<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 000-26367
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ACTIVE SOFTWARE, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 94-3232772
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3333 OCTAVIUS DRIVE
SANTA CLARA, CALIFORNIA 95054
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (408) 988-0414
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES [X] NO [ ]
As of October 31, 1999 there were 24,060,883 shares of the registrant's Common
Stock outstanding.
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ACTIVE SOFTWARE, INC.
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 1999
TABLE OF CONTENTS
PAGE NUMBERING
IN SEQUENTIAL
NUMBERING SYSTEM
----------------
PART I. FINANCIAL INFORMATION
<TABLE>
<S> <C>
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets as of
September 30, 1999 and December 31, 1998 3
Condensed Consolidated Statements of Operations -
Three and Nine Months Ended September 30, 1999 and 1998 4
Condensed Consolidated Statements of Cash Flows -
Three and Nine Months Ended September 30, 1999 and 1998 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 7
Item 3. Quantitative and Qualitative Disclosures about Market Risk 20
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds 21
Item 6. Exhibits and Reports on Form 8-K 21
Signatures 22
</TABLE>
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
ACTIVE SOFTWARE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998(1)
--------------- ----------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 34,705 $ 7,461
Short-term investments 9,191 -
Accounts receivable (net of allowances of
$236 and $200, respectively) 3,742 3,362
Prepaid expenses and other current assets 1,168 495
--------------- ---------------
Total current assets 48,854 11,318
Property and equipment, net 1,797 796
Other assets 350 180
--------------- ---------------
Total assets $ 50,953 $ 12,294
=============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
Current liabilities:
Accounts payable $ 2,202 $ 739
Accrued compensation and related benefits 1,905 1,115
Deferred revenue 3,858 1,154
Accrued royalties 378 375
Other accrued liabilities 306 335
Current portion of notes payable 137 107
--------------- ---------------
Total current liabilities 8,786 3,825
Notes payable, less current portion - 108
Convertible redeemable preferred stock - 25,117
Stockholders' equity (deficiency):
Common Stock 71,897 3,934
Deferred stock compensation (3,832) (2,939)
Notes receivable from stockholders (9) (9)
Accumulated other comprehensive loss (5) -
Accumulated deficit (25,884) (17,742)
--------------- ---------------
Total stockholders' equity (deficiency) 42,167 (16,756)
--------------- ---------------
Total liabilities and stockholders' equity (deficiency) $ 50,953 $ 12,294
=============== ===============
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(1) Derived from December 31, 1998 audited balance sheet included in the Company's prospectus.
</TABLE>
See notes to condensed consolidated financial statements.
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ACTIVE SOFTWARE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------ ----------- ----------- -----------
Sept. 30 Sept. 30 Sept. 30 Sept. 30
------------ ----------- ----------- -----------
1999 1998 1999 1998
------------ ---------- ----------- -----------
<S> <C> <C> <C> <C>
Revenue:
License $ 5,075 $ 1,642 $ 10,997 $ 3,597
Service 2,091 427 4,837 881
---------- ---------- ----------- -----------
Total revenue 7,166 2,069 15,834 4,478
---------- ---------- ----------- -----------
Cost of revenue:
License 403 157 868 204
Service 1,785 629 4,589 1,135
----------- ---------- ----------- -----------
Total cost of revenue 2,188 786 5,457 1,339
----------- ---------- ----------- -----------
Gross profit 4,978 1,283 10,377 3,139
Operating expenses:
Research and development 2,113 1,208 4,389 2,821
Sales and marketing 4,741 2,392 11,697 6,187
General and administrative 849 603 1,842 1,492
Amortization of deferred stock compensation 303 95 868 179
----------- ---------- ----------- -----------
Total operating expenses 8,006 4,298 18,796 10,679
----------- ---------- ----------- -----------
Loss from operations (3,028) (3,015) (8,419) (7,540)
Other income, net 228 94 277 186
----------- ---------- ----------- ----------
Net loss $ (2,800) $ (2,921) $ (8,142) $ (7,354)
=========== ========== =========== ==========
Basic and diluted net loss per share $ (0.19) $ (0.77) $ (1.01) $ (2.31)
=========== ========== =========== ==========
Shares used in calculating basic and diluted net
loss per share 14,591 3,817 $ 8,032 $ 3,185
=========== ========== =========== ==========
Pro forma basic and diluted net loss per share $ (0.13) $ (0.17) $ (0.43) $ (0.48)
=========== ========== =========== ==========
Shares used in calculating pro forma basic and
diluted net loss per share 20,925 17,222 19,080 15,435
=========== ========== =========== ==========
</TABLE>
See notes to condensed consolidated financial statements.
<PAGE>
ACTIVE SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
--------------------------
1999 1998
----------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (8,142) $ (7,354)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 503 342
Amortization of deferred stock compensation 868 179
Issuance of warrants 350 285
Changes in assets and liabilities:
Accounts receivable (380) (1,066)
Prepaid expenses and other current assets (673) (60)
Accounts payable 1,463 296
Accrued compensation and related benefits 790 184
Accrued royalties 3 144
Other accrued liabilities (29) 157
Deferred revenue 2,704 429
---------- ----------
Net cash used in operating activities (2,543) (6,464)
---------- ----------
Cash flows from investing activities:
Property and equipment additions (1,514) (451)
Proceeds from sale of fixed assets 10 (19)
Purchases of short-term investments (9,196) -
Other assets (170) -
---------- ----------
Net cash used in investing activities (10,870) (470)
---------- ----------
Cash flows from financing activities:
Sale of Common Stock 40,743 281
Repurchase of Common Stock (8) (14)
Sale of convertible redeemable preferred stock - 11,125
Repayment of notes receivable from stockholders - 40
Repayment of capital lease obligation and line of credit (3,372) (67)
Proceeds from line of credit 3,294 -
---------- ----------
Net cash provided by financing activities 40,657 11,365
---------- ----------
Net increase in cash and cash equivalents 27,244 4,431
Cash and cash equivalents--beginning of period 7,461 2,876
---------- ----------
Cash and cash equivalents--end of period $ 34,705 $ 7,307
========== ===========
Supplemental disclosure of cash flow information--
Cash paid during the period for interest $ 62 $ 33
========== ==========
Noncash financing activities:
Conversion of convertible redeemable preferred stock to Common Stock $ 25,117 $ -
========== ==========
Deferred stock compensation $ 1,761 $ 1,860
========== ==========
</TABLE>
See notes to condensed consolidated financial statements.
<PAGE>
ACTIVE SOFTWARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements have been
prepared in conformity with generally accepted accounting principles. However,
certain information or footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed, or omitted, pursuant to the rules and regulations of the
Securities and Exchange Commission for interim financial statements. In the
opinion of management, the statements include all adjustments necessary for
interim financial statements (which are of a normal and recurring nature) for
the fair presentation of the results of the interim periods presented. The
results of operations for such periods are not necessarily indicative of
results to be expected for the entire current year or other future interim
periods.
The condensed consolidated financial statements and related disclosures
have been prepared with the presumption that users of the interim financial
information have read or have access to the audited financial statements for the
preceding fiscal year. Accordingly, these condensed consolidated financial
statements should be read in conjunction with the audited consolidated financial
statements and related notes thereto included in the Company's Prospectus dated
August 12, 1999.
2. INITIAL PUBLIC OFFERING
On August 18, 1999 the Company completed its initial public offering
and issued 4,025,000 shares, including 525,000 shares pursuant to the
underwriters' exercise of their overallotment option, of its Common Stock to the
public at a price of $11.00 per share. Net proceeds to the Company, after
deducting the underwriting discount and estimated expenses, were approximately
$40.1 million.
3. NET LOSS PER SHARE AND PRO FORMA NET LOSS PER SHARE
Basic and diluted net loss per share are computed using the weighted
average number of common shares outstanding. Options, warrants, shares subject
to repurchase and convertible preferred stock were not included in the
computation of diluted net loss per share because the effect would be
anti-dilutive.
Pro forma net loss per share for the quarter ended September 30, 1998
does not include the effect of approximately 13,405,323 shares of convertible
preferred stock outstanding, 1,873,725 stock options outstanding, 178,912 Common
Stock warrants outstanding, and approximately 1,717,081 shares of Common Stock
issued and subject to repurchase by the Company, because their effects are anti-
dilutive.
Pro forma net loss per share for the quarter ended September 30, 1999
includes the effect of approximately 13,405,323 shares of preferred stock
converted at the Company's IPO on August 13, 1999; it does not include 3,626,425
shares issuable upon exercise of stock options outstanding, approximately 36,764
shares issuable upon exercise of warrants outstanding, and approximately
1,013,370 shares of Common Stock issued and subject to repurchase by the
Company, because their effects are anti-dilutive.
4. COMPREHENSIVE INCOME
In June 1997, the Financial Accounting Standards Board issued Statement
No. 130, "Reporting Comprehensive Income," which establishes standards for
reporting and displaying comprehensive income and its components in the
financial statements. The only item included in other comprehensive loss which
the Company currently reports is unrealized loss on investments.
The following is a calculation of comprehensive loss, in thousands:
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------- ---------------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net loss $ (2,800) $ (2,921) $ (8,142) $ (7,354)
Other comprehensive loss:
Unrealized loss on investments (5) - (5) -
--------- --------- --------- ---------
Comprehensive loss $ (2,805) $ (2,921) $ (8,147) $ (7,354)
========= ========= ========= =========
</TABLE>
5. RECENTLY ISSUED ACCOUNTING STANDARDS
In December 1998, the AICPA issued SOP 98-9, "Modification of SOP 97-2,
Software Revenue Recognition with Respect to Certain Transactions." This
amendment clarified the specification of what was considered vendor-specific
objective evidence of fair value for the various elements in a multiple element
arrangement. Full implementation guidelines for this standard have not yet been
issued and may result in unanticipated changes in our revenue recognition
practices which could affect the timing of our future revenue and operating
results.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following information should be read in conjunction with the condensed
historical financial information and the notes thereto included in this report
and Management's Discussion and Analysis of Financial Condition and Results of
Operations and related financial information contained in the Company's
Registration Statement on Form S-1 filed with the Securities and Exchange
Commission in conjunction with our initial public offering of Common Stock.
In addition, this report contains forward-looking statements that involve
risks and uncertainties. Words such as "anticipates," "believes," "plans,"
"expects," "future," "intends" and similar expressions identify forward-
looking statements. These statements are not guarantees of future performance
and are subject to certain risks and uncertainties that could cause actual
results to differ materially from those expressed or forecasted. Factors that
might cause such a difference include, but are not limited to, those discussed
in the section entitled "Factors That May Affect Future Results" and those
appearing elsewhere in this Form 10-Q. Readers are cautioned not to place
undue reliance on these forward-looking statements, which reflect management's
analysis only as of the date hereof. We assume no obligation to update these
forward-looking statements to reflect actual results or changes in factors or
assumptions affecting forward-looking statements.
REVENUE
Total revenue for the three months ended September 30, 1999 increased to
$7.2 million from $2.1 million for the three months ended September 30, 1998,
an increase of 243%. Total revenue increased 251% to $15.8 million for the
nine months ended September 30, 1999 from $4.5 million for the nine months
ended September 30, 1998. License revenue increased to $5.1 million in the
three months ended September 30, 1999 from $1.7 million in the three months
ended September 30, 1998, an increase of 200%. License revenue increased 205%
to $11 million for the nine months ended September 30, 1999 from $3.6 million
for the nine months ended September 30, 1998. The increase in license revenue
was due to an increase of $.3 million in sales of additional ActiveWorks
products and features to existing customers and to an increase of $7.1 million
in sales of our products to new customers.
<PAGE>
Service revenue increased 320% to $2.1 million in the three months ended
September 30, 1999 from $0.5 million in the three months ended September 30,
1998. Service revenue for the nine months ended September 30, 1999 was $4.8
million, an increase of 433% from the $0.9 million for the nine months ended
September 30, 1998. The increase in service revenue was due primarily to an
increase in maintenance and support fees of $1.3 million in connection with the
growth of our customer base and an increase in consulting fees of $2.6 million
as a result of the establishment of our professional services organization in
the third quarter of 1998.
COST OF REVENUE
Total cost of revenue increased to $2.2 million in the three months ended
September 30, 1999 from $786,000 in the three months ended September 30, 1998.
For the nine months ended September, 30, 1999 total cost of revenue increased to
$5.5 million from $1.3 million for the corresponding period in 1998.
Cost of License Revenue
Cost of license revenue increased to $403,000 in the three months ended
September 30, 1999 from $157,000 in the three months ended September 30, 1998.
For the nine months ended September 30, 1999, cost of license revenue increased
to $868,000 from $204,000 in the nine months ended September 30, 1998. As a
percentage of license revenue, cost of license revenue was 8% for the three
months ended September 30, 1999 as compared to 10% for the three months ended
September 30, 1998. For the nine months ended September 30, 1999 cost of license
revenue was 8% of license revenue as compared to 6% of license revenue for the
nine months ended September 30, 1998. The growth in cost of license revenue as a
percentage of license revenue for the nine months ended September 30, 1999 was
attributable primarily to a larger proportion of our products sold during that
period incorporating third-party technology for which we pay royalties. We
anticipate that the cost of license revenue will increase in absolute dollars as
we license additional products, although cost of license revenue will vary as a
percentage of license revenue from period to period.
Cost of Service Revenue
Cost of service revenue increased to $1.8 million in the three months ended
September 30, 1999 from $629,000 in the three months ended September 30, 1998.
For the nine months ended September 30, 1999, cost of service revenue increased
to $4.6 million from $1.1 million in the nine months ended September 30, 1998.
The growth in cost of service revenue was attributable primarily to an increase
in personnel dedicated to support a larger number of customers. As a percentage
of service revenue, cost of service revenue was 86% and 147% in the three months
ended September 30, 1999 and 1998, respectively, and was 95% and 129% for the
nine months ended September 30, 1999 and 1998, respectively. We anticipate that
the cost of service revenue will increase in absolute dollars as we continue to
expand our services offerings, although cost of service revenue may vary as a
percentage of service revenue from period to period.
Because the gross margin on license revenue is higher than the gross
margin on service revenue, gross profit as a percentage of total revenue is
affected by the mix of license and service revenue. 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 to $2.1 million in the three months ended
September 30, 1999, from $1.2 million in the three months ended September 30,
1998. For the nine months ended September 30, 1999, research and development
expenses increased to $4.4 million from $2.8 million for the same period in
1998. The increase was attributable primarily to the addition of personnel
<PAGE>
in our research and development organization associated with product development
as well as the expense associated with the issuance of a stock warrant to a
strategic partner, Intel Corporation, in connection with the achievement of
certain performance improvements. As a percentage of total revenue, research and
development expenses were 29% and 58% in the three months ended September 30,
1999 and 1998, respectively and 28% and 63% in the nine months ended September
30, 1999 and 1998, respectively. The decreases in percentage of revenue were
attributable primarily to the increases in the revenue base. 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 revenue from period to
period.
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 to $4.7 million from $2.4 million in
the three months ended September 30, 1999 and 1998, respectively. For the nine
months ended September 30, 1999, sales and marketing expenses were $11.7
million, as compared to $6.2 million for the same period in 1998. The increase
was attributable primarily to the addition of employees in sales and
marketing, increased commissions related to increased revenue and, to a lesser
extent, costs associated with increased efforts to develop market awareness of
our products and services. As a percentage of total revenue, sales and
marketing expenses for the three months ended September 30, 1999 and 1998
represented 66% and 116%, respectively. For the nine months ended September
30, 1999, sales and marketing expenses as a percentage of total revenue were
74%, as compared to 138% for the corresponding period in 1998. 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 revenue 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 to $849,000 in the three months
ended September 30, 1999 from $603,000 in the three months ended September 30,
1998, representing 12% and 29%, respectively, of total revenue. For the nine
months ended September 30, 1999, general and administrative expenses were $1.8
million, as compared to $1.5 million for the corresponding period in 1998. As
a percentage of total revenue, general and administrative expenses were 12%
and 33% for the nine months ended September 30, 1999 and 1998, respectively.
The increase in absolute dollars was due primarily to the addition of
financial and management personnel, as well as costs associated with operating
as a public company. We expect that general and administrative expenses will
continue to 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 the first quarter of 1999 and in 1998 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 September 30, 1999 and December 31, 1998
amounted to $3.8 million and $2.9 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 $868,000 and $179,000 was amortized in the nine
months ended September 30, 1999 and 1998, 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 Other Income
Net other income consists primarily of interest income from cash and cash
equivalents and short-term investments offset by interest expense related to
obligations under capital leases. For the three months ended September 30, 1999,
net interest income was approximately $228,000,
<PAGE>
as compared to $94,000 for the three months ended September 30, 1998. For the
nine months ended September 30, 1999 and 1998 net interest income was $277,000
and $186,000, respectively. The increase in net interest income was due
primarily to increased interest income earned on higher cash and cash equivalent
balances as well as short-term investment balances, which increased due to the
initial public offering of our Common Stock in August 1999.
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 September 30, 1999. Additionally, on August
18, 1999 we completed an initial public offering of our Common Stock, which
resulted in net proceeds of approximately $40.1 million. As of September 30,
1999, we had $43.9 million of cash and cash equivalents and short-term
investments.
Net cash used in operating activities was $2.6 million in the nine months
ended September 30, 1999, attributable primarily to a net loss of $8.1 million
and an increase in prepaid and other current assets of $673,000, offset in
part by amortization of deferred stock compensation of $868,000, an increase
in accounts payable of $1.5 million, an increase in accrued compensation and
benefits of $790,000 and an increase in deferred revenue of $2.7 million. For
the nine months ended September 30, 1998, net cash used in operating
activities was $6.5 million, attributable primarily to a net loss of $7.4
million, and offset in part by an increase in accounts receivable of $1.1
million, an increase in deferred revenue of $429,000 and an increase in
accounts payable of $296,000. Our sales cycle is lengthy and unpredictable and
could cause our quarterly revenue 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 in the nine months ended September
30, 1999 was $10.8 million, due primarily to the increase in the investment
portfolio. For the nine months ended September 30, 1998, investing activities
used cash of $470,000, attributable primarily to an increase in property and
equipment additions.
Net cash provided by financing activities was $40.7 million for the nine
months ended September 30, 1999, due primarily to the completion of our
initial public offering of Common Stock. For the corresponding period in 1998,
cash provided by financing activities was attributable primarily to proceeds
from the issuance of convertible redeemable preferred stock in the amount of
$11.1 million.
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 our current cash and cash equivalents and short-term
investments. After this time, if cash generated from operations is
insufficient to satisfy our liquidity requirements, 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 COMPLIANCE
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.
<PAGE>
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, 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 revenue, 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. 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.
FACTORS THAT MAY AFFECT OUR OPERATING RESULTS
<PAGE>
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
eBusiness integration software market, including:
. our substantial dependence on our ActiveWorks software products, from
which we derive substantially all of our revenue 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 eBusiness 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 $8.1 million in the nine
months ended September 30, 1999, and, as of September 30, 1999, we had an
accumulated deficit of approximately $25.9 million. We cannot assure you that
our revenue 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 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;
<PAGE>
. 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 eBusiness
integration solutions for our customers;
. changes in our mix of revenue 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 REVENUE IS 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 revenue from the sale of our
ActiveWorks Integration System software products and related services. We expect
revenue from this product family to continue to account for substantially all of
our future revenue. 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
REVENUE, OUR REVENUE COULD SUFFER IF WE LOSE A MAJOR CUSTOMER
We have generated a substantial portion of our annual and quarterly
historical revenue from a limited number of customers. As a result, if we lose
a major customer, our revenue could suffer. In 1997, The Boeing Company
accounted for 33% of our total revenue. In 1998, no customer accounted for
more than 10% of our total revenue. For the nine months ended September 30,
1999, Level 3 Communications accounted for 10% of our total revenue. We expect
that a small number of customers will continue to account for a substantial
portion of our revenue in any given quarter for the foreseeable future.
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 have recently expanded our
direct sales force and plan to recruit additional sales personnel. As of
September 30, 1999, we employed approximately 62 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
<PAGE>
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 revenue 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 eBusiness
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.
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 eBUSINESS INTEGRATION MARKET IS IN AN EARLY STAGE OF DEVELOPMENT, AND
eBUSINESS INTEGRATION SOFTWARE PRODUCTS, INCLUDING OUR ACTIVEWORKS SOFTWARE
PRODUCTS, MAY NOT ACHIEVE MARKET ACCEPTANCE
The market for eBusiness 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 eBusiness integration
<PAGE>
products such as our ActiveWorks software products. If eBusiness 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 $300,000. 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 eBUSINESS 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 eBusiness 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 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.
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 revenue has grown from approximately $285,000 during 1996 to $15.8 million
for the nine-month period ending September 30, 1999. The number of our employees
has grown from approximately 48 at the end of 1997 to 157 as of September 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:
<PAGE>
. 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 three 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.
RAPID TECHNOLOGICAL CHANGE IN THE eBUSINESS INTEGRATION SOFTWARE MARKET COULD
CAUSE OUR PRODUCTS TO BECOME OBSOLETE OR REQUIRE US TO REDESIGN OUR PRODUCTS
The eBusiness 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
<PAGE>
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 eBusiness
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 eBusiness 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 REVENUE FROM THOSE MARKETS IN WHICH WE CURRENTLY OPERATE
In the nine months ended September 30, 1999, we have generated less than
10% of our revenue 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 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 revenue 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
<PAGE>
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.
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 eBusiness 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 Compliance."
<PAGE>
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.
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 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.
BECAUSE 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
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 change 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
<PAGE>
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.
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
Executive officers and directors, as well as their respective affiliates,
beneficially own a total of approximately 38% of our outstanding Common Stock.
As a result, these stockholders are 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 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.
CHANGES IN ACCOUNTING STANDARDS COULD AFFECT THE CALCULATION OF OUR
FUTURE OPERATING RESULTS
In December 1998, the AICPA issued SOP 98-9, "Modification of SOP 97-2,
Software Revenue Recognition with Respect to Certain Transactions." This
amendment clarified the specification of what was considered vendor-specific
objective evidence of fair value for the various elements in a multiple element
arrangement. Full implementation guidelines for this standard, which have not
yet been issued, may result in unanticipated changes in our revenue recognition
practices, which changes could materially adversely affect our business,
financial condition or operating results.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our exposure to market risk for changes in interest rates relates primarily
to the increase or decrease in the amount of interest income we can earn on our
investment portfolio. We do not plan to use derivative financial instruments in
our investment portfolio. We plan to ensure the safety and preservation of our
invested principal funds by limiting default risks, market risk and reinvestment
risk. We plan to mitigate default risk by investing in high-credit quality
securities.
We have not had any significant transactions in foreign currencies, nor do
we have any significant balances that are due or payable in foreign currencies
at September 30, 1999. Therefore, a change in foreign currency rates would have
an
<PAGE>
insignificant impact on our financial position or results of operations. We do
not hedge any of our foreign currency exposures.
PART II. OTHER INFORMATION
Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(c) Sales of Unregistered Securities
From July 1, 1999 to August 13, 1999 we issued options to
purchase 560,000 shares of Common Stock at a weighted-average
exercise price of $12.00 per share to our employees pursuant to
the 1996A and 1999 Stock Plans. During this period, 134,475
shares of Common Stock were purchased at a weighted-average
exercise price of $1.074 per share upon exercise of options
granted under the 1996A Stock Plan. These options and shares of
Common Stock were issued by us in reliance upon Rule 701
promulgated under the Securities Act of 1933, as amended.
(d) Use of Proceeds
On August 18, 1999, the Company completed an initial public
offering of its Common Stock, $0.001 par value. The managing
underwriters in the offering were Goldman, Sachs & Co., Lehman
Brothers and Dain Rauscher Wessels. The shares of Common Stock
sold in the offering were registered under the Securities Act
of 1933, as amended, on a Registration Statement on Form S-1
that was declared effective by the SEC on August 12, 1999. The
offering commenced on August 13, 1999, on which date 3,500,000
shares of Common Stock registered under the Registration
Statement were sold at a price of $11.00 per share. The
Underwriters also exercised an overallotment option of 525,000
shares. All 525,000 overallotment shares were sold at a price
of $11.00 per share. The aggregate price of the offering amount
registered and sold was $44.3 million. In connection with the
offering, the Company incurred an aggregate of approximately
$3.1 million in underwriting discounts and approximately $1.1
million in other related expenses, the net proceeds of the
offering were approximately $40.1 million. The Company has
invested the net proceeds from its initial public offering of
Common Stock in interest bearing investment grade instruments.
The Company expects to use the net proceeds primarily for
working capital and for other general corporate purposes. The
amounts and timing of these expenditures will vary depending on
a number of factors, including the amount of cash generated by
our operations, competitive and technological developments and
the rate of growth, if any, of our business. In addition, we
may 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. Although we have no present commitments or agreements
with respect to such acquisitions, management will have
significant discretion in applying the net proceeds of this
offering.
None of the net proceeds of the Company's offering were paid
directly or indirectly to any director, officer, general
partner of Active Software or their associates, persons owning
10% or more of any class of equity securities of the Active
Software, or an affiliate of Active Software.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On July 15, 1999, the Company held its 1999 annual meeting of
stockholders. The following summarizes the matters submitted to a vote of the
stockholders:
1. The election of the following nominees to serve as members of
the Board of Directors:
NOMINEE IN FAVOR WITHHELD
--------------------- --------------------- -------------------
R.James Green 17,431,975 None
Rafael Bracho 17,431,975 None
Kevin R. Compton 17,431,975 None
James P. Gauer 17,431,975 None
Michael J. Odrich 17,431,975 None
Todd Rulon-Miller 17,431,975 None
Roger S. Siboni 17,431,975 None
2. The reincorporation of the Company under the laws of Delaware,
including the amendment of the Company's certificate of incorporation,
authorizing 5,000,000 shares of undesignated Preferred Stock of which the
Board of Directors has the authority to issue and to determine the rights,
preferences and privileges:
IN FAVOR WITHHELD
-------------------- ---------------------
17,431,975 None
3. The approval of certain amendments to the Company's 1996 and
1996A Stock Plans:
IN FAVOR WITHHELD
------------------- ---------------------
16,696,681 735,294
4. The adoption of the Company's 1999 Stock Plan, the reservation
of 3,000,000 shares of Common Stock for issuance under such plan, and the
automatic increase in the number of shares reserved under such plan on July 1 of
each of the following years: 2000, 2001, 2002, 2003 and 2004, by an amount equal
to the lesser of 1,500,000 shares or four percent of the total shares
outstanding on the last day of the immediately preceding fiscal year:
IN FAVOR WITHHELD
------------------- ---------------------
17,431,975 None
5. The adoption of the 1999 Directors' Stock Option Plan and the
reservation of 300,000 shares of the Company's Common Stock for issuance
thereunder:
IN FAVOR WITHHELD
------------------- ---------------------
17,431,975 None
6. The adoption of the 1999 Employee Stock Purchase Plan, the
reservation of 750,000 shares of Common stock for issuance under such plan, and
the automatic increase in the number of shares reserved under such plan 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 immediately preceding fiscal year:
IN FAVOR WITHHELD
------------------- ---------------------
17,431,975 None
7. The ratification of the appointment of Deloitte & Touche LLP as
independent auditors of the Company for the fiscal year ending December 31,
1999:
IN FAVOR WITHHELD
------------------- --------------------
17,431,975 None
The above share amounts have been adjusted to reflect the Company's
three-for-two stock split and the conversion of the Company's outstanding
Preferred Stock into Common Stock upon completion of the Company's initial
public offering in August 1999.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27.1 Financial Data Schedule
(b) Reports on Form 8-K
None
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, Active
Software has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
ACTIVE SOFTWARE, INC.
By: /s/ JON A. BODE
-----------------------------------------
Jon A. Bode
Chief Financial Officer (Principal
Financial and Accounting Officer)
Dated: November 12, 1999
INDEX TO EXHIBITS
Exhibit No. Document Description
- ----------- --------------------
27.1 Financial Data Schedule
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM ACTIVE
SOFTWARE, INC.'S QUARTERLY REPORT ON FORM 10-Q FOR THE PERIOD ENDED SEPT. 30,
1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 34,705
<SECURITIES> 9,191
<RECEIVABLES> 3,978
<ALLOWANCES> (236)
<INVENTORY> 0
<CURRENT-ASSETS> 48,854
<PP&E> 3,167
<DEPRECIATION> (1,370)
<TOTAL-ASSETS> 50,953
<CURRENT-LIABILITIES> 8,786
<BONDS> 0
0
0
<COMMON> 71,897
<OTHER-SE> (29,730)
<TOTAL-LIABILITY-AND-EQUITY> 50,950
<SALES> 10,997
<TOTAL-REVENUES> 15,834
<CGS> 868
<TOTAL-COSTS> 5,457
<OTHER-EXPENSES> 18,796
<LOSS-PROVISION> 50
<INTEREST-EXPENSE> 62
<INCOME-PRETAX> (8,142)
<INCOME-TAX> 0
<INCOME-CONTINUING> (8,142)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (8,142)
<EPS-BASIC> (1.01)
<EPS-DILUTED> (1.01)
</TABLE>
