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UNITED STATES
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 MARCH 31, 2000
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 April 30, 2000 there were 25,808,100 shares of the registrant's Common
Stock outstanding.
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ACTIVE SOFTWARE, INC.
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 2000
TABLE OF CONTENTS
PAGE NUMBERING
IN SEQUENTIAL
NUMBERING SYSTEM
----------------
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets as of
March 31, 2000 and December 31, 1999 3
Condensed Consolidated Statements of Operations -
Three Months Ended March 31, 2000 and 1999 4
Condensed Consolidated Statements of Cash Flows -
Three Months Ended March 31, 2000 and 1999 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 9
Item 3. Quantitative and Qualitative Disclosures about Market Risk 14
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds 23
Item 6. Exhibits and Reports on Form 8-K 24
Signatures 24
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ACTIVE SOFTWARE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999(1)
--------------- ----------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................ $ 14,938 $ 17,299
Short-term investments................................... 16,916 19,906
Accounts receivable (net of allowances of $593 and $493). 9,336 9,486
Prepaid expenses and other current assets................ 1,631 953
-------- --------
Total current assets................................... 42,821 47,644
Property and equipment, net................................ 2,563 1,951
Convertible subordinated promissory note receivable........ - 2,000
Long-term marketable securities............................ 4,500 -
Goodwill and acquired intangibles, net..................... 44,651 -
Other assets............................................... 2,281 227
-------- --------
Total assets........................................... $ 96,816 $ 51,822
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable......................................... $ 2,166 $ 1,424
Accrued compensation and related benefits................ 2,883 3,039
Deferred revenues........................................ 6,220 4,006
Accrued royalties........................................ 558 400
Other accrued liabilities................................ 2,111 1,617
Current portion of long-term obligations................. 609 109
-------- -------
Total current liabilities.............................. 14,547 10,595
-------- -------
Long-term obligations, less current portion................ 267 -
-------- -------
Stockholders' equity:
Preferred stock, $0.001 par value: authorized
5,000,000 shares; none outstanding.................... - -
Common stock, $0.001 par value; authorized,
100,000,000 shares; outstanding--2000, 24,768,168
shares; 1999, 24,069,853 shares....................... 118,173 71,900
Deferred stock compensation............................. (3,228) (3,530)
Notes receivable from stockholders...................... - (2)
Accumulated other comprehensive loss.................... (39) (32)
Accumulated deficit..................................... (32,904) (27,109)
-------- --------
Total stockholders' equity............................ 82,002 41,227
-------- --------
Total liabilities and stockholders' equity............ $ 96,816 $ 51,822
======== ========
</TABLE>
- -------------
(1) Derived from December 31, 1999 audited balance sheet included in the 1999
Annual Report on Form 10-K of Active Software, Inc.
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ACTIVE SOFTWARE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
------------ -----------
2000 1999
------------ ----------
<S> <C> <C>
Revenue:
License........................................................ $ 10,170 $ 2,364
Service........................................................ 3,425 1,198
---------- ----------
Total revenue............................................... 13,595 3,562
---------- ----------
Cost of revenue:
License........................................................ 404 152
Service........................................................ 2,566 1,227
---------- ----------
Total cost of revenue....................................... 2,970 1,379
---------- ----------
Gross profit...................................................... 10,625 2,183
Operating expenses:
Research and development....................................... 2,640 1,060
Sales and marketing............................................ 7,991 3,146
General and administrative..................................... 1,212 476
Amortization of deferred stock compensation.................... 302 263
Amortization of Goodwill and acquired intangibles.............. 2,018 -
Purchased in-process technology................................ 2,737 -
---------- ----------
Total operating expenses.................................... 16,900 4,945
---------- ----------
Loss from operations.............................................. (6,275) (2,762)
Other income (expense):
Interest income................................................ 533 62
Interest expense and other..................................... (53) (41)
---------- ----------
Total other income, net..................................... 480 21
---------- ----------
Net loss.......................................................... $ (5,795) $ (2,741)
========== ==========
Basic and diluted net loss per share.............................. $ (0.25) $ (0.60)
========== ==========
Shares used in calculating basic and diluted net
loss per share................................................. 23,560 4,542
========== ==========
</TABLE>
See notes to condensed consolidated financial statements.
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ACTIVE SOFTWARE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
--------------------------
2000 1999
----------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net loss............................................................... $ (5,795) $ (2,741)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization....................................... 350 135
Amortization of Goodwill and acquired intangibles................... 2,018 -
Amortization of deferred stock compensation......................... 302 263
Purchased in-process technology..................................... 2,737 -
Changes in assets and liabilities, net of effects of acquisition:
Accounts receivable.............................................. 452 697
Prepaid expenses and other current assets........................ (647) (142)
Accounts payable................................................. 625 495
Accrued compensation and related benefits........................ (263) (44)
Accrued royalties................................................ 158 (130)
Other accrued liabilities........................................ 403 (177)
Deferred revenue................................................. 2,050 89
---------- ----------
Net cash provided by (used in) operating activities........... 2,390 (1,555)
---------- ----------
Cash flows from investing activities:
Property and equipment additions....................................... (938) (258)
Purchase of short-term and long-term investments....................... (13,319) -
Maturities & sales of short-term investments........................... 11,802 -
Acquisition of a business, net of cash acquired........................ (2,091) -
Other assets........................................................... (354) (123)
---------- ----------
Net cash used in investing activities......................... (4,900) (381)
---------- ----------
Cash flows from financing activities:
Sale of common stock................................................... 273 244
Repayment of notes receivable from stockholders........................ 2 -
Repayment of long-term obligations..................................... (126) (24)
---------- ----------
Net cash provided by financing activities..................... 149 220
---------- ----------
Net increase in cash and cash equivalents................................. (2,361) (1,716)
Cash and cash equivalents--beginning of period............................ 17,299 7,461
---------- ----------
Cash and cash equivalents--end of period.................................. $ 14,938 $ 5,745
========== ==========
Supplemental disclosure of cash flow information:
Cash paid during the period for interest............................... $ 53 $ 9
========== ==========
Supplemental schedule of noncash investing and financing transactions:
Issuance of common stock and options for business acquisitions.......... $ 46,000 -
========== ==========
</TABLE>
See notes to condensed consolidated financial statements.
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ACTIVE SOFTWARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000
(UNAUDITED)
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 consolidated 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 Annual Report on Form 10-K for the fiscal year ended December 31, 1999.
The consolidated results of operations for the three months ended March 31,
2000, are not necessarily indicative of the results to be expected for any
subsequent period or for the entire fiscal year ending December 31, 1999.
2. ACQUISITION
In February 2000, the Company acquired Alier, Inc. (Alier) a provider of
enterprise application integration solutions to financial institutions. In
connection with this transaction, all outstanding shares of capital stock of
Alier were exchanged for 390,875 shares of our common stock valued at $32.7
million and cash of $2.0 million. In addition, the outstanding options to
purchase Alier capital stock were converted into options to purchase 158,277
shares of our common stock valued at $13.3 million. The company assumed certain
liabilities of Alier and incurred $316,000 in transaction costs. The acquisition
was accounted for as a purchase and, accordingly, the results of operations of
Alier have been included in the Company's financial statements from the date of
acquisition. In connection with the acquisition, the purchase price was
allocated, based on an independent valuation, to goodwill and acquired
intangibles of $46.7 million and purchased in-process technology of $2.7
million. For the first quarter of fiscal 2000, the Company recorded $2.0 million
for amortization of goodwill and acquired intangibles, which are amortized over
their useful lives of one to three years, and $2.7 million for the purchased in-
process technology.
In connection with the acquisition, net assets acquired were as follows (in
thousands):
Current assets................................................... $ 259
Property and equipment, net...................................... 24
Intangible assets................................................ 46,669
Current liabilities assumed...................................... (1,373)
Transaction costs................................................ (316)
Purchased in-process technology.................................. 2,737
--------
Net assets acquired.............................................. $48,000
========
The following unaudited pro forma summary results of operations data have
been prepared assuming that the Alier acquisition had occurred as of the first
day of the fiscal year of the acquisition and of the preceding fiscal year. The
consolidated results are not necessarily indicative of results of future
operations nor of results that would have occurred had the acquisitions been
consummated as of
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the beginning of the periods presented. The pro forma information excludes the
impact of the one-time charges related to purchased in-process technology of
$2.7 million recorded in the first quarter of fiscal 2000 (in thousands, except
per share amount):
1999 1998
--------- --------
(unaudited) (unaudited)
Net revenue.......................................... $ 29,051 $ 9,407
========= ========
Net loss............................................. $(28,656) $(26,374)
========= ========
Basic and diluted net loss per share................. $ (2.34) $ (7.56)
========= ========
3. NET LOSS PER SHARE
Basic and diluted net loss per share are computed using the weighted
average number of common shares outstanding. Options, warrants and shares
subject to repurchase were not included in the computation of diluted net loss
per share because the effect would be anti-dilutive.
The following table sets forth the computation of basic and diluted net
loss per share for the periods indicated (in thousands, except per share
amounts):
Three Months Ended
March 31,
---------------------
2000 1999
--------- --------
Net loss............................................ $ (5,795) $ (2,741)
========= ========
Basic and diluted
Weighted average shares of common stock
outstanding............................... 24,206 5,986
Less: weighted average common shares subject to
Repurchase.............................. (646) (1,444)
--------- --------
Denominator for diluted net loss per share 23,560 4,542
========= ========
Basic net loss per share............................ $ (0.25) $ (0.60)
========= ========
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 is unrealized
loss on investments.
The following is a calculation of comprehensive loss (in thousands):
Three Months Ended
March 31
---------------------------
2000 1999
---------- ----------
Net loss........................................... $ (5,795) $ (2,741)
Other comprehensive loss:
Unrealized loss on investments..................... (39) -
--------- ---------
Comprehensive loss................................. $ (5,834) $ (2,741)
========= =========
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5. INDUSTRY AND GEOGRAPHIC SEGMENT INFORMATION
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 small European offices to support sales and marketing. The following is a
summary of operations within geographic areas (in thousands):
Three months ended
March 31,
------------------
2000 1999
-------- --------
Revenues(1):
United States........................................ $12,475 $3,370
Europe............................................... 1,120 192
------- -------
Total revenues..................................... $13,595 $3,562
======= =======
- --------
(1) Revenues are broken out geographically by the ship-to location of the
customer.
The Company has no significant long-lived assets deployed outside of the
U.S.
6. SUBSEQUENT EVENTS
In February 2000, the Company agreed to acquire Premier Software
Technologies, Inc. (Premier), a provider of integration products and services
for eCommerce. In connection with this transaction, the Company issued 121,308
shares of common stock and paid cash of $500,000 in exchange for all of the
outstanding shares of capital stock of Premier.
In February 2000, the Company agreed to acquire TransLink Software, Inc.
(Translink), a provider of high performance mainframe integration solutions for
eBusiness. In connection with this transaction, the Company issued 796,363
shares of the Company's common stock and paid cost of $4.5 million. In addition,
the outstanding options to purchase TransLink capital stock were converted into
options to purchase an aggregate of 43,041 shares of the Company's common stock.
Both acquisitions of Premier and Translink were completed in April 2000.
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Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion of the financial condition and results of
operations of Active Software, Inc. ("ASWX" or the "Company") should be read in
conjunction with the Management's Discussion and Analysis of Financial Condition
and Results of Operations and the Consolidated Financial Statements and the
Notes thereto included in the Company's Annual Report on Form 10-K for the year
ended December 31, 1999. This quarterly report on Form 10-Q contains
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended. Words such as "anticipates," "expects," "intends," "plans,"
"believes," "seeks," "estimates" and similar expressions identify such
forward-looking statements. These forward-looking statements are subject to
risks and uncertainties that could cause actual results to differ materially
from those indicated in the forward-looking statements. Factors which could
cause actual results to differ materially include those set forth in the
following discussion, and, in particular, the risks discussed below under the
subheading "Factors that May Affect Future Results." Unless required by law, the
Company undertakes no obligation to update publicly any forward-looking
statements.
Overview
We are a provider of eBusiness infrastructure software products that
provides our customers with a platform to automate end-to-end business processes
inside their enterprise, with business-to-business (B2B) trading partners and
with customers over the Internet. Our ActiveWorks(TM) 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 automate business processes without costly and
time-consuming custom programming, enabling them to quickly and cost-effectively
compete in today's rapidly changing network economy. We have designed the
ActiveWorks Integration System to provide a highly flexible and adaptable
eBusiness infrastructure 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 eBusiness solution.
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 75% and 66% of
our total revenues in the first quarter of fiscal 2000 and 1999 respectively,
while service revenues comprised 25% and 34% 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. 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 $6.2 million and $4.0 million as of
March 31, 2000 and December 31, 1999, respectively. Substantially all of our
customers enter into maintenance and support contracts when they purchase their
initial ActiveWorks software products.
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
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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. Since the first
quarter of 1999, we expanded our presence in international markets by opening
sales offices in the United Kingdom, in the Netherlands and in Singapore, and by
establishing relationships with system integrators and resellers in other
international markets. Revenues derived from international sales represented 8%
and 5% of total revenues in the first quarter of fiscal 2000 and 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.
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 to 220 as of March
31, 2000 from 163 as of December 31, 1999. As a result of these investments, we
have incurred net losses in each fiscal quarter since inception and, as of March
31, 2000, had an accumulated deficit of $32.9 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.
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, which 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 February 2000, we completed the acquisition of Alier, Inc., a provider
of enterprise application integration software. In connection with this
transaction, pursuant to which Alier became a wholly owned subsidiary of Active
Software, all outstanding shares of capital stock of Alier were exchanged for
390,875 shares of our common stock valued at $32.7 million and cash of $2.0
million. In addition, the outstanding options to purchase Alier capital stock
were converted into options to purchase 158,277 shares of our common stock
valued at $13.3 million. The merger was accounted for as a purchase transaction.
Of the 390,875 shares of our common stock issued in the transaction, a total of
38,685 shares are being held in escrow for the purpose of indemnifying us
against certain liabilities of Alier. This escrow will expire on February 11,
2001.
In February 2000, we agreed to acquire Premier Software Technologies, Inc.
(Premier), a provider of integration products and services for eCommerce. In
connection with this transaction, we issued 121,308 shares of our common stock
and cash in the amount of $500,000 in exchange for all of the outstanding shares
of capital stock of Premier.
In February 2000, we agreed to acquire TransLink Software, Inc.
(Translink), a provider of high performance mainframe integration solutions for
eBusiness. In connection with this transaction, we made a cash payment in the
aggregate amount of approximately $4.5 million (less certain amounts related to
professional fees) and issued 796,363 shares of our common stock. In addition,
the outstanding options to purchase TransLink capital stock were converted into
options to purchase an aggregate of 43,041 shares of our common stock.
Each of the Premier and TransLink transactions will be accounted for using
purchase accounting and are subject to customary closing conditions. Both
acquisitions were completed in April 2000. Amortization of goodwill and other
intangible in connection with these transactions is expected to increase our net
loss for the foreseeable future. In addition, we expect that our operating
expenses will significantly increase for the foreseeable future as a result of
these transactions.
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REVENUE
Total revenue for the three months ended March 31, 2000 increased to $13.6
million from $3.6 million for the three months ended March 31, 1999, an increase
of 282%.
License revenue increased to $10.2 million in the three months ended March
31, 2000 from $2.4 million in the three months ended March 31, 1999, an increase
of 330%. The increase in license revenue was due to an increase of $2.2 million
in sales of additional ActiveWorks products and features to existing customers
and to an increase of $5.6 million in sales of our products to new customers.
Service revenue increased 186% to $3.4 million in the three months ended
March 31, 2000 from $1.2 million in the three months ended March 31, 1999. The
increase in service revenue was due primarily to an increase in maintenance and
support fees of $883,000 in connection with the growth of our customer base and
an increase in consulting fees of $1.4 million.
International revenues increased 483% to $1.1 million in the three months
ended March 31, 2000 from $192,000 in the three months ended March 31, 1999.
International revenues accounted for 8% and 5% of the total revenue for the
first quarter of fiscal 2000 and 1999, respectively. The increase in absolute
dollars was the result of expansion of the Company's international sales force
and an increase in licensed revenue to the European region.
COST OF REVENUE
Total cost of revenue increased to $3.0 million in the three months ended
March 31, 2000 from $1.4 million in the three months ended March 31, 1999.
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 license revenue increased to $404,000 in the three months
ended March 31, 2000 from $152,000 in the three months ended March 31, 1999. The
growth in cost of license revenues was attributable primarily to the increase in
license revenues. As a percentage of license revenue, cost of license revenue
was 4% and 6% for the first quarter of fiscal 2000 and 1999, respectively. 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 revenues consists of compensation and related overhead
costs for personnel engaged in consulting, training, maintenance and support
services for our customers. Cost of service revenue increased to $2.6 million in
the three months ended March 31, 2000 from $1.2 million in the three months
ended March 31, 1999. 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 75%
and 102% for the first quarter of fiscal 2000 and 1999, respectively. The
decrease in percentage of service revenue was attributable primarily to the
increases in the service revenue base. We anticipate that the cost of service
revenue will increase in absolute dollars as we continue to expand our services
offering, 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 $2.6
million in the three months ended March
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31, 2000, from $1.1 million in the three months ended March 31, 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 revenue, research and development expenses were 19% and 30%
in the first quarter of fiscal 2000 and 1999, respectively. The decrease in
percentage of revenue is due primarily to the fact that revenues have increased
faster than research and development expenses in those periods. 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, sales
commissions, public relations, industry tradeshows and promotional expenditures.
Sales and marketing expenses increased to $8.0 million from $3.1 million in the
three months ended March 31, 2000 and 1999, respectively. The increase was
attributable primarily to the expansion of our direct sales force and increased
promotional activity. The increase during this period was attributable primarily
to the addition of 44 employees in sales and marketing in the first quarter of
fiscal 2000, 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 revenue, sales
and marketing expenses for the first quarter of fiscal 2000 and 1999 represented
59% and 88%, respectively. The decrease in sales and marketing expenses as a
percentage of revenues is primarily due to the fact that revenues have increased
faster than sales and marketing expenses in those periods. 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 $1.2
million in the three months ended March 31, 2000 from $476,000 in the three
months ended March 31, 1999. The increase was due primarily to the addition of
financial and management personnel, as well as costs associated with operating
as a public company. As a percentage of total revenues, general and
administrative expenses were 9% and 13% of total revenues for the first quarter
of fiscal 2000 and 1999, respectively. The decrease in percentage of revenue was
attributable primarily to the increases in the revenue base. 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.
Amortization of Deferred Stock Compensation. Options granted 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, net of amortization associated with these options as of March 31,
2000 and December 31, 1999 amounted to $3.2 million and $3.5 million,
respectively. These amounts are being amortized over the respective vesting
periods of these equity arrangements, generally 50 months. Of the total deferred
stock compensation, approximately $303,000 and $263,000 was amortized in the
three months ended March 31, 2000 and 1999, respectively. We expect amortization
of approximately $1,208,000 in 2000, $1,208,000 in 2001, $993,000 in 2002 and
$122,000 in 2003 related to these options.
Amortization of goodwill and other intangibles. Amortization of goodwill
and other intangibles was $2.0 million in the first quarter of fiscal 2000. This
amount represents one and a half months of amortization of goodwill and other
intangibles recorded upon the acquisitions of Alier, Inc. The estimated useful
life of the goodwill and the other intangibles is 3 years for trained and
assembled workforce, one year for license agreements, 2 years for non-compete
agreements and 3 years for goodwill, and we expect amortization of approximately
$16,147,000 in 2000, $15,581,000 in 2001 and $14,941,000 in 2002 related to
goodwill and other intangibles.
Purchased In-Process technology. Purchased in-process technology was $2.7
million in the first quarter of fiscal 2000. This amount represents one-time
charge of $2.7 million recorded upon the acquisition of Alier in February 2000.
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OTHER INCOME (NET)
Other income consists primarily of interest income from cash and cash
equivalents, short-term investments and long-term marketable securities offset
by interest expense related to long-term obligations. For the three months ended
March 31, 2000, net interest income was approximately $533,000, as compared to
$62,000 for the three months ended March 31, 1999. The increase in the first
quarter of fiscal 2000 was attributable primarily to higher cash balances
resulting from the initial public offering of our common stock in August 1999.
LIQUIDITY AND CAPITAL RESOURCES
In August 1999, we completed the initial public offering of our common
stock, which resulted in net proceeds of approximately $40 million. As of March
31, 2000, we had $31.9 million of cash and cash equivalents and short-term
investments.
Net cash provided by operating activities was $2.4 million in the first
quarter of fiscal 2000 and net cash used in operating activities was $1.6
million in the first quarter of fiscal 1999. For the first quarter of fiscal
2000, cash provided by operating activities was attributable primarily to a
decrease in accounts receivable of $452,000, depreciation and amortization of
$350,000, amortization of deferred stock compensation of $302,000, amortization
of goodwill and acquired intangibles of $2.0 million and purchased in-process
technology of $2.7 million, an increase in accounts payable and other accrued
liabilities of $1.0 million and an increase in deferred revenue of $2.0 million
offset in part by a net loss of $5.8 million, an increase in prepaid and other
current assets of $647,000 and a decrease in accrued compensation and benefits
of $263,000. For the first quarter of fiscal 1999, cash used in operating
activities was attributable primarily to a net loss of $2.7 million, offset in
part by a decrease in accounts receivable of $697,000, amortization of deferred
stock compensation of $263,000, and an increases in accounts payable and other
accrued liabilities of $318,000. 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 $4.9 million and $381,000 in the
first quarter of fiscal 2000 and 1999, respectively. For the first quarter of
fiscal 2000, cash used in investing activities was attributable primarily to the
acquisition of Alier, purchases of investments, purchases of property and
equipment, offset by maturities and sales of investments. For the first quarter
of fiscal 1999, cash used in investing activities was attributable primarily to
purchases of property and equipment.
Net cash provided by financing activities was $149,000 and $220,000 in the
first quarter of fiscal 2000 and 1999, respectively. For the first quarter of
fiscal 2000 and 1999, cash provided by financing activities was attributable
primarily to proceeds from the issuance of common stock.
As of March 31, 2000, our principal commitments consisted of obligations
outstanding under operating leases and notes payable. Although we have no
material commitments for capital expenditures, we expect to increase capital
expenditures and lease commitments consistent with our anticipated growth in
operations, infrastructure and personnel. We also may increase our capital
expenditures as we expand into additional international markets.
We believe that our current cash, cash equivalents, short-term and
long-term investments, will be sufficient to meet our anticipated cash needs for
working capital and capital expenditures for at least the next twelve months. 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
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financing, we may be required to reduce the scope of our planned product
development and marketing efforts, which could harm our business, financial
position, results of operations or cash flows.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Active Software is exposed to a variety of risks, including changes in
interest rates affecting the return on its investments and foreign currency
fluctuations. The Company has established policies and procedures to manage its
exposure to fluctuations in interest rates and foreign currency exchange rates.
Interest Rate Risk. Active Software maintains its funds in money market and
Certificate of Deposit accounts at banks. The Company's exposure to market risk
due to fluctuations in interest rates relates primarily to its interest earnings
on its cash deposits. These securities are subject to interest rate risk in as
much as their fair value will fall if market interest rates increase. If market
interest rates were to increase immediately and uniformly by 10% from the levels
prevailing as of March 31, 2000, the fair value of the portfolio would not
decline by a material amount. Active Software does not use derivative financial
instruments to mitigate risks. However, it does have an investment policy that
would allow it to invest in short-term and long-term investments such as money
market instruments and corporate debt securities. The Company's policy does
attempt to reduce such risks by typically limiting the maturity date of such
securities to no more than eighteen months with a maximum average maturity to
its whole portfolio of such investments at six months, placing its investments
with high credit quality issuers and limiting the amount of credit exposure with
any one issuer.
Foreign Currency Exchange Rate Risk. Active Software's exposure to market
risk due to fluctuations in foreign currency exchange rates relates primarily to
the intercompany balances with its UK, Netherland and Singapore subsidiaries.
The Company closed these subsidiaries as of March 31, 2000 and only has some
insignificant cash balances remaining in these countries. Although the Company
transacts business in various foreign countries, settlement amounts are usually
based on U.S. currency. Transaction gains or losses have not been significant in
the past, and there is no hedging activity on the pound, guilders or other
currencies. The Company would not experience a material foreign exchange loss
based on a hypothetical 10% adverse change in the price of the pound, guilders
or Singapore dollars against the U.S. dollar. Consequently, Active Software does
not expect that a reduction in the value of such accounts denominated in foreign
currencies resulting from even a sudden or significant fluctuation in foreign
exchange rates would have a direct material impact on the Company's financial
position, results of operations or cash flows.
Notwithstanding the foregoing analysis of the direct effects of interest
rate and foreign currency exchange rate fluctuations on the value of certain of
Active Software's investments and accounts, the indirect effects of such
fluctuations could have a material adverse effect on the Company's business,
financial condition and results of operations. For example, international demand
for Active Software's products is affected by foreign currency exchange rates.
In addition, interest rate fluctuations may affect the buying patterns of the
Company's customers. Furthermore, interest rate and currency exchange rate
fluctuations have broad influence on the general condition of the U.S. foreign
and global economics, which could materially adversely affect the Company.
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FACTORS THAT MAY AFFECT FUTURE RESULTS
In addition to the other information in this Report, the following factors
should be considered carefully in evaluating the Company's business and
prospects:
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 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.
Although our revenue has increased in recent quarters, we may not be able
to sustain our growth or obtain sufficient revenue to achieve and sustain
profitability. We incurred net losses of $5.8 million in the three months ended
March 31, 2000, $9.4 million in 1999 and $9.9 million in 1998, and, as of March
31, 2000, we had an accumulated deficit of approximately $32.9 million.
Since the beginning of fiscal 1999, we have invested significantly in
building our sales and marketing organization and in our technology research and
development. We expect to continue to spend substantial financial and other
resources on expanding our direct sales and marketing activities and developing
and introducing enhancements to our existing products and new software products.
As a result, we need to generate significant revenue to achieve and maintain
profitability. We expect that our sales and marketing expenses and our research
and development expenses will continue to increase in absolute dollars and may
increase as percentages of revenue for the foreseeable future.
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 stock would likely decline. The factors that may cause
fluctuations of our operating results include the following:
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. 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 eBusiness
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.
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. For the three months ended March
31, 2000, and March 31, 1999, no customer accounted for more than 10% of our
total revenues. 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.
We may be unable to successfully integrate Alier, Premier or TransLink into our
business or achieve the expected benefits of these acquisitions.
Our acquisition of Alier, which was completed in February 2000, and our
acquisitions of Premier and TransLink, which were completed in April 2000, will
require integrating the products, business and operations of these companies
with our company. We may not be able to successfully assimilate the personnel,
operations and customers of these companies into our business. Additionally, we
may fail to achieve the anticipated synergies from the acquisitions, including
product integration, marketing, product development, distribution and other
operational synergies. The integration process may further strain our existing
financial and
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managerial controls and reporting systems and procedures. This may result in the
diversion of management and financial resources from our core business
objectives. In addition, we are not experienced in managing significant
facilities or operations in geographically distant areas. Finally, we cannot be
certain that we will be able to retain these companies' key employees.
Any future acquisitions of companies or technologies may result in disruptions
to our business or the distraction of our management.
We may acquire or make investments in other complementary businesses and
technologies in the future. We may not be able to identify other future suitable
acquisition or investment candidates, and even if we do identify suitable
candidates, we may not be able to make these acquisitions or investments on
commercially acceptable terms, or at all. If we do acquire or invest in other
companies, we may not be able to realize the benefits we expected to achieve at
the time of entering into the transaction. In any future acquisitions we will
likely face the same risks as discussed above with respect to the integration of
the businesses of Alier, Premier and TransLink. Further, we may have to incur
debt or issue equity securities to pay for any future acquisitions or
investments, the issuance of which could be dilutive to our existing
stockholders.
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 March 31,
2000, we employed approximately 89 individuals in our sales and marketing
organization. Currently, we believe we will need to expand our sales
organization by more than 25% of its present size over the next year. 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,
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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
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 significant capital
expenditures by our customers. 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
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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 revenues have grown to approximately $13.6 million for the three-month
period ending March 31, 2000 from $27.4 million during 1999. The number of our
employees has grown to 220 at the end of March 31, 2000 from 163 as of December
31, 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 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
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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 eCommerce. 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 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
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we first contact the customer may range from four to six 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.
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.
For the first quarter of fiscal 2000, we have generated 8% 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
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;
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. 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 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.
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Our stock price may be volatile, which could cause investors to lose all or part
of their investments in our stock.
We expect that the market price of our common stock will fluctuate as a
result of variations in our quarterly operating results. These fluctuations may
be exaggerated if the trading volume of our common stock is low. In addition,
due to the technology-intensive and emerging nature of our business, the market
price of our common stock may rise and fall in response to:
. announcements of technological or competitive developments;
. acquisitions or strategic alliances by us or our competitors;
. the gain or loss of a significant customer or order; and
. changes in estimates of our financial performance or changes in
recommendations by securities analysts.
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.
Our executive officers and directors and their respective affiliates,
currently own a significant portion of our outstanding common stock.
Accordingly, these stockholders may, as a practical matter, be able to exert
significant influence over matters requiring approval by our stockholders,
including the election of directors and the approval of mergers or other
business combinations. This concentration could have the effect of delaying or
preventing a change in control.
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.
PART II. OTHER INFORMATION
Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Use of Proceeds
On August 12, 1999, in connection with our initial public
offering, a Registration Statement on Form S-1 (No. 333-80549)
was declared effective by the Securities and Exchange Commission,
pursuant to which 4,025,000 shares of our common stock were
offered and sold for our account at a price of $11.00 per share,
generating aggregate gross proceeds of $44.3 million for the
account of the Company. The managing
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underwriters were Goldman, Sachs & Co., Lehman Brothers and Dain
Rauscher Wessels. After deducting approximately $3.1 million in
underwriting discounts and $1.2 million in other related
expenses, the net proceeds of the offering were approximately $40
million. As of March 31, 2000, $36.4 million of the net proceeds
were invested in cash and cash equivalents, short-term and
long-term investments and approximately $3.6 million had been
used for working capital. We intend to use such proceeds for
capital expenditures and for general corporate purposes,
including working capital to fund anticipated operating losses.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27.1 Financial Data Schedule
(b) Reports on Form 8-K
(1) Current Report on Form 8-K, as amended, filed on February 25, 2000
with respect to Active Software's acquisition of Alier, Inc.
(2) Current Report on Form 8-K filed on April 21, 2000 with respect to
Active Software's acquisition of TransLink Software, Inc.
(3) Current Report on Form 8-K filed on May 3, 2000 with respect to
Active Software's acquisition of Premier Software Technologies, Inc.
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: May 10, 2000
INDEX TO EXHIBITS
Exhibit No. Document Description
- ----------- --------------------
27.1 Financial Data Schedule
Page 24
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-2000 DEC-31-1999
<PERIOD-START> JAN-01-2000 JAN-01-1999
<PERIOD-END> MAR-31-2000 MAR-31-1999
<CASH> 14,938 17,299
<SECURITIES> 16,916 19,906
<RECEIVABLES> 9,929 9,979
<ALLOWANCES> 593 493
<INVENTORY> 0 0
<CURRENT-ASSETS> 42,821 47,644
<PP&E> 4,482 3,543
<DEPRECIATION> 1,919 1,592
<TOTAL-ASSETS> 96,816 51,822
<CURRENT-LIABILITIES> 14,547 10,595
<BONDS> 0 0
0 0
0 0
<COMMON> 118,173 71,900
<OTHER-SE> 0 0
<TOTAL-LIABILITY-AND-EQUITY> 96,816 51,822
<SALES> 13,595 3,562
<TOTAL-REVENUES> 13,595 3,562
<CGS> 2,970 1,379
<TOTAL-COSTS> 16,900 4,945
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> (480) (21)
<INCOME-PRETAX> (5,795) (2,741)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (5,795) (2,741)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (5,795) (2,741)
<EPS-BASIC> (0.25) (0.60)
<EPS-DILUTED> (0.25) (0.60)
</TABLE>
