<PAGE>
Filed Pursuant to Rule 424(b)(3)
3,500,000 Shares Registration No. 333-80549
Active Software, Inc.
[LOGO OF ACTIVE SOFTWARE] Common Stock
----------------
This is an initial public offering of shares of common stock of Active
Software, Inc. All of the 3,500,000 shares of common stock are being sold by
Active Software.
Prior to this offering, there has been no public market for the common
stock. The common stock has been approved for quotation on the Nasdaq National
Market under the symbol "ASWX."
See "Risk Factors" beginning on page 7 to read about factors you should
consider before buying shares of the common stock.
----------------
Neither the Securities and Exchange Commission nor any other regulatory body
has approved or disapproved of these securities or passed upon the accuracy or
adequacy of this prospectus. Any representation to the contrary is a criminal
offense.
----------------
<TABLE>
<CAPTION>
Per
Share Total
------ -----------
<S> <C> <C>
Initial public offering price............................... $11.00 $38,500,000
Underwriting discount....................................... $ 0.77 $ 2,695,000
Proceeds, before expenses, to Active Software............... $10.23 $35,805,000
</TABLE>
To the extent that the underwriters sell more than 3,500,000 shares of
common stock, the underwriters have the option to purchase up to an additional
525,000 shares from Active Software at the initial public offering price less
the underwriting discount.
----------------
The underwriters expect to deliver the shares on August 18, 1999.
Goldman, Sachs & Co. Lehman Brothers
Dain Rauscher Wessels
a division of Dain Rauscher Incorporated
----------------
Prospectus dated August 12, 1999
<PAGE>
[Inside Front Cover]
Electronic Business Integration Software
[Stylized graphic of portion of a globe with rings circling the globe at
different angles. The rings are comprised of letters forming World Wide Web
addresses.]
[Active Software logo]
[Different colored blocks containing the words "Integration," "Scalability,"
"Security," "Real time" and "Solution."]
<PAGE>
PROSPECTUS SUMMARY
You should read the following summary together with the more detailed
information regarding Active Software and the financial statements and notes
appearing elsewhere in this prospectus. Unless otherwise indicated, this
prospectus assumes:
. our reincorporation in Delaware and a three-for-two stock split, which
were completed in July 1999 and August 1999, respectively,
. the automatic conversion of our outstanding convertible redeemable
preferred stock into common stock upon closing of the offering,
. the filing of our amended and restated certificate of incorporation,
authorizing a class of 5,000,000 shares of undesignated preferred stock,
upon closing of the offering, and
. no exercise by the underwriters of their option to purchase additional
shares of stock in the offering.
Active Software, Inc.
Our Business
We are a provider of software that enables the seamless exchange of
information among incompatible software applications used by an enterprise and
its customers, suppliers and partners. Our ActiveWorks Integration System
empowers our customers to become electronic businesses, conducting their
business operations and transactions electronically through the use of the
Internet and other networking technologies. As a result, our customers are able
to take advantage of their long-term investments in applications, systems and
technologies. Our software has been licensed across multiple industries to over
100 customers. We believe that our ActiveWorks Integration System provides
significant business benefits to our customers by allowing them to bring their
products and services to market faster, and respond more quickly and at a lower
cost to the evolving needs of their enterprises.
Our Market Opportunity
Companies today utilize a broad range of often incompatible software
applications for many key business functions. To take full advantage of this
significant investment, companies need to be able to integrate these
applications so that they operate seamlessly with one another. The explosive
emergence of the Internet has added another dimension to this challenge by
providing companies with the ability to conduct their business electronically.
We believe that companies today require an integration solution that fully
capitalizes on the benefits of Internet technologies. In addition, these
companies need a solution that is flexible and adaptable, provides key
functionality, such as security and integration management and monitoring, and
can be implemented quickly and easily. To address this need, we have developed
the ActiveWorks Integration System, which offers the following attributes:
. A comprehensive and highly reliable software solution that enables an
enterprise's disparate software applications to exchange information in
real time, both internally and across the enterprise's network of
customers, suppliers and partners.
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<PAGE>
. A broad portfolio of dynamic software components, called adapters, which
connect individual software applications to the ActiveWorks Integration
System and are readily configurable to meet constantly changing
application requirements and specifications.
. The flexibility to respond quickly and effectively to changes in the
customer's business with minimal custom programming.
. The ability to expand incrementally to match not only the number of
transactions processed by a customer's computer systems but also the
breadth of its network of customers, suppliers and partners.
. Built-in security features that allow information to be transmitted
securely across the customer's network of customers, suppliers and
partners.
. Efficient, easy-to-use and centralized management and monitoring of the
integration system and its components, resulting in a reduction of the
cost and time required for system-wide maintenance.
Our Strategy
Our mission is to establish the ActiveWorks Integration System as the
leading software solution for electronic business integration worldwide. Key
elements of this strategy include:
. Facilitating broad acceptance and deployment of the ActiveWorks
Integration System to establish it as the electronic business integration
software solution of choice across multiple industries.
. Enhancing our technological leadership through ongoing investment and
innovation.
. Expanding the capabilities of our products to provide our customers with
a complete electronic business integration solution.
. Leveraging our partnerships with system integrators and service,
distribution and marketing partners to provide a wide range of support
and implementation services to our customers.
. Continuing our commitment to customer satisfaction and providing our
customers with the highest quality products and services, directly and
through our partners.
Our ability to execute our strategy involves risks and uncertainties, some
of which are not within our control. For more information regarding these risks
and uncertainties, please see "Risk Factors."
Other Information
Our total revenues were $7.6 million and $8.7 million for 1998 and the six
months ended June 30, 1999, respectively, and our net loss was $9.9 million and
$5.3 million for the same periods. As of December 31, 1998 and June 30, 1999,
our total accumulated deficit was $17.7 million and $23.1 million,
respectively.
We were originally incorporated under the laws of California in September
1995 and reincorporated in Delaware in July 1999. Our principal executive
offices are located at 3333 Octavius Drive, Santa Clara, California, 95054, and
our telephone number is (408) 988-0414. The address of our Web site is
"www.activesw.com." Information contained on our Web site is not a part of this
prospectus.
The Active Software logo is a registered trademark of Active Software, Inc.,
and "Active Software," "ActiveWorks" and "ActiveWorks Integration System" are
trademarks of Active Software, Inc. This prospectus also contains brand names,
trademarks or service marks of companies other than Active Software, Inc., and
these brand names, trademarks and service marks are the property of their
respective holders.
4
<PAGE>
The Offering
<TABLE>
<S> <C>
Shares offered by Active
Software........................ 3,500,000 shares
Shares to be outstanding after
this offering................... 23,251,372 shares
Use of proceeds.................. To fund anticipated operating losses, working
capital and other general corporate purposes.
Nasdaq National Market symbol.... ASWX
</TABLE>
The above information is based on shares outstanding as of June 30, 1999 and
excludes:
. 3,222,149 shares issuable upon exercise of options outstanding at a
weighted average exercise price of $2.66 per share as of June 30, 1999,
. 215,676 shares issuable upon exercise of warrants outstanding at a
weighted average exercise price of $1.31 per share as of June 30, 1999,
and
. a total of 4,231,812 shares available for future issuance under our
various stock plans.
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<PAGE>
Summary Consolidated Financial Information
(in thousands, except per share data)
The following table sets forth a summary of our consolidated statements of
operations data for the periods presented. The pro forma information in the
following table gives effect to the automatic conversion of all outstanding
shares of our convertible redeemable preferred stock into common stock upon the
closing of this offering. In connection with this offering, the 1998
consolidated financial statements have been restated to reflect the revised
value of warrants issued to non-employees for services rendered and deferred
compensation relating to issuance of options to employees. See Note 11 to the
1998 consolidated financial statements.
<TABLE>
<CAPTION>
Six Months
Sept. 19, 1995 Year Ended December 31, Ended June 30,
(Inception) to ------------------------- ----------------
Dec. 31, 1995 1996 1997 1998 1998 1999
-------------- ------- ------- ------- ------- -------
Consolidated Statements of
Operations Data:
<S> <C> <C> <C> <C> <C> <C>
Revenues:
License................. $ -- $ 280 $ 2,625 $ 5,900 $ 1,955 $ 5,922
Service................. 25 5 568 1,699 454 2,746
------- ------- ------- ------- ------- -------
Total revenues........ 25 285 3,193 7,599 2,409 8,668
Gross profit.............. 15 114 2,540 4,832 1,856 5,399
Operating expenses........ 142 3,030 7,522 15,045 6,381 10,790
Loss from operations...... (127) (2,916) (4,982) (10,213) (4,525) (5,391)
Net loss.................. (133) (2,814) (4,853) (9,942) (4,433) (5,342)
======= ======= ======= ======= ======= =======
Basic and diluted net loss
per share................ $(10.23) $ (6.59) $ (2.50) $ (3.21) $ (1.34) $ (1.08)
======= ======= ======= ======= ======= =======
Shares used in computing
basic and diluted net
loss per share........... 13 427 1,945 3,096 3,301 4,962
======= ======= ======= ======= ======= =======
Pro forma basic and
diluted net loss per
share.................... $ (0.64) $ (0.29)
======= =======
Shares used in computing
pro forma basic and
diluted net loss per
share.................... 15,457 18,367
======= =======
</TABLE>
The following table sets forth a summary of our consolidated balance sheet
at June 30, 1999:
. on an actual basis;
. on a pro forma basis to give effect to the automatic conversion of all
shares outstanding of our convertible redeemable preferred stock into
common stock upon the closing of this offering; and
. on a pro forma as adjusted basis to reflect the conversion of the
convertible redeemable preferred stock and our receipt of the estimated
net proceeds from the sale of 3,500,000 shares of common stock in this
offering.
<TABLE>
<CAPTION>
As of June 30, 1999
--------------------------------
Pro Forma
Actual Pro Forma As Adjusted
-------- --------- ------------
<S> <C> <C> <C>
Consolidated Balance Sheet Data:
Cash and cash equivalents...................... $ 6,729 $ 6,729 $41,434
Working capital................................ 2,198 2,198 36,903
Total assets................................... 13,207 13,207 47,912
Notes payable, less current portion............ 59 59 59
Convertible redeemable preferred stock......... 25,117 -- --
Total stockholders' equity (deficiency)........ (21,096) 4,021 38,726
</TABLE>
6
<PAGE>
RISK FACTORS
You should carefully consider the following risks before making a decision
to buy our common stock. You should also refer to the other information set
forth in this prospectus, including the discussions set forth in "Special Note
Regarding Forward-Looking Statements," "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Business," as well as our
consolidated financial statements and the related notes.
We only began selling our products in August 1996 and, as a result, you may
have difficulty evaluating our business and operating results.
We have a limited operating history and cannot be certain that our business
strategy will be successful. We were incorporated in September 1995 and
commercially released our first software product in August 1996. An investor in
our common stock must consider the risks and difficulties frequently
encountered by early stage companies in new and rapidly evolving markets such
as the electronic business integration software market, including:
. our substantial dependence on our ActiveWorks software products, from
which we derive substantially all of our revenues and which have limited
market acceptance to date;
. our need to introduce new software products and services to respond to
technological and competitive developments and customer needs;
. our ability to manage our anticipated growth;
. our need to expand our distribution capability through our direct sales
organization and through third party distributors and system integrators;
. our ability to respond to competitive developments;
. the market's acceptance of electronic business integration; and
. our dependence on our current executive officers and key employees.
We have a history of losses, we expect future losses, and we may not achieve or
maintain profitability.
We have incurred net losses in each fiscal quarter since our inception and
do not expect to achieve profitability in the foreseeable future. We incurred
net losses of $9.9 million in 1998 and $5.3 million in the six months ended
June 30, 1999, and, as of June 30, 1999, we had an accumulated deficit of
approximately $23.1 million. We cannot assure you that our revenues will grow
or that we will achieve or maintain profitability in the future. In addition,
we intend to significantly increase our future product development, sales and
marketing, and administrative expenses over the next 18 months. Accordingly, we
will need to significantly increase revenue to achieve and maintain
profitability. Our ability to increase revenue and achieve profitability will
be affected by the other risks and uncertainties described in this section and
in "Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Our operating results are subject to fluctuations and seasonality and, if we
fail to meet the expectations of securities analysts or investors, our stock
price could decline significantly.
Our operating results are difficult to predict, and we believe that period-
to-period comparisons of our operating results will not necessarily be
meaningful. As a result, you should not rely upon them as an indication of
future performance. Our future quarterly operating results may fluctuate and
may not meet the expectations of securities analysts or investors. If this
occurs, the price of our common
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<PAGE>
stock would likely decline. The factors that may cause fluctuations of our
operating results include the following:
. the size, timing and contractual terms of sales of our products and
services due to the long and unpredictable sales cycle for our products;
. technical difficulties in our software that could delay product shipments
or increase the costs of introducing new products;
. introductions of new products or new versions of existing products by us
or our competitors;
. changes in the pricing of our products and services or those of our
competitors;
. our ability and the ability of our partners to implement electronic
business integration solutions for our customers;
. changes in our mix of revenues generated from product sales and services;
. changes in our mix of sales channels through which our products and
services are sold; and
. the fixed nature of our operating expenses, such as base compensation and
rent.
In addition, we expect to experience seasonality in the sales of our
software products. For example, we expect that sales may decline during summer
months, particularly in European markets. We also anticipate that sales may be
lower in our first fiscal quarter due to patterns in the capital budgeting and
purchasing cycles of our current and prospective customers. These seasonal
variations in our sales may lead to fluctuations in our quarterly operating
results. Furthermore, it is difficult for us to evaluate the degree to which
this seasonality may affect our business because our growth may have largely
overshadowed this seasonality in recent periods. In addition, concerns
regarding year 2000 compliance issues may adversely affect the demand for
software products like ours if our customers divert resources to address year
2000 issues.
Because our revenues are dependent on sales of our ActiveWorks software
products, our business could be materially harmed by factors that adversely
affect the pricing and demand for these products.
We currently derive substantially all of our revenues from the sale of our
ActiveWorks Integration System software products and related services. We
expect revenues from this product family to continue to account for
substantially all of our future revenues. As a result, factors adversely
affecting the pricing of or demand for our ActiveWorks software products, such
as competition and technological change, could materially harm our business.
Because a small number of customers account for a substantial portion of our
revenues, our revenues could suffer if we lose a major customer.
We have generated a substantial portion of our annual and quarterly
historical revenues from a limited number of customers. As a result, if we lose
a major customer, our revenues could suffer. In 1997, The Boeing Company
accounted for 33% of our total revenues. In 1998, no customer accounted for
more than 10% of our total revenues. For the six months ended June 30, 1999,
Level 3 Communications and the National Security Agency accounted for 16% and
13% of our total revenues, respectively. We expect that a small number of
customers will continue to account for a substantial portion of our revenues in
any given quarter for the foreseeable future. See "Business--Customers" for
additional information about our customers and quantitative information
relating to our dependence on these customers.
We need to expand our sales and distribution channels, and, if we fail to do
so, our growth could be limited.
We will need to significantly expand our direct and indirect sales
operations in order to increase market awareness of our ActiveWorks software
products and to generate increased revenue. We
8
<PAGE>
have recently expanded our direct sales force and plan to recruit additional
sales personnel. As of June 30, 1999, we employed approximately 51 individuals
in our sales and marketing organization. Currently, we believe we will need to
expand our sales organization by more than 100% of its present size over the
next 18 months. New sales personnel will require training and take time to
achieve full productivity. There is strong competition for qualified sales
personnel in our business, and we may not be able to attract and retain
sufficient new sales personnel to expand our operations. In addition, we
believe that our future success is dependent upon expansion of our indirect
distribution channel, which consists of our relationships with a variety of
distribution partners such as system integrators, independent software vendors
and value added resellers. To date, we have relationships with only a limited
number of these partners. We cannot be certain that we will be able to
establish relationships with additional distribution partners on a timely
basis, or at all, or that these distribution partners will devote adequate
resources to promoting or selling our products. In addition, we may also face
potential conflicts between our direct sales force and third-party reselling
efforts.
We rely on system integrators and other strategic relationships to implement
and promote our software products and, if these relationships fail, our
business could be harmed.
We have entered into relationships with third-party system integrators, as
well as with hardware platform and software applications developers and service
providers. We have derived, and anticipate that we will continue to derive, a
significant portion of our revenues from customers that purchase products or
services from our partners. In most cases, the partner refers the customer to
us, and we enter into a software license agreement directly with the customer.
Our future growth will be limited if we fail to work effectively with our
partners or fail to grow our base of these types of partners.
Our partners are not required to market or promote our products and
generally are not restricted from working with competing software companies.
Accordingly, our success will depend on their willingness and ability to devote
sufficient resources and efforts to marketing our ActiveWorks software products
rather than the products of others. If these relationships fail, we will have
to devote substantially more resources to the distribution, sales and
marketing, implementation and support of our products than we would otherwise,
and our efforts may not be as effective as those of our partners, which would
harm our business.
The ActiveWorks Integration System must integrate with applications made by
third parties, and, if we lose access to the programming interfaces for these
applications, or if we are unable to modify our products or develop new
products in response to changes in these applications, our business could
suffer.
Our ActiveWorks Integration System uses software components called adapters
to communicate with our customers' enterprise applications. Our ability to
develop these adapters is largely dependent on our ability to gain access to
the application programming interfaces, or APIs, for the applications, and we
may not have access to necessary APIs in the future. APIs are written and
controlled by the application provider. Accordingly, if an application provider
becomes a competitor by entering the electronic business integration market, it
could restrict our access to its APIs for competitive reasons. Our business
could suffer if we are unable to gain access to these APIs. Furthermore, we may
need to modify our ActiveWorks software products or develop new adapters in the
future as new applications or newer versions of existing applications are
introduced. If we fail to continue to develop adapters or respond to new
applications or newer versions of existing applications, our business could
suffer.
9
<PAGE>
We rely in part on third parties to develop adapters necessary for the
integration of applications using our ActiveWorks Integration System, and we
cannot be certain that these companies will continue to develop these adapters
or that these adapters will be free of defects.
A core element of our strategy is to enable third parties to develop
adapters that operate with our ActiveWorks Integration System. If these third
parties are unable or unwilling to develop these adapters, we may need to
develop them internally, which would require us to divert financial and
technical resources to these efforts. In addition, we cannot be certain that
adapters developed by third parties will not contain undetected errors or
defects, which could harm our reputation, result in product liability or
decrease the market acceptance of our products.
The electronic business integration market is in an early stage of development,
and electronic business integration software products, including our
ActiveWorks software products, may not achieve market acceptance.
The market for electronic business integration software is relatively new
and rapidly evolving, and there is a variety of integration methods available.
We do not know if our target markets will widely adopt and deploy electronic
business integration products such as our ActiveWorks software products. If
electronic business integration products such as our ActiveWorks software
products are not widely adopted by our target markets, our business will
suffer.
Our products are complex and generally involve capital expenditures by our
customers in excess of $200,000. We do not have a long history of selling our
products and will have to devote substantial resources to educate prospective
customers about the benefits of our ActiveWorks software products. Our efforts
to educate potential customers may not result in our products achieving market
acceptance. In addition, many of these prospective customers have made
significant investments in internally-developed or custom systems and would
incur significant costs in switching to third-party products such as ours.
Furthermore, even if our products are effective, our target customers may not
choose them for technical, cost, support or other reasons. If the market for
our products fails to grow or grows more slowly than we anticipate, our
business could suffer.
Because market participants in some markets have adopted industry-specific
technologies, we may need to expend significant resources in order to address
specific markets.
Our strategy is to develop our ActiveWorks integration software to be
broadly applicable to many industries. However, in some markets, market
participants have adopted core technologies that are specific to their markets.
For example, many companies in the healthcare and financial services industries
have adopted industry-specific protocols for the interchange of information. In
order to successfully sell our products to companies in these markets, we may
need to expand or enhance our products to adapt to these industry-specific
technologies, which could be costly and require the diversion of engineering
resources.
Competition in the electronic business integration software market is intense,
and, if we are unable to compete effectively, the demand for, or the prices of,
our products may be reduced.
The electronic business integration software market is extremely competitive
and subject to rapid change. We compete with various providers of application
integration solutions, including CrossWorlds, New Era of Networks, Software
Technologies Corporation and Vitria. In addition, a number of other companies
are offering products and services that address specific aspects of application
integration, including IBM, BEA Systems, Inc. and TIBCO Software Inc. We also
face competition for some aspects of our product and service offerings from
major system integrators, both independently and in conjunction with corporate
in-house information technology departments, which have traditionally been the
prevalent resource for application integration. We expect additional
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<PAGE>
competition from other established and emerging companies. Furthermore, our
competitors may combine with each other, and other companies may enter our
markets by acquiring or entering into strategic relationships with our
competitors.
Many of our current and potential competitors have longer operating
histories, significantly greater financial, technical, product development and
marketing resources, greater name recognition and larger customer bases than we
do. Our present or future competitors may be able to develop products
comparable or superior to those we offer, adapt more quickly than we do to new
technologies, evolving industry trends or customer requirements, or devote
greater resources to the development, promotion and sale of their products than
we do. Accordingly, we may not be able to compete effectively in our markets,
competition may intensify and future competition may harm our business. See
"Business--Competition" for additional information relating to the competitive
disadvantages we face in competing for product sales.
Our recent growth has placed a significant strain on our management, systems
and resources, and we may experience difficulties managing our expected growth.
We have been experiencing a period of rapid growth over recent years. Our
total revenues have grown from approximately $285,000 during 1996 to $7.6
million during 1998. The number of our employees has grown from approximately
48 at the end of 1997 to 120 as of June 30, 1999. This growth has placed, and
we expect that any future growth we experience will continue to place, a
significant strain on our management, systems and resources. To manage the
anticipated growth of our operations, we will be required to:
. improve existing and implement new operational, financial and management
information controls, reporting systems and procedures;
. hire, train and manage additional qualified personnel; and
. manage our relationships with our customers, suppliers and partners.
In particular, we expect to implement a new financial and accounting
management information system during the next six months. We may not be able to
install management information and control systems in an efficient and timely
manner, and our current or planned personnel, systems, procedures and controls
may not be adequate to support our future operations.
In the future, we may experience difficulties meeting the demand for our
products and services. The installation and use of our products sometimes
requires implementation services, which are provided to our customers either by
us or by our partners. Our growth could be limited if we or our partners are
unable to provide these implementation services to our customers in a timely
manner. In addition, our management team may not be able to achieve the rapid
execution necessary to fully exploit the market for our products and services.
Any failure to manage growth effectively could materially harm our business.
We rely on the services of our founders and other key personnel, whose
knowledge of our business and technical expertise would be extremely difficult
to replace.
Our future success depends, to a significant degree, on the continued
services of our founders, R. James Green and Rafael Bracho, as well as other
key management, sales and technical personnel. Our officers and key employees
are not bound by employment agreements, and we do not maintain life insurance
policies on any of our employees. The loss of services of any of these
employees for any reason could harm our business. Given our early stage of
development, we are dependent on our ability to attract, retain and motivate
high caliber personnel, and we may not be able to recruit and retain additional
qualified personnel. Competition for qualified personnel in the software
industry and in the San Francisco Bay area, as well as other markets in which
we recruit, is extremely intense and characterized by rapidly increasing
salaries, which may increase our operating expenses or hinder our ability to
recruit qualified candidates.
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Rapid technological change in the electronic business integration software
market could cause our products to become obsolete or require us to redesign
our products.
The electronic business integration software market is characterized by
rapid technological change, frequent new product introductions, changes in the
enterprise software applications used by our customers and emerging industry
standards, particularly those related to electronic commerce. We also expect
that the rapid evolution of Internet-based applications and standards, as well
as general technology trends such as changes in or introductions of operating
systems, will require us to adapt our software products to remain competitive.
Our products could become obsolete and unmarketable if we are unable to adapt
to new technologies or standards.
To be successful, we will need to develop and introduce new products and
product enhancements that respond to technological changes or evolving industry
standards in a timely manner and on a cost-effective basis. We cannot assure
you that we will successfully develop these types of products and product
enhancements or that our products will achieve broad market acceptance. Our
failure to respond in a timely and cost-effective manner to new and evolving
technologies could adversely impact our business.
Because our products incorporate technology licensed to us from third parties,
the loss of our right to use this licensed technology could harm our business.
We license technology that is incorporated into our products from third
parties, including security software from SPYRUS. Any significant interruption
in the supply or support of any licensed software could adversely affect our
sales, unless and until we can replace the functionality provided by this
licensed software. Because our products incorporate software developed and
maintained by third parties, we depend on these third parties to deliver and
support reliable products, enhance their current products, develop new products
on a timely and cost-effective basis and respond to emerging industry standards
and other technological changes. The failure of these third parties to meet
these criteria could harm our business.
Our sales cycle is lengthy and unpredictable and may cause our operating
results to fluctuate, which could result in volatility in the price of our
stock.
The typical sales cycle of our ActiveWorks Integration System is lengthy and
unpredictable and involves significant capital investment decisions by
prospective customers, as well as our education of potential customers
regarding the benefits of our ActiveWorks software products. Any delay in sales
of our products could cause our operating results to vary significantly from
quarter to quarter, which could result in volatility in our stock price. Many
of our prospective customers have neither set aside money to purchase
electronic business integration software nor dedicated specific personnel for
the procurement and implementation of these software products. As a result,
before purchasing our products, our customers spend a substantial amount of
time performing internal reviews and obtaining capital expenditure approvals.
Currently, the time to receive an initial order from a customer from the time
we first contact the customer may range from six to nine months, with
enterprise-wide deployment occurring over a longer period of time. This cycle
may lengthen in the future. The emerging and evolving nature of the electronic
business integration software market may cause prospective customers to
postpone their purchase decisions. In addition, general concerns regarding year
2000 compliance may further delay purchase decisions by prospective customers.
Because our strategy to expand our international operations is subject to
uncertainties, we may not be able to enter new international markets or
generate significant revenues from those markets in which we currently operate.
To date, we have generated less than 5% of our revenues from sales of our
products in international markets and have little experience with international
operations and localization of our products for foreign markets. We intend to
continue to expand our international operations and enter
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new international markets, which will require significant management attention
and financial resources. Our international operations are subject to a number
of risks and uncertainties, including:
. the difficulties and costs of staffing and managing foreign operations;
. our ability to establish relationships with system integrators and
service, distribution and marketing partners and the performance of these
partners in selling our products;
. the difficulties and costs of localizing products for foreign markets,
including the development of multilingual capabilities in our products;
. unexpected changes in regulatory requirements;
. legal uncertainties regarding liability, export and import restrictions,
tariffs and other trade barriers;
. reduced protection of intellectual property in other countries;
. increased difficulty in collecting delinquent or unpaid accounts;
. fluctuations in the value of the U.S. dollar relative to other
currencies;
. potentially adverse tax consequences; and
. political and economic instability.
Any of these factors could impair our ability to expand our international
operations into these markets or to generate significant revenues from those
markets in which we operate.
Our software products are complex and may contain unknown defects that could
harm our reputation, result in product liability or decrease market acceptance
of our products.
Our software products are complex and include software that is internally
developed and licensed from third parties. These software products may contain
errors or defects, particularly when first introduced or when new versions or
enhancements are released. Although we have not experienced any material
software defects to date, these defects could cause our customers to experience
severe system failures. Because our customers depend on our software for their
critical systems and business functions, any interruptions could:
. damage our reputation;
. cause our customers to initiate product liability suits against us;
. increase our product development costs;
. divert our product development resources;
. cause us to lose sales; or
. delay market acceptance of our products.
Although we conduct extensive testing, we may not discover software defects
that affect our current or new products or enhancements until after they are
sold. Furthermore, because our ActiveWorks software products are designed to
work in conjunction with a wide variety of applications, we are unable to test
our products with all of these applications.
13
<PAGE>
Because our products could interfere with the operations of our customers'
other software applications, we may be subject to potential product liability
and warranty claims by these customers, which may be costly and may not be
adequately covered by insurance.
Our ActiveWorks products are integrated with our customers' networks and
software applications. The sale and support of our products may entail the risk
of product liability or warranty claims based on damage to these networks or
applications. In addition, the failure of our products to perform to customer
expectations could give rise to warranty claims. Any of these claims, even if
not meritorious, could result in costly litigation or divert management's
attention and resources. Although we carry general liability insurance, our
current insurance coverage would likely be insufficient to protect us from all
liability that may be imposed under these types of claims.
Our year 2000 compliance efforts could be costly and time-consuming, and our
business could suffer if we or our customers do not adequately address year
2000 risks.
Many currently installed computer systems are not capable of distinguishing
21st century dates from 20th century dates. As a result, beginning on January
1, 2000, computer systems and software used by many companies and organizations
in a wide variety of industries, including technology, transportation,
utilities, finance and telecommunications, will produce erroneous results or
fail unless they have been modified or upgraded to process date information
correctly.
Our software products could fail due to processing errors caused by
inaccurate calculations with respect to the year 2000. In addition, third party
hardware and software used with our software products could experience year
2000 compliance problems which are wrongly attributed to us, or our customers,
partners or suppliers could experience year 2000 compliance problems. The
occurrence of any of these events could result in delays or losses of revenues,
diversion of our resources, damage to our reputation, increased service and
warranty costs and litigation costs.
Our year 2000 compliance efforts may also involve significant time and
expense, and uncorrected problems could harm our business. We may also
experience reduced sales of our products as potential customers reduce their
budgets for electronic business integration products due to increased
expenditures on their own year 2000 compliance efforts. For a further
discussion of year 2000 issues, see "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Year 2000."
Our intellectual property could be used by others without our consent because
protection of our intellectual property is limited.
We rely primarily on a combination of copyrights, trademarks, trade secret
laws and contractual obligations with employees and third parties to protect
our proprietary rights. We do not currently own any issued patents, and other
protection of our intellectual property is limited. Despite our efforts to
protect our proprietary rights, unauthorized parties may copy aspects of our
products and obtain and use information that we regard as proprietary. In
addition, other parties may breach confidentiality agreements or other
protective contracts we have entered into, and we may not be able to enforce
our rights in the event of these breaches. Furthermore, we expect that we will
increase our international operations in the future, and the laws of many
foreign countries do not protect our intellectual property rights to the same
extent as the laws of the United States. For more information regarding our
intellectual property, see "Business--Proprietary Rights."
Our products may infringe the intellectual property rights of others, and
resulting claims against us could be costly and require us to enter into
disadvantageous license or royalty arrangements.
The software industry is characterized by the existence of a large number of
patents and frequent litigation based on allegations of patent infringement and
the violation of other intellectual
14
<PAGE>
property rights. Although we attempt to avoid infringing known proprietary
rights of third parties in our product development efforts, we expect that we
may be subject to legal proceedings and claims for alleged infringement by us
or our licensees of third party proprietary rights, such as patents, trademarks
or copyrights, from time to time in the ordinary course of business. Any claims
relating to the infringement of third party proprietary rights, even if not
meritorious, could result in costly litigation, divert management's attention
and resources, or require us to enter into royalty or license agreements which
are not advantageous to us. In addition, parties making these claims may be
able to obtain an injunction, which could prevent us from selling our products
in the United States or abroad. Any of these results could harm our business.
We may increasingly be subject to infringement claims as the number of products
and competitors in our industry grows and functionalities of products overlap.
Furthermore, former employers of our current and future employees may assert
that our employees have improperly disclosed confidential or proprietary
information to us. For more information concerning the risk of infringement,
see "Business--Proprietary Rights."
Because there has been no prior market for our stock, and the market for stocks
of technology companies has experienced extreme price and volume fluctuations,
our stock price may be volatile, which could adversely affect your investment.
Prior to this offering, there has been no public market for our common
stock. The price of the common stock that will prevail in the market after this
offering may be higher or lower than the price you pay. An active public market
for our common stock may not develop or be sustained after this offering. If
you purchase shares of common stock in this offering, you will pay a price that
was not established in a competitive market. Rather, you will pay the price
that we negotiated with the representatives of the underwriters. Many factors
could cause the market price of our common stock to rise and fall. Some of
these factors are:
. variations in our quarterly results;
. announcements of technological innovations by us or by our competitors;
. introductions of new products or new pricing policies by us or by our
competitors;
. acquisitions or strategic alliances by us or by our competitors;
. recruitment or departure of key personnel;
. the gain or loss of significant orders;
. concerns over year 2000 issues;
. changes in the estimates of our operating performance or changes in
recommendations by securities analysts; and
. market conditions in the industry and the economy as a whole.
In addition, the market for stocks of technology and Internet-related
companies has experienced extreme price and volume fluctuations that often have
been unrelated to these companies' operating performance. These fluctuations
could lower the market price of our common stock regardless of our actual
operating performance.
In the past, securities class action litigation has often been brought
against a company following a period of volatility in the market price of its
securities. 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, which could harm our business.
15
<PAGE>
Our officers, directors and affiliated entities own a large percentage of our
voting stock and could significantly influence the outcome of actions requiring
stockholder approval.
Upon completion of this offering, executive officers and directors, as well
as their respective affiliates, will beneficially own a total of approximately
38% 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 concentration of ownership may delay, deter or prevent
transactions that would result in a change of control, which in turn could
reduce the market price of our common stock.
Our certificate of incorporation, bylaws and Delaware law contain provisions
that could discourage or prevent a takeover, even if an acquisition would be
beneficial to our stockholders.
Provisions of our certificate of incorporation, bylaws and Delaware law may
discourage, delay or prevent a merger or acquisition that some stockholders may
consider favorable. These provisions, which are more fully described in
"Description of Capital Stock--Anti-Takeover Provisions of Charter Documents
and Delaware Law," include:
. authorizing our board of directors to issue additional preferred stock;
. limiting the persons who may call special meetings of stockholders;
. prohibiting stockholder action by written consent;
. establishing advance notice requirements for nominations for election of
our board of directors or for proposing matters that can be acted on by
stockholders at stockholder meetings;
. prohibiting cumulative voting in the election of directors; and
. establishing a classified board of directors.
A total of 19,751,372, or 85%, of our total outstanding shares are restricted
from immediate resale but may be sold into the market in the near future. This
could cause the market price of our common stock to drop significantly, even if
our business is doing well.
After this offering, we will have outstanding 23,251,372 shares of common
stock. This includes 3,500,000 shares that we are selling in the offering,
which may be resold immediately in the public market. The remaining 19,751,372
shares will become eligible for resale in the public market as shown in the
table below.
<TABLE>
<CAPTION>
Number of shares/
% of total
outstanding Date of availability for resale into public
after the offering market
------------------ -------------------------------------------
<S> <C>
16,875,848 / 73% 180 days after the date of this prospectus
due to an agreement these stockholders have
with Active Software and the underwriters.
However, the underwriters can waive this
restriction and allow these stockholders to
sell their shares at any time. 11,766,953 of
these shares will be subject to sales volume
limitations under the federal securities
laws.
2,875,524 / 12% Between 180 days and 365 days after the date
of this prospectus due to the requirements of
federal securities laws.
</TABLE>
16
<PAGE>
You will experience immediate and substantial dilution in the net tangible book
value of the shares you purchase.
If you purchase shares of common stock in this offering, you will experience
immediate and substantial dilution of $9.33 per share, based on the initial
public offering price of $11.00 per share. This dilution is in large part
because our earlier investors paid substantially less than the public offering
price when they purchased their shares of common stock. You will experience
additional dilution upon the exercise of outstanding stock options or warrants
to purchase our common stock.
Our management and board of directors have broad discretion to use the offering
proceeds.
We have not designated any specific use for the net proceeds of this
offering. We expect to use the proceeds primarily for working capital and other
general corporate purposes. As a result, our management and board of directors
will have broad discretion in spending the proceeds of this offering.
Some shares in this offering may have been offered in violation of the
Securities Act of 1933, which could give purchasers of these shares the right
to seek refunds or damages.
Prior to the effectiveness of our registration statement for this offering,
we sent a letter and other written materials to approximately 219 employees and
friends of Active Software whom we had designated as potential purchasers of up
to 200,000 shares of common stock in a directed share program in connection
with this offering. These materials requested that the recipients send an
indication of interest to Lehman Brothers Inc. These materials were not
accompanied by a preliminary prospectus and may have constituted a prospectus
that does not meet the requirements of the Securities Act of 1933. The mailing
of these materials was promptly followed by a letter advising recipients that
they could indicate an interest in purchasing shares only after they had
received a preliminary prospectus. If the mailing of these original materials
did constitute a violation of the Securities Act of 1933, the recipients of the
letter who purchased common stock in this offering could have the right, for a
period of one year from the date of their purchase of common stock, to obtain
recovery of the consideration paid in connection with their purchase of common
stock or, if they had already sold the stock, sue us for damages resulting from
their purchase of common stock. These refunds or damages could total up to
approximately $2.2 million, based on the initial public offering price of
$11.00 per share, in the event that investors suffer a total loss of their
investment during this period and seek refunds or damages. If this were to
occur, our business, results of operations and financial condition could
suffer.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus, including the sections entitled "Prospectus Summary," "Risk
Factors," "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Business," contains forward-looking statements.
These statements relate to future events or our future financial performance,
and involve known and unknown risks, uncertainties and other 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 of
activity, performance or achievements expressed or implied by these forward-
looking statements. In some cases, you can identify forward-looking statements
by terminology such as "may," "will," "should," "expects," "plans,"
"anticipates," "believes," "estimates," "predicts," "potential," "continue" or
the negative of these terms or other comparable terminology. These statements
are only predictions. Actual events or results may differ materially. In
evaluating these statements, you should specifically consider various factors,
including the risks outlined in "Risk Factors." These factors may cause our
actual results to differ materially from any forward-looking statement.
17
<PAGE>
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.
USE OF PROCEEDS
The net proceeds to us from the sale of the 3,500,000 shares of common stock
being offered by us are estimated to be approximately $34.7 million, or
approximately $40.1 million if the underwriters' over-allotment option is
exercised in full. This estimate is based on the public offering price of
$11.00 per share, after deducting the underwriting discounts and commissions
and the estimated offering expenses.
The principal purposes of this offering are to fund our anticipated
operating losses, increase our working capital, create a public market for our
common stock, facilitate our future access to the public capital markets and
increase our visibility in our markets. We intend to use the net proceeds of
this offering primarily for working capital to fund our expected losses and
other general corporate purposes. Furthermore, we expect to use a portion of
the proceeds for capital expenditures, which are expected to be at least $1.5
million in 1999. We may also use a portion of the net proceeds to acquire
additional businesses, products and technologies or to establish joint ventures
that we believe will complement our current or future business. However, we
have no specific plans, agreements or commitments to do so and are not
currently engaged in any negotiations for any acquisitions or joint ventures.
The amounts that we actually expend for working capital 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. For a more
detailed discussion of our anticipated future losses and fluctuations in
operating results, see "Risk Factors--We have a history of losses, we expect
future losses, and we may not achieve or maintain profitability" and "--Our
operating results are subject to fluctuations and seasonality and, if we fail
to meet the expectations of securities analysts or investors, our stock price
could decline significantly." As a result, we will retain broad discretion in
the allocation of the net proceeds of this offering. Pending these uses, we
will invest the net proceeds in short-term, interest-bearing, investment-grade
securities.
DIVIDEND POLICY
We have never declared or paid cash dividends on our common stock. We
currently intend to retain any future earnings to fund the development and
growth of our business. Therefore, we do not currently anticipate paying any
cash dividends in the foreseeable future.
18
<PAGE>
CAPITALIZATION
The following table sets forth our capitalization as of June 30, 1999. Our
capitalization is presented:
. on an actual basis;
. on a pro forma basis to give effect to the automatic conversion of all
outstanding shares of our convertible redeemable preferred stock into
common stock upon the closing of this offering; and
. on a pro forma as adjusted basis to reflect the conversion of the
convertible redeemable preferred stock and our receipt of the estimated
net proceeds from the sale of 3,500,000 shares of common stock in this
offering.
<TABLE>
<CAPTION>
As of June 30, 1999
--------------------------------
Pro Forma
Actual Pro Forma As Adjusted
-------- --------- -----------
(in thousands)
<S> <C> <C> <C>
Current portion of notes payable............... $ 105 $ 105 $ 105
Notes payable, less current portion............ 59 59 59
Convertible redeemable preferred stock,
13,405,500 shares authorized, 13,405,332
shares issued and outstanding, actual; none
authorized, issued or outstanding, pro forma
and pro forma as adjusted..................... 25,117 -- --
Stockholders' equity (deficiency):
Preferred stock, no shares authorized, issued
and outstanding, actual and pro forma;
5,000,000 shares authorized, none issued or
outstanding, pro forma as adjusted.......... -- -- --
Common stock, 30,000,000 shares authorized,
actual and pro forma, 6,346,040 shares
issued and outstanding, actual; 19,751,372
shares issued and outstanding, pro forma;
100,000,000 shares authorized, 23,251,372
shares issued and outstanding, pro forma as
adjusted.................................... 6,132 31,249 65,954
Deferred stock compensation.................. (4,135) (4,135) (4,135)
Notes receivable from stockholders........... (9) (9) (9)
Accumulated deficit.......................... (23,084) (23,084) (23,084)
-------- -------- --------
Total stockholders' equity (deficiency).... (21,096) 4,021 38,726
-------- -------- --------
Total capitalization....................... $ 4,185 $ 4,185 $ 38,890
======== ======== ========
</TABLE>
In addition to the shares of common stock to be outstanding after the
offering, we may issue additional shares of common stock under the following
plans and arrangements:
. 3,222,149 shares issuable upon exercise of options outstanding at a
weighted average exercise price of $2.66 per share as of June 30, 1999,
. 215,676 shares issuable upon exercise of warrants outstanding at a
weighted average exercise price of $1.31 per share as of June 30 1999,
and
. a total of 4,231,812 shares available for future issuance under our
various stock plans.
Please read the capitalization table together with the sections of this
prospectus entitled "Selected Consolidated Financial Data" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
with the consolidated financial statements and related notes included elsewhere
in this prospectus.
19
<PAGE>
DILUTION
Our pro forma net tangible book value as of June 30, 1999 was $4.0 million
or $0.20 per share. Pro forma net tangible book value per share represents the
amount of our total tangible assets reduced by the amount of our total
liabilities and divided by the total number of shares of common stock
outstanding after giving effect to the automatic conversion of our convertible
redeemable preferred stock. 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 pro forma net tangible book
value per share of common stock immediately after the completion of this
offering. After giving effect to the sale of the 3,500,000 shares of common
stock offered by us at the initial public offering price of $11.00 per share,
and after deducting the underwriting discount and estimated offering expenses
payable by us, our pro forma net tangible book value at June 30, 1999 would
have been approximately $38.7 million or $1.67 per share of common stock. This
represents an immediate increase in pro forma net tangible book value of $1.47
per share to existing stockholders and an immediate dilution of $9.33 per share
to new investors of common stock. The following table illustrates this dilution
on a per share basis:
<TABLE>
<S> <C> <C>
Initial public offering price per share........................... $11.00
Pro forma net tangible book value per share as of June 30, 1999. $0.20
Increase per share attributable to new investors................ 1.47
-----
Pro forma net tangible book value per share after this offering... 1.67
------
Dilution per share to new investors............................... $ 9.33
======
</TABLE>
The following table summarizes on a pro forma basis after giving effect to
the offering, as of June 30, 1999, the differences between the existing
stockholders and new investors with respect to the number of shares of common
stock purchased from us, the total consideration paid to us and the average
price per share paid:
<TABLE>
<CAPTION>
Average
Shares Purchased Total Consideration Price
------------------ ------------------- Per
Number Percent Amount Percent Share
---------- ------- ----------- ------- -------
<S> <C> <C> <C> <C> <C>
Existing stockholders............ 19,751,372 85% $25,899,000 40% $ 1.31
New investors.................... 3,500,000 15 38,500,000 60 11.00
---------- --- ----------- ---
Total.......................... 23,251,372 100% $64,399,000 100%
========== === =========== ===
</TABLE>
The foregoing discussion and tables are based upon the number of shares
actually issued and outstanding on June 30, 1999 and assume no exercise of
options or warrants outstanding as of June 30, 1999. As of that date, there
were:
. 3,222,149 shares issuable upon exercise of options outstanding at a
weighted average exercise price of $2.66 per share as of June 30, 1999,
and
. 215,676 shares issuable upon exercise of warrants outstanding at a
weighted average exercise price of $1.31 per share as of June 30, 1999.
To the extent these options and warrants are exercised, there will be
further dilution to new investors.
20
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data below should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results
of Operations," the Consolidated Financial Statements and Notes thereto and the
other information contained in this prospectus. The consolidated statements of
operations data for the years ended December 31, 1996, 1997 and 1998, and the
consolidated balance sheet data as of December 31, 1997 and 1998, are derived
from the audited financial statements, which have been audited by Deloitte &
Touche LLP and which are included elsewhere in this prospectus. The
consolidated statements of operations data for the period from September 19,
1995 to December 31, 1995 and the consolidated balance sheet data as of
December 31, 1995 and 1996 are derived from audited consolidated financial
statements that are not included in this prospectus. The consolidated
statements of operations data for the six-month periods ended June 30, 1998 and
1999, and the consolidated balance sheet data at June 30, 1999, are derived
from unaudited consolidated financial statements included elsewhere in this
prospectus. The unaudited consolidated financial statements have been prepared
on substantially the same basis as the audited consolidated financial
statements and, in the opinion of management, include all adjustments,
consisting only of normal recurring adjustments, necessary for a fair
presentation of the results of operations for these periods. The historical
results presented below are not necessarily indicative of future results. The
pro forma information in the following table gives effect to the automatic
conversion of all outstanding shares of our convertible redeemable preferred
stock into common stock upon the closing of this offering.
<TABLE>
<CAPTION>
Six Months
Ended
Sept. 19, 1995 Years Ended December 31, June 30,
(inception) ----------------------------------------------
to Dec. 31, 1995 1996 1997 1998(1) 1998 1999
---------------- -------- -------- ----------------- -------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C>
Consolidated Statements
of Operations Data:
Revenues:
License................ $ -- $ 280 $ 2,625 $ 5,900 $ 1,955 $ 5,922
Service................ 25 5 568 1,699 454 2,746
------- -------- -------- -------- ------- -------
Total revenues....... 25 285 3,193 7,599 2,409 8,668
Cost of revenues:
License................ -- 6 30 477 47 465
Service................ 10 165 623 2,290 506 2,804
------- -------- -------- -------- ------- -------
Total cost of
revenues............ 10 171 653 2,767 553 3,269
------- -------- -------- -------- ------- -------
Gross profit............ 15 114 2,540 4,832 1,856 5,399
Operating expenses:
Research and
development........... 78 1,182 2,830 3,971 1,613 2,276
Sales and marketing.... 23 685 2,896 8,669 3,795 6,956
General and
administrative........ 41 1,163 1,796 2,069 889 993
Amortization of
deferred stock
compensation.......... -- -- -- 336 84 565
------- -------- -------- -------- ------- -------
Total operating
expenses............ 142 3,030 7,522 15,045 6,381 10,790
------- -------- -------- -------- ------- -------
Loss from operations.... (127) (2,916) (4,982) (10,213) (4,525) (5,391)
Interest income
(expense), net......... (6) 102 129 271 92 49
------- -------- -------- -------- ------- -------
Net loss................ $ (133) $ (2,814) $ (4,853) $ (9,942) $(4,433) $(5,342)
======= ======== ======== ======== ======= =======
Basic and diluted net
loss per share......... $(10.23) $ (6.59) $ (2.50) $ (3.21) $ (1.34) $ (1.08)
======= ======== ======== ======== ======= =======
Shares used in computing
basic and diluted net
loss per share......... 13 427 1,945 3,096 3,301 4,962
======= ======== ======== ======== ======= =======
Pro forma basic and
diluted net loss per
share (unaudited)...... $ (0.64) $ (0.29)
======== =======
Shares used in computing
pro forma basic and
diluted net loss per
share (unaudited)...... 15,457 18,367
======== =======
</TABLE>
21
<PAGE>
<TABLE>
<CAPTION>
As of December 31, As of
--------------------------------- June 30,
1995 1996 1997 1998(1) 1999
----- ------- ------- -------- --------
(in thousands)
<S> <C> <C> <C> <C> <C>
Consolidated Balance Sheet Data:
Cash and cash equivalents......... $ 95 $ 1,393 $ 2,876 $ 7,461 $ 6,729
Working capital (deficit)......... (316) 1,002 2,755 7,493 2,198
Total assets...................... 316 1,901 5,195 12,294 13,207
Notes payable, less current
portion.......................... -- 300 216 108 59
Convertible redeemable preferred
stock............................ -- 3,995 11,008 25,117 25,117
Total stockholders' deficiency.... (126) (2,891) (7,743) (16,756) (21,096)
</TABLE>
- --------
(1) In connection with this offering, the 1998 consolidated financial
statements have been restated to reflect the revised value of warrants
issued to non-employees for services rendered and deferred compensation
relating to issuance of options to employees. See Note 11 to the 1998
consolidated financial statements.
22
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the Consolidated
Financial Statements and Notes thereto and the other information contained in
this prospectus.
Overview
We are a provider of electronic business integration software. Our
ActiveWorks Integration System provides a platform for the seamless, real-time
integration of packaged and custom enterprise software applications, both
internally and among an enterprise's network of customers, suppliers and
partners. We were incorporated in September 1995. From inception until August
1996, when we shipped our first product, our operations consisted primarily of
start-up activities, including research and development, recruiting personnel
and raising capital. Since shipping our first product, we have continued to
focus on these activities, as well as building our sales and marketing
presence, expanding and enhancing our product offerings, building relationships
with third parties to leverage our distribution and services capabilities, and
supporting and maintaining our product deployments within an expanding customer
base. In addition, we established our professional services organization in the
third quarter of 1998 to support our system integrator partners.
We generate revenue principally from licenses of our ActiveWorks software
products and, to a lesser extent, from services such as maintenance and
support, as well as consulting and training. License revenues comprised 78% and
68% of our total revenues in 1998 and in the six months ended June 30, 1999,
respectively, while service revenues comprised 22% and 32% of our total
revenues in the same periods. We recognize license revenues upon shipment of
the software if collection of the resulting receivable is probable, an
agreement has been signed, the fee is fixed or determinable and we have no
significant obligations remaining. A customer purchasing the ActiveWorks
Integration System will, at a minimum, purchase at least one Information Broker
and one or more adapters to connect the Information Broker to the customer's
various enterprise software applications. In addition, the customer may
purchase optional features such as the multi-broker option, high-availability
option, secure socket layer option and integration agents. For more information
on these various product features, see "Business--Products and Services" and
"--Technology." Revenues from maintenance and support are recognized ratably
over the period of the contract, which is typically one year, while revenues
from consulting and training services are recognized as the services are
performed. Payments received in advance of services rendered are recorded as
deferred revenues, and these balances were $1.2 million and $2.0 million at
December 31, 1998 and June 30, 1999, respectively. Substantially all of our
customers enter into maintenance and support contracts when they purchase their
initial ActiveWorks software products. While we do not currently have a formal
procedure or system to track customers who renew their contracts, we expect to
implement a tracking system within the next six months.
We promote and sell our ActiveWorks software products through our direct
sales force and through indirect channels. We have derived, and expect to
continue to derive, a significant portion of our sales in both channels from
customers that have significant relationships with third-party system
integrators. Our current relationships with these system integrators typically
are structured as co-marketing arrangements in which the customer is referred
by the system integrator to license the software directly from us. As a result
there is no revenue sharing arrangement between the system integrator and us,
and our current arrangements with these system integrators generally do not
impose any limitations on our ability to sell our products. In addition, we
have entered into a limited number of reseller arrangements in which our
products are embedded in the reseller's products, for which we receive a
royalty from the reseller. To date, revenues from these reseller arrangements
have been insignificant. In the first quarter of 1999, we expanded our presence
in international
23
<PAGE>
markets by opening sales offices in the United Kingdom and in the Netherlands,
and by establishing relationships with system integrators and resellers in
other international markets. Revenues derived from international sales
represented 4% and 2% of total revenues in 1998 and in the six months ended
June 30, 1999, respectively. We expect that international sales will account
for an increasing portion of our revenues, although the percentage of our total
revenues derived from international sales may vary.
Cost of license revenues consists primarily of third-party license and
support fees and, to a lesser extent, costs of duplicating media and
documentation. Cost of service revenues consists of compensation and related
overhead costs for personnel engaged in consulting, training, maintenance and
support services for our customers.
Since inception, we have incurred substantial research and development costs
and have invested heavily in the expansion of our sales and marketing and
professional services organizations to build an infrastructure to support our
long-term growth strategy. Our full-time employees increased from 48 as of
December 31, 1997 to 120 as of June 30, 1999. As a result of these investments,
we have incurred net losses in each fiscal quarter since inception and, as of
June 30, 1999, had an accumulated deficit of $23.1 million. We anticipate that
our operating expenses will continue to increase for the foreseeable future, as
we expand our product development and sales and marketing efforts. In addition,
we expect to incur additional expenses associated with being a public company.
Accordingly, we expect to incur net losses for the foreseeable future.
Costs for the development of new software products and substantial
enhancements to existing software products are expensed as incurred until
technological feasibility has been established, at which time any additional
development costs would be capitalized. Because we believe our current process
for developing software is essentially completed concurrently with the
establishment of technological feasibility, no costs have been capitalized to
date.
We believe that period-to-period comparisons of our historical operating
results are not necessarily meaningful and should not be relied upon as being
indicative of future performance. Our prospects must be considered in light of
the risks, expenses and difficulties frequently encountered by companies in
early stages of development, particularly companies in new and rapidly evolving
markets like ours. Although we recently have experienced significant revenue
growth, this trend may not continue. Furthermore, we may not achieve or
maintain profitability in the future.
In October 1998, we issued a warrant to a strategic partner, Intel
Corporation, for the purchase of 36,764 shares of common stock at an exercise
price of $4.08 per share. The warrant was contingently exercisable upon the
achievement by Intel of specified performance improvements to our software
product. These improvements were achieved in August 1999. The warrant will
expire on October 29, 2005. We will record a research and development expense
of $350,000 in the quarter ended September 30, 1999, representing the fair
value of the warrants at the time the contingency was resolved.
Since inception, we have incurred net losses for federal and state tax
purposes and have not recognized any tax provision or benefit. As of December
31, 1998, we had net operating loss carryforwards of approximately $15.2
million and $11.3 million for federal and state income tax purposes,
respectively. The federal and state net operating loss carryforwards, if not
utilized, expire through 2013 and 2003, respectively. We also have research and
development credit carryforwards of approximately $313,000 and $178,000 for
federal and state income tax purposes, respectively. The federal research and
development credit carryforward expires, if not utilized, through 2013, while
the state credit has no expiration. Federal and state tax laws impose
significant restrictions on the utilization of net operating loss carryforwards
in the event of a shift in our ownership that constitutes
24
<PAGE>
an "ownership change," as defined in Section 382 of the Internal Revenue Code.
See Note 6 of Notes to Consolidated Financial Statements for additional
information on these carryforwards.
We have placed a valuation allowance against our net deferred tax assets due
to the uncertainty surrounding the realization of these assets. We evaluate on
a quarterly basis the recoverability of the net deferred tax assets and the
level of the valuation allowance. When it is determined that it is more likely
than not the net deferred tax assets are realizable, the valuation allowance
will be reduced.
For 1997 and prior years, we recognized revenues in accordance with the
American Institute of Certified Public Accountants Statement of Position 91-1.
Commencing in 1998, we began recognizing revenues in accordance with the
American Institute of Certified Public Accountants Statement of Position 97-2,
"Software Revenue Recognition," or SOP 97-2, as amended by Statements of
Position 98-4 and 98-9. To date, our adoption of these new standards has not
had any material effect on our revenue recognition. Further implementation
guidelines relating to these standards may result in unanticipated changes in
our revenue recognition practices, and these changes could affect our future
revenues and earnings.
In connection with this offering, subsequent to the issuance of our 1998
consolidated financial statements, our management determined that the fair
value of the common stock used to calculate the value of warrants and deferred
stock compensation relating to options issued to employees should be revised.
As a result, the 1998 consolidated financial statements have been restated to
recognize an additional $280,000 of sales and marketing expense, $3.2 million
of deferred compensation and a corresponding increase in common stock. See Note
11 to the 1998 consolidated financial statements.
Results of Operations
The following table sets forth, for the periods indicated, the statements of
operations data as a percentage of total revenues.
<TABLE>
<CAPTION>
Six Months
Years Ended Ended June
December 31, 30,
-------------------- -------------
1996 1997 1998 1998 1999
------ ---- ---- ----- -----
<S> <C> <C> <C> <C> <C>
Revenues:
License................................. 98 % 82 % 78 % 81 % 68 %
Service................................. 2 18 22 19 32
------ ---- ---- ----- ----
Total revenues........................ 100 100 100 100 100
Cost of revenues:
License................................. 2 1 6 2 5
Service................................. 58 19 30 21 32
------ ---- ---- ----- ----
Total cost of revenues................ 60 20 36 23 37
Gross profit............................. 40 80 64 77 63
Operating expenses:
Research and development................ 415 89 52 67 26
Sales and marketing..................... 240 91 114 158 80
General and administrative.............. 408 56 27 37 11
Amortization of deferred stock
compensation........................... -- -- 4 3 7
------ ---- ---- ----- ----
Total operating expenses.............. 1,063 236 197 265 124
------ ---- ---- ----- ----
Loss from operations..................... (1,023) (156) (133) (188) (61)
Interest income, net..................... 36 4 3 4 1
------ ---- ---- ----- ----
Net loss................................. (987)% (152)% (130)% (184)% (60)%
====== ==== ==== ===== ====
</TABLE>
25
<PAGE>
Six Months Ended June 30, 1998 and 1999
Revenues
Total revenues increased from $2.4 million in the six months ended June 30,
1998 to $8.7 million in the six months ended June 30, 1999. License revenues
increased from $2.0 million in the six months ended June 30, 1998 to $5.9
million in the six months ended June 30, 1999. The increase in license revenues
was due to an increase of $1.6 million in sales of additional ActiveWorks
products and features to existing customers and to an increase of $2.3 million
in sales of our products to new customers.
Service revenues increased from $454,000 in the six months ended June 30,
1998 to $2.7 million in the six months ended June 30, 1999. The increase in
service revenues was attributable primarily to an increase in consulting fees
of $1.6 million as a result of the establishment of our professional services
organization in the third quarter of 1998 and an increase in maintenance and
support fees of $655,000 due to the growth of our customer base.
Cost of Revenues
Total cost of revenues increased from $553,000 in the six months ended June
30, 1998 to $3.3 million in the six months ended June 30, 1999. Cost of license
revenues increased from $47,000 in the six months ended June 30, 1998 to
$465,000 in the six months ended June 30, 1999. As a percentage of license
revenues, cost of license revenues was 2% and was 8% in the six months ended
June 30, 1998 and 1999, respectively. The growth in cost of license revenues as
a percentage of license revenues and on an absolute basis was attributable
primarily to a larger proportion of our products sold in the six months ended
June 30, 1999 incorporating third-party technology for which we pay royalties.
We anticipate that the cost of license revenues will increase in absolute
dollars as we license additional products, although cost of license revenues
will vary as a percentage of license revenues from period to period.
Cost of service revenues increased from $506,000 in the six months ended
June 30, 1998 to $2.8 million in the six months ended June 30, 1999. The growth
in cost of service revenues was attributable primarily to an increase in
personnel dedicated to support a larger number of customers. As a percentage of
service revenues, cost of service revenues was 111% and 102% in the six months
ended June 30, 1998 and 1999, respectively. Cost of service revenues has
exceeded service revenues primarily because the growth rate of personnel
engaged in our service operations has exceeded the rate of growth of our
service revenues as we continue to invest in building the capability to support
our customers. We anticipate that the cost of service revenues will increase in
absolute dollars as we continue to expand our services offerings, although cost
of service revenues may vary as a percentage of service revenues from period to
period.
Because the gross margin on license revenues is higher than the gross margin
on service revenues, gross profit as a percentage of total revenues is affected
by the mix of license and service revenues. We expect that this mix will
fluctuate from quarter to quarter.
Operating Expenses
Research and Development. Research and development expenses consist
primarily of compensation and related costs for research and development
employees and contractors. Research and development expenses increased from
$1.6 million in the six months ended June 30, 1998 to
26
<PAGE>
$2.3 million in the six months ended June 30, 1999. The increase was
attributable primarily to the addition of personnel in our research and
development organization associated with product development. As a percentage
of total revenues, research and development expenses were 67% and 26% in the
six months ended June 30, 1998 and 1999, respectively. We expect to continue to
make substantial investments in research and development and anticipate that
research and development expenses will continue to increase in absolute
dollars, but may vary as a percentage of total revenues from period to period.
In addition, research and development expenses in the third quarter of 1999
will be significantly increased as a result of the achievement of performance
improvements by a strategic partner, Intel Corporation, in connection with a
warrant issued to Intel. For further details regarding this warrant, see "--
Overview."
Sales and Marketing. Sales and marketing expenses consist primarily of
compensation and related costs for sales and marketing personnel and
promotional expenditures. Sales and marketing expenses increased from $3.8
million in the six months ended June 30, 1998 to $7.0 million in the six months
ended June 30, 1999. The increase was attributable primarily to the addition of
18 employees in sales and marketing and increased commissions related to
increased revenues, and, to a lesser extent, costs associated with increased
efforts to develop market awareness of our products and services. As a
percentage of total revenues, sales and marketing expenses were 158% and 80%
for the six months ended June 30, 1998 and 1999, respectively. We expect to
continue increasing our marketing and promotional efforts and to hire
additional sales personnel. Accordingly, we anticipate that sales and marketing
expenses will increase in absolute dollars, but may vary as a percentage of
total revenues from period to period.
General and Administrative. General and administrative expenses consist
primarily of personnel expenses, legal and accounting expenses and other
general corporate expenses. General and administrative expenses increased from
$889,000 in the six months ended June 30, 1998 to $993,000 in the six months
ended June 30, 1999, due primarily to the addition of financial and management
personnel. As a percentage of total revenues, general and administrative
expenses were 37% and 11% in the six months ended June 30, 1998 and 1999,
respectively. We expect that general and administrative expenses will increase
in absolute dollars as we add personnel and incur additional costs related to
the anticipated growth of our business and operation as a public company.
Amortization of Deferred Stock Compensation. Options granted in 1998 and in
the first quarter of 1999 have been considered to be compensatory as the
estimated fair value for accounting purposes was greater than the exercise
price as determined by the board of directors on the date of grant. The total
deferred stock compensation associated with these options as of December 31,
1998 and June 30, 1999 amounted to $2.9 million and $4.1 million, respectively,
net of amortization. These amounts are being amortized over the respective
vesting periods of these equity arrangements, generally 50 months. Of the total
deferred stock compensation, approximately $84,000 and $565,000 was amortized
in the six months ended June 30, 1998 and 1999, respectively. We expect
amortization of approximately $1,169,000 in 1999, $1,208,000 in 2000,
$1,208,000 in 2001, $993,000 in 2002 and $122,000 in 2003 related to these
options.
Net Interest Income
Net interest income consists primarily of interest earned on cash and cash
equivalents, offset by interest expense related to obligations under capital
leases. In the six months ended June 30, 1998 and 1999, net interest income was
approximately $92,000 and $49,000, respectively. The decrease in net interest
income was due primarily to decreased interest income earned on lower cash and
cash equivalent balances.
27
<PAGE>
Years Ended December 31, 1996, 1997 and 1998
Revenues
Total revenues were $285,000, $3.2 million and $7.6 million in 1996, 1997
and 1998, respectively. License revenues increased from $280,000 in 1996 to
$2.6 million in 1997 and to $5.9 million in 1998. The increase in license
revenues in 1997 was due primarily to increased sales of our ActiveWorks
software products to new customers in 1997. The increase in 1998 was
attributable to an increase of $1.5 million in sales of additional ActiveWorks
products and features to existing customers and to an increase of $1.8 million
in sales of our products to new customers. As a percentage of total revenues,
license revenues were 82% and 78% for 1997 and 1998, respectively.
Service revenues increased from $5,000 in 1996 to $568,000 in 1997 and to
$1.7 million in 1998. As a percentage of total revenues, service revenues were
18% and 22% for 1997 and 1998, respectively. The increase in 1997 was
attributable primarily to growth in our customer base. The increase in 1998 was
attributable primarily to an increase in consulting fees of $655,000, as a
result of the establishment of our professional services organization in the
third quarter of 1998, and an increase in maintenance and support fees of
$475,000, due to the growth of our customer base.
Cost of Revenues
Cost of license revenues increased from $6,000 in 1996 to $30,000 in 1997
and to $477,000 in 1998. As a percentage of license revenues, cost of license
revenues was 1% and 8% for 1997 and 1998, respectively. The growth in cost of
license revenues as a percentage of license revenues and on an absolute basis
was attributable primarily to a larger proportion of our products sold
incorporating third party technology for which we pay royalties.
Cost of service revenues increased from $165,000 in 1996 to $623,000 in 1997
and to $2.3 million in 1998. The growth in cost of service revenues was
attributable primarily to an increase in personnel dedicated to support a
larger number of customers. As a percentage of service revenues, cost of
service revenues was 110% and 135% for 1997 and 1998, respectively.
Operating Expenses
Research and Development. Research and development expenses increased from
$1.2 million in 1996 to $2.8 million in 1997 and to $4.0 million in 1998. The
increases during these periods were attributable primarily to the addition of
personnel in our research and development organization associated with product
development. As a percentage of total revenues, research and development
expenses were 89% and 52% for 1997 and 1998, respectively.
Sales and Marketing. Sales and marketing expenses increased from $685,000 in
1996 to $2.9 million in 1997 and to $8.7 million in 1998. The increases during
these periods were attributable primarily to the addition of 12 employees in
sales and marketing in 1997 and 14 employees in sales and marketing in 1998 and
to increased commissions related to increased revenues and, to a lesser extent,
to costs associated with increased efforts to develop market awareness of our
products and services. As a percentage of total revenues, sales and marketing
expenses were 91% and 114% for 1997 and 1998, respectively.
General and Administrative. General and administrative expenses increased
from $1.2 million in 1996 to $1.8 million in 1997 and to $2.1 million in 1998.
The increases during these periods were due primarily to the addition of
financial and management personnel. As a percentage of total revenues, general
and administrative expenses were 56% and 27% of total revenues for 1997 and
1998, respectively.
28
<PAGE>
Amortization of Deferred Stock Compensation. Total deferred stock
compensation as of December 31, 1998 amounted to $2.9 million. Amortization of
deferred stock compensation was $336,000 in 1998.
Net Interest Income
Net interest income was $102,000, $129,000 and $271,000 in 1996, 1997 and
1998, respectively. The increases during these periods were due primarily to
increased interest income earned on higher cash and cash equivalent balances as
a result of convertible redeemable preferred stock financings in 1997 and 1998.
29
<PAGE>
Quarterly Results of Operations
The following table sets forth unaudited consolidated statements of
operations data for the six quarters ended June 30, 1999, as well as this
information expressed as a percentage of our total revenues for the periods
indicated. This information has been derived from unaudited consolidated
financial statements that, in the opinion of our management, include all
adjustments, consisting only of normal recurring adjustments, necessary for a
fair presentation of this information when read in conjunction with our annual
audited consolidated financial statements and related notes. The operating
results for any quarter are not necessarily indicative of results for any
future period. In connection with this offering, the quarterly amounts have
been restated to reflect the revised value of warrants issued to non-employees
for services rendered and deferred compensation relating to issuance of options
to employees. See Note 11 to the 1998 consolidated financial statements.
<TABLE>
<CAPTION>
Three Months Ended
----------------------------------------------------------------
Mar. 31, June 30, Sept. 30, Dec. 31, Mar. 31, June. 30,
1998 1998 1998 1998 1999 1999
-------- -------- --------- -------- -------- ---------
(in thousands, except percentages)
<S> <C> <C> <C> <C> <C> <C>
Consolidated Statements
of Operations Data:
Revenues:
License................ $ 1,247 $ 708 $ 1,642 $ 2,303 $ 2,364 $ 3,558
Service................ 196 258 427 818 1,198 1,548
------- ------- ------- ------- ------- -------
Total revenues....... 1,443 966 2,069 3,121 3,562 5,106
Cost of revenues:
License................ 3 44 157 273 152 313
Service................ 236 270 629 1,155 1,227 1,577
------- ------- ------- ------- ------- -------
Total cost of
revenues............ 239 314 786 1,428 1,379 1,890
Gross profit............ 1,204 652 1,283 1,693 2,183 3,216
Operating expenses:
Research and
development........... 619 994 1,208 1,150 1,060 1,216
Sales and marketing.... 1,626 2,169 2,392 2,482 3,146 3,810
General and
administrative........ 406 483 603 577 476 517
Amortization of
deferred stock
compensation.......... 22 62 95 157 263 302
------- ------- ------- ------- ------- -------
Total operating
expenses............ 2,673 3,708 4,298 4,366 4,945 5,845
------- ------- ------- ------- ------- -------
Loss from operations.... (1,469) (3,056) (3,015) (2,673) (2,762) (2,629)
Interest income, net.... 12 80 94 85 21 28
------- ------- ------- ------- ------- -------
Net loss................ $(1,457) $(2,976) $(2,921) $(2,588) $(2,741) $(2,601)
======= ======= ======= ======= ======= =======
Percentage of Total
Revenues:
Revenues:
License................ 86 % 73 % 79 % 74 % 66 % 70 %
Service................ 14 27 21 26 34 30
------- ------- ------- ------- ------- -------
Total revenues....... 100 100 100 100 100 100
Cost of revenues:
License................ * 5 8 9 4 6
Service................ 16 28 30 37 34 31
------- ------- ------- ------- ------- -------
Total cost of
revenues............ 16 33 38 46 38 37
Gross profit............ 84 67 62 54 62 63
Operating expenses:
Research and
development........... 43 103 59 37 30 24
Sales and marketing.... 113 225 116 80 88 75
General and
administrative........ 28 50 29 18 13 10
Amortization of
deferred stock
compensation.......... 2 6 5 5 7 6
------- ------- ------- ------- ------- -------
Total operating
expenses............ 186 384 209 140 138 115
------- ------- ------- ------- ------- -------
Loss from operations.... (102) (317) (147) (86) (76) (52)
Interest income, net.... 1 8 5 3 1 1
------- ------- ------- ------- ------- -------
Net loss................ (101)% (309)% (142)% (83)% (75)% (51) %
======= ======= ======= ======= ======= =======
</TABLE>
- --------
* Less than 1%
30
<PAGE>
License revenues increased in each of the quarters ended September 30, 1998,
December 31, 1998, March 31, 1999 and June 30, 1999 due to increased sales of
our ActiveWorks software products to new customers and increased sales of
additional ActiveWorks products to existing customers. License revenues
declined from $1.2 million in the quarter ended March 31, 1998 to $708,000 in
the quarter ended June 30, 1998, due primarily to the delay in a significant
purchase by a customer, which was subsequently recognized in the quarter ended
September 30, 1998. Service revenues generally increased in each of the
quarters presented above, due primarily to the increasing size of our customer
base.
Cost of license revenues and cost of service revenues increased in each of
the quarters ended June 30, 1998, September 30, 1998 and December 31, 1998,
both in absolute dollars and as a percentage of related revenues. These
increases were attributable primarily to increases in the number of service
professionals to support ongoing maintenance and support of our growing
customer base and to increased sales of our ActiveWorks software products. The
increases in cost of service revenues in absolute dollars in the quarters ended
September 30, 1998, December 31, 1998, March 31, 1999 and June 30, 1999 were
also attributable to the establishment of our professional services
organization in the third quarter of 1998.
Our operating expenses have increased in absolute dollars in connection with
investment in the growth of our business and operating structure. Total
operating expenses have decreased as a percentage of total revenues in the
quarters ended September 30, 1998, December 31, 1998, March 31, 1999 and June
30, 1999. Sales and marketing expenses increased in absolute dollars in each of
the quarters presented above as a result of increased spending for salaries and
commissions, public relations and promotional expenses. Research and
development expenses decreased in absolute dollars in the quarters ended
December 31, 1998 and March 31, 1999 and decreased as a percentage of total
revenues in the quarters ended September 30, 1998, December 31, 1998, March 31,
1999 and June 30, 1999. This decrease was due primarily to decreasing reliance
on outsourcing for documentation and quality assurance. While we expect that
research and development expenses will increase significantly over the next 18
months, they may vary as we develop new products and enhance existing products.
In addition, research and development expenses in the third quarter of 1999
will be significantly increased as a result of the achievement of performance
improvements by a strategic partner, Intel Corporation, in connection with a
warrant issued to Intel. For further details regarding this warrant, see "--
Overview."
The amount and timing of our operating expenses generally will vary from
quarter to quarter depending on our level of actual and anticipated business
activities. Our revenues and operating results are difficult to forecast and
will fluctuate, and we believe that period-to-period comparisons of our
operating results will not necessarily be meaningful. As a result, you should
not rely upon them as an indication of future performance. It is likely that
our future quarterly operating results from time to time will not meet the
expectations of security analysts or investors, which would likely cause the
price of the common stock to decline.
Liquidity and Capital Resources
Since inception, we have financed our operations primarily through private
sales of convertible redeemable preferred stock, which totaled $25.1 million in
net proceeds through June 30, 1999. We have also financed our operations
through a line of credit, under which $3.3 million was outstanding as of June
30, 1999. As of June 30, 1999, we had $6.7 million of cash and cash
equivalents.
Net cash used in operating activities was $2.5 million, $4.8 million and
$9.0 million in 1996, 1997 and 1998, respectively, and $3.2 million in the six
months ended June 30, 1999. For 1997, cash used by operating activities was
attributable primarily to a net loss of $4.9 million and an increase in
accounts receivable of $1.5 million, offset in part by an increase in deferred
revenues of $606,000
31
<PAGE>
and an increase in accrued compensation and related benefits of $582,000. For
1998, cash used by operating activities was attributable primarily to a net
loss of $9.9 million and an increase in accounts receivable of $1.8 million,
offset in part by an increase in deferred revenues of $432,000 and increases in
other accrued liabilities and accounts payable. For the six months ended June
30, 1999, cash used by operating activities was attributable primarily to a net
loss of $5.3 million, offset in part by an increase in accounts receivable of
$727,000, an increase in accounts payable of $678,000 and an increase in
deferred revenues of $899,000. Our sales cycle is lengthy and unpredictable,
and could cause our quarterly revenues and operating results to fluctuate. Any
change in our sales cycle could adversely affect the amount of cash provided by
our operating activities.
Net cash used in investing activities was $336,000, $642,000 and $711,000 in
1996, 1997 and 1998, and $1.2 million in the six months ended June 30, 1999.
For each of these periods, cash used in investing activities was attributable
primarily to purchases of property and equipment.
Net cash provided by financing activities was $4.2 million, $6.9 million and
$14.3 million in 1996, 1997 and 1998, and $3.7 million in the six months ended
June 30, 1999. For each of 1996, 1997 and 1998, cash provided by financing
activities was attributable primarily to proceeds from the issuance of
convertible redeemable preferred stock. In addition, we received proceeds of
$401,000 in 1996 from an equipment loan, of which $164,000 in principal amount
was outstanding at June 30, 1999. For the six months ended June 30, 1999, cash
provided by financing activities was attributable primarily to amounts drawn
under a line of credit secured by equipment and receivables.
As of June 30, 1999, our principal commitments consisted of obligations
outstanding under operating leases and equipment loans. Although we have no
material commitments for capital expenditures, we anticipate that capital
expenditures and lease commitments will increase, consistent with our
anticipated growth in operations, infrastructure and personnel. For 1999, we
anticipate that capital expenditures will be at least $1.5 million. We also may
establish additional operations as we expand globally.
We anticipate that our liquidity needs for at least the next eighteen months
will be met by the net proceeds from this offering, together with our current
cash and cash equivalents. After this time, we cannot assure you that cash
generated from operations will be sufficient to satisfy our liquidity
requirements, and we may need to raise additional capital by selling additional
equity or debt securities or by obtaining a credit facility. If additional
funds are raised through the issuance of debt securities, these securities
could have rights, preferences and privileges senior to holders of common
stock, and the terms of these securities could impose restrictions on our
operations. The sale of additional equity or convertible debt securities could
result in additional dilution to our stockholders, and we cannot be certain
that additional financing will be available in amounts or on terms acceptable
to us, if at all. If we are unable to obtain this additional financing, we may
be required to reduce the scope of our planned product development and
marketing efforts, which could harm our business, financial condition and
operating results.
Year 2000
Many currently installed computer systems and software products are coded to
accept only two digit entries in the date code field. These systems and
software products will need to accept four digit entries to distinguish 21st
century dates from 20th century dates. This problem may result in software
failures or the creation of erroneous results.
We have conducted a year 2000 readiness review for the current versions of
our products. The review includes assessment, implementation and validation
testing. We have largely completed all phases of this plan for the current
versions of our products. As a result, we believe all current versions of our
products are capable of properly distinguishing between 20th and 21st century
dates,
32
<PAGE>
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 our products are also capable of properly distinguishing
between 20th and 21st century dates.
We are testing software obtained from third parties that is incorporated
into our products, and we have requested that our vendors confirm that their
software is capable of properly distinguishing between 20th and 21st century
dates. We have been informed by many of our vendors that their products that we
use are capable of properly distinguishing between 20th and 21st century dates.
Despite testing by us and by current and potential customers, and assurances
from developers of products incorporated into our products, our products may
contain undetected errors or defects associated with year 2000 date functions.
Known or unknown errors or defects in our products could result in delay or
loss of revenues, diversion of development resources, damage to our reputation,
or increased service and warranty costs, any of which could harm our business.
Some commentators have predicted significant litigation regarding year 2000
compliance issues, and we are aware of 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.
Our internal systems include our information technology systems and non-
information technology systems. We have completed an assessment of our material
internal information technology systems and non-information technology systems.
We expect to complete validation testing of our information technology systems
and related contingency planning by August 31, 1999. To the extent that we are
not able to test the technology provided by third-party vendors, we are seeking
assurances from vendors that their systems are year 2000 compliant. We are not
currently aware of any material operational issues associated with preparing
our internal information technology systems and non-information technology
systems for the year 2000. However, we may experience material unanticipated
problems or additional costs caused by undetected errors or defects in the
technology used in our internal information technology systems and non-
information technology systems.
We do not currently have any information concerning the year 2000 compliance
status of our customers. If our current or future customers fail to achieve
year 2000 compliance or if they divert technology expenditures, especially
technology expenditures that were earmarked for our products, to address year
2000 compliance problems, our business could suffer.
We have funded our year 2000 plan from available cash and have not
separately accounted for these expenses in the past. To date, these expenses
have not been material and have totaled less than $200,000. Most of our
expenses have related to, and are expected to continue to relate to, the
operating costs associated with time spent by employees in the evaluation
process and year 2000 compliance matters generally. We expect to incur no more
than an additional $300,000 to verify that our products, information technology
systems and non-information technology systems are capable of properly
distinguishing between 20th century and 21st century dates. In addition, we may
experience material problems and expenses associated with year 2000 compliance
that could adversely affect our business, results of operations and financial
condition. Finally, we are also subject to external forces that might generally
affect industry and commerce, such as year 2000 compliance failures by utility
or transportation companies and related service interruptions.
We do not have a formal contingency plan to address any unanticipated year
2000 problems that may occur in our products or our internal systems. If these
problems arise, we expect to make the necessary expenditures to assess and
remedy these problems. We cannot currently estimate the amount or timing of
these potential expenditures. They may be significant and could have an adverse
effect on our business.
33
<PAGE>
Accounting Standards
In June 1997, the Financial Accounting Standards Board issued accounting
statement No. 130, Reporting Comprehensive Income, which requires an enterprise
to report, by major components and as a single total, the change in its net
assets during the period from nonowner sources. We had no comprehensive income
items to report, other than net loss, for any of the periods presented. The
FASB also issued accounting statement No. 131, Disclosures About Segments of an
Enterprise and Related Information, which establishes annual and interim
reporting standards for an enterprise's business segments and related
disclosures about its products, services, geographic areas and major customers.
We currently operate in one reportable segment.
In March 1998, the American Institute of Certified Public Accountants issued
SOP 98-1, Accounting for the Costs of Computer Software Developed or Obtained
for Internal Use. This standard requires companies to capitalize qualifying
computer software costs, which are incurred during the application development
stage, and amortize them over the software's estimated useful life. SOP 98-1 is
effective for fiscal years beginning after December 15, 1998. We are currently
evaluating the impact of SOP 98-1 on our financial statements and related
disclosures.
In June 1998, the Financial Accounting Standards Board issued accounting
statement No. 133, Accounting for Derivative Instruments and Hedging
Activities. This statement requires companies to record derivatives on the
balance sheet as assets or liabilities measured at fair value. Gains or losses
resulting from changes in the values of those derivatives would be accounted
for depending on the use of the derivative and whether it qualifies for hedge
accounting. SFAS No. 133 will be effective for us beginning in 2001. We are
currently evaluating the impact of SFAS No. 133 on our financial statements and
related disclosures.
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BUSINESS
Overview
We are a provider of electronic business integration software that provides
our customers with a platform for the seamless, real-time integration of
packaged and custom software applications, both internally and across their
networks of customers, suppliers and partners. Our Active Works Integration
System enables our customers to accelerate their time to market for products
and services, enhance their relationships with customers, suppliers and
partners and substantially reduce their operating and information technology
costs. Our customers use our platform to link their disparate applications
without costly and time-consuming custom programming, enabling them to quickly
and cost-effectively take full advantage of their long-term investments in
systems and technologies to compete in today's rapidly changing electronic
business environment. We have designed the ActiveWorks Integration System to
provide a highly flexible and adaptable electronic business integration
platform that can be deployed quickly and changed easily in response to
evolving business requirements. In addition, we partner with a broad range of
system integrators and hardware, software and service providers in order to
offer our customers a comprehensive integration solution.
Industry Background
Over the past decade, enterprise computing environments have undergone a
significant transformation. This transformation has been driven by accelerating
organizational demands for flexibility, efficiency, and speed in order to more
effectively respond to a rapidly changing business environment and increasingly
global marketplace. In parallel, there has been a shift from in-house, custom
development of mission-critical applications to the purchase of these
applications and related services from third-party vendors. Packaged
applications have spread throughout the enterprise to address many highly
strategic business functions, including resource planning, management of supply
and distribution networks, customer relationship management, sales force
automation, business decision support and e-commerce. In this new corporate
environment, a single business process can require access to data and
information from many distinct applications, none of which are designed to
communicate seamlessly and in real time with the others.
Companies have invested an enormous amount of financial and technical
resources in developing and deploying a broad range of packaged and custom
applications. To take full advantage of these investments, it has become
critical for companies to efficiently integrate these applications. META Group
estimates that the average Fortune 1000 company maintains 49 distinct
enterprise applications and spends from one-quarter to one-third of its total
information technology budget on integration-related efforts. The complexity of
this integration challenge has historically required time-consuming, expensive,
custom-developed in-house solutions or third-party specialized consulting and
system integration services. More recently, the market for third-party
enterprise application integration, or EAI, software has emerged to provide
this integration capability as a packaged solution. Driven by the increasingly
business-critical need for integration, the application and data integration
software market is projected by the Yankee Group to reach a total size of $5
billion by 2001. We cannot assure you that this estimate will be achieved.
Against this backdrop, the explosive emergence of the Internet has further
changed the nature and pace of business operations and competition. Companies
are now able to conduct business electronically through an Internet-enabled
real-time network of customers, suppliers and partners. As a result, the
ability to operate as an electronic business has become a critical strategic
objective. Companies need to integrate all aspects of their enterprises,
including back-office operations and processing, front-office applications,
such as sales, marketing and customer service, and supplier management systems,
such as planning, sourcing, purchasing, fulfillment and inventory control. For
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example, a company can now give suppliers and partners real-time electronic
access to its scheduling, billing and inventory information, thereby enhancing
communication, reducing operating costs and creating a networked organization
that takes advantage of supplier and partner strengths in ways not previously
possible. To compete successfully, a company needs an integration platform that
allows it to adapt quickly to changing market conditions, accelerate time to
market, enhance relationships with customers, suppliers and partners, and
reduce operating costs.
We believe that traditional integration and EAI solutions fail to fully
capitalize on the benefits of Internet technologies and do not adequately
address the challenges of this electronic business environment. These solutions
are often inflexible and rigid, lack key functionality, such as security and
integration management and monitoring, and do not offer the speed of
implementation and time-to-market benefits required in today's business
environment. As a result, we believe that there is a significant opportunity
for a vendor who can provide a platform that enables seamless, real-time and
efficient integration across widely distributed and disparate computing
environments. This platform needs to provide the following key capabilities:
. Comprehensive, Robust Solution: a comprehensive, packaged solution for
electronic business integration that does not require substantial custom
programming and includes a broad portfolio of integration and management
facilities;
. Dynamic Adaptability: a system designed to adapt quickly and efficiently
to changing business operations, rules and processes, and to accommodate
change without additional programming;
. Scalability: a system that easily accommodates a wide range of
transaction and data flow volumes across locally and globally-distributed
networks;
. Extensibility: flexibility to allow for the efficient incorporation of
and integration with evolving technologies;
. Security: inherent state-of-the-art security and administrative
capabilities designed for an enterprise operating in an electronic
business environment with its customers, suppliers and partners; and
. Management and Monitoring: efficient, easy-to-use and centralized
management and monitoring of the integration platform and all of its
components.
The Active Software Solution
We develop, market and support an electronic business integration platform
that enables our customers to more quickly expand and capitalize upon greater
business opportunities. The ActiveWorks Integration System connects a wide
range of enterprise applications and systems and provides a comprehensive
software platform for integrating these applications with minimal custom
programming.
We believe the ActiveWorks platform provides the following compelling and
strategic business benefits to our customers:
. Accelerates Time to Market. The ActiveWorks platform enables our
customers to accelerate time to market for new products and services by
integrating and synchronizing the information flow between enterprise
applications in an electronic business environment. By enabling the close
interaction of customers, suppliers and partners, the ActiveWorks
solution provides the integration platform for the seamless exchange of
relevant information internally and across the enterprise's network of
customers, suppliers and partners. In addition, the platform is readily
adaptable to changing business and computing environments, providing the
business flexibility to respond in real time to changes in either the
external market or internal
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computing environment. The architecture, dynamic adapter portfolio and
management and monitoring functionality all provide an enhanced level of
adaptability to changes in business processes and rules in an evolutionary
manner with minimal disruption to business operations.
. Improves Customer and Supplier Interaction. The ActiveWorks platform, by
enabling scalable and secure electronic business, can enhance our
customers' business relationships with their customers and suppliers. We
offer a comprehensive, robust solution for integration across traditional
business boundaries, providing the information link to customers and
suppliers and greatly enhancing an organization's ability to respond
quickly, accurately and effectively to customer and supplier needs.
. Reduces Operational Costs. The ActiveWorks platform is designed to enable
our customers to operate in a more efficient and streamlined manner,
significantly reducing their operational costs. Our customers are able to
take advantage of the capabilities of the ActiveWorks platform to
interact electronically with customers, suppliers and partners in a cost-
effective manner. In addition, our platform minimizes the need for time-
consuming and expensive custom programming, reducing the number of highly
skilled programmers required to implement and maintain our system. The
ActiveWorks solution is not only designed for rapid initial deployment,
but also can be efficiently altered in response to an upgrade or
replacement of a specific application or an internal or external business
process change. As a result, our solution substantially reduces the
installation and maintenance costs associated with other integration
approaches.
In addition to these business benefits, our platform is differentiated from
other integration solutions through the following core competencies, which we
believe enable us to deliver faster time to integration than the solutions
offered by our competitors:
. Comprehensive and Robust Platform. Our platform, the ActiveWorks
Integration System, provides an integration architecture upon which our
customers can develop strategic electronic business initiatives. We offer
a comprehensive platform for electronic business integration, including
base integration functionality, a broad set of dynamic adapters for
integrating a wide variety of applications across multiple operating
systems, and management and monitoring capabilities. In addition, in
order to provide the security capabilities critical to operating an
effective electronic business, we embed security features throughout our
platform, rather than merely layering them on top. Our platform is
designed to provide the reliability required for mission-critical
operations, even against network, hardware or software failures. We
believe that the comprehensive and robust nature of our platform approach
assures our customers that their eBusiness needs can be met today and in
the future.
. Dynamic Adapters. We maintain and continue to expand our portfolio of
dynamic adapters for integrating a wide variety of applications across
multiple operating systems. These adapters, which connect individual
software applications to the ActiveWorks platform, are readily
configurable and easily reconfigurable to meet constantly changing
application requirements and specifications. This broad portfolio of
dynamic adapters substantially reduces the need for the custom
programming often required with other integration solutions. Our
development and production efforts are supported by third parties that
build Active Software-certified adapters, which facilitates the pervasive
adoption of the ActiveWorks Integration System as a standard integration
platform.
. Flexibility and Adaptability to Change. Because our customers' needs are
not static, we have designed our solution to be dynamic. Since little or
no custom programming is required, the ActiveWorks platform provides the
flexibility to respond quickly and effectively to changes in business
operations, rules and processes both inside the company and across its
network of customers, suppliers and partners. In addition, the
ActiveWorks platform is designed to allow the efficient incorporation of,
and integration with, evolving technologies and standards.
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. Scalability. We provide global information sharing, guaranteed delivery
and transparent information routing across geographic regions. Our
software is designed to be expandable not only across a customer's
existing organization, but throughout its network of customers, suppliers
and partners. As a result, our architecture not only scales to match the
number of transactions, but also scales across geographies.
. Embedded Security. Security is a high priority for Internet and
electronic business needs and will become increasingly important in a
global economy. Our implementation of security mechanisms allows
integration to be safely extended to applications running at customer,
supplier or partner sites and can be selected to fit current needs and
then adjusted to fit future requirements.
. Management and Monitoring Capabilities. Our ActiveWorks solution allows
systems administrators to view business event transmissions, both in real
time and historically. Our graphical management and monitoring
capabilities provide a unified view of the interactions among the
applications, which reduces the cost and time required for system-wide
maintenance.
The Active Software Strategy
Active Software's mission is to establish the ActiveWorks Integration System
as the leading platform for electronic business integration worldwide. Key
elements of this strategy include:
Facilitate Broad Acceptance and Deployment of Our Electronic Business
Integration Platform
Our objective is to establish the ActiveWorks Integration System as the
electronic business integration platform of choice across multiple industries.
To facilitate this broad acceptance, we have designed our platform to be open,
extensible and broadly applicable to many different markets. For example, we
have licensed the ActiveWorks Integration System to leading enterprises in the
financial services, technology, telecommunications, government, utilities,
retail, manufacturing and transportation industry sectors. We intend to
continue leveraging our existing customers to serve as reference accounts in
order to further penetrate these markets, as well as to expand into other
markets. An important aspect of our strategy has been to develop partnerships
with organizations that extend our market reach and supplement and complement
our capabilities, particularly in providing expertise with respect to specific
large markets. By working together to meet our customers' needs, we can become
an integral part of their electronic business strategy, which provides
significant additional opportunities for us to grow with our customers going
forward.
Enhance Our Technological Leadership through Ongoing Investment and Innovation
We expect to continually add to the depth and breadth of the ActiveWorks
Integration System, always with the ultimate objective of making electronic
business integration faster and easier for our customers. We believe that
ongoing innovation will be critical to realizing this objective and building
technological barriers to entry. Our key technical personnel have been
recognized as innovators in integration, middleware and networking
technologies. We believe that the recognition by industry analysts and the
media of our technical achievements is important in increasing market awareness
and generating business referral opportunities.
Provide a Complete Electronic Business Integration Solution
We recognize that solving the integration challenges facing our customers is
critical to the continued success of their businesses. Our approach is designed
to help them meet those challenges by offering a comprehensive electronic
business integration solution. We intend to
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continue to enhance and expand the capabilities of our products in order to
continue to provide our customers with a comprehensive electronic business
integration platform. The ActiveWorks Integration System incorporates the
Information Broker, dynamic adapters and management facilities necessary to
provide a robust platform for electronic business integration. In addition, we
have developed a methodology that enables our customers to develop a focused
integration strategy and implementation plan. This methodology is accompanied
by pre-built standard integration processes that can be readily customized and
deployed. Finally, we understand that our customers' success is paramount and
we partner with a variety of third parties whose capabilities both complement
and augment our own in order to assist our customers in rapidly delivering
successful business results.
Leverage Our Partnerships with System Integrators and Service, Distribution
and Marketing Partners
We intend to expand and strengthen our partnerships with system integrators
and service, distribution and marketing partners in order to provide services
and sales leverage to our software product-based business model. We have
established a series of partnerships and alliances with system integrators,
such as American Management Systems, Inc., Cambridge Technology Partners, Inc.
and Electronic Data Systems, and service, distribution and marketing partners,
such as BroadVision, Inc., Cisco Systems, Inc., Hewlett-Packard Company, Siebel
Systems, Inc. and Sun Microsystems, Inc. These partnerships and alliances
provide an extension of our direct sales force through our joint promotional
and selling efforts and enable us to reach a broader range of customers than
would be possible through our sales force alone. These relationships also
enable us to focus on being the provider of electronic business integration
software, leveraging our unique capabilities and technologies while providing
our customers with a comprehensive solution and enabling us to scale our
business more quickly, effectively and inexpensively.
Continue Our Commitment to Customer Satisfaction
We understand that in order for us to be successful, our customers must be
successful. We are committed to customer satisfaction throughout our
organization, and we endeavor to provide our customers with the highest quality
products and services, directly and through our partners. We also intend to
continue leveraging our existing customers to serve as reference accounts for
prospective customers. In order to accomplish this, we invest substantial time
and effort in testing our products and working closely with our customers to
quickly address any issues that arise. Our in-house professional services
efforts are focused on providing both our customers and our partners with the
technical assistance and capabilities required to ensure smooth implementation
of our eBusiness integration solution. We carefully select partners who share
our commitment to high quality work and outstanding customer service.
Products and Services
We market the ActiveWorks Integration System and professional services that
support our customers' and partners' use of our products. In addition, our
Active Integration Methodology provides a framework for accelerating
integration projects implemented by our customers and our system integrator
partners.
ActiveWorks Integration System
The ActiveWorks Integration System consists of a number of products that
work together to provide our customers with a comprehensive integration
platform. These products include the ActiveWorks Designer for graphically
designing integration projects; the Information Broker, which provides the
underlying technology for integrating different sources of data in real time;
Dynamic Adapters, which provide connectivity to applications and systems;
Integration Agents, which provide a
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mechanism for extending integration projects with specialized code; Graphical
Integration Tools, which provide for the configuration of the system; and
Graphical Management and Monitoring Tools, which make the integration platform
easy to deploy, manage and maintain.
. ActiveWorks Designer. The ActiveWorks Designer provides a visual point-
and-click environment for designing and testing an integration project.
The ActiveWorks Designer supports the industry standards for process
modeling and design. Once the design for integration is complete, the
ActiveWorks Designer automatically generates the underlying code and
configuration information. The ActiveWorks Designer also supports
automatic simulation of the integration, testing and project reporting,
thereby decreasing the likelihood of errors during an integration
project. The ActiveWorks Designer implements the Active Integration
Methodology and eliminates much of the custom programming involved in
integrating complex systems.
. ActiveWorks Information Broker. The Information Broker is the central
component of the ActiveWorks Integration System. The Information Broker
resides on a server and mediates requests to and from applications,
providing essential queuing, filtering, routing and storage of
information in a secure manner. The Information Broker ensures that
events are delivered once, and only once. ActiveWorks' scalable
architecture simplifies systems integration because all collaborating
applications communicate through the Information Broker, rather than in a
more complex point-to-point fashion.
. Information Broker Options. Our customers may choose the following
Information Broker options, which increase functionality and enhance the
ability of ActiveWorks to support mission-critical electronic business
integration projects:
. The Multi-Broker Option enables an unlimited number of Information
Brokers to be configured to provide information sharing and automatic
information delivery throughout the enterprise, including its network
of customers, suppliers and partners. Multiple Information Brokers
collaborate to provide a single integrated system that efficiently
delivers information among applications.
. The High Availability Option ensures uninterrupted availability
without data loss through server outages.
. The Secure Socket Layer, or SSL, Option enables customers to send
encrypted data with digital signature authentication.
. ActiveWorks Dynamic Adapters. Dynamic adapters connect individual
software applications to the ActiveWorks platform. Active Software and
its partners have developed a large number of dynamic adapters that work
with many enterprise applications and systems, including:
. front office and e-commerce applications, including those from
Clarify, Inc., Siebel Systems, Inc., The Vantive Corporation and
InterWorld Corporation;
. back office enterprise applications, including those from PeopleSoft,
Inc. and SAP;
. relational databases, including those from IBM (DB2), Informix
Corporation, Microsoft Corporation (SQL Server), Oracle Corporation
and Sybase, Inc.;
. mainframe and other data sources, such as IBM 3270, CICS and MQ
Series; and
. custom applications developed using ActiveX, C, C++, CORBA and the
Java language.
Our breadth of dynamic adapters enables easier and faster integration
of additional applications to an electronic business integration solution
or project. The wide range of dynamic adapters available from Active
Software and its partners give ActiveWorks a scope of integration not
available from other integration solution providers. We believe that our
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ActiveWorks dynamic adapters are also more configurable and adaptable
than approaches available from other vendors. ActiveWorks dynamic
adapters enable new functionality in the integrated application to become
immediately and automatically available to the rest of the system.
. ActiveWorks Adapter Development Kit. The ActiveWorks Adapter Development
Kit enables customers, partners and independent software vendors to
create their own custom dynamic adapters for the ActiveWorks platform,
which further extend the capabilities of the ActiveWorks Integration
System. Virtually any application can be integrated through the use of
custom adapters created with the Adapter Development Kit, thereby
ensuring that customers can successfully integrate their current
applications, as well as applications which may be developed or acquired
in the future.
. ActiveWorks Integration Agents. ActiveWorks Integration Agents provide
additional integration logic and data transformation to meet demanding
integration requirements. The Integration Logic Agent extends the
processing capabilities of the integrated system by providing a framework
for managing and executing custom code written in the Java language. The
Business Rule Agent monitors events and specifies the processing of these
events based on the application of business rules. The Data
Transformation Agent performs complex transformations to enable
incompatible data types to be exchanged across applications using complex
data formats such as Electronic Data Interchange, or EDI, and Extensible
Markup Language, or XML.
. ActiveWorks Graphical Integration Tools. ActiveWorks Graphical
Integration Tools enable the Information Broker and dynamic adapters to
be configured or reconfigured in real time, eliminating the need for
expensive custom programming.
. ActiveWorks Graphical Management and Monitoring Tools. ActiveWorks
Graphical Management and Monitoring Tools facilitate the rapid deployment
of electronic business integration solutions using the ActiveWorks
platform. These tools have an easy-to-use graphical point-and-click
interface that provides users with insight regarding the activity of a
deployed ActiveWorks system.
The Active Integration Methodology
Designed to rapidly deliver successful business results, the Active
Integration Methodology involves project planning, integration analysis and
design, best practices mentoring and quality assurance testing. The Active
Integration Methodology consists of standard business integration processes and
an integration framework, all of which help customers and partners complete
integration projects more quickly.
. Integration Processes are pre-built standard business integration
solutions that synchronize information and coordinate business processes
across multiple enterprise applications. Integration processes have been
developed for common business requirements, including customer
synchronization, customer support billing, account status, bill of
materials and order/inventory status. All of these pre-built integration
processes can be used as provided, or customized to fit the particular
business requirements.
. The Integration Framework consists of templates for creating custom
integration processes as quickly as possible. With Active Software's
expertise built-in, the Integration Framework enables customers to focus
on developing the content of their business processes, rather than the
underlying technology formats. The Integration Framework is typically
used when there is no pre-built integration process available or when it
is necessary to develop a customer-specific process for the integration
project.
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Professional Services
Our professional services include training, consulting, support and
maintenance. Support and maintenance services are provided to our customers
through agreements under which we provide technical support by telephone, fax,
email and the Web during business hours and provide updates and upgrades to our
software products. In addition, customers can elect optional services such as
emergency coverage on a 24 hours per day, seven days per week basis and
dedicated technical account managers. We also provide customer training at our
Santa Clara, California facility and other locations, with coursework related
to various aspects of our electronic business integration solution.
While we generally partner with system integrators to provide services such
as project implementation and management to our customers, our professional
services organization also directly supports our customers by providing
services related to electronic business integration mentoring, integration
process design and custom adapter development.
Strategic Partners
System Integrators. We have a software product-based business model that
leverages system integrator partners who jointly or separately provide a range
of services to our customers, including first-line technical support and
project implementation services. Accordingly, we have established a series of
partnerships with system integrators worldwide. These partnerships allow us to
maintain our focus as a product company while simultaneously obtaining sales,
technical and service leverage through our partners to provide our customers
with a comprehensive eBusiness integration solution. The following is a
representative list of our system integrator partners:
<TABLE>
<S> <C>
. Alodar Systems, Inc. .Inventa Corporation
. American Management Systems, Inc. .Inffinix Software
. Cambridge Technology Partners, Inc. .KPMG
. Catapult Technology .ObTech, Inc.
. DMR Consulting Group .Primix Solutions, Inc.
. Electronic Data Systems Corporation .Siemens Business Services
. Fort Point Partners
</TABLE>
Solution and Complementary Partners. An important part of our strategy is to
work with solution and complementary partners who have capabilities that can
complement and augment our electronic business integration solution and extend
our market reach. Many of these partners package or incorporate our products
with their products or solutions, enabling us to create combined offerings that
address specific problems, reach specific markets and provide more complete and
tailored offerings. The following is a representative list of our solution and
complementary partners:
<TABLE>
<S> <C>
. Aspect Telecommunications Corporation .Moss Software, Inc.
. Baan Company, N.V. .Newtonian Software, Inc.
. Blue Lobster Software .PeopleSoft, Inc.
. BroadVision, Inc. .Perot Systems Corporation
. Calico Commerce, Inc. .Pivotal Software Inc.
. Cisco Systems, Inc. .Siebel Systems, Inc.
. Clarify, Inc. .Sun Microsystems, Inc.
. Hewlett-Packard Company .Technology House
. InterWorld Corporation .The Vantive Corporation
. LongView Solutions
</TABLE>
Technology
Our ActiveWorks Integration System is based on an innovative architecture
that enables the integration of disparate enterprise applications, such as
custom and packaged applications,
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databases and e-commerce applications. As a result, these applications can
exchange information in real time, enabling a business to operate faster and
more efficiently and to use intranets and the Internet to conduct electronic
transactions internally and with customers, suppliers and partners. This new
way of implementing business processes across applications minimizes the need
for expensive custom programming.
Overview of the ActiveWorks Integration System
In the ActiveWorks Integration System, integrated applications exchange
messages called events. An event can announce a business event, such as "order
shipped" or request a service, such as "retrieve X's current bill." The
software components that connect an integrated application to the ActiveWorks
Integration System are called adapters. An adapter subscribes to events that
are related to its application and translates between the application's
programming interface, or API, and the event. When the adapter receives an
event, it invokes the API to make the application do what the event says needs
to be done. The adapter may also be invoked by its application, in which case
it publishes an event, typically a notice that announces to the rest of the
system that something has happened in the application--for example, a notice
that an order has been shipped. Adapters do not communicate directly with each
other. Instead they send events to, and receive events from, an Information
Broker, which is the hub of the ActiveWorks Integration System. In effect, the
Information Broker serves as an operating system for events and handles event
queuing, delivery, filtering and security checking.
Individual customers select the various ActiveWorks components appropriate
to their needs and use them to integrate their existing applications to fulfill
their business requirements. Regardless of the individual variations of unique
installations, all ActiveWorks systems include the necessary attributes for a
robust electronic business integration platform: scalability, security,
adaptability and extensibility.
Scalability
The ActiveWorks Integration System can be distributed and expanded
incrementally by simply adding multiple Information Brokers between the
integrated applications. An initial hub-and-spoke configuration deployed for
internal use can be incrementally expanded to a multi-hub configuration. The
addition of Information Brokers enables the ActiveWorks Integration System to
support more simultaneous connections to applications and provide faster
response to each connection, while reducing traffic that flows across the
network backbone. In addition, expanding a single-broker system to a multi-
broker system requires no changes to the applications and their adapters, and
administrators can manage a multi-broker system in the same manner as a single-
broker system. Instead of requiring administrators to replicate configuration
changes across multiple brokers, the brokers propagate the changes themselves.
Security
The ActiveWorks Integration System incorporates a wide range of security
features that address critical electronic business security issues arising from
global operations, business transactions conducted over the Internet and the
integration of applications at partner or vendor sites. These security features
include:
. Territories and territory gateways. Multiple brokers can be employed to
scale and distribute integration both within an electronic business and
among electronic businesses. Using multi-broker features called
territories and territory gateways, select communications can securely
take place with applications running at partner or vendor sites.
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. Encryption. The ActiveWorks Integration System uses the same state-of-
the-art encryption standard (SSL) and encryption technology (public key)
that are widely used to protect e-commerce.
. Digital signatures. A digital signature is an encrypted message digest
that can detect events that have been tampered with or otherwise
corrupted during transmission. A receiver can tell if an event has
arrived intact by computing its own message digest and comparing it with
the digest transmitted with the event.
. Digital certificates. Analogous to a passport, a digital certificate is a
digital document that cannot be forged. The digital certificate attests
that the public key in the certificate really belongs to the subject
named in the certificate. Digital certificates can be used to detect and
authenticate adapters or users.
. Authorization. The ActiveWorks Integration System limits a user's or an
application's ability to perform only those functions for which it has
been specifically authorized. The authorization capability controls
access to and distribution of critical business information.
Adaptability
We produce many dynamic adapters that enable interfacing with a wide range
of packaged applications (including those from SAP, PeopleSoft and Clarify);
databases (including those from Oracle, Sybase and Informix); custom
applications developed using ActiveX, C, C++, CORBA and the Java language; and
mainframe and other data sources (including CICS and MQ Series). In addition,
ActiveWorks offers an Adapter Development Kit that enables third parties to
develop additional dynamic adapters.
ActiveWorks dynamic adapters are designed to be reusable in a wide variety
of circumstances. They are able to receive instructions and configuration
information that will change their behavior while they are running. This
flexibility allows a single dynamic adapter to support a wide variety of
business processes and to adjust its behavior dynamically without code changes.
The ability to make these types of adjustments at the deployment site without
changing or writing code has been crucial to the achievement of robust systems
in a short time period.
Extensibility
The ActiveWorks Integration System employs software components called agents
to extend its processing functionality. Agents subscribe to a set of event
types and publish or deliver another set of transformed events. Customers can
develop custom agents using language adapters we offer for applications written
using C/C++, CORBA/IDL, the Java language or ActiveX. Examples of processing
that might be performed by agents include error processing, integration
functions such as insert or update processing, complex data transformations or
workflow processing.
The agent architecture enables a more flexible and scalable approach to
providing processing extensions, rather than direct inclusion of processing
within the Information Broker. By separating the processing, agents can be run
either locally on the same system as the Information Broker, or on one or more
remote systems for more configuration flexibility.
Customers
As of June 30, 1999, Active Software has licensed its ActiveWorks
Integration System to over 100 companies. Our typical customers are medium to
large businesses, particularly Global 2000 companies, a term used to describe
the world's largest 2,000 companies in terms of revenues. In the six months
ended June 30, 1999, repeat customers accounted for approximately 62% of total
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revenues. In 1997, The Boeing Company accounted for 33% of our total revenues.
In 1998, no customer accounted for more than 10% of our total revenues. For
the six months ended June 30, 1999, Level 3 Communications, Inc. and the
National Security Agency accounted for 16% and 13% of our total revenues,
respectively. We expect that a small number of customers will continue to
account for a substantial portion of our revenues for the foreseeable future.
The following is a representative list of our customers by industry:
Financial Services Technology Manufacturing and
Automatic Data Calico Technology, Other
Processing, Inc. Inc. The Boeing Company
American Management Comdisco, Inc. Falconbridge
Systems, Inc. Creo Products Inc. Herman Miller, Inc.
Daiwa Securities Hewlett-Packard
America Company Telecommunications
Fidelity Investments InterWorld Level 3
Corporation Communications, Inc.
Government and Utilities IntraWare, Inc. MediaOne Group, Inc.
AEP Energy Services Intuit, Inc. RCN Corporation
City of Toronto Juniper Networks, In.c Telecel
CTX Corporation Motorola, Inc.
Houston Associates Order Trust Other
Idaho Power Company Technology House C.H. Robinson Company
Lockheed Martin VeriFone, Inc. Federal Express
Missiles and Space Xtra Online Corporation
Company Marshall Industries
Union Energy Inc. Starbucks Corporation
U.S. Dept. of Defense
U.S. Dept. of
Transportation
The customers listed above accounted for 66% and 75% of total revenues in
1998 and the six months ended June 30, 1999, respectively. All of the above
customers have generated at least $70,000 in revenues to us since we
introduced our software products in August 1996.
Sales and Marketing
We promote and sell our products through our direct sales organization in
North America and Europe, as well as through system integrators and value
added resellers in countries where we have no direct sales operations. As of
June 30, 1999, we had 51 people in our sales and marketing organization, of
which 45 were in the United States and six were in Europe. We intend to
increase the size of our direct sales force and to establish additional sales
offices domestically and internationally. Currently, we believe we will need
to expand our sales organization by more than 100% of its present size over
the next 18 months.
Our system integrator partners and service, distribution and marketing
partners have capabilities that complement and augment our electronic business
integration solution and extend our market reach. In particular, our system
integrator partners often contribute industry-specific and application-
specific expertise as well as large scale project management capabilities that
enable us to address a broad range of markets. Many of our service,
distribution and marketing partners package or incorporate our products with
their products or solutions, enabling us to create combined offerings with
these partners that address specific problems, focus on specific markets and
provide more complete and tailored offerings. Our current relationships with
our partners typically are structured as co-marketing arrangements in which
the customer is referred by the partner to license the software directly from
us. As a result there is no revenue sharing arrangement between the partner
and us, and our current arrangements with these partners generally do not
impose any limitations on our ability to sell our products. In addition, we
have entered into a limited number of reseller
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arrangements in which our products are embedded in the reseller's products, for
which we receive a royalty from the reseller. To date, revenues from these
reseller arrangements have been insignificant.
Our marketing efforts are focused on developing greater awareness among
target customers for the ActiveWorks Integration System and the benefits it
provides. We market our products and services through targeted events including
tradeshows, conferences and seminars. We also regularly promote our products
through a variety of public relations activities and industry analyst
briefings, and our executives are frequent speakers at industry conferences and
forums in many of the markets we serve. We have developed a wide range of
collateral materials and sales and promotional tools that are used by our
direct sales organization, as well as by our system integrators and value added
reseller partners. These materials include brochures, data sheets, technical
and business white papers, case studies, press releases and our web site.
Research and Development
We believe that strong product development capabilities are essential to our
strategy of continuing to enhance and expand the capabilities of our products
in order to continue to provide our customers with a comprehensive electronic
business integration platform. We have invested significant time and resources
in creating a structured process for undertaking all product development. This
process involves several functional groups at all levels within our
organization and is designed to provide a framework for defining and addressing
the activities required to bring product concepts and development projects to
market successfully. In addition, we have recruited key engineers and software
developers with experience in the application integration, networking and
Internet software markets.
Our research and development expenses were $2.8 million in 1997, $4.0
million in 1998 and $2.3 million for the six months ended June 30, 1999. As of
June 30, 1999, approximately 32 employees were engaged in research and
development activities.
Competition
The electronic business integration market is extremely competitive and
subject to rapid change. We believe that the competitive factors affecting the
market for our products and services include product functionality and
features; availability of global support; incumbency of vendors; ease of
product implementation; quality of customer support services; and vendor and
product reputation. The relative importance of each of these factors depends
upon the specific customer environment. We believe that we have a strong
competitive position with respect to factors such as product features and
functionality, quality of customer support services and the ease of
implementation of our products. Because many of our competitors have longer
operating histories and greater resources, we believe that we do not compete as
favorably with respect to factors that involve the establishment of long-
standing relationships, such as incumbency of vendors and reputation of vendor
and products, or extensive resources, such as the availability of global
support.
We compete with various providers of application integration solutions,
including CrossWorlds, New Era of Networks, Software Technologies Corporation
and Vitria. In addition, a number of other companies are offering products and
services that address specific aspects of application integration, including
IBM, BEA Systems, Inc. and TIBCO Software Inc. We also face competition for
some aspects of our product and service offerings from major system
integrators, both independently and in conjunction with in-house corporate
information technology departments, which have traditionally been the prevalent
resource for application integration. We expect additional competition from
other established and emerging companies. Furthermore, our competitors may
combine with each other, or other companies may enter our markets by acquiring
or entering into strategic relationships with our competitors. For more
information regarding our competition, see "Risk Factors--Competition in the
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electronic business integration market is intense, and if we are unable to
compete effectively, the demand for, or the prices of, our products may be
reduced."
Proprietary Rights
We rely primarily on a combination of copyrights, trademarks, trade secret
laws and contractual obligations with employees and third parties to protect
our proprietary rights. We do not currently own any issued patents, and other
protection of our intellectual property is limited. Despite our efforts to
protect our proprietary rights, unauthorized parties may copy aspects of our
products and obtain and use information that we regard as proprietary. In
addition, other parties may breach confidentiality agreements or other
protective contracts we have entered into, and we may not be able to enforce
our rights in the event of these breaches. Furthermore, we expect that we will
increase our international operations in the future, and the laws of many
foreign countries do not protect our intellectual property rights to the same
extent as the laws of the United States.
The software industry is characterized by the existence of a large number of
patents and frequent litigation based on allegations of patent infringement and
the violation of other intellectual property rights. Although we attempt to
avoid infringing known proprietary rights of third parties in our product
development efforts, we expect that we may be subject to legal proceedings and
claims for alleged infringement by us or our licensees of third party
proprietary rights, such as patents, trademarks or copyrights, by us or our
licensees from time to time in the ordinary course of business. Any claims
relating to the infringement of third party proprietary rights, even if not
meritorious, could result in costly litigation, divert management's attention
and resources, or require us to enter into royalty or license agreements which
are not advantageous to us. In addition, parties making these claims may be
able to obtain an injunction, which could prevent us from selling our products
in the United States or abroad. Any of these results could harm our business.
We may increasingly be subject to infringement claims as the number of products
and competitors in our industry grow and functionalities of products overlap.
Furthermore, former employers of our current and future employees may assert
that our employees have improperly disclosed confidential or proprietary
information to us.
In addition, we license technology that is incorporated into our products
from third parties, including security software from SPYRUS, and any
significant interruption in the supply or support of any licensed software
could adversely affect our sales, unless and until we can replace the
functionality provided by this licensed software. For more information
regarding our dependence on third party technology, see "Risk Factors--Because
our products incorporate technology licensed to us from third parties, the loss
of our right to use this licensed technology could harm our business."
Employees
As of June 30, 1999, we had a total of 120 employees, of which 32 were in
research and development, 51 were in sales and marketing, 26 were in
professional services and product support, and 11 were in finance and
administration. Our future performance depends in significant part upon our
ability to attract new personnel and the continued service of existing
personnel in key areas including engineering, technical support and sales.
Competition for these personnel is intense and there can be no assurance that
we will be successful in attracting or retaining these personnel in the future.
None of our employees are subject to a collective bargaining agreement. We
consider our relations with our employees to be good.
Facilities
We lease approximately 24,000 square feet for our headquarters facility in
Santa Clara, California. The current lease for the Santa Clara facility expires
in December 2003 and does not
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provide for a right of extension or renewal. We also lease space at various
other locations in the United States and in other countries. Each of these
other offices is generally leased on a month-to-month basis or under a lease
with a remaining term of 12 months or less.
Legal Proceedings
We are not currently subject to any material legal proceedings; however, we
may from time to time become a party to various legal proceedings arising in
the ordinary course of our business.
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MANAGEMENT
Executive Officers and Directors
Our executive officers and directors and their ages as of May 31, 1999 are
as follows:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
R. James Green.................. 49 Chief Executive Officer, President and
Chairman of the Board of Directors
Rafael Bracho................... 43 Chief Technology Officer, Executive Vice
President and Director
Jon A. Bode..................... 42 Chief Financial Officer and Vice President,
Finance and Administration
Edwin C. Winder................. 50 Senior Vice President, Worldwide Sales
Sydney Springer................. 52 Vice President, Engineering
John M. Dempsey................. 47 Vice President, Professional Services
M. Zack Urlocker................ 36 Vice President, Marketing
Kevin R. Compton................ 40 Director
James P. Gauer.................. 47 Director
Michael J. Odrich............... 35 Director
Todd Rulon-Miller............... 48 Director
Roger S. Siboni................. 44 Director
</TABLE>
R. James Green co-founded Active Software in September 1995, and has served
as President and Chief Executive Officer since October 1997 and as a Director
since November 1995. Mr. Green has also served as Chairman since April 1996 and
served as President from November 1995 to April 1996. Prior to founding Active
Software, Mr. Green established and managed the distributed objects program at
Sun Microsystems, Inc., a provider of network computing products, where he was
Director of Engineering from 1988 to 1995. Mr. Green holds a B.A. degree from
Hanover College, an M.S. degree from North Carolina State University and an
M.S. degree in Computer Science from San Jose State University.
Rafael Bracho co-founded Active Software and has served as Chief Technology
Officer and Executive Vice President since November 1995. Dr. Bracho also has
served as a Director from November 1995 to April 1996 and from March 1997 to
present. Prior to founding Active Software, Dr. Bracho held various positions
at Sun Microsystems, Inc., where he was Senior Staff Engineer from January 1993
to September 1995 and Manager, NeWS Technology Department from April 1990 to
January 1993. Dr. Bracho holds a B.S. degree in Biomedical Engineering from
Universidad Iberoamericana (Mexico), an M.S. degree in Electrical Engineering
from the University of Washington and a Ph.D. degree in Electrical and Computer
Engineering from Carnegie Mellon University.
Jon A. Bode has served as Chief Financial Officer and Vice President,
Finance and Administration since joining Active Software in August 1997. Prior
to joining Active Software, from February 1997 to August 1997, Mr. Bode was
Acting Chief Financial Officer of NVIDIA Corporation, a provider of video
graphics processors, and of PharmaSonics, Inc., a medical device company. From
February 1996 to January 1997, Mr. Bode was Chief Financial Officer at Internet
Profiles Corporation, a provider of Internet traffic analysis and research
services. From October 1992 to November 1995, Mr. Bode held various financial
management positions, including Vice President, Finance and Administration, at
ArcSys Inc., a developer of automation software for physical layout of
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semiconductors. Mr. Bode holds a B.A. degree from Calvin College and an M.B.A.
degree from the University of Michigan.
Edwin C. Winder has served as Senior Vice President, Worldwide Sales since
joining Active Software in August 1997. Prior to joining Active Software, Mr.
Winder held a variety of sales management positions at Informix Corporation, a
database software company, where he was Senior Vice President, Japan Operations
from January 1996 to March 1997, Senior Vice President, Intercontinental from
April 1994 to December 1995, and Senior Vice President, Americas from January
1991 to March 1994. Mr. Winder holds a B.S. degree in Electrical Engineering
from Southern University and is a graduate of the Stanford University Executive
Program.
Sydney Springer has been Vice President, Engineering of Active Software
since October 1997, and served as Active Software's Director of Engineering
from February 1997 through October 1997. Prior to joining Active Software, Ms.
Springer held a variety of senior engineering and management positions at Sun
Microsystems, Inc. from February 1986 to January 1997, including Senior Staff
Engineer, Manager, NEO Technology Services, Project Lead--Integrated Multimedia
Group, and Manager, NeWS Technology Department. Ms. Springer holds a B.S.
degree in Applied Behavioral Sciences from the University of California at
Davis.
John M. Dempsey has served as Vice President, Professional Services since
joining Active Software in July 1998. Prior to joining Active Software, Mr.
Dempsey held a variety of executive management positions at Computer Sciences
Corporation, a system integrator, including Vice President, Communications
Industry Services from September 1996 to June 1998, and Vice President,
Consulting and Systems Integration from January 1990 to September 1996. Mr.
Dempsey holds a B.S. degree in Computer Science from the University of
Massachusetts and an M.S. degree in Engineering Management from Northeastern
University.
M. Zack Urlocker has served as Vice President, Marketing since joining
Active Software in February 1999. Prior to joining Active Software, Mr.
Urlocker held a variety of management positions with Inprise Corporation
(formerly Borland International), a software company, from August 1990 to
January 1999, including Vice President, Marketing from December 1997 to
February 1999 and Vice President, Product Management from February 1997 to
November 1997. Mr. Urlocker attended the J. L. Kellogg Graduate School of
Management at Northwestern University and holds a B.S. degree in Computer
Science from Concordia University (Montreal, Canada) and an M.Math degree in
Computer Science from University of Waterloo (Canada).
Kevin R. Compton has served as a director of Active Software since January
1996. Since 1990, Mr. Compton has served as a general partner of Kleiner
Perkins Caufield & Byers, a venture capital investment firm. Mr. Compton serves
on the Board of Directors of Citrix Systems, Inc., OneWorld Communications,
Inc., Corsair Communications, Inc., Rhythms NetConnections Inc. and VeriSign,
Inc. and is also a director of several privately-held companies.
James P. Gauer has been a director of Active Software since January 1996.
Since April 1999, he has served as a general partner of Palomar Ventures, a
venture capital investment firm, and from December 1992 to April 1999, he was a
general partner of Enterprise Partners.
Michael J. Odrich has been a director of Active Software since March 1997.
Since 1988, Mr. Odrich has held several positions at Lehman Brothers Inc., an
investment banking firm, and is currently Managing Director and head of Venture
Capital Investing at Lehman Brothers. Mr. Odrich is also a director of several
privately-held companies.
Todd Rulon-Miller has been a director of Active Software since October 1997.
Since 1998, Mr. Rulon-Miller has served as a partner of Apogee Venture Group, a
venture capital investment firm.
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Mr. Rulon-Miller was Vice President, Worldwide Sales at Netscape Communications
Corporation from 1994 to 1997, President and Chief Executive Officer at
Software Alliance from 1992 to 1994, and Vice President, Sales--North American
Operations at NeXT Computers from 1986 to 1992. Mr. Rulon-Miller is also a
director of several privately-held companies.
Roger S. Siboni has been a director of Active Software since August 1998.
Mr. Siboni has been President and Chief Executive Officer of E.piphany, a
relationship management software company, since August 1998. Prior to joining
E.piphany, Mr. Siboni spent more than twenty years at KPMG Peat Marwick LLP, a
worldwide accounting and consulting organization, most recently as its Deputy
Chairman and Chief Operating Officer. Mr. Siboni serves as a director of
Cadence Design Systems, Inc., FileNET Corporation, Macromedia, Inc. and the
Walter A. Haas School of Business at the University of California at Berkeley.
Board Composition
Our bylaws currently provide for a board of directors consisting of seven
members. All directors hold office until the next annual meeting of our
stockholders and until their successors have been elected and qualified.
Messrs. Compton, Gauer and Odrich were elected to the board of directors under
a voting agreement by and among Active Software and its principal stockholders.
This voting agreement will terminate upon completion of this offering.
In accordance with the terms of our amended and restated certificate of
incorporation to be effective upon completion of this offering, the board of
directors will be divided into three classes, each serving staggered three-year
terms, following the completion of this offering: Class I, whose initial term
will expire at the annual meeting (or special meeting held in lieu of an annual
meeting) of stockholders held in 2000; Class II, whose initial term will expire
at the annual meeting (or special meeting held in lieu of an annual meeting) of
stockholders in 2001; and Class III, whose initial term will expire at the
annual meeting (or special meeting held in lieu of an annual meeting) of
stockholders in 2002. As a result, only one class of directors will be elected
at each annual meeting of stockholders of Active Software, with the other
classes continuing for the remainder of their respective terms. Messrs. Bracho,
Green and Odrich have been designated as Class I directors; Messrs. Compton and
Gauer have been designated as Class II directors; and Messrs. Siboni and Rulon-
Miller have been designated as Class III directors. These provisions in our
amended and restated certificate of incorporation may have the effect of
delaying or preventing changes in control or management of Active Software.
Board Compensation
Except for reimbursement for reasonable travel expenses relating to
attendance at board meetings and the grant of stock options, directors are not
compensated for their services as directors. Directors who are employees of
Active Software are eligible to participate in our 1996 Stock Plan, 1996A Stock
Plan and 1999 Stock Plan and will be eligible to participate in our 1999
Employee Stock Purchase Plan. Directors who are not employees of Active
Software will be eligible to participate in our 1999 Directors' Stock Option
Plan. See "Stock Plans" for more information regarding these plans.
In October 1997, we granted a nonstatutory stock option to Mr. Rulon-Miller
to purchase 60,000 shares of our common stock at an exercise price of $0.18 per
share. Additionally, in May 1999, we granted another nonstatutory stock option
to Mr. Rulon-Miller to purchase an additional 7,500 shares of our common stock
at an exercise price of $10.67 per share. In August 1998, we granted a
nonstatutory stock option to Mr. Siboni to purchase 60,000 shares of our common
stock at an exercise price of $0.77 per share. Each of these options vests over
a fifty-month period.
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In June 1999, we granted nonstatutory stock options to each of Messrs.
Compton, Gauer and Odrich for the purchase of 5,000 shares of common stock at
an exercise price of $11.00 per share. Each of these options is exercisable for
the full number of shares under the option.
Board Committees
The compensation committee currently consists of Messrs. Odrich and Gauer.
The compensation committee:
. reviews and approves the compensation and benefits for our executive
officers and grants stock options under our stock option plans; and
. makes recommendations to the board of directors regarding these matters.
The audit committee consists of Messrs. Siboni and Compton. The audit
committee:
. makes recommendations to the board of directors regarding the selection
of independent auditors;
. reviews the results and scope of the audit and other services provided by
our independent auditors; and
. reviews and evaluates our audit and control functions.
Compensation Committee Interlocks and Insider Participation
The members of the compensation committee of Active Software's board of
directors are currently Messrs. Odrich and Gauer, neither of whom has been an
officer or employee of Active Software at any time. Investment entities
affiliated with Messrs. Odrich and Gauer have purchased shares of our
convertible redeemable preferred stock in private placement transactions. These
transactions are described in "Related Party Transactions."
No executive officer of Active Software serves as a member of the board of
directors or compensation committee of any entity that has one or more
executive officers serving on Active Software's board of directors or
compensation committee.
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Executive Compensation
Summary Compensation Information
The following table sets forth compensation awarded to, earned by, or paid
to our Chief Executive Officer and the four other most highly compensated
executive officers whose total cash compensation exceeded $100,000 during the
year ended December 31, 1998. The amounts in the column titled "All Other
Compensation" consist of life insurance premiums paid by Active Software.
Summary Compensation Table
<TABLE>
<CAPTION>
Long-Term and Other
Compensation
------------------------
Annual
Compensation
------------------ Securities All Other
Salary Underlying Compensation
Name and Principal Position ($) Bonus ($) Options (#) ($)
--------------------------- -------- --------- ----------- ------------
<S> <C> <C> <C> <C>
R. James Green..................... $172,231 $61,967 150,000 $ 874
President and Chief Executive
Officer
Rafael Bracho...................... 151,924 65,376 90,000 441
Executive Vice President and Chief
Technology Officer
Edwin C. Winder.................... 176,538 77,871 -- 893
Senior Vice President, Worldwide
Sales
Jon A. Bode........................ 110,322 20,860 45,000 301
Vice President, Finance and
Administration and Chief
Financial Officer
Sydney Springer.................... 152,387 3,868 -- 1,263
Vice President, Engineering
</TABLE>
Option Grants
The following table shows information regarding stock options granted to the
executive officers named in the Summary Compensation Table during the year
ended December 31, 1998. No stock appreciation rights were granted to these
individuals during the year.
All of the following stock options were granted under the 1996A Stock Plan
and are exercisable for all option shares; however, any shares purchased upon
exercise of these options are subject to repurchase by Active Software at the
original exercise price per share upon the termination of the optionee's
employment with Active Software. This right of repurchase lapses over time,
with the shares issuable upon exercise of each of these options vesting as to
24% of the shares on the first anniversary of the vesting commencement date
specified in the respective option agreement and 2% of the shares each month
thereafter.
The percentages below are based on a total of 1,969,500 shares subject to
options granted by Active Software during the year ended December 31, 1998 to
employees and consultants of Active Software, including the executive officers
named in the Summary Compensation Table.
The exercise price per share of each option was equal to the fair market
value of the common stock as determined by the board of directors on the date
of grant. The potential realizable values assume that the initial public
offering price of $11.00 per share was the fair market value of the common
stock on the date of grant and that the price of the applicable stock increases
from the date of grant until the end of the ten-year option term at the annual
rates specified. There is no assurance provided to any executive officer or any
other holder of our securities that the actual stock price appreciation over
the 10-year option term will be at the assumed 5% and 10% levels or at any
other defined level.
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Option Grants in 1998
<TABLE>
<CAPTION>
Potential Realizable
Value at Assumed
Number of Percentage Annual Rates Of Stock
Shares of Total Exercise Price Appreciation
Underlying Options Price for Option Term
Options Granted to per Expiration ---------------------
Name Granted Employees Share Date 5% 10%
---- ---------- ---------- -------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
R. James Green.......... 150,000 7.6% $1.33 12/17/2008 $2,488,754 $4,083,029
Rafael Bracho........... 90,000 4.6 1.33 12/17/2008 1,493,252 2,449,817
Edwin C. Winder......... -- -- -- -- -- --
Jon A. Bode............. 45,000 2.3 1.33 12/17/2008 746,626 1,224,909
Sydney Springer......... -- -- -- -- -- --
</TABLE>
The following table provides summary information concerning the shares of
common stock represented by outstanding stock options held by each of the
executive officers named in the Summary Compensation Table as of December 31,
1998.
The value realized represents the difference between the fair market value
of the shares as of December 31, 1998, based on the assumed fair market value
of $11.00 per share, and the exercise price of the option.
Aggregated Option Exercises in 1998 and Fiscal Year-End Option Values
<TABLE>
<CAPTION>
Number of
Securities Underlying Value of Unexercised
Unexercised Options In-the-Money Options
Shares at December 31, 1998 (#) at December 31, 1998 ($)
Acquired Value ------------------------- -------------------------
Name on Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
---- ----------- ---------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
R. James Green.......... -- -- 150,000 -- $1,450,000 --
Rafael Bracho........... -- -- 90,000 -- 870,000 --
Edwin C. Winder......... 349,500 $3,781,590 -- -- -- --
Jon A. Bode............. 172,500 1,866,450 45,000 -- 435,000 --
Sydney Springer......... 142,500 1,541,850 -- -- -- --
</TABLE>
In March 1999, we granted to Sydney Springer and Edwin Winder options to
purchase 15,000 shares and 30,000 shares, respectively, of common stock, in
each case at an exercise price of $4.00 per share. In July 1999, we granted to
R. James Green and Rafael Bracho options to purchase 150,000 shares and 45,000
shares, respectively, of common stock at an exercise price of $12.00 per share.
Each of these options vests over a fifty-month period.
Stock Plans
1999 Stock Plan
Our 1999 Stock Plan was adopted by the board of directors in June 1999 and
will be submitted for approval by our stockholders prior to the completion of
this offering. A total of 3,000,000 shares of common stock has been reserved
for issuance under the 1999 Stock Plan, all of which remain available for
future option grants. In addition, the number of shares reserved under the plan
will automatically be increased on July 1 of each of the following years: 2000,
2001, 2002, 2003 and 2004, in an amount equal to the lesser of (a) 1,500,000
shares, or (b) four percent of the shares outstanding on the last day of the
preceding fiscal year. The purposes of the 1999 Stock Plan are to attract and
retain the best available personnel to Active Software, to provide additional
incentives to our employees and consultants and to promote the success of our
business.
The 1999 Stock Plan provides for the grant of incentive stock options to
employees, including officers and directors, and nonstatutory stock options and
stock purchase rights to employees and
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consultants, including nonemployee directors. If not terminated earlier, the
1999 Stock Plan will terminate in June 2009.
The 1999 Stock Plan may be administered by the board of directors or a
committee of the board. The administrator determines the terms of options and
stock purchase rights granted under the 1999 Stock Plan, including the number
of shares subject to the award, exercise or purchase price, term and
exercisability. In no event, however, may an individual employee receive option
grants or stock purchase rights for more than 1,000,000 shares under the 1999
Stock Plan in any fiscal year.
The exercise price of all incentive stock options granted under the 1999
Stock Plan must be at least equal to the fair market value of the common stock
on the date of grant. The exercise price of any incentive stock option granted
to an optionee who owns stock representing more than 10% of the total combined
voting power of all classes of outstanding capital stock of Active Software or
any parent or subsidiary corporation of Active Software must equal at least
110% of the fair market value of the common stock on the date of grant.
However, the exercise price of a nonstatutory stock option granted to an
individual who, on the last day of our most recently completed fiscal year, is
our chief executive officer, or is acting in this capacity, or is one of our
four most highly compensated officers, other than our chief executive officer,
whose total cash compensation exceeded $100,000 during the fiscal year, will
generally equal at least 100% of the fair market value of the common stock on
the date of grant. The exercise prices of nonstatutory stock options granted to
other persons will be specified by the administrator at the time of grant.
Payment of the exercise price may be made in cash or other consideration as
determined by the administrator.
The administrator determines the term of options, which may not exceed 10
years or 5 years in the case of an incentive stock option granted to a 10%
stockholder. Generally, no option may be transferred by the optionee other than
by will or the laws of descent or distribution. However, the administrator may
in its discretion permit transferability of nonstatutory stock options granted
under the 1999 Stock Plan. The administrator determines when options become
exercisable. Options granted under the 1999 Stock Plan generally become
exercisable at the rate of 24% of the total number of shares subject to the
options on the first anniversary of the vesting commencement date, and 2% of
the total number of shares subject to the options each month thereafter.
In addition to stock options, the administrator may issue to employees,
directors and consultants stock purchase rights under the 1999 Stock Plan. The
administrator determines the number of shares, price, terms, conditions and
restrictions related to a grant of stock purchase rights. Unless the
administrator determines otherwise, the recipient of a stock purchase right
must execute a restricted stock purchase agreement granting Active Software an
option to repurchase the shares at cost upon termination of the recipient's
relationship with us. This repurchase right generally lapses on the same
schedule as options vest.
If we sell all or substantially all of our assets, merge with another
corporation or engage in specified reorganizations, the 1999 Stock Plan
provides for automatic acceleration of vesting with respect to 50% of the
remaining unvested shares under each stock option, effective as of the closing
or completion of the change of control transaction, provided that this partial
vesting acceleration does not preclude "pooling of interests" accounting
treatment for the change of control transaction. In addition, if we sell all or
substantially all of our assets or merge with another corporation, then each
option and stock purchase right may be assumed or an equivalent option or stock
purchase right substituted by the successor corporation. However, if the
successor corporation does not agree to assume or substitute an option or stock
purchase right, then the option will automatically be terminated. The
administrator has the authority to amend or terminate the 1999 Stock Plan as
long as the amendment or termination does not adversely affect any outstanding
option or stock purchase right and provided that stockholder approval will be
obtained to the extent it is required by applicable law.
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<PAGE>
1996 and 1996A Stock Plans
Our 1996 Stock Plan was adopted by the board of directors and approved by
our stockholders in January 1996. Our 1996A Stock Plan was adopted by the board
of directors in August 1996 and approved by our stockholders in March 1997. A
total of 6,846,000 shares of common stock has been reserved for issuance under
the 1996 and 1996A Stock Plans, 181,812 of which remained available for future
option grants as of June 30, 1999. The 1996 and 1996A Stock Plans provide that
any shares repurchased or returned to the 1996 Stock Plan will be automatically
transferred to the 1996A Stock Plan, subject to a maximum of 6,846,000 shares,
and will be available for future issuance under the 1996A Stock Plan.
The purposes of the 1996 and 1996A Stock Plans are to attract and retain the
best available personnel to Active Software, to provide additional incentives
to our employees and consultants and to promote the success of our business.
The 1996 and 1996A Stock Plans provide for the grant of incentive stock options
to employees, including officers and directors, and nonstatutory stock options
and stock purchase rights to employees and consultants, including nonemployee
directors. If not terminated earlier, the 1996 Stock Plan will terminate in
January 2006 and the 1996A Stock Plan will terminate in August 2006.
The terms of options and stock purchase rights issued under the 1996 and
1996A Stock Plans are generally the same as those which may be issued under the
1999 Stock Plan, except with respect to the following features. Nonstatutory
stock options and stock purchase rights granted under the 1996 and 1996A Stock
Plans are nontransferable in all cases and must generally be granted with an
exercise or purchase price equal to at least 85% of the fair market value of
the common stock on the date of grant. In addition, prior to the date of this
offering, optionees have generally been permitted by the board of directors to
enter into amendments to their option agreements that allow for the immediate
exercise of all the shares subject to the options, including shares which are
not yet vested at the time of exercise. These option agreement amendments give
Active Software the right to repurchase the unvested shares at the optionee's
exercise price in the event of termination of the optionee's employment or
consulting relationship with us. Our repurchase right lapses over the same
period as the vesting schedule that applied to the option prior to its
exercise.
No individual employee may receive options or stock purchase rights with
respect to more than 1,000,000 shares of common stock under the 1996 and 1996A
Stock Plans during any fiscal year.
1999 Directors' Stock Option Plan
The 1999 Directors' Stock Option Plan was adopted by the board of directors
in June 1999 and will be submitted for approval by our stockholders before
completion of this offering. A total of 300,000 shares of common stock has been
reserved for issuance under the 1999 Directors' Stock Option Plan, all of which
remain available for future grants.
The 1999 Directors' Stock Option Plan provides for the grant of nonstatutory
stock options to nonemployee directors of Active Software. The 1999 Directors'
Stock Option Plan is designed to work automatically without administration;
however, to the extent administration is necessary, it will be performed by the
board of directors. To the extent they arise, it is expected that conflicts of
interest will be addressed by abstention of any interested director from both
deliberations and voting regarding matters in which the director has a personal
interest.
The 1999 Directors' Stock Option Plan provides that each person who becomes
a nonemployee director of Active Software after the effective date of this
offering will be granted a nonstatutory stock option to purchase 20,000 shares
of common stock on the date on which the optionee first becomes a nonemployee
director of Active Software. In addition, each existing nonemployee director
who was
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<PAGE>
elected to the board of directors prior to the completion of this offering by
the holders of our convertible redeemable preferred stock will be granted a
nonstatutory stock option to purchase 20,000 shares of common stock on the
first annual stockholders meeting following the effective date of this
offering, provided that he or she remains on the board of directors following
the meeting. Thereafter, on the date of our annual stockholders meeting each
year, each nonemployee director will be granted an additional option to
purchase 5,000 shares of common stock if, on this date, he or she has served on
our board of directors for at least six months. Our directors elected by our
convertible redeemable preferred stockholders prior to the offering who receive
an option to purchase 20,000 shares on the first annual stockholders meeting
following the offering will be eligible to receive additional options to
purchase 5,000 shares beginning on the second annual stockholders meeting
following the offering.
The 1999 Directors' Stock Option Plan sets neither a maximum nor a minimum
number of shares for which options may be granted to any one nonemployee
director, but does specify the number of shares that may be included in any
grant and the method of making a grant. No option granted under the 1999
Directors' Stock Option Plan is transferable by the optionee other than by will
or the laws of descent or distribution or under a qualified domestic relations
order. Each option is exercisable, during the lifetime of the optionee, only by
the optionee or under a qualified domestic relations order.
The 1999 Directors' Stock Option Plan provides that all options granted
under this plan will be fully exercisable as to 100% of the total number of
shares on the date of grant. If a nonemployee director ceases to serve as a
director of Active Software for any reason other than death or disability, he
or she may within 90 days after the date he or she ceases to be a director of
Active Software, exercise options granted under the 1999 Directors' Stock
Option Plan to the extent that he or she was entitled to exercise it at the
date of termination. The exercise price of all stock options granted under the
1999 Directors' Stock Option Plan will be equal to the fair market value of a
share of our common stock on the date of grant of the option. Options granted
under the 1999 Directors' Stock Option Plan have a term of five years.
In the event of the dissolution or liquidation of Active Software, a sale of
all or substantially all of our assets, our merger with or into another
corporation or any other reorganization of Active Software in which more than
50% of the shares of Active Software entitled to vote are exchanged, each
option outstanding under the plan will terminate if not exercised prior to
consummation of the transaction, if the acquiring entity does not assume or
substitute the option. The board of directors may amend or terminate the 1999
Directors' Stock Option Plan at any time as long as their action does not
adversely affect any outstanding option and stockholder approval is obtained
for any amendment as required by applicable law. If not terminated earlier, the
1999 Directors' Stock Option Plan will have a term of ten years.
1999 Employee Stock Purchase Plan
Our 1999 Employee Stock Purchase Plan was adopted by the board of directors
in June 1999 and will be submitted for approval by our stockholders before
completion of this offering. A total of 750,000 shares of common stock has been
reserved for issuance under the 1999 Employee Stock Purchase Plan. The number
of shares reserved for issuance under the 1999 Employee Stock Purchase Plan
will automatically increase on July 1 of each of the fiscal years beginning in
2000, 2001, 2002, 2003 and 2004 by an amount equal to the lesser of 350,000
shares or one percent of the total shares outstanding on the last day of the
immediately preceding fiscal year.
The 1999 Employee Stock Purchase Plan, which is intended to qualify under
Section 423 of the Code, will be implemented by a series of overlapping
offering periods of approximately 24 months duration, with new offering periods
(other than the first offering period) commencing on May 1 and
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November 1 of each year. Each offering period will generally consist of four
consecutive purchase periods of six months' duration, at the end of which an
automatic purchase will be made for participants. The initial offering period
is expected to commence on the date of this offering and end on October 31,
2001; the initial purchase period is expected to begin on the date of this
offering and end on April 30, 2000, with subsequent purchase periods ending on
October 31, 2000, April 30, 2000 and October 31, 2001. The 1999 Employee Stock
Purchase Plan will be administered by the board of directors or by a committee
appointed by the board. Our employees (including officers and employee
directors), or employees of any majority-owned subsidiary designated by the
board, are eligible to participate in the 1999 Employee Stock Purchase Plan if
they are employed by us or a subsidiary of ours for at least 20 hours per week
and more than five months per year. The 1999 Employee Stock Purchase Plan
permits eligible employees to purchase common stock through payroll deductions,
which in any event may not exceed 20% of an employee's base salary, commissions
and bonus. The purchase price is equal to the lower of 85% of the fair market
value of the common stock at the beginning of each offering period or at the
end of each purchase period. Employees may end their participation in the 1999
Employee Stock Purchase Plan at any time during an offering period, and
participation ends automatically on termination of employment.
An employee cannot be granted an option under the 1999 Employee Stock
Purchase Plan if immediately after the grant the employee would own stock
and/or hold outstanding options to purchase stock equaling 5% or more of the
total voting power or value of all classes of our stock or stock of our
subsidiaries, or if the option would permit an employee to purchase stock under
the 1999 Employee Stock Purchase Plan at a rate that exceeds $25,000 in fair
market value of stock for each calendar year in which the option is
outstanding. In addition, no employee may purchase more than 1,000 shares of
common stock under the 1999 Employee Stock Purchase Plan in any one purchase
period. If the fair market value of the common stock on a purchase date is less
than the fair market value at the beginning of the offering period, each
participant in that offering period will automatically be withdrawn from the
offering period as of the end of the purchase date and re-enrolled in the new
offering period beginning on the first business day following the purchase
date.
If we merge or consolidate with or into another corporation or sell all or
substantially all of our assets, each right to purchase stock under the 1999
Employee Stock Purchase Plan will be assumed or an equivalent right substituted
by the successor corporation. However, the board of directors will shorten any
ongoing offering period so that employees' rights to purchase stock under the
1999 Employee Stock Purchase Plan are exercised prior to the transaction in the
event that the successor corporation refuses to assume each purchase right or
to substitute an equivalent right of the acquiring corporation. The board of
directors has the power to amend or terminate the 1999 Employee Stock Purchase
Plan and to change or terminate offering periods as long as this action does
not adversely affect any outstanding rights to purchase stock thereunder.
However, the board of directors may amend or terminate the 1999 Employee Stock
Purchase Plan or an offering period even if it would adversely affect
outstanding options in order to avoid our incurring adverse accounting charges.
Limitation of Liability and Indemnification Matters
Our amended and restated certificate of incorporation limits the liability
of directors to the maximum extent permitted by Delaware law. Section 145 of
the Delaware General Corporation Law provides that a director of a corporation
will not be personally liable for monetary damages for breach of the
individual's fiduciary duties as a director except for:
. liability for any breach of the director's duty of loyalty to Active
Software or to its stockholders,
. liability for acts or omissions not in good faith or that involve
intentional misconduct or a knowing violation of law,
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. liability for unlawful payments of dividends or unlawful stock
repurchases or redemptions as provided in Section 174 of the Delaware
General Corporation Law, or
. liability for any transaction from which a director derives an improper
personal benefit.
Our bylaws provide that Active Software will indemnify its directors and
executive officers and may indemnify its officers, employees and other agents
to the full extent permitted by law. We believe that indemnification under our
bylaws covers at least negligence and gross negligence on the part of an
indemnified party. Our bylaws also permit us to advance expenses incurred by an
indemnified party in connection with the defense of any action or proceeding
arising out of the party's status or service as a director, officer, employee
or other agent of Active Software upon an undertaking by the indemnified party
to repay these advances if it is ultimately determined that the party is not
entitled to indemnification.
We have entered into separate indemnification agreements with each of our
directors and officers. These agreements require us to indemnify the director
or officer against expenses, including legal fees, judgments, fines and
settlements paid by the individual in connection with any action, suit or
proceeding arising out of the individual's status or service as a director or
officer of Active Software. We are not required to indemnify the individual
against liabilities arising from willful misconduct or conduct that is
knowingly fraudulent or deliberately dishonest. In addition, the
indemnification agreements require us to advance expenses incurred by the
individual in connection with any proceeding against the individual with
respect to which he or she may be entitled to indemnification by us. We believe
that the indemnification provisions of our amended and restated certificate of
incorporation and bylaws, as well as these indemnification agreements are
necessary to attract and retain qualified persons as directors and officers. We
also maintain directors' and officers' liability insurance.
At present we are not aware of any pending litigation or proceeding
involving any director, officer, employee or agent of Active Software where
indemnification will be required or permitted. Furthermore, we are not aware of
any threatened litigation or proceeding that might result in a claim for
indemnification.
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RELATED PARTY TRANSACTIONS
Stock option grants to directors and executive officers of Active Software
are described under the captions "Management--Board Compensation" and "--
Executive Compensation."
Since January 1, 1996, we have issued shares of our convertible redeemable
preferred stock to investors in private placement transactions as follows: a
total of 6,022,500 shares of Series A convertible redeemable preferred stock at
$0.67 per share in February 1996, a total of 3,915,000 shares of Series B
convertible redeemable preferred stock at $1.79 per share in April 1997, and a
total of 3,467,832 shares of Series C convertible redeemable preferred stock at
$4.08 per share between March and October 1998. The following table summarizes
the shares of convertible redeemable preferred stock purchased by our directors
and 5% stockholders and persons and entities associated with them in these
private placement transactions.
<TABLE>
<CAPTION>
Series A Series B Series C
Preferred Preferred Preferred
Stock Stock Stock
--------- --------- ---------
<S> <C> <C> <C>
Entities affiliated with directors
----------------------------------
Entities affiliated with Kleiner Perkins
Caufield & Byers (Kevin R. Compton).......... 2,250,000 557,619 164,214
Entities affiliated with Lehman Brothers Inc.
(Michael J. Odrich).......................... -- 1,672,863 490,195
Ocean Park Ventures, L.P. (James P. Gauer).... 525,000 126,858 --
5% stockholders
---------------
Sierra Ventures V, L.P. ...................... 750,000 557,620 73,530
Entities affiliated with Enterprise Partners.. 2,475,000 598,048 151,654
Stephen MacDonald............................. -- 278,809 68,628
</TABLE>
In the table above, shares held by affiliated persons and entities have been
aggregated. See "Principal Stockholders" for more information on these
affiliates. In connection with the above transactions, we entered into an
agreement with the investors providing for registration rights with respect to
these shares. For more information regarding this agreement, see "Description
of Capital Stock--Registration Rights of Securityholders."
In February 1996, we issued a total of 600,000 shares of common stock to
investment funds affiliated with Enterprise Partners in connection with a loan
to us by Enterprise Partners in October 1995 in the amount of $250,000 for seed
funding. This indebtedness was canceled in February 1996 as partial
consideration for the shares of Series A convertible redeemable preferred stock
purchased by these investment funds in February 1996.
We have entered into indemnification agreements with our officers and
directors containing provisions which may require us to, among other things,
indemnify our officers and directors against liabilities that may arise by
reason of their status or service as officers or directors (other than
liabilities arising from willful misconduct of a culpable nature) and to
advance their expenses incurred as a result of any proceeding against them as
to which they could be indemnified. See "Management--Limitation of Liability
and Indemnification Matters" for more information on our indemnification
obligations.
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PRINCIPAL STOCKHOLDERS
The following table sets forth information known to us with respect to the
beneficial ownership of our common stock as of June 30, 1999, as adjusted to
reflect the sale of the common stock offered hereby, by:
. each stockholder known by us to own beneficially more than 5% of the
common stock,
. our Chief Executive Officer and our four other most highly compensated
executive officers,
. each director, and
. all directors and executive officers as a group.
Except as otherwise noted, the address of each person listed in the table is
c/o Active Software, Inc., 3333 Octavius Drive, Santa Clara, CA 95054.
Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and includes voting and investment power
with respect to shares. To our knowledge, except under applicable community
property laws or as otherwise indicated, the persons named in the table have
sole voting and sole investment control with respect to all shares beneficially
owned. The applicable percentage of ownership for each stockholder is based on
19,751,372 shares of common stock outstanding as of June 30, 1999 and an
assumed 23,251,372 shares outstanding after the completion of this offering, in
each case together with applicable options for that stockholder. Shares of
common stock issuable upon exercise of options and other rights beneficially
owned that are exercisable within 60 days of June 30, 1999 are deemed
outstanding for the purpose of computing the percentage ownership of the person
holding those options and other rights but are not deemed outstanding for
computing the percentage ownership of any other person. A portion of the shares
issuable upon exercise of the options in the table below is subject to
repurchase by Active Software at the original exercise price in the event of
termination of the holder's relationship as an employee or director of Active
Software. This repurchase right lapses over time.
<TABLE>
<CAPTION>
Percent Options
Beneficially Owned Exercisable
Total ---------------------- within 60 Days
Number of Before After of June 30,
Name and Address Shares Offering Offering 1999
- ---------------- --------- --------- --------- --------------
<S> <C> <C> <C> <C>
Entities affiliated with
Enterprise Partners
5000 Birch Street, Suite
6200
Newport Beach, CA
92660(1)................... 3,719,702 18.8% 16.0% --
Entities affiliated with
Kleiner Perkins Caufield &
Byers
2750 Sand Hill Road
Menlo Park, CA 94025(2).... 2,971,836 15.0 12.8 --
Entities affiliated with
Lehman Brothers Inc.
3 World Financial Center
New York, NY 10285(3)...... 2,163,057 11.0 9.3 --
Sierra Ventures V, L.P.
3000 Sand Hill Road
Menlo Park, CA 94025(4).... 1,381,150 7.0 5.9 --
R. James Green(5)........... 1,215,000 6.1 5.2 150,000
Stephen A. MacDonald(6)..... 1,109,935 5.6 4.8 --
Jon A. Bode(7).............. 217,500 1.1 * 45,000
Rafael Bracho(8)............ 715,500 3.6 3.1 135,000
Sydney Springer(9).......... 157,500 * * 15,000
Edwin Winder(10)............ 375,000 1.9 1.6 30,000
Kevin R. Compton(2)......... 2,976,836 15.0 12.8 5,000
James P. Gauer(11).......... 761,858 3.9 3.3 5,000
Michael J. Odrich(3)........ 2,168,057 11.0 9.3 5,000
Todd Rulon-Miller........... 67,500 * * 67,500
Roger S. Siboni............. 60,000 * * 60,000
All directors and executive
officers as a group
(12 persons)............... 9,100,751 44.2 37.7 857,750
</TABLE>
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- --------
* Less than one percent.
(1) Includes 3,422,126 shares held by Enterprise Partners III, L.P. and
297,576 shares held by Enterprise Partners III Associates, L.P. The
general partner of each of these entities is Enterprise Management
Partners III, L.P. The general partners of Enterprise Management Partners
III, L.P. are Andrew E. Senyei, William R. Stensrud and James H. Berglund.
(2) Includes 889,474 shares held by Kleiner Perkins Caufield & Byers VII,
L.P., 2,047,441 shares held by KPCB Java Fund, L.P. and 34,921 shares held
by KPCB Information Sciences Zaibatsu Fund II, L.P. Kevin R. Compton, a
director of Active Software, is a general partner of KPCB VII Associates,
L.P., the general partner of Kleiner Perkins Caufield & Byers VII, L.P.
and KPCB Information Sciences Zaibatsu Fund II, L.P. The other general
partners of KPCB VII Associates, L.P. are Brook H. Byers, L. John Doerr,
William R. Hearst III, Vinod Khosla, E. Floyd Kvamme, Joseph S. Lacob,
Bernard J. Lacroute, James P. Lally and Douglas J. Mackenzie. Mr. Compton
is also a general partner of KPCB VIII Associates, L.P., which is the
general partner of KPCB Java Associates, L.P., the general partner of KPCB
Java Fund, L.P. The other general partners of KPCB VIII Associates, L.P.
are Brook H. Byers, L. John Doerr, William R. Hearst III, Vinod Khosla,
Joseph S. Lacob and Douglas J. Mackenzie. Mr. Compton disclaims beneficial
ownership of these shares, except to the extent of his pecuniary interest
in the shares.
(3) Includes 1,993,479 shares held by LB I Group Inc. LB I Group Inc. is a
subsidiary of Lehman Brothers Holdings Inc., a publicly-traded
corporation. 144,837 shares held by Lehman Brothers MBG Venture Capital
Partners 1997 (A), L.P., 21,850 shares held by Lehman Brothers MBG Venture
Capital Partners 1998, (A), L.P., 403 shares held by Lehman Brothers MBG
Venture Capital Partners 1998 (B), L.P., and 2,488 shares held by Lehman
Brothers MBG Venture Capital Partners 1998 (C), L.P. Michael Odrich, a
director of Active Software, is a vice president of LB I Group Inc., which
is the general partner of each of the Lehman Brothers MBG Venture Capital
Partners funds described above. In addition, Mr. Odrich is a limited
partner of Lehman Brothers MBG Venture Capital Partners 1997 (A), L.P. and
Lehman Brothers MBG Venture Capital Partners 1998 (A), L.P. Mr. Odrich
disclaims beneficial ownership of these shares, except to the extent of
his pecuniary interest in the shares.
(4) SV Associates V, L.P. is the general partner of Sierra Ventures V, L.P.
The general partners of SV Associates V, L.P. are Jeffrey M. Drazan, Peter
C. Wendell and Petri T. Vainio.
(5) Includes 1,065,000 shares held by R. James Green and Carol E. Green,
Trustees of the Green Family Trust U/D/T dated August 23, 1996. A portion
of these shares is subject to repurchase by Active Software at the
original exercise price in the event of termination of employment with
Active Software, which repurchase right lapses over time. Does not include
a total of 510,000 shares held in trusts for the benefit of Mr. Green's
children and for which Mr. Green has neither voting nor dispositive power.
(6) Includes 594,312 shares held by the MacDonald Family Trust dated October
27, 1987, and a total of 515,624 shares held in various trusts for the
benefit of Mr. MacDonald's children.
(7) Includes 172,500 shares issued upon exercise of stock options. A portion
of these shares is subject to repurchase by Active Software at the
original exercise price in the event of termination of employment with
Active Software, which repurchase right lapses over time.
(8) Includes 580,500 shares held by the Rafael Bracho or Laraine Dietz
Peterson 1999 Inter Vivos Trust. A portion of these shares is subject to
repurchase by Active Software at the original exercise price in the event
of termination of employment with Active Software, which repurchase right
lapses over time. Does not include a total of 225,000 shares held in
trusts for the benefit of Mr. Bracho's children and over which Mr. Bracho
has neither voting nor dispositive power.
(9) Includes 142,500 shares issued upon exercise of stock options. A portion
of these shares is subject to repurchase by Active Software at the
original exercise price in the event of termination of employment with
Active Software, which repurchase right lapses over time.
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(10) Includes 345,000 shares issued upon exercise of stock options. A portion
of these shares is subject to repurchase by Active Software at the
original exercise price in the event of termination of employment with
Active Software, which repurchase right lapses over time.
(11) Includes 756,858 shares held by Ocean Park Ventures, L.P. Mr. Gauer is a
general partner of Ocean Park Ventures, L.P. Mr. Gauer is also a limited
partner of Enterprise Partners III, L.P. and Enterprise Partners III
Associates, L.P. and disclaims beneficial ownership of the shares held by
these entities, except to the extent of his pecuniary interest in the
shares.
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DESCRIPTION OF CAPITAL STOCK
Following the closing of the sale of the shares offered hereby, our
authorized capital stock will consist of 100,000,000 shares of common stock,
$0.001 par value, and 5,000,000 shares of preferred stock, $0.001 par value.
Common Stock
Effective upon the closing of this offering, excluding the shares offered
hereby, there will be 19,751,372 shares of common stock outstanding, based on
shares outstanding as of June 30, 1999. These shares were held of record by
approximately 121 stockholders. There will be 23,251,372 shares of common stock
outstanding (assuming no exercise or conversion of outstanding options and
warrants after June 30, 1999) after giving effect to the sale of the shares of
common stock offered hereby.
The holders of common stock are entitled to one vote per share on all
matters to be voted upon by the stockholders. Subject to preferences that may
be applicable to any outstanding preferred stock, the holders of common stock
are entitled to receive ratably any dividends that may be declared from time to
time by the board of directors out of funds legally available therefor. In the
event of a liquidation, dissolution or winding up of Active Software, the
holders of common stock are entitled to share ratably in all assets remaining
after payment of liabilities, subject to prior rights of preferred stock, if
any, then outstanding. The common stock has no preemptive or conversion rights
or other subscription rights. There are no redemption or sinking fund
provisions available to the common stock. All outstanding shares of common
stock are fully paid and non-assessable, and the shares of common stock to be
issued upon completion of this offering will be fully paid and non-assessable.
Preferred Stock
Effective upon the closing of this offering, Active Software will be
authorized to issue 5,000,000 shares of undesignated preferred stock. The board
of directors will have the authority to issue the undesignated preferred stock
in one or more series and to determine the powers, preferences and rights and
the qualifications, limitations or restrictions granted to or imposed upon any
wholly unissued series of undesignated preferred stock and to fix the number of
shares constituting any series and the designation of these series, without any
further vote or action by the stockholders. The issuance of preferred stock may
have the effect of delaying, deferring or preventing a change in control of
Active Software without further action by the stockholders and may adversely
affect the voting and other rights of the holders of common stock. At present,
we have no plans to issue any shares of preferred stock.
Warrants
As of June 30, 1999, warrants were outstanding to purchase a total of
215,676 shares of common stock at a weighted average exercise price of $1.31
per share. Of these warrants, warrants to purchase a total of 136,912 shares of
common stock at a weighted average exercise price of $0.77 per share will
terminate upon the completion of this offering if not exercised prior to that
time.
Registration Rights of Securityholders
The holders of 15,724,325 shares of common stock (the "Registrable
Securities"), as well as 78,763 shares issuable upon exercise of warrants, or
their transferees are entitled to rights with respect to the registration of
these shares under the Securities Act. These rights are provided under the
terms of an agreement between Active Software and the holders of Registrable
Securities. Subject to limitations in this agreement, the holders of the
Registrable Securities may require, on two occasions at any time after six
months from the effective date of this offering, that Active Software use its
best efforts to register the Registrable Securities for public resale, provided
that the proposed total offering price is at least $5,000,000. If we register
any of our common stock either for our own
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account or for the account of other security holders, the holders of
Registrable Securities are entitled to include their shares of common stock in
the registration. A holder's right to include shares in an underwritten
registration is subject to the ability of the underwriters to limit the number
of shares included in this offering. In addition, these holders have the right
to require Active Software to register their shares on Form S-3 under the
Securities Act, if Active Software is eligible to use this form. All fees,
costs and expenses of these registrations must be borne by Active Software and
all selling expenses (including underwriting discounts, selling commissions
and stock transfer taxes) relating to Registrable Securities must be borne by
the holders of the securities being registered.
Anti-Takeover Provisions of Charter Documents and Delaware Law
We are subject to the provisions of Section 203 of the Delaware Law. In
general, the statute prohibits a publicly held Delaware corporation from
engaging in a "business combination" with an "interested stockholder" for a
period of three years after the date that the person became an interested
stockholder unless (with some exceptions) the business combination or the
transaction in which the person became an interested stockholder is approved
in a prescribed manner. Generally, a "business combination" includes a merger,
asset or stock sale or other transaction resulting in a financial benefit to
the stockholder, and an "interested stockholder" is a person who, together
with affiliates and associates, owns (or within three years prior, did own)
15% or more of the corporation's outstanding voting stock.
Upon completion of this offering, our charter documents also will contain
provisions that may have the effect of delaying or preventing changes in
control or management of Active Software, which could have an adverse effect
on the market price of our common stock. For example, our charter documents
will contain a provision eliminating the ability of stockholders to take
actions by written consent. In addition, our amended and restated certificate
of incorporation to be effective upon completion of this offering also
provides that the board of directors will be divided into three classes, each
serving staggered three-year terms, following the completion of this offering:
Class I, whose initial term will expire at the annual meeting (or special
meeting held in lieu of an annual meeting) of stockholders held in 2000; Class
II, whose initial term will expire at the annual meeting (or special meeting
held in lieu of an annual meeting) of stockholders in 2001; and Class III,
whose initial term will expire at the annual meeting (or special meeting held
in lieu of an annual meeting) of stockholders in 2002. As a result, only one
class of directors will be elected at each annual meeting of stockholders of
Active Software, with the other classes continuing for the remainder of their
respective terms. Messrs. Bracho, Green and Odrich have been designated as
Class I directors; Messrs. Compton and Gauer have been designated as Class II
directors; and Messrs. Siboni and Rulon-Miller have been designated as Class
III directors. In addition, our amended and restated certificate of
incorporation permits our board of directors to issue up to 5,000,000 shares
of preferred stock and to fix the rights, preferences, privileges and
restrictions, including voting rights, of these shares without any further
vote or action by the stockholders.
Our stock option and purchase plans generally provide for assumption of
these plans or substitution of an equivalent option of a successor corporation
or, alternatively, at the discretion of the board of directors, exercise of
some or all of the option stock, including non-vested shares, or acceleration
of vesting of shares issued under restricted stock grants, upon a change of
control or similar event.
Transfer Agent and Registrar
The Transfer Agent and Registrar for our common stock is ChaseMellon
Shareholder Services, L.L.C.
Nasdaq Stock Market Listing
Our common stock has been approved for quotation on the Nasdaq National
Market under the trading symbol "ASWX."
65
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no market for our common stock.
Future sales of substantial amounts of common stock in the public market could
adversely affect prevailing market prices. As described below, no shares
currently outstanding will be available for sale immediately after this
offering because of contractual restrictions on resale. Sales of substantial
amounts of our common stock in the public market after the restrictions lapse
could adversely affect the prevailing market price and impair our ability to
raise equity capital in the future.
Upon completion of the offering, we will have 23,251,372 outstanding shares
of common stock, based upon shares outstanding as of June 30, 1999. Of these
shares, the 3,500,000 shares sold in the offering, plus any shares issued upon
exercise of the underwriters' over-allotment option, will be freely tradable
without restriction under the Securities Act, unless purchased by our
"affiliates," as that term is defined in Rule 144 under the Securities Act. In
general, affiliates include officers, directors or 10% stockholders.
The remaining 19,751,372 shares outstanding are "restricted securities"
within the meaning of Rule 144. Restricted securities may be sold in the public
market only if registered or if they qualify for an exemption from registration
under Rules 144, 144(k) or 701 promulgated under the Securities Act, which are
summarized below. Sales of the restricted securities in the public market, or
the availability of these shares for sale, could adversely affect the market
price of the common stock.
Our directors, officers and stockholders have entered into lock-up
agreements in connection with this offering generally providing that they will
not offer, sell, contract to sell or grant any option to purchase or otherwise
dispose of our common stock or any securities exercisable for or convertible
into our common stock owned by them for a period of 180 days after the date of
this prospectus without the prior written consent of Goldman, Sachs & Co.
Notwithstanding possible earlier eligibility for sale under the provisions of
Rules 144, 144(k) and 701, shares subject to lock-up agreements will not become
eligible for resale until these agreements expire or are waived by Goldman,
Sachs & Co. Taking into account the lock-up agreements, and assuming Goldman,
Sachs & Co. does not release stockholders from these agreements, the following
shares will be eligible for sale in the public market at the following times:
. beginning on the effective date of this prospectus, only the shares sold
in the offering will be immediately available for sale in the public
market.
. beginning 180 days after the effective date, approximately 2,533,038
shares will be eligible for sale under Rule 701, approximately 2,575,857
additional shares will be eligible for sale under Rule 144(k), and
approximately 11,766,953 additional shares will be eligible for sale
under Rule 144.
. between 180 days and 365 days after the effective date, approximately
2,875,524 shares will be eligible for sale under Rule 144 at various
times.
In general, under Rule 144 as currently in effect, after the expiration of
the lock-up agreements, a person who has beneficially owned restricted
securities for at least one year would be entitled to sell within any three-
month period a number of shares that does not exceed the greater of:
. one percent of the number of shares of common stock then outstanding,
which will equal approximately 232,514 shares immediately after the
offering; or
. the average weekly trading volume of the common stock during the four
calendar weeks preceding the sale.
Sales under Rule 144 are also subject to requirements with respect to manner
of sale, notice, and the availability of current public information about us.
Under Rule 144(k), a person who is not
66
<PAGE>
deemed to have been our affiliate at any time during the three months preceding
a sale, and who has beneficially owned the shares proposed to be sold for at
least two years, 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, as currently in effect, permits our employees, officers, directors
or consultants who purchased shares under a written compensatory plan or
contract to resell these shares in reliance upon Rule 144 but without
compliance with specific restrictions. Rule 701 provides that affiliates may
sell their Rule 701 shares under Rule 144 without complying with the holding
period requirement and that non-affiliates may sell these shares in reliance on
Rule 144 without complying with the holding period, public information, volume
limitation or notice provisions of Rule 144.
In addition, we intend to file, immediately after the effectiveness of this
offering, a registration statement on Form S-8 under the Securities Act
covering all shares of common stock reserved for issuance under our 1996 Stock
Plan, 1996A Stock Plan, 1999 Stock Plan, 1999 Directors' Stock Option Plan and
1999 Employee Stock Purchase Plan. Shares registered under this registration
statement would be available for sale in the open market in the future unless
these shares are subject to vesting restrictions with Active Software or the
contractual restrictions described above. For more information on shares
eligible for resale, our stock plans and registration rights, see "Risk
Factors--A total of 19,751,372, or 85%, of our total outstanding shares are
restricted from immediate resale but may be sold into the market in the near
future. This could cause the market price of our common stock to drop
significantly, even if our business is doing well," "Management--Stock Plans"
and "Description of Capital Stock."
LEGAL MATTERS
The validity of the common stock offered hereby will be passed upon for
Active Software by Venture Law Group, A Professional Corporation, Menlo Park,
California. Mark A. Medearis, a director of Venture Law Group, is the Secretary
of Active Software. Legal matters specified by the underwriters in connection
with this offering will be passed upon for the underwriters by Shearman &
Sterling, Menlo Park, California. Venture Law Group and its affiliates
beneficially own a total of 34,155 shares of our common stock.
EXPERTS
The consolidated financial statements as of December 31, 1997 and 1998 and
for each of the three years in the period ended December 31, 1998 included in
this prospectus and the related consolidated financial statement schedule
included elsewhere in the registration statement have been audited by Deloitte
& Touche LLP, independent auditors, as stated in their reports appearing herein
and elsewhere in the registration statement, and have been so included in
reliance upon the reports of this firm given upon their authority as experts in
accounting and auditing.
67
<PAGE>
ADDITIONAL INFORMATION
We have filed with the Securities and Exchange Commission a registration
statement on Form S-1, including the exhibits and schedule filed with the
registration statement, under the Securities Act of 1933 with respect to the
shares to be sold in this offering. This prospectus does not contain all the
information set forth in the registration statement. For further information
with respect to us and the shares to be sold in this offering, we refer you to
the registration statement. Statements contained in this prospectus as to the
contents of any contract, agreement or other document to which we make
reference to, are not necessarily complete, and in each instance we refer you
to the copy of the contract, agreement or other document filed as an exhibit to
the registration statement, each statement being qualified in all respects by
the more complete description of the matter involved. Each statement will be
deemed incorporated by that reference.
You may read and copy all or any portion of the registration statement or
any reports, statements or other information we file at the Commission's public
reference room at Room 1024, Judiciary Plaza, 450 Fifth Street, N.C.,
Washington, D.C. 20549 and at the regional offices of the Commission located at
Seven World Trade Center, 13th Floor, New York, New York 10048 and 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661. You can request copies of
these documents upon payment of a duplicating fee, by writing to the
Commission. Please call the Commission at 1-800-SEC-0330 for further
information on the operation of the public reference rooms. Our Commission
filings, including the registration statement, will also be available to you on
the Commission's Internet site, http://www.sec.gov.
68
<PAGE>
ACTIVE SOFTWARE, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Audited Consolidated Financial Statements:
Independent Auditors' Report............................................. F-2
Consolidated Balance Sheets at December 31, 1997, 1998, June 30, 1999
(unaudited) and Pro Forma at June 30, 1999 (unaudited).................. F-3
Consolidated Statements of Operations for the years ended December 31,
1996, 1997 and 1998 and six months ended June 30, 1998 and 1999
(unaudited)............................................................. F-4
Consolidated Statements of Stockholders' Equity (Deficiency) for the
years ended December 31, 1996, 1997 and 1998 and six months ended June
30, 1999 (unaudited).................................................... F-5
Consolidated Statements of Cash Flows for the years ended December 31,
1996, 1997 and 1998 and six months ended June 30, 1998 and 1999
(unaudited)............................................................. F-6
Notes to Consolidated Financial Statements............................... F-7
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Active Software, Inc.:
We have audited the accompanying consolidated balance sheets of Active
Software, Inc. and subsidiary as of December 31, 1997 and 1998, and the related
consolidated statements of operations, stockholders' equity (deficiency), and
cash flows for each of the three years in the period ended December 31, 1998.
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 in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Active Software, Inc. and
subsidiary at December 31, 1997 and 1998, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1998 in conformity with generally accepted accounting principles.
As discussed in Note 11, the accompanying 1998 consolidated financial
statements have been restated.
/s/ Deloitte & Touche LLP
San Jose, California
January 22, 1999
(August 5, 1999 as to Note 10 and July 15, 1999 as to Note 11)
F-2
<PAGE>
ACTIVE SOFTWARE, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and par value amounts)
<TABLE>
<CAPTION>
December 31, Pro Forma
---------------------- June 30, June 30,
1997 1998 1999 1999
------- ------------- ----------- -----------
(As restated, (Unaudited) (Note 1)
see Note 11) (Unaudited)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash
equivalents.............. $ 2,876 $ 7,461 $ 6,729
Accounts receivable (net
of allowances of $82,
$200 and $200)........... 1,535 3,362 4,089
Prepaid expenses and
other current assets..... 58 495 507
------- -------- --------
Total current assets.... 4,469 11,318 11,325
Property and equipment,
net....................... 651 796 1,576
Other assets............... 75 180 306
------- -------- --------
Total assets............... $ 5,195 $ 12,294 $ 13,207
======= ======== ========
LIABILITIES AND
STOCKHOLDERS' EQUITY
(DEFICIENCY)
Current liabilities:
Line of credit............ $ -- $ -- $ 3,294
Accounts payable.......... 306 739 1,417
Accrued compensation and
related benefits......... 582 1,115 1,591
Deferred revenues......... 722 1,154 2,053
Accrued royalties......... -- 375 486
Other accrued
liabilities.............. 13 335 181
Current portion of notes
payable.................. 91 107 105
------- -------- --------
Total current
liabilities............ 1,714 3,825 9,127
------- -------- --------
Notes payable, less current
portion................... 216 108 59
------- -------- --------
Commitments (Notes 7 and
10)
Convertible redeemable
preferred stock:
Series A convertible
redeemable preferred
stock; $0.001 par value;
designated and
outstanding--6,022,500
shares; pro forma--none
outstanding; (liquidation
preference of $4,015)....... 3,995 3,995 3,995 $ --
Series B convertible
redeemable preferred
stock; $0.001 par value;
designated and
outstanding--3,915,000
shares; pro forma--none
outstanding; (liquidation
preference of $7,021)....... 7,013 7,013 7,013 --
Series C convertible
redeemable preferred
stock; $0.001 par value;
designated--3,467,832
shares: outstanding--1997,
none; 1998 and 1999,
3,467,832 shares; pro
forma--none outstanding;
(liquidation preference of
$14,149).................... -- 14,109 14,109 --
Stockholders' equity
(deficiency):
Preferred stock, $0.001
par value: pro forma
authorized 5,000,000
shares; none outstanding. -- -- -- --
Common stock, $0.001 par
value; authorized--
30,000,000 shares;
outstanding--1997,
4,145,850 shares; 1998,
5,874,725 shares; 1999
6,346,040 shares; pro
forma--19,751,372 shares
outstanding.............. 106 3,934 6,132 31,249
Deferred stock
compensation.............. -- (2,939) (4,135) (4,135)
Notes receivable from
stockholders.............. (49) (9) (9) (9)
Accumulated deficit........ (7,800) (17,742) (23,084) (23,084)
------- -------- -------- --------
Total stockholders'
equity (deficiency).... (7,743) (16,756) (21,096) $ 4,021
------- -------- -------- ========
Total liabilities and
stockholders' equity
(deficiency).............. $ 5,195 $ 12,294 $ 13,207
======= ======== ========
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
ACTIVE SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Six Months Ended
Years Ended December 31, June 30,
------------------------------- ------------------
1996 1997 1998 1998 1999
------- ------- ------------- -------- --------
(As restated, (Unaudited)
see Note 11)
<S> <C> <C> <C> <C> <C>
Revenues:
License.................. $ 280 $ 2,625 $ 5,900 $ 1,955 $ 5,922
Service.................. 5 568 1,699 454 2,746
------- ------- ------- -------- --------
Total revenues......... 285 3,193 7,599 2,409 8,668
------- ------- ------- -------- --------
Costs of revenues:
License.................. 6 30 477 47 465
Service.................. 165 623 2,290 506 2,804
------- ------- ------- -------- --------
Total cost of revenues. 171 653 2,767 553 3,269
------- ------- ------- -------- --------
Gross profit............... 114 2,540 4,832 1,856 5,399
Operating expenses:
Research and development. 1,182 2,830 3,971 1,613 2,276
Sales and marketing...... 685 2,896 8,669 3,795 6,956
General and
administrative.......... 1,163 1,796 2,069 889 993
Amortization of deferred
stock compensation...... -- -- 336 84 565
------- ------- ------- -------- --------
Total operating
expenses.............. 3,030 7,522 15,045 6,381 10,790
------- ------- ------- -------- --------
Loss from operations....... (2,916) (4,982) (10,213) (4,525) (5,391)
Interest income (expense):
Interest income.......... 102 179 313 130 96
Interest expense......... -- (50) (42) (38) (47)
------- ------- ------- -------- --------
Total interest income
(expense)............. 102 129 271 92 49
------- ------- ------- -------- --------
Net loss................... $(2,814) $(4,853) $(9,942) $ (4,433) $ (5,342)
======= ======= ======= ======== ========
Basic and diluted net loss
per share................. $ (6.59) $ (2.50) $ (3.21) $ (1.34) $ (1.08)
======= ======= ======= ======== ========
Shares used in calculating
basic and diluted net loss
per share................. 427 1,945 3,096 3,301 4,962
======= ======= ======= ======== ========
Pro forma basic and diluted
net loss per share
(Note 1).................. $ (0.64) $ (0.29)
======= ========
Shares used in calculating
pro forma basic and
diluted net loss per share
(Note 1).................. 15,457 18,367
======= ========
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
ACTIVE SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
(In thousands, except share amounts)
<TABLE>
<CAPTION>
Notes
Common Stock Deferred Receivable
----------------- Stock from Accumulated
Shares Amount Compensation Stockholders Deficit Total
--------- ------ ------------ ------------ ----------- --------
<S> <C> <C> <C> <C> <C> <C>
Balances, January 1,
1996................... 2,145,000 $ 14 $ -- $ (7) $ (133) $ (126)
Issuance of common
stock.................. 1,394,250 87 -- (42) -- 45
Issuance of common stock
for note payable
financing.............. 600,000 4 -- -- -- 4
Net loss................ -- -- -- -- (2,814) (2,814)
--------- ------ ------- ---- -------- --------
Balances, December 31,
1996................... 4,139,250 105 -- (49) (2,947) (2,891)
Issuance of common
stock.................. 6,600 1 -- -- -- 1
Net loss................ -- -- -- -- (4,853) (4,853)
--------- ------ ------- ---- -------- --------
Balances, December 31,
1997................... 4,145,850 106 -- (49) (7,800) (7,743)
Issuance of common
stock.................. 2,397,375 297 -- -- -- 297
Repurchase of common
stock.................. (668,500) (45) -- 29 -- (16)
Repayments of note
receivable............. -- -- -- 11 -- 11
Issuance of warrants, as
restated, see Note 11.. -- 301 -- -- -- 301
Deferred stock
compensation, as
restated, see Note 11.. -- 3,275 (3,275) -- -- --
Amortization of deferred
stock compensation, as
restated, see Note 11.. -- -- 336 -- -- 336
Net loss, as restated .. -- -- -- -- (9,942) (9,942)
--------- ------ ------- ---- -------- --------
Balances, December 31,
1998, as restated, see
Note 11................ 5,874,725 3,934 (2,939) (9) (17,742) (16,756)
Issuance of common stock
(unaudited)............ 509,715 440 -- -- -- 440
Repurchase of common
stock (unaudited)...... (38,400) (3) (3)
Deferred stock
compensation
(unaudited)............ -- 1,761 (1,761) -- -- --
Amortization of deferred
stock compensation
(unaudited)............ -- -- 565 -- -- 565
Net loss (unaudited).... -- -- -- -- (5,342) (5,342)
--------- ------ ------- ---- -------- --------
Balances, June 30, 1999
(unaudited)............ 6,346,040 $6,132 $(4,135) $ (9) $(23,084) $(21,096)
========= ====== ======= ==== ======== ========
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
ACTIVE SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Six Months Ended
Years Ended December 31, June 30,
------------------------------- ------------------
1996 1997 1998 1998 1999
------- ------- ------------- -------- --------
(As restated, (Unaudited)
see Note 11)
<S> <C> <C> <C> <C> <C>
Cash flows from operating
activities:
Net loss.................. $(2,814) $(4,853) $(9,942) $ (4,433) $ (5,342)
Adjustments to reconcile
net loss to net cash used
in operating activities:
Depreciation and
amortization............. 124 318 461 214 296
Amortization of deferred
stock compensation....... -- -- 336 84 565
Interest expense recorded
in connection with note
financing................ 4 -- -- -- --
Issuance of warrants...... -- -- 301 97 --
Changes in assets and
liabilities:
Accounts receivable...... (34) (1,475) (1,827) 644 (727)
Prepaid expenses and
other current assets.... (42) (12) (437) 23 (12)
Accounts payable......... 18 75 433 258 678
Accrued compensation and
related benefits........ 92 582 533 (126) 476
Accrued royalties........ -- -- 375 6 111
Other accrued
liabilities............. -- (58) 322 48 (154)
Deferred revenues........ 116 606 432 (289) 899
------- ------- ------- -------- --------
Net cash used in
operating activities... (2,536) (4,817) (9,013) (3,474) (3,210)
------- ------- ------- -------- --------
Cash flows from investing
activities:
Property and equipment
additions................ (322) (588) (606) (284) (1,086)
Proceeds from sale of
fixed assets............. 10
Other assets.............. (14) (54) (105) (61) (126)
------- ------- ------- -------- --------
Net cash used in
investing activities.... (336) (642) (711) (345) (1,202)
------- ------- ------- -------- --------
Cash flows from financing
activities:
Sale of common stock...... 45 1 297 280 440
Repurchase of common
stock.................... -- -- (16) (14) (3)
Sale of convertible
redeemable preferred
stock.................... 3,745 7,013 14,109 10,375 --
Repayment of notes
receivable from
stockholders............. -- -- 11 40 --
Proceeds from line of
credit................... -- -- -- -- 3,294
Proceeds from notes
payable.................. 401 -- -- -- --
Repayment of notes payable
......................... (21) (72) (92) (44) (51)
------- ------- ------- -------- --------
Net cash provided by
financing activities.... 4,170 6,942 14,309 10,637 3,680
------- ------- ------- -------- --------
Net increase (decrease) in
cash and cash equivalents. 1,298 1,483 4,585 6,818 (732)
Cash and cash equivalents--
beginning of period....... 95 1,393 2,876 2,876 7,461
------- ------- ------- -------- --------
Cash and cash equivalents--
end of period............. $ 1,393 $ 2,876 $ 7,461 $ 9,694 $ 6,729
======= ======= ======= ======== ========
Supplemental disclosure of
cash flow information--
Cash paid during the
period for interest....... $ 2 $ 50 $ 42 $ 23 $ 15
======= ======= ======= ======== ========
Noncash financing
activities:
Repurchase of common stock
by cancellation of note
receivable............... $ -- $ -- $ 29 $ -- $ --
======= ======= ======= ======== ========
Common stock issued for
notes receivable......... $ 42 $ -- $ -- $ -- $ --
======= ======= ======= ======== ========
Conversion of note payable
to convertible redeemable
preferred stock.......... $ 250 $ -- $ -- $ -- $ --
======= ======= ======= ======== ========
Deferred stock
compensation............. $ -- $ -- $ 3,275 $ 1,184 $ 1,761
======= ======= ======= ======== ========
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE>
ACTIVE SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1996, 1997 and 1998 and
Six Months Ended June 30, 1998 and 1999 (Unaudited)
1. Business and Significant Accounting Policies
Business--Active Software, Inc. (the Company), incorporated in California in
September 1995, develops and markets software products for businesses that
allow users to integrate incompatible software applications across their
extended enterprises of customers, suppliers and partners.
Principles of Consolidation--The consolidated financial statements include
the accounts of the Company and its wholly-owned subsidiary. All intercompany
transactions and balances have been eliminated in consolidation.
Cash Equivalents--The Company considers all highly liquid debt instruments
purchased with a remaining maturity of three months or less to be cash
equivalents.
Property and equipment are stated at cost. Depreciation and amortization are
computed using the straight-line method over estimated useful lives of three
years. Leasehold improvements are amortized over the shorter of the lease term
or their useful life.
Long-Lived Assets--The Company evaluates its long-lived assets for
impairment whenever events or changes in circumstances indicate that the
carrying amount of such assets or intangibles may not be recoverable.
Recoverability of assets to be held and used is measured by a comparison of the
carrying amount of an asset to future undiscounted net cash flows expected to
be generated by the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceeds the fair value of the assets.
Software Development Costs--Costs for the development of new software
products and substantial enhancements to existing software products are
expensed as incurred until technological feasibility has been established, at
which time any additional development costs would be capitalized in accordance
with Statement of Financial Accounting Standards (SFAS) No. 86, Computer
Software To Be Sold, Leased, or Otherwise Marketed. Because the Company
believes its current process for developing software is essentially completed
concurrently with the establishment of technological feasibility, no costs have
been capitalized to date.
Notes Receivable from Stockholders--The notes receivable from stockholders
were issued in exchange for common stock, bear interest at 5.73% per annum, and
are due from November 30, 1999 through January 15, 2000.
Revenue Recognition--Active Software's revenue recognition policy is
consistent with Statement of Position 97-2, as amended. License revenues are
comprised of fees for the Company's software products. Revenue from license
fees is recognized when an agreement has been signed, delivery of the product
has occurred, no significant Company obligations remain, the fee is fixed or
determinable, collectibility is probable and vendor-specific objective evidence
exists to allocate a portion of the total fee to any undelivered elements of
the arrangement. For electronic delivery, the software is considered to have
been delivered when the Company has provided the customer with the access codes
that allow for immediate possession of the software. If the fee due from the
customer is not fixed or determinable, revenue is recognized as payments become
due from the customer. If collectibility is not considered probable, revenue is
recognized when the fee is collected. Revenue on arrangements with customers
who are not ultimate users (primarily resellers) is not recognized until the
product is delivered to the end user.
F-7
<PAGE>
ACTIVE SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Service revenues are comprised of revenue from support arrangements,
consulting fees and training. Support arrangements do not provide for specified
upgrade rights and provide technical support and the right to unspecified
upgrades on an if-and-when-available basis. Revenue from support arrangements
is recognized on a straight-line basis as services revenue over the life of the
related agreement, which is typically one year. If support or consulting
services are included in an arrangement that includes a license agreement,
amounts related to support or consulting are allocated based on vendor-specific
objective evidence. Vendor-specific objective evidence for support and
professional services is based on the price when such elements are sold
separately, or, when not sold separately, the price established by management
having the relevant authority. Where discounts are offered on multiple element
arrangements, a proportionate amount of that discount is applied to each
element included in the arrangement based on each element's fair value.
Consulting and training revenue is recognized when provided to the customer.
Customer advances and billed amounts due from customers in excess of revenue
recognized are recorded as deferred revenue.
Income Taxes--Income taxes are provided for using an asset and liability
approach which requires recognition of deferred tax liabilities and assets, net
of valuation allowances, for the expected future tax consequences of temporary
differences between the financial statement carrying amounts and the tax bases
of assets and liabilities and net operating loss and tax credit carryforwards.
Foreign Currency Transactions--The functional currency of the Company's
foreign subsidiary is the U.S. dollar. Accordingly, all monetary assets and
liabilities are translated at the current exchange rate at the end of the year,
nonmonetary assets and liabilities are translated at historical rates and
revenues and expenses are translated at average exchange rates in effect during
the period. Transaction gains and losses have not been significant to date.
Stock Compensation--The Company accounts for stock-based awards to employees
using the intrinsic value method in accordance with Accounting Principles Board
Opinion No. 25, Accounting for Stock Issued to Employees.
Net Loss per Common Share--Basic net loss per common share excludes dilution
and is computed by dividing net loss by the weighted average number of common
shares outstanding for the period (excluding shares subject to repurchase).
Diluted net loss per common share was the same as basic net loss per common
share for all periods presented since the effect of any potentially dilutive
securities is excluded as they are anti-dilutive because of the Company's net
losses.
Pro Forma Net Loss per Common Share--Pro forma basic and diluted net loss
per common share is computed by dividing net loss by the weighted average
number of common shares outstanding for the period (excluding shares subject to
repurchase) plus the weighted average number of common shares resulting from
the automatic conversion of outstanding shares of convertible redeemable
preferred stock, which will occur upon the closing of the planned initial
public offering.
Unaudited Pro Forma Information--Upon the closing of the planned initial
public offering, each of the outstanding shares of convertible redeemable
preferred stock will automatically convert into one share of common stock. The
pro forma information is presented as if this conversion had occurred at June
30, 1999.
Unaudited Interim Financial Information--The interim financial information
as of June 30, 1999 and for the six months ended June 30, 1998 and 1999 is
unaudited and has been prepared on the same basis as the audited financial
statements. In the opinion of management, such unaudited
F-8
<PAGE>
ACTIVE SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
financial information includes all adjustments (consisting only of normal
recurring adjustments) necessary for a fair presentation of the interim
information. Operating results for the six months ended June 30, 1999 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 1999.
Concentration of Credit Risk--Financial instruments that potentially expose
the Company to concentrations of credit risk consist primarily of accounts
receivable. The Company primarily sells its products to companies in North
America. The Company does not require collateral or other security to support
accounts receivable. To reduce credit risk, management performs ongoing credit
evaluations of its customers' financial condition. The Company maintains
allowances for potential credit losses.
Financial Instruments--The Company's financial instruments include cash and
cash equivalents, notes receivable from stockholders and long-term debt. At
December 31, 1997 and 1998, the fair value of these financial instruments
approximated their financial statement carrying amounts.
Significant 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 disclosures of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from these estimates.
Certain Significant Risks and Uncertainties--The Company operates in the
software industry, and accordingly, can be affected by a variety of factors.
For example, management of the Company believes that changes in any of the
following areas could have a significant negative effect on the Company in
terms of its future financial position, results of operations or cash flows;
ability to obtain additional financing; fundamental changes in the technology
underlying software products; market acceptance of the Company's products under
development; development of sales channels; loss of significant customers;
adverse changes in international market conditions; year 2000 compliance
issues; litigation or other claims against the Company; the hiring, training
and retention of key employees; successful and timely completion of product
development efforts; and new product introductions by competitors.
Recently Adopted Accounting Standards--In June 1997, the FASB issued SFAS
No. 130, Reporting Comprehensive Income, which requires an enterprise to
report, by major components and as a single total, the change in its net assets
during the period from nonowner sources; and SFAS No. 131, Disclosures About
Segments of an Enterprise and Related Information, which establishes annual and
interim reporting standards for an enterprise's business segments and related
disclosures about its products, services, geographic areas and major customers.
The Company had no comprehensive income items, other than net loss, to report
for any of the periods presented. The Company currently operates in one
reportable segment under SFAS No. 131.
Recently Issued Accounting Standards--In March 1998, the American Institute
of Certified Public Accountants issued SOP 98-1, Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use. This standard
requires companies to capitalize qualifying computer software costs incurred
during the application development stage and amortize them over the software's
estimated useful life. SOP 98-1 is effective for fiscal years beginning after
December 15, 1998. The Company is currently evaluating the impact of SOP 98-1
on its financial statements and related disclosures.
F-9
<PAGE>
ACTIVE SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities. This statement
requires companies to record derivatives on the balance sheet as assets or
liabilities, measured at fair value. Gains or losses resulting from changes in
the values of those derivatives would be accounted for depending on the use of
the derivative and whether it qualifies for hedge accounting. SFAS No. 133 will
be effective for
the Company's fiscal year ending December 31, 2001. The Company is currently
evaluating the
impact of SFAS No. 133 on its financial statements and related disclosures.
Reclassifications--Certain reclassifications have been made to the 1996 and
1997 financial statement presentation to conform to the 1998 presentation.
2. Property and Equipment
Property and equipment consist of (in thousands):
<TABLE>
<CAPTION>
December 31,
-------------- June 30,
1997 1998 1999
------ ------ --------
<S> <C> <C> <C>
Equipment ....................................... $ 937 $1,523 $ 2,370
Software......................................... 52 72 186
Leasehold improvements........................... 102 102 81
------ ------ -------
1,091 1,697 2,637
Accumulated depreciation and amortization........ (440) (901) (1,061)
------ ------ -------
$ 651 $ 796 $ 1,576
====== ====== =======
</TABLE>
3. Notes Payable
In 1996, the Company borrowed $401,000 pursuant to a loan agreement with a
third party. The note bears interest at an effective rate of 17%, is payable in
monthly installments through July 2000 and is collateralized by all of the
Company's equipment. As of December 31, 1998, a principal balance of $215,000
was outstanding under these notes and is due as follows (in thousands):
<TABLE>
<CAPTION>
Year Ended
December 31,
------------
<S> <C>
1999................................................................. $107
2000................................................................. 108
----
$215
====
</TABLE>
4. Convertible Redeemable Preferred Stock and Stockholders' Equity
Convertible Redeemable Preferred Stock
Convertible redeemable preferred stock details are as follows:
. In February 1996, 6,022,500 shares of Series A convertible redeemable
preferred stock were sold at $0.67 per share; in April 1997, 3,915,900
shares of Series B convertible redeemable preferred stock were sold at
$1.79 per share; and in March 1998, June 1998, July 1998 and October
1998, the Company sold 1,928,615 shares, 620,098 shares, 183,825 shares
and 735,294 shares, respectively, of Series C convertible redeemable
preferred stock at $4.08 per share.
. Each share of Series A, B, and C convertible redeemable preferred stock
is convertible into one share of common stock (subject to adjustment for
events of dilution). Each share will automatically convert into common
stock upon the completion of a public offering with aggregate proceeds
greater than $10,000,000 and at a price per share of not less than $6.00.
F-10
<PAGE>
ACTIVE SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
. Each share of Series A, B, and C convertible redeemable preferred stock
has voting rights equivalent to the number of shares of common stock into
which it is convertible.
. When declared by the Board of Directors, the holders of Series A, B, and
C convertible redeemable preferred stock are entitled to receive
noncumulative dividends of $0.04, $0.11, and $0.24 per share per annum,
respectively, prior to the payment of any dividends on common stock.
. In the event the Company is acquired or merges into another company
(unless the Company's stockholders own more than 50% of the surviving
entity) or in the event of liquidation, dissolution or winding up of the
Company, Series A, B, and C convertible redeemable preferred stock
stockholders shall receive $0.67, $1.79, and $4.08 per share,
respectively (aggregating approximately $4,015,000, $7,021,000 and
$14,149,000 at December 31, 1998, respectively), adjusted for certain
events of dilution, as defined. Any remaining assets shall be distributed
ratably to the common and preferred stockholders (on an as converted
basis); except that the Series A, B, and C convertible redeemable
preferred stockholders shall be limited to per share distributions of
$1.33, $3.59, and $8.16 respectively, in addition to the distributions
mentioned in the preceding sentence.
. The Series A, B, and C convertible redeemable preferred stock
stockholders have certain registration rights.
. The Series A, B, and C convertible redeemable preferred stock is
redeemable if the Company receives a written request from the holders of
at least two-thirds of the then outstanding shares of Series A, B, and C
convertible redeemable preferred stock, respectively. The shares are
redeemable at $0.67, $1.79, and $4.08 per share, respectively, plus any
dividends declared, but not paid, on the date of redemption. No dividends
have been declared to date. Upon receipt of such written request, the
Company shall redeem the number of shares in three equal annual
installments beginning the later of March 2002 or ninety days after
receipt of such request.
Stock Plans
At December 31, 1998, the Company has reserved an aggregate of 6,846,000
shares of common stock for issuance, at the discretion of the Board of
Directors, to officers, directors, employees and consultants pursuant to its
1996 and 1996A Stock Plans (the Plans). Options are generally granted at fair
market value at the date of grant as determined by the Board of Directors.
Options granted under the Plans generally vest over 50 months and expire ten
years from the date of grant. In February 1998, the Company amended the stock
option agreements under the Plans to allow employees to exercise their stock
options immediately. All unvested shares are placed in escrow and continue to
vest according to the employee's normal stock option vesting schedule. The
unvested shares are subject to repurchase at the option of the Company at the
original purchase price upon termination of the employee. In 1998, 668,500
shares were repurchased at their original cost of $0.07 per share and returned
to the Plans. At December 31, 1998, 1,282,525 shares are available for future
issuance and 906,188 shares are subject to repurchase.
In addition to shares issued under the Stock Plans, the Company has issued
2,304,000 shares pursuant to individual restricted stock purchase agreements.
The Company has the right of first refusal on the sale of common stock acquired
under such restricted stock purchase agreements. This right expires if the
Company's stock becomes publicly traded in an established market. Upon
termination of employment, the Company has the right to repurchase any unvested
shares at the
F-11
<PAGE>
ACTIVE SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
original purchase price. This right expires generally over four years. In
addition, upon termination of certain key employees, the Company has the right
to repurchase vested shares at the original purchase price per share. Such
repurchase right expires in 2000 or upon the Company's stock becoming publicly
traded. At December 31, 1998, 540,000 shares are subject to such repurchase
rights.
Additional information with respect to outstanding options under the Plans
is as follows:
<TABLE>
<CAPTION>
Weighted
Number of Average
Options Exercise Price
---------- --------------
<S> <C> <C>
Outstanding, January 1, 1997 (none exercis-
able)........................................ 1,588,500 $0.07
Granted (weighted average fair value of
$0.03)...................................... 1,681,125 0.17
Exercised.................................... (6,600) 0.07
Cancelled.................................... (99,300) 0.14
---------- -----
Outstanding, December 31, 1997 (1,127,580
exercisable at a weighted average price of
$0.07)....................................... 3,163,725 0.12
Granted (weighted average fair value of
$0.27)...................................... 1,969,500 0.90
Exercised.................................... (2,397,375) 0.13
Cancelled.................................... (143,100) 0.18
---------- -----
Outstanding, December 31, 1998................ 2,592,750 0.70
Granted...................................... 1,210,874 6.13
Exercised.................................... (509,715) 0.90
Cancelled.................................... (71,760) 2.89
---------- -----
Outstanding, June 30, 1999 (unaudited)........ 3,222,149 $2.66
========== =====
</TABLE>
Additional information regarding options outstanding as of December 31, 1998
is as follows:
<TABLE>
<CAPTION>
Options Outstanding Options Vested
------------------------------------------ ----------------------
Weighted
Average
Remaining Weighted Weighted
Range of Contractual Average Average
Exercise Number Life Exercise Number Exercise
Prices Outstanding (Years) Price Vested Price
-------- ----------- ----------- -------- ------ --------
<S> <C> <C> <C> <C> <C>
$0.07 446,250 7.25 $0.07 169,422 $0.07
0.18 555,750 8.90 0.18 129,300 0.18
0.27 127,500 9.19 0.27 -- --
0.67 45,000 9.27 0.67 -- --
0.77 502,500 9.56 0.77 -- --
1.33 915,750 9.90 1.33 -- --
--------- -------
$0.07--$1.33 2,592,750 9.13 $0.70 298,722 $0.11
========= =======
</TABLE>
During the year ended December 31, 1998 and the six months ended June 30,
1999, in connection with the grant of certain stock options, the Company
recorded deferred stock compensation of $3,275,000 and $1,761,000,
respectively, representing the difference between the exercise price of the
options and the estimated fair value of the Company's common stock on the date
of grant. Such amount is being amortized over the vesting period of the related
options, generally fifty months. For the year ended December 31, 1998 and six
months ended June 30, 1999, amortization of deferred stock compensation was
$336,000 and 565,000, respectively. At June 30, 1999, $4,135,000 of unamortized
deferred stock compensation remains.
F-12
<PAGE>
ACTIVE SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
SFAS No. 123, Accounting for Stock-Based Compensation, requires the
disclosure of pro forma net loss and net loss per share had the Company adopted
the fair value method as of the beginning of fiscal 1995. Under SFAS 123, the
fair value of stock-based awards to employees is calculated through the use of
option pricing models, even though such models were developed to estimate the
fair value of freely tradable, fully transferable options without vesting
restrictions, which significantly differ from the Company's stock option
awards. These models also require subjective assumptions, including future
stock price volatility and expected time to exercise, which greatly affect the
calculated values. The Company's calculations were made using the minimum value
option pricing model with the following weighted average assumptions: expected
life, 24 months following vesting in 1996, 1997 and 1998; risk free interest
rate, 6% in 1996, 1997 and 1998; and no dividends during the expected term. The
Company's calculations are based on a multiple option valuation approach and
forfeitures are recognized as they occur. If the computed fair values of the
1996, 1997 and 1998 awards had been amortized to expense over the vesting
period of the awards, pro forma net loss would have been $2,822,000 ($(6.61)
per share, basic and diluted) in 1996, $4,876,000 ($(2.51) per share, basic and
diluted) in 1997 and $10,004,000 ($(3.23) per share, basic and diluted) in
1998.
Common Stock Warrants
In September 1996, in conjunction with a note payable, the Company issued a
warrant to purchase up to 42,000 shares of common stock at $0.67 per share. The
warrant expires on September 30, 2004. The fair value of the warrant was
insignificant.
In June and July 1998, the Company issued warrants to system integrators in
connection with services rendered to purchase up to 136,912 shares of common
stock at $0.77 per share. The warrants expire at the earliest of: i) 2003, ii)
immediately prior to closing of an acquisition of the Company or sale of all or
substantially all of the assets of the Company, or iii) immediately prior to
the effective date of the Company's initial underwritten public offering. An
expense of $300,600 was recorded in 1998 related to the issuance of such
warrants which was based on the warrants' estimated fair market value at the
date of issuance.
In October 1998, the Company issued a warrant to a strategic partner to
purchase 36,764 shares of common stock at $4.08 per share. The warrant is
contingently exercisable upon the earliest of: i) achievement of certain
performance improvements to the Company's software product or ii) immediately
prior to the closing of an acquisition of the Company. The warrant generally
expires at the earlier of: i) October 29, 2005 or ii) August 31, 1999 in the
event that the strategic partner has not achieved the software performance
improvements. The fair value of the warrant will be recorded as expense in the
period in which the contingency is resolved.
At December 31, 1998, the Company has reserved shares of common stock for
issuance as follows:
<TABLE>
<S> <C>
Conversion of convertible redeemable preferred stock.............. 13,405,332
Issuances under the Stock Plans................................... 4,165,465
Exercise of common stock warrants................................. 215,676
----------
17,786,473
==========
</TABLE>
F-13
<PAGE>
ACTIVE SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
5. Net Loss per Share
The following is a reconciliation of the numerators and denominators used in
computing basic and diluted net loss per share (in thousands):
<TABLE>
<CAPTION>
Years Ended Six Months Ended
December 31, June 30,
------------------------- ------------------
1996 1997 1998 1998 1999
------- ------- ------- -------- --------
<S> <C> <C> <C> <C> <C>
Net loss (numerator), basic and
diluted........................ $(2,814) $(4,853) $(9,942) $ (4,433) $ (5,342)
Shares (denominator):
Weighted average common shares
outstanding.................. 2,914 4,140 5,118 5,763 6,297
Weighted average common shares
outstanding subject to
repurchase................... (2,487) (2,195) (2,022) (2,462) (1,335)
------- ------- ------- -------- --------
Shares used in computation,
basic and diluted............ 427 1,945 3,096 3,301 4,962
======= ======= ======= ======== ========
Net loss per share, basic and
diluted........................ $ (6.59) $ (2.50) $ (3.21) $ (1.34) $ (1.08)
======= ======= ======= ======== ========
</TABLE>
For the above mentioned periods, the Company had securities outstanding
which could potentially dilute basic earnings per share in the future, but were
excluded from the computation of diluted net loss per share in the periods
presented, as their effect would have been antidilutive. Such outstanding
securities consist of the following:
<TABLE>
<CAPTION>
December 31, June 30,
-------------------------------- ---------------------
1996 1997 1998 1998 1999
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Convertible redeemable
preferred stock........ 6,022,500 9,937,500 13,405,332 12,486,213 13,405,332
Shares of common stock
subject to repurchase.. 2,829,000 1,823,998 1,446,188 2,359,166 1,229,318
Outstanding options..... 1,588,500 3,163,725 2,592,750 1,594,875 3,222,149
Warrants................ 42,000 42,000 215,676 133,912 215,676
---------- ---------- ---------- ---------- ----------
Total................... 10,482,000 14,967,223 17,659,946 16,574,166 18,072,475
========== ========== ========== ========== ==========
Weighted average
exercise price of
options................ $ 0.07 $ 0.12 $ 0.70 $ 0.25 $ 2.66
========== ========== ========== ========== ==========
Weighted average
exercise price of
warrants............... $ 0.67 $ 0.67 $ 1.31 $ 0.74 $ 1.31
========== ========== ========== ========== ==========
</TABLE>
6. Income Taxes
The Company's net deferred tax assets are comprised of the following at
December 31 (in thousands):
<TABLE>
<CAPTION>
1997 1998
------- -------
<S> <C> <C>
Net deferred tax assets and liabilities:
Net operating loss carryforwards......................... $ 2,861 $ 6,379
General business credits................................. 330 491
Other timing differences................................. (104) 179
------- -------
3,087 7,049
Valuation allowance........................................ (3,087) (7,049)
------- -------
Net deferred tax assets.................................... $ -- $ --
======= =======
</TABLE>
F-14
<PAGE>
ACTIVE SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Deferred income taxes reflect the tax effects of temporary differences
between the carrying amount of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes, as well as net operating
loss and tax credit carryforwards. Due to the uncertainty surrounding the
realization of its deferred tax assets, as of December 31, 1997 and 1998, the
Company has fully reserved its net deferred tax assets of $3,087,000 and
$7,049,000, respectively.
The Company's effective tax rate differs from the expected benefit at the
federal statutory tax rate at December 31 as follows:
<TABLE>
<CAPTION>
1996 1997 1998
----- ----- -----
<S> <C> <C> <C>
Federal statutory tax
rate..................... (35.0)% (35.0)% (35.0)%
State taxes, net of
federal benefit.......... (6.0) (6.0) (6.0)
Other..................... 0.6 1.3 1.0
Valuation allowance....... 40.4 39.7 40.0
----- ----- -----
Effective tax rate...... --% --% --%
===== ===== =====
</TABLE>
Substantially all of the Company's loss from operations for all periods
presented is generated from domestic operations.
At December 31, 1998, the Company has net operating loss (NOL) carryforwards
of approximately $15,203,000 and $11,303,000 for federal and state income tax
purposes, respectively. The federal NOL carryforwards expire through 2013,
while the state NOL carryforwards expire through 2003.
At December 31, 1998, the Company also has research and development credit
carryforwards of approximately $313,000 and $178,000 available to offset future
federal and state income taxes, respectively. The federal credit expires
through 2013, and the state credit carryforward has no expiration.
The extent to which the loss and credit carryforwards can be used to offset
future taxable income and tax liabilities, respectively, may be limited,
depending on the extent of ownership changes within any three-year period.
7. Commitments
The Company leases its facilities under noncancelable operating leases
expiring through February 2000. Rent expense was $64,000, $323,000 and $191,000
in 1996, 1997 and 1998, respectively. Future minimum rent payments in 1999 are
$246,000 and in 2000 are $8,000.
8. Segment Information, Operating by Geographic Area and Significant Customers
The Company operates in one reportable segment, the development and
marketing of software products for businesses that allow integration of
incompatible software applications across their extended enterprises of
customers, suppliers and partners. The Company principally operates in the U.S.
with a small European office to support sales and marketing. The following is a
summary of operations within geographic areas (in thousands):
<TABLE>
<CAPTION>
Six Months
Years Ended Ended June
December 31, 30,
------------------ -------------
1996 1997 1998 1998 1999
---- ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Revenues(1):
United States............................. $285 $3,193 $7,296 $2,229 $8,480
Europe.................................... -- -- 303 180 188
---- ------ ------ ------ ------
Total revenues.......................... $285 $3,193 $7,599 $2,409 $8,668
==== ====== ====== ====== ======
</TABLE>
- --------
(1) Revenues are broken out geographically by the ship-to location of the
customer.
F-15
<PAGE>
ACTIVE SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company has no significant long-lived assets deployed outside of the
U.S.
During 1996, two customers accounted for 53% and 26% of the Company's total
revenues, respectively. During 1997, one customer accounted for 33% of the
Company's total revenues. During 1998, no customers accounted for more than
10% of the Company's total revenues.
At December 31, 1997, two customers accounted for 34% and 22% of accounts
receivable, respectively. At December 31, 1998, two customers accounted for
22% and 21% of accounts receivable, respectively.
9. Employee Benefit Plan
In January 1997, the Company established a 401(k) tax-deferred savings
plan, whereby eligible employees may contribute a percentage of their eligible
compensation (presently from 1% to 15% up to the maximum allowed under IRS
rules). Company contributions are discretionary. No such Company contributions
have been made since inception of this plan.
10. Subsequent Events
In June 1999, the board of directors approved, subject to stockholder
approval, the following:
. Reincorporation of the Company in the state of Delaware.
. The Company's 1999 Stock Plan (the "1999 Plan"). The 1999 Plan becomes
effective upon the closing of the Company's initial public offering. A
total of 3,000,000 shares will be reserved for issuance under the 1999
Plan. In addition, the number of shares reserved under the plan will
automatically be increased on July 1 of each of the following years:
2000, 2001, 2002, 2003 and 2004, in an amount equal to the lesser of (a)
1,500,000 shares, or (b) four percent of the shares outstanding on the
last day of the preceding fiscal year.
. The Company's 1999 Employee Stock Purchase Plan (the "ESPP") and the 1999
Directors' Stock Option Plan (the "Directors' Plan"). The ESPP and
Directors' Plans become effective upon the closing of the Company's
initial public offering. Under the ESPP, eligible employees may purchase
common stock through payroll deductions, which may not exceed 20% of any
employee's compensation, nor more than 1,000 shares in any one purchase
period. A total of 750,000 shares of commons stock will be reserved for
issuance under the ESPP. The number of shares reserved for issuance under
the ESPP will automatically increase on July 1 of each of the following
years: 2000, 2001, 2002, 2003 and 2004, by an amount equal to the lesser
of 350,000 shares or one percent of the total shares outstanding on the
last day of the immediately preceding fiscal year. Under the Directors'
Plan, a total of 300,000 shares of common stock will be reserved for the
grant of nonstatutory stock options to nonemployee directors of the
Company. Options granted under the Directors' Plan shall be immediately
vested and expire in ten years from the date of grant.
. An increase of authorized shares of common stock to 100,000,000 shares
and creation of newly undesignated preferred stock totaling 5,000,000
shares, contingent upon the approval of the reincorporation of the
Company in Delaware and the closing of the Company's initial public
offering.
. A three-for-two stock split of the outstanding shares of common and
convertible redeemable preferred stock. The stock split was effected on
August 2, 1999.
F-16
<PAGE>
ACTIVE SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
All shares and per share amounts in these financial statements have been
adjusted to give effect to the stock split.
In March 1999, the Company entered into a non-cancelable operating lease
expiring in 2003 requiring annual lease payments of approximately $365,000 in
1999, $557,000 in 2000, $571,000 in 2001, $585,000 in 2002 and $550,000 in
2003.
On June 28, 1999, the Company entered into a $3.0 million secured revolving
line of credit agreement expiring in June 2000 and a $2.0 million equipment
line of credit expiring in June 2003. The Company had a total of $3.3 million
outstanding under these lines of credit at June 30, 1999. Borrowings bear
interest at the bank's prime rate (7.75% at June 30, 1999) plus 1.0%. The
Company was in compliance with all financial covenants at June 30, 1999.
In August 1999, the warrant to purchase 36,764 shares of common stock issued
to a strategic partner became exercisable based on achievement of performance
improvements. (See Note 4). Accordingly, the Company will record a research and
development expense of approximately $350,000 in the quarter ended September
30, 1999, representing the fair value of the warrant at the time the
contingency was resolved.
Prior to the effectiveness of the registration of the shares of the
Company's common stock being sold in an initial public offering (IPO), a letter
and other written materials were mailed to employees and friends of Active
Software whom the Company had designated as potential purchasers of up to
200,000 shares of common stock in the IPO. These materials requested that the
recipients send an indication of interest to the underwriter. These materials
were not accompanied by a preliminary prospectus and may have constituted a
prospectus that does not meet the requirements of the Securities Act of 1933.
The mailing of these materials was promptly followed by a letter advising
recipients that they could indicate an interest in purchasing shares only after
they had received a preliminary prospectus. If the mailing of these original
materials did constitute a violation of the Securities Act of 1933, the
recipients of the letter who purchased common stock in the IPO could have the
right, for a period of one year from the date of their purchase of common
stock, to obtain recovery of the consideration paid in connection with their
purchase of common stock or, if they had already sold the stock, sue the
Company for damages resulting from their purchase of common stock. These
refunds or damages could total up to approximately $2.2 million, based on the
initial public offering price of $11.00 per share, in the event that investors
suffer a total loss of their investment during this period and seek refunds or
damages. Lehman Brothers Inc., one of the underwriters, has agreed to indemnify
Active Software for such liabilities.
F-17
<PAGE>
ACTIVE SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
11. RESTATEMENT
Subsequent to the issuance of the Company's 1998 consolidated financial
statements, the Company's management determined that the fair value of warrants
issued to non-employees for services rendered and deferred stock compensation
relating to issuance of options to employees during 1998 should be revised. The
fair value calculation has been revised to consider the indicated value derived
from preferred stock sales during the same time period. As a result, the 1998
consolidated financial statements have been restated from the amounts
previously reported to recognize an additional $280,000 of sales and marketing
expense, $3.2 million of deferred compensation and a corresponding increase in
common stock. A summary of the significant effects of the restatement is as
follows (in thousands except per share amounts):
<TABLE>
<CAPTION>
As Previously
Reported As Restated
------------- -----------
<S> <C> <C>
At December 31, 1998:
Common stock........................................ $ 836 $ 3,934
Deferred stock compensation......................... (457) (2,939)
Accumulated deficit................................. (17,126) (17,742)
For year ended December 31, 1998:
Sales and marketing................................. 8,389 8,669
Amortization of deferred stock compensation......... -- 336
Net loss............................................ (9,326) (9,942)
Basic and diluted loss per share.................... (3.01) $ (3.21)
</TABLE>
* * * * *
F-18
<PAGE>
UNDERWRITING
Active Software and the underwriters for the offering named below have
entered into an underwriting agreement with respect to the shares being
offered. Subject to certain conditions, each underwriter has severally agreed
to purchase the number of shares indicated in the following table. Goldman,
Sachs & Co., Lehman Brothers Inc. and Dain Rauscher Wessels, a division of Dain
Rauscher Incorporated, are the representatives of the underwriters.
<TABLE>
<CAPTION>
Number of
Underwriters Shares
------------ ---------
<S> <C>
Goldman, Sachs & Co................................................ 1,120,000
Lehman Brothers Inc................................................ 1,120,000
Dain Rauscher Wessels, a division of Dain Rauscher Incorporated.... 560,000
BancBoston Robertson Stephens Inc.................................. 85,000
Deutsche Bank Securities Inc....................................... 85,000
A.G. Edwards & Sons, Inc........................................... 85,000
Edward D. Jones & Co., L.P......................................... 85,000
Advest, Inc........................................................ 40,000
Robert W. Baird & Co. Incorporated................................. 40,000
William Blair & Company, L.L.C..................................... 40,000
Legg Mason Wood Walker, Incorporated............................... 40,000
Needham & Company, Inc............................................. 40,000
The Seidler Companies Incorporated................................. 40,000
SoundView Technology Group, Inc.................................... 40,000
Sturdivant & Co., Inc.............................................. 40,000
Wit Capital Corporation............................................ 40,000
---------
Total............................................................ 3,500,000
=========
</TABLE>
If the underwriters sell more shares than the total number set forth in the
table above, the underwriters have an option to buy up to 525,000 additional
shares from Active Software to cover such sales. They may exercise that option
for 30 days. If any shares are purchased pursuant to this option, the
underwriters will severally purchase shares in approximately the same
proportion as set forth in the table above.
The following table shows the per share and total underwriting discounts and
commissions to be paid to the underwriters by Active Software. Such amounts are
shown assuming both no exercise and full exercise of the underwriters' option
to purchase additional shares.
<TABLE>
<CAPTION>
Paid by Active Software
-------------------------
No Exercise Full Exercise
----------- -------------
<S> <C> <C>
Per Share........................................... $ 0.77 $ 0.77
Total............................................... $2,695,000 $3,099,250
</TABLE>
Shares sold by the underwriters to the public will initially be offered at
the initial public offering price set forth on the cover of this prospectus.
Any shares sold by the underwriters to securities dealers may be sold at a
discount of up to $0.42 per share from the initial public offering price. Any
such securities dealers may resell any shares purchased from the underwriters
to certain other brokers or dealers at a discount of up to $0.10 per share from
the initial public offering price. If all of the shares are not sold at the
initial public offering price, the representatives may change the offering
price and the other selling terms.
Active Software has agreed with the underwriters not to dispose of or hedge
any of its common stock or securities convertible into or exchangeable for
shares of common stock during the period
U-1
<PAGE>
from the date of this prospectus continuing through the date 180 days after the
date of this prospectus, except with the prior written consent of the
representatives. This agreement does not apply to any existing employees
benefit plans. See "Shares Available for Future Sale" for a discussion of
transfer restrictions.
In addition, Active Software's officers, directors and substantially all
holders of shares of Active Software's common stock have agreed that, subject
to limited exceptions, they will not offer to sell, sell, contract to sell,
pledge, grant any option to purchase, make any short sale or otherwise dispose
of any shares owned of record or beneficially prior to the offering or any
securities convertible into or exchangeable for shares of common stock for a
period of 180 days from the date of this prospectus without the prior written
consent of the representatives.
At Active Software's request, the underwriters have reserved up to 200,000
shares of the common stock offered hereby for sale, at the initial public
offering price, to employees, customers and other friends of Active Software
through a directed share program. The number of shares available for sale to
the general public will be reduced to the extent these persons purchase the
reserved shares. There can be no assurance that any of the reserved shares will
be so purchased. Any reserved shares not so purchased will be offered by the
underwriters to the general public on the same basis as other shares offered
hereby.
Prior to this offering, there has been no public market for the shares. The
initial public offering price was negotiated among Active Software and the
representatives. Among the factors that were considered in determining the
initial public offering price of the shares, in addition to prevailing market
conditions, were Active Software's historical performance, estimates of the
business potential and earnings prospects of Active Software, an assessment of
Active Software's management and the consideration of the above factors in
relation to market valuation of companies in related businesses.
The common stock has been approved for quotation on the Nasdaq National
Market under the symbol "ASWX."
In connection with this offering, the underwriters may purchase and sell
shares of common stock in the open market. These transactions may include short
sales, stabilizing transactions and purchases to cover positions created by
short sales. Short sales involve the sale by the underwriters of a greater
number of shares than they are required to purchase in this offering.
Stabilizing transactions consist of certain bids or purchases made for the
purpose of preventing or retarding a decline in the market price of the common
stock while this offering is in progress.
The underwriters also may impose a penalty bid. This occurs when a
particular underwriter repays to the underwriters a portion of the underwriting
discount received by it because the representatives have repurchased shares
sold by or for the account of such underwriter in stabilizing or short covering
transactions.
These activities by the underwriters may stabilize, maintain or otherwise
affect the market price of the common stock. As a result, the price of the
common stock may be higher than the price that otherwise might exist in the
open market. If these activities are commenced, they may be discontinued by the
underwriters at any time. These transactions may be completed on the Nasdaq
National Market, in the over-the-counter market or otherwise.
The underwriters may not confirm sales to discretionary accounts without the
prior written approval of the customer.
Active Software estimates that the total expenses of this offering,
excluding underwriting discounts and commissions, will be approximately $1.1
million.
U-2
<PAGE>
Active Software has agreed to indemnify the several underwriters against
certain liabilities, including liabilities under the Securities Act of 1933. In
addition, Lehman Brothers Inc. has agreed to indemnify both Active Software and
the other underwriters for liabilities arising out of the distribution of
written materials that were provided to approximately 219 individuals that
Active Software had designated as potential purchasers of up to 200,000 shares
of common stock in this offering through a directed share program. Goldman,
Sachs & Co., one of the lead managers for this offering, has no administrative
duties with respect to this program.
Affiliates of Lehman Brothers Inc., one of the representatives of the
underwriters, hold shares of convertible redeemable preferred stock of Active
Software that will convert into 2,163,057 shares of common stock upon closing
of the offering. In addition, Michael J. Odrich, a director of Active Software,
is a Managing Director of Lehman Brothers. Because of this relationship between
Lehman Brothers and Active Software, the offering is being conducted in
accordance with Rule 2720 of the NASD. That rule requires that the initial
public offering price can be no higher than that recommended by a "qualified
independent underwriter," as defined by the NASD. Goldman, Sachs & Co. is
serving in that capacity and will perform due diligence investigations and
review and participate in the preparation of the registration statement of
which this prospectus forms a part. Goldman, Sachs & Co. will receive a
customary fee from Active Software as compensation for such role.
U-3
<PAGE>
[Inside Back Cover]
ActiveWorks Integration System
A comprehensive software solution that fully integrates the disparate
software applications of an electronic business and enables these applications
to exchange information in real time across the extended enterprise.
[Graphic consisting of Active Software logo in the center of a hub and spoke
diagram with the following systems connected to the logo: Relational Database,
Mainframes, Custom Applications, Middleware, Internet and Packaged
Applications.]
[Active Software logo]
<PAGE>
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No dealer, salesperson or other person is authorized to give any information
or to represent anything not contained in this prospectus. You must not rely on
any unauthorized information or representations. This prospectus is an offer to
sell only the shares offered hereby, but only under circumstances and in juris-
dictions where it is lawful to do so. The information contained in this pro-
spectus is current only as of its date.
----------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary........................................................ 3
Risk Factors.............................................................. 7
Use of Proceeds........................................................... 18
Dividend Policy........................................................... 18
Capitalization............................................................ 19
Dilution.................................................................. 20
Selected Consolidated Financial Data...................................... 21
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 23
Business.................................................................. 35
Management................................................................ 49
Related Party Transactions................................................ 60
Principal Stockholders.................................................... 61
Description of Capital Stock.............................................. 64
Shares Eligible for Future Sale........................................... 66
Legal Matters............................................................. 67
Experts................................................................... 67
Additional Information.................................................... 68
Index to Consolidated Financial Statements................................ F-1
Underwriting.............................................................. U-1
</TABLE>
Through and including September 6, 1999 (the 25th day after the date of this
prospectus), all dealers effecting transactions in these securities, whether or
not participating in this offering, may be required to deliver a prospectus.
This is in addition to a dealer's obligation to deliver a prospectus when act-
ing as underwriter and with respect to an unsold allotment or subscription.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
3,500,000 Shares
Active Software, Inc.
Common Stock
----------------
[LOGO OF ACTIVE SOFTWARE]
----------------
Goldman, Sachs & Co.
Lehman Brothers
Dain Rauscher Wessels
a division of Dain Rauscher Incorporated
Representatives of the Underwriters
- --------------------------------------------------------------------------------
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