<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1999
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number: 000-26367
----------------
ACTIVE SOFTWARE, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
Delaware 94-3232772
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
</TABLE>
3333 Octavius Drive
Santa Clara, California 95054
(Address of principal executive offices, including zip code)
(408) 988-0414
(Registrant's telephone number, including area code)
----------------
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.001 per share
----------------
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 than the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of the
registrant was approximately $1,772,885,000 as of March 15, 2000, based upon
the closing sale price on the Nasdaq National Market reported for such date.
Shares of Common Stock held by each officer and director and by each person
who owns 5% or more of the outstanding Common Stock have been excluded in that
such persons may be deemed to be affiliates. This determination of affiliate
status is not necessarily a conclusive determination for other purposes.
There were 24,734,855 shares of the registrant's Common Stock issued and
outstanding as of March 15, 2000.
DOCUMENTS INCORPORATED BY REFERENCE
Definitive Proxy Statement relating to the Company's 2000 Annual Meeting of
Stockholders to be filed hereafter (incorporated into Part III hereof).
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
PART I
Item 1. Business.
Overview
We are a provider of eBusiness infrastructure software 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.
Recent Developments
Initial Public Offering. In August 1999, we completed the initial public
offering of our common stock, which resulted in net proceeds of approximately
$40 million. In the offering, we issued and sold an aggregate of 4,025,000
shares of common stock at an initial public offering price of $11.00 per
share.
Acquisitions. In February 2000, we completed the acquisition of Alier,
Inc., a worldwide provider of enterprise application integration (EAI)
solutions to financial institutions. 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.
In February 2000, we agreed to acquire Premier Software Technologies, Inc.,
a provider of integration products and services for eCommerce. In connection
with this transaction, we expect to issue 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., a provider
of high performance mainframe integration solutions for eBusiness. In
connection with this transaction, we expect to make a cash payment of
approximately $4.5 million (less certain amounts related to professional fees)
and issue a number of shares of our common stock equal to approximately $67.0
million (less certain amounts related to professional fees) divided by
$82.45104 (the average closing price of our common stock during the 30-day
period prior to signing the agreement). In addition, the outstanding options
to purchase TransLink capital stock will be converted into options to purchase
shares of our common stock.
Partnerships. In January 2000, we announced a partnership with NTT Software
Corporation to increase our presence in the Japanese market. Under terms of
the agreement, NTT Software will be the sole distributor of Active Software's
ActiveWorks Integration System in Japan.
Products. In February 2000, we announced the ActiveWorks Business Exchange
Server, a business-to-business (B2B) solution that enables a company to
quickly automate critical business processes and share sensitive business
information with partners over the Internet securely and reliably. A
significant new component of ActiveWorks, the Business Exchange Server is
designed to deliver B2B integration that helps trading partners increase
efficiency throughout the value chain and achieve new competitive advantages.
2
<PAGE>
Industry Background
Over the past decade, enterprise computing environments have undergone a
significant transformation. This transformation has been driven by
accelerating organizational demands for flexibility, efficiency, and speed in
order to more effectively respond to a rapidly changing business environment
and increasingly global marketplace. In parallel, there has been a shift from
in-house, custom development of mission-critical applications to the purchase
of these applications and related services from third-party vendors. Packaged
applications have spread throughout the enterprise to address many highly
strategic business functions, including resource planning, management of
supply and distribution networks, customer relationship management, sales
force automation, business decision support and eCommerce. In this new
corporate environment, a single business process can require access to data
and information from many distinct applications, none of which are designed to
communicate seamlessly and in real time with the others.
Companies have invested an enormous amount of financial and technical
resources in developing and deploying a broad range of packaged and custom
applications. To take full advantage of these investments, it has become
critical for companies to efficiently integrate these applications. META Group
estimates that the average Fortune 1000 company maintains 49 distinct
enterprise applications and spends from one-quarter to one-third of its total
information technology budget on integration-related efforts. The complexity
of this integration challenge has historically required time-consuming,
expensive, custom-developed in-house solutions or third-party specialized
consulting and system integration services. More recently, the market for
third-party enterprise application integration, or EAI, software has emerged
to provide this integration capability as a packaged solution. Driven by the
increasingly business-critical need for integration, the application and data
integration software market is projected by the Yankee Group to reach a total
size of $5 billion by 2001. In addition, the Gartner Group has reported that
the total volume of B2B transactions exceeded $145 billion in 1999, and
predicts that this volume will grow to more than $7 trillion by 2004, a
sustained annual growth rate of 120%. We cannot assure you that these
estimates will be achieved.
Against this backdrop, the explosive emergence of the Internet has further
changed the nature and pace of business operations and competition. Companies
are now able to conduct business electronically through an Internet-enabled
real-time network of customers, suppliers and partners. As a result, the
ability to operate as an eBusiness has become a critical strategic objective.
Companies need to integrate all aspects of their enterprises, including back-
office operations and processing, front-office applications, such as sales,
marketing and customer service, and supplier management systems, such as
planning, sourcing, purchasing, fulfillment and inventory control. For
example, a company can now give suppliers and partners real-time electronic
access to its scheduling, billing and inventory information, thereby enhancing
communication, reducing operating costs and creating a networked organization
that takes advantage of supplier and partner strengths in ways not previously
possible. To compete successfully, a company needs an integration platform
that allows it to adapt quickly to changing market conditions, accelerate time
to market, enhance relationships with customers, suppliers and partners, and
reduce operating costs.
We believe that traditional integration and EAI solutions fail to fully
capitalize on the benefits of Internet technologies and do not adequately
address the challenges of this eBusiness environment. These solutions are
often inflexible and rigid, lack key functionality, such as security and
integration management and monitoring, and do not offer the speed of
implementation and time-to-market benefits required in today's business
environment. As a result, we believe that there is a significant opportunity
for a vendor who can provide a platform that enables seamless, real-time and
efficient integration across the extended enterprise of B2B trading partners.
This platform needs to provide the following key capabilities:
. Comprehensive, Robust Solution: a comprehensive, end-to-end solution for
eBusiness integration inside the enterprise and with B2B trading
partners and customers over the Internet that does not require
substantial custom programming;
. Dynamic Adaptability: a system designed to adapt quickly and efficiently
to changing business operations, rules and processes, and to accommodate
change without additional programming;
3
<PAGE>
. Scalability: a system that easily accommodates a wide range of
transaction and data flow volumes across locally and globally-
distributed networks;
. Extensibility: flexibility to allow for the efficient incorporation of
and integration with evolving technologies;
. Security: inherent state-of-the-art security and administrative
capabilities designed for an enterprise operating in an eBusiness
environment with its customers, suppliers and partners; and
. Management and Monitoring: efficient, easy-to-use and centralized
management and monitoring of the integration platform and all of its
components.
The Active Software Solution
We develop, market and support eBusiness infrastructure software products
that enable our customers to more quickly expand and capitalize upon greater
business opportunities. The ActiveWorks Integration System connects a wide
range of enterprise and B2B applications and systems and provides a
comprehensive software platform for integrating these applications with
minimal custom programming.
We believe the ActiveWorks platform provides the following compelling and
strategic business benefits to our customers:
. Accelerates Time to Market. The ActiveWorks platform enables our
customers to accelerate time to market for new products and services by
integrating and synchronizing the entire end-to-end information flow
between enterprise applications and B2B partners in an eBusiness
environment. By enabling the close interaction of customers, suppliers
and partners, the ActiveWorks solution provides the integration platform
for the seamless exchange of relevant information internally and across
the enterprise's network of customers, suppliers and partners. In
addition, the platform is readily adaptable to changing business and
computing environments, providing the business flexibility to respond in
real time to changes in the market. The architecture, intelligent
adapter portfolio and management and monitoring functionality all
provide an enhanced level of adaptability to changes in business
processes and rules in an evolutionary manner with minimal disruption to
business operations.
. Improves Customer and Supplier Interaction. The ActiveWorks platform, by
enabling scalable and secure eBusiness, can enhance our customers'
business relationships with their customers and B2B partners. We offer a
comprehensive, robust solution for integration across traditional
business boundaries, providing the information link to customers and
suppliers and greatly enhancing an organization's ability to respond
quickly, accurately and effectively to customer and supplier needs.
. Reduces Operational Costs. The ActiveWorks platform is designed to
enable our customers to operate in a more efficient and streamlined
manner. Our customers are able to take advantage of the capabilities of
the ActiveWorks platform to interact electronically with customers,
suppliers and partners, significantly reducing their operational costs.
In addition, our platform minimizes the need for time-consuming and
expensive custom programming, reducing the number of highly skilled
programmers required to implement and maintain our system. The
ActiveWorks solution is not only designed for rapid initial deployment,
but also can be efficiently altered in response to an upgrade or
replacement of a specific application or an internal or external
business process change. As a result, our solution substantially reduces
the installation and maintenance costs associated with other integration
approaches.
In addition to these business benefits, our platform is differentiated from
other integration solutions through the following core competencies, which we
believe enable us to deliver faster time to integration than the solutions
offered by our competitors:
. Comprehensive and Robust Platform. Our platform, the ActiveWorks
Integration System, provides an integration architecture upon which our
customers can develop strategic eBusiness initiatives. We
4
<PAGE>
offer a comprehensive platform for eBusiness integration, including base
integration functionality, a broad set of intelligent adapters for
integrating a wide variety of applications across multiple operating
systems, and management and monitoring capabilities. In addition, in
order to provide the security capabilities critical to operating an
effective eBusiness, we embed security features throughout our platform,
rather than merely layering them on top. Our platform is designed to
provide the reliability required for mission-critical operations, even
against network, hardware or software failures. We believe that the
comprehensive and robust nature of our platform approach assures our
customers that their eBusiness needs can be met today and in the future.
. Intelligent Adapters. We maintain and continue to expand our portfolio
of Intelligent Adapters for integrating a wide variety of applications
across multiple operating systems. These Adapters, which connect
individual software applications to the ActiveWorks platform, are
readily configurable and easily reconfigurable to meet constantly
changing application requirements and specifications. This broad
portfolio of Intelligent Adapters substantially reduces the need for the
custom programming often required with other integration solutions. Our
development and production efforts are supported by third parties that
build Active Software-certified Adapters, which facilitates the
pervasive adoption of the ActiveWorks Integration System as a standard
integration platform.
. Flexibility and Adaptability to Change. Because our customers' needs are
not static, we have designed our solution to be dynamic. Since little or
no custom programming is required, the ActiveWorks platform provides the
flexibility to respond quickly and effectively to changes in business
operations, rules and processes both inside the company and across its
network of customers, suppliers and partners. In addition, the
ActiveWorks platform is designed to allow the efficient incorporation
of, and integration with, evolving technologies and standards.
. Scalability. We provide global information sharing, guaranteed delivery
and transparent information routing across geographic regions. Our
software is designed to be expandable not only across a customer's
existing organization, but throughout its network of customers,
suppliers and B2B partners. As a result, our architecture not only
scales to match the number of transactions, but also scales across
geographies.
. Embedded Security. Security is a high priority for Internet and
eBusiness needs and will become increasingly important in a global
economy. Our implementation of security mechanisms allows integration to
be safely extended to applications running at customer, supplier or
partner sites and can be selected to fit current needs and then adjusted
to fit future requirements.
. Management and Monitoring Capabilities. Our ActiveWorks solution allows
systems administrators to view business event transmissions, both in
real time and historically. Our graphical management and monitoring
capabilities provide a unified view of the interactions among the
applications, which reduces the cost and time required for system-wide
maintenance.
The Active Software Strategy
Active Software's mission is to establish the ActiveWorks Integration
System as the leading platform for eBusiness integration worldwide. Key
elements of this strategy include:
Facilitate Broad Acceptance and Deployment of Our eBusiness Integration
Platform
Our objective is to establish the ActiveWorks Integration System as the
eBusiness integration platform of choice across multiple industries. To
facilitate this broad acceptance, we have designed our platform to be open,
extensible and broadly applicable to many different markets. For example, we
have licensed the ActiveWorks Integration System to leading enterprises in the
financial services, technology, telecommunications, government, utilities,
retail, manufacturing and transportation industry sectors. We intend to
continue leveraging our existing customers to serve as reference accounts in
order to further penetrate these markets, as well as to expand into other
markets. An important aspect of our strategy has been to develop partnerships
with organizations that
5
<PAGE>
extend our market reach and supplement and complement our capabilities,
particularly in providing expertise with respect to specific large markets. By
working together to meet our customers' needs, we can become an integral part
of their eBusiness strategy, which provides significant additional
opportunities for us to grow with our customers going forward.
Enhance Our Technological Leadership through Ongoing Investment and
Innovation
We expect to continually add to the depth and breadth of the ActiveWorks
Integration System, always with the ultimate objective of making eBusiness
integration faster and easier for our customers. We believe that ongoing
innovation will be critical to realizing this objective and building
technological barriers to entry. Our key technical personnel have been
recognized as innovators in integration, middleware and networking
technologies. We believe that the recognition by industry analysts and the
media of our technical achievements is important in increasing market
awareness and generating business referral opportunities.
Provide a Complete eBusiness Integration Solution
We recognize that solving the integration challenges facing our customers
is critical to the continued success of their businesses. Our approach is
designed to help them meet those challenges by offering a comprehensive
eBusiness integration solution. We intend to continue to enhance and expand
the capabilities of our products in order to continue to provide our customers
with a comprehensive eBusiness integration platform. The ActiveWorks
Integration System incorporates the Information Broker, intelligent Adapters
and management facilities necessary to provide a robust platform for eBusiness
integration. In addition, we have developed a methodology that enables our
customers to develop a focused integration strategy and implementation plan.
This methodology is accompanied by pre-built standard integration processes
that can be readily customized and deployed. Finally, we understand that our
customers' success is paramount and we partner with a variety of third parties
whose capabilities both complement and augment our own in order to assist our
customers in rapidly delivering successful business results.
Leverage Our Partnerships with System Integrators and Service, Distribution
and Marketing Partners
We intend to expand and strengthen our partnerships with system integrators
and service, distribution and marketing partners in order to provide services
and sales leverage to our software product-based business model. We have
established a series of partnerships and alliances with system integrators,
such as American Management Systems, Inc., Cambridge Technology Partners, Inc.
and Electronic Data Systems, and service, distribution and marketing partners,
such as BroadVision, Inc., Cisco Systems, Inc., Hewlett-Packard Company,
Siebel Systems, Inc. and Sun Microsystems, Inc. These partnerships and
alliances provide an extension of our direct sales force through our joint
promotional and selling efforts and enable us to reach a broader range of
customers than would be possible through our sales force alone. These
relationships also enable us to focus on being the provider of eBusiness
integration software, leveraging our unique capabilities and technologies
while providing our customers with a comprehensive solution and enabling us to
scale our business more quickly, effectively and inexpensively.
Continue Our Commitment to Customer Satisfaction
We understand that in order for us to be successful, our customers must be
successful. We are committed to customer satisfaction throughout our
organization, and we endeavor to provide our customers with the highest
quality products and services, directly and through our partners. We also
intend to continue leveraging our existing customers to serve as reference
accounts for prospective customers. In order to accomplish this, we invest
substantial time and effort in testing our products and working closely with
our customers to quickly address any issues that arise. Our in-house
professional services efforts are focused on providing both our customers and
our partners with the technical assistance and capabilities required to ensure
smooth implementation of our eBusiness integration solution. We carefully
select partners who share our commitment to high quality work and outstanding
customer service.
6
<PAGE>
Products and Services
We market the ActiveWorks Integration System and professional services that
support our customers' and partners' use of our products. In addition, our
Active Integration Methodology provides a framework for accelerating
integration projects implemented by our customers and our system integrator
partners.
ActiveWorks Integration System
The ActiveWorks Integration System consists of a number of products that
work together to provide our customers with a comprehensive integration
platform. These products include the ActiveWorks Visual Integrator for
graphically designing integration projects; the Information Broker, which
provides the underlying technology for integrating different sources of data
in real time; Intelligent Adapters, which provide connectivity to applications
and systems; Integration Agents, which provide a mechanism for extending
integration projects with specialized code; and Graphical Management and
Monitoring Tools, which make the integration platform easy to deploy, manage
and maintain.
. ActiveWorks Visual Integrator. The ActiveWorks Visual Integrator is a
visual design tool that automates the design, development and deployment
of reusable integration processes. Once the design for integration is
complete, the ActiveWorks Visual Integrator automatically generates the
underlying code and configuration information, enabling customers to
focus on data and business process issues, not technical complexities.
The ActiveWorks Visual Integrator implements the Active Integration
Methodology and eliminates much of the custom programming involved in
integrating complex systems.
. ActiveWorks Information Broker. The Information Broker is the central
component of the ActiveWorks Integration System. The Information Broker
resides on a server and mediates requests to and from applications,
providing essential queuing, filtering, routing and storage of
information in a secure manner. The Information Broker ensures that
events are delivered once, and only once. ActiveWorks' scalable
architecture simplifies systems integration because all collaborating
applications communicate through the Information Broker, rather than in
a more complex point-to-point fashion.
. Information Broker Options. Our customers may choose the following
Information Broker options, which increase functionality and enhance the
ability of ActiveWorks to support mission-critical eBusiness integration
projects:
. The Multi-Broker Option enables an unlimited number of Information
Brokers to be configured to provide information sharing and
automatic information delivery throughout the enterprise, including
its network of customers, suppliers and partners. Multiple
Information Brokers collaborate to provide a single integrated
system that efficiently delivers information among applications.
. The High Availability Option ensures uninterrupted availability
without data loss through server outages.
. The Secure Socket Layer, or SSL, Option enables customers to send
encrypted data with digital signature authentication.
. ActiveWorks Intelligent Adapters. Intelligent Adapters connect
individual software applications to the ActiveWorks platform. Active
Software and its partners have developed a large number of Intelligent
Adapters that work with many enterprise applications and systems,
including:
. front-office and eCommerce applications, including those from
Clarify, Inc., Siebel Systems, Inc. and InterWorld Corporation;
. back office enterprise applications, including those from
PeopleSoft, Inc. and SAP;
. relational databases, including those from IBM (DB2), Informix
Corporation, Microsoft Corporation (SQL Server), Oracle Corporation
and Sybase, Inc.;
7
<PAGE>
. mainframe and other data sources, such as IBM 3270, CICS and MQ
Series; and
. custom applications developed using ActiveX, C, C++, CORBA, Java and
XML Languages.
Our breadth of Intelligent Adapters enables easier and faster integration
of additional applications to an eBusiness integration solution or project.
The wide range of Intelligent Adapters available from Active Software and its
partners give ActiveWorks a scope of integration not available from other
integration solution providers. We believe that our ActiveWorks Intelligent
Adapters are also more configurable and adaptable than approaches available
from other vendors. ActiveWorks Intelligent Adapters enable new functionality
in the integrated application to become immediately and automatically
available to the rest of the system.
. ActiveWorks Adapter Development Kit. The ActiveWorks Adapter Development
Kit enables customers, partners and independent software vendors to
create their own custom Adapters for the ActiveWorks platform, which
further extend the capabilities of the ActiveWorks Integration System.
Virtually any application can be integrated through the use of custom
Adapters created with the Adapter Development Kit, thereby ensuring that
customers can successfully integrate their current applications, as well
as applications which may be developed or acquired in the future.
. ActiveWorks Integration Agents. ActiveWorks Integration Agents provide
additional integration logic and data transformation to meet demanding
integration requirements. The Integration Logic Agent extends the
processing capabilities of the integrated system by providing a
framework for managing and executing custom code written in the Java
language. The Business Rule Agent monitors events and specifies the
processing of these events based on the application of business rules.
The Data Transformation Agent performs complex transformations to enable
incompatible data types to be exchanged across applications using
complex data formats such as Electronic Data Interchange, or EDI, and
Extensible Markup Language, or XML.
The Active Integration Methodology
Designed to rapidly deliver successful business results, the Active
Integration Methodology involves project planning, integration analysis and
design, best practices mentoring and quality assurance testing. The Active
Integration Methodology consists of standard business integration processes
and an integration framework, all of which help customers and partners
complete integration projects more quickly.
. Integration Processes are pre-built standard business integration
solutions that synchronize information and coordinate business processes
across multiple enterprise applications. Integration processes have been
developed for common business requirements, including customer
synchronization, customer support billing, account status, bill of
materials and order/inventory status. All of these pre-built integration
processes can be used as provided, or customized to fit the particular
business requirements.
. The Integration Framework consists of templates for creating custom
integration processes as quickly as possible. With Active Software's
expertise built-in, the Integration Framework enables customers to focus
on developing the content of their business processes, rather than the
underlying technology formats. The Integration Framework is typically
used when there is no pre-built integration process available or when it
is necessary to develop a customer-specific process for the integration
project.
Professional Services
Our professional services include training, consulting, support and
maintenance. Support and maintenance services are provided to our customers
through agreements under which we provide technical support by telephone, fax,
email and the Web during business hours and provide updates and upgrades to
our software products. In addition, customers can elect optional services such
as emergency coverage on a 24 hours per day,
8
<PAGE>
seven days per week basis and dedicated technical account managers. We also
provide customer training at our Santa Clara, California facility and other
locations, with coursework related to various aspects of our eBusiness
integration solution.
While we generally partner with system integrators to provide services such
as project implementation and management to our customers, our professional
services organization also directly supports our customers by providing
services related to eBusiness integration mentoring, integration process
design and custom Adapter development.
Strategic Partners
System Integrators. We have a software product-based business model that
leverages system integrator partners who jointly or separately provide a range
of services to our customers, including first-line technical support and
project implementation services. Accordingly, we have established a series of
partnerships with system integrators worldwide. These partnerships allow us to
maintain our focus as a product company while simultaneously obtaining sales,
technical and service leverage through our partners to provide our customers
with a comprehensive eBusiness integration solution. The following is a
representative list of our system integrator partners:
<TABLE>
<C> <S>
.Alodar Systems, Inc. .Fort Point Partners
.American Management Systems, Inc. .Inventa Corporation
.Cambridge Technology Partners, Inc. .Inffinix Software
.Catapult Technology .KPMG
.Deloitte Consulting .ObTech, Inc.
.DMR Consulting Group .Primix Solutions, Inc.
.Electronic Data Systems Corporation .Siemens Business Services
.Ernst & Young
</TABLE>
Solution and Complementary Partners. An important part of our strategy is
to work with solution and complementary partners who have capabilities that
can complement and augment our eBusiness integration solution and extend our
market reach. Many of these partners package or incorporate our products with
their products or solutions, enabling us to create combined offerings that
address specific problems, reach specific markets and provide more complete
and tailored offerings. The following is a representative list of our solution
and complementary partners:
<TABLE>
<S> <C>
. Aspect Telecommunications Corporation .InterWorld Corporation
.Art Techology Group, Inc. .LongView Solutions
.Baan Company, N.V. .PeopleSoft, Inc.
.BroadVision, Inc. .Perot Systems Corporation
.Calico Commerce, Inc. .Pivotal Software Inc.
.Cisco Systems, Inc. .Portal Software
.Clarify, Inc. .Siebel Systems, Inc.
.Corio, Inc. .Sun Microsystems, Inc.
.Hewlett-Packard Company .Technology House
</TABLE>
Technology
Our ActiveWorks Integration System is based on an innovative architecture
that enables the integration of disparate enterprise applications, such as
custom and packaged applications, databases and eCommerce applications. As a
result, these applications can exchange information in real time, enabling a
business to operate faster and more efficiently and to use intranets and the
Internet to conduct electronic transactions internally and with customers,
suppliers and B2B partners. This new way of implementing business processes
across applications minimizes the need for expensive custom programming.
9
<PAGE>
Customers
As of December 31, 1999, Active Software has licensed its ActiveWorks
Integration System to over 150 companies. Our typical customers are medium to
large businesses, particularly Global 2000 companies, a term used to describe
the world's largest 2000 companies in terms of revenues. In 1999, repeat
customers accounted for approximately 48% of total revenues and Warburg Dillon
Read accounted for 12% of our total revenues. In 1998, no customer accounted
for more than 10% of our total revenues. In 1997, The Boeing Company accounted
for 33% of our total revenues. We expect that a small number of customers will
continue to account for a substantial portion of our revenues for the
foreseeable future.
The following is a representative list of our customers by industry:
<TABLE>
<S> <C> <C>
Financial Services Technology Manufacturing and Other
Automatic Data Processing, Inc. Calico Technology, Inc. The Boeing Company
American Management Systems,
Inc. Comdisco, Inc. Herman Miller, Inc.
Citibank Creo Products Inc.
Fidelity Investments Hewlett-Packard Company Telecommunications
Warburg Dillon Read IntraWare, Inc. Level 3 Communications, Inc.
Intuit, Inc. MediaOne Group, Inc.
Government and Utilities Juniper Networks, Inc. RCN Corporation
AEP Energy Services Motorola, Inc. Teligent
CTX Corporation Order Trust Telecel
Idaho Power Company Redback Networks
Lockheed Martin Missiles Sun Microsystems Other
and Space Company Technology House Federal Express Corporation
State of California, San Diego
County VeriFone, Inc. Homepoint.com
U.S. Dept. of Defense Starbucks Corporation
U.S. Dept. of Transportation VitaminShoppe.com
W.W. Grainger
</TABLE>
The customers listed above accounted for 64% and 66% of total revenues in
1999 and 1998, respectively. All of the above customers have generated at
least $70,000 in revenues to us since we introduced our software products in
August 1996.
Sales and Marketing
We promote and sell our products through our direct sales organization in
North America and Europe, as well as through system integrators and value
added resellers in countries where we have no direct sales operations. As of
December 31, 1999, we had 66 people in our sales and marketing organization,
of which 54 were in the United States and 12 were in Europe. We intend to
increase the size of our direct sales force and to establish additional sales
offices domestically and internationally. Currently, we believe we will need
to expand our sales organization by more than 100% of its present size over
the next year.
Our system integrator partners and service, distribution and marketing
partners have capabilities that complement and augment our eBusiness
integration solution and extend our market reach. In particular, our system
integrator partners often contribute industry-specific and application-
specific expertise as well as large scale project management capabilities that
enable us to address a broad range of markets. Many of our service,
distribution and marketing partners package or incorporate our products with
their products or solutions, enabling us to create combined offerings with
these partners that address specific problems, focus on specific markets and
provide more complete and tailored offerings. Our current relationships with
our partners typically are structured as co-marketing arrangements in which
the customer is referred by the partner to license the software directly from
us. As a result there is no revenue sharing arrangement between the partner
and us, and our current arrangements with these partners generally do not
impose any limitations on our ability to sell our products. In addition, we
have entered into a limited number of reseller arrangements in which our
products are
10
<PAGE>
embedded in the reseller's products, for which we receive a royalty from the
reseller. To date, revenues from these reseller arrangements have been
insignificant.
Our marketing efforts are focused on developing greater awareness among
target customers for the ActiveWorks Integration System and the benefits it
provides. We market our products and services through targeted events
including tradeshows, conferences and seminars. We also regularly promote our
products through a variety of public relations activities and industry analyst
briefings, and our executives are frequent speakers at industry conferences
and forums in many of the markets we serve. We have developed a wide range of
collateral materials and sales and promotional tools that are used by our
direct sales organization, as well as by our system integrators and value
added reseller partners. These materials include brochures, data sheets,
technical and business white papers, case studies, press releases and our web
site.
Research and Development
We believe that strong product development capabilities are essential to
our strategy of continuing to enhance and expand the capabilities of our
products in order to continue to provide our customers with a comprehensive
eBusiness integration platform. We have invested significant time and
resources in creating a structured process for undertaking all product
development. This process involves several functional groups at all levels
within our organization and is designed to provide a framework for defining
and addressing the activities required to bring product concepts and
development projects to market successfully. In addition, we have recruited
key engineers and software developers with experience in the application
integration, networking and Internet software markets.
Our research and development expenses were $6.8 million in 1999, $4.0
million in 1998 and $2.8 million in 1997. As of December 31, 1999,
approximately 40 employees were engaged in research and development
activities.
Competition
The eBusiness integration market is extremely competitive and subject to
rapid change. We believe that the competitive factors affecting the market for
our products and services include product functionality and features;
availability of global support; incumbency of vendors; ease of product
implementation; quality of customer support services; and vendor and product
reputation. The relative importance of each of these factors depends upon the
specific customer environment. We believe that we have a strong competitive
position with respect to factors such as product features and functionality,
quality of customer support services and the ease of implementation of our
products. Because many of our competitors have longer operating histories and
greater resources, we believe that we do not compete as favorably with respect
to factors that involve the establishment of long- standing relationships,
such as incumbency of vendors and reputation of vendor and products, or
extensive resources, such as the availability of global support.
We compete with various providers of application integration solutions,
including CrossWorlds, New Era of Networks, Software Technologies Corporation
and Vitria. With our B2B capabilities we also compete with new companies such
as Extricity, OnDisplay and WebMethods. In addition, a number of other
companies are offering products and services that address specific aspects of
application integration, including IBM, BEA Systems, Inc. and TIBCO Software
Inc. We also face competition for some aspects of our product and service
offerings from major system integrators, both independently and in conjunction
with in-house corporate information technology departments, which have
traditionally been the prevalent resource for application integration. We
expect additional competition from other established and emerging companies.
Furthermore, our competitors may combine with each other, or other companies
may enter our markets by acquiring or entering into strategic relationships
with our competitors. For more information regarding our competition, see
"Factors That May Affect Future Results--Competition in the eBusiness
integration market is intense, and if we are unable to compete effectively,
the demand for, or the prices of, our products may be reduced."
11
<PAGE>
Proprietary Rights
We rely primarily on a combination of copyrights, trademarks, trade secret
laws and contractual obligations with employees and third parties to protect
our proprietary rights. We do not currently own any issued patents, and other
protection of our intellectual property is limited. Despite our efforts to
protect our proprietary rights, unauthorized parties may copy aspects of our
products and obtain and use information that we regard as proprietary. In
addition, other parties may breach confidentiality agreements or other
protective contracts we have entered into, and we may not be able to enforce
our rights in the event of these breaches. Furthermore, we expect that we will
increase our international operations in the future, and the laws of many
foreign countries do not protect our intellectual property rights to the same
extent as the laws of the United States.
The software industry is characterized by the existence of a large number
of patents and frequent litigation based on allegations of patent infringement
and the violation of other intellectual property rights. Although we attempt
to avoid infringing known proprietary rights of third parties in our product
development efforts, we expect that we may be subject to legal proceedings and
claims for alleged infringement by us or our licensees of third party
proprietary rights, such as patents, trademarks or copyrights, by us or our
licensees from time to time in the ordinary course of business. Any claims
relating to the infringement of third party proprietary rights, even if not
meritorious, could result in costly litigation, divert management's attention
and resources, or require us to enter into royalty or license agreements,
which are not advantageous to us. In addition, parties making these claims may
be able to obtain an injunction, which could prevent us from selling our
products in the United States or abroad. Any of these results could harm our
business. We may increasingly be subject to infringement claims as the number
of products and competitors in our industry grow and functionalities of
products overlap. Furthermore, former employers of our current and future
employees may assert that our employees have improperly disclosed confidential
or proprietary information to us.
In addition, we license technology that is incorporated into our products
from third parties, including security software from SPYRUS, and any
significant interruption in the supply or support of any licensed software
could adversely affect our sales, unless and until we can replace the
functionality provided by this licensed software. For more information
regarding our dependence on third party technology, see "Factors That May
Affect Future Results--Because our products incorporate technology licensed to
us from third parties, the loss of our right to use this licensed technology
could harm our business."
Employees
As of December 31, 1999, we had a total of 163 employees, of which 40 were
in research and development, 66 were in sales and marketing, 39 were in
professional services and product support, and 18 were in finance and
administration. Our future performance depends in significant part upon our
ability to attract new personnel and the continued service of existing
personnel in key areas including engineering, technical support and sales.
Competition for these personnel is intense and there can be no assurance that
we will be successful in attracting or retaining these personnel in the
future. None of our employees are subject to a collective bargaining
agreement. We consider our relations with our employees to be good.
Item 2. Properties.
Active Software's principal administrative, sales, marketing, research and
development and operations facilities is located in Santa Clara, California,
where we occupy approximately 24,000 square feet under a lease that expires in
November 2003 and does not provide for a right of extension or renewal.
Active Software also leases space for sales and support offices in
California, Colorado, Illinois, Michigan, Minnesota, New Jersey, New York,
Pennsylvania, Texas and Virginia. In addition, we lease space for sales
offices in France, Germany, Netherlands and United Kingdom.
12
<PAGE>
Item 3. Legal Proceedings.
We are not currently subject to any material legal proceedings; however, we
may from time to time become a party to various legal proceedings arising in
the ordinary course of our business.
Item 4. Submission of Matters to a Vote of Security Holders.
Not applicable.
13
<PAGE>
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
Price Range of Common Stock
Our common stock has been listed for quotation on the Nasdaq National
Market under the symbol "ASWX" since our initial public offering on August 13,
1999. The following table shows the high and low sales prices of our common
stock as reported by the Nasdaq National Market for the period indicated.
<TABLE>
<CAPTION>
High Low
------- ------
<S> <C> <C>
Quarter ended September 30, 1999 (from August 13, 1999)..... $ 29.50 $12.50
Quarter ended December 31, 1999............................. $105.00 $22.50
</TABLE>
The closing sale price of the common stock as reported on the Nasdaq
National Market on March 15, 2000 was $128.50 per share. As of that date there
were approximately 384 holders of record of the common stock. This does not
include the number of persons whose stock is in nominee or "street name"
accounts through brokers.
The market price of our common stock has been and may continue to be
subject to wide fluctuations in response to a number of events and factors,
such as quarterly variations in our operating results, announcements of
technological innovations or new products by us or its competitors, changes in
financial estimates and recommendations by securities analysts, the operating
and stock performance of other companies that investors may deem comparable to
us, and news reports relating to trends in our markets. In addition, the stock
market in recent years has experienced extreme price and volume fluctuations
that have particularly affected the market prices of many high technology and
Internet-related companies that have often been unrelated or disproportionate
to the operating performance of companies. These fluctuations, as well as
general economic and market conditions, may adversely affect the market price
for our common stock.
Dividend Policy
We have never paid cash dividends on our common stock. We currently intend
to retain any future earnings to fund the development and growth of our
business. Therefore, we do not currently anticipate paying any cash dividends
in the foreseeable future.
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 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
December 31, 1999, $37.2 million of the net proceeds were invested in cash and
cash equivalents and short-term investments and approximately $2.8 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.
14
<PAGE>
Item 6. Selected Consolidated Financial Data.
The following selected consolidated financial data below should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations," the Consolidated Financial Statements and Notes
thereto and the other information included on this Annual Report on Form 10-K.
The consolidated statements of operations data for each of the years in the
three-year period ended December 31, 1999, and the consolidated balance sheet
data as of December 31, 1999 and 1998, are derived from the consolidated
financial statements which are included in this Form 10-K. The historical
results presented below are not necessarily indicative of future results.
<TABLE>
<CAPTION>
Sept. 19, 1995
Years Ended December 31, (inception)
------------------------------------ To Dec. 31,
1999 1998 1997 1996 1995
-------- -------- ------- ------- --------------
(in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
Consolidated Statements
of Operations Data:
Revenues:
License................ $ 20,491 $ 5,900 $ 2,625 $ 280 $ --
Service................ 6,952 1,699 568 5 25
-------- -------- ------- ------- -------
Total revenues....... 27,443 7,599 3,193 285 25
Cost of revenues:
License................ 1,376 477 30 6 --
Service................ 6,409 2,290 623 165 10
-------- -------- ------- ------- -------
Total cost of
revenues............ 7,785 2,767 653 171 10
-------- -------- ------- ------- -------
Gross profit............. 19,658 4,832 2,540 114 15
Operating expenses:
Research and
development........... 6,780 3,971 2,830 1,182 78
Sales and marketing.... 18,821 8,669 2,896 685 23
General and
administrative........ 3,076 2,069 1,796 1,163 41
Amortization of
deferred stock
compensation.......... 1,170 336 -- -- --
-------- -------- ------- ------- -------
Total operating
expenses............ 29,847 15,045 7,522 3,030 142
-------- -------- ------- ------- -------
Loss from operations..... (10,189) (10,213) (4,982) (2,916) (127)
Other income (expense),
net..................... 822 271 129 102 (6)
-------- -------- ------- ------- -------
Net loss................. $ (9,367) $ (9,942) $(4,853) $(2,814) $ (133)
======== ======== ======= ======= =======
Basic and diluted net
loss per share.......... $ (0.79) $ (3.21) $ (2.50) $ (6.59) $(10.23)
======== ======== ======= ======= =======
Shares used in computing
basic and diluted net
loss per share.......... 11,851 3,096 1,945 427 13
======== ======== ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
As of December 31,
-----------------------------------------
1999 1998 1997 1996 1995
------- -------- ------- ------- -----
(in thousands)
<S> <C> <C> <C> <C> <C>
Consolidated Balance Sheet Data:
Cash and cash equivalents.......... $17,299 $ 7,461 $ 2,876 $ 1,393 $ 95
Working capital (deficit).......... 37,049 7,493 2,755 1,002 (316)
Total assets....................... 51,822 12,294 5,195 1,901 316
Notes payable, less current
portion........................... -- 108 216 300 --
Convertible redeemable preferred
stock............................. -- 25,117 11,008 3,995 --
Total stockholders' equity
(deficiency)....................... 41,227 (16,756) (7,743) (2,891) (126)
</TABLE>
15
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
This section of this Report includes a number of forward-looking statements
that reflect our current views with respect to future events and financial
performance. We use words such as "anticipates," "believes," "expects,"
"future," and "intends," and similar expressions to identify forward-looking
statements. You should not place undue reliance on these forward-looking
statements, which apply only as of the date of this Report. These forward-
looking statements are subject to risks and uncertainties that could cause
actual results to differ materially from historical results or our
predictions. These risks are described in "Factors that May Affect Future
Results" and elsewhere in this Report. See "Special Note Regarding Forward-
Looking Statements."
The following discussion should be read in conjunction with the
Consolidated Financial Statements and Notes thereto and the other information
contained in this Report.
Overview
We are a provider of eBusiness integration software. Our ActiveWorks
Integration System provides a platform for the seamless, real-time integration
of packaged and custom enterprise software applications, both internally and
among an enterprise's network of customers, suppliers and partners. We were
incorporated in September 1995. From inception until August 1996, when we
shipped our first product, our operations consisted primarily of start-up
activities, including research and development, recruiting personnel and
raising capital. Since shipping our first product, we have continued to focus
on these activities, as well as building our sales and marketing presence,
expanding and enhancing our product offerings, building relationships with
third parties to leverage our distribution and services capabilities, and
supporting and maintaining our product deployments within an expanding
customer base. In addition, we established our professional services
organization in the third quarter of 1998 to support our system integrator
partners.
We generate revenue principally from licenses of our ActiveWorks software
products and, to a lesser extent, from services such as maintenance and
support, as well as consulting and training. License revenues comprised 75%
and 78% of our total revenues in 1999 and 1998 respectively, while service
revenues comprised 25% and 22% 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 $4.0 million and $1.2 million at
December 31, 1999 and December 31, 1998 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 between the system integrator and us,
and our current arrangements with these system integrators generally do not
impose any limitations on our ability to sell our products. In addition, we
have entered into a limited number of reseller arrangements in which our
products are embedded in the reseller's products, for which we receive a
royalty from the reseller. To date, revenues from these reseller arrangements
have been insignificant. In the first quarter of 1999, we expanded our
presence in international markets by opening sales offices in the United
Kingdom and in the Netherlands, and by establishing relationships with system
integrators and resellers
16
<PAGE>
in other international markets. Revenues derived from international sales
represented 11% and 4% of total revenues in 1999 and 1998, 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 163 as of
December 31, 1999 from 81 as of December 31, 1998. As a result of these
investments, we have incurred net losses in each fiscal quarter since
inception and, as of December 31, 1999, had an accumulated deficit of $27.1
million. We anticipate that our operating expenses will continue to increase
for the foreseeable future, as we expand our product development and sales and
marketing efforts. In addition, we expect to incur additional expenses
associated with being a public company. Accordingly, we expect to incur net
losses for the foreseeable future.
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 will be 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.,
a provider of integration products and services for eCommerce. In connection
with this transaction, we expect to issue 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., a provider
of high performance mainframe integration solutions for eBusiness. In
connection with this transaction, we expect to make a cash payment in the
aggregate amount of approximately $4.5 million (less certain amounts related
to professional fees) and issue a number of shares of our common stock equal
to approximately $67.0 million (less certain amounts related to professional
fees) divided by $82.45104 (the average closing price of our common stock
during the 30-day period prior to signing the agreement). In addition, the
outstanding options to purchase TransLink capital stock will be converted into
options to purchase 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.
Amortization of goodwill and other intangible assets 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.
17
<PAGE>
Results of Operations for Fiscal Years Ended December 31, 1999, 1998 and 1997
Revenues
Total revenues were $27.4 million, $7.6 million and $3.2 million in 1999,
1998 and 1997, respectively. License revenues increased to $20.5 million in
1999 from $5.9 million in 1998 and from $2.6 million in 1997. The increase in
license revenues was due to an increase of $10 million in 1999 and $1.5
million in 1998 in sales of additional ActiveWorks products and features to
existing customers, and an increase of $4.6 million in 1999 and $1.8 million
in 1998 in sales of our products to new customers. As a percentage of total
revenues, license revenues were 75% and 78% for 1999 and 1998, respectively.
Service revenues increased to $7.0 million in 1999 from $1.7 million in
1998 and from $568,000 in 1997. As a percentage of total revenues, service
revenues were 25% and 22% for 1999 and 1998, respectively. The increase was
attributable primarily to an increase in consulting fees of $3.4 million in
1999 and $655,000 in 1998, as a result of the establishment of our
professional services organization in the third quarter of 1998, and an
increase in maintenance and support fees of $1.8 million in 1999 and $475,000
in 1998 due to the growth of our customer base.
We expect services revenue to increase as a percentage of total revenue due
to the expected growth of our customer base.
Cost of Revenues
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 revenues increased to $1.4 million in 1999 from
$477,000 in 1998 and from $30,000 in 1997. As a percentage of license
revenues, cost of license revenues was 7% and 8% for 1999 and 1998,
respectively. The growth in cost of license revenues on an absolute dollars
basis was attributable primarily to a larger proportion of our products sold
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 may 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 revenues increased to $6.4 million
in 1999 from $2.3 million in 1998 and from $623,000 in 1997. The growth in
cost of service revenues was attributable primarily to an increase in
personnel dedicated to support a larger number of customers. As a percentage
of service revenues, cost of service revenues was 92% and 135% for 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 $6.8
million in 1999 from $4.0 million in 1998 and from $2.8 million in 1997. The
increases during these periods were attributable primarily to the addition of
personnel in our research and development organization associated with product
development as well as the $350,000 expense associated with the issuance of a
stock warrant to a strategic partner, Intel Corporation, in connection with
the achievement of certain software performance improvements. As a percentage
of total revenues, research and development expenses were 25% and 52% for 1999
and 1998, respectively. The decrease in research and development expenses as a
percentage of
18
<PAGE>
revenues from 1999 and 1998 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 $18.8 million in 1999
from $8.7 million in 1998 and from $2.9 million in 1997. The increase was
attributable to the expansion of our direct sales force and increased
promotional activity. The increases during these periods were attributable
primarily to the addition of 35 employees in sales and marketing in 1999 and
14 employees in sales and marketing in 1998 and to increased commissions
related to increased revenues and, to a lesser extent, to costs associated
with increased efforts to develop market awareness of our products and
services. As a percentage of total revenues, sales and marketing expenses were
69% and 114% for 1999 and 1998, respectively. The decrease in sales and
marketing expenses as a percentage of revenues from 1999 and 1998 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
$3.1 million in 1999 from $2.1 million in 1998 and from $1.8 million in 1997.
The increases during these periods were 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 11% and 27% of total revenues for 1999 and 1998,
respectively. 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 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 December 31,
1999 and December 31, 1998 amounted to $3.5 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 $1.2 million and
$336,000 was amortized in 1999 and 1998, 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.
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. In 1999, 1998 and 1997, other income was
$822,000, $271,000 and $129,000, respectively. The increase in 1999 was
attributable primarily to higher cash balances resulting from the initial
public offering of our common stock in August 1999. The increases during 1998
and 1997 were due primarily to a higher average cash and short-term investment
balances as a result of convertible redeemable preferred stock financing in
1998 and 1997.
Liquidity and Capital Resources
Prior to our initial public offering in August 1999, we financed our
operations primarily through private sales of convertible redeemable preferred
stock, which totaled $25.1 million in net proceeds through December 31, 1999.
In August 1999, we completed the initial public offering of our common stock,
which resulted in net proceeds of approximately $40 million. As of December
31, 1999, we had $37.2 million of cash and cash equivalents and short-term
investments.
19
<PAGE>
Net cash used in operating activities was $6.8 million, $9.0 million and
$4.8 million in 1999, 1998 and 1997, respectively. For 1999, cash used by
operating activities was attributable primarily to a net loss of $9.4 million,
an increase in account receivable of $6.1 million, an increase in prepaid and
other current assets of $458,000, offset in part by amortization of deferred
stock compensation of $1.2 million, an increase in accounts payable and other
accrued liabilities of $2.0 million, an increase in accrued compensation and
benefits of $1.9 million and an increase in deferred revenue of $2.9 million.
For 1998, cash used by operating activities was attributable primarily to a
net loss of $9.9 million and an increase in accounts receivable of $1.8
million, offset in part by an increase in deferred revenues of $432,000 and
increases in other accrued liabilities and accounts payable. For 1997, cash
used by operating activities was attributable primarily to a net loss of $4.9
million and an increase in accounts receivable of $1.5 million, offset in part
by an increase in deferred revenues of $606,000 and an increase in accrued
compensation and related benefits of $582,000. 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 $23.9 million, $711,000 and
$642,000 in 1999, 1998 and 1997, respectively. For 1999, cash used in
investing activities was attributable primarily to the increase in our
investment portfolio as a result of our initial public offering. For 1998 and
1997, cash used in investing activities was attributable primarily to
purchases of property and equipment.
Net cash provided by financing activities was $40.5 million, $14.3 million
and $6.9 million in 1999, 1998 and 1997 respectively. In August 1999, we
completed the initial public offering of 4,025,000 shares of our common stock
at a public offering price of $11.00 per share, which resulted in net proceeds
to us of approximately $40 million. All of the outstanding shares of
convertible preferred stock were automatically converted into shares of common
stock in August 1999 upon the closing of the initial public offering. For 1998
and 1997, cash provided by financing activities was attributable primarily to
proceeds from the issuance of convertible redeemable preferred stock.
As of December 31, 1999, our principal commitments consisted of obligations
outstanding under operating leases. 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 and short-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 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.
Accounting Standards
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 133, Accounting for Derivative
Instruments and Hedging Activities. This statement requires companies to
record derivatives on the balance sheet as assets or liabilities measured at
fair value. Gains or losses resulting from changes in the values of those
derivatives would be accounted for depending on the use of the derivative and
whether it qualifies for hedge accounting. SFAS No. 133 will be effective for
us beginning in 2001. Although the Company has not fully assessed the
implications of SFAS No. 133, management does not believe the adoption of this
statement will have a significant impact on the Company's consolidated
financial position, results of operations of cash flows.
20
<PAGE>
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 $9.4 million in 1999 and $9.9 million
in 1998, and, as of December 31, 1999, we had an accumulated deficit of
approximately $27.1 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:
. the size, timing and contractual terms of sales of our products and
services due to the long and unpredictable sales cycle for our products;
21
<PAGE>
. 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. In 1999, Warburg Dillon Reed
accounted for 12% of our total revenues. In 1998, no customer accounted for
more than 10% of our total revenues. In 1997, The Boeing Company accounted for
33% 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
prospective acquisitions of Premier and TransLink 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
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.
22
<PAGE>
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
December 31, 1999, we employed approximately 66 individuals in our sales and
marketing organization. Currently, we believe we will need to expand our sales
organization by more than 50% 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,
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
23
<PAGE>
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 capital expenditures by our
customers in excess of $200,000. We do not have a long history of selling our
products and will have to devote substantial resources to educate prospective
customers about the benefits of our ActiveWorks software products. Our efforts
to educate potential customers may not result in our products achieving market
acceptance. In addition, many of these prospective customers have made
significant investments in internally-developed or custom systems and would
incur significant costs in switching to third-party products such as ours.
Furthermore, even if our products are effective, our target customers may not
choose them for technical, cost, support or other reasons. If the market for
our products fails to grow or grows more slowly than we anticipate, our
business could suffer.
Because market participants in some markets have adopted industry-specific
technologies, we may need to expend significant resources in order to address
specific markets.
Our strategy is to develop our ActiveWorks integration software to be
broadly applicable to many industries. However, in some markets, market
participants have adopted core technologies that are specific to their
markets. For example, many companies in the healthcare and financial services
industries have adopted industry-specific protocols for the interchange of
information. In order to successfully sell our products to companies in these
markets, we may need to expand or enhance our products to adapt to these
industry-specific technologies, which could be costly and require the
diversion of engineering resources.
Competition in the 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
24
<PAGE>
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 $27.4 during 1999 from $7.6 million
during 1998. The number of our employees has grown to approximately 163 at the
end of 1999 from 81 as of December 31, 1998. 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
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.
25
<PAGE>
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
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.
To date, we have generated 11% 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;
26
<PAGE>
. our ability to establish relationships with system integrators and
service, distribution and marketing partners and the performance of
these partners in selling our products;
. the difficulties and costs of localizing products for foreign markets,
including the development of multilingual capabilities in our products;
. unexpected changes in regulatory requirements;
. legal uncertainties regarding liability, export and import restrictions,
tariffs and other trade barriers;
. reduced protection of intellectual property in other countries;
. increased difficulty in collecting delinquent or unpaid accounts;
. fluctuations in the value of the U.S. dollar relative to other
currencies;
. potentially adverse tax consequences; and
. political and economic instability.
Any of these factors could impair our ability to expand our international
operations into these markets or to generate significant revenues from those
markets in which we operate.
Our software products are complex and may contain unknown defects that could
harm our reputation, result in product liability or decrease market acceptance
of our products.
Our software products are complex and include software that is internally
developed and licensed from third parties. These software products may contain
errors or defects, particularly when first introduced or when new versions or
enhancements are released. Although we have not experienced any material
software defects to date, these defects could cause our customers to
experience severe system failures. Because our customers depend on our
software for their critical systems and business functions, any interruptions
could:
. damage our reputation;
. cause our customers to initiate product liability suits against us;
. increase our product development costs;
. divert our product development resources;
. cause us to lose sales; or
. delay market acceptance of our products.
Although we conduct extensive testing, we may not discover software defects
that affect our current or new products or enhancements until after they are
sold. Furthermore, because our ActiveWorks software products are designed to
work in conjunction with a wide variety of applications, we are unable to test
our products with all of these applications.
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.
27
<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.
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.
28
<PAGE>
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.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Active Software Corporation 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 at December 31, 1999, 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 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 twelve 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 and Netherland subsidiaries. The
Company closed these subsidiaries in 1999 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, or guilders 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.
29
<PAGE>
Item 8. Financial Statements and Supplementary Data.
See Part IV, Item 14 of this Report.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
Not applicable.
30
<PAGE>
PART III
Our Proxy Statement for our 2000 Annual Meeting of Stockholders, which,
when filed pursuant to Regulation 14A under the Securities Exchange Act of
1934, will be incorporated by reference in this Annual Report on Form 10-K
pursuant to General Instruction G(3) of Form 10-K and will provide the
information required under Part III (Items 10, 11, 12 and 13).
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a) The following documents are filed as part of this report:
(1) Consolidated Financial Statements and Independant Auditor's Report,
which are set forth in the Index to Consolidated Financial
Statements.
<TABLE>
<CAPTION>
Pages
-----
<S> <C>
Independent Auditors' Report............................................ 35
Consolidated Balance Sheets as of December 31, 1999 and 1998............ 36
Consolidated Statements of Operations for the years ended December 31,
1999, 1998 and 1997.................................................... 37
Consolidated Statements of Stockholders' Equity (Deficiency)
and Comprehensive loss for the years ended December 31, 1999, 1998 and
1997................................................................... 38
Consolidated Statements of Cash Flows for the years ended December 31,
1999, 1998 and 1997.................................................... 39
Notes to Consolidated Financial Statements.............................. 40
</TABLE>
(2) Financial Statement Schedules. The following financial statement
schedule of the Company for the years ended December 31, 1999, 1998 and
1997 is filed as part of this report on Form 10-K and should be read in
conjunction with the financial statements.
<TABLE>
<CAPTION>
Schedule Title Pages
-------- ----- -----
<C> <S> <C>
Independent Auditors' Report on Schedule ................... 51
II Valuation and Qualifying Accounts........................... 52
</TABLE>
Schedules not listed above have been omitted because they are not
applicable, not required, or the information required to be set forth therein
is included in the Consolidated Financial Statements or notes thereto.
(3) Exhibits.
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
2.1(1) Form of Agreement and Plan of Merger between the Registrant and Active
Software, Inc., a California Corporation.
3.3(1) Amended and Restated Certificate of Incorporation of the Registrant.
3.4(1) Bylaws of the Registrant.
4.1(1) Form of the Registrant's Common Stock Certificate.
10.1(1) Form of Indemnification Agreement.
10.2(1) 1996 Stock Plan, as amended, and form of stock option agreement and
restricted stock purchase agreement.
10.3(1) 1996A Stock Plan, as amended, and form of stock option agreement and
restricted stock purchase agreement.
10.4(1) 1999 Stock Plan and form of stock option agreement and restricted
stock purchase agreement.
10.5(1) 1999 Employee Stock Purchase Plan and form of subscription agreement.
</TABLE>
31
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
10.6(1) 1999 Directors' Stock Option Plan and form of stock option
agreement.
10.7(1) Amended and Restated Rights Agreement dated March 27, 1998, as
amended.
10.8(1) Warrant to purchase shares of the Registrant's common stock issued
by the Registrant to Intel Corporation, dated October 29, 1998.
10.9(1) Warrant to purchase shares of the Registrant's common stock issued
by the Registrant to Venture Lending & Leasing, Inc., dated
September 27, 1996.
10.10(1) Loan Agreement, dated as of September 27, 1996, between the
Registrant and Venture Lending & Leasing, Inc., with exhibits
attached thereto including execution copies of the Security
Agreement, dated as of September 27, 1996, and the Promissory
Note, dated December 20, 1996.
10.11(1)+ SecureWeb Toolkit(TM) Developer & Joint Development Agreement,
effective as of July 23, 1996, between the Registrant and Terisa
Systems, Inc.
10.12(1) SecureWeb Toolkit(TM) Distribution Agreement, effective as of July
23, 1996, between the Registrant and Terisa Systems, Inc.
10.13(1) Sublease Agreement by and between The Vantive Corporation and the
Registrant, dated March 1, 1999.
10.14(1) 1999 Executive Incentive Plan.
10.15(1) Loan and Security Agreement between the Registrant and Silicon
Valley Bank.
10.16(2) Alier, Inc. 1996 Stock Option Plan.
10.17(3) Alier, Inc. 1997 Stock Option Plan.
10.18(4) Agreement and Plan of Reorganization dated as of January 19, 2000,
by and among Active Software, Inc., Igator Acquisitions Corp.,
Alier, Inc., and Alex Osborne and Scott Persinger, Shareholders of
Alier, Inc.
10.19(5) Registration Rights Agreement dated as of February 11, 2000, by and
among Active Software, Inc. and Alex Osborne, Scott Persinger,
David Lemberger and Carron Schmick.
21 Subsidiaries of the Registrant.
23 Independent Auditors' Consent.
24 Power of Attorney (see page 33).
27 Financial Data Schedule.
</TABLE>
- --------
(1) Incorporated herein by reference to the exhibit filed with our
Registration Statement on Form S-1 (Commission File No. 333-80549).
(2) Incorporated herein by reference to Exhibit 4.1 to our Registration
Statement on Form S-8 filed on February 17, 2000 (Commission File No. 333-
30654).
(3) Incorporated herein by reference to Exhibit 4.2 to our Registration
Statement on Form S-8 filed on February 17, 2000 (Commission File No. 333-
30654).
(4) Incorporated herein by reference to Exhibit 2.1 to our Current Report on
Form 8-K filed on February 25, 2000.
(5) Incorporated herein by reference to Exhibit 2.2 to our Current Report on
Form 8-K filed on February 25, 2000.
+ Confidential treatment has been granted by the Securities and Exchange
Commission with respect to certain information in these exhibits.
(b) Reports on Form 8-K
On February 25, 2000, we filed a Current Report on Form 8-K with respect to
our acquisition of Alier, Inc.
32
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
Date: March 30, 2000 ACTIVE SOFTWARE, INC.
/s/ R. James Green
By: _________________________________
R. James Green
President and Chief Executive
Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints R. James Green and Jon A. Bode, jointly
and severally, his or her attorneys-in-fact, each with the power of
substitution, for him or her in any and all capacities, to sign any amendments
to this Report on Form 10-K, and to file the same, with exhibits thereto and
other documents in connection therewith with the Securities and Exchange
Commission, hereby ratifying and confirming all that each of said attorneys-
in-fact, or his or her substitute or substitutes may do or cause to be done by
virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ R. James Green President, Chief Executive March 30, 2000
____________________________________ Officer and Director
R. James Green (Principal Executive
Officer)
/s/ Jon A. Bode Vice President of Finance March 30, 2000
____________________________________ and Administration and
Jon A. Bode Chief Financial Officer
(Principal Financial and
Accounting Officer)
/s/ Rafael Bracho Chief Technology Officer and March 30, 2000
____________________________________ Director
Rafael Bracho
/s/ Kevin R. Compton Director March 30, 2000
____________________________________
Kevin R. Compton
/s/ James P. Gauer Director March 30, 2000
____________________________________
James P. Gauer
/s/ Michael J. Odrich Director March 30, 2000
____________________________________
Michael J. Odrich
/s/ Conway Rulon-Miller Director March 30, 2000
____________________________________
Conway Rulon-Miller
/s/ Roger S. Siboni Director March 30, 2000
____________________________________
Roger S. Siboni
</TABLE>
33
<PAGE>
ACTIVE SOFTWARE, INC.
CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Audited Consolidated Financial Statements:
Independent Auditors' Report.............................................. 35
Consolidated Balance Sheets as of December 31, 1999 and 1998.............. 36
Consolidated Statements of Operations for the years ended December 31,
1999, 1998 and 1997...................................................... 37
Consolidated Statements of Stockholders' Equity (Deficiency) and
Comprehensive Loss for the years ended December 31, 1999, 1998 and 1997.. 38
Consolidated Statements of Cash Flows for the years ended December 31,
1999, 1998 and 1997...................................................... 39
Notes to Consolidated Financial Statements................................ 40
</TABLE>
34
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of Active Software, Inc.:
We have audited the accompanying consolidated balance sheets of Active
Software, Inc. and subsidiaries as of December 31, 1999 and 1998, and the
related consolidated statements of operations, stockholders' equity
(deficiency) and comprehensive loss, and cash flows for each of the three
years in the period ended December 31, 1999. These financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Active Software, Inc. and
subsidiaries at December 31, 1999 and 1998, and the results of their
operations and their cash flows for each of the three years in the period
ended December 31, 1999 in conformity with generally accepted accounting
principles.
/s/ Deloitte & Touche LLP
San Jose, California
January 21, 2000
(February 27, 2000 as to Note 12)
35
<PAGE>
ACTIVE SOFTWARE, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and par value amounts)
<TABLE>
<CAPTION>
December 31,
------------------
1999 1998
-------- --------
ASSETS
------
<S> <C> <C>
Current assets:
Cash and cash equivalents................................ $ 17,299 $ 7,461
Short-term investments................................... 19,906 --
Accounts receivable (net of allowances of $493 and
$200)................................................... 9,486 3,362
Prepaid expenses and other current assets................ 953 495
-------- --------
Total current assets................................... 47,644 11,318
Property and equipment, net................................ 1,951 796
Convertible subordinated promissory note receivable........ 2,000 --
Other assets............................................... 227 180
-------- --------
Total assets........................................... $ 51,822 $ 12,294
======== ========
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
-------------------------------------------------
<S> <C> <C>
Current liabilities:
Accounts payable......................................... $ 1,424 $ 739
Accrued compensation and related benefits................ 3,039 1,115
Deferred revenues........................................ 4,006 1,154
Accrued royalties........................................ 400 375
Other accrued liabilities................................ 1,617 335
Current portion of notes payable......................... 109 107
-------- --------
Total current liabilities.............................. 10,595 3,825
-------- --------
Notes payable, less current portion........................ -- 108
-------- --------
Commitments (Notes 8 and 11)
Convertible redeemable preferred stock:
Series A convertible redeemable preferred stock; $0.001 par
value; designated and outstanding--1999, none; 1998,
6,022,500 shares.......................................... -- 3,995
Series B convertible redeemable preferred stock; $0.001 par
value; designated and outstanding--1999, none; 1998,
3,915,000 shares.......................................... -- 7,013
Series C convertible redeemable preferred stock; $0.001 par
value; designated--3,467,832 shares: outstanding--; 1999,
none; 1998, 3,467,832 shares.............................. -- 14,109
Stockholders' equity (deficiency):
Preferred stock, $0.001 par value: authorized 5,000,000
shares; none outstanding................................ -- --
Common stock, $0.001 par value; authorized--1999,
100,000,000 shares; 1998, 30,000,000 shares;
outstanding--1999, 24,069,853 shares; 1998, 5,874,725
shares.................................................. 71,900 3,934
Deferred stock compensation................................ (3,530) (2,939)
Notes receivable from stockholders......................... (2) (9)
Accumulated other comprehensive loss....................... (32) --
Accumulated deficit........................................ (27,109) (17,742)
-------- --------
Total stockholders' equity (deficiency)................ 41,227 (16,756)
-------- --------
Total liabilities and stockholders' equity
(deficiency).......................................... $ 51,822 $ 12,294
======== ========
</TABLE>
See notes to consolidated financial statements.
36
<PAGE>
ACTIVE SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------
1999 1998 1997
-------- -------- -------
<S> <C> <C> <C>
Revenues:
License........................................ $ 20,491 $ 5,900 $ 2,625
Service........................................ 6,952 1,699 568
-------- -------- -------
Total revenues............................... 27,443 7,599 3,193
-------- -------- -------
Costs of revenues:
License........................................ 1,376 477 30
Service........................................ 6,409 2,290 623
-------- -------- -------
Total cost of revenues....................... 7,785 2,767 653
-------- -------- -------
Gross profit..................................... 19,658 4,832 2,540
Operating expenses:
Research and development....................... 6,780 3,971 2,830
Sales and marketing............................ 18,821 8,669 2,896
General and administrative..................... 3,076 2,069 1,796
Amortization of deferred stock compensation.... 1,170 336 --
-------- -------- -------
Total operating expenses..................... 29,847 15,045 7,522
-------- -------- -------
Loss from operations............................. (10,189) (10,213) (4,982)
Other income (expense):
Interest income................................ 960 313 179
Interest and other expense, net................ (138) (42) (50)
-------- -------- -------
Total other income, net...................... 822 271 129
-------- -------- -------
Net loss......................................... $ (9,367) $ (9,942) $(4,853)
======== ======== =======
Basic and diluted net loss per share............. $ (0.79) $ (3.21) $ (2.50)
======== ======== =======
Shares used in calculating basic and diluted net
loss per share.................................. 11,851 3,096 1,945
======== ======== =======
</TABLE>
See notes to consolidated financial statements.
37
<PAGE>
ACTIVE SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY) AND COMPREHENSIVE
LOSS
(In thousands)
<TABLE>
<CAPTION>
Notes Accumulated
Common Stock Deferred Receivable Other
--------------- Stock from Comprehensive Accumulated Comprehensive
Shares Amount Compensation Stockholders Income Deficit Total Loss
------ ------- ------------ ------------ ------------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances, January 1,
1997................... 4,139 $ 105 -- $(49) $ -- $ (2,947) $(2,891)
Net loss................ -- -- -- -- -- (4,853) (4,853) $(4,853)
=======
Issuance of common
stock.................. 7 1 -- -- -- -- 1
------ ------- ------- ---- ---- -------- -------
Balances, December 31,
1997................... 4,146 106 -- (49) -- (7,800) (7,743)
Net loss................ -- -- -- -- -- (9,942) (9,942) (9,942)
=======
Issuance of common
stock.................. 2,397 297 -- -- -- -- 297
Repurchase of common
stock.................. (669) (45) -- 29 -- -- (16)
Repayments of note
receivable............. -- -- -- 11 -- -- 11
Issuance of warrants.... -- 301 -- -- -- -- 301
Deferred stock
compensation........... -- 3,275 (3,275) -- -- -- --
Amortization of deferred
stock compensation..... -- -- 336 -- -- -- 336
------ ------- ------- ---- ---- -------- -------
Balances, December 31,
1998................... 5,874 3,934 (2,939) (9) -- (17,742) (16,756)
Net loss................ -- -- -- -- -- (9,367) (9,367) (9,367)
Other comprehensive
loss, net of tax--
Change in net
unrealized loss from
short-term
investments............ -- -- -- -- (32) -- (32) (32)
-------
Total comprehensive
loss................... $(9,399)
=======
Issuance of common stock
in connection with the
Company's initial
public offering, net of
issuance costs of
$3,881................. 4,025 39,990 -- -- -- -- 39,990
Issuance of common
stock.................. 678 651 -- -- -- -- 651
Issuance of common stock
upon exercise of
warrants............... 178 455 -- -- -- -- 455
Repurchase of common
stock.................. (90) (8) -- -- -- -- (8)
Conversion of preferred
stock.................. 13,405 25,117 -- -- -- -- 25,117
Deferred stock
compensation........... -- 1,761 (1,761) -- -- -- --
Amortization of deferred
stock compensation..... -- -- 1,170 -- -- -- 1,170
Repayments of note
receivable............. -- -- -- 7 -- -- 7
------ ------- ------- ---- ---- -------- -------
Balances, December 31,
1999................... 24,070 $71,900 $(3,530) $ (2) $(32) $(27,109) $41,227
====== ======= ======= ==== ==== ======== =======
</TABLE>
See notes to consolidated financial statements.
38
<PAGE>
ACTIVE SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Years Ended December
31,
-------------------------
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss......................................... $(9,367) $(9,942) $(4,853)
Adjustments to reconcile net loss to net cash
used in operating activities:
Loss on disposal of property and equipment..... 3 -- --
Depreciation and amortization.................. 713 461 318
Amortization of deferred stock compensation.... 1,170 336 --
Issuance of warrants for services.............. 455 301 --
Changes in assets and liabilities:
Accounts receivable.............................. (6,124) (1,827) (1,475)
Prepaid expenses and other current assets........ (458) (437) (12)
Accounts payable................................. 685 433 75
Accrued compensation and related benefits........ 1,924 533 582
Accrued royalties................................ 25 375 --
Other accrued liabilities........................ 1,282 322 (58)
Deferred revenues................................ 2,852 432 606
------- ------- -------
Net cash used in operating activities........ (6,840) (9,013) (4,817)
------- ------- -------
Cash flows from investing activities:
Property and equipment additions................. (1,910) (606) (588)
Proceeds from sale of fixed assets............... 39 -- --
Purchase of short-term investments............... (19,938) -- --
Issuance of convertible subordinated promisory
note receivable................................. (2,000) -- --
Other assets..................................... (47) (105) (54)
------- ------- -------
Net cash used in investing activities........ (23,856) (711) (642)
------- ------- -------
Cash flows from financing activities:
Sale of common stock............................. 40,641 297 1
Repurchase of common stock....................... (8) (16) --
Sale of convertible redeemable preferred stock... -- 14,109 7,013
Repayment of notes receivable from stockholders.. 7 11 --
Repayment of notes payable....................... (106) (92) (72)
------- ------- -------
Net cash provided by financing activities.... 40,534 14,309 6,942
------- ------- -------
Net increase in cash and cash equivalents.......... 9,838 4,585 1,483
Cash and cash equivalents--beginning of year....... 7,461 2,876 1,393
------- ------- -------
Cash and cash equivalents--end of year............. $17,299 $ 7,461 $ 2,876
======= ======= =======
Supplemental disclosure of cash flow information--
Cash paid during the period for interest.......... $ 67 $ 42 $ 50
======= ======= =======
Noncash financing activities:
Repurchase of common stock by cancellation of
note Receivable................................. $ -- $ 29 $ --
======= ======= =======
Deferred stock compensation...................... $ 1,761 $ 3,275 $ --
======= ======= =======
Redeemable preferred stock converted into common
stock ............................................ $25,117 $ -- $ --
======= ======= =======
</TABLE>
See notes to consolidated financial statements.
39
<PAGE>
ACTIVE SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1999, 1998 and 1997
1. Business and Significant Accounting Policies
Business--Active Software, Inc. (the Company), reincorporated in Delaware
in June 1999, develops and markets software products for businesses that allow
users to integrate incompatible software applications across their extended
enterprises of customers, suppliers and partners.
Principles of Consolidation--The consolidated financial statements include
the accounts of the Company and its wholly-owned subsidiaries. All
intercompany transactions and balances have been eliminated in consolidation.
Cash Equivalents--The Company considers all highly liquid debt instruments
purchased with a remaining maturity of three months or less to be cash
equivalents.
Short-term investments represent highly liquid debt instruments purchased
with a maturity date at purchase of greater than 90 days and are stated at
fair value. The differences between amortized cost (cost adjusted for
amortization of premiums and accretion of discounts which are recognized as
adjustments to interest income) and fair value representing unrealized holding
gains or losses are recorded as accumulated other comprehensive loss within
stockholders' equity. While the Company's intent is to hold debt securities to
maturity, they are classified as available-for-sale because the sale of such
securities may be required prior to maturity. Any gains and losses on the sale
of debt securities are determined on a specific identification basis.
Property and equipment are stated at cost. Depreciation and amortization
are computed using the straight-line method over estimated useful lives of
three years. Leasehold improvements are amortized over the shorter of the
lease term or their useful life.
Long-Lived Assets--The Company evaluates its long-lived assets for
impairment whenever events or changes in circumstances indicate that the
carrying amount of such assets may not be recoverable. If such assets are
considered to be impaired, the impairment to be recognized is measured by the
amount by which the carrying amount of the assets exceeds the fair value of
the assets.
Software Development Costs--Costs for the development of new software
products and substantial enhancements to existing software products are
expensed as incurred until technological feasibility has been established, at
which time any additional development costs would be capitalized in accordance
with Statement of Financial Accounting Standards (SFAS) No. 86, Computer
Software To Be Sold, Leased, or Otherwise Marketed. Because the Company
believes its current process for developing software is essentially completed
concurrently with the establishment of technological feasibility, no costs
have been capitalized to date.
Notes Receivable from Stockholders--The notes receivable from stockholders
were issued in exchange for common stock, bear interest at 5.73% per annum,
and are due on January 15, 2000.
Revenue Recognition--Active Software's revenue recognition policy is
consistent with Statement of Position (SOP) 97-2, as amended. License revenues
are comprised of fees for the Company's software products. Revenue from
license fees is recognized when an agreement has been signed, delivery of the
product has occurred, no significant Company obligations remain, the fee is
fixed or determinable, collectibility is probable and vendor-specific
objective evidence exists to allocate a portion of the total fee to any
undelivered elements of the arrangement. For electronic delivery, the software
is considered to have been delivered when the Company has provided the
customer with the access codes that allow for immediate possession of the
software. If the fee due from the customer is not fixed or determinable,
revenue is recognized as payments become due from the customer. If
collectibility is not considered probable, revenue is recognized when the fee
is collected. Revenue
40
<PAGE>
ACTIVE SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
on arrangements with customers who are not ultimate users (primarily
resellers) is not recognized until the product is delivered to the end user.
Service revenues are comprised of revenue from support arrangements,
consulting fees and training. Support arrangements do not provide for
specified upgrade rights and provide technical support and the right to
unspecified upgrades on an if-and-when-available basis. Revenue from support
arrangements is recognized on a straight-line basis as services revenue over
the life of the related agreement, which is typically one year. If support or
consulting services are included in an arrangement that includes a license
agreement, amounts related to support or consulting are allocated based on
vendor-specific objective evidence. Vendor-specific objective evidence for
support and professional services is based on the price when such elements are
sold separately, or, when not sold separately, the price established by
management having the relevant authority. Where discounts are offered on
multiple element arrangements, a proportionate amount of that discount is
applied to each element included in the arrangement based on each element's
fair value. Consulting and training revenue is recognized when provided to the
customer. Customer advances and billed amounts due from customers in excess of
revenue recognized are recorded as deferred revenue.
Income Taxes--Income taxes are provided for using an asset and liability
approach which requires recognition of deferred tax liabilities and assets,
net of valuation allowances, for the expected future tax consequences of
temporary differences between the financial statement carrying amounts and the
tax bases of assets and liabilities and net operating loss and tax credit
carryforwards.
Research and development expenses are charged to operations as incurred.
Such expenses include product development costs and costs related to the
Company's internally developed software systems. To date, these costs which
meet the capitalization criteria of SOP 98-1, Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use have not been
significant.
Foreign Currency Transactions--The functional currency of the Company's
foreign subsidiaries is the U.S. dollar. Accordingly, all monetary assets and
liabilities are translated at the current exchange rate at the end of the
year, nonmonetary assets and liabilities are translated at historical rates
and revenues and expenses are translated at average exchange rates in effect
during the period. Transaction gains and losses have not been significant to
date.
Stock Compensation--The Company accounts for stock-based awards to
employees using the intrinsic value method in accordance with Accounting
Principles Board Opinion (APB No. 25), Accounting for Stock Issued to
Employees.
Net Loss per Common Share--Basic net loss per common share excludes
dilution and is computed by dividing net loss by the weighted average number
of common shares outstanding for the period (excluding shares subject to
repurchase). Diluted net loss per common share was the same as basic net loss
per common share for all periods presented since the effect of any potentially
dilutive securities is excluded as they are anti-dilutive because of the
Company's net losses.
Concentration of Credit Risk--Financial instruments that potentially expose
the Company to concentrations of credit risk consist primarily of accounts
receivable. The Company primarily sells its products to companies in North
America. The Company does not require collateral or other security to support
accounts receivable. To reduce credit risk, management performs ongoing credit
evaluations of its customers' financial condition. The Company maintains
allowances for potential credit losses.
Financial Instruments--The Company's financial instruments include cash and
cash equivalents, short-term investments, accounts receivable, notes
receivable and long-term debt. For cash and accounts receivable, the carrying
amount is a reasonable estimate of the fair value. The carrying amount for
cash equivalents and short-term investments approximates fair value because of
the short maturity of those investments. The fair value of long-term debt
approximates the carrying amount.
41
<PAGE>
ACTIVE SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Use of Estimates--The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, and disclosures of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from these estimates.
Certain Significant Risks and Uncertainties--The Company operates in the
software industry, and accordingly, can be affected by a variety of factors.
For example, management of the Company believes that changes in any of the
following areas could have a significant negative effect on the Company in
terms of its future financial position, results of operations or cash flows;
fundamental changes in the technology underlying software products; market
acceptance of the Company's products under development; development of sales
channels; loss of significant customers; adverse changes in international
market conditions; litigation or other claims against the Company; the hiring,
training and retention of key employees; successful and timely completion of
product development efforts; and new product introductions by competitors.
Recently issued Accounting Standards--In June 1998, the Financial
Accounting Standards Board issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. This statement requires companies to
record derivatives on the balance sheet as assets or liabilities, measured at
fair value. Gains or losses resulting from changes in the values of those
derivatives would be accounted for depending on the use of the derivative and
whether it qualifies for hedge accounting. SFAS No. 133 will be effective for
the Company's fiscal year ending December 31, 2001. Although the Company has
not fully assessed the implications of SFAS No. 133, management does not
believe the adoption of this statement will have a significant impact on the
Company's consolidated financial position, results of operations or cash
flows.
2. Short-term Investments
Short term investments include the following available-for-sale securities
at December 31, 1999 (in thousands):
<TABLE>
<CAPTION>
Unrealized Unrealized
Amortized Market Holding Holding
Cost Value Gains Losses
--------- ------- ---------- ----------
<S> <C> <C> <C> <C>
Commercial Paper................... $10,045 $10,042 $ -- $ (3)
Corporate bonds.................... 6,093 6,075 -- (18)
U.S. Government and agencies
securities........................ 3,800 3,789 -- (11)
------- ------- ---- ----
$19,938 19,906 $ -- $(32)
======= ======= ==== ====
</TABLE>
42
<PAGE>
ACTIVE SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
3. Property and Equipment
Property and equipment consist of (in thousands):
<TABLE>
<CAPTION>
December 31,
---------------
1999 1998
------- ------
<S> <C> <C>
Equipment................................................. $ 3,107 $1,523
Software.................................................. 237 72
Leasehold improvements.................................... 199 102
------- ------
3,543 1,697
Accumulated depreciation and amortization................. (1,592) (901)
------- ------
$ 1,951 $ 796
======= ======
</TABLE>
4. Convertible Note Receivable
In December 1999, the Company was issued a $2.0 million convertible
subordinated promissory note receivable (the "note") by another company (the
"investee"). The note bears interest at a rate of 6% per annum. The note is
automatically convertible into shares of the investee's capital stock upon a
qualified equity financing by the investee. If the investee does not complete
a qualified equity financing by June 30, 2000, the unpaid principal and
accrued interest will be due upon demand.
5. Debt Obligations
In 1999, the Company entered into a $3.0 million secured revolving line of
credit agreement expiring in June 2000 and a $2.0 million equipment line of
credit expiring in June 2003. There were no borrowings under these agreements
as of December 31, 1999. Borrowings bear interest at the bank's prime rate
(8.5% at December 31, 1999) plus 1.0%. The Company is required to comply with
certain restrictive covenants under this agreement. The Company was in
compliance with all such convenants at December 31, 1999.
In 1996, the Company borrowed $401,000 at an effective rate of 17%, payable
in monthly installments through July 2000 and is collateralized by all of the
Company's equipment. As of December 31, 1999, a principal balance of $109,000
was outstanding.
6. Stockholders' Equity
Initial Public Offering
In August 1999, the Company completed its initial public offering ("IPO")
of 4,025,000 shares of its common stock at an initial public offering price of
$11 per share. The net proceeds to the Company from the offering, after
deducting underwriting discounts and commissions and offering expenses
incurred by the Company, were approximately $40 million. In conjunction with
the IPO, all outstanding shares of the Company's preferred stock automatically
converted into common stock on a one-to-one basis.
Stock Split
On August 2, 1999, the Company effected a three-for-two stock split of the
outstanding shares of common and convertible redeemable preferred stock. All
shares and per share amounts in these consolidated financial statements have
been adjusted to give effect to the stock split.
43
<PAGE>
ACTIVE SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Convertible Redeemable Preferred Stock
Upon completion of the Company's initial public offering in August 1999,
all shares of Series A, B, and C convertible preferred stock were converted to
common stock in accordance with their existing terms. All shares were
converted on a one-to-one basis
Preferred Stock
In August 1999, the Company's Board of Directors authorized the issuance of
up to 5,000,000 shares of $0.001 par value preferred stock. At December 31,
1999, no shares were issued and outstanding.
Stock Plans
As of December 31, 1999, a total of 9,846,000 shares of common stock were
reserved for issuance under the Company's equity incentive plans (the
"Plans"), comprising 3,000,000 shares authorized under the 1999 Stock Option
Plan and 6,846,000 shares authorized under the 1996 and 1996A Stock Option
Plan. In addition, the number of shares reserved under the 1999 plan will
automatically be increased on July 1 of each of the following years: 2000,
2001, 2002, 2003 and 2004, in an amount equal to the lesser of (a) 1,500,000
shares, or (b) four percent of the shares outstanding on the last day of the
preceding fiscal year.
Options under the Plan are generally granted at fair market value of the
common stock on the date of grant, vest over 50 months and expire ten years
from the date of grant.
In February 1998, the Company amended the stock option agreements under the
1996 and 1996A Plans to allow employees to exercise their stock options
immediately. All unvested shares are placed in escrow and continue to vest
according to the employee's normal stock option vesting schedule. The unvested
shares are subject to repurchase at the option of the Company at the original
purchase price upon termination of the employee. In 1999, 90,450 shares were
repurchased at the weighted average original cost of $0.09 per share and
returned to the Plans. At December 31, 1999, 2,593,459 shares are available
for future issuance and 723,843 shares are subject to repurchase.
In addition to shares issued under the Stock Plans, the Company had issued
2,304,000 shares pursuant to individual restricted stock purchase agreements.
Upon termination of employment, the Company had the right to repurchase any
unvested shares at the original purchase price. This right expires generally
over four years. At December 31, 1999, shares were subject to such repurchase
rights.
44
<PAGE>
ACTIVE SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Additional information with respect to outstanding options under the Plans
is as follows:
<TABLE>
<CAPTION>
Weighted
Number of Average
Options Exercise Price
---------- --------------
<S> <C> <C>
Outstanding, January 1, 1997 (none exercisable).. 1,588,500 $0.07
Granted (weighted average fair value of
$0.03)........................................ 1,681,125 0.17
Exercised...................................... (6,600) 0.07
Cancelled...................................... (99,300) 0.14
---------- -----
Outstanding, December 31, 1997 (1,127,580
exercisable at a weighted average exercise price
of $0.07)....................................... 3,163,725 0.12
Granted (weighted average fair value of
$0.27)........................................ 1,969,500 0.90
Exercised...................................... (2,397,375) 0.13
Cancelled...................................... (143,100) 0.18
---------- -----
Outstanding, December 31, 1998 (298,722
exercisable at a weighted average exercise price
of $0.11)....................................... 2,592,750 0.70
Granted (weighted average fair value of
$9.87)........................................ 1,991,875 13.54
Exercised...................................... (655,010) 0.99
Cancelled...................................... (234,860) 6.67
---------- -----
Outstanding, December 31, 1999................... 3,694,755 $7.27
========== =====
</TABLE>
Additional information regarding options outstanding as of December 31,
1999 is as follows:
<TABLE>
<CAPTION>
Options Outstanding Options Vested
------------------------------------ ----------------
Number of Weighted
Options Average Weighted Weighted
Outstanding at Remaining Average Average
Range of December 31, Contractual Exercise Number Exercise
Exercise Prices 1999 Life (Years) Price Vested Price
--------------- -------------- ----------- -------- ------- --------
<S> <C> <C> <C> <C> <C>
$ 0.07-$ 0.18......... 642,050 7.18 $ 0.13 384,296 $ 0.10
$ 0.27-$ 0.67......... 125,400 8.21 $ 0.34 47,700 $ 0.35
$ 0.77-$ 1.33......... 1,143,500 8.76 $ 1.12 308,375 $ 1.10
$ 2.67-$ 4.00......... 622,805 9.13 $ 2.97 3,900 $ 2.67
$10.67-$11.00......... 425,500 9.39 $10.76 10,000 $11.00
$12.00-$21.13......... 512,000 9.58 $12.27 -- --
$22.38-$36.19......... 81,500 9.76 $27.50 -- --
$66.00-$94.00......... 142,000 9.93 $73.99 -- --
--------- -------
$ 0.07-$94.00......... 3,694,755 8.78 $ 7.27 754,271 $ 0.68
========= =======
</TABLE>
1999 Director Option Plan
In June 1999, the Company approved the 1999 Director Option Plan (the
Director Plan) whereby the Company has reserved a total of 300,000 shares of
common stock for the grant of nonstatutory stock options to nonemployee
directors of the Company. Under the terms of the Director Plan, each newly
elected director will be granted an option to purchase 20,000 shares of common
stock. In addition, commencing with the 2000 annual meeting of the
stockholders and for every annual meeting of stockholders thereafter, each non
employee director of the Company will be granted an option to purchase 5,000
shares of common stock. Options granted under the Directors' Plan shall be
immediately vested and expire ten years from the date of grant. In 1999, no
options have been granted under the plan.
45
<PAGE>
ACTIVE SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
1999 Employee Stock Purchase Plan
In June 1999, the Company approved the 1999 Employee Stock Purchase Plan
(the "ESPP"). Under the ESPP, eligible employees may purchase common stock
through payroll deductions, which may not exceed 20% of any employee's
compensation subject to an annual limitation. A total of 750,000 shares of
common stock have been reserved for issuance under the ESPP. The number of
shares reserved for issuance under the ESPP will automatically increase on
July 1 of each of the following years: 2000, 2001, 2002, 2003 and 2004, by an
amount equal to the lesser of 350,000 shares or one percent of the total
shares outstanding on the last day of the immediately preceding fiscal year.
Each participant is granted an option to purchase the Company's common stock
on the first day of each 24 month offering period and such option is
automatically exercised on the last day of each six month purchase period
during the offering period. The purchase price for the Company's common stock
under the Purchase Plan is 85% of the lesser of the fair market value of the
Company's common stock on the first day of the applicable offering period and
the last day of the applicable purchase period. The first offering period
began on August 13, 1999. Offering periods thereafter will begin on May 1 and
November 1 of each year. In 1999, no shares of common stock have been issued
under the Purchase Plan.
Stock Compensation
During the years ended December 31, 1999 and 1998, in connection with the
grant of certain stock options, the Company recorded deferred stock
compensation of $1,761,000 and $3,275,000, respectively, representing the
difference between the exercise price of the options and the estimated fair
value of the Company's common stock on the date of grant. Such amount is being
amortized over the vesting period of the related options, generally fifty
months. For the years ended December 31, 1999 and 1998, amortization of
deferred stock compensation was $1,170,000 and $336,000, respectively. At
December 31, 1999, $3,530,000 of unamortized deferred stock compensation
remains.
Additional Stock Plan Information
As discussed in Note 1, the Company continues to account for its stock-
based awards using the intrinsic value method in accordance with APB No. 25,
Accounting for Stock Issued to Employees, and its related interpretations.
Accordingly, no compensation expenses has been recognized in the accompanying
consolidated financial statements for employee stock arrangements.
SFAS No. 123, Accounting for Stock-Based Compensation, requires the
disclosure of pro forma net loss and net loss per share had the Company
adopted the fair value method as of the beginning of fiscal 1995. Under SFAS
123, the fair value of stock-based awards to employees is calculated through
the use of option pricing models, even though such models were developed to
estimate the fair value of freely tradable, fully transferable options without
vesting restrictions, which significantly differ from the Company's stock
option awards. These models also require subjective assumptions, including
future stock price volatility and expected time to exercise, which greatly
affect the calculated values. The Company's fair value calculations on stock-
based awards under the Plan and the Director Plan were made using Black
Scholes option pricing model with the following weighted average assumptions:
expected life, 24 months following vesting in 1999, 1998 and 1997; stock
volatility of 116% in 1999, 0% in 1998 and 1997; risk free interest rate, 6%
in 1999, 1998 and 1997; and no dividends during the expected term. The
Company's calculations are based on a multiple option valuation approach and
forfeitures are recognized as they occur. If the computed fair values of the
1999, 1998 and 1997 awards had been amortized to expense over the vesting
period of the awards, pro forma net loss would have been $11,246,000 ($(0.95)
per share, basic and diluted) in 1999, $10,004,000 ($(3.23) per share, basic
and diluted) in 1998 and $4,876,000 ($(2.51) per share, basic and diluted) in
1997.
46
<PAGE>
ACTIVE SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Common Stock Warrants
In September 1996, in conjunction with a note payable, the Company issued a
warrant to purchase 42,000 shares of common stock at $0.67 per share. The
warrant was exercised in September 1999 under net issuance method which
resulted in a total of 40,833 shares of common stock issued to the warrant
holder.
In June and July 1998, the Company issued warrants to system integrators in
connection with services rendered to purchase up to 136,912 shares of common
stock at $0.77 per share. An expense of $300,600 was recorded in 1998 related
to the issuance of such warrants which was based on the warrants' estimated
fair market value at the date of issuance. All 136,912 warrants were exercised
in July 1999.
In October 1998, the Company issued a warrant to a strategic partner to
purchase 36,764 shares of common stock at $4.08 per share which expire in
October 2005. In August 1999, the warrant to purchase 36,764 shares of common
stock issued to the strategic partner became exercisable based on achievement
of certain software performance improvements. Accordingly, the Company
recorded a research and development expense of approximately $350,000 in 1999,
representing the fair value of the warrant at the time the contingency was
resolved.
At December 31, 1999, the Company has reserved shares of common stock for
issuance as follows:
<TABLE>
<S> <C>
Issuances under the Stock Plans................................ 7,338,214
Exercise of common stock warrants.............................. 36,764
---------
7,374,978
=========
</TABLE>
7. Net Loss per Share
The following is a reconciliation of the numerators and denominators used
in computing basic and diluted net loss per share (in thousands):
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Net loss (numerator), basic and diluted...... $(9,367) $(9,942) $(4,853)
Shares (denominator):
Weighted average common shares
outstanding............................... 13,517 5,118 4,140
Weighted average common shares outstanding
subject to repurchase..................... (1,666) (2,022) (2,195)
-------- -------- --------
Shares used in computation, basic and
diluted................................... 11,851 3,096 1,945
======== ======== ========
Net loss per share, basic and diluted ....... $ (0.79) $ (3.21) $ (2.50)
======== ======== ========
</TABLE>
47
<PAGE>
ACTIVE SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
For the above mentioned periods, the Company had securities outstanding
which could potentially dilute basic earnings per share in the future, but
were excluded from the computation of diluted net loss per share in the
periods presented, as their effect would have been antidilutive. Such
outstanding securities consist of the following:
<TABLE>
<CAPTION>
December 31,
----------------------------------
1999 1998 1997
---------- ----------- -----------
<S> <C> <C> <C>
Convertible redeemable preferred stock.. -- 13,405,332 9,937,500
Shares of common stock subject to
repurchase............................. 723,843 1,446,188 1,823,998
Outstanding options..................... 3,694,755 2,592,750 3,163,725
Warrants................................ 36,764 215,676 42,000
---------- ----------- -----------
Total................................... 4,455,362 17,659,946 14,967,223
========== =========== ===========
Weighted average exercise price of
options................................ $ 7.27 $ 0.70 $ 0.12
========== =========== ===========
Weighted average exercise price of
warrants............................... $ 4.08 $ 1.31 $ 0.67
========== =========== ===========
</TABLE>
8. Income Taxes
The Company's net deferred tax assets are comprised of the following at
December 31 (in thousands):
<TABLE>
<CAPTION>
1999 1998
-------- -------
<S> <C> <C>
Net deferred tax assets and liabilities:
Net operating loss carryovers........................... $ 7,570 $ 6,379
General business credits................................ 1,229 491
Other timing differences................................ 128 (251)
Deferred revenue........................................ 1,278 13
Accrued expenses........................................ 996 417
-------- -------
11,201 7,049
Valuation Allowance..................................... (11,201) (7,049)
-------- -------
Net Deferred Tax Assets................................... -- --
======== =======
</TABLE>
Deferred income taxes reflect the tax effects of temporary differences
between the carrying amount of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes, as well as net
operating loss and tax credit carryforwards. Due to the uncertainty
surrounding the realization of its deferred tax assets, as of December 31,
1999 and 1998, the Company has fully reserved its net deferred tax assets of
$11,201,000 and $7,049,000, respectively.
The Company's effective tax rate differs from the expected benefit at the
federal statutory tax rate at December 31 as follows:
<TABLE>
<CAPTION>
1999 1998 1997
----- ----- -----
<S> <C> <C> <C>
Federal statutory tax
rate..................... (35.0)% (35.0)% (35.0)%
State taxes, net of
federal benefit.......... (6.0) (6.0) (6.0)
Other..................... 1.0 1.0 1.3
Valuation allowance....... 40.0 40.0 39.7
----- ----- -----
Effective tax rate...... -- % -- % -- %
===== ===== =====
</TABLE>
48
<PAGE>
ACTIVE SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Substantially all of the Company's loss from operations for all prior
periods presented is generated from domestic operations.
At December 31, 1999, the Company had net operating loss (NOL)
carryforwards of approximately $19,285,000 and $13,035,000 for federal and
state income tax purposes, respectively. The federal NOL carryforwards expire
through 2019, while the state NOL carryforwards expire through 2004.
At December 31, 1999, the Company had NOL carryforwards of approximately
$126,000 for foreign income tax purposes. The foreign NOL carryforwards
expiration is determined by foreign jurisdictions.
Included in deferred assets are approximately $407,000 of cumulative tax
deductions related to equity transactions, the benefit of which will be
credited to stockholders' equity, if and when realized after the other tax
deductions in the carryforwards have been realized.
Undistributed earnings of the Company's foreign subsidiaries are considered
to be indefinitely reinvested and, accordingly, no provision for federal and
state income taxes has been provided thereon. Upon distribution of those
earnings in the form of dividends or otherwise, the Company would be subject
to both US income taxes (subject to an adjustment for foreign tax credits) and
withholding taxes payable to the various foreign countries. It is not
practicable to estimate income tax liability that might be incurred on the
remittance of such earnings.
At December 31, 1999, the Company also has research and development credit
carryforwards of approximately $789,000 and $440,000 available to offset
future federal and state income taxes, respectively. The federal credit
carryforward expires through 2019, and the state credit carryforward has no
expiration.
The extent to which the loss and credit carryforwards can be used to offset
future taxable income and tax liabilities, respectively, may be limited,
depending on the extent of ownership changes within any three-year period.
9. Commitments
The Company leases its facilities under noncancelable operating leases
expiring through November 2003. Rent expense was $840,000, $323,000 and
$191,000 in 1999, 1998 and 1997, respectively. Future minimum rent payments
are $725,000, $610,000, $586,000 and $550,000 in 2000, 2001, 2002 and 2003,
respectively.
10. Segment Information, Operating by Geographic Area and Significant
Customers
The Company operates in one reportable segment, the development and
marketing of software products for businesses that allow integration of
incompatible software applications across their extended enterprises of
customers, suppliers and partners. The Company principally operates in the
U.S. with small European offices to support sales and marketing. The following
is a summary of operations within geographic areas (in thousands):
<TABLE>
<CAPTION>
Years Ended December
31,
---------------------
1999 1998 1997
------- ------ ------
<S> <C> <C> <C>
Revenues(1):
United States........................................ $24,317 $7,296 $3,193
Europe............................................... 3,126 303 --
------- ------ ------
Total revenues..................................... $27,443 $7,599 $3,193
======= ====== ======
</TABLE>
- --------
(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.
49
<PAGE>
ACTIVE SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
During 1999, one customer accounted for 12% of the Company's total
revenues. During 1998, no customers accounted for more than 10% of the
Company's total revenues. During 1997, one customer accounted for 33% of the
Company's total revenues
At December 31, 1999, one customer accounted for 11% and two customers
accounted for 13%, of accounts receivable. At December 31, 1998, two customers
accounted for 22% and 21% of accounts receivable, respectively.
11. Employee Benefit Plan
In January 1997, the Company established a 401(k) tax-deferred savings
plan, whereby eligible employees may contribute a percentage of their eligible
compensation (presently from 1% to 15% up to the maximum allowed under IRS
rules). Company contributions are discretionary. No such Company contributions
have been made since inception of this plan.
12. Subsequent Events
In February 2000, the Company acquired Alier Inc. (Alier), a provider of
enterprise application integration software by issuing 390,875 shares of
common stock valued at approximately $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 common stock valued at
approximately $13.3 million. The merger will be accounted for as a purchase
transaction.
In February 2000, the Company agreed to acquire TransLink Software, Inc.
(TransLink), a provider of high performance mainframe integration solutions.
In connection with this transaction, the Company expects to make a cash
payment of approximately $4.5 million (less certain amounts related to
professional fees) and issue shares of the Company's common stock equal to
approximately $67.0 million (less certain amounts related to professional
fees) divided by $82.45104 (the average closing price of our common stock
during the 30-day period prior to signing the agreement). In addition, the
outstanding options to purchase TransLink capital stock will be converted into
options to purchase shares of the Company's common stock.
Additionally, in February 2000, the Company agreed to acquire Premier
Software Technologies, Inc. (Premier), a provider of integration products and
services. In connection with this transaction, the Company expects to issue
121,308 shares of common stock and cash totalling $500,000 in exchange for all
of the outstanding shares of capital stock of Premier.
In February 2000, the convertible subordinated promissory note of $2.0
million (see note 4) was converted into an aggregate of 856,385 shares of
Series C Preferred Stock of the investee.
50
<PAGE>
INDEPENDENT AUDITORS' REPORT ON SCHEDULE
To the Board of Directors and Stockholders of Active Software, Inc.:
We have audited the consolidated financial statements of Active Software,
Inc. and subsidiaries as of December 31, 1999 and 1998, and for each of the
three years in the period ended December 31, 1999, and have issued our report
thereon dated January 21, 2000 (February 27, 2000 as to Note 12) included
elsewhere in this Annual Report on Form 10-K. Our audits also included the
financial statement schedule of Active Software, Inc. and subsidiaries listed
in Item 14(a)(1) of this Annual Report on Form 10-K. This consolidated
financial statement schedule is the responsibility of the Company's
management. Our responsibility is to express an opinion based on our audits.
In our opinion, such financial statement schedule, when considered in relation
to the basic consolidated financial statements taken as a whole, presents
fairly, in all material respects the information set forth therein.
/s/ Deloitte & Touche LLP
San Jose, California
January 21, 2000
(February 27, 2000 as to Note 12)
51
<PAGE>
ACTIVE SOFTWARE, INC.
VALUATION AND QUALIFYING ACCOUNTS
For the Years Ended December 31, 1999, 1998, and 1997
(Amounts in thousands)
<TABLE>
<CAPTION>
Balance at Additions Write-offs
Beginning of and Charges and Balance at
Description Year to Expenses Deductions End of Year
- ----------- ------------ ----------- ---------- -----------
<S> <C> <C> <C> <C>
Year Ended December 31, 1999
Allowance for doubtful
accounts..................... $200 $293 $ -- $493
==== ==== ===== ====
Year Ended December 31, 1998
Allowance for doubtful
accounts..................... $ 82 $118 $ -- $200
==== ==== ===== ====
Year Ended December 31, 1997
Allowance for doubtful
accounts..................... $ 0 $ 82 $ -- $ 82
==== ==== ===== ====
</TABLE>
52
<PAGE>
EXHIBIT 21
List of Subsidiaries of Active Software, Inc.
- ---------------------------------------------
<TABLE>
<CAPTION>
Name of Subsidiary Jurisdiction Doing Business As
- ------------------ ------------ -----------------
<S> <C> <C>
Active Software International, Inc. California Active Software International
Alier, Inc. California Alier, Inc.
Active Software Europe B.V. Netherlands Active Software Europe B.V.
Active Software (U.K.) Ltd. United Kingdom Active Software (U.K.) Ltd.
ASWX PTE LTD Singapore ASWX PTE LTD
</TABLE>
Active Software International, Inc. and Alier, Inc. are wholly owned
subsidiaries of Active Software, Inc. Active Software Europe B.V., ASWX PTE LTD
and Active Software (UK) Ltd. are wholly owned subsidiaries of Active Software
International Inc.
<PAGE>
Exhibit 23
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement Nos.
333-30654 and 333-85491 of Active Software, Inc. and subsidiaries on Form S-8
of our reports dated January 21, 2000 (February 27, 2000 as to Note 12),
appearing in this Annual Report on Form 10-K of Active Software, Inc. and
subsidiaries for the year ended December 31, 1999.
/s/ DELOITTE & TOUCHE LLP
San Jose, California
March 27, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 12-MOS
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1998
<PERIOD-START> JAN-01-1999 JAN-01-1998
<PERIOD-END> DEC-31-1999 DEC-31-1998
<CASH> 17,299 7,461
<SECURITIES> 19,906 0
<RECEIVABLES> 9,979 3,562
<ALLOWANCES> 493 200
<INVENTORY> 0 0
<CURRENT-ASSETS> 47,644 11,318
<PP&E> 3,543 1,697
<DEPRECIATION> 1,592 901
<TOTAL-ASSETS> 51,822 12,294
<CURRENT-LIABILITIES> 10,595 3,825
<BONDS> 0 0
0 0
0 25,117
<COMMON> 71,900 3,934
<OTHER-SE> 0 0
<TOTAL-LIABILITY-AND-EQUITY> 51,822 12,294
<SALES> 27,443 7,599
<TOTAL-REVENUES> 27,443 7,599
<CGS> 7,785 2,767
<TOTAL-COSTS> 37,632 17,812
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> (822) (271)
<INCOME-PRETAX> (9,367) (9,942)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (9,367) (9,942)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (9,367) (9,942)
<EPS-BASIC> (0.79) (3.21)
<EPS-DILUTED> (0.79) (3.21)
</TABLE>
