of this offering in short term interest bearing,
investment-grade securities. We cannot predict whether the proceeds will be
invested to yield a favorable return. We believe that our available cash,
together with the net proceeds of this offering, will be sufficient to meet our
capital requirements for at least the next 12 months.
DIVIDEND POLICY
We have never paid or declared any cash dividends. We currently expect to
retain earnings for use in the operation and expansion of our business, and
therefore do not anticipate paying any cash dividends. See "Description of
Capital Stock."
PRICE RANGE OF COMMON STOCK
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.
<TABLE>
<CAPTION>
Quarter Ended High Low
- ------------- ------- ------
<S> <C> <C>
September 30, 1999.............................................. $ 25.31 $15.78
December 31, 1999............................................... $136.50 $19.69
March 31, 2000 (Through February 7, 2000)....................... $133.44 $80.13
</TABLE>
On February 7, 2000, the last reported sale price of our common stock on the
Nasdaq National Market was $113.75 per share. As of December 31, 1999, there
were approximately 225 stockholders of record of our common stock.
17
<PAGE>
CAPITALIZATION
The following table sets forth the following information:
. Our actual capitalization as of December 31, 1999; and
. Our as adjusted capitalization to give effect to the sale of the
1,500,000 shares of common stock at an assumed offering price of $113.75
per share in this offering, less the underwriting discounts and
commissions and estimated offering expenses.
<TABLE>
<CAPTION>
December 31, 1999
------------------
As
Actual Adjusted
-------- --------
(in thousands,
except share
data)
<S> <C> <C>
Stockholders' equity:
Convertible Preferred Stock: $.001 par value; 5,000,000
shares authorized; no shares issued and outstanding,
actual and as adjusted.................................. $ -- $ --
Common Stock: $.001 par value; 250,000,000 shares
authorized; 61,750,992 shares issued and outstanding;
63,250,992 shares issued and outstanding, as adjusted... 62 63
Additional paid-in capital............................... 91,290 253,084
Accumulated other comprehensive loss..................... (54) (54)
Unearned stock-based compensation........................ (7,223) (7,223)
Notes receivable......................................... (291) (291)
Accumulated deficit...................................... (24,334) (24,334)
-------- --------
Total stockholders' equity............................. 59,450 221,245
-------- --------
Total capitalization................................. $ 59,450 $221,245
======== ========
</TABLE>
This table excludes the following shares:
. 7,276,014 shares of common stock issuable upon the exercise of stock
options outstanding under our stock option plans, and 9,106,248
additional shares of common stock available for issuance under these
stock option plans; and
. 3,000,000 shares of common stock available for issuance under our
employee stock purchase plan.
18
<PAGE>
DILUTION
The net tangible book value of our common stock, on December 31, 1999 was
approximately $59.5 million, or approximately $0.96 per share. Net tangible
book value per share represents the amount of our total tangible assets less
total liabilities divided by the number of shares of common stock outstanding.
Dilution in pro forma net tangible book value per share represents the
difference between the amount per share paid by purchasers of shares of common
stock in this offering and the net tangible book value per share of our common
stock immediately afterwards. Assuming our sale of 1,500,000 shares of common
stock offered by this prospectus at an assumed offering price of $113.75 per
share, and after deducting underwriting discounts and commissions and estimated
offering expenses, our net tangible book value at December 31, 1999 would have
been approximately $221.2 million or $3.50 per share. This represents an
immediate decrease in net tangible book value of $2.54 per share to new
investors purchasing shares of common stock in this offering. The following
table illustrates this dilution:
<TABLE>
<S> <C> <C>
Assumed public offering price per share.......................... $113.75
Pro forma net tangible book value per share at December 31,
1999.......................................................... $0.96
Increase per share attributable to new investors............... 2.54
-----
Pro forma net tangible book value per share after this offering.. 3.50
-------
Dilution per share to new investors.............................. $110.25
=======
</TABLE>
The following table summarizes, on a pro forma basis, as of December 31,
1999, the differences between the number of shares of common stock purchased
from us, the total consideration paid and the average price per share paid by
existing stockholders and by the new investors purchasing shares in this
offering. We used an assumed offering price of $113.75 per share, and we have
not deducted underwriting discounts and commissions and estimated offering
expenses in our calculations.
<TABLE>
<CAPTION>
Shares Purchased Total Consideration Average
------------------ -------------------- Price
Number Percent Amount Percent Per Share
---------- ------- ------------ ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders......... 61,750,992 97.6% $ 77,974,000 31.4% $ 1.26
New investors................. 1,500,000 2.4% 170,625,000 68.6% $113.75
---------- ---- ------------ ----
Total....................... 63,250,992 100% $248,599,000 100%
========== ==== ============ ====
</TABLE>
The foregoing discussion and tables assume no exercise of any outstanding
stock options. The exercise of options outstanding under our stock option plans
having an exercise price less than the offering price would increase the
dilutive effect to new investors. See "Capitalization" and "Management--
Employee Stock Plans."
19
<PAGE>
SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with
Vitria's financial statements and related notes included elsewhere in this
prospectus and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" included elsewhere herein. The statement of operations
data for the years ended December 31, 1997, 1998 and 1999, and the balance
sheet data as of December 31, 1998 and 1999, are derived from the audited
financial statements included elsewhere in this prospectus. The statement of
operations data for the years ended December 31, 1995 and 1996, and the balance
sheet data as of December 31, 1995, 1996 and 1997, are derived from the audited
financial statements not included elsewhere in this prospectus. The historical
results are not necessarily indicative of results to be expected for future
periods.
<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)
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>
20
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Overview
Vitria was incorporated in October 1994. We initially generated revenues
exclusively through consulting contracts with third parties and government
grants from the National Institute of Standards and Technology, or NIST. In
June 1997, we commercially released our first product. With the initial release
of this product, we accelerated the development of our sales and marketing
organizations. We have incurred significant losses since inception, and as of
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. 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
21
<PAGE>
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.
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<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 prospectus and include all adjustments, consisting only of normal
recurring adjustments, that we consider necessary for a fair presentation of
this information. You should read this information in conjunction with our
annual audited financial statements and related notes appearing elsewhere in
this prospectus. Our quarterly operating results are expected to vary
significantly from quarter to quarter and you should not draw any conclusions
about our future results from the results of operations for any quarter.
<TABLE>
<CAPTION>
Mar. 31, June 30, Sept. 30, Dec. 31, Mar. 31, June 30, 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>
23
<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.
24
<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, recruiting costs,
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.
25
<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 have $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 November 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.
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 will be
sufficient to meet our working capital and operating expense requirements for
at least the next twelve months. Thereafter, we may require additional funds to
support our working capital and operating expense requirements of for other
purposes and may seek to raise these additional funds through public or private
debt or equity financings. There can be no assurance that this additional
financing will be available, or if available, will be on reasonable terms and
not dilutive to our stockholders.
26
<PAGE>
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.
Qualitative and Quantitative 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.
Year 2000 Readiness
The "Year 2000 issue" refers generally to the problems that some software
may have in determining the correct century for the year. For example, software
with date-sensitive functions that is not Year 2000 compliant may not be able
to distinguish whether "00" means 1900 or 2000, which may result in failures or
the creation of erroneous results.
We designed our product to be Year 2000 compliant when configured and used
in accordance with the related documentation, and provided that the underlying
operating system of the host machine and any other software used with or in the
host machine or our product are Year 2000 compliant. However, we have not
exhaustively tested our product for Year 2000 compliance. We continue to
respond to customer questions about prior versions of our product on a case-by-
case basis.
We have defined Year 2000 compliant as the ability to:
. Correctly handle date information needed for the December 31, 1999 to
January 1, 2000 date change;
. Function according to the product documentation provided for this date
change, without changes in operation resulting from the advent of a new
century, assuming correct configuration;
. Respond to two-digit date input in a way that resolves the ambiguity as
to century in a disclosed, defined and predetermined manner;
. Store and provide output of date information in ways that are unambiguous
as to century if the date elements in interfaces and data storage specify
the century; and
. Recognize year 2000 as a leap year.
We have assurances from our vendors that their licensed software is Year
2000 compliant. To date, we have received assurances from a subset of the
vendors of our enterprise resource planning software, and technology support
software as to their Year 2000 compliance. Despite testing by us and current
and potential customers, and assurances from developers of product incorporated
into our product, our product may contain undetected errors or defects
associated with Year 2000 date functions. Known or unknown errors or defects in
our product could result in delay or loss of revenues, diversion of development
resources, damage to our reputation, increased service and warranty costs, or
liability from our customers, any of which could seriously harm our business.
27
<PAGE>
As a specific example, older versions of Vitria's BusinessWare product were
designed to work with Sun Microsystem's Java Developer Kit version 1.1.5. Sun
Microsystems has announced that this version and earlier versions of the Java
Developer Kit are not Year 2000 compliant. Vitria customers who are still using
these older versions of the BusinessWare product are thus subject to Year 2000
operating risk due to this Java Developer Kit compliance problem. We have
notified customers in order to migrate them to newer versions of the
BusinessWare product which use Sun Microsystem's Java Developer Kit version
1.1.7. Sun Microsystems claims that version 1.1.7 is Year 2000 compliant. We
have not made any representations to our customers concerning the Year 2000
readiness of this development kit. To the extent one or more of these customers
fail to migrate to the newer Vitria BusinessWare product, these customers could
potentially suffer operating difficulties in systems using Vitria's
BusinessWare product. Vitria could be exposed to an indirect liability in this
event.
Some commentators have predicted significant litigation regarding Year 2000
compliance issues, and we are aware of these lawsuits against other software
vendors. Because of the unprecedented nature of this litigation, it is
uncertain whether or to what extent we may be affected by it. Congress has
passed a law that is intended to limit liability for some failures to achieve
Year 2000 compliance. There can be no assurance that this bill will provide us
with any protection.
We have completed an assessment of our material internal information and
non-information technology systems, including both our own software products
and third party software and hardware technology. To the extent that we are not
able to test the technology provided by third party vendors, we are seeking
assurances from these vendors that their systems are Year 2000 compliant. We
are not currently aware of any material operational issues or costs associated
with preparing our internal information technology and non-information
technology systems for the Year 2000. However, we may experience material
unanticipated problems and costs caused by undetected errors or defects in the
technology used in our internal information technology and non-information
technology systems. As of the date of this prospectus, there has been no
material adverse effect on our business due to potential Year 2000 problems.
We do not currently have any information concerning the Year 2000 compliance
status of our customers. Our current or future customers may incur significant
expenses to achieve Year 2000 compliance. If our customers are not Year 2000
compliant, they may experience material costs to remedy problems, or they may
face litigation costs. In either case, Year 2000 issues could reduce or
eliminate the budgets that current or potential customers could have for or
delay purchases of our product and services. As a result, our business could be
seriously harmed.
We have funded our Year 2000 plan from operating cash flows and have not
separately accounted for these costs in the past. To date, these costs have not
been material. We will incur additional costs related to the Year 2000 plan for
administrative personnel to manage the project, outside contractor assistance,
technical support for our products, product engineering and customer
satisfaction. In addition, we may experience material problems and costs with
Year 2000 compliance that could seriously harm our business, but as of the date
of this prospectus, we have not experienced any material problems or costs.
We do not have a contingency plan to address situations that may result if
our critical operations are not Year 2000 ready, and we do not anticipate the
need to do so. The cost of developing and implementing the plan may itself be
material. Finally, we are also subject to external forces that might generally
affect industry and commerce, including utility or transportation company Year
2000 compliance failure interruptions.
Year 2000 issues affecting our business, if not adequately addressed by us,
our third party vendors or suppliers or our customers, could have a number of
"worst case" consequences. These include:
. claims from our customers asserting liability, including liability for
breach of warranties related to the failure of our product and services
to function properly, and any resulting settlements or judgments; and
. our inability to manage our own business.
28
<PAGE>
BUSINESS
This prospectus contains forward-looking statements that involve risks and
uncertainties. Our actual results may differ significantly from the results
discussed in these forward-looking statements. Factors that may cause
differences include, but are not limited to, those discussed in "Risk Factors."
We are a leading provider of eBusiness infrastructure software. Our product,
BusinessWare, provides the infrastructure which enables incompatible
information technology systems to exchange information over corporate networks
and the Internet. BusinessWare enables this exchange to take place
automatically, without human intervention. This eliminates manual entry of
information into multiple IT systems, and eliminates the need to manually
exchange information with customers and business partners using phone,
facsimile or mail. BusinessWare is designed to provide business managers with a
software infrastructure that gives them complete control and visibility of
their business operations, enabling them to reduce time to market, rapidly
respond to change, and manage the growing complexity of business interactions
with partners and customers.
We have initially targeted the telecommunications, business services,
manufacturing and financial services industries. To date, we have licensed
BusinessWare to over 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 EDS. In addition, Vitria
develops products targeted at specific industries and built on BusinessWare.
Industry Background
The use of the Internet to conduct business, often referred to as
"eBusiness," is fundamentally changing business-to-business, business-to-
consumer and business-to-employee interactions. Many companies are exploring
innovative business models to capitalize on this eBusiness opportunity. These
eBusiness participants include established companies transitioning to new
Internet-enabled business models, new companies formed specifically to deliver
products and services over the Internet, and providers of Internet hardware and
software, including networking and telecommunications companies. These
companies operate in an environment characterized by rapid change and
increasingly complex business interactions with partners and customers. The
business processes that define these complex interactions often span an
"extended enterprise" that links companies with an Internet-enabled network of
partners and customers.
To compete in this new environment, companies must conduct business in
"real-time" by communicating instantly with customers and partners over the
Internet, using a clearly defined set of business processes that can be
continuously analyzed and rapidly changed. From order fulfillment to customer
service, the benefits of automating business processes across the extended
enterprise are significant. For example, telecommunications service providers
that automate the transmission of customer orders between themselves and local
network providers can reduce service activation times, resulting in increased
customer satisfaction. Similarly, companies that allow their customers to place
and track their orders using applications accessible via the Internet can
increase revenue opportunities while reducing order management and customer
service costs.
Deploying software solutions that deliver these business benefits is a
significant challenge. Companies need to define and manage the business
processes that implement these solutions. Once defined, these business
processes must be tied into the underlying information technology, or IT,
systems that support them so that information can flow smoothly from the first
step of the process to the last. Business processes must often coordinate the
flow of information between several IT systems which operate separately. These
systems may utilize packaged software applications or custom software
applications developed by a company for internal use. These stand-alone systems
add additional complexity to the effort because they typically are not designed
to work with each other.
29
<PAGE>
The following diagram illustrates the complexity of conducting business
over the Internet. The diagram depicts the order fulfillment process for a
company that allows customers to place orders directly, using a Web-based
order entry system application, and outsources its inventory management and
shipping processes to a distribution partner. The diagram shows how each step
in the order fulfillment process directs the flow of information across
internal and external IT systems, and how these systems must be integrated to
smoothly process the customer order from initial placement to final product
delivery and customer billing.
[Graphic shows the flow of an order from a customer to a Web browser to an
order entry system to an order fulfillment system to an inventory management
system to a billing system.]
We believe companies must address the following requirements in order to
capitalize on the eBusiness opportunity:
. define, manage and automate their business processes;
. exchange business information between a company and its partners and
customers in a secure and reliable fashion using Internet standards;
. integrate the internal and external IT systems that implement business
process steps; and
. gather and analyze, in real time, key business and process information,
and use the results to automatically change business processes.
Current software products generally focus on just one or two of these
requirements. For example, enterprise application integration, or EAI, vendors
focus on integrating IT systems. Messaging software vendors focus on inter-
application communications. In particular, EAI products suffer from the
following limitations:
Weak Process Automation and Real-Time Analysis Functionality. EAI products
address the application integration aspect of an eBusiness infrastructure.
However, they do not generally provide the functionality to manage and
automate the business processes that define eBusiness solutions. In
addition, EAI products typically support analysis of business and process
information that is done only after the process is complete, as compared
to "real-time" analysis that occurs concurrently with the process.
Require Extensive IT Involvement. EAI products generally require multiple
custom software programs to define and implement business processes. As a
result, the design, implementation and modification of business processes
require extensive involvement by IT personnel. This makes it is difficult
for business managers to manage their business processes.
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Lack of Support for Internet Standards. Ideally, companies need to
seamlessly exchange information between their corporate networks and the
Internet. EAI products typically do not use Internet standards, for
example XML and HTTP, to describe and exchange information between IT
systems. This makes it difficult for companies to deploy eBusiness
solutions that link them with their partners and customers over the
Internet.
Limited Scalability. EAI products are typically built on "hub-and-spoke"
architectures that are designed for single site deployment. Generally,
solutions based on these architectures can neither be incrementally
expanded, or scaled, to support high transaction volumes nor distributed
across multiple locations without incurring significant administrative
overhead.
We believe that there is a significant market opportunity for an
infrastructure software product that addresses these limitations and enables
companies to rapidly capitalize on the eBusiness opportunity. We believe that
the market will grow from $313 million in 1998 to more than $5 billion by
2003.
Vitria Solution
Vitria is a leading provider of eBusiness infrastructure software.
BusinessWare enables companies to automate business processes across the
extended enterprise and integrates the underlying IT systems that must work
together to support these processes.
BusinessWare combines in a single solution the four elements that we
believe are essential for eBusiness infrastructure software:
(1) Business Process Automation--Empowers business users to define, manage
and automate business processes through a graphical modeling
environment;
(2) Internet-Based Communications--Exchanges business information between a
company and its partners and customers in a secure and reliable fashion
using Internet standards;
(3) Application Integration--Integrates the internal and external IT
systems that implement business process steps across the extended
enterprise; and
(4) Real-Time Analysis--Gathers key business and process information in
real time, analyzes the data in real time, and selectively uses the
results to automatically change business processes.
Once customers use BusinessWare to define their business process models and
integrate the underlying IT systems, BusinessWare automatically controls the
flow of information across the IT systems as specified by the process models.
BusinessWare continuously analyzes the customer's business processes and can
automatically change the processes in response to this analysis. This
capability allows companies to transform the information flowing through their
IT systems into "actionable intelligence" that enables business managers to
optimize their business operations.
BusinessWare allows customers to solve their eBusiness problems using
graphical models rather than developing custom programs. Rather than writing
software programs, business managers can create visual diagrams of business
processes, called "process models," using a point-and-click user interface.
BusinessWare then translates these process models into software programs that
automate the flow of information across a company's underlying IT systems. Our
graphical process models are "directly executable," which means that they can
be deployed immediately, without programming by IT personnel.
We believe that BusinessWare provides the following benefits to customers:
Easy for Business Managers to Use. The combination of our graphical process
modeling and automation functionality with our robust application integration
foundation, allows customers to focus on the business objectives of eBusiness
rather than the mechanics of solution implementation.
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Reduces Time to Market. We enable customers to reduce their time to market
by allowing them to graphically define and automate new business processes to
support the delivery of new products and services.
Leverages IT Investment. We help companies to preserve and leverage the
substantial IT investment they have made by allowing them to assemble eBusiness
solutions using their existing IT systems.
Allows Rapid Response to Change. We enable customers to graphically model
their existing business processes, and then continuously refine and optimize
them as business conditions change over time. To change a business process,
managers simply change the associated graphical model.
Provides a Comprehensive Solution. BusinessWare combines the four elements
of an eBusiness infrastructure software product in a single comprehensive
solution. This eliminates the need for our customers to purchase and integrate
separate solution components from multiple vendors.
Scales to Support High Transaction Volumes and Distributed Deployment. Our
product features an architecture that uses the same distributed processing
principles as those used on the Web. Unlike alternative "hub-and-spoke"
architectures that are optimized for single site deployment, our "federated"
architecture allows customers to incrementally add servers to support
increasing loads, without adding administrative complexity.
Enables Mission-Critical Deployments. The importance of our customers'
eBusiness initiatives demand that our software meets high standards for
performance, security and reliability. BusinessWare has been designed for
superior performance to accommodate the high transaction volumes enabled by the
Internet. In addition, our solution was designed to ensure secure communication
of business information across the extended enterprise using rigorous
authentication and data encryption technologies. BusinessWare provides high
availability through multiple server redundancy and automatic failover to
backup systems.
Strategy
Our objective is to establish BusinessWare as the leading infrastructure
software product for real-time eBusiness. Key elements of our strategy to
achieve this objective include:
Leverage and Expand Strategic Alliances. We intend to leverage our
relationships with leading system integrators, including Andersen Consulting,
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.
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Target Fast-Growing Vertical Markets. To date, we have targeted the
telecommunications, business services, manufacturing and financial services
industries. These markets are characterized by high rates of growth, dynamic
business processes and rapid adoption of eBusiness solutions. We intend to
expand our position in these markets and leverage this position to target other
markets.
Extend Relationships with Customers. The strategic importance of
BusinessWare to our customers allows us to develop relationships with their
senior decision makers. This visibility to senior management and a focused
implementation approach facilitate the rapid adoption and deployment of
BusinessWare throughout the organization. We intend to leverage these
relationships as we introduce new products and services. Additionally, because
BusinessWare is used by companies to automate and manage their interactions
across their extended enterprise, we are introduced to opportunities with our
customers' business partners.
Products
BusinessWare is an eBusiness infrastructure software product designed to
provide customers with a comprehensive infrastructure for rapidly capitalizing
on the eBusiness opportunity. The BusinessWare product is illustrated and
summarized below:
[GRAPHIC APPEARS HERE]
[Graphic: Depicts the components of the Vitria product including the following:
.BusinessWare Modeler
.BusinessWare Administrator
.BusinessWare Server
.BusinessWare Automator
.BusinessWare Analyzer
.BusinessWare Communicator
.BusinessWare Connectors and Transformers
.BusinessWare Common Services
.Customer's IT systems]
BusinessWare Modeler. The Modeler is BusinessWare's process modeling
component. Business managers use the Modeler to create graphical models of
their business processes using a point-and-click interface. These process
models provide an intuitive visual representation of interdependent processing
steps. Users can add business rules to each processing step to provide
additional modeling flexibility. Once specified and saved in the BusinessWare
Repository, process models can be directly executed by the BusinessWare
Automator. The Modeler supports advanced modeling constructs that allow users
to define and manage complex, real-world business processes. The Modeler
supports Unified Modeling Language, the industry standard for business process
modeling and automation.
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BusinessWare Server. The BusinessWare Server provides the host environment
for five functional components: Automator, Analyzer, Communicator, Connector
and Transformer. The BusinessWare Server is designed to provide a set of common
services that are shared by each of these components:
. Security: provides rigorous support for authentication, data encryption
and access control.
. Transaction management: ensures the integrity of business processes and
related updates to underlying IT systems.
. Persistence: provides automatic recovery in the event of system or
network failures.
. Repository: stores and manages all BusinessWare metadata, such as process
models.
BusinessWare Automator. Automator is BusinessWare's process automation
component. It executes the business process models defined by users in the
Modeler and stored in the BusinessWare Repository. Automator automates business
processes by coordinating the flow of information among the underlying IT
systems.
BusinessWare Analyzer. Analyzer selectively gathers and analyzes business
and process information throughout the extended enterprise. Analyzer provides
business managers rapid access to key statistics, such as the number of on-time
shipments, which they use to manage their business. Analyzer also helps
companies to rapidly identify processing bottlenecks, thus providing them with
the information they need to support their continuous process improvement
efforts. Analyzer's results can be automatically fed back into Automator to
change business processes in real time.
BusinessWare Communicator. Communicator provides the communications backbone
that ties together all of the BusinessWare components and the IT systems that
they integrate. Communicator provides fast and secure information delivery and
allows the customer to choose between multiple quality of service options such
as guaranteed delivery or best effort. Communicator supports Internet
standards, including HTTP and XML. Communicator is designed to interoperate
with third-party messaging products.
BusinessWare Connectors and Transformers. Connectors and Transformers
together provide BusinessWare's application integration functionality, enabling
heterogeneous IT systems to exchange information.
. Connectors translate business information to Internet standards, such as
XML. We provide off-the-shelf Connectors for a number of popular packaged
applications, messaging systems and databases. We also provide a toolkit
that enables customers to rapidly develop Connectors for custom or legacy
systems.
. Transformers map data structures from one IT system to another. In
addition to our own transformation components, customers have the option
to augment their BusinessWare solution with transformation products from
third parties.
BusinessWare Administrator. Administrator is BusinessWare's graphical
systems management and monitoring component. Administrator allows systems
administrators to perform local and remote administration from any BusinessWare
server.
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Customers
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:
<TABLE>
<S> <C>
A.B. Watley, Inc. Inacom Corporation
Advanced Radio Telecom Corp. KPMG LLP
Allied Riser Communications
Corporations Level 3 Communications, Inc.
American Century Services MVX.com
Corporation
@Link Network, Inc. NET-tel Corporation
CableVision Systems Corporation NextLink Communications, Inc.
Citizens Telecom Services Company,
LLC NorthPoint Communications, Inc.
Covad Communications Company PSI.Net, Inc.
Deutsche Bank AG Rhythms NetConnections Inc.
Digital Microwave Corporation Southern California Edison
Duke Energy Corporation Telstra Corporation Ltd
Federal Express Corporation 3Com Corporation
FirstWorld Communications, Inc. 2-Wire, Inc.
Fujitsu PC Corporation WebLink Wireless, Inc.
Hewitt Associates LLC Verio, Inc.
ICG Communications, Inc.
</TABLE>
Technology
We have assembled a team of software engineers with expertise in distributed
computing, model-driven business process automation, and real-time query
processing. Our founders, Dr. JoMei Chang and Dr. M. Dale Skeen, have
established reputations as technology innovators. Dr. Chang is the principal
patent author for one of the first "reliable multicast" protocols. Multicast
protocols reduce traffic congestion over the Internet. Dr. Skeen is the
principal author of multiple patents for "publish-and-subscribe" communication,
which is the preferred communication method for enterprise application
integration. Publish-and-subscribe is a communication method that allows IT
systems to exchange information anonymously. Following an open competition, the
National Institute of Standards and Technology's Advanced Technology Program
awarded us three prestigious, multi-million dollar research grants to address
complex business integration and supply chain management problems. For a
description of these awards, see "Government Grants."
Model-Driven Business Process Automation. We have pioneered and
commercialized the concept of direct manipulation and execution of business
processes through graphical models. This powerful concept combines visual
process modeling with business rules to express and automate complex business
scenarios using terminology and concepts familiar to business users. Advanced
modeling functions, including nested and concurrent processes, are designed to
provide users with the sophisticated modeling power they need to express the
real-world complexity of today's business operations. In addition, our product
allows companies to define business processes that can automatically select
alternate processing steps based on current business conditions.
Real-Time Analysis. We have pioneered and commercialized the concept of a
general purpose real-time query tool. This tool allows users to define queries
that continuously monitor and analyze, in real time, information flowing across
their business processes and IT systems. Real-time query processing is
fundamentally different from more traditional query processing. Whereas
traditional query processing optimizes the one-time, bulk evaluation of a
single query across a large number of records, Vitria's technology is designed
to optimize the incremental evaluation of a single new message against a large
number of outstanding queries. Since it is possible to have thousands of real-
time queries concurrently active, we have developed patent-pending algorithms
for optimizing the processing of a large number of concurrent queries.
Vitria has also pioneered technology to perform complex real-time queries
that join two or more real-time information streams together, or that join a
real-time information stream to information stored in a database.
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This capability significantly increases the power of real-time querying. We
have developed patent-pending algorithms to execute and optimize these complex,
real-time queries.
Scalability and Reliability. BusinessWare implements an architecture and a
naming scheme modeled after that used by the Web. This architecture partitions
workload among an unlimited number of servers and supports incremental
expansion, as needed. Additional servers can be added in a manner that is
transparent to end users and system administrators, resulting in scalability to
high orders of magnitude without unnecessary administrative overhead.
BusinessWare is also designed to support the caching and replication of
information across multiple servers to provide faster information access and
robust failover and recovery support in the event of system or network
failures. BusinessWare supports the option to use a reliable multicast protocol
that is built on top of the Internet-based IP multicast protocol. Multicast
protocols provide a particularly efficient method for disseminating real-time
information to a large number of users. The combination of our architecture,
extensive use of duplicated information stored in multiple locations, and
support for multicast protocols is designed to enable our solutions to
communicate business information across the extended enterprise with little
latency, and high scalability and reliability.
Security. Security is essential for business-critical applications operating
over extranets and the Internet. BusinessWare provides a security framework
based on the widely accepted Secure Socket Layers, or SSL, standard. Our
security framework supports unique "digital signatures" for each user, as well
as multiple means of verifying a user's identity and encrypting computer data.
The framework is designed to be easily extended to support additional user
verification and encryption services. All BusinessWare components provide
discretionary authorization of users through the use of a list of authorized
users of the IT system. In addition, BusinessWare can support multiple security
domains and provide secure communication between domains. Security domains
allow the selective and secure sharing of information among business partners,
while allowing each partner to retain control over their own security policies.
Sales and Marketing
We license our product and sell services primarily through our direct sales
organization, complemented by the selling and support efforts of our system
integrators and other strategic partners. As of December 31, 1999, our sales
force consisted of 98 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.
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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 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.
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Government Grants
We have received three governmental research grants that have funded, and
continue to fund, portions of our research and development. We were awarded our
first grant in January 1996 by the National Institute of Standards and
Technology, commonly referred to as NIST, under its advanced technology
program. This NIST program is a partnership between government and private
industry to encourage commercially promising, but highly challenging research.
We used this grant to fund research and development of model-driven
technologies for integrating IT systems. We received an additional grant from
NIST in October 1997 to conduct further research and development into these
technologies. Under the terms of these grants, we retain all intellectual
property rights to all research results except that the federal government has
a non-exclusive, non-transferable, paid-up license to any patents arising from
this research. In addition, the NIST grants require us to commercially license
the research results. We are fulfilling this obligation by incorporating our
results into our BusinessWare software products.
Our third grant was awarded to us as a member of the Extended Enterprise
Coalition for Integrated Collaborative Manufacturing Systems, also known as
EECOMS. EECOMS is a consortium of vendors, customers and providers of enabling
technologies, whose goal is to develop new frameworks to improve supply chain
logistics, product delivery to customers, product inventories and the
competitive ability of U.S. manufacturers in the global marketplace. We were
awarded this grant in January 1998 and the grant is scheduled to conclude in
December 2000. Funds under this grant have been used to develop supply chain
scenarios for the extended enterprise. Research results from this grant are
jointly owned by EECOMS and the federal government is granted a non-exclusive
license to these research results and related intellectual property rights. We
have not used these funds for technology development.
Competition
The market for our product is competitive, evolving and subject to rapid
technological change. The intensity of competition is expected to increase in
the future. We believe that eBusiness infrastructure software must address four
requirements: (1) business process automation, (2) Internet-based
communications, (3) application integration, and (4) real-time analysis. 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.
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;
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. 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.
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.
Facilities
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.
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MANAGEMENT
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
---- --- --------
<C> <C> <S>
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.
Board Committees
Audit committee. Our audit committee currently consists of Messrs. Halperin
and Walecka. The audit committee reviews our internal accounting procedures and
consults with and reviews the services provided by our independent accountants.
Compensation committee. Our compensation committee currently consists of
Messrs. Younger and Halperin. The compensation committee administers our stock
option plans, reviews and approves the compensation and benefits of all our
officers and establishes and reviews general policies relating to compensation
and benefits of our employees.
Director Compensation
Directors currently receive no cash compensation from us for their services
as members of the board or for attendance at committee meetings. In August
1999, Messrs. Halperin, Walecka and Younger, directors of
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Vitria, were each granted an option to purchase 40,000 shares of Common Stock
at an exercise price of $5.00 per share. Each option was granted under the 1999
Equity Incentive Plan.
Compensation Committee Interlocks and Insider Participation
None of our executive officers serve as a member of the board of directors
or compensation committee of any entity that has one or more executive officers
serving as a member of our board of directors or compensation committee.
Messrs. Younger and Halperin serve as members of the compensation committee.
Individuals and investment entities affiliated with Messrs. Younger and
Halperin have purchased shares of common stock and preferred stock. See
"Certain Transactions."
Board Composition
We have authorized five directors. In accordance with the terms of our
certificate of incorporation, the terms of office of the board of directors are
divided into three classes. As a result, a portion of our board of directors
are elected each year. The division of the three classes and their respective
election dates are as follows:
. the class I directors' term will expire at the annual meeting of
stockholders to be held in 2000;
. the class II directors' term will expire at the annual meeting of
stockholders to be held in 2001; and
. the class III director's term will expire at the annual meeting of
stockholders to be held in 2002.
Our class I directors are Dr. Skeen and Mr. Younger. Our class II directors
are Messrs. Halperin and Walecka. Our class III director is Dr. Chang. At each
annual meeting of stockholders the successors to directors whose terms will
then expire will be elected to serve from the time of election and
qualification until the third annual meeting following election. Any additional
directorships resulting from an increase in the number of directors will be
distributed among the three classes so that, as nearly as possible, each class
will consist of one-third of the directors. This classification of the board of
directors may have the effect of delaying or preventing changes in control or
management of Vitria.
Executive Compensation
The following table sets forth summary information concerning the
compensation paid to our Chief Executive Officer and four most highly
compensated executive officers during the years ended December 31, 1998 and
December 31, 1999.
Summary Compensation Table
<TABLE>
<CAPTION>
Annual Compensation
------------------------
Number of
Securities
Fiscal Underlying Other
Name and Principal Position Year Salary Bonus Options Compensation
- --------------------------- ------ -------- -------- ---------- ------------
<S> <C> <C> <C> <C> <C>
JoMei Chang, Ph.D.(1)......... 1999 $225,338 $ 75,000 850,000 --
President and Chief Executive
Officer 1998 175,000 75,000 -- --
M. Dale Skeen, Ph.D.(2)....... 1999 200,272 60,000 750,000 --
Chief Technology Officer 1998 150,000 60,000 -- --
Jay W. Shiveley, III.......... 1999 150,147 240,000 100,000 --
Senior Vice President,
Worldwide Sales 1998 140,000 210,000 300,000 --
Aleksander E. Osadzinski (3).. 1999 185,219 5,400 70,000 --
Vice President, Marketing 1998 39,965 -- 600,000 --
Paul R. Auvil, III (4)........ 1999 185,960 37,500 100,000 --
Vice President, Finance,
Chief Financial 1998 130,517 33,781 500,000 --
Officer and Secretary
</TABLE>
- ---------------------
(1) Dr. Chang's 1999 salary figure includes $90,000 in non-qualified deferred
compensation. Dr. Chang's 1998 salary figure includes $9,798 in non-
qualified deferred compensation.
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<PAGE>
(2) Dr. Skeen's 1999 salary figure includes $80,109 in non-qualified deferred
compensation. Dr. Skeen's 1998 salary figure includes $8,592 in non-
qualified deferred compensation.
(3) Mr. Osadzinski joined our company in October 1998. His annualized 1998
salary was $185,000.
(4) Mr. Auvil joined our company in April 1998. His annualized 1998 salary was
$160,000. Mr. Auvil's 1998 salary figure includes a $4,302 payment for
reimbursement of relocation expenses.
Option Grants in Fiscal Year 1999
The following table sets forth each grant of stock options during the fiscal
year ended December 31, 1999, to each of the individuals listed on the previous
table.
The exercise price of each option was equal to the fair market value of our
common stock as valued by the board of directors on the date of grant. The
exercise price may be paid in cash, in shares of our common stock valued at
fair market value on the exercise date or through a cashless exercise procedure
involving a same-day sale of the purchased shares.
The potential realizable value is calculated based on the ten-year term of
the option at the time of grant. Stock price appreciation of 5% and 10% is
assumed pursuant to rules promulgated by the Securities and Exchange Commission
and does not represent our prediction of our stock price performance. The
potential realizable values at 5% and 10% appreciation are calculated by
. multiplying the number of shares of common stock subject to a given
option by the initial public offering price of $8.00 per share.
. assuming that the aggregate stock value derived from that calculation
compounds at the annual 5% or 10% rate shown in the table until the
expiration of the options; and
. subtracting from that result the aggregate option exercise price.
The shares listed in the following table under "Number of Securities
Underlying Options Granted" are subject to vesting. Upon completion of 12
months of service from the vesting start date, 20% of the option shares vest
and the balance vest in a series of equal monthly installments over the next
four years of service. Each of the options has a ten-year term, subject to
earlier termination if the optionee's service with us ceases. See "Employee
Stock Plans" for a description of the material terms of these options.
Percentages shown under "Percent of Total Options Granted to Employees in
Fiscal Year" are based on an aggregate of 6,545,200 options granted to
employees of Vitria under our stock option plans during the fiscal year ended
December 31, 1999.
<TABLE>
<CAPTION>
Potential Realizable Value at
Number of Percent of Assumed Annual
Securities Total Options Rates of Stock Price
Underlying Granted to Exercise Appreciation for Option Term
Options Employees in Price Per Expiration ------------------------------
Name Granted Fiscal 1999 Share Date 5% 10%
- ---- ---------- ------------- --------- ---------- -------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
JoMei Chang, Ph.D. ..... 750,000 11.46% $4.00 7/11/09 $ 6,540,668 $ 13,355,070
100,000 1.53 5.00 7/11/09 772,089 1,480,676
M. Dale Skeen, Ph.D. ... 650,000 9.93 4.00 7/11/09 5,668,574 10,274,394
100,000 1.53 5.00 7/11/09 772,089 1,480,676
Jay W. Shiveley, III.... 100,000 1.53 5.00 7/11/09 772,089 1,480,676
Aleksander E.
Osadzinski............. 70,000 1.07 5.00 7/11/09 540,462 1,036,473
Paul R. Auvil, III...... 100,000 1.53 5.00 7/11/09 772,089 1,480,676
</TABLE>
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<PAGE>
Fiscal Year-End Option Values
The following table sets forth the number and value of securities underlying
unexercised options that are held by each of the individuals listed on the
previous page as of December 31, 1999.
Amounts shown under the columns "Value Realized" and "Value of Unexercised
In-the-Money Options at December 31, 1999" are based on $117.00 per share which
was the last reported sale price of our stock on December 31, 1999, without
taking into account any taxes that may be payable in connection with the
transaction, multiplied by the number of shares underlying the option, less the
exercise price payable for these shares. Vitria's stock option plans allow for
the early exercise of options granted to employees. All options exercised early
are subject to repurchase by Vitria at the original exercise price, upon the
optionee's cessation of service prior to the vesting of the shares.
<TABLE>
<CAPTION>
Number of Securities
Underlying Unexercised Value of Unexercised
Options at In-the-Money Options at
December 31, 1999 December 31, 1999
Shares Acquired Value ------------------------- -------------------------
Name on Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
- ---- --------------- ----------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
JoMei Chang, Ph.D. ..... -- -- -- 850,000 $ -- $95,950,000
M. Dale Skeen, Ph.D. ... -- -- -- 750,000 -- 84,650,000
Jay W. Shiveley, III.... 400,000(1) $46,750,000 720,000 80,000 84,240,000 9,360,000
Aleksander E.
Osadzinski............. -- -- 395,000 50,000 46,215,000 5,850,000
Paul R. Auvil, III...... -- -- 20,000 80,000 2,340,000 9,360,000
</TABLE>
- --------
(1) Includes 125,000 shares subject to repurchase as of December 31, 1999.
Employment and Change of Control Agreements
In March 1998, we entered into an employment agreement with Paul R. Auvil,
III, our Vice President, Finance, Chief Financial Officer and Secretary. The
agreement provides that Mr. Auvil is employed "at-will," and the employment
relationship may be terminated for any reason at any time, but if after a
change of control due to a merger or acquisition, Mr. Auvil is not offered a
position with the successor company, Mr. Auvil will be entitled to severance
pay equal to six months of his base salary at the time of termination.
Employee Stock Plans
1999 Equity Incentive Plan
We adopted the equity incentive plan in June 1999. The incentive plan is an
amendment and restatement of the equity incentive plan we adopted in 1995.
Share Reserve. We have currently reserved 24,013,814 shares for issuance
under the incentive plan, less shares issued or issuable under Vitria's
executive incentive plan. On December 31 of each year for 10 years, starting
with the year 1999, the number of shares in this reserve shared by the
incentive plan and the executive plan will automatically increase by 6.5% of
the outstanding common stock on a fully-diluted basis. However, no more than
16,000,000 shares may be used for incentive stock options under both the
executive plan and the incentive plan. If stock awards granted under the
incentive plan expire or otherwise terminate without being exercised, the
shares not acquired pursuant to the stock awards again become available for
issuance under the incentive plan.
Administration. The board administers the incentive plan unless it has
delegated administration to a committee. The board has the authority to
construe, interpret and amend the incentive plan as well as to determine:
. the grant recipients;
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<PAGE>
. the grant dates;
. the number of shares subject to the award;
. the exercisability of the award;
. the exercise price;
. the type of consideration; and
. the other terms of the award.
Eligibility. The board may grant incentive stock options that qualify under
Section 422 of the Internal Revenue Code, to employees, including officers, of
Vitria or an affiliate of Vitria. The board may grant nonstatutory stock
options, stock bonuses, restricted stock purchase awards and stock appreciation
rights to employees, including officers, or directors of and consultants to
Vitria or an affiliate of Vitria. A restricted stock purchase award is an offer
to purchase our shares at a price either at or near the fair market value of
the shares. A stock bonus, on the other hand, is a grant of our shares at no
cost to the recipient in consideration for past services rendered. Vitria may
reacquire the shares under either type of award at the original purchase price,
which is zero in the case of a stock bonus, if the recipient's service to
Vitria or an affiliate is terminated before the shares vest. A stock
appreciation right is a right that allows a recipient to elect to receive cash
or stock of a value equal to the appreciation of optioned rights.
The board may not grant an incentive stock option to any person who, at the
time of the grant, owns (or is deemed to own) stock possessing more than 10% of
the total combined voting power of Vitria or any affiliate of Vitria, unless
the exercise price is at least 110% of the fair market value of the stock on
the grant date and the option term is five years or less. In addition, the
aggregate fair market value, determined at the grant date, of incentive stock
option shares that are exercisable for the first time during a calendar year,
under the incentive plan and all other stock plans of Vitria and its
affiliates, may not exceed $100,000.
Section 162(m) of the Internal Revenue Code, among other things, denies a
deduction to publicly held corporations to some compensation paid to specific
employees in a taxable year to the extent that the compensation exceeds
$1,000,000. When we become subject to Section 162(m), the board may not grant
options and stock appreciation rights under the incentive plan to an employee
covering an aggregate of more than 2,400,000 shares in any calendar year.
Options and Stock Appreciation Rights. The board may grant incentive stock
options and stock appreciation rights with an exercise price of 100% or more of
the fair market value of a share of our common stock on the grant date. It may
grant nonstatutory stock options with an exercise price as low as 85% of the
fair market value of a share on the grant date.
Option Terms. The maximum option term is 10 years. The board may provide for
exercise periods of any length in individual option grants, subject to
limitations. However, generally an option terminates three months after the
optionholder's service terminates. If the termination is due to the
optionholder's disability, the exercise period generally is extended to 12
months. If the termination is due to the optionholder's death or if the
optionholder dies within three months after his or her service terminates, the
exercise period generally is extended to 18 months following death.
Other Provisions. The optionholder may designate a beneficiary to exercise
the option following the optionholder's death. Nonstatutory stock options may
be transferable. Otherwise, the option exercise rights will pass by the
optionholder's will or by the laws of descent and distribution.
The board determines the purchase price of other stock awards, but the
purchase price may not be less than 85% of the fair market value of Vitria's
common stock on the grant date. However, the board may award stock bonuses in
consideration of past services without a purchase payment. Shares sold or
awarded under the
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<PAGE>
incentive plan may, but need not be, restricted and subject to a repurchase
option in favor of Vitria in accordance with a vesting schedule that the board
determines. The board, however, may accelerate the vesting of the restricted
stock.
Transactions not involving receipt of consideration by Vitria, including a
merger, consolidation, reorganization, stock dividend, or stock split, may
change the class and number of shares subject to the incentive plan and to
outstanding awards. In that event, the board will appropriately adjust the
incentive plan as to the class and the maximum number of shares subject to the
incentive plan, to the incentive stock option limitation and to the Section
162(m) limitation. It also will adjust outstanding awards as to the class,
number of shares and price per share subject to the awards.
Upon a change in control of Vitria the surviving entity will either assume
or substitute outstanding awards under the incentive plan. Otherwise, the
vesting and exercisability of awards generally will accelerate.
Options Issued. As of December 31, 1999, Vitria has issued 6,623,050 shares
upon the exercise of options under the incentive plan, 1,418,600 shares of
which have been repurchased and 3,015,320 shares of which are subject to
repurchase; options to purchase 5,052,514 shares were outstanding; and
9,106,248 shares, less shares issued or issuable pursuant to the exercise or
award of stock awards under Vitria's 1998 Executive Incentive Plan, remained
available for future grant. As of December 31, 1999, the board has granted
2,010,000 restricted stock awards under the incentive plan, 60,000 shares of
which have been repurchased. The incentive plan will terminate in 2009 unless
the board terminates it sooner.
1998 Executive Incentive Plan
We adopted the executive incentive plan in October 1998 and amended it in
December 1998. We again amended the executive plan in June 1999.
Share Reserve. We have currently reserved 24,013,814 shares for issuance
under the executive plan less shares issued or issuable under Vitria's equity
incentive plan. On December 31 of each year for 10 years, starting with the
year 1999, the number of shares in this reserve shared by the incentive plan
and the executive plan will automatically increase by 6.5% of the outstanding
common stock on a fully-diluted basis. However, no more than 16,000,000 shares
may be used for incentive stock options under both the executive plan and the
incentive plan. If options granted under the executive plan expire or otherwise
terminate without being exercised, the shares not acquired pursuant to the
options again become available for issuance under the executive plan.
Administration. The board administers the executive plan unless it has
delegated administration to a committee. The board has the authority to
construe, interpret and amend the executive plan as well as to determine:
. the grant recipients;
. the grant dates;
. the number of shares subject to the option;
. the exercisability of the option;
. the exercise price;
. the type of consideration; and
. the other terms of the option.
Eligibility. The board may grant incentive stock options that qualify under
Section 422 of the Internal Revenue Code to employees, including officers, of
Vitria or an affiliate of Vitria. The board may grant
46
<PAGE>
nonstatutory stock options to employees, including officers, or directors of
and consultants to Vitria or an affiliate of Vitria.
The board may not grant an incentive stock option to any person who, at the
time of the grant, owns (or is deemed to own) stock possessing more than 10% of
the total combined voting power of Vitria or an affiliate of Vitria, unless the
exercise price is at least 110% of the fair market value of the stock on the
grant date and the option term is five years or less. In addition, the
aggregate fair market value, determined at the grant date, of incentive stock
option shares that are exercisable for the first time during a calendar year,
under the executive plan and all other stock plans of Vitria and its
affiliates, may not exceed $100,000.
Section 162(m) of the Internal Revenue Code, among other things, denies a
deduction to publicly held corporations to compensation paid to specific
employees in a taxable year to the extent that the compensation exceeds
$1,000,000. When we become subject to Section 162(m), the board may not grant
options under the executive plan to an employee covering an aggregate of more
than 2,400,000 shares in any calendar year.
Options Rights. The board may grant incentive stock options with an exercise
price of 100% or more of the fair market value of a share of our common stock
on the grant date. It may grant nonstatutory stock options with any exercise
price it determines.
Option Terms. The maximum incentive stock option term is 10 years. The board
may provide for exercise periods of any length in individual option grants.
However, generally an option terminates three months after the optionholder's
service terminates. If the termination is due to the optionholder's disability,
the exercise period generally is extended to 12 months. If the termination is
due to the optionholder's death or if the optionholder dies within three months
after his or her service terminates, the exercise period generally is extended
to 18 months following death.
Other Provisions. The optionholder may designate a beneficiary to exercise
the option following the optionholder's death. Nonstatutory stock option rights
may be transferable. Otherwise, the option exercise rights will pass by the
optionholder's will or by the laws of descent and distribution.
Transactions not involving receipt of consideration by Vitria, such as a
merger, consolidation, reorganization, stock dividend, or stock split, may
change the class and number of shares subject to the executive plan and to
outstanding options. In that event, the board will appropriately adjust the
executive plan as to the class and the maximum number of shares subject to the
executive plan and to the Section 162(m) limitation. It also will adjust
outstanding options as to the class, number of shares and price per share
subject to the options.
Upon a change in control of Vitria the surviving entity will either assume
or substitute all outstanding options under the executive plan. Otherwise, the
vesting and exercisability of the options generally will accelerate.
Options Issued. As of December 31, 1999, Vitria has issued 306,500 shares
upon the exercise of options under the executive plan, 50,000 of which have
been repurchased and 64,834 of which are subject to repurchase; options to
purchase 2,223,500 shares were outstanding; and 9,106,248 shares less shares
issued or issuable pursuant to the exercise or award of stock awards under
Vitria's 1999 Equity Incentive Plan, remained available for future grant. The
executive plan will terminate in 2008 unless the board terminates it sooner.
1999 Employee Stock Purchase Plan
We adopted the employee stock purchase plan in June 1999.
Share Reserve. We authorized the issuance of 3,000,000 shares of our common
stock pursuant to purchase rights granted to employees of Vitria and to
employees of designated affiliates of Vitria. On
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<PAGE>
August 14 of each year for 10 years, beginning in 2000, the number of shares in
the reserve automatically will be increased by the greater of:
. 2% of our outstanding shares on a fully-diluted basis, or
. that number of shares so that the share reserve is 3,000,000 shares.
The automatic share reserve increase in the aggregate may not exceed 33,000,000
shares over the 10-year period.
Eligibility. The purchase plan is intended to qualify as an employee stock
purchase plan within the meaning of Section 423 of the Internal Revenue Code.
The purchase plan provides a means by which employees may purchase our common
stock through payroll deductions. We implement this purchase plan by offerings
of purchase rights to eligible employees. Generally, all employees of Vitria
and any United States affiliate may participate in the purchase plan, excluding
part-time and seasonal employees. However, no employee may participate in the
purchase plan if immediately after we grant the employee a purchase right, the
employee has voting power over 5% or more of our outstanding capital stock. As
of the date of this prospectus, no shares of common stock have been purchased
under the purchase plan.
Administration. Under the purchase plan, the board may specify offerings of
up to 27 months. The first offering began on the effective date of our initial
public offering. Unless the board otherwise determines, our common stock is
purchased for accounts of participating employees at a price per share equal to
the lower of:
. 85% of the fair market value of a share on the first day of the offering,
or
. 85% of the fair market value of a share on the purchase date.
The board may provide that employees who become eligible to participate
after the offering period begins nevertheless may enroll in the offering. These
employees will purchase our stock at the lower of:
. 85% of the fair market value of a share on the day they began
participating in the purchase plan, or
. 85% of the fair market value of a share on the purchase date.
Under the current offering, employees may authorize payroll deductions of up
to 10% of their base compensation, not including sales commissions or bonuses,
for the purchase of stock under the purchase plan and may end their
participation in the offering at any time up to 10 days before a purchase date.
Participation ends automatically on termination of employment with Vitria or
its affiliate.
Other Provisions. The board may grant eligible employees purchase rights
under the purchase plan only if the purchase rights together with any other
purchase rights granted under other employee stock purchase plans established
by Vitria or its affiliate, if any, do not permit the employee's rights to
purchase our stock to accrue at a rate that exceeds $25,000 of the fair market
value of our stock for each calendar year in which the purchase rights are
outstanding. The board also may limit the number of shares that an employee may
purchase on any purchase date.
Upon a change of control of Vitria the board may provide that the successor
corporation will assume or substitute outstanding purchase rights.
Alternatively, the board may shorten the offering and provide that shares will
be purchased for participants immediately before the change in control.
401(k) Plan
The Company maintains a 401(k) Plan for eligible employees. An employee
participant may contribute up to 20% of his or her total annual compensation to
the 401(k) Plan, up to a legal annual limit. The annual limit for calendar year
1999 was $10,000. Each participant is fully vested in his or her deferred
salary contributions.
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Participant contributions are held and invested by the 401(k) Plan's trustee.
We may make discretionary contributions as a percentage of participant
contributions, subject to established limits. To date, we have made no
contributions to the 401(k) Plan on behalf of the participants. The 401(k) Plan
is intended to qualify under Section 401 of the Internal Revenue Code, so that
contributions by employees or by Vitria to the 401(k) Plan, and income earned
on the 401(k) Plan contributions, are not taxable to employees until withdrawn
from the 401(k) Plan, and so that contributions by Vitria, if any, will be
deductible when made.
1998 Nonqualified Deferred Compensation Plan
In December 1998, we established a nonqualified, unfunded deferred
compensation plan for executive officers providing for payments upon
retirement, death or disability. Under the plan, these employees receive
payments equal to the employee's entire accrued benefit, the sum of all
deferred amounts and any discretionary corporate contributions credited to the
plan and due and owing to the employee, together with earning adjustments,
minus any distributions. These employees may elect to defer up to 70% of their
salary compensation and 100% of their bonus compensation. As of December 31,
1999, we have not made any contributions to the plan. Amounts, if any, deferred
by executive officers during 1999 are included in the Summary Compensation
Table above.
Limitation of Liability and Indemnification
Our certificate of incorporation and bylaws contain provisions permitted
under Delaware law relating to the liability of directors. These provisions
eliminate a director's personal liability for monetary damages resulting from a
breach of fiduciary duty, except in circumstances involving wrongful acts,
including:
. for any breach of the director's duty of loyalty to Vitria or our
stockholders;
. for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
. for any acts under Section 174 of the Delaware General Corporation Law;
or
. for any transaction from which the director derives an improper personal
benefit.
These provisions do not limit or eliminate our rights or any stockholder's
rights to seek non-monetary relief including an injunction or rescission, in
the event of a breach of director's fiduciary duty. These provisions will not
alter a director's liability under federal securities laws. In addition, we
intend to enter into separate indemnification agreements with our directors and
executive officers that provide each of them indemnification protection in the
event the amended and restated certificate of incorporation and amended and
restated bylaws are subsequently amended. We believe that these provisions and
agreements will assist us in attracting and retaining qualified individuals to
serve as directors and officers.
49
<PAGE>
CERTAIN TRANSACTIONS
The following executive officers, directors or holders of more than five
percent of our voting securities purchased securities in the amounts as of the
date set forth below.
<TABLE>
<CAPTION>
Shares of Preferred Stock
-----------------------------------------------------------
Common Stock Series A Series A1 Series B Series C Series D
-------------- ------------- --------- --------- ------------- --------
<S> <C> <C> <C> <C> <C> <C>
Directors and Executive
Officers
JoMei Chang, Ph.D....... 8,553,756 843,750 -- -- -- --
M. Dale Skeen, Ph.D..... 10,916,250 843,750 -- -- -- --
Robert M. Halperin(1)... 1,374,996 1,351,664 542,950 -- -- --
William H. Younger,
Jr..................... -- -- -- -- 23,770 42,292
Entities Affiliated with
Directors
Brentwood
Associates(2).......... -- -- -- 4,962,654 497,512 888,888
Sutter Hill
Ventures(3)............ -- -- -- 4,962,654 497,512 888,888
Other 5% Stockholders
Weston Presidio Capital
II, L.P................ -- -- -- -- 2,860,698 211,760
The Chang Family Trust,
Michael W. Taylor,
Trustee(4)............. 3,382,494 -- 1,357,376 -- -- --
Price Per Share......... $0.002-$0.125 $0.18 $0.31 $0.91 $2.01 $2.25
Date(s) of Purchase..... 12/94 to 09/98 1/95 and 8/96 5/96(5) 10/97 10/98 to 1/99 5/99
</TABLE>
- --------
(1) Includes shares held by Mr. Halperin's children and trusts for his
grandchildren.
(2) John L. Walecka, one of our directors, is a general partner of venture
funds associated with Brentwood Associates.
(3) William H. Younger, Jr., one of our directors, is a general partner of
Sutter Hill Ventures.
(4) The Chang Family Trust is a trust for the benefit of family members of Dr.
JoMei Chang.
(5) Notes convertible into Series A1 preferred stock were issued in May 1996.
The conversion of these notes occurred in December 1997.
Investor Rights Agreement. Vitria and the preferred stockholders described
above have entered into an agreement, pursuant to which these and other
preferred stockholders possess registration rights with respect to their shares
of common stock. Upon the completion of our initial public offering, all shares
of our outstanding preferred stock were automatically converted into an equal
number of shares of common stock.
We have entered into indemnification agreements with our directors and
officers for the indemnification of and advancement of expenses to these
persons to the full extent permitted by law. We also intend to execute these
agreements with our future directors and officers.
We believe that all of the transactions set forth above were made on terms
no less favorable to Vitria than could have been obtained from unaffiliated
third parties. All future transactions, including loans, between Vitria and its
officers, directors, principal stockholders and their affiliates will be
approved by a majority of the board of directors, including a majority of the
independent and disinterested directors, and will continue to be on terms no
less favorable to Vitria than could be obtained from unaffiliated third
parties.
50
<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of our common stock as of December 31, 1999, and as adjusted to
reflect the sale of our common stock offered by this prospectus, by:
. each of the individuals listed on the "Summary Compensation Table" above;
. each of our directors;
. all current directors and executive officers as a group;
. each person (or group of affiliated persons) who is known by us to own
beneficially 5% or more of our common stock; and
. each selling stockholder.
Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission. In computing the number of shares
beneficially owned by a person and the percentage ownership of that person,
shares of common stock subject to options held by that person that are
currently exercisable or exercisable within 60 days of December 31, 1999 are
deemed outstanding. These shares, however, are not deemed outstanding for the
purposes of computing the percentage ownership of each other person.
Except as indicated in the footnotes to this table and pursuant to
applicable community property laws, each stockholder named in the table has
sole voting and investment power with respect to the shares shown as
beneficially owned by them. Percentage of ownership is based on 61,750,992
shares of common stock outstanding on December 31, 1999 and 63,250,992 shares
of common stock outstanding after completion of this offering. This table
assumes no exercise of the underwriters' over-allotment option. Unless
otherwise indicated, the address of each of the individuals named below is: c/o
Vitria Technology, Inc., 945 Stewart Drive, Sunnyvale, California 94086.
<TABLE>
<CAPTION>
Shares Beneficially
Owned Prior to
Shares issuable Offering (Including
pursuant to the Number of Shares
Options Shown in Shares Beneficially
Exercisable within the First Column) Owned after Offering
Name and Address of 60 days of -------------------- Number of --------------------
Beneficial Owner December 31, 1999 Number Percent Shares Offered Number Percent
------------------- ------------------ ------------ ------------------------ ------------ ----------
<S> <C> <C> <C> <C> <C> <C>
Directors and Executive
Officers
JoMei Chang, Ph.D.(1)... -- 9,641,174 15.61% 400,000 9,241,174 14.61%
M. Dale Skeen,
Ph.D.(1)............... -- 12,005,670 19.44% 400,000 11,605,670 18.35%
William H. Younger,
Jr.(2)................. 40,000 2,075,808 3.36% 282,513 1,793,295 2.83%
John L. Walecka(3)...... 40,000 6,389,054 10.34% 881,072 5,507,982 8.70%
Robert M. Halperin(4)... 40,000 2,942,426 4.76% 326,876 2,615,550 4.13%
Jay W. Shiveley,
III(5)................. 740,000 1,540,000 2.46% 72,500 1,467,500 2.29%
Paul R. Auvil, III(6)... 40,000 549,950 * 17,997 531,953 *
Aleksander E.
Osadzinski(7).......... 415,000 640,000 1.03% 15,000 625,000 *
All directors and
executive officers as a
group (9 persons)(8)... 1,815,000 34,950,744 54.98% 2,395,958 32,554,786 50.03%
5% Stockholders
The Chang Family Trust,
Michael W. Taylor,
Trustee(9)............. -- 4,739,870 7.68% 200,000 4,539,870 7.18%
Entities affiliated with
Brentwood Venture
Capital(10)............ -- 6,349,054 10.28% 881,072 5,467,982 8.64%
Other Selling
Stockholders
Tench Coxe(11).......... -- 567,460 * 78,748 488,712 *
Entities affiliated with
Integral Capital
Partners(12)........... -- 639,070 1.03% 63,907 575,163 *
Richard Koo(13)......... 56,000 830,000 1.34% 76,733 753,267 1.19%
ML IBK Positions,
Inc.(14)............... -- 1,492,538 2.42% 149,254 1,343,284 2.12%
Alex Siegel............. 78,334 850,000 1.37% 77,166 772,834 1.22%
Entities affiliated with
Sutter Hill
Ventures(15)........... -- 1,445,268 2.34% 200,563 1,244,705 1.97%
TOW Partners, a
California Limited
Partnership(16)........ -- 240,684 * 33,400 207,284 *
Weston Presidio Capital
II, L.P.(17)........... -- 3,072,458 4.98% 310,000 2,762,458 4.37%
Wythes Trust(18)........ -- 245,822 * 34,113 211,709 *
33 other selling
stockholders as a
group(19).............. 596,519 2,102,824 3.37% 80,721 2,022,103 3.17%
</TABLE>
51
<PAGE>
- ---------------------
* Less than 1%
(1) Includes 833,338 shares held by Skeen/Chang Investments, L.P., of which
Drs. JoMei Chang and M. Dale Skeen are general partners. Also includes
200,000 shares are being offered by the Chang-Skeen Charitable Remainder
Trust, of which Drs. JoMei Chang and M. Dale Skeen are trustees. Excludes
100,000 shares held by the trust.
(2) Includes 1,315,792 shares held by Sutter Hill Ventures, a California
Limited Partnership, 182,595 shares of which are being offered, 36,656
shares held by Sutter Hill Ventures Entrepreneurs Fund (Al), L.P., 5,087
shares of which are being offered, 92,820 shares held by Sutter Hill
Ventures Entrepreneurs Fund (QP), L.P., 12,881 shares of which are being
offered, and 590,540 shares held by William H. Younger, Jr., Trustee, The
Younger Living Trust, of which 81,950 shares are being offered. Mr.
Younger is a general partner of Sutter Hill Ventures and disclaims
beneficial ownership of the shares held by Sutter Hill Ventures, Sutter
Hill Entrepreneurs Fund (Al), L.P., and Sutter Hill Entrepreneurs Fund
(QP), L.P., except to the extent of his pecuniary interest in these
shares. Sutter Hill Ventures, Sutter Hill Entrepreneurs Fund (Al), L.P.,
and Sutter Hill Entrepreneurs Fund (QP), L.P. are located at 755 Page
Mill Road, Suite A-200, Palo Alto, CA 94304.
(3) Includes 6,095,092 shares held by Brentwood Associates VIII, L.P., of
which 845,829 shares are being offered, and 253,962 shares held by
Brentwood Affiliates Fund, L.P., of which 35,243 shares are being
offered. Mr. Walecka is a general partner of Brentwood Venture Capital
and disclaims beneficial ownership of the shares held by these entities
except to the extent of his proportionate partnership interest therein.
Entities affiliated with Brentwood Venture Capital are located at 3000
Sand Hill Road, Building 2, Suite 290, Menlo Park, CA 94025.
(4) Includes 180,000 shares held by the Robert and Ruth Halperin Foundation,
all of which are being offered, 1,101,560 shares held by Mr. Halperin's
children for which he has power of attorney but as to which he does not
have dispositive power over and disclaims beneficial ownership of the
shares held by his children, of which 110,156 shares are being offered.
Excludes 367,184 shares held in trust for Mr. Halperin's grandchildren,
of which 36,720 shares are being offered. Mr. Halperin does not have
voting or dispositive power over and disclaims beneficial ownership of
the shares held by his grandchildren's trusts.
(5) Includes 50,000 shares subject to repurchase by Vitria within 60 days of
December 31, 1999.
(6) Includes 316,667 shares subject to repurchase by Vitria within 60 days of
December 31, 1999.
(7) Includes 65,000 shares subject to repurchase by Vitria within 60 days of
December 31, 1999.
(8) Includes 551,666 shares subject to repurchase by Vitria within 60 days of
December 31, 1999. See footnotes (5) through (7).
(9) The Chang Family Trust is a trust for the benefit of family members of
Dr. JoMei Chang. Dr. Chang does not have voting or dispositive power over
and disclaims beneficial ownership of the shares held by the trust.
(10) Includes 6,095,092 shares held by Brentwood Associates VIII, L.P., of
which 845,829 shares are being offered, and 253,962 shares held by
Brentwood Affiliates Fund, L.P., of which 35,243 shares are being
offered. Entities affiliated with Brentwood Venture Capital are located
at 3000 Sand Hill Road, Building 2, Suite 290, Menlo Park, CA 94025.
(11) Includes 543,690 shares held by the Coxe/Otus Revocable Trust, of which
75,449 shares are being offered, and 23,770 shares held by Wells Fargo
Bank, Trustee SHV M/P/T fbo Tench Coxe, of which 3,299 shares are being
offered.
(12) Includes 520,486 shares held by Integral Capital Partners III, L.P., of
which 52,049 shares are being offered, and 118,584 shares held by Integral
Capital Partners International III, L.P., of which 11,858 shares are being
offered. Entities affiliated with Integral Capital Partners are located at
2750 Sand Hill Road, Menlo Park, CA 94025.
(13) Includes 5,334 shares subject to repurchase by Vitria within 60 days of
December 31, 1999.
(14) ML IBK Positions, Inc. is located at 3300 Hillview Avenue, Suite 150, Palo
Alto, CA 94304.
(15) Includes 1,315,792 shares held by Sutter Hill Ventures, a California
Limited Partnership, 182,595 shares of which are being offered, 36,656
shares held by Sutter Hill Ventures Entrepreneurs Fund (AI), L.P., 5,087
shares of which are being offered, and 92,820 shares held by Sutter Hill
Ventures Entrepreneurs Fund (QP), L.P., 12,881 shares of which are being
offered. Sutter Hill Ventures, Sutter Hill Entrepreneurs Fund (AI), L.P.
and Sutter Hill Entrepreneurs Fund (QP), L.P. are located at 755 Page
Mill Road, Suite A-200, Palo Alto, CA 94304.
(16) TOW Partners, A California Limited Partnership is located at 755 Page Mill
Road, Suite A-200, Palo Alto, CA 94304.
(17) Weston Presidio Capital II, L.P. is located at 343 Sansome Street, Suite
1210, San Francisco, CA 94104.
(18) Includes 221,240 shares held by the Wythes Living Trust, of which 30,702
shares are being offered, and 24,582 shares held by the Wythes
Grandchildren Living Trust, of which 3,411 shares are being offered.
(19) Includes 675,238 shares subject to repurchase by Vitria within 60 days of
December 31, 1999.
52
<PAGE>
DESCRIPTION OF CAPITAL STOCK
Our authorized capital stock consists of 250 million shares of common stock,
$0.001 par value, and five million shares of preferred stock, $0.001 par value.
Common Stock
As of December 31, 1999, there were 61,750,992 shares of common stock
outstanding that were held of record by approximately 225 stockholders. There
will be 63,250,992 shares of common stock outstanding, assuming no exercise of
outstanding options, after giving effect to the sale by us of 1,500,000 shares
of the shares of common stock in this offering.
The holders of common stock are entitled to one vote per share on all
matters submitted to a vote of our stockholders. Subject to preferences that
may be applicable to any preferred stock outstanding at the time, the holders
of outstanding shares of common stock are entitled to receive ratably any
dividends out of assets legally available therefor as our board of directors
may from time to time determine. Upon liquidation, dissolution or winding up of
Vitria, holders of our common stock are entitled to share ratably in all assets
remaining after payment of liabilities and the liquidation preference of any
then outstanding shares of preferred stock. Holders of common stock have no
preemptive or conversion rights or other subscription rights. There are no
redemption or sinking fund provisions applicable to the common stock. All
outstanding shares of common stock are fully paid and nonassessable.
Preferred Stock
Our certificate of incorporation provides that our board of directors have
the authority, without further action by the stockholders, to issue up to five
million shares of preferred stock in one or more series. The board is able to
fix the rights, preferences, privileges and restrictions of the preferred
stock, including dividend rights, conversion rights, voting rights, terms of
redemption, liquidation preferences, sinking fund terms and the number of
shares constituting any series or the designation of this series. The issuance
of preferred stock could adversely affect the voting power of holders of common
stock, and the likelihood that holders of preferred stock will receive dividend
payments and payments upon liquidation may have the effect of delaying,
deferring or preventing a change in control of Vitria, which could depress the
market price of our common stock. We have no present plan to issue any shares
of preferred stock.
Registration Rights of Stockholders
The holders of 22,921,678 shares of common stock or their transferees are
entitled to rights to register these shares under the Securities Act of 1933.
If we propose to register any of our securities under the Securities Act,
either for our own account or for the account of other securityholders, the
holders of these shares are entitled to notice of the registration and are
entitled to include, at our expense, their shares of common stock. In addition,
the holders of these shares may require us, at our expense and on not more than
two occasions at any time beginning approximately six months from the date of
the closing of our initial public offering, to file a registration statement
under the Securities Act with respect to their shares of common stock, and we
are required to use our best efforts to effect the registration. Further, the
holders may require us at our expense to register their shares on Form S-3 when
this form becomes available. These rights shall terminate on the earlier of
four years after the effective date of our initial public offering, or when a
holder is able to sell all its shares pursuant to Rule 144 under the Securities
Act in any 90-day period.
Anti-Takeover Provisions of Delaware Law and Charter Provisions
We are subject to Section 203 of the Delaware General Corporation Law. In
general, the statute prohibits a publicly held Delaware corporation from
engaging in any business combination with any
53
<PAGE>
interested stockholder for a period of three years following the date that the
stockholder became an interested stockholder unless:
. prior to the date, the board of directors of the corporation approved
either the business combination or the transaction that resulted in the
stockholder becoming an interested stockholder;
. upon consummation of the transaction that resulted in the stockholder's
becoming an interested stockholder, the interested stockholder owned at
least 85% of the voting stock of the corporation outstanding at the time
the transaction commenced, excluding those shares owned by persons who
are directors and also officers, and employee stock plans in which
employee participants do not have the right to determine confidentially
whether shares held subject to the plan will be tendered in a tender or
exchange offer; or
. on or subsequent to the date, the business combination is approved by the
board of directors and authorized at an annual or special meeting of
stockholders, and not by written consent, by the affirmative vote of at
least two-thirds of the outstanding voting stock that is not owned by the
interested stockholder.
Section 203 defines "business combination" to include:
. any merger or consolidation involving the corporation and the interested
stockholder;
. any sale, transfer, pledge or other disposition involving the interested
stockholder of 10% or more of the assets of the corporation;
. subject to exceptions, any transaction that results in the issuance or
transfer by the corporation of any stock of the corporation to the
interested stockholder; or
. the receipt by the interested stockholder of the benefit of any loans,
advances, guarantees, pledges or other financial benefits provided by or
through the corporation.
In general, Section 203 defines an interested stockholder as any entity or
person beneficially owning 15% or more of the outstanding voting stock of the
corporation and any entity or person affiliated with or controlling or
controlled by the entity or person.
Our bylaws provide that candidates for director may be nominated only by the
board of directors or by a stockholder who gives written notice to us no later
than 60 days prior nor earlier than 90 days prior to the first anniversary of
the last annual meeting of stockholders. The board may consist of one or more
members to be determined from time to time by the board. The board currently
consists of five members divided into three different classes. As a result,
only one class of directors will be elected at each annual meeting of
stockholders of Vitria, with the other classes continuing for the remainder of
their respective terms. Between stockholder meetings, the board may appoint new
directors to fill vacancies or newly created directorships.
Our certificate of incorporation requires that any action required or
permitted to be taken by our stockholders must be effected at a duly called
annual or special meeting of stockholders and may not be effected by a consent
in writing. Our certificate of incorporation also provides that the authorized
number of directors may be changed only by resolution of the board of
directors. Delaware law and these charter provisions may have the effect of
deterring hostile takeovers or delaying changes in control or our management,
which could depress the market price of our common stock.
Section 2115
We are currently subject to Section 2115 of the California Corporations
Code. Section 2115 provides that, regardless of a company's legal domicile,
provisions of California corporate law relating to shareholder rights,
54
<PAGE>
election and removal of directors and distributions to shareholders will apply
to that company if the company meets the requirements of Section 2115. We will
not be subject to Section 2115 if:
. we are qualified for trading as a national market security on The Nasdaq
National Market, and we have at least 800 stockholders of record as of
the record date of our most recent annual meeting, or
. during any income year less than 50% of our outstanding voting securities
are held of record by persons having addresses in California.
The following table sets forth some of the effects on our corporate
governance of California Corporations Code Section 2115:
<TABLE>
<CAPTION>
Section 2115 Non-Section 2115
------------ ----------------
<S> <C> <C>
Election of Cumulative voting is allowed, No cumulative voting is allowed;
Directors which allows each shareholder to accordingly a holder of 50% or
vote the number of votes equal to more of voting stock controls
the number of candidates election of all directors.
multiplied by the number of votes
to which the shareholders' shares
are normally entitled in favor of
one candidate. This potentially
allows minority stockholders to
elect some members of the board.
Removal of Directors Removal with or without cause by If the board is classified,
the affirmative vote of the removal is only allowed for cause
holders of a majority of upon the affirmative vote of a
outstanding voting stock is majority of the outstanding
allowed. voting stock entitled to vote in
the election of directors.
Supermajority Vote
Requirement In order to institute a Simple majority may adopt
supermajority provision, the amendment providing for
amendment must be approved by at supermajority.
least as large a proportion as
would be required under the
amendment.
Dividend Dividends are only payable out of Dividends are payable out of
Distribution the surplus of retained earnings either the surplus of retained
and if, immediately after the earnings or out of its net
distribution, a company's assets profits for the year the
are at least equal to its distribution takes place, or the
liabilities. preceding year.
Dissenters' Rights Generally available in any type Generally only available in a
of reorganization, including a merger. No rights so long as our
merger, sale of assets or common stock is quoted on The
sale/exchange of shares. If the Nasdaq National Market or traded
shares are listed on an exchange, on an exchange.
5% of the shareholders must
assert their right for any
shareholder to have these rights.
</TABLE>
In addition to these differences, Section 2115 also provides for information
rights and required filings in the event a company effects a sale of assets or
completes a merger.
Transfer Agent
The transfer agent and registrar for our common stock is BankBoston, N.A.
Its phone number is (781) 575-3120.
55
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Future sales of substantial amounts of our common stock in the public
market, or the possibility of such sales occurring, could adversely affect the
prevailing market price for our common stock and our ability to raise equity
capital in the future.
Upon completion of this offering, we will have outstanding an aggregate of
63,250,992 shares of common stock, assuming no exercise of outstanding options.
Of these shares, all of the shares sold in this offering and our initial public
offering will be freely tradable without restriction or further registration
under the Securities Act, unless these shares are purchased by affiliates. The
remaining 51,350,992 shares of common stock held by existing stockholders are
restricted securities. Restricted securities may be sold in the public market
only if registered or if they qualify for an exemption from registration
described below under Rules 144, 144(k) or 701 promulgated under the Securities
Act.
As a result of the contractual restrictions described below and the
provisions of Rules 144, 144(k) and 701, the restricted shares will be
available for sale in the public market as follows:
<TABLE>
<CAPTION>
Approximate Number of
Shares Eligible for
Date Future Sale Comment
---- --------------------- -------
<C> <C> <S>
March 15, 2000 5,981,355 Underwriters' lock-up in connection
with our initial public offering
released. These shares may be sold
under Rules 144, 144(k) or 701
April 25, 2000 10,454,490 Underwriters' lock-up with respect
to 25% of the shares held by each
stockholder that entered into a
lock-up in connection with this
offering released. These shares may
be sold under Rules 144, 144(k) or
701
, 2000 32,511,352 These shares may be sold under
Rules 144, 144(k) or 701
At various times thereafter 2,403,795 These shares may be sold under
Rules 144, 144(k) or 701
</TABLE>
Lock-Up Agreements. All of our officers and directors and the selling
stockholders have agreed not to transfer or dispose of, directly or indirectly,
any shares of our common stock or any securities convertible into or
exercisable or exchangeable for shares of our common stock, for a period of 90
days after the date the registration statement of which this prospectus is a
part is declared effective. However, each director, officer and selling
stockholder that entered into a lock-up agreement in connection with this
offering will be released from their respective lock-up agreement on April 25,
2000 with respect to 25% of their shares. Transfers or dispositions can be made
sooner with the prior written consent of Credit Suisse First Boston
Corporation.
Rule 144. In general, under Rule 144 as currently in effect, a person or
persons whose shares are aggregated, who has beneficially owned restricted
securities for at least one year, including the holding period of any prior
owner except an affiliate, would be entitled to sell within any three-month
period a number of shares that does not exceed the greater of:
. 1% of the number of shares of our common stock then outstanding which
will equal approximately 630,251 shares immediately after this offering;
or
56
<PAGE>
. the average weekly trading volume of our common stock on the Nasdaq
National Market during the four calendar weeks preceding the filing of a
notice on Form 144 with respect to the sale.
Sales under Rule 144 are also subject to manner of sale provisions and
notice requirements and to the availability of current public information about
Vitria.
Rule 144(k). Under Rule 144(k), a person who is not deemed to have been one
of our affiliates at any time during the 90 days preceding a sale, and who has
beneficially owned the shares proposed to be sold for at least two years,
including the holding period of any prior owner except an affiliate, is
entitled to sell these shares without complying with the manner of sale, public
information, volume limitation or notice provisions of Rule 144.
Rule 701. In general, under Rule 701 of the Securities Act as currently in
effect, any of our employees, consultants or advisors, other than affiliates,
who purchases or receives shares from us in connection with a compensatory
stock purchase plan or option plan or other written agreement will be eligible
to resell their shares on March 15, 2000 upon the expiration of lock-up
agreements that were entered into in connection with our initial public
offering, subject only to the manner of sale provisions of Rule 144, and by
affiliates under Rule 144 without compliance with its holding period
requirements.
Registration Rights. The holders of 22,921,678 shares of our common stock,
or their transferees, are entitled to rights with respect to the registration
of their shares under the Securities Act. Registration of their shares under
the Securities Act would result in the shares becoming freely tradable without
restriction under the Securities Act, except for shares purchased by
affiliates, immediately upon the effectiveness of this registration.
Stock Options. We have filed a registration statement under the Securities
Act covering an aggregate of 12,277,348 shares of common stock reserved for
issuance under our 1999 Equity Incentive Plan and 1998 Executive Incentive Plan
and 3,000,000 shares reserved for issuance under our 1999 Employee Stock
Purchase Plan. We will file a registration statement under the Securities Act
covering an additional 4,013,814 shares of common stock reserved for issuance
under our 1999 Equity Incentive Plan and 1998 Executive Incentive Plan.
Accordingly, shares registered under the registration statement will, subject
to Rule 144 volume limitations applicable to affiliates, be available for sale
in the open market on March 15, 2000 upon the expiration of lock-up agreements
that were entered into in connection with our initial public offering.
57
<PAGE>
UNDERWRITING
Under the terms and subject to the conditions contained in the underwriting
agreement dated , 2000, we and the selling stockholders have agreed to sell
to the underwriters named below, for whom Credit Suisse First Boston
Corporation, Merrill Lynch, Pierce, Fenner & Smith Incorporated, FleetBoston
Robertson Stephens Inc. and SoundView Technology Group, Inc. are acting as
representatives, the following respective number of shares of common stock:
<TABLE>
<CAPTION>
Number of
Underwriter Shares
----------- ---------
<S> <C>
Credit Suisse First Boston Corporation.............................
Merrill Lynch, Pierce, Fenner & Smith
Incorporated.................................................
FleetBoston Robertson Stephens Inc.................................
SoundView Technology Group, Inc....................................
---------
Total............................................................ 5,000,000
=========
</TABLE>
The underwriting agreement provides that the underwriters are obligated to
purchase all the shares of common stock in the offering, if any are purchased,
other than those shares covered by the over-allotment option described below.
The underwriting agreement also provides that if an underwriter defaults the
purchase commitments of non-defaulting underwriters may be increased or the
offering of common stock may be terminated.
The selling stockholders have granted to the underwriters a 30-day option to
purchase up to 750,000 additional shares from them at the public offering price
less the underwriting discounts and commissions. This option may be exercised
only to cover any over-allotments of common stock.
The underwriters propose to offer the shares of common stock to the public
initially at the public offering price on the cover page of this prospectus and
to selling group members at that price less a concession of $ per share.
The underwriters and selling group members may allow a discount of $ per
share on sales to other broker/dealers. After the public offering, the public
offering price and concession and discount to dealers may be changed by the
representatives.
The following table summarizes the compensation and estimated expenses we
and the selling stockholders will pay.
<TABLE>
<CAPTION>
Per Share Total
----------------------------- -----------------------------
Without With Without With
Over-allotment Over-allotment Over-allotment Over-allotment
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Underwriting discounts
and commissions paid by
us..................... $ $ $ $
Expenses payable by us.. $ $ $ $
Underwriting discounts
and commissions paid by
selling stockholders... $ $ $ $
Expenses payable by the
selling stockholders... $ $ $ $
</TABLE>
We, our directors, officers and the selling stockholders have agreed that we
and they will not offer, sell, contract to sell, announce the intention to
sell, pledge or otherwise dispose of, directly or indirectly, or file with the
Securities and Exchange Commission a registration statement under the
Securities Act of 1933 relating to, any additional shares of our common stock
or securities convertible into or exchangeable or exercisable for any
58
<PAGE>
of our common stock, enter into a transaction which would have the same
effect, or enter into any swap, hedge or other arrangement that transfers, in
whole or in part, any of the economic consequences of ownership of our common
stock, whether any such aforementioned transaction is to be settled by
delivery of our common stock or such other securities, in cash or otherwise,
or publicly disclose the intention to make any such offer, sale, pledge,
disposition or filing, without the prior consent of Credit Suisse First Boston
Corporation for a period of 90 days after the date of this prospectus, except
in connection with our stock option and employee stock purchase plans.
However, each director, officer and selling stockholder that has entered into
a lock-up agreement will be released from their respective lock-up agreement
with respect to 25% of their shares on April 25, 2000.
We and the selling stockholders have agreed to indemnify the underwriters
against liabilities under the Securities Act of 1933 or to contribute to
payments which the underwriters may be required to make in that respect.
Our common stock is quoted on the Nasdaq Stock Market's National Market
under the symbol "VITR."
ML IBK Positions, Inc., an affiliate of Merrill Lynch, Pierce, Fenner &
Smith Incorporated, one of the representatives of the underwriters, will hold
1,343,284 shares of our common stock upon the closing of the offering.
The representatives may engage in over-allotment, stabilizing transactions,
syndicate covering transactions, penalty bids and "passive" market making in
accordance with Regulation M under the Securities Exchange Act of 1934.
. Over-allotment involves syndicate sales in excess of the offering size,
which creates a syndicate short position.
. Stabilizing transactions permit bids to purchase the underlying security
so long as the stabilizing bids do not exceed a specified maximum.
. Syndicate covering transactions involve purchases of the common stock in
the open market after the distribution has been completed in order to
cover syndicate short positions.
. Penalty bids permit the representatives to reclaim a selling concession
from a syndicate member when the common stock originally sold by the
syndicate member are purchased in a syndicate covering transaction to
cover syndicate short positions.
. In "passive" market making, market makers in the common stock who are
underwriters or prospective underwriters may, subject to certain
limitations, make bids for purchases of the common stock until the time,
if any, at which a stabilizing bid is made.
These stabilizing transactions, syndicate covering transactions, penalty bids
and "passive" market making may cause the price of the common stock to be
higher than it would otherwise be in the absence of these transactions. These
transactions may be effected on the Nasdaq Stock Market's National Market or
otherwise and, if commenced, may be discontinued at any time.
59
<PAGE>
NOTICE TO CANADIAN RESIDENTS
Resale Restrictions
The distribution of the common stock in Canada is being made only on a
private placement basis exempt from the requirement that we prepare and file a
prospectus with the securities regulatory authorities in each province where
trades of common stock are effected. Accordingly, any resale of the common
stock in Canada must be made in accordance with applicable securities laws
which will vary depending on the relevant jurisdiction, and which may require
resales to be made in accordance with available statutory exemptions or
pursuant to a discretionary exemption granted by the applicable Canadian
securities regulatory authority. Purchasers are advised to seek legal advice
prior to any resale of the common stock.
Representations of Purchasers
Each purchaser of common stock in Canada who receives a purchase
confirmation will be deemed to represent to us and the dealer from whom the
purchase confirmation is received that (i) the purchaser is entitled under
applicable provincial securities laws to purchase the common stock without the
benefit of a prospectus qualified under these securities laws, (ii) where
required by law, that the purchaser is purchasing as principal and not as
agent, and (iii) the purchaser has reviewed the text above under "Resale
Restrictions".
Rights of Action (Ontario Purchasers)
The securities being offered are those of a foreign issuer and Ontario
purchasers will not receive the contractual right of action prescribed by
Ontario securities law. As a result, Ontario purchasers must rely on other
remedies that may be available, including common law rights of action for
damages or recission or rights of action under the civil liability provisions
of the U.S. federal securities laws.
Enforcement of Legal Rights
All of the issuer's directors and officers as well as the experts named
herein may be located outside of Canada and, as a result, it may not be
possible for Canadian purchasers to effect service of process within Canada
upon the issuer or these persons. All or a substantial portion of the assets of
the issuer and these persons may be located outside of Canada and, as a result,
it may not be possible to satisfy a judgment against the issuer or these
persons in Canada or to enforce a judgment obtained in Canadian courts against
the issuer or these persons outside of Canada.
Notice to British Columbia Residents
A purchaser of common stock to whom the Securities Act (British Columbia)
applies is advised that the purchaser is required to file with the British
Columbia Securities Commission a report within ten days of the sale of any
common stock acquired by the purchaser in this offering. This report must be in
the form attached to British Columbia Securities Commission Blanket Order BOR
#95/17, a copy of which may be obtained from Vitria. Only one report must be
filed in respect of common stock acquired on the same date and under the same
prospectus exemption.
Taxation and Eligibility for Investment
Canadian purchasers of common stock should consult their own legal and tax
advisors with respect to the tax consequences of an investment in the common
stock in their particular circumstances and with respect to the eligibility of
the common stock for investment by the purchaser under relevant Canadian
legislation.
60
<PAGE>
LEGAL MATTERS
The validity of the common stock offered by this prospectus will be passed
upon for us by Cooley Godward LLP, Palo Alto, California. As of the date of
this prospectus, partners and associates of Cooley Godward LLP own an aggregate
of approximately 24,874 shares of common stock through an investment
partnership and attorneys own approximately 52,846 shares of common stock
directly. The underwriters have been represented by Wilson Sonsini Goodrich &
Rosati, Professional Corporation, Palo Alto, California.
EXPERTS
The financial statements as of December 31, 1998 and 1999 and for each of
the three years in the period ended December 31, 1999 included in this
Prospectus have been so included in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
said firm as experts in auditing and accounting.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Securities and Exchange Commission a registration
statement, which term shall include any amendment to the registration
statement, on Form S-1 under the Securities Act of 1933 with respect to the
shares of common stock offered by our company and the selling stockholders.
This prospectus, which constitutes a part of the registration statement, does
not contain all of the information set forth in the Registration Statement,
some items of which are contained in exhibits to the registration statement as
permitted by the rules and regulations of the Commission. For further
information with respect to Vitria and the common stock offered, reference is
made to the registration statement, including the exhibits, and the financial
statements and notes filed as a part of the registration statement. A copy of
the registration statement, including the exhibits and the financial statements
and notes filed as a part of it, may be inspected without charge at the public
reference facilities maintained by the Commission in Room 1024, 450 Fifth
Street, N.W., Washington, D.C. 20549, and the Commission's regional offices
located at the Northwestern Atrium Center, 500 West Madison Street, Suite 1400,
Chicago Illinois 60661 and Seven World Trade Center, 13th Floor, New York, New
York 10048, and copies of all or any part of the registration statement may be
obtained from the Securities and Exchange Commission upon the payment of fees
prescribed by it. The Securities and Exchange Commission maintains a Web site
at http://www.sec.gov that contains reports, proxy and information statements
and other information regarding companies that file electronically with it.
61
<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, 1998 and 1999, 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,
------------------
1998 1999
-------- --------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents................................ $ 12,792 $ 52,218
Short-term investments................................... -- 13,231
Accounts receivable, net................................. 5,973 11,443
Other current assets..................................... 180 4,389
-------- --------
Total current assets................................... 18,945 81,281
Property and equipment, net................................ 967 4,452
Other assets............................................... 88 761
-------- --------
Total asset............................................ $ 20,000 $ 86,494
======== ========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable......................................... $ 757 $ 401
Accrued liabilities...................................... 2,978 11,016
Deferred revenue......................................... 2,874 15,627
-------- --------
Total current liabilities.............................. 6,609 27,044
-------- --------
Commitments and contingencies (Note 5)
Stockholders' equity:
Convertible Preferred Stock: issuable in series, $.001
par value; 13,470 shares authorized; 10,445 shares
issued and outstanding at December 31, 1998; 5,000
shares authorized; no shares issued and outstanding at
December 31, 1999....................................... 11 --
Common Stock: $.001 par value; 41,000 shares authorized;
30,536 shares issued and outstanding at December 31,
1998; 250,000 shares authorized; 61,751 shares issued
and outstanding at December 31, 1999.................... 30 62
Additional paid-in capital............................... 29,089 91,290
Accumulated other comprehensive loss..................... -- (54)
Unearned stock-based compensation........................ (5,511) (7,223)
Notes receivable......................................... -- (291)
Accumulated deficit...................................... (10,228) (24,334)
-------- --------
Total stockholders' equity............................. 13,391 59,450
-------- --------
Total liabilities and stockholders' equity............. $ 20,000 $ 86,494
======== ========
</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,
--------------------------
1997 1998 1999
------- ------- --------
<S> <C> <C> <C>
Revenues:
License.......................................... $ 955 $ 5,198 $ 21,790
Service.......................................... 1,425 1,633 8,539
Government grant................................. 1,255 796 1,212
------- ------- --------
Total revenues................................. 3,635 7,627 31,541
------- ------- --------
Cost of revenues:
License.......................................... 18 -- 407
Service.......................................... 338 2,109 6,103
Government grant................................. 1,255 796 1,212
------- ------- --------
Total cost of revenues......................... 1,611 2,905 7,722
------- ------- --------
Gross profit....................................... 2,024 4,722 23,819
------- ------- --------
Operating expenses:
Sales and marketing.............................. 1,143 6,572 20,009
Research and development......................... 841 4,794 10,736
General and administrative....................... 695 1,807 3,991
Amortization of stock-based compensation......... -- 1,424 4,525
------- ------- --------
Total operating expenses....................... 2,679 14,597 39,261
------- ------- --------
Loss from operations............................... (655) (9,875) (15,442)
Interest and other income.......................... 75 306 1,336
------- ------- --------
Net loss........................................... (580) (9,569) (14,106)
Deemed preferred stock dividend.................... -- -- (1,908)
------- ------- --------
Net loss available to common stockholders.......... $ (580) $(9,569) $(16,014)
======= ======= ========
Basic and diluted net loss per share available to
common stockholders............................... $(0.03) $ (0.40) $(0.42)
======= ======= ========
Basic and diluted weighted average shares used in
the computation of net loss per share available to
common stockholders............................... 19,830 24,006 37,874
======= ======= ========
</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,
--------------------------
1997 1998 1999
------- ------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss......................................... $ (580) $(9,569) $(14,106)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Gain on sale of fixed assets................... -- -- (114)
Depreciation and amortization.................. 207 255 1,138
Provision for doubtful accounts................ -- 350 246
Stock-based compensation expense............... -- 1,424 4,571
Changes in assets and liabilities:
Accounts receivable.......................... (1,097) (4,723) (5,716)
Other current assets......................... (58) (140) (4,209)
Other assets................................. (62) -- (673)
Accounts payable............................. 62 546 (356)
Accrued liabilities.......................... 432 2,370 8,038
Deferred revenue............................. 223 2,651 12,753
------- ------- --------
Net cash provided by (used in) operating
activities...................................... (873) (6,836) 1,572
------- ------- --------
Cash flows from investing activities:
Net cash used in purchasing property and
equipment ...................................... (431) (947) (4,623)
Net cash provided from sale of property and
equipment....................................... -- -- 114
Net cash used in purchasing securities........... -- -- (13,282)
------- ------- --------
Net cash used in investing activities ........... (431) (947) (17,791)
------- ------- --------
Cash flows from financing activities:
Issuance of convertible note..................... 560 -- --
Issuance of Convertible Preferred Stock, net..... 9,468 10,967 4,934
Issuance of Common Stock, net.................... 15 470 50,714
------- ------- --------
Net cash provided by financing activities........ 10,043 11,437 55,648
------- ------- --------
Effect of exchange rates on changes in cash and
cash equivalents.................................. -- -- (3)
Net increase in cash and cash equivalents.......... 8,739 3,654 39,426
Cash and cash equivalents at beginning of period... 399 9,138 12,792
------- ------- --------
Cash and cash equivalents at end of period......... $ 9,138 $12,792 $ 52,218
======= ======= ========
Supplemental non-cash financing activities:
Issuance of Convertible Preferred Stock to
founders for convertible note payable........... $ 560 $ -- $ --
======= ======= ========
Issuance of Common Stock for services............ $ -- $ 147 $ 46
======= ======= ========
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,
--------------------------
1997 1998 1999
------- ------- --------
<S> <C> <C> <C>
Numerator:
Net loss..................................... $ (580) $(9,569) $(14,106)
Deemed preferred stock dividend.............. -- -- (1,908)
------- ------- --------
Net loss available to common stockholders.... $ (580) $(9,569) $(16,014)
======= ======= ========
Denominator:
Weighted average shares...................... 26,232 27,762 42,664
Weighted average Common Stock subject to
repurchase agreements....................... (6,402) (3,756) (4,790)
------- ------- --------
Denominator for basic and diluted
calculation................................. 19,830 24,006 37,874
------- ------- --------
Net loss per share available to common
stockholders:
Basic and diluted............................ $ (0.03) $ (0.40) $ (0.42)
======= ======= ========
</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,
--------------------
1997 1998 1999
------ ------ ------
<S> <C> <C> <C>
Weighted average effect of antidilutive securities:
Preferred Stock..................................... 4,790 16,216 13,380
Convertible debt.................................... 1,114 -- --
Employee stock options.............................. 1,054 3,248 4,781
Common Stock subject to repurchase agreements....... 6,402 3,756 4,790
------ ------ ------
13,360 23,220 22,951
====== ====== ======
</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, 1998 and
1999, 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,
----------------
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Company A..................................................... 44% --% --%
Company B..................................................... --% 12% --%
Company C..................................................... --% 30% --%
Company F..................................................... --% --% 11%
Government grant.............................................. 37% 10% --%
</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,
---------------
1998 1999
------ ------
<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.
F-11
<PAGE>
VITRIA TECHNOLOGY, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 2--Balance Sheet Components (in thousands):
<TABLE>
<CAPTION>
December 31,
---------------
1998 1999
------ -------
<S> <C> <C>
Accounts receivable, net:
Accounts receivable....................................... $5,884 $11,784
Unbilled consulting services.............................. 100 --
Unbilled grant revenue.................................... 322 238
------ -------
6,306 12,022
Less: Allowance for doubtful accounts....................... (333) (579)
------ -------
$5,973 $11,443
====== =======
Property and equipment, net:
Computer equipment........................................ $ 479 $ 1,851
Software licenses......................................... 124 859
Furniture and fixtures.................................... 404 1,149
Leasehold improvements.................................... 263 1,690
------ -------
1,270 5,549
Less: Accumulated depreciation and amortization............. (303) (1,097)
------ -------
$ 967 $ 4,452
====== =======
Accrued liabilities:
Payroll and related expense............................... $1,941 $ 5,266
Professional services..................................... 123 1,191
Other..................................................... 914 4,559
------ -------
$2,978 $11,016
====== =======
</TABLE>
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,
--------------------------
1997 1998 1999
------- -------- --------
<S> <C> <C> <C>
Federal statutory benefit....................... $ (197) $ (3,254) $ (4,796)
State taxes, net of federal benefit............. (8) (287) (635)
Future benefits not currently recognized........ 205 2,971 3,621
Nondeductible compensation...................... -- 570 1,810
------ -------- --------
$ -- $ -- $ --
====== ======== ========
</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.
F-12
<PAGE>
VITRIA TECHNOLOGY, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Deferred tax assets and liabilities consist of the following (in thousands):
<TABLE>
<CAPTION>
December 31,
----------------
1998 1999
------- -------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards......................... $ 2,656 $ 5,059
Accruals and allowances.................................. 492 1,338
Research credits......................................... 519 1,369
Capitalized expenses..................................... -- 673
------- -------
Net deferred tax assets.................................... 3,667 8,439
Valuation allowance........................................ (3,667) (8,439)
------- -------
$ -- $ --
======= =======
</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,
1998 and 1999.
Note 4--Government Grants:
During January 1996, the Company received a grant award from the National
Institute of Standards and Technology ("NIST") totaling $2,000,000 to conduct
research and provide technical and business reports on a project to create a
highly flexible technology to simplify the task of integrating and sharing
real-time data among many different planning, tracking and control systems. The
grant reimburses the Company's allowable expenses over a period of two years
with $1,010,000 and $990,000 budgeted for the grant years ended January 25,
1997 and 1998, respectively. NIST requires the Company to comply with certain
cost accounting and reporting requirements, as applicable. For the periods
ending December 31, 1996 and 1997, the Company recognized revenue for grant-
related expenditures in the amount of $984,000 and $1,016,000, respectively. In
October 1997, the Company received an additional NIST grant totaling $2,000,000
to investigate at least three categories of Model-Driven Components. The grant
reimburses the Company's allowable expenses over a period of two years with
$970,000 and $1,030,000 of the amended budget for the grant years ending
September 30, 1998 and 1999, respectively. Additionally, NIST requires the
Company to comply with certain cost accounting and reporting requirements, as
applicable. For the period ended December 31, 1997, 1998 and 1999, the Company
has incurred reimbursable costs of $467,000, $822,000 and $624,000,
respectively, in grant-related expenditures. Also in November 1997, the Company
received a joint-venture NIST grant totaling $1,600,000 to help develop
technology to enable the building of integrated manufacturing applications for
multi-company supply chain planning and execution. The grant reimburses the
Company's allowable expenses over a period of three years with $300,000,
$650,000 and $650,000 of the amended budget for the grant years ending December
31, 1998, 1999 and 2000, respectively. Additionally, NIST requires the Company
to comply with certain cost accounting and reporting requirements, as
applicable. For the periods ended December 31, 1997, 1998 and 1999, the Company
has incurred reimbursable costs of $30,000, $297,000, and $587,000
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, 1998 and 1999 respectively. Such amounts will be recognized as
revenue or refunded, depending upon the outcome of the approval process.
F-13
<PAGE>
VITRIA TECHNOLOGY, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 $146,000, $546,000 and $1,594,000 for the years ended
December 31, 1997, 1998 and 1999.
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.
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, 1998 and 1999, there were approximately 6,112,000 and 3,171,000
shares, respectively, subject to repurchase.
During the years ended December 31, 1998 and 1999, the Company issued
105,000 and 25,200 shares, respectively, of Common Stock to consultants in
exchange for services. In connection with these issuances the Company recorded
expenses of $147,000 and $46,000 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.
F-14
<PAGE>
VITRIA TECHNOLOGY, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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>
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
F-15
<PAGE>
VITRIA TECHNOLOGY, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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
1995 and 1996, the Company sold 2,010,000 shares of Common Stock to employees
under the 1995 Equity Incentive Plan. In December 1998 and January 1999, the
Company sold 95,000 of the Series C Convertible Preferred Stock to employees
under the 1995 Equity Incentive Plan.
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.
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.
F-16
<PAGE>
VITRIA TECHNOLOGY, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following table summarizes information about stock option transactions
under the Plans (in thousands, except per share amounts):
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------
1997 1998 1999
---------------- ---------------- ----------------
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.............. 978 $0.05 3,254 $0.11 3,754 $0.18
Granted below fair
value.................. -- 0.13 6,516 0.16 5,793 2.94
Granted at fair value .. 3,166 0.13 -- -- 884 37.92
Exercised............... (402) 0.06 (4,028) 0.12 (2,499) 0.59
Canceled................ (488) 0.13 (1,988) 0.11 (656) 1.06
----- ------ ------
Outstanding at end of
period................. 3,254 0.11 3,754 0.18 7,276 6.74
===== ====== ======
Options vested.......... -- 120 4,580
===== ====== ======
Weighted average fair
value of options
granted during the
period................. $0.03 $0.05 $9.49
===== ===== =====
</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>
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, 1997, 1998 and 1999 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,
-------------------------
1997 1998 1999
------ ------- --------
<S> <C> <C> <C>
Net loss available to common stockholders:
As reported................................... $ (580) $(9,569) $(16,014)
------ ------- --------
Pro forma..................................... $ (636) $(9,628) $(24,438)
------ ------- --------
Net loss per share available to common
stockholders:
As reported:
Basic and diluted........................... $(0.03) $ (0.40) $ (0.42)
------ ------- --------
Pro forma:
Basic and diluted........................... $(0.03) $ (0.40) $ (0.65)
------ ------- --------
</TABLE>
F-17
<PAGE>
VITRIA TECHNOLOGY, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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,
-------------------------------
1997 1998 1999
--------- --------- ---------
<S> <C> <C> <C>
Risk-free interest rates.................... 5.55-6.20% 4.13-5.46% 4.60-6.19%
Expected lives (in years)................... 5 5 5
Dividend yield.............................. 0% 0% 0%
Expected volatility......................... 0% 0% 230%
</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.
Unearned stock-based compensation
In connection with certain stock option grants, during the year ended
December 31, 1998 and 1999, the Company recognized unearned compensation
totaling $6,788,000 and $6,237,000, respectively, which is being amortized over
the five year vesting periods of the related options using the multiple option
approach. Amortization expense recognized for the year ended December 31, 1998
and 1999 totaled approximately $1,277,000 and $4,525,000, 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.
F-18
<PAGE>
[LOGO OF VITRIA TECHNOLOGY, INC.]
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. Other Expenses Of Issuance And Distribution
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by us in connection with the
sale of the common stock being registered hereby. All amounts are estimates
except the SEC Registration Fee, the NASD Filing Fee and the Nasdaq National
Market Additional Listing Fee.
<TABLE>
<S> <C>
SEC Registration Fee............................................. $187,473
NASD Filing Fee.................................................. 30,500
NASDAQ National Market Additional Listing Fee.................... 17,500
Printing......................................................... 50,000
Legal Fees and Expenses.......................................... 250,000
Accounting Fees and Expenses..................................... 150,000
Blue Sky Fees and Expenses....................................... 2,500
Transfer Agent and Registrar Fees................................ 10,000
Miscellaneous.................................................... 27,027
--------
Total.......................................................... 725,000
========
</TABLE>
We intend to pay all expenses of registration, issuance and distribution.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
As permitted by Delaware law, our amended and restated certificate of
incorporation provides that no director of ours will be personally liable to us
or our stockholders for monetary damages for breach of fiduciary duty as a
director, except for liability:
. for any breach of duty of loyalty to us or to our stockholders;
. for acts or omissions not in good faith or that involve intentional
misconduct or a knowing violation of law;
. under Section 174 of the Delaware General Corporation Law; or
. for any transaction from which the director derived an improper personal
benefit.
Our amended and restated certificate of incorporation further provides that
we must indemnify our directors and executive officers and may indemnify its
other officers and employees and agents to the fullest extent permitted by
Delaware law. We believe that indemnification under our amended and restated
certificate of incorporation covers negligence and gross negligence on the part
of indemnified parties.
We have entered into indemnification agreements with each of our directors
and officers. These agreements, among other things, require us to indemnify
each director and officer for some expenses including attorneys' fees,
judgments, fines and settlement amounts incurred by any of these persons in any
action or proceeding, including any action by or in the right of Vitria,
arising out of person's services as our director or officer, any subsidiary of
ours or any other company or enterprise to which the person provides services
at our request.
The underwriting agreement (Exhibit 1.1) will provide for indemnification by
the underwriters of Vitria, our directors, our officers who sign the
registration statement, and our controlling persons for some liabilities,
including liabilities arising under the Securities Act.
ITEM 15. Recent Sales of Unregistered Securities
Since inception, Vitria has sold and issued the following unregistered
securities:
(1) From January 1995 through January 15, 2000, Vitria has granted stock
options to purchase 17,325,680 shares of the common stock and 189,552 shares of
Series C preferred stock to employees,
II-1
<PAGE>
consultants and directors pursuant to its 1999 Equity Incentive Plan and 1998
Executive Incentive Plan. Of these stock options, 3,120,116 shares have been
canceled without being exercised, 6,929,550 shares have been exercised,
1,528,600 shares of common stock and 18,950 shares of Series C preferred stock
of which have been repurchased and 7,276,014 shares remain outstanding. From
December 13, 1997 through December 31, 1999, Vitria has also granted restricted
stock awards to purchase 2,010,000 shares of the common stock pursuant to the
stock option plans, 60,000 shares of which have been repurchased.
(2) In December 1994, Vitria issued an aggregate of 22,187,496 shares of
common stock to 7 purchasers at $0.002 per share, for an aggregate purchase
price of $ .
(3) In August 1996, Vitria issued an aggregate of 2,040,000 shares of common
stock to 3 purchasers at $0.05 per share, for an aggregate purchase price of
$102,000.
(4) In January 1995 and August 1996, Vitria issued an aggregate of 3,039,164
shares of Series A preferred stock to 6 purchasers at $0.18 per share, for an
aggregate purchase price of $540,202. All shares of Series A preferred stock
were converted into shares of common stock at the rate of one share of common
stock for each share of Series A preferred stock owned upon completion of the
initial public offering.
(5) In May 1996, Vitria issued notes convertible into an aggregate of
1,900,326 shares of Series A1 preferred stock to 3 purchasers at a purchase
price of $0.31 per share for an aggregate purchase price of $579,599, which
conversion occurred in December 1997. All shares of Series A1 preferred stock
were converted into shares of common stock at the rate of one share of common
stock for each shares of Series A1 preferred stock owned upon completion of the
initial public offering.
(6) From December 1997 to September 1998, Vitria issued an aggregate of
95,000 shares of common stock to 7 purchasers at $0.125 per share, for an
aggregate purchase price of $11,875.
(7) In October 1997, Vitria issued an aggregate of 10,476,714 shares of
Series B preferred stock to 8 purchasers at $0.91 per share, for an aggregate
purchase price of $9,499,970. All shares of Series B preferred stock were
converted into shares of common stock at the rate of one share of common stock
for each share of Series B preferred stock owned upon completion of the initial
public offering.
(8) From October 1998 to January 1999, Vitria issued an aggregate of
5,687,066 shares of Series C preferred stock to 39 purchasers at a purchase
price of $2.01 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.
(9) In January 1999, Vitria 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.
(10) In May 1999, Vitria issued an aggregate of 2,007,960 shares of Series D
preferred stock to 17 purchasers at a purchase price of $2.25 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.
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 (2) through
(10) 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 Vitria or had access, through employment or other
relationships, to the information.
II-2
<PAGE>
ITEM 16. Exhibits and Financial Schedules
<TABLE>
<CAPTION>
Exhibit
Number Description of Document
------- -----------------------
<C> <S>
1.1 Form of Underwriting Agreement.
3.1+ Agreement and Plan of Merger, dated July 29, 1999.
3.2+ Amended and Restated Certificate of Incorporation of the Registrant to
be effective following the closing of this offering.
3.3+ Bylaws of the Registrant.
3.4+ Certificate of Incorporation of the Registrant
4.1+ Reference is made to Exhibits 3.1 through 3.3.
4.2+ Specimen Stock Certificate.
4.3+ Second Amended and Restated Investor Rights Agreement, dated May 20,
1999.
5.1 Opinion of Cooley Godward LLP.
10.1+ Form of Indemnity Agreement.
10.2+ Amended and Restated 1999 Equity Incentive Plan.
10.3+ 1998 Executive Incentive Plan.
10.4+ 1999 Employee Stock Purchase Plan.
10.5+ 1998 Nonqualified Deferred Compensation Plan.
10.6+ Standard Industrial/Commercial Single-Tenant Lease-Net by and between
Portola Land Company and the Registrant, dated January 28, 1997.
10.7+ Sublease by and between Applied Materials, Inc. and the Registrant,
dated April 6, 1999.
10.8+ First Amendment to Sublease by and between Applied Materials, Inc. and
the Registrant, dated December 14, 1999.
23.1 Consent of PricewaterhouseCoopers LLP.
23.2 Consent of Cooley Godward LLP. Reference is made to Exhibit 5.1.
24.1+ Power of Attorney.
27.1+ Financial Data Schedule.
</TABLE>
- --------
+ Previously filed.
ITEM 17. Undertakings
The undersigned registrant hereby undertakes:
(1) That for purposes of determining any liability under the Securities Act,
the information omitted from the form of this prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this Registration
Statement as of the time it was declared effective.
(2) That for purposes of determining any liability under the Securities Act,
each post-effective amendment that contains a form of prospectus shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of the securities at that time shall be deemed to be
the initial bona fide offering thereof.
(3) Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the provisions referenced in Item 15 of this
Registration Statement or otherwise, the Registrant has been advised that in
the opinion of the Securities and Exchange Commission this indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against these
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer, or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by a
director, officer, or controlling person in connection with the securities
being registered, the Registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question of whether the indemnification by it is
against public policy as expressed in the Securities Act of 1933, and will be
governed by the final adjudication of this issue.
(4) To provide to the Underwriters at the closing specified in the
Underwriting Agreement certificates in the denomination and registered in the
names required by the Underwriters to permit prompt delivery to each purchaser.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 2 to Registration Statement to be signed on
its behalf by the undersigned, thereunto duly authorized, in the city of Palo
Alto, state of California, on February 8, 2000.
VITRIA TECHNOLOGY, INC.
/s/ JoMei Chang, Ph.D.
By: _____________________________________
JoMei Chang, Ph.D.
President and Chief Executive Officer
In accordance with the requirements of the Securities Act of 1933, this
Amendment No. 2 to Registration Statement has been signed by the following
persons in the capacities and on these dates stated:
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ JoMei Chang, Ph.D. President, Chief Executive February 8, 2000
______________________________________ Officer and Director
JoMei Chang, Ph.D. (Principal Executive
Officer)
/s/ Paul R. Auvil, III Vice President, Finance, February 8, 2000
______________________________________ Chief Financial Officer
Paul R. Auvil, III and Secretary (Principal
Financial and Accounting
Officer)
/s/ M. Dale Skeen, Ph.D. Chief Technology Officer February 8, 2000
______________________________________ and Director
M. Dale Skeen, Ph.D.
/s/ Robert M. Halperin Director February 8, 2000
______________________________________
Robert M. Halperin
/s/ William H. Younger, Jr. Director February 8, 2000
______________________________________
William H. Younger, Jr.
/s/ John L. Walecka Director February 8, 2000
______________________________________
John L. Walecka
</TABLE>
II-4
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description of Document
------- -----------------------
<C> <S>
1.1 Form of Underwriting Agreement.
3.1+ Agreement and Plan of Merger, dated July 29, 1999.
3.2+ Amended and Restated Certificate of Incorporation of the Registrant to
be effective following the closing of this offering.
3.3+ Bylaws of the Registrant.
3.4+ Certificate of Incorporation of the Registrant.
4.1+ Reference is made to Exhibits 3.1 through 3.3.
4.2+ Specimen Stock Certificate.
4.3+ Second Amended and Restated Investor Rights Agreement, dated May 20,
1999.
5.1 Opinion of Cooley Godward LLP.
10.1+ Form of Indemnity Agreement.
10.2+ Amended and Restated 1999 Equity Incentive Plan.
10.3+ 1998 Executive Incentive Plan.
10.4+ 1999 Employee Stock Purchase Plan.
10.5+ 1998 Nonqualified Deferred Compensation Plan.
10.6+ Standard Industrial/Commercial Single-Tenant Lease-Net by and between
Portola Land Company
and the Registrant, dated January 28, 1997.
10.7+ Sublease by and between Applied Materials, Inc. and the Registrant,
dated April 6, 1999.
10.8+ First Amendment to Sublease by and between Applied Materials, Inc. and
the Registrant, dated December 14, 1999.
23.1 Consent of PricewaterhouseCoopers LLP.
23.2 Consent of Cooley Godward LLP. Reference is made to Exhibit 5.1.
24.1+ Power of Attorney.
27.1+ Financial Data Schedule.
</TABLE>
- --------
+ Previously filed.
<PAGE>
Exhibit 1.1
5,000,000 Shares
VITRIA TECHNOLOGY, INC.
Common Stock, par value $0.001 per share
UNDERWRITING AGREEMENT
----------------------
February ____, 2000
CREDIT SUISSE FIRST BOSTON CORPORATION
MERRILL LYNCH , PIERCE, FENNER & SMITH INCORPORATED
FLEETBOSTON ROBERTSON STEPHENS, INC.
SOUNDVIEW TECHNOLOGY GROUP, INC.
As Representatives of the Several Underwriters,
c/o Credit Suisse First Boston Corporation,
Eleven Madison Avenue,
New York, N.Y. 10010-3629
Dear Sirs:
1. Introductory. Vitria Technology, Inc., a Delaware corporation
("Company"), proposes to issue and sell 1,500,000 shares of its Common Stock
("Securities"), and the stockholders listed in Schedule A hereto ("Selling
Stockholders") propose severally to sell an aggregate of 3,500,000 outstanding
shares of the Securities (such 5,000,000 shares of Securities being hereinafter
referred to as the "Firm Securities"). The Selling Stockholders also propose to
sell to the Underwriters, at the option of the Underwriters, an aggregate of not
more than 750,000 additional outstanding shares of the Company's Securities as
set forth below (the "Optional Securities"). The Firm Securities and the
Optional Securities are herein collectively called the "Offered Securities." The
Company and the Selling Stockholders hereby agree with the several Underwriters
named in Schedule B hereto ("Underwriters") as follows:
2. Representations and Warranties of the Company and the Selling
Stockholders.
(a) The Company and JoMei Chang and M. Dale Skeen (the "Senior
Management") represent and warrant to, and agree with, the several Underwriters
that:
(i) A registration statement (No. 333-95319) relating to the
Offered Securities, including a form of prospectus, has been filed with the
Securities and Exchange Commission ("Commission") and either (A) has been
declared effective under the Securities Act of 1933 ("Act") and is not proposed
to be amended or (B) is proposed to be amended by amendment or post-effective
amendment. If such registration statement ("initial registration statement") has
been declared effective, either (A) an additional registration statement
("additional registration statement") relating to the Offered Securities may
have been filed with the Commission pursuant to Rule 462(b) ("Rule 462(b)")
under the Act and, if so filed, has become effective upon filing pursuant to
such Rule and the Offered Securities all have been duly registered under the Act
pursuant to the initial registration statement and, if applicable, the
additional registration statement or (B) such an additional registration
statement is proposed to be filed with the Commission pursuant to Rule 462(b)
and will become effective upon filing pursuant to such Rule and upon such filing
the Offered Securities will all have been duly registered under the Act pursuant
to the initial registration statement and such additional registration
statement. If the Company does not propose to amend the initial registration
statement or if an additional registration statement has been filed and the
Company does not propose to amend it, and if any post-effective amendment to
either such registration statement has been filed with the Commission prior to
the execution and delivery of this Agreement, the
<PAGE>
most recent amendment (if any) to each such registration statement has been
declared effective by the Commission or has become effective upon filing
pursuant to Rule 462(c) ("Rule 462(c)") under the Act or, in the case of the
additional registration statement, Rule 462(b). For purposes of this Agreement,
"Effective Time" with respect to the initial registration statement or, if filed
prior to the execution and delivery of this Agreement, the additional
registration statement means (A) if the Company has advised the Representatives
that it does not propose to amend such registration statement, the date and time
as of which such registration statement, or the most recent post-effective
amendment thereto (if any) filed prior to the execution and delivery of this
Agreement, was declared effective by the Commission or has become effective upon
filing pursuant to Rule 462(c), or (B) if the Company has advised the
Representatives that it proposes to file an amendment or post-effective
amendment to such registration statement, the date and time as of which such
registration statement, as amended by such amendment or post-effective
amendment, as the case may be, is declared effective by the Commission. If an
additional registration statement has not been filed prior to the execution and
delivery of this Agreement but the Company has advised the Representatives that
it proposes to file one, "Effective Time" with respect to such additional
registration statement means the date and time as of which such registration
statement is filed and becomes effective pursuant to Rule 462(b). "Effective
Date" with respect to the initial registration statement or the additional
registration statement (if any) means the date of the Effective Time thereof.
The initial registration statement, as amended at its Effective Time, including
all information contained in the additional registration statement (if any) and
deemed to be a part of the initial registration statement as of the Effective
Time of the additional registration statement pursuant to the General
Instructions of the Form on which it is filed and including all information (if
any) deemed to be a part of the initial registration statement as of its
Effective Time pursuant to Rule 430A(b) ("Rule 430A(b)") under the Act, is
hereinafter referred to as the "Initial Registration Statement". The additional
registration statement, as amended at its Effective Time, including the contents
of the initial registration statement incorporated by reference therein and
including all information (if any) deemed to be a part of the additional
registration statement as of its Effective Time pursuant to Rule 430A(b), is
hereinafter referred to as the "Additional Registration Statement". The Initial
Registration Statement and the Additional Registration Statement are herein
referred to collectively as the "Registration Statements" and individually as a
"Registration Statement". The form of prospectus relating to the Offered
Securities, as first filed with the Commission pursuant to and in accordance
with Rule 424(b) ("Rule 424(b)") under the Act or (if no such filing is
required) as included in a Registration Statement, is hereinafter referred to as
the "Prospectus". No document has been or will be prepared or distributed in
reliance on Rule 434 under the Act.
(ii) If the Effective Time of the Initial Registration
Statement is prior to the execution and delivery of this Agreement: (A) on the
Effective Date of the Initial Registration Statement, the Initial Registration
Statement conformed in all respects to the requirements of the Act and the rules
and regulations of the Commission ("Rules and Regulations") and did not include
any untrue statement of a material fact or omit to state any material fact
required to be stated therein or necessary to make the statements therein not
misleading, (B) on the Effective Date of the Additional Registration Statement
(if any), each Registration Statement conformed, or will conform, in all
respects to the requirements of the Act and the Rules and Regulations and did
not include, or will not include, any untrue statement of a material fact and
did not omit, or will not omit, to state any material fact required to be stated
therein or necessary to make the statements therein not misleading and (C) on
the date of this Agreement, the Initial Registration Statement and, if the
Effective Time of the Additional Registration Statement is prior to the
execution and delivery of this Agreement, the Additional Registration Statement
each conforms, and at the time of filing of the Prospectus pursuant to Rule
424(b) or (if no such filing is required) at the Effective Date of the
Additional Registration Statement in which the Prospectus is included, each
Registration Statement and the Prospectus will conform, in all respects to the
requirements of the Act and
-2-
<PAGE>
the Rules and Regulations, and neither of such documents includes, or will
include, any untrue statement of a material fact or omits, or will omit, to
state any material fact required to be stated therein or necessary to make the
statements therein not misleading. If the Effective Time of the Initial
Registration Statement is subsequent to the execution and delivery of this
Agreement: on the Effective Date of the Initial Registration Statement, the
Initial Registration Statement and the Prospectus will conform in all respects
to the requirements of the Act and the Rules and Regulations, neither of such
documents will include any untrue statement of a material fact or will omit to
state any material fact required to be stated therein or necessary to make the
statements therein not misleading, and no Additional Registration Statement has
been or will be filed. The two preceding sentences do not apply to statements in
or omissions from a Registration Statement or the Prospectus based upon written
information furnished to the Company by any Underwriter through the
Representatives specifically for use therein, it being understood and agreed
that the only such information is that described as such in Section 7(c) hereof.
(iii) The Company has been duly incorporated and is an
existing corporation in good standing under the laws of the State of Delaware,
with power and authority (corporate and other) to own its properties and conduct
its business as described in the Prospectus; and the Company is duly qualified
to do business as a foreign corporation in good standing in all other
jurisdictions in which its ownership or lease of property or the conduct of its
business requires such qualification, except where the failure to be so
qualified would not have a material adverse effect on the condition (financial
or other), business, properties or results of operations of the Company and its
subsidiaries taken as a whole ("Material Adverse Effect").
(iv) Each subsidiary of the Company has been duly
incorporated and is an existing corporation in good standing under the laws of
the jurisdiction of its incorporation, with power and authority (corporate and
other) to own its properties and conduct its business as described in the
Prospectus; and each subsidiary of the Company is duly qualified to do business
as a foreign corporation in good standing in all other jurisdictions in which
its ownership or lease of property or the conduct of its business requires such
qualification; all of the issued and outstanding capital stock of each
subsidiary of the Company has been duly authorized and validly issued and is
fully paid and nonassessable; and the capital stock of each subsidiary owned by
the Company, directly or through subsidiaries, is owned free from liens;
encumbrances and defects.
(v) The Offered Securities and all other outstanding shares
of capital stock of the Company have been duly authorized; all outstanding
shares of capital stock of the Company are, and, when the Offered Securities
have been delivered and paid for in accordance with this Agreement on each
Closing Date (as defined below), such Offered Securities will have been, validly
issued, fully paid and nonassessable and will conform to the description thereof
contained in the Prospectus; and the stockholders of the Company have no
preemptive rights with respect to the Securities.
(vi) Except as disclosed in the Prospectus, there are no
contracts, agreements or understandings between the Company and any person that
would give rise to a valid claim against the Company or any Underwriter for a
brokerage commission, finder's fee or other like payment in connection with this
offering.
(vii) There are no contracts, agreements or understandings
between the Company and any person granting such person the right to require the
Company to file a registration statement under the Act with respect to any
securities of the Company owned or to be owned by such person or to require the
Company to include such securities in the securities registered pursuant to a
Registration Statement or in any securities being registered pursuant to any
other registration statement filed by the Company under the Act other than those
that (A) have been waived, (B) have expired or (C) have been complied with.
(viii) The Offered Securities have been approved for listing on
The Nasdaq Stock Market's National Market, subject to notice of issuance.
(ix) No consent, approval, authorization, or order of, or
filing with, any governmental agency or body or any court is required for the
consummation of the transactions contemplated by this Agreement in connection
with the issuance and sale of the Offered Securities by the
-3-
<PAGE>
Company or the Senior Management, except such as have been obtained and made
under the Act except such consents, approvals or filings with the National
Association of Securities Dealers, Inc. (the "NASD") and such as may be required
under state securities laws.
(x) The execution, delivery and performance of this
Agreement, and the issuance and sale of the Offered Securities will not result
in a breach or violation of any of the terms and provisions of, or constitute a
default under, the charter or by-laws of the Company or any subsidiary of the
Company, any statute, any rule, regulation or order of any governmental agency
or body or any court, domestic or foreign, having jurisdiction over the Company
or any subsidiary of the Company or any of its properties, or any agreement or
instrument material to the Company and to which the Company or any such
subsidiary is a party or by which the Company or any such subsidiary is bound or
to which any of the properties of the Company or any such subsidiary is subject,
and the Company has full power and authority to authorize, issue and sell the
Offered Securities as contemplated by this Agreement.
(xi) This Agreement has been duly authorized, executed and
delivered by the Company.
(xii) Except as disclosed in the Prospectus, the Company and
its subsidiaries have good and marketable title to all real properties and all
other properties and assets owned by them, in each case free from liens,
encumbrances and defects that would materially affect the value thereof or
materially interfere with the use made or to be made thereof by them; and except
as disclosed in the Prospectus, the Company and its subsidiaries hold any leased
real or personal property under valid and enforceable leases with no exceptions
that would materially interfere with the use made or to be made thereof by them.
(xiii) The Company and its subsidiaries possess adequate
certificates, authorities or permits issued by appropriate governmental agencies
or bodies necessary to conduct the business now operated by them, as described
in the Prospectus, and have not received any notice of proceedings relating to
the revocation or modification of any such certificate, authority or permit
that, if determined adversely to the Company or any of its subsidiaries, would
individually or in the aggregate have a Material Adverse Effect.
(xiv) No labor dispute with the employees of the Company or
any subsidiary exists or, to the knowledge of the Company, is imminent that
might have a Material Adverse Effect.
(xv) The Company and its subsidiaries own, possess licenses
or can acquire on reasonable terms, adequate trademarks, trade names and other
rights to inventions, know-how, patents, licenses, copyrights, confidential
information and other intellectual property, (collectively, "intellectual
property rights") necessary to conduct the business now operated by them, as
described in the Prospectus, or presently employed by them, except where the
failure to so own or possess such intellectual property rights would not,
individually or in the aggregate, have a Material Adverse Effect, and have not
received any notice of, and are not aware of any, infringement of or conflict
with asserted rights of others with respect to any intellectual property rights
that, if determined adversely to the Company or any of its subsidiaries, would
individually or in the aggregate have a Material Adverse Effect.
(xvi) Except as disclosed in the Prospectus, neither the
Company nor or any of its subsidiaries is in violation of any statute, any rule,
regulation, decision or order of any governmental agency or body or any court,
domestic or foreign, relating to the use, disposal or release of hazardous or
toxic substances or relating to the protection or restoration of the environment
or human exposure to hazardous or toxic substances (collectively, "environmental
laws"), owns or operates any real property contaminated with any substance that
is subject to any environmental laws, is liable for any off-site disposal or
contamination pursuant to any environmental laws, or is subject to any claim
relating to any environmental laws, which violation, contamination, liability or
claim would individually or in the
-4-
<PAGE>
aggregate have a Material Adverse Effect; and the Company is not aware of any
pending investigation which might lead to such a claim.
(xvii) Except as disclosed in the Prospectus, there are no
pending actions, suits or proceedings against the Company, or any of its
subsidiaries or any of their respective properties that, if determined adversely
to the Company or any of its subsidiaries, would individually or in the
aggregate have a Material Adverse Effect, or would materially and adversely
affect the ability of the Company to perform its obligations under this
Agreement, or which are otherwise material in the context of the sale of the
Offered Securities; and no such actions, suits or proceedings are threatened or,
to the Company's knowledge, contemplated.
(xviii) The financial statements included in each Registration
Statement and the Prospectus present fairly the financial position of the
Company and its consolidated subsidiaries as of the dates shown and their
results of operations and cash flows for the periods shown, and such financial
statements have been prepared in conformity with the generally accepted
accounting principles in the United States applied on a consistent basis.
(xix) Except as disclosed in the Prospectus, since the date of
the latest audited financial statements included in the Prospectus there has
been no material adverse change, nor any development or event that could result
in a prospective material adverse change, in the condition (financial or other),
business, properties or results of operations of the Company and its
subsidiaries taken as a whole, and except as disclosed in or contemplated by the
Prospectus, there has been no dividend or distribution of any kind declared,
paid or made by the Company on any class of its capital stock.
(xx) The Company is not and, after giving effect to the
offering and sale of the Offered Securities and the application of the proceeds
thereof as described in the Prospectus, will not be an "investment company" as
defined in the Investment Company Act of 1940.
(b) Each Selling Stockholder severally represents and warrants to,
and agrees with, the several Underwriters that:
(i) Such Selling Stockholder has and on each Closing Date
hereinafter mentioned will have valid and unencumbered title to the Offered
Securities to be delivered by such Selling Stockholder on such Closing Date and
full right, power and authority to enter into this Agreement and to sell,
assign, transfer and deliver the Offered Securities to be delivered by such
Selling Stockholder on such Closing Date hereunder; and upon the delivery of and
payment for the Offered Securities on each Closing Date hereunder the several
Underwriters will acquire valid and unencumbered title to the Offered Securities
to be delivered by such Selling Stockholder on such Closing Date.
(ii) All information furnished in writing by or on behalf of
such Selling Stockholder specifically for use in the Registration Statement and
Prospectus is, and on the Closing Date will be, true, correct, and complete, and
does not, and on the Closing Date will not, contain any untrue statement of a
material fact or omit to state any material fact necessary to make such
information not misleading.
(iii) Each of the Senior Management and Paul R. Auvil, III
hereby represents and warrants that each has reviewed the Registration Statement
and Prospectus and, although such person has not independently verified the
accuracy of completeness of all the information contained therein, nothing has
come to the attention of such person that would lead such person to believe that
on the Effective Date, the Registration Statement contained any untrue statement
of a material fact or omitted to state any material fact required to be stated
therein or necessary in order to make the statements therein not misleading;
and, on the Effective Date the Prospectus contained and, on any Closing Date
contains any untrue statement of a material fact or omitted or omits to state
any material fact necessary in order to make
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the statements therein, in light of the circumstances under which they were
made, not misleading; provided however, that none of the representations and
warranties in this paragraph (iii) shall apply to statements in, or omissions
from, the Registration Statement or the Prospectus made in reliance upon and in
conformity with information herein or otherwise furnished in writing to the
Company by or on behalf of the Underwriters for use in the Registration
Statement or the Prospectus.
(iv) Except as disclosed in the Prospectus or pursuant to
this Agreement, there are no contracts, agreements or understandings between
such Selling Stockholder and any person that would give rise to a valid claim
against such Selling Stockholder or any Underwriter for a brokerage commission,
finder's fee or other like payment in connection with this offering.
3. Purchase, Sale and Delivery of Offered Securities. On the basis of
the representations, warranties and agreements herein contained, but subject to
the terms and conditions herein set forth, the Company and each Selling
Stockholder agree, severally and not jointly, to sell to each Underwriter, and
each Underwriter agrees, severally and not jointly, to purchase from the Company
and each Selling Stockholder, at a purchase price of $_______ per share, that
number of Firm Securities (rounded up or down, as determined by Credit Suisse
First Boston Corporation ("CSFBC") in its discretion, in order to avoid
fractions) obtained by multiplying _________________ Firm Securities in the case
of the Company and the number of Firm Securities set forth opposite the name of
such Selling Stockholder in Schedule A hereto, in the case of a Selling
Stockholder, in each case by a fraction the numerator of which is the number of
Firm Securities set forth opposite the name of such Underwriter in Schedule B
hereto and the denominator of which is the total number of Firm Securities.
Certificates in negotiable form for the Offered Securities to be sold by
the Selling Stockholders hereunder have been placed in custody, for delivery
under this Agreement, under Custody Agreements made with BancBoston, N.A. as
custodian ("Custodian"). Each Selling Stockholder agrees that the shares
represented by the certificates held in custody for the Selling Stockholders
under such Custody Agreements are subject to the interests of the Underwriters
hereunder, that the arrangements made by the Selling Stockholders for such
custody are to that extent irrevocable, and that the obligations of the Selling
Stockholders hereunder shall not be terminated by operation of law, whether by
the death of any individual Selling Stockholder or the occurrence of any other
event, or in the case of a trust, by the death of any trustee or trustees or the
termination of such trust. If any individual Selling Stockholder or any such
trustee or trustees should die, or if any other such event should occur, or if
any of such trusts should terminate, before the delivery of the Offered
Securities hereunder, certificates for such Offered Securities shall be
delivered by the Custodian in accordance with the terms and conditions of this
Agreement as if such death or other event or termination had not occurred,
regardless of whether or not the Custodian shall have received notice of such
death or other event or termination.
The Company and the Custodian will deliver the Firm Securities to the
Representatives for the accounts of the Underwriters, at the office of CSFBC,
Eleven Madison Avenue, New York, New York 10010-3629, against payment of the
purchase price in Federal (same day) funds by official bank check or checks or
wire transfer to an account at a bank acceptable to CSFBC drawn to the order of
the Company in the case of 1,500,000 shares of Firm Securities and to the order
of the Custodian in the case of 3,500,000 shares of Firm Securities, at the
office of Cooley Godward LLP ("Cooley Godward"), 5 Palo Alto Square, 4th Floor,
3000 El Camino Real, Palo Alto, California at 10:00 A.M., New York time, on
[________, 2000], or at such other time not later than seven full business days
thereafter as CSFBC and the Company determine, such time being herein referred
to as the "First Closing Date". For purposes of Rule 15c6 1 under the
Exchange Act, the First Closing Date (if later than the otherwise applicable
settlement date) shall be the settlement date for payment of funds and delivery
of securities for all the Offered Securities sold pursuant to the offering. The
certificates for the Firm Securities so to be delivered will be in definitive
form, in such denominations and registered in such names as CSFBC requests and
will be made available for checking and packaging at the above office of CSFBC
in New York at least 24 hours prior to the First Closing Date.
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In addition, upon written notice from CSFBC given to [the Company and] the
Selling Stockholders from time to time not more than 30 days subsequent to the
date of the Prospectus, the Underwriters may purchase all or less than all of
the Optional Securities at the purchase price per Security to be paid for the
Firm Securities. The Selling Stockholders agree severally and not jointly, to
sell to the Underwriters the respective numbers of Optional Securities obtained
by multiplying the number of Optional Securities specified in such notice by a
fraction the numerator of which is the number of shares set forth opposite the
names of such Selling Stockholders in Schedule A hereto under the caption
"Number of Optional Securities to be Sold" and the denominator of which is the
total number of Optional Securities (subject to adjustment by CSFBC to eliminate
fractions). Such Optional Securities shall be purchased from each Selling
Stockholder for the account of each Underwriter in the same proportion as the
number of Firm Securities set forth opposite such Underwriter's name bears to
the total number of Firm Securities (subject to adjustment by CSFBC to eliminate
fractions) and may be purchased by the Underwriters only for the purpose of
covering over-allotments made in connection with the sale of the Firm
Securities. No Optional Securities shall be sold or delivered unless the Firm
Securities previously have been, or simultaneously are, sold and delivered. The
right to purchase the Optional Securities or any portion thereof may be
exercised from time to time and to the extent not previously exercised may be
surrendered and terminated at any time upon notice by CSFBC to [the Company and]
the Selling Stockholders.
Each time for the delivery of and payment for the Optional Securities,
being herein referred to as an "Optional Closing Date," which may be the First
Closing Date (the First Closing Date and each Optional Closing Date, if any,
being sometimes referred to as a "Closing Date"), shall be determined by CSFBC
but shall be not later than five full business days after written notice of
election to purchase Optional Securities is given. The Custodian will deliver
the Optional Securities being purchased on each Optional Closing Date to the
Representatives for the accounts of the several Underwriters, at the above
office of CSFBC in New York, against payment of the purchase price therefor in
Federal (same day) funds by official bank check or checks or wire transfer to an
account at a bank acceptable to CSFBC drawn to the order of the Custodian at the
above office of Cooley Godward in Palo Alto, California. The certificates for
the Optional Securities being purchased on each Optional Closing Date will be in
definitive form, in such denominations and registered in such names as CSFBC
requests upon reasonable notice prior to such Optional Closing Date and will be
made available for checking and packaging at the above office of CSFBC in New
York at a reasonable time in advance of such Optional Closing Date.
4. Offering by Underwriters. It is understood that the several
Underwriters propose to offer the Offered Securities for sale to the public as
set forth in the Prospectus.
5. Certain Agreements of the Company and the Selling Stockholders. The
Company agrees with the several Underwriters and the Selling Stockholders that:
(a) If the Effective Time of the Initial Registration Statement is
prior to the execution and delivery of this Agreement, the Company will file the
Prospectus with the Commission pursuant to and in accordance with subparagraph
(1) (or, if applicable and if consented to by CSFBC, subparagraph (4)) of Rule
424(b) not later than the earlier of (A) the second business day following the
execution and delivery of this Agreement or (B) the fifteenth business day after
the Effective Date of the Initial Registration Statement.
The Company will advise CSFBC promptly of any such filing pursuant to
Rule 424(b). If the Effective Time of the Initial Registration Statement is
prior to the execution and delivery of this Agreement and an additional
registration statement is necessary to register a portion of the Offered
Securities under the Act but the Effective Time thereof has not occurred as of
such execution and delivery, the Company will file the additional registration
statement or, if filed, will file a post-effective amendment thereto with the
Commission pursuant to and in accordance with Rule 462(b) on or prior to 10:00
P.M., New York time, on the date of this Agreement or, if earlier, on or prior
to the time the Prospectus is printed
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<PAGE>
and distributed to any Underwriter, or will make such filing at such later date
as shall have been consented to by CSFBC.
(b) The Company will advise CSFBC promptly of any proposal to amend
or supplement the initial or any additional registration statement as filed or
the related prospectus or the Initial Registration Statement, the Additional
Registration Statement (if any) or the Prospectus and will not effect such
amendment or supplementation without CSFBC's consent; and the Company will also
advise CSFBC promptly of the effectiveness of each Registration Statement (if
its Effective Time is subsequent to the execution and delivery of this
Agreement) and of any amendment or supplementation of a Registration Statement
or the Prospectus and of the institution by the Commission of any stop order
proceedings in respect of a Registration Statement and will use its best efforts
to prevent the issuance of any such stop order and to obtain as soon as possible
its lifting, if issued.
(c) If, at any time when a prospectus relating to the Offered
Securities is required to be delivered under the Act in connection with sales by
any Underwriter or dealer, any event occurs as a result of which the Prospectus
as then amended or supplemented would include an untrue statement of a material
fact or omit to state any material fact necessary to make the statements
therein, in the light of the circumstances under which they were made, not
misleading, or if it is necessary at any time to amend the Prospectus to comply
with the Act, the Company will promptly notify CSFBC of such event and will
promptly prepare and file with the Commission, at its own expense, an amendment
or supplement which will correct such statement or omission or an amendment
which will effect such compliance. Neither CSFBC's consent to, nor the
Underwriters' delivery of, any such amendment or supplement shall constitute a
waiver of any of the conditions set forth in Section 6.
(d) As soon as practicable, but not later than the Availability Date
(as defined below), the Company will make generally available to its
securityholders an earnings statement covering a period of at least 12 months
beginning after the Effective Date of the Initial Registration Statement (or, if
later, the Effective Date of the Additional Registration Statement) which will
satisfy the provisions of Section 11(a) of the Act. For the purpose of the
preceding sentence, "Availability Date" means the 45th day after the end of the
fourth fiscal quarter following the fiscal quarter that includes such Effective
Date, except that, if such fourth fiscal quarter is the last quarter of the
Company's fiscal year, "Availability Date" means the 90th day after the end of
such fourth fiscal quarter.
(e) The Company will furnish to the Representatives copies of each
Registration Statement (five of which will be signed and will include all
exhibits), each related preliminary prospectus, and, so long as a prospectus
relating to the Offered Securities is required to be delivered under the Act in
connection with sales by any Underwriter or dealer, the Prospectus and all
amendments and supplements to such documents, in each case in such quantities as
CSFBC requests. The Prospectus shall be so furnished on or prior to 3:00 P.M.,
New York time, on the business day following the later of the execution and
delivery of this Agreement or the Effective Time of the Initial Registration
Statement. All other documents shall be so furnished as soon as available. The
Company will pay the expenses of printing and distributing to the Underwriters
all such documents.
(f) The Company will arrange for the qualification of the Offered
Securities for sale under the laws of such jurisdictions as CSFBC designates and
will continue such qualifications in effect so long as required for the
distribution.
(g) During the period of five (5) years hereafter, the Company will
furnish to the Representatives and, upon request, to each of the other
Underwriters, as soon as practicable after the end of each fiscal year, a copy
of its annual report to stockholders for such year; and the Company will furnish
to the Representatives (i) as soon as available, a copy of each report and any
definitive proxy statement of the Company filed with the Commission under the
Securities Exchange Act of 1934 or mailed to stockholders,
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<PAGE>
and (ii) from time to time, such other information concerning the Company as
CSFBC may reasonably request.
(h) The Company agrees with the several Underwriters that the
Company will pay all expenses incident to the performance of the obligations of
the Company and the Selling Stockholders, under this Agreement, for any filing
fees and other expenses (including fees and disbursements of counsel) incurred
in connection with qualification of the Offered Securities for sale under the
laws of such jurisdictions as CSFBC designates and the printing of memoranda
relating thereto, for the filing fee incident to, and the reasonable fees and
disbursements of counsel to the Underwriters in connection with, the review by
the National Association of Securities Dealers, Inc. of the Offered Securities,
for any travel expenses of the Company's officers and employees and any other
expenses of the Company in connection with attending or hosting meetings with
prospective purchasers of the Offered Securities, and for expenses incurred in
distributing preliminary prospectuses and the Prospectus (including any
amendments and supplements thereto) to the Underwriters.
(i) Each Selling Stockholder agrees to deliver to CSFBC, attention:
Transactions Advisory Group on or prior to the First Closing Date a properly
completed and executed United States Treasury Department Form W-9 (or other
applicable form or statement specified by Treasury Department regulations in
lieu thereof).
(j) For a period of 90 days after the date of the initial public
offering of the Offered Securities, the Company will not offer, sell, contract
to sell, pledge or otherwise dispose of, directly or indirectly, or file with
the Commission a registration statement under the Act relating to, any
additional shares of its Securities or securities convertible into or
exchangeable or exercisable for any shares of its Securities, or publicly
disclose the intention to make any such offer, sale, pledge, disposition or
filing, without the prior written consent of CSFBC, except issuances of
Securities pursuant to the conversion of convertible securities or the exercise
of warrants and options, in each case outstanding on the date hereof, grants of
employee stock options pursuant to the terms of a plan in effect on the date
hereof, issuances of Securities pursuant to the exercise of such options or the
exercise of any other employee stock options outstanding on the date hereof.
(k) Each Selling Stockholder agrees, for a period of 90 days after
the date of the initial public offering of the Offered Securities, not to offer,
sell, contract to sell, pledge or otherwise dispose of, directly or indirectly,
any additional shares of the Securities of the Company or securities convertible
into or exchangeable or exercisable for any shares of Securities, or publicly
disclose the intention to make any such offer, sale, pledge or disposition,
without the prior written consent of CSFBC .
(l) The Company will (i) enforce the terms of each Lock-up
Agreement, and (ii) issue stop-transfer instructions to the transfer agent for
the Securities with respect to any transaction or contemplated transaction that
would constitute a breach of or default under the applicable Lock-up Agreement.
In addition, except with the prior written consent of CSFBC, the Company agrees
(i) not to amend or terminate, or waive any right under, any Lock-up Agreement,
or take any other action that would directly or indirectly have the same effect
as an amendment or termination, or waiver of any right under any Lock-up
Agreement, that would permit any holder of Securities, or any securities
convertible into, or exercisable or exchangeable for, Securities, to make any
short sale of, grant any option for the purchase of, or otherwise transfer or
dispose of, any such Securities or other securities, prior to the expiration of
the 90 days after the date of the Prospectus except as specifically contemplated
in any Lock-Up Agreement and (ii) not to consent to any sale, short sale, grant
of an option for the purchase of, or other disposition or transfer of shares of
Securities, or securities convertible into or exercisable or exchangeable for
Securities, subject to a Lock-up Agreement.
6. Conditions of the Obligations of the Underwriters. The obligations of
the several Underwriters to purchase and pay for the Firm Securities on the
First Closing Date and the Optional
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<PAGE>
Securities to be purchased on each Optional Closing Date will be subject to the
accuracy of the representations and warranties on the part of the Company and
the Selling Stockholders herein, to the accuracy of the statements of Company
officers made pursuant to the provisions hereof, to the performance by the
Company and the Selling Stockholders of their obligations hereunder and to the
following additional conditions precedent:
(a) The Representatives shall have received a letter, dated the date
of delivery thereof (which, if the Effective Time of the Initial Registration
Statement is prior to the execution and delivery of this Agreement, shall be on
or prior to the date of this Agreement (but in no event earlier than the
Effective Time) or, if the Effective Time of the Initial Registration Statement
is subsequent to the execution and delivery of this Agreement, shall be prior to
the filing of the amendment or post-effective amendment to the registration
statement to be filed shortly prior to such Effective Time), of
PricewaterhouseCoopers LLP confirming that they are independent public
accountants within the meaning of the Act and the applicable published Rules and
Regulations thereunder and stating to the effect that:
(i) in their opinion the financial statements and schedules
examined by them and included in the Registration Statements comply
as to form in all material respects with the applicable accounting
requirements of the Act and the related published Rules and
Regulations;
(ii) they have performed the procedures specified by the
American Institute of Certified Public Accountants for a review of
interim financial information as described in Statement of Auditing
Standards No. 71, Interim Financial Information, on the unaudited
financial statements included in the Registration Statements;
(iii) on the basis of the review referred to in clause (ii)
above, a reading of the latest available interim financial statements
of the Company, inquiries of officials of the Company who have
responsibility for financial and accounting matters and other
specified procedures, nothing came to their attention that caused
them to believe that:
(A) the unaudited financial statements included in the
Registration Statements do not comply as to form in all
material respects with the applicable accounting requirements
of the Act and the related published Rules and Regulations or
any material modifications should be made to such unaudited
financial statements for them to be in conformity with
generally accepted accounting principles;
(B) at the date of the latest available balance sheet
read by such accountants, or at a subsequent specified date
not more than three business days prior to the date of such
letter, there was any change in the capital stock or deferred
revenue or any increase in long-term debt, total or current
liabilities or stockholders' deficit, or any decrease in
current assets or total assets of the Company and its
consolidated subsidiaries, as compared with amounts shown on
the latest balance sheet included in the Prospectus; or
(C) for the period from the closing date of the latest
statement of operations included in the Prospectus to a
specified date not more than three business days prior to the
date of such letter, there were any decreases, as compared
with the corresponding period of the previous year and with
the period of corresponding length in the previous quarter,
in total revenues, or increases in loss from operations,
comprehensive loss or the total or per share amounts of basic
net loss;
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<PAGE>
except in all cases set forth in clauses (B) and (C) above for changes,
increases or decreases which the Prospectus discloses have occurred or may occur
or which are described in such letter; and
(iv) they have compared specified dollar amounts (or
percentages derived from such dollar amounts) and other financial
information contained in the Registration Statements (in each case
to the extent that such dollar amounts, percentages and other
financial and statistical information are derived from the general
accounting records of the Company and its subsidiaries subject to
the internal controls of the Company's accounting system or are
derived directly from such records by analysis or computation) with
the results obtained from inquiries, a reading of such general
accounting records and other procedures specified in such letter and
have found such dollar amounts, percentages and other financial and
statistical information to be in agreement with such results, except
as otherwise specified in such letter.
For purposes of this subsection, (i) if the Effective Time of the Initial
Registration Statement is subsequent to the execution and delivery of this
Agreement, "Registration Statements" shall mean the initial registration
statement as proposed to be amended by the amendment or post-effective amendment
to be filed shortly prior to its Effective Time, (ii) if the Effective Time of
the Initial Registration Statement is prior to the execution and delivery of
this Agreement but the Effective Time of the Additional Registration Statement
is subsequent to such execution and delivery, "Registration Statements" shall
mean the Initial Registration Statement and the additional registration
statement as proposed to be filed or as proposed to be amended by the post-
effective amendment to be filed shortly prior to its Effective Time, and (iii)
"Prospectus" shall mean the prospectus included in the Registration Statements.
(b) If the Effective Time of the Initial Registration Statement
is not prior to the execution and delivery of this Agreement, such Effective
Time shall have occurred not later than 10:00 P.M., New York time, on the date
of this Agreement or such later date as shall have been consented to by CSFBC.
If the Effective Time of the Additional Registration Statement (if any) is not
prior to the execution and delivery of this Agreement, such Effective Time shall
have occurred not later than 10:00 P.M., New York time, on the date of this
Agreement or, if earlier, the time the Prospectus is printed and distributed to
any Underwriter, or shall have occurred at such later date as shall have been
consented to by CSFBC. If the Effective Time of the Initial Registration
Statement is prior to the execution and delivery of this Agreement, the
Prospectus shall have been filed with the Commission in accordance with the
Rules and Regulations and Section 5(a) of this Agreement. Prior to such Closing
Date, no stop order suspending the effectiveness of a Registration Statement
shall have been issued and no proceedings for that purpose shall have been
instituted or, to the knowledge of Senior Management, the Company or the
Representatives, shall be contemplated by the Commission.
(c) Subsequent to the execution and delivery of this Agreement,
there shall not have occurred (i) any change, or any development or event
involving a prospective change, in the condition (financial or other), business,
properties or results of operations of the Company or its subsidiaries taken as
one enterprise which, in the judgment of a majority in interest of the
Underwriters including the Representatives, is material and adverse and makes it
impractical or inadvisable to proceed with completion of the public offering or
the sale of and payment for the Offered Securities; (ii) any downgrading in the
rating of any debt securities of the Company by any "nationally recognized
statistical rating organization" (as defined for purposes of Rule 436(g) under
the Act), or any public announcement that any such organization has under
surveillance or review its rating of any debt securities of the Company (other
than an announcement with positive implications of a possible upgrading, and no
implication of a possible downgrading, of such rating); (iii) any material
suspension or material limitation of trading in securities generally on the New
York Stock Exchange, or any setting of minimum prices for trading on such
exchange, or any suspension of trading of any securities of the Company on any
exchange or in the over-the-counter market; (iv) any banking moratorium declared
by U.S. Federal or New York authorities; or (v) any outbreak or escalation of
major hostilities in which the United States is involved, any declaration of war
by Congress
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<PAGE>
or any other substantial national or international calamity or emergency if, in
the judgment of a majority in interest of the Underwriters including the
Representatives, the effect of any such outbreak, escalation, declaration,
calamity or emergency makes it impractical or inadvisable to proceed with
completion of the public offering or the sale of and payment for the Offered
Securities.
(d) The Representatives shall have received an opinion, dated such
Closing Date, of Cooley Godward, counsel for the Company, to the effect that:
(i) The Company has been duly incorporated and is an
existing corporation in good standing under the laws of the State
of Delaware, with corporate power and authority to own its
properties and conduct its business as described in the Prospectus.
To such counsel's knowledge, the Company is duly qualified to do
business as a foreign corporation in good standing in all other
jurisdictions in which its ownership or lease of property or the
conduct of its business requires such qualification, except where
the failure to be so qualified would not have a Material Adverse
Effect;
(ii) The Offered Securities and all other outstanding shares
of the capital stock of the Company have been duly authorized and
validly issued, are fully paid and nonassessable and conform to the
description thereof contained in the Prospectus under the heading
"Description of Capital Stock"; and the stockholders of the Company
have no statutory preemptive rights or, to such counsel's
knowledge, any similar rights with respect to the Offered
Securities;
(iii) Except as disclosed in the Prospectus, to such counsel's
knowledge there are no contracts, agreements or understandings
between the Company and any person granting such person the right
to require the Company to file a registration statement under the
Act with respect to any securities of the Company owned or to be
owned by such person or to require the Company to include such
securities in the securities registered pursuant to the
Registration Statement or in any securities being registered
pursuant to any other registration statement filed by the Company
under the Act, other than those that have been waived or have
expired;
(iv) The Company is not and, after giving effect to the
offering and sale of the Offered Securities and the application of
the proceeds thereof as described in the Prospectus, will not be an
"investment company" as defined in the Investment Company Act of
1940.
(v) No consent, approval, authorization or order of, or
filing with, any governmental agency or body or any court is
required for the consummation of the transactions contemplated by
this Agreement in connection with the issuance or sale of the
Offered Securities by the Company, except such as required under
the Act and except for such consents, approvals or filings with the
National Association of Securities Dealers, Inc. or as may be
required under state securities laws;
(vi) The execution, delivery and performance of the Agreement
and the issuance and sale of the Offered Securities will not result
in a breach or violation of any of the terms and provisions of, or
constitute a default under, the charter or bylaws of the Company,
any statute, any rule, regulation or, to such counsel's knowledge,
any order of any governmental agency or body or any court having
jurisdiction over the Company or any of its properties, or any
agreement or instrument filed as an exhibit to the Registration
Statement and the Company has full power and authority to
authorize, issue and sell the Offered Securities as contemplated by
the Agreement;
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<PAGE>
(vii) The Initial Registration Statement and the Additional
Registration Statement (if any) have become effective under the Act
and, to the best knowledge of such counsel, no stop order suspending
the effectiveness of a Registration Statement or suspending or
preventing the use of the Prospectus is in effect and no proceedings
for that purpose have been instituted or are pending or threatened by
the Commission. The required filing of the Prospectus pursuant to
Rule 424(b) of the Rules and Regulations has been made in the manner
and within the time period required by such Rule 424(b). Each
Registration Statement and the Prospectus (except as to the financial
statements and schedules and other financial data and statistical
data derived therefrom as to which such counsel need express no
opinion), and each amendment or supplement thereto, as of their
respective effective or issue dates, complied as to form in all
material respects with the requirements of the Act and the Rules and
Regulations. To the knowledge of such counsel, there are no legal or
governmental proceedings pending or threatened which are of a
character required to be disclosed in the Registration Statement
which are not disclosed as required, nor are there contracts or
documents to which the Company is a party which are of a character
required to be filed as exhibits to the Registration Statement, which
are not filed as required.
(viii) The statements set forth under the headings
"Management - Employee Stock Plans", "Management - Limitation of
Liability and Indemnification", "Certain Transactions", "Principal
and Selling Stockholders", "Description of Capital Stock", and
"Shares Eligible for Future Sale" in the Prospectus, insofar as such
statements purport to summarize legal matters, documents or
proceedings referred to therein, provide a fair summary of such legal
matters, documents or proceedings to the extent required under the
Act and the Rules and Regulations thereunder;
(ix) This Agreement has been duly authorized, executed and
delivered by the Company;
In addition to the matters set forth above, counsel rendering the
foregoing opinion shall also include a statement to the effect that nothing has
come to such counsel's attention which has caused such counsel to believe that
any part of a Registration Statement or any amendment thereto (except as to the
financial statements and schedules and other financial data and statistical data
derived therefrom as to which such counsel need express no opinion) on the date
it became effective under the Act, contained an untrue statement of a material
fact or omitted to state a material fact required to be stated therein or
necessary to make the statements therein not misleading or that the Prospectus
or any amendment or supplement thereto (except as to the financial statements
and schedules and other financial data and statistical data derived therefrom as
to which such counsel need express no opinion), as of its date or as of the
Closing Date contained an untrue statement of a material fact or omitted or
omits to state a material fact necessary in order to make the statements
therein, in the light of the circumstances under which they were made, not
misleading.
(e) The Representatives shall have received the opinion contemplated
in the Power of Attorney executed and delivered by each Selling Stockholder and
an opinion, dated such Closing Date, of [Cooley Godward], counsel for the
Selling Stockholders, to the effect that:
(i) Assuming that the several Underwriters purchase the
Offered Securities to be delivered by the Selling Stockholders on the Closing
Date hereunder for value and without notice of any adverse claim as such term is
used in Section 8105 of the California Commercial Code as of the date hereof,
the delivery of the certificates representing such Offered Securities sold by
the Selling Stockholders either registered in the name of the Underwriters or
effectively endorsed to the Underwriters in blank will pass to the Underwriters
all rights that the transferor has in such Offered Securities free of all
adverse claims;
-13-
<PAGE>
(ii) To its knowledge, no consent, approval, authorization
of, or filing with, any governmental agency or body, or pursuant to any court
order entered against any Selling Stockholder, is necessary for the consummation
of the transactions contemplated by the Custody Agreement or this Agreement in
connection with the sale of the Offered Securities sold by the Selling
Stockholders, except such as have been obtained and made under the Act and such
as may be required under state securities laws;
(iii) The execution, delivery and performance of the Custody
Agreement and this Agreement and the consummation of the transactions therein
and herein by the Selling Stockholders will not result in a breach or violation
of any statute, rule or regulation, other than blue sky or state securities laws
as to which such counsel need not express an opinion, or, to the knowledge of
such counsel, any order of any governmental agency or body entered against such
Selling Stockholder or their properties. The execution, delivery and performance
of the Custody Agreement and this Agreement and the consummation of the
transactions therein and herein by the Selling Stockholders who are trustees
will not result in a breach or violation of any of the terms and provisions of,
and constitute a default under, such Selling Stockholder's applicable trust or
partnership agreement; and
(iv) The Power of Attorney and related Custody Agreement with
respect to each Selling Stockholder has been duly authorized (if not a natural
person), executed and delivered by such Selling Stockholder and constitute valid
and legally binding obligations of each such Selling Stockholder enforceable in
accordance with their terms, subject to bankruptcy, insolvency, fraudulent
transfer, reorganization, moratorium and similar laws of general applicability
relating to or affecting creditors' rights and to general equity principles; and
(v) This Agreement has been duly authorized (if not a
natural person), executed and delivered by each Selling Stockholder.
(f) The Representatives shall have received from Wilson Sonsini
Goodrich & Rosati, counsel for the Underwriters, such opinion or opinions, dated
such Closing Date, with respect to the incorporation of the Company, the
validity of the Offered Securities delivered on such Closing Date, the
Registration Statements, the Prospectus and other related matters as the
Representatives may require, and the Selling Stockholders and the Company shall
have furnished to such counsel such documents as they request for the purpose of
enabling them to pass upon such matters.
(g) The Representatives shall have received a certificate, dated
such Closing Date, of the President or any Vice President and a principal
financial or accounting officer of the Company in which such officers, to the
best of their knowledge after reasonable investigation, shall state that: the
representations and warranties of the Company in this Agreement are true and
correct; the Company has complied with all agreements and satisfied all
conditions on its part to be performed or satisfied hereunder at or prior to
such Closing Date; no stop order suspending the effectiveness of any
Registration Statement has been issued and no proceedings for that purpose have
been instituted or are contemplated by the Commission; the Additional
Registration Statement (if any) satisfying the requirements of subparagraphs (1)
and (3) of Rule 462(b) was filed pursuant to Rule 462(b), including payment of
the applicable filing fee in accordance with Rule 111(a) or (b) under the Act,
prior to the time the Prospectus was printed and distributed to any Underwriter;
and, subsequent to the date of the most recent financial statements in the
Prospectus, there has been no material adverse change, nor any development or
event involving a prospective material adverse change, in the condition
(financial or other), business, properties or results of operations of the
Company and its subsidiaries taken as a whole except as set forth in or
contemplated by the Prospectus or as described in such certificate.
(h) The Representatives shall have received a letter, dated such
Closing Date, of PricewaterhouseCoopers LLP which meets the requirements of
subsection (a) of this Section, except that the specified date referred to in
such subsection will be a date not more than three days prior to such Closing
Date for the purposes of this subsection.
-14-
<PAGE>
The Selling Stockholders and the Company will furnish the
Representatives with such conformed copies of such opinions, certificates,
letters and documents as the Representatives reasonably request. CSFBC may in
its sole discretion waive on behalf of the Underwriters compliance with any
conditions to the obligations of the Underwriters hereunder, whether in respect
of an Optional Closing Date or otherwise.
7. Indemnification and Contribution. (a) The Company and each of the
Senior Management, severally and not jointly, will indemnify and hold harmless
each Underwriter, its partners, directors and officers and each person, if any,
who controls such Underwriter within the meaning of Section 15 of the Act,
against any losses, claims, damages or liabilities, joint or several, to which
such Underwriter may become subject, under the Act or otherwise, insofar as such
losses, claims, damages or liabilities (or actions in respect thereof) arise out
of or are based upon any untrue statement or alleged untrue statement of any
material fact contained in any Registration Statement, the Prospectus, or any
amendment or supplement thereto, or any related preliminary prospectus, or arise
out of or are based upon the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading, and will reimburse each Underwriter for any legal or
other expenses reasonably incurred by such Underwriter in connection with
investigating or defending any such loss, claim, damage, liability or action as
such expenses are incurred; provided, however, that the Company and the Senior
Management will not be liable in any such case to the extent that any such loss,
claim, damage or liability arises out of or is based upon an untrue statement or
alleged untrue statement in or omission or alleged omission from any of such
documents in reliance upon and in conformity with written information furnished
to the Company by any Underwriter through the Representatives specifically for
use therein, it being understood and agreed that the only such information
furnished by any Underwriter consists of the information described as such in
subsection (c) below; provided, that the liability of the Senior Management
pursuant to this subsection (a) shall be limited to an amount equal to the
aggregate gross proceeds (after deducting discounts and commissions) to such
Senior Management from the sale of Securities by such Senior Management; and
provided, further, that with respect to any untrue statement or alleged untrue
statement in or omission or alleged omission from any preliminary prospectus the
indemnity agreement contained in this subsection (a) shall not inure to the
benefit of any Underwriter from whom the person asserting any such losses,
claims, damages or liabilities purchased the Offered Securities concerned, to
the extent that a prospectus relating to such Offered Securities was required to
be delivered by such Underwriter under the Act in connection with such purchase
and any such loss, claim, damage or liability of such Underwriter results from
the fact that there was not sent or given to such person, at or prior to the
written confirmation of the sale of such Offered Securities to such person, a
copy of the Prospectus if the Company had previously furnished copies thereof to
such Underwriter. In addition, the Company and each of the Underwriters agree
with the Senior Management that any claim of such Underwriter against the Senior
Management for indemnification, reimbursement or advancement of expenses
pursuant to this Section 7 (except for any breach of any representation or
warranty in Section 2 hereof) shall first be sought by such Underwriter to be
satisfied in full by the Company and shall be satisfied by the Senior Management
only to the extent that such claim has not been satisfied in full by the Company
for any reason within the 30-day period following the date requested for
payment. The Company and the Senior Management may agree, among themselves and
without limiting the rights of the Underwriters under this Agreement, as to the
respective amounts of such liability for which they each shall be responsible,
including, without limitation, allocating between the Company and the Senior
Management the liability resulting from a breach of the representation and
warranties of the Company and the Senior Management hereunder.
(c) Each of the Selling Stockholders (other than Senior Management),
severally and not jointly, will indemnify and hold harmless each Underwriter,
its partners, directors and officers and each person who controls such
Underwriter within the meaning of Section 15 of the Act, against any losses,
claims, damages or liabilities, joint or several, to which such Underwriter may
become subject, under the Act or otherwise, insofar as such losses, claims,
damages or liabilities (or actions in respect thereof) arise out of or are based
upon any untrue statement or alleged untrue statement of any material fact
contained in
-15-
<PAGE>
any Registration Statement, the Prospectus, or any amendment or supplement
thereto, or any related preliminary prospectus, or arise out of or are based
upon the omission or alleged omission to state therein a material fact required
to be stated therein or necessary to make the statements therein not misleading,
in each case to the extent, but only to the extent, that such untrue statement
or alleged untrue statement or omission or alleged omission was made in any
Registration Statement or the Prospectus or any such amendment or supplement in
reliance upon and in conformity with written information furnished to the
Company by such Selling Stockholder (other than Senior Management) expressly for
use therein; and will reimburse each Underwriter for any legal or other expenses
reasonably incurred by such Underwriter in connection with investigating or
defending any such loss, claim, damage, liability or action as such expenses are
incurred; provided, however, that the Selling Stockholders will not be liable in
any such case to the extent that any such loss, claim, damage or liability
arises out of or is based upon an untrue statement or alleged untrue statement
in or omission or alleged omission from any of such documents in reliance upon
and in conformity with written information furnished to the Company by an
Underwriter through the Representatives specifically for use therein, it being
understood and agreed that the only such information furnished by any
Underwriter consists of the information described as such in subsection (c)
below; and provided that the liability of a Selling Stockholder pursuant to this
subsection (b) shall be limited to an amount equal to the aggregate gross
proceeds (after deducting discounts and commissions) to such Selling Stockholder
from the sale of Offered Securities by such Selling Stockholder hereunder; and
provided, further, that with respect to any untrue statement or alleged untrue
statement in or omission or alleged omission from any preliminary prospectus the
indemnity agreement contained in this subsection (b) shall not inure to the
benefit of any Underwriter from whom the person asserting any such losses,
claims, damages or liabilities purchased the Offered Securities concerned, to
the extent that a prospectus relating to such Offered Securities was required to
be delivered by such Underwriter under the Act in connection with such purchase
and any such loss, claim, damage or liability of such Underwriter results from
the fact that there was not sent or given to such person, at or prior to the
written confirmation of the sale of such Offered Securities to such person, a
copy of the Prospectus if the Company had previously furnished copies thereof to
such Underwriter
(d) Each Underwriter will severally and not jointly indemnify and
hold harmless the Company, each Selling Stockholder, their directors and
officers and each person, if any who controls the Company or any Selling
Stockholder within the meaning of Section 15 of the Act, against any losses,
claims, damages or liabilities to which the Company or such Selling Stockholder
may become subject, under the Act or otherwise, insofar as such losses, claims,
damages or liabilities (or actions in respect thereof) arise out of or are based
upon any untrue statement or alleged untrue statement of any material fact
contained in any Registration Statement, the Prospectus, or any amendment or
supplement thereto, or any related preliminary prospectus, or arise out of or
are based upon the omission or the alleged omission to state therein a material
fact required to be stated therein or necessary to make the statements therein
not misleading, in each case to the extent, but only to the extent, that such
untrue statement or alleged untrue statement or omission or alleged omission was
made in reliance upon and in conformity with written information furnished to
the Company by such Underwriter through the Representatives specifically for use
therein, and will reimburse any legal or other expenses reasonably incurred by
the Company and the Selling Stockholder in connection with investigating or
defending any such loss, claim, damage, liability or action as such expenses are
incurred, it being understood and agreed that the only such information
furnished by any Underwriter consists of the following information in the
Prospectus furnished on behalf of each Underwriter: the information regarding
concession and reallowance figures contained in the fourth paragraph under the
caption "Underwriting" and the information regarding stabilizing transactions
contained in the thirteenth paragraph under the caption "Underwriting."
(e) Promptly after receipt by an indemnified party under this
Section of notice of the commencement of any action, such indemnified party
will, if a claim in respect thereof is to be made against the indemnifying party
under subsection (a), (b) or (c) above, notify the indemnifying party of the
commencement thereof; but the omission so to notify the indemnifying party will
not relieve it from any liability which it may have to any indemnified party
otherwise than under subsection (a), (b) or (c) above.
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<PAGE>
In case any such action is brought against any indemnified party and it notifies
the indemnifying party of the commencement thereof, the indemnifying party will
be entitled to participate therein and, to the extent that it may wish, jointly
with any other indemnifying party similarly notified, to assume the defense
thereof, with counsel satisfactory to such indemnified party (who shall not,
except with the consent of the indemnified party, be counsel to the indemnifying
party), and after notice from the indemnifying party to such indemnified party
of its election so to assume the defense thereof, the indemnifying party will
not be liable to such indemnified party under this Section for any legal or
other expenses subsequently incurred by such indemnified party in connection
with the defense thereof other than reasonable costs of investigation. No
indemnifying party shall, without the prior written consent of the indemnified
party, effect any settlement of any pending or threatened action in respect of
which any indemnified party is or could have been a party and indemnity could
have been sought hereunder by such indemnified party unless such settlement (i)
includes an unconditional release of such indemnified party from all liability
on any claims that are the subject matter of such action and (ii) does not
include a statement as to, or an admission of, fault, culpability or a failure
to act by or on behalf of an indemnified party.
(f) If the indemnification provided for in this Section is
unavailable or insufficient to hold harmless an indemnified party under
subsection (a), (b) or (c) above, then each indemnifying party shall contribute
to the amount paid or payable by such indemnified party as a result of the
losses, claims, damages or liabilities referred to in subsection (a), (b) or (c)
above (i) in such proportion as is appropriate to reflect the relative benefits
received by the Company, the Senior Management and the Selling Stockholders on
the one hand and the Underwriters on the other from the offering of the
Securities or (ii) if the allocation provided by clause (i) above is not
permitted by applicable law, in such proportion as is appropriate to reflect not
only the relative benefits referred to in clause (i) above but also the relative
fault of the Company, the Senior Management and the Selling Stockholders on the
one hand and the Underwriters on the other in connection with the statements or
omissions which resulted in such losses, claims, damages or liabilities as well
as any other relevant equitable considerations. The relative benefits received
by the Company, the Senior Management and the Selling Stockholders on the one
hand and the Underwriters on the other shall be deemed to be in the same
proportion as the total gross proceeds from the offering (after deducting
discounts and commissions) received by the Company, the Senior Management and
the Selling Stockholders bear to the total underwriting discounts and
commissions received by the Underwriters. The relative fault shall be determined
by reference to, among other things, whether the untrue or alleged untrue
statement of a material fact or the omission or alleged omission to state a
material fact relates to information supplied by the Company, the Senior
Management and the Selling Stockholders or the Underwriters and the parties'
relative intent, knowledge, access to information and opportunity to correct or
prevent such untrue statement or omission. The amount paid by an indemnified
party as a result of the losses, claims, damages or liabilities referred to in
the first sentence of this subsection (e) shall be deemed to include any legal
or other expenses reasonably incurred by such indemnified party in connection
with investigating or defending any action or claim which is the subject of this
subsection (e). Notwithstanding the provisions of this subsection (e), no
Underwriter shall be required to contribute any amount in excess of the amount
by which the total price at which the Securities underwritten by it and
distributed to the public were offered to the public exceeds the amount of any
damages which such Underwriter has otherwise been required to pay by reason of
such untrue or alleged untrue statement or omission or alleged omission. No
person guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the Act) shall be entitled to contribution from any person who was not
guilty of such fraudulent misrepresentation. The Underwriters' obligations in
this subsection (e) to contribute are several in proportion to their respective
underwriting obligations and not joint.
(g) The obligations of the Company and the Selling Stockholders
under this Section shall be in addition to any liability which the Company and
the Selling Stockholders may otherwise have and shall extend, upon the same
terms and conditions, to each person, if any, who controls any Underwriter
within the meaning of the Act; and the obligations of the Underwriters under
this Section shall be in addition to any liability which the respective
Underwriters may otherwise have and shall extend, upon the same terms and
conditions, to each director of the Company, to each officer of the Company who
has signed
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<PAGE>
a Registration Statement and to each person, if any, who controls the Company
within the meaning of the Act.
8. Default of Underwriters. If any Underwriter or Underwriters default
in their obligations to purchase Offered Securities hereunder on either the
First or any Optional Closing Date and the aggregate number of shares of Offered
Securities that such defaulting Underwriter or Underwriters agreed but failed to
purchase does not exceed 10% of the total number of shares of Offered Securities
that the Underwriters are obligated to purchase on such Closing Date, CSFBC may
make arrangements satisfactory to the Company and the Selling Stockholders for
the purchase of such Offered Securities by other persons, including any of the
Underwriters, but if no such arrangements are made by such Closing Date, the
non-defaulting Underwriters shall be obligated severally, in proportion to their
respective commitments hereunder, to purchase the Offered Securities that such
defaulting Underwriters agreed but failed to purchase on such Closing Date. If
any Underwriter or Underwriters so default and the aggregate number of shares of
Offered Securities with respect to which such default or defaults occur exceeds
10% of the total number of shares of Offered Securities that the Underwriters
are obligated to purchase on such Closing Date and arrangements satisfactory to
CSFBC and the Company and the Selling Stockholders for the purchase of such
Offered Securities by other persons are not made within 36 hours after such
default, this Agreement will terminate without liability on the part of any non-
defaulting Underwriter, the Company or the Selling Stockholders, except as
provided in Section 9 (provided that if such default occurs with respect to
Optional Securities after the First Closing Date, this Agreement will not
terminate as to the Firm Securities or any Optional Securities purchased prior
to such termination). As used in this Agreement, the term "Underwriter" includes
any person substituted for an Underwriter under this Section. Nothing herein
will relieve a defaulting Underwriter from liability for its default.
9. Survival of Certain Representations and Obligations. The respective
indemnities, agreements, representations, warranties and other statements of the
Selling Stockholders, of the Company or its officers and of the several
Underwriters set forth in or made pursuant to this Agreement will remain in full
force and effect, regardless of any investigation, or statement as to the
results thereof, made by or on behalf of any Underwriter, any Selling
Stockholders the Company or any of their respective representatives, officers or
directors or any controlling person, and will survive delivery of and payment
for the Offered Securities. If this Agreement is terminated pursuant to Section
8 or if for any reason the purchase of the Offered Securities by the
Underwriters is not consummated, the Company and the Selling Stockholders shall
remain responsible for the expenses to be paid or reimbursed by them pursuant to
Section 5 and the respective obligations of the Company, the Selling
Stockholders and the Underwriters pursuant to Section 7 shall remain in effect,
and if any Offered Securities have been purchased hereunder the representations
and warranties in Section 2 and all obligations under Section 5 shall also
remain in effect. If the purchase of the Offered Securities by the Underwriters
is not consummated for any reason other than solely because of the termination
of this Agreement pursuant to Section 8 or the occurrence of any event specified
in clause (iii), (iv) or (v) of Section 6(c), the Company will reimburse the
Underwriters for all out-of-pocket expenses (including fees and disbursements of
counsel) reasonably incurred by them in connection with the offering of the
Offered Securities.
10. Notices. All communications hereunder will be in writing and, if sent
to the Underwriters, will be mailed, delivered or telegraphed and confirmed to
the Representatives c/o Credit Suisse First Boston Corporation, Eleven Madison
Avenue, New York, N.Y. 10010-3629, Attention: Investment Banking Department--
Transactions Advisory Group, or, if sent to the Company, will be mailed,
delivered or telegraphed and confirmed to it at 500 Ellis Street, Mountain View,
California 94043, Attention: Chief Executive Officer; provided, however, that
any notice to an Underwriter pursuant to Section 7 will be mailed, delivered or
telegraphed and confirmed to such Underwriter.
11. Successors. This Agreement will inure to the benefit of and be
binding upon the parties hereto and their respective personal representatives
and successors and the officers and directors and controlling persons referred
to in Section 7, and no other person will have any right or obligation
hereunder.
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<PAGE>
12. Representation of Underwriters. The Representatives will act for the
several Underwriters in connection with this financing, and any action under
this Agreement taken by the Representatives jointly or by CSFBC on behalf of the
Representatives will be binding upon all the Underwriters. JoMei Chang, Ph.D.
and/or Paul R. Auvil, III will act as attorneys-in-fact for the Selling
Stockholders in connection with such transactions, and any action under or in
respect of this Agreement taken by JoMei Chang, Ph.D. and/or Paul R. Auvil, III
in such capacity will be binding upon all the Selling Stockholders.
13. Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be deemed to be an original, but all such
counterparts shall together constitute one and the same Agreement.
14. Applicable Law. This Agreement shall be governed by, and construed in
accordance with, the laws of the State of New York, without regard to principles
of conflicts of laws.
The Company hereby submits to the non-exclusive jurisdiction of the Federal
and state courts in the Borough of Manhattan in The City of New York in any suit
or proceeding arising out of or relating to this Agreement or the transactions
contemplated hereby.
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<PAGE>
If the foregoing is in accordance with the Representatives' understanding
of our agreement, kindly sign and return to the Company one of the counterparts
hereof, whereupon it will become a binding agreement between the Company and the
several Underwriters in accordance with its terms.
Very truly yours,
Vitria Technology, Inc.
By:_______________________________________________
By:_______________________________________________
[___________________]
[___________________]
As Attorneys-in-Fact acting on behalf of each of
the Selling Stockholders named in Schedule A to
this Agreement.
The foregoing Underwriting Agreement is hereby
confirmed and accepted as of the date first above
written.
CREDIT SUISSE FIRST BOSTON CORPORATION
MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED
BANCBOSTON ROBERTSON STEPHENS, INC.
SOUNDVIEW TECHNOLOGY GROUP, INC.
Acting on behalf of themselves and as the
Representatives of the several
Underwriters
By: CREDIT SUISSE FIRST BOSTON CORPORATION
By:---------------------------------------
Title: Managing Director
-------------------------------------
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<PAGE>
SCHEDULE A
<TABLE>
<CAPTION>
Number of Number of
Firm Securities Optional Securities
Selling Stockholder To be Sold To be Sold
- -------------------------------------- ---------------------- ----------------------
<S> <C> <C>
===================================================================================================================================
Total
</TABLE>
-21-
<PAGE>
SCHEDULE B
<TABLE>
<CAPTION>
Number of
Underwriter Firm Securities
- --------------------------------------------------------------- -----------------
<S> <C>
Credit Suisse First Boston Corporation.......................
Merrill Lynch, Pierce, Fenner & Smith Incorporated...........
BancBoston Robertson Stephens Inc............................
SoundView Technology Group, Inc..............................
Total.........................................
</TABLE>
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<PAGE>
Exhibit 5.1
[COOLEY GODWARD LLP LETTERHEAD]
February 8, 2000
Vitria Technology, Inc. ERIC C. JENSEN
500 Ellis St. 650 843-5049
Mountain View, CA 94043 [email protected]
Ladies and Gentlemen:
You have requested our opinion with respect to certain matters in connection
with the filing by Vitria Technology, Inc., (the "Company"), of a Registration
Statement on Form S-1, as amended (the "Registration Statement"), with the
Securities and Exchange Commission (the "Commission"), covering an underwritten
public offering of up to 5,750,000 shares of Common Stock (the "Common Stock").
In connection with this opinion, we have (i) examined and relied upon the
Registration Statement and related Prospectus, the Company's Certificate of
Incorporation, as amended, and the Company's Bylaws, as amended, and the
originals or copies certified to our satisfaction of such records, documents,
certificates, memoranda and other instruments as in our judgment are necessary
or appropriate to enable us to render the opinion expressed below; and (ii)
assumed that the shares of the Common Stock will be sold by the Underwriters at
a price established by the Pricing Committee of the Board of Directors of the
Company.
On the basis of the foregoing, and in reliance thereon, we are of the opinion
that the Common Stock, when sold and issued in accordance with the Registration
Statement and related Prospectus, will be validly issued, fully paid and
nonassessable.
We consent to the reference to our firm under the caption "Legal Matters" in the
prospectus included in the Registration Statement and to the filing of this
opinion as an exhibit to the Registration Statement.
Very truly yours,
Cooley Godward LLP
By: /s/ Eric C. Jensen
__________________________
Eric C. Jensen
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in this Registration Statement on Form S-1 of
our report dated January 21, 2000, relating to the financial statements of
Vitria Technology Inc., which appears in such Registration Statement. We also
consent to the reference to us under the heading "Experts" in such Registration
Statement.
/s/ PricewaterhouseCoopers LLP
San Jose, California
February 7, 2000
