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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
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FORM 10-K
[X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended December 31, 2000
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: 0-27207
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VITRIA TECHNOLOGY, INC.
(Exact name of registrant as specified in its charter)
Delaware 77-0386311
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
945 Stewart Drive
Sunnyvale, CA 94086
(Address, including zip code, of principal executive offices)
Registrant's telephone number, includes area code: (408) 212-2700
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Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.001 par value per share
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Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, (or such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [_]
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. [_]
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of February 28, 2001 was approximately: $343,981,000. Shares of
common stock held by each current executive officer and director and by each
person who is known by the registrant to own 5% or more of the outstanding
common stock have been excluded from this computation in that such persons may
be deemed to be affiliates of the Company. Share ownership information of
certain persons known by the Company to own greater than 5% of the outstanding
common stock for purposes of the preceding calculation is based solely on
information on Schedule 13G filed with the Commission and is as of December 31,
2000. This determination of affiliate status is not a conclusive determination
for other purposes.
Number of shares of common stock outstanding as of February 28, 2001:
128,413,139
DOCUMENTS INCORPORATED BY REFERENCE
The Registrant has incorporated by reference into Part III hereof portions
of its Proxy Statement for its 2001 Annual Meeting of Stockholders to be filed
by April 30, 2001.
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VITRIA TECHNOLOGY, INC.
TABLE OF CONTENTS
Page
----
PART I
ITEM 1. BUSINESS...................................................... 3
ITEM 2. PROPERTIES.................................................... 11
ITEM 3. LEGAL PROCEEDINGS............................................. 11
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS........... 11
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS....................................................... 12
ITEM 6. SELECTED FINANCIAL DATA....................................... 13
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS..................................... 14
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.... 21
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA................... 31
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE...................................... 31
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT............ 32
ITEM 11. EXECUTIVE COMPENSATION........................................ 32
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.................................................... 32
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................ 32
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K...................................................... 33
2
FORWARD-LOOKING STATEMENTS
This report on Form 10-K contains forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934 which are subject to the "safe harbor" created
by those sections. These forward-looking statements are generally identified by
words such as "expect," "anticipate," "intend," "plan," "believe," "hope,"
"assume," "estimate" and other similar words and expressions. These forward-
looking statements involve risks and uncertainties that could cause our actual
results to differ materially from those in the forward-looking statements,
including, without limitation, the business risks discussed on pages 21 through
30 of this report on Form 10-K. These business risks should be considered in
evaluating our prospectus and future financial performance.
PART I
ITEM 1. BUSINESS
Overview
We are a leading provider of ebusiness infrastructure software. Our product,
BusinessWare(TM), provides the infrastructure which enables incompatible
information technology, or IT, systems to exchange information over corporate
networks and the Internet. BusinessWare enables this exchange to take place
automatically, without human intervention. This eliminates manual entry of
information into multiple IT systems, and eliminates the need to manually
exchange information with customers and business partners using phone,
facsimile or mail. BusinessWare is designed to provide business managers with a
software infrastructure that gives them complete control and visibility of
their business operations, enabling them to reduce time to market, rapidly
respond to change, and manage the growing complexity of business interactions
with partners and customers.
We have initially targeted the telecommunications, manufacturing, financial
services and energy industries. To date, we have licensed BusinessWare to over
200 companies, including 3Com Corporation, Alestra, S. de R.L. de C.V, American
Airlines, Inc., American Century Services Corporation, Apple Computer, Inc.,
BellSouth Technology Services, Inc., BP International, Ltd., Convergys
Corporation, Dana Corporation, Deutsche Bank AG, New York Branch, Exodus
Communications, Inc., H.E. Butt Grocery Company, Jefferson Pilot Financial,
Kemper Technology Services, Inc., KLA-Tencor Corporation, Omnisky, The Reynolds
& Reynolds Company, Schneider National, Inc., Sprint/United Management Company,
Sunrise Communications AG, Telstra Corporation, Ltd., The Trane Company,
Transora, Trans Union LLC and WebLink Wireless, Inc. We intend to expand our
position in our current markets and leverage this position to penetrate other
markets. As part of our strategy to establish BusinessWare as the leading
software infrastucture product for ebusiness, we have developed strong working
relationships with leading system integrators, including Accenture (formerly
Andersen Consulting), Cap Gemini Ernst & Young, Deloitte Consulting, Electronic
Data Systems, KPMG Consulting, and PricewaterhouseCoopers. In addition, Vitria
develops products targeted at specific industries built on BusinessWare.
Vitria Solution
Vitria is a leading provider of ebusiness infrastructure software.
BusinessWare enables companies to automate business processes across the
extended enterprise and integrates the underlying IT systems that must work
together to support these processes.
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BusinessWare combines in a single solution the four elements that we believe
are essential for ebusiness infrastructure software:
(1) Business Process Management (BPM)--Empowers business users to define,
manage and automate business processes through a graphical modeling
environment;
(2) Business-to-Business Integration (B2Bi)--Exchanges business information
between a company, its partners and customers in a secure and reliable
fashion using Internet standards;
(3) Enterprise Application Integration (EAI)--Integrates the internal and
external IT systems that implement business process steps across the
extended enterprise; and
(4) Real-Time Analysis--Gathers key business and process information in
real time, analyzes the data in real time, and selectively uses the
results to automatically change business processes.
Once customers use BusinessWare to define their business process models and
integrate the underlying IT systems, BusinessWare automatically controls the
flow of information across the IT systems as specified by the process models.
BusinessWare continuously analyzes the customer's business processes and can
automatically change the processes in response to this analysis. This
capability allows companies to transform the information flowing through their
IT systems into "actionable intelligence" that enables business managers to
optimize their business operations.
BusinessWare allows customers to solve their ebusiness problems using
graphical models rather than developing custom programs. Rather than writing
software programs, business managers can create visual diagrams of business
processes, called "process models," using a point-and-click user interface.
BusinessWare then translates these process models into software programs that
automate the flow of information across a company's underlying IT systems. Our
graphical process models are "directly executable," which means that they can
be deployed immediately, without programming by IT personnel.
We believe that BusinessWare provides the following benefits to customers:
Easy for Business Managers to Use. The combination of our graphical process
modeling and automation functionality with our robust application integration
foundation, allows customers to focus on the business objectives of ebusiness
rather than the mechanics of solution implementation.
Reduces Time to Market. We enable customers to reduce their time to market
by allowing them to graphically define and automate new business processes to
support the delivery of new products and services.
Leverages IT Investment. We help companies to preserve and leverage the
substantial IT investment they have made by allowing them to assemble ebusiness
solutions using their existing IT systems.
Allows Rapid Response to Change. We enable customers to graphically model
their existing business processes, and then continuously refine and optimize
them as business conditions change over time. To change a business process,
managers simply change the associated graphical model.
Provides a Comprehensive Solution. BusinessWare combines the four elements
of an ebusiness infrastructure software product in a single comprehensive
solution. This eliminates the need for our customers to purchase and integrate
separate solution components from multiple vendors.
Scales to Support High Transaction Volumes and Distributed Deployment. Our
product features an architecture that uses the same distributed processing
principles as those used on the Web. Unlike alternative "hub-and-spoke"
architectures that are optimized for single site deployment, our "federated"
architecture allows customers to incrementally add servers to support
increasing loads, without adding administrative complexity.
Enables Mission-Critical Deployments. The importance of our customers'
ebusiness initiatives demands that our software meets high standards for
performance, security and reliability. BusinessWare has been
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designed for superior performance to accommodate the high transaction volumes
enabled by the Internet. In addition, our solution was designed to ensure
secure communication of business information across the extended enterprise
using rigorous authentication and data encryption technologies. BusinessWare
provides high availability through multiple server redundancy and automatic
failover to backup systems.
Strategy
Our objective is to establish BusinessWare as the leading infrastructure
software product for real-time ebusiness. Key elements of our strategy to
achieve this objective include:
Leverage and Expand Strategic Alliances. We intend to leverage our
relationships with leading system integrators, including Accenture (formerly
Andersen Consulting), Cap Gemini Ernst & Young, Deloitte Consulting, Electronic
Data Systems, KPMG Consulting, and PricewaterhouseCoopers, to extend our reach
and provide comprehensive solutions to our customers. System integrators help
our customers deploy and install our product. We have established a group to
focus exclusively on strengthening and expanding these relationships. We
believe these firms' relationships with the most senior levels of management
facilitate access to strategic projects which often generate large commitments
from our customers and can reduce the length of our sales cycles. In addition,
we believe the software deployment expertise and industry knowledge of system
integrators shortens the implementation time of our product and helps us to
secure add-on business.
Develop Market-Focused Solutions. We are developing packaged ebusiness
solutions built on BusinessWare which capture and automate business processes
used widely in specific industries such as telecommunications, manufacturing,
financial services and energy. We intend to leverage the industry expertise of
our system integrator partners and our customers to rapidly build these market-
focused solutions. We believe customers and partners will derive significant
time-to-market benefits and reduce their implementation and maintenance costs
by deploying these out-of-the-box business solutions. This strategy also
provides us with additional revenue opportunities while reducing our internal
development costs.
Expand Product and Technology Leadership. We have established an
infrastructure software product that combines business process management, B2B
integration, enterprise application integration, and real-time analysis in a
single unified environment. We intend to continue to introduce innovative
products which enable our customers to rapidly deploy complex business
solutions and extend their enterprise easily and cost-effectively. As an
example, on March 26, 2001, we announced that we have entered into a definitive
agreement to acquire XMLSolutions Corporation, a provider of EDI and XML
transformation technology. We also intend to extend our technological
leadership by continuing to invest significantly in research and development.
We have assembled a team of prominent developers and engineers with expertise
in Internet communication protocols, messaging technologies, and enterprise
software and have established a corporate culture which fosters continuous
product innovation. In addition, by promoting and embracing emerging Internet
standards, we intend to facilitate the broad acceptance of our product.
Target Fast-Growing Vertical Markets. To date, we have targeted the
telecommunications, manufacturing, financial services, and energy industries.
These markets are characterized by high rates of growth, dynamic business
processes and rapid adoption of ebusiness solutions. We intend to expand our
position in these markets and leverage this position to target other markets.
Extend Relationships with Customers. The strategic importance of
BusinessWare to our customers allows us to develop relationships with their
senior decision makers. This visibility to senior management and a focused
implementation approach facilitate the rapid adoption and deployment of
BusinessWare throughout the organization. We intend to leverage these
relationships as we introduce new products and services. Additionally, we are
introduced to opportunities with our customers' business partners because
BusinessWare is used by companies to automate and manage their interactions
across their extended enterprise.
Products
BusinessWare. BusinessWare is an ebusiness infrastructure software product
designed to provide customers with a comprehensive infrastructure for rapidly
capitalizing on the ebusiness opportunity.
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BusinessWare Modeler. The Modeler is BusinessWare's process modeling
component. Business managers use the Modeler to create graphical models of
their business processes using a point-and-click interface. These process
models provide an intuitive visual representation of interdependent processing
steps. Users can add business rules to each processing step to provide
additional modeling flexibility. Once specified and saved in the BusinessWare
Repository, process models can be directly executed by the BusinessWare
Automator. The Modeler supports advanced modeling constructs that allow users
to define and manage complex, real-world business processes. The Modeler
supports Unified Modeling Language, the industry standard for business process
modeling and automation.
BusinessWare Server. The BusinessWare Server provides the host environment
for five functional components: Automator, Analyzer, Communicator, Connector
and Transformer. The BusinessWare Server is designed to provide a set of common
services that are shared by each of these components:
. Security: provides rigorous support for authentication, data encryption
and access control.
. Transaction management: ensures the integrity of business processes and
related updates to underlying IT systems.
. Persistence: provides automatic recovery in the event of system or
network failures.
. Repository: stores and manages all BusinessWare metadata, such as process
models.
BusinessWare Automator. Automator is BusinessWare's process automation
component. It executes the business process models defined by users in the
Modeler and stored in the BusinessWare Repository. Automator automates business
processes by coordinating the flow of information among the underlying IT
systems.
BusinessWare Analyzer. Analyzer selectively gathers and analyzes business
and process information throughout the extended enterprise. Analyzer provides
business managers rapid access to key statistics, such as the number of on-time
shipments, which they use to manage their business. Analyzer also helps
companies to rapidly identify processing bottlenecks, thus providing them with
the information they need to support their continuous process improvement
efforts. Analyzer's results can be automatically fed back into Automator to
change business processes in real time.
BusinessWare Communicator. Communicator provides the communications backbone
that ties together all of the BusinessWare components and the IT systems that
they integrate. Communicator provides fast and secure information delivery and
allows the customer to choose between multiple quality of service options such
as guaranteed delivery or best effort. Communicator supports Internet
standards, including HTTP and XML. Communicator is designed to interoperate
with third-party messaging products.
BusinessWare Connector. Connectors provide and enable heterogeneous IT
systems to exchange information and translate business information to Internet
standards, such as XML. We provide off-the-shelf Connectors for a number of
popular packaged applications, messaging systems and databases. We also provide
a toolkit that enables customers to rapidly develop Connectors for custom or
legacy systems.
BusinessWare Transformer. Transformers map data structures from one IT
system to another. In addition to our own transformation components, customers
have the option to augment their BusinessWare solution with transformation
products from third parties.
BusinessWare Administrator. Administrator is BusinessWare's graphical
systems management and monitoring component. Administrator allows systems
administrators to perform local and remote administration from any BusinessWare
server.
Vitria Business Network. BusinessWare allows companies to electronically
bond with their trading partners, by intelligently and automatically managing
the exchange of business information between them. For
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example, the order management system at an Internet Service Provider (ISP) can
electronically exchange order information with the order management system at a
broadband service wholesaler. When the ISP takes an order for Internet service,
it automatically passes an order to the broadband provider, eliminating the
time and cost associated with manually exchanging the information. Because of
this ability, companies are able to quickly form ebusiness communities, or
"ecommunities" with their trading partners.
We believe that there is a natural desire on the part of ecommunity members
to interact with other ecommunities. Hence, we have seen the emergence of the
"Vitria Business Network", or VBN, a dynamic network of trading partners,
linking multiple ecommunities within and across industries. Companies
subscribing to the VBN have access, through electronic bonding, to other VBN
members, providing a rich set of products and services for trading partners,
and a ready-made market of trading partners for service providers.
Sales and Marketing
We license our product and sell services primarily through our direct sales
organization, complemented by the selling and support efforts of our system
integrators and other strategic partners. As of December 31, 2000, our sales
force consisted of sales professionals and system engineers located in 41
domestic locations, two locations in Canada, five locations in Europe, two
locations in Asia and one in Australia. System engineers who provide pre-sales
support to potential customers on product information and deployment
capabilities complement our direct sales professionals. We plan to continue to
expand the size of our direct sales organization domestically and
internationally.
Our sales process requires that we work closely with targeted customers to
identify short-term technical needs and long-term goals. Our sales team, which
includes both sales and technical professionals, then works with the customer
to develop a proposal to address these needs. In many cases, we collaborate
with our customers' senior management team, including the chief executive
officer, chief information officer and chief financial officer, to develop
mission-critical applications. The level of customer analysis and financial
commitment required for many of our product implementations has caused our
sales cycle to range from two to nine months.
We focus our marketing efforts on educating potential customers, generating
new sales opportunities, and creating awareness of our product and their
applications. We conduct a variety of marketing programs to educate our target
market, including seminars, trade shows, direct mail campaigns, press
relations, and industry analyst programs.
Strategic Relationships
To enhance the productivity of our sales and service organizations, we have
established relationships with system integrators, value-added resellers and
complementary technology vendors.
System Integrators. We have established strategic relationships with a
number of leading system integrators including Accenture (formally Andersen
Consulting), Cap Gemini Ernst & Young, Deloitte Consulting, Electronic Data
Systems, KPMG Consulting, and PricewaterhouseCoopers. Many of our system
integrators have deep relationships across a broad range of enterprise
customers and our relationships with these system integrators often enable us
to reach key decision makers within these enterprises more quickly, thus
reducing sales cycles. Working with system integrators enables us to leverage
our service organization and shorten solution implementation time. In addition,
by leveraging our partners' domain expertise, we can more effectively and
rapidly build custom templates which codify business process solutions for
vertical markets.
Value-Added Resellers. We also market BusinessWare through value-added
resellers, or "VARs." VARs enable us to seed the market with specific pre-
packaged solutions built on the BusinessWare platform. Our VARs include Daleen,
Nortel and Siemens in the United States, and Fujitsu, NTT and Suntory in Japan.
Many of these VARs specialize in providing solutions to particular industries
including telecommunications and financial services. We intend to leverage our
VARs' industry expertise to deliver solutions that accelerate our penetration
in key markets.
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Complementary Technology Vendors. We also work with leading application
software, database and hardware vendors to ensure compatibility of BusinessWare
with their software and hardware. We have relationships with leading companies
including Hewlett-Packard Company, IBM, Informix Corp., Microsoft Corporation,
Nortel, Oracle Corporation, PeopleSoft, Portal Software, Inc., Siebel Systems,
Inc. and Sun Microsystems Inc.
Service and Support
The primary function of our professional services organization is to
facilitate the implementation of our product by system integrators. We provide
services directly to our customers and to system integrators for BusinessWare
project planning, implementation and performance. Our professional services
organization works closely with system integrators to train their personnel in
the design and implementation of our product.
Customer support is available by telephone and over the Internet seven days
a week, 24 hours a day. Our education services group delivers education and
product training to our customers and strategic partners, concerning the design
of business solutions using BusinessWare, as well as the technical aspects of
deployment, use and maintenance.
Research and Development
As of December 31, 2000, our engineering group consisted of the following
groups:
Product Development. Our product development teams are organized around
components of BusinessWare. Each component is developed independently in
order to speed design and testing. Development of the customer interface is
centralized, with the goal of creating a consistent and unified product
look and feel.
Advanced Research. Our advanced research group works independently from
our product development teams to research and develop advanced
architectures and technologies. This group also closely monitors
developments in industry standards related to ebusiness, Internet
technologies, operating systems, networks and software applications.
Quality Assurance and Platform Support. This group designs and manages a
process designed to identify and prevent software defects throughout the
development cycle.
Documentation. This group is responsible for creating and maintaining
customer and system integrator documentation for our products.
Research and development expenses were $29.4 million in 2000, $10.7 million
in 1999 and $4.8 million in 1998.
Competition
The market for our product is competitive, evolving and subject to rapid
technological change. The intensity of competition is expected to increase in
the future. We believe that ebusiness infrastructure software must address four
requirements: (1) business process management (BPM), (2) B2B integration
(B2Bi), (3) enterprise application integration (EAI), and (4) real-time
analysis. We believe BusinessWare's ability to address all four requirements is
an important differentiating factor. Most competitive products focus on either
EAI or B2Bi. EAI software companies include CrossWorlds Software, Inc., IBM,
SeeBeyond, Sybase, Inc. and Tibco Software, Inc. B2Bi software companies
include webMethods and traditional electronic data interchange (EDI) companies
such as SBC Communications and Peregrine Systems. Customers could extend any of
these products to support business process management by writing custom
programs. However, we believe that none of our competitors' products offer
model-driven business process management or real-time analysis. With model-
driven business process management, business users can define and manage their
business processes using visual representations created using a graphical user
interface. In the future, these companies may expand
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the breadth of their product offerings, including model-driven business process
management and real-time analysis. In this event, we could face greater
competition and our business could be seriously harmed. In addition, "in house"
information technology departments of potential customers have developed or may
develop systems that substitute for some or all of the functionality of our
BusinessWare product. We expect that internally developed application
integration and process automation efforts will continue to be a principal
source of competition for the foreseeable future. We may in the future also
encounter competition from major enterprise software developers including
Oracle Corporation, PeopleSoft, Inc., SAP AG, and Microsoft Corporation.
We believe that the principal competitive factors in our market include:
. the breadth and depth of solutions;
. product quality and performance;
. ease and speed of implementation
. ability of products to operate with multiple software applications;
. ability to implement solutions;
. customer service;
. relationship with system integrators;
. establishment of a significant base of reference customers;
. strength of core technology; and
. product price.
Although we believe that our solutions compete favorably with respect to
these factors, our market is relatively new and is evolving rapidly. We may not
be able to maintain our competitive position against current and potential
competitors, especially those with significantly greater resources.
Intellectual Property and Other Property Rights
Our success is dependent upon our ability to develop and protect our
proprietary technology and intellectual proprietary rights. We rely primarily
on a combination of contractual provisions, confidentiality procedures, trade
secrets, and patent, copyright and trademark laws to accomplish these goals.
We license BusinessWare pursuant to non-exclusive license agreements which
impose restrictions on customers' ability to utilize the software. In addition,
we seek to avoid disclosure of our trade secrets, including but not limited to,
requiring employees, customers and others with access to our proprietary
information to execute confidentiality agreements with us and restricting
access to our source code. We also seek to protect our software, documentation
and other written materials under trade secret and copyright laws.
We have several U.S. patent applications pending. It is possible that the
patents that we have applied for, if issued, or our potential future patents
may be successfully challenged or that no patent will be issued from our patent
application. It is also possible that we may not develop proprietary products
or technologies that are patentable, that any patent issued to us may not
provide us with any competitive advantages, or that the patents of others will
seriously harm our ability to do business.
Despite our efforts to protect our proprietary rights, existing laws afford
only limited protection. Attempts may be made to copy or reverse engineer
aspects of our product or to obtain and use information that we regard as
proprietary. Accordingly, there can be no assurance that we will be able to
protect our proprietary rights against unauthorized third-party copying or use.
Use by others of our proprietary rights could materially harm our business.
Furthermore, policing the unauthorized use of our product is difficult and
expensive litigation may be necessary in the future to enforce our intellectual
property rights.
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It is also possible that third parties will claim that we have infringed on
their current or future products. We expect that ebusiness developers will
increasingly be subject to infringement claims as the number of products in
different industry segments overlap. Any claims, with or without merit, could
be time-consuming, result in costly litigation, prevent product shipment, cause
delays, or require us to enter into royalty or licensing agreements, any of
which could harm our business. Patent litigation in particular has complex
technical issues and inherent uncertainties. In the event an infringement claim
against us was successful and we could not obtain a license on acceptable terms
or license a substitute technology or redesign to avoid infringement, our
business would be harmed.
Employees
As of December 31, 2000, we had a total of 785 employees. None of our
employees is represented by a collective bargaining agreement, nor have we
experienced any work stoppage. We consider our relations with our employees to
be good.
Financial Information by Business Segment and Geographic Data
Vitria operates in one segment, business-to-business electronic commerce
solutions. We recognized approximately 13% of revenue from customers located
outside the United States in 2000. No one region or country accounted for 10%
or more of revenues in 2000. The information included in Note 1 (under the
heading "Segment information") and Note 8 of Notes to the Consolidated
Financial Statements, is incorporated herein by reference.
Executive Officers of the Registrant
Name Age Position
---- --- --------
JoMei Chang, Ph.D. ..... 48 President, Chief Executive Officer and Director
M. Dale Skeen, Ph.D. ... 46 Chief Technology Officer and Director
Mark R. Hill............ 40 Senior Vice President, Marketing and Business Development
Paul R. Auvil, III...... 37 Vice President, Finance and Chief Financial Officer
Karen O. Cottle......... 51 Vice President, General Counsel and Secretary
Edward Sweeney.......... 44 Vice President, Human Resources
Frank Yu................ 36 Vice President, Engineering
JoMei Chang, Ph.D., co-founded Vitria in 1994 and has been our President,
Chief Executive Officer and a Director since Vitria's inception. Prior to
founding Vitria, Dr. Chang was Vice President and General Manager, Trader
Workstation and General Manager, Emerging Technologies from 1986 to 1994 at
Teknekron Software Systems, now TIBCO, Inc., a software company. From 1984 to
1986 she served as a senior engineer in the Network File System group at Sun
Microsystems. Dr. Chang holds a B.S. in Computer Science from National
ChiaoTung University, Taiwan and a Ph.D. in Electrical Engineering on Database
Management Systems from Purdue University.
M. Dale Skeen, Ph.D., co-founded Vitria in 1994 and has been our Chief
Technology Officer and a Director since Vitria's inception. Prior to founding
Vitria, Dr. Skeen worked at TIBCO where he served as Chief Scientist from 1986
to 1994. Dr. Skeen was a research scientist at IBM's Almaden Research Center
from 1984 to 1986. Dr. Skeen was on the faculty at Cornell University from 1981
to 1984. Dr. Skeen holds a B.S. in Computer Science from North Carolina State
University and a Ph.D. in Computer Science on Distributed Database Systems from
the University of California, Berkeley.
Mark R. Hill, has been our Senior Vice President, Marketing and Business
Development since January 2001. From February 2000 to September 2000, Mr. Hill
was chief executive officer of Done.com, a wireless B2B application service
provider. From 1992 to January 2000, Mr. Hill held various positions at Xerox
Corporation including Vice President and General Manager of the networked color
copier/printer business. From 1989 to 1992, Mr. Hill was a consultant with Bain
& Company. Mr. Hill holds a B.S. in Biochemistry from Harvard College and an
M.B.A. from Harvard Business School.
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Paul R. Auvil, III, has been our Vice President, Finance and Chief Financial
Officer since 1998, and Secretary from 1999 until July 2000. From 1997 to 1998,
he served as Vice President and General Manager of the Internet Products
Division of VLSI Technology Inc., a semiconductor company, and as its General
Manager, PC Products Strategic Business Unit from 1996 to 1997. Mr. Auvil also
held various other positions at VLSI, including European Controller in 1992 and
Director of Financial Planning from 1993 to 1995. Mr. Auvil holds a Bachelor of
Engineering from Dartmouth College and Master of Management from the Kellogg
Graduate School of Management at Northwestern University.
Karen O. Cottle, has been our Vice President and General Counsel since
February 2000 and our Secretary since July 2000. From 1996 to 1999, Ms. Cottle
was General Counsel, Vice President, and Corporate Secretary of Raychem
Corporation, a materials science company. From 1986 to 1996, Ms. Cottle served
as Division Counsel for Raychem Corporation. From 1978 to 1986, Ms. Cottle was
an associate and partner with the San Francisco law firm of Farella, Braun, and
Martel. Ms. Cottle holds a B.A. in Government from Pomona College and a J.D.
from Boalt Hall School of Law at University of California, Berkeley.
Edward Sweeney, has been our Vice President of Human Resources since June
2000. From July 1998 to May 2000, Mr. Sweeney served as Vice President of Human
Resources for Candescent Technologies Corporations, a privately held flat panel
display development and manufacturing company. From 1983 to 1998, Mr. Sweeney
held a number of Human Resources roles with National Semicoductor Corporation
in both Europe and the United States. Mr. Sweeney earned his B.S. in
organizational behavior and his M.S. in organizational development at the
University of San Francisco.
Frank Yu, has been our Vice President, Engineering since August 1999. From
1996 to 1999, he served as Vice President, Research and Development of Walker
Interactive Systems, Inc., a financial software company, and from 1998 to 1999
he also served as the General Manager of the Analytical Solutions Business Unit
of Walker Interactive Systems, Inc. Mr. Yu also held positions as Chief
Architect and other senior technical positions for various product divisions of
Cadence Design Systems, Inc. from 1990 to 1996. Mr. Yu holds a B.S. in Computer
and Information Sciences from the University of California, Santa Cruz.
ITEM 2. PROPERTIES
Our principal sales, marketing, research and development and administrative
offices are currently located in approximately 192,000 square feet in
Sunnyvale, California. These leases will expire in August 2003 through October
2007. Of this total available space at December 31, 2000, approximately 63,000
square feet is subleased under agreements expiring in March 2002 and June 2002.
ITEM 3. LEGAL PROCEEDINGS
Vitria is currently a party to various legal actions arising out of the
normal course of business, none of which is expected to have a material adverse
effect on Vitria's financial position, cash flows or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
11
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock is traded on the Nasdaq National Market under the symbol
"VITR." Public trading of our common stock commenced on September 17, 1999. The
following table shows, for the periods indicated, the high and low per share
prices of our common stock, as reported by the Nasdaq National Market.
Quarter Ended High Low
- ------------- ------- ------
Fiscal 1999
September 30, 1999............................................... $ 12.66 $ 7.89
December 31, 1999................................................ $ 68.25 $ 9.85
Fiscal 2000
March 31, 2000................................................... $106.00 $40.00
June 30, 2000.................................................... $ 63.00 $18.00
September 30, 2000............................................... $ 74.25 $33.00
December 31, 2000................................................ $ 47.00 $ 4.19
As of December 31, 2000, there were approximately 473 stockholders of record
of our common stock. We have never paid or declared any cash dividends. We
currently expect to retain earnings for use in the operation and expansion of
our business and therefore do not anticipate paying any cash dividends in the
foreseeable future.
12
ITEM 6. SELECTED FINANCIAL DATA
The statement of operations data for the years ended December 31, 1998, 1999
and 2000, and the balance sheet data as of December 31, 1999 and 2000, have
been derived from our audited financial statements included elsewhere in this
Annual Report on Form 10-K. The statement of operations data for the years
ended December 31, 1996 and 1997, and the balance sheet data as of December 31,
1996, 1997 and 1998 have been derived from our audited financial statements not
included in this Annual Report on Form 10-K. Our historical results are not
necessarily indicative of results to be expected for any future period. The
data presented below have been derived from financial statements that have been
prepared in accordance with accounting principles generally accepted in the
United States and should be read in conjunction with our financial statements,
including the notes, and with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" included elsewhere in this
Annual Report on Form 10-K.
Year Ended December 31,
-------------------------------------------
2000 1999 1998 1997 1996
-------- -------- ------- ------ ------
(in thousands, except per share data)
Consolidated Statement of
Operations Data:
Revenues:
License......................... $102,287 $ 21,790 $ 5,198 $ 955 $ --
Service and other............... 32,442 9,751 2,429 2,680 2,026
-------- -------- ------- ------ ------
Total revenues................ 134,729 31,541 7,627 3,635 2,026
-------- -------- ------- ------ ------
Cost of revenues:
License......................... 935 407 -- 18 --
Service and other............... 22,051 7,315 2,905 1,593 1,167
-------- -------- ------- ------ ------
Total cost of revenues........ 22,986 7,722 2,905 1,611 1,167
-------- -------- ------- ------ ------
Gross profit...................... 111,743 23,819 4,722 2,024 859
-------- -------- ------- ------ ------
Operating expenses:
Sales and marketing............. 78,361 20,009 6,572 1,143 80
Research and development........ 29,441 10,736 4,794 841 397
General and administrative...... 14,230 3,991 1,807 695 147
Amortization of stock-based
compensation................... 3,420 4,525 1,424 -- --
-------- -------- ------- ------ ------
Total operating expenses...... 125,452 39,261 14,597 2,679 624
-------- -------- ------- ------ ------
Income (loss) from operations..... (13,709) (15,442) (9,875) (655) 235
Other income, net................. 13,015 1,336 306 75 8
-------- -------- ------- ------ ------
Net income (loss) before income
taxes............................ (694) (14,106) (9,569) (580) 243
Provision for income taxes........ 584 -- -- -- --
Deemed preferred stock dividend... -- (1,908) -- -- --
-------- -------- ------- ------ ------
Net income (loss) available to
common stockholders.............. $ (1,278) $(16,014) $(9,569) (580) $ 243
======== ======== ======= ====== ======
Net income (loss) per share
available to common stockholders:
Basic........................... $ (0.01) $ (0.21) $ (0.20) $(0.01) $ 0.01
Diluted......................... $ (0.01) $ (0.21) $ (0.20) (0.01) 0.00
Weighted average shares used in
computation of net income (loss)
per share available to common
stockholders:
Basic........................... 122,365 75,748 48,012 39,660 28,176
Diluted......................... 122,365 75,748 48,012 39,660 55,340
13
December 31,
------------------------------------
2000 1999 1998 1997 1996
-------- ------- ------- ------ ----
(in thousands)
Consolidated Balance Sheet Data:
Cash, cash equivalents and short-term
investments............................ $224,138 $65,449 $12,792 $9,138 $399
Working capital......................... 197,118 54,237 12,336 9,762 585
Total assets............................ 310,192 86,494 20,000 11,141 961
Deferred revenue........................ 46,611 15,627 2,874 223 --
Stockholders' equity.................... 237,145 59,450 13,391 10,099 636
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis should be read with "Selected
Financial Data" and our consolidated financial statements and notes included
elsewhere in this Annual Report on Form 10-K. The discussion in this Annual
Report on Form 10-K contains forward-looking statements that involve risks and
uncertainties, such as statements of our plans, objectives, expectations and
intentions. The cautionary statements made in this Annual Report on Form 10-K
should be read as applying to all related forward-looking statements wherever
they appear in this Annual Report on Form 10-K. Our actual results could differ
materially from those discussed here. Factors that could cause or contribute to
these differences include those discussed in "Business Risks" below as well as
those discussed elsewhere.
Overview
Vitria was incorporated in October 1994. We initially generated revenues
exclusively through consulting contracts with third parties and government
grants from the National Institute of Standards and Technology, or NIST. In
June 1997, we commercially released our first product. With the initial release
of this product, we accelerated the development of our sales and marketing
organizations. We have incurred significant losses since inception, and as of
December 31, 2000, we had an accumulated deficit of $25.6 million.
We derive revenues primarily from two sources: licenses and services and
other. Since the introduction of our product in 1997, licenses have become our
primary source of revenues. Our product is typically licensed directly to
customers for a perpetual term, with pricing based on the number of systems or
applications managed. We record license revenues when a license agreement has
been signed by both parties, the fee is fixed or determinable, collection of
the fee is probable, and delivery of our product has occurred. For electronic
transmissions, we consider our product to have been delivered when the access
code to download the software from the Internet has been provided to the
customer.
Service and other revenues include product maintenance, consulting, training
and government grants. Customers who license BusinessWare normally purchase
maintenance contracts. These contracts provide for unspecified software
upgrades and technical support over a specified term, which is typically twelve
months. Maintenance contracts are usually paid in advance, and revenues from
these contracts are recognized ratably over the term of the contract. A
majority of our customers use third-party system integrators to implement our
products. Customers typically purchase additional consulting services from us
to support their implementation activities. These consulting services are
generally sold on a time and materials basis and recognized as the services are
performed. We also offer training services which are sold on a per student
basis and recognized as the classes are attended. Our government grant revenues
have significantly decreased over the past three years. Our government grants
ended in April 2000 and we do not expect to recognize future government grant
revenues except to the extent to which they are currently recorded in deferred
revenue.
We market our product through our direct sales force and augment our
marketing efforts through relationships with system integrators, value-added
resellers and technology vendors. While our revenues to date have been derived
primarily from accounts in the United States, we opened an office in the United
Kingdom in June 1999 and in Japan, Australia, France, Germany, Italy, and The
Netherlands in 2000 and plan to expand further in Europe and Asia.
14
During 2000, we recognized approximately 13% of our revenues from customers
outside the United States. We believe international revenues will become a more
significant component of our total revenues as our operations grow. To date, we
have not experienced significant seasonality of revenues. We expect that future
results may be affected by the fiscal or quarterly budget cycle of our
customers.
Sales to our ten largest customers accounted for 86% of total revenues in
1998, 49% of total revenues in 1999, and 25% of total revenues in 2000. In
1998, revenues from KPMG Consulting, Level 3 and NIST accounted for 12%, 30%
and 10%, respectively, of total revenues. In 1999, revenues from Sprint
accounted for 11% of total revenues. In 2000, no single customer accounted for
more than 10% of total revenues. While our dependence on any single customer
has been declining over the past three years, we expect that revenues from a
limited number of customers will continue to account for a large percentage of
total revenues in future quarters. Therefore, the loss or delay of individual
orders could have a significant impact on revenues. Our ability to attract new
customers will depend on a variety of factors, including the reliability,
security, scalability and the overall cost-effectiveness of our products.
While revenues had grown sequentially each quarter at a rapid pace during
the first three quarters of fiscal year 2000, our revenues for the fourth
quarter ended December 31, 2000 reflected a slight decline sequentially from
our revenues in the third quarter. This sequential decline was due principally
to a slowdown in our order activity from customers in the telecommunications
industry. During fiscal year 2001, revenues are expected to grow at a much
slower pace than in prior periods due primarily to the ongoing slowdown in the
telecommunications industry combined with a general slowdown in IT spending in
other vertical markets.
We have a limited operating history that makes it difficult to predict
future operating results. We believe our success requires expanding our
customer base and continuing to enhance our BusinessWare products. We intend to
continue to invest significantly in sales, marketing and research and
development and expect to incur operating losses for at least the next eighteen
months. Our revenues and operating results depend upon the volume and timing of
customer orders and payments and the date of product delivery. Historically, a
substantial portion of revenues in a given quarter have been recorded in the
third month of that quarter, with a concentration of these revenues in the last
two weeks of the third month. We expect this trend to continue and, therefore,
any failure or delay in the closing of orders would have a material adverse
effect on our quarterly operating results. Since our operating expenses are
based on anticipated revenues, and because a high percentage of these expenses
are relatively fixed, a delay in the recognition of revenues from one or more
license transactions could cause significant variations in operating results
from quarter to quarter and cause unexpected results. Revenues from contracts
that do not meet our revenue recognition policy requirements for which we have
been paid or have a valid receivable are recorded as deferred revenues. While a
portion of our revenues each quarter is recognized from deferred revenue, our
quarterly performance will depend primarily upon entering into new contracts to
generate revenues for that quarter. New contracts may not result in revenues
during the quarter in which the contract was signed, and we may not be able to
predict accurately when revenues from these contracts will be recognized. Our
future operating results will depend on many factors, including the following:
. size and timing of customer orders and product and service delivery;
. level of demand for our professional services;
. changes in the mix of our products and services;
. actions taken by our competitors, including new product introductions and
pricing changes;
. costs of maintaining and expanding our operations;
. timing of our development and release of new and enhanced products;
. costs and timing of hiring qualified personnel;
. success in maintaining and enhancing existing relationships and
developing new relationships with system integrators;
15
. technological changes in our markets, including changes in standards for
computer and networking software and hardware;
. deferrals of customer orders in anticipation of product enhancements or
new products;
. delays in our ability to recognize revenues as a result of the decision
by our customers to postpone software delivery;
. customer budget cycles and changes in these budget cycles;
. availability of customer funds for software purchases given external
economic factors; and
. costs related to acquisition of technologies or businesses.
As a result of these factors, we believe that period-to-period comparisons
of our results of operations are not necessarily meaningful and should not be
relied upon as indications of future performance. It is likely that in some
future quarter our operating results will be below the expectations of public
market analysts and investors. In this event, the price of our common stock
would likely decline.
16
Quarterly Results of Operations
The following tables set forth statement of operations data for each of the
eight quarters ended December 31, 2000, as well as the percentage of our total
revenues represented by each item. This information has been derived from our
unaudited financial statements. The unaudited financial statements have been
prepared on the same basis as the audited financial statements contained in
this annual report and include all adjustments, consisting only of normal
recurring adjustments, that we consider necessary for a fair presentation of
this information. You should read this information in conjunction with our
annual audited financial statements and related notes appearing elsewhere in
this annual report. Our quarterly operating results are expected to vary
significantly from quarter to quarter and you should not draw any conclusions
about our future results from the results of operations for any quarter.
Mar. 31, June 30, Sept. 30, Dec. 31, Mar. 31, June 30, Sept. 30, Dec. 31,
1999 1999 1999 1999 2000 2000 2000 2000
-------- -------- --------- -------- -------- -------- --------- --------
(in thousands, except per share data)
Statement of Operations
Data:
Revenues:
License................ $ 3,487 $ 3,691 $ 5,209 $ 9,403 $16,318 $25,273 $32,676 $28,020
Service and other...... 1,722 2,608 2,626 2,795 4,217 6,480 8,935 12,810
------- ------- ------- ------- ------- ------- ------- -------
Total revenues....... 5,209 6,299 7,835 12,198 20,535 31,753 41,611 40,830
------- ------- ------- ------- ------- ------- ------- -------
Cost of revenues:
License................ 62 122 101 122 383 305 114 133
Service and other...... 1,544 1,810 1,861 2,100 3,693 4,570 6,977 6,811
------- ------- ------- ------- ------- ------- ------- -------
Total cost of
revenues............ 1,606 1,932 1,962 2,222 4,076 4,875 7,091 6,944
------- ------- ------- ------- ------- ------- ------- -------
Gross profit......... 3,603 4,367 5,873 9,976 16,459 26,878 34,520 33,886
------- ------- ------- ------- ------- ------- ------- -------
Operating expenses:
Sales and marketing.... 2,889 3,890 5,089 8,141 11,662 19,859 23,521 23,319
Research and
development........... 1,961 1,922 2,981 3,872 5,282 6,215 8,647 9,297
General and
administrative........ 726 875 981 1,409 2,189 3,227 4,609 4,205
Amortization of stock-
based compensation.... 867 1,085 1,411 1,162 1,064 976 733 647
------- ------- ------- ------- ------- ------- ------- -------
Total operating
expenses............ 6,443 7,772 10,462 14,584 20,197 30,277 37,510 37,468
------- ------- ------- ------- ------- ------- ------- -------
Loss from operations... (2,840) (3,405) (4,589) (4,608) (3,738) (3,399) (2,990) (3,582)
Other income, net...... 129 105 331 771 1,913 3,494 3,769 3,839
------- ------- ------- ------- ------- ------- ------- -------
Net income (loss) before
income taxes........... (2,711) (3,300) (4,258) (3,837) (1,825) 95 779 257
Provision for income
taxes.................. -- -- -- -- -- 67 86 431
------- ------- ------- ------- ------- ------- ------- -------
Net income (loss)....... (2,711) (3,300) (4,258) (3,837) (1,825) 28 693 (174)
Deemed preferred stock
dividend............... -- (1,908) -- -- -- -- -- --
------- ------- ------- ------- ------- ------- ------- -------
Net income (loss)
available to common
stockholders........... $(2,711) $(5,208) $(4,258) $(3,837) $(1,825) $ 28 $ 693 $ (174)
======= ======= ======= ======= ======= ======= ======= =======
Basic net income (loss)
per share.............. $ (0.06) $ (0.10) $ (0.07) $ (0.02) $ (0.02) $ 0.00 $ 0.01 $ 0.00
======= ======= ======= ======= ======= ======= ======= =======
Diluted net income
(loss) per share....... $ (0.06) $ (0.10) $ (0.07) $ (0.02) $ (0.02) $ 0.00 $ 0.00 $ 0.00
======= ======= ======= ======= ======= ======= ======= =======
As a Percentage of Total
Revenues:
Revenues:
License................ 67% 59% 67% 77% 80% 80% 79% 69%
Service and other...... 33 41 33 23 20 20 21 31
------- ------- ------- ------- ------- ------- ------- -------
Total revenues....... 100 100 100 100 100 100 100 100
------- ------- ------- ------- ------- ------- ------- -------
Cost of revenues:
License................ 1 2 1 1 2 1 0 0
Service and other...... 30 29 24 17 18 14 17 17
------- ------- ------- ------- ------- ------- ------- -------
Total cost of
revenues............ 31 31 25 18 20 15 17 17
------- ------- ------- ------- ------- ------- ------- -------
Gross profit......... 69 69 75 82 80 85 83 83
------- ------- ------- ------- ------- ------- ------- -------
Operating expenses:
Sales and marketing.... 55 62 65 67 57 63 56 57
Research and
development........... 38 30 38 32 26 20 21 23
General and
administrative........ 14 14 12 11 10 10 11 10
Amortization of stock-
based compensation.... 17 17 18 9 5 3 2 2
------- ------- ------- ------- ------- ------- ------- -------
Total operating
expenses............ 124 123 133 119 98 96 90 92
------- ------- ------- ------- ------- ------- ------- -------
Loss from operations... (55) (54) (58) (37) (18) (11) (7) (9)
Other income, net...... 3 2 4 6 9 11 9 9
------- ------- ------- ------- ------- ------- ------- -------
Net income (loss) before
income taxes........... (52) (52) (54) (31) (9) 0 2 0
Provision for income
taxes.................. -- -- -- -- -- 0 0 1
------- ------- ------- ------- ------- ------- ------- -------
Net income (loss)....... (52) (52) (54) (31) (9) 0 2 (1)
Deemed preferred stock
dividend............... -- (30) -- -- -- -- -- --
------- ------- ------- ------- ------- ------- ------- -------
Net income (loss)
available to common
stockholders........... (52)% (82)% (54)% (31)% (9)% 0% 2% (1)%
======= ======= ======= ======= ======= ======= ======= =======
17
Revenues
License. License revenues increased from $5.2 million in 1998 to $21.8
million in 1999. License revenues increased 369% over 1999 to $102.3 million in
2000. These increases were the result of the growth in the number of licenses
to new customers and to a higher average transaction size. Our average
transaction size has increased due to larger deployments by our customers.
During fiscal year 2001, revenues are expected to grow at a much slower pace
than in prior periods primarily due to the ongoing slowdown in the
telecommunications industry combined with a general slowdown in IT spending in
other vertical markets.
Service and other. Service and other revenues increased from $2.4 million in
1998 to $9.8 million in 1999 and to $32.4 million in 2000. The substantial
increase in service revenues began in the fourth quarter of 1998 due to the
growth of maintenance, support and consulting revenues associated with license
agreements signed in earlier periods. These service revenues continued to
increase each quarter of 1999 and 2000 as we supported a number of new
deployments of our product. Service and other revenues include government grant
contract revenues, which ended in April 2000. We do not expect to recognize
future government grant revenues except for $849,000 which has been recorded in
deferred revenue. Revenue recognition for this deferred government grant
revenue is dependent upon the results of a government audit.
Cost of Revenues
License. Cost of license revenues increased from $407,000 in 1999 to
$935,000 in 2000. Cost of license revenues consists of royalty payments to
third parties for technology incorporated in our product. We began incurring
royalty payment obligations in the first quarter of 1999 due to the licensing
to our customers of a product that incorporated third-party technology. The
increase of $528,000 from 1999 to 2000 is due to the rapid growth of our
license product sales, some of which incorporate third-party technology.
Measured as a percentage of license sales, the cost of license sales decreased
from 2% in 1999 to 1% in 2000 as more revenue came from products that did not
contain third-party technology. Cost of license revenues varies as it is
dependent upon the third-party technology incorporated into our products and
the buying patterns of our customers. We expect the cost of license revenue to
continue to increase. However, as a percentage of license revenue, we do not
expect any significant variation in the cost of license revenues from the past
two years.
Service and other. Cost of service and other revenues consists of salaries,
facility costs, travel expenses and payments to third-party consultants
incurred in providing customer support, training and implementation services.
Cost of service and other revenues also includes costs associated with
government grants which are exactly equal to the grant revenues recognized.
Cost of service and other revenues was $2.9 million in 1998, $7.3 million in
1999 and $22.1 million in 2000. As a percentage of our service and other
revenues, these costs represented 120% in 1998, 75% in I999 and 68% in 2000.
The increase of $4.4 million from 1998 to 1999 resulted from hiring additional
support, training and implementation personnel, increased utilization of third-
party consultants, and higher travel expenses associated with an increased
number of customer implementations. From 1999 to 2000, cost of service and
other revenues increased $14.7 million due primarily to the continued hiring of
services personnel as well as higher travel costs related to increasing number
of implementations. We expect that cost of service and other revenues will
continue to increase in dollar amount as we continue to expand our customer
support organization to meet anticipated customer demand.
Operating Expenses
Sales and Marketing. Sales and marketing expenses consist of salaries,
commissions, field office expenses, travel, entertainment and promotional
expenses. Sales and marketing expenses increased from $6.6 million in 1998 to
$20.0 million in 1999, and to $78.4 million in 2000. The $13.4 million increase
in sales and marketing expenses from 1998 to 1999 resulted from hiring
additional sales and marketing personnel and from increased commission expense
driven by the growth in revenues. Sales and marketing expenses increased $58.4
million from 1999 to 2000 as we continued to rapidly add sales and marketing
personnel as well as launch our first advertising campaign. We expect that
sales and marketing expenses will continue to increase
18
as we continue to expand our sales and marketing efforts, establish additional
U.S. and international sales offices and increase promotional activities.
Research and Development. Research and development expenses include costs
associated with the development of new products, enhancements to existing
products, and quality assurance activities. These costs consist primarily of
employee salaries, benefits, and the cost of consulting resources that
supplement the internal development team. Costs of developing software for
external use that may have been eligible for capitalization have not been
material and we have expensed all of these costs as incurred. Research and
development expenses increased from $4.8 million in 1998 to $10.7 million in
1999, and to $29.4 million in 2000. The increase of $5.9 million for 1999
compared to 1998 was primarily attributable to increases in personnel expenses
and contractor fees. The $18.7 million increase from 1999 to 2000 was primarily
the result of higher salary expenses related to additional research and
development personnel, higher facilities costs associated with the increase in
personnel, and increased usage of third-party consultants to assist with
research and development programs. We anticipate that we will continue to
devote substantial resources to research and development and that these
expenses will continue to increase in dollar amounts.
General and Administrative. General and administrative expenses consist of
salaries for administrative, executive and finance personnel, information
systems costs, outside professional service fees and allowances for doubtful
accounts. These expenses increased from $1.8 million in 1998 to $4.0 million in
1999 and to $14.2 million in 2000. The increase of $2.2 million from 1998 to
1999 was attributable to increases in personnel expenses as we continued to add
personnel to support internal operations. The $10.2 million increase from 1999
to 2000 was attributable to increases in personnel expenses, recruiting fees
associated with our headcount growth, outside professional service fees and the
allowance for doubtful accounts in response to the broadening of our customer
base and increasing accounts receivable balances. We believe that our general
and administrative expenses will continue to increase in dollar amounts as a
result of our growing operations.
Amortization of Stock-based Compensation. Amortization of stock-based
compensation includes the amortization of unearned employee stock-based
compensation and expenses for stock granted to consultants in exchange for
services. Employee stock-based compensation expense is amortized over a five-
year vesting period using the multiple option approach. We amortized employee
stock-based compensation expense of $1.4 million in 1998, $4.5 million in 1999
and $3.4 million in 2000. We expect to record employee stock-based compensation
expenses of approximately $1.9 million, $1.1 million, $500,000 and $100,000 for
the years ending December 31, 2001, 2002, 2003 and 2004, respectively. Unearned
compensation expense will be reduced in future periods to the extent that
options are terminated prior to vesting. We recorded expenses of $147,000,
$46,000 and $320,000 for the years ended December 31, 1998, 1999 and 2000,
respectively, in connection with stock issued for services.
Interest and Other Income. Interest and other income increased from $306,000
in 1998, to $1.3 million in 1999, and to $13.0 million in 2000. The increases
are due to increased interest income on the proceeds of our initial public
offering in September of 1999 and our follow-on public offering in February of
2000.
Provision for Income Taxes
We recorded an income tax provision of $584,000 for the year ended December
31, 2000. The provision relates to income taxes currently payable on income
generated in non-U.S. tax jurisdictions, state income taxes, and foreign
withholding taxes incurred on software license revenues. As of December 31,
2000, the Company had approximately $13.1 million and $7.6 million of federal
and state net operating loss carryforwards available to offset further taxable
income. Such net operating loss carryforwards expire at various dates through
2020 to the extent that they are not utilized. Because the realization of the
loss carryforward benefits cannot be reasonably assured, we have set up a full
valuation allowance against these deferred tax assets. Management evaluates the
realizability of the deferred tax assets on a quarterly basis.
We did not record an income tax provision in 1998 or 1999 as we had
cumulative net operating losses in all tax jurisdictions.
19
Liquidity and Capital Resources
We raised approximately $50.0 million in September 1999 from an initial
public offering of 13,800,000 shares of our common stock, net of underwriting
discounts, commissions and issuance costs. Prior to the offering we had
financed our operations through private sales of common and preferred stock,
with cumulative net proceeds of $27.7 million. In February 2000, we raised
approximately $171.2 million from a follow-on public offering of 3,000,000
shares of our common stock, net of underwriting discounts, commissions and
issuance costs.
As of December 31, 2000, we had $154.8 million in cash and cash equivalents,
$69.3 in short-term investments and $197.1 million in working capital with no
outstanding long-term debt, compared to $52.2 million in cash and cash
equivalents, $13.2 million in short-term investments and $54.2 million in
working capital with no outstanding long-term debt at December 31, 1999.
Net cash used in operating activities was $6.8 million in 1998. Net cash
generated from operating activities was $1.6 million in 1999 and $20.9 million
in 2000. Net cash used to fund operating activities in 1998 reflects net
losses, offset in part by increases in deferred revenues. Net cash provided by
operating activities in 1999 was primarily attributed to an increase in
deferred revenue and amortization of deferred stock-based compensation, which
was offset almost entirely by an increase in net loss. Net cash provided by
operating activities in 2000 was primarily attributed to a decrease in net loss
and an increase in deferred revenue and accrued liabilities, partially offset
by an increase in accounts receivable.
Net cash used in investing activities was $947,000, $17.8 million and $93.8
million in 1998, 1999 and 2000, respectively. In 1998, investing activities
consisted primarily of purchases of computer hardware and software, office
furniture and equipment and leasehold improvements. In 1999, net cash used in
investing activities included purchases of marketable debt securities of $13.3
million and purchases of fixed assets of $4.6 million. In 2000, net cash used
in investing activities consisted of equity investments of $5.1 million made in
several private companies, purchases of marketable debt securities of $220.4
million, proceeds from maturities of marketable debt securities totaling $145.6
million and $13.9 million for the purchase of fixed assets.
Net cash generated from financing activities was $11.4 million in 1998,
$55.6 million in 1999 and $175.6 million in 2000. Net cash generated from
financing activities consists primarily of net proceeds from the issuance of
convertible preferred and common stock.
At December 31, 2000, we had operating lease commitments of $42.9 million.
We expect to experience significant growth in our operating expenses into
the forseeable future in order to execute our business plan. As a result, we
anticipate that operating expenses will constitute a material use of our cash
resources. In addition, we may utilize cash resources to fund acquisitions or
investments in other businesses, technologies or product lines. We believe that
our available cash and cash equivalents will be sufficient to meet our working
capital and operating expense requirements for at least the next twelve months.
At some point in the future we may require additional funds to support our
working capital and operating expense requirements or for other purposes and
may seek to raise these additional funds through public or private debt or
equity financings. If the Company ever needed to seek additional financing,
there is no assurance that this additional financing will be available, or if
available, will be on reasonable terms and not dilutive to our stockholders.
Recently Issued Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Financial
Instruments and Hedging Activities," or "SFAS 133," which provides a
comprehensive and consistent standard for the recognition and measurement of
derivatives and hedging activities. SFAS 133, as amended, is required to be
adopted by Vitria effective January 1, 2001 and is not anticipated to have a
material impact on our results of operations, financial position
20
or cash flows when adopted. We currently hold no derivative financial
instruments and do not currently engage in hedging activities.
In December 1999, the Security and Exchange Commission issued Staffing
Accounting Bulletin No. 101, Revenue Recognition in Financial Statements, or
SAB 101, and amended it in March and June 2000. SAB 101 provides guidance on
the recognition, presentation and disclosure of revenue in financial statements
for all public registrants. We adopted SAB 101 in the fourth quarter of 2000
and the adoption did not have a material impact on our financial statement
position or results of operations.
In March 2000, the Financial Accounting Standards Board issued
Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation--an Interpretation of APB No.25," or FIN 44. FIN 44 clarifies the
application of APB No. 25 and, among other issues, clarifies the following: the
definition of an employee for purposes of applying APB No. 25; the criteria for
determining whether a plan qualifies as a non-compensatory plan; the accounting
consequence of various modifications to the terms of the previously fixed stock
options or awards; and the accounting for an exchange of stock compensation
awards in a business combination. FIN 44 is effective July 1, 2000, but certain
conclusions in FIN 44 cover specific events that occurred after either December
15, 1998 or January 12, 2000. The application of FIN 44 has not had a material
impact on our financial position or our results of operations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
In the normal course of business, the financial position of Vitria is
routinely subjected to a variety of risks, including market risk associated
with interest rate movements and collectibility of accounts receivable. We
regularly assess these risks and have established policies and business
practices to protect against the adverse effects of these and other potential
exposures. As a result, we do not anticipate material losses in these areas. As
we expand our operations internationally, we will also become subject to risks
associated with currency rate movements on non-U.S. dollar denominated assets
and liabilities.
We are exposed to interest rate risk on our investments of cash, cash
equivalents and marketable debt securities. The primary objective of our
investment activities is to preserve principal while at the same time
maximizing yields without significantly increasing risk. To achieve this
objective, we invest in highly liquid and high quality debt securities. To
minimize the exposure due to adverse shifts in interest rates, we invest in
short-term securities with maturities of less than one year. If a one
percentage point change in interest rates were to have occurred on December 31,
2000 or December 31, 1999, such a change would not have had a material effect
on the fair value of our investment portfolio as of that date. Due to the
nature of our short-term investments, we have concluded that we do not have a
material financial market risk exposure.
Business Risks
In addition to the risks discussed in "Business" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations," our
business is subject to the business risks set forth below.
Risks Related to Vitria
Since our short operating history makes it difficult to evaluate our prospects,
our future financial performance may disappoint securities analysts or
investors and result in a decline in our stock price.
We were incorporated in October 1994. Until November 1997, we were engaged
primarily in research and development of our initial product. We licensed our
first product in November 1997. Because of our limited operating history, we
have limited insight into trends that may emerge in our market and affect our
business. The revenue and income potential of our market are unproven. As a
result of our limited operating history, we have limited financial data that
you can use to evaluate our business. You must consider our prospects in light
of the risks, expenses and challenges we might encounter because we are in the
early stages of development in a new and rapidly evolving market.
21
Although we have in the past reported net income available to stockholders, we
cannot guarantee we will do so in the future.
We have incurred substantial losses since inception as we funded the
development of our products and the growth of our organization. We have an
accumulated deficit of $25.6 million as of December 31, 2000. We intend to
continue investing heavily in sales, marketing and research and development. As
a result, we are likely to report future operating losses and cannot guarantee
we will report net income in the future.
Our operating results fluctuate significantly and an unanticipated decline in
revenue may disappoint securities analysts or investors and result in a decline
in our stock price.
Although we have had significant revenue growth in recent quarters, our
growth rates may not be sustainable and prospective investors should not use
these past results to predict future operating margins or results. Our
quarterly operating results have fluctuated significantly in the past and may
vary significantly in the future. If our operating results are below the
expectations of securities analysts or investors, our stock price is likely to
decline. Period-to-period comparisons of our historical results of operations
are not necessarily a good predictor of our future performance.
While revenues had grown sequentially each quarter at a rapid pace during
the first three quarters of fiscal year 2000, our revenues for the fourth
quarter ended December 31, 2000 reflected a slight decline sequentially from
our revenues in the third quarter. This sequential decline was due principally
to a slowdown in our order activity from customers in the telecommunications
industry. During fiscal year 2001, revenues are expected to grow at a much
slower pace than in prior periods due primarily to the ongoing slowdown in the
telecommunications industry combined with a general slowdown in IT spending in
other vertical markets.
Our revenues and operating results depend upon the volume and timing of
customer orders and payments and the date of product delivery. Historically, a
substantial portion of revenues in a given quarter have been recorded in the
third month of that quarter, with a concentration of these revenues in the last
two weeks of the third month. We expect this trend to continue and, therefore,
any failure or delay in the closing of orders would have a material adverse
effect on our quarterly operating results. Since our operating expenses are
based on anticipated revenues and because a high percentage of these expenses
are relatively fixed, a delay in the recognition of revenue from one or more
license transactions could cause significant variations in operating results
from quarter to quarter and cause unexpected results.
Our quarterly results will depend primarily upon entering into new or
follow-on contracts to generate revenues for that quarter. New contracts may
not result in revenue in the quarter in which the contract was signed, and we
may not be able to predict accurately when revenues from these contracts will
be recognized.
Our product may not achieve market acceptance, which could cause our revenues
to decline.
Deployment of our product requires interoperability with a variety of
software applications and systems and, in some cases, the ability to process a
high number of transactions per second. If our product fails to satisfy these
demanding technological objectives, our customers will be dissatisfied and we
may be unable to generate future sales. Failure to establish a significant base
of customer references will significantly reduce our ability to license our
product to additional customers.
Our revenues will likely decline if we do not develop and maintain successful
relationships with system integrators.
System integrators install and deploy our products and those of our
competitors, and perform custom integration of systems and applications. Some
system integrators engage in joint marketing and sales efforts with us. If
these relationships fail, we will have to devote substantially more resources
to the sales and marketing, and implementation and support of our product than
we would otherwise have to, and our efforts may not be as effective as those of
the system integrators. In many cases, these parties have extensive
22
relationships with our existing and potential customers and influence the
decisions of these customers. We rely upon these firms for recommendations of
our product during the evaluation stage of the purchasing process, as well as
for implementation and customer support services. A number of our competitors
have strong relationships with these system integrators and, as a result, these
system integrators may recommend competitors' products and services. In
addition, a number of our competitors have relationships with a greater number
of these system integrators and, therefore, have access to a broader base of
enterprise customers. Our failure to establish or maintain these relationships
would significantly harm our ability to license and successfully implement our
software product. In addition, we rely on the industry expertise and reach of
these firms. Therefore, this failure would also harm our ability to develop
industry-specific products. We are currently investing, and plan to continue to
invest, significant resources to develop and maintain these relationships. Our
operating results could be adversely affected if these efforts do not generate
license and service revenues necessary to offset this investment.
We may suffer product deployment delays, a lower quality of customer service
and increased expenses if sufficient system integrator implementation teams are
not available.
System integrators help our customers install and deploy our product. These
system integrators are not contractually required to implement our product, and
competition for these resources may preclude us from obtaining sufficient
resources to provide the necessary implementation services to support our
needs. If the number of installations of our product exceeds our access to the
resources provided by these system integrators, we will be required to provide
these services internally, which would significantly limit our ability to meet
our customers' implementation needs and increase our expenses. In addition, we
cannot control the level and quality of service provided by our current and
future implementation partners.
Because a small number of customers have in the past accounted for a
substantial portion of our revenues, our revenues could decline due to the loss
or delay of a single customer order.
Sales to our ten largest customers accounted for 25% of total revenues in
the fiscal year ended December 31, 2000. Our license agreements do not
generally provide for ongoing license payments. Therefore, we expect that
revenues from a limited number of customers will continue to account for a
significant percentage of total revenues in future quarters. Our ability to
attract new customers will depend on a variety of factors, including the
reliability, security, scalability, breadth and depth of our products, and
cost-effectiveness of our products. The loss or delay of individual orders
could have a significant impact on revenues and operating results. Our failure
to add new customers that make significant purchases of our product and
services would reduce our future revenues.
Our sales are concentrated in the telecommunication, manufacturing, financial
services and energy industries, and if our customers in these markets decrease
their information technology spending, or we fail to penetrate other
industries, our revenues may decline.
We expect to continue to direct our sales and marketing efforts toward
companies in the telecommunications, manufacturing, financial services and
energy industries. Given the high degree of competition and the rapidly
changing environment in these industries, there is no assurance that we will be
able to continue sales in these industries at current levels. In addition, we
intend to market our product in new vertical markets. Customers in these new
vertical markets are likely to have different requirements and may require us
to change our product design or features, sales methods, support capabilities
or pricing policies. If we fail to successfully address these new vertical
markets we may experience decreased sales in future periods.
During the fourth quarter of 2000, companies in the telecommunications
industry began sharply decreasing their capital expenditures as the U.S.
economy contracted. This decrease in spending and the overall contraction in
the U.S. economy negatively impacted our fourth quarter revenues and may
continue to negatively impact our revenues for the foreseeable future.
23
Failure of our current or potential Internet customers to receive necessary
funding could harm our business.
Some of our customers include Internet companies. Most privately and
publicly held Internet companies require outside cash sources to continue
operations. To the extent additional funding is less available for Internet
companies as a result of a stock market decline or other factors, demand for
our products may decline significantly, thereby reducing our sales. On sales we
do generate from Internet companies, we may need to defer recognizing revenue
until payment is received.
The recent downturn in the U.S. economy may cause a decline in capital
allocations, thus reducing our revenue and affecting our accounts receivable.
The recent downturn in the U.S. economy may cause a decline in capital
allocations for software purchases. The delay in capital expenditures may cause
a decrease in sales, may cause an increase in our accounts receivable and may
make collection of license and support payments from our customers more
difficult. In addition, if our customers seek protection from creditors through
formal bankruptcy filings, we may experience an increase in delinquent accounts
receivable.
Our markets are highly competitive and, if we do not compete effectively, we
may suffer price reductions, reduced gross margins and loss of market share.
The market for our product is intensely competitive, evolving and subject to
rapid technological change. The intensity of competition is expected to
increase in the future. Increased competition is likely to result in price
reductions, reduced gross margins and loss of market share, any one of which
could significantly reduce our future revenues. Our current competitors
include:
B2Bi and EAI Vendors. We face direct and indirect competition from vendors
offering Business-to-Business Integration ("B2Bi") and Enterprise Application
Integration ("EAI"), as well as other aspects of our products. Some of these
vendors include BEA Systems, Inc., CrossWorlds Software, Inc., IBM Corporation,
Sybase, Inc., Tibco Software, Inc., and webMethods, Inc. In the future, some of
these companies may expand their products to enhance existing, or to provide,
process automation and real-time analysis functionality. Additionally, in this
fast-growing market, these or other competitors may merge to attempt the
creation of a more competitive entity, or one that offers a broader solution
than we provide.
Internal IT Departments. "In house" information technology departments of
potential customers have developed or may develop systems that provide for some
or all of the functionality of our BusinessWare product. We expect that
internally developed application integration and process automation efforts
will continue to be a principal source of competition for the foreseeable
future. In particular, it can be difficult to sell our product to a potential
customer whose internal development group has already made large investments in
and progress towards completion of systems that our product is intended to
replace.
Other Software Vendors. We may in the future also encounter competition from
major enterprise software developers including Oracle Corporation, PeopleSoft,
Inc., and SAP AG. In addition, Microsoft Corporation has announced its
intention to introduce products that could compete with some aspects of our
product. Other companies that target the enterprise software market may also
try to expand into the integration market.
Many of our competitors have more resources and broader customer
relationships than we do. In addition, many of these competitors have extensive
knowledge of our industry. Current and potential competitors have established
or may establish cooperative relationships among themselves or with third
parties to offer a single solution and increase the ability of their products
to address customer needs.
Although we believe that our solutions generally compete favorably with
respect to these factors, our market is relatively new and is evolving rapidly.
We may not be able to maintain our competitive position against current and
potential competitors, especially those with significantly greater resources.
24
We experience long and variable sales cycles, which could have a negative
impact on our results of operations for any given quarter.
Our product is often used by our customers to deploy mission-critical
solutions used throughout their organization. Customers generally consider a
wide range of issues before committing to purchase our product, including
product benefits, ability to operate with existing and future computer systems,
ability to accommodate increased transaction volume and product reliability.
Many customers will be addressing these issues for the first time. As a result,
we or other parties, including system integrators, must educate potential
customers on the use and benefits of our product and services. In addition, the
purchase of our product generally involves a significant commitment of capital
and other resources by a customer. This commitment often requires significant
technical review, assessment of competitive products, and approval at a number
of management levels within the customer's organization. Because of these
issues, our sales cycle has ranged from two to nine months and is difficult to
predict for any particular license transaction.
The cost and difficulty in implementing our product could significantly harm
our reputation with customers, diminishing our ability to license additional
products to our customers.
Our product is often purchased as part of large projects undertaken by our
customers. These projects are complex, time consuming and expensive. Failure by
customers to successfully deploy our product, or the failure by us or third-
party consultants to ensure customer satisfaction, could damage our reputation
with existing and future customers and reduce future revenues. In many cases,
our customers must interact with, modify, or replace significant elements of
their existing computer systems. The costs of our product and services
represent only a portion of the related hardware, software, development,
training and consulting costs. The significant involvement of third parties,
including system integrators, reduces the control we have over the
implementation of our product and the quality of customer service provided to
organizations which license our software.
If we are not successful in continuing to develop packaged versions of our
product, our ability to increase future revenues could be harmed.
We have developed and intend to continue to develop packaged versions of our
product which incorporate business processes of specific industries, including
telecommunications, manufacturing, financial services and energy. This presents
technical challenges and will require collaboration with system integrators and
the commitment of significant resources. If we are not successful in developing
these targeted products or these products do not achieve market acceptance, our
ability to increase future revenues could be harmed.
Our operating results are substantially dependent on license revenues from one
product and our business could be materially harmed by factors that adversely
affect the pricing and demand for our product.
Since 1998, a majority of our total revenues has been, and is expected to
be, derived from the license of our BusinessWare product. Accordingly, our
future operating results will depend on the demand for BusinessWare by future
customers, including new and enhanced releases that are subsequently
introduced. If our competitors release new products that are superior to
BusinessWare in performance or price, or we fail to enhance BusinessWare and
introduce new products in a timely manner, demand for our product may decline.
A decline in demand for BusinessWare as a result of competition, technological
change or other factors would significantly reduce our revenues.
If our product does not operate with the many hardware and software platforms
used by our customers, our business may fail.
We currently serve a customer base with a wide variety of constantly
changing hardware, packaged software applications and networking platforms. If
our product fails to gain broad market acceptance, due to its
25
inability to support a variety of these platforms, our operating results may
suffer. Our business depends, among others, on the following factors:
. our ability to integrate our product with multiple platforms and
existing, or legacy, systems and to modify our product as new versions of
packaged applications are introduced;
. the portability of our product, particularly the number of operating
systems and databases that our product can source or target;
. our ability to anticipate and support new standards, especially Internet
standards;
. the integration of additional software modules under development with our
existing product; and
. our management of software being developed by third parties for our
customers or use with our product.
If we fail to introduce new versions and releases of our product in a timely
manner, our revenues may decline.
We may fail to introduce or deliver new products on a timely basis, if at
all. In the past, we have experienced delays in the commencement of commercial
shipments of our BusinessWare product. To date, these delays have not had a
material impact on our revenues. If new releases or products are delayed or do
not achieve market acceptance, we could experience a delay or loss of revenues
and cause customer dissatisfaction. In addition, customers may delay purchases
of our product in anticipation of future releases. If customers defer material
orders in anticipation of new releases or new product introductions, our
revenues may decline.
Our product relies on third-party programming tools and applications. If we
lose access to these tools and applications, or are unable to modify our
product in response to changes in these tools and applications, our revenues
could decline.
Our programs utilize Java programming technology provided by Sun
Microsystems. We also depend upon access to the interfaces, known as "APIs,"
used for communication between external software products and packaged
application software. Our access to APIs of third-party applications are
controlled by the providers of these applications. If the application provider
denies or delays our access to APIs, our business may be harmed. Some
application providers may become competitors or establish alliances with our
competitors, increasing the likelihood that we would not be granted access to
their APIs. We also license technology related to the connectivity of our
product to third-party database and other applications and we incorporate some
third-party technology into our product offerings. Loss of the ability to use
this technology, delays in upgrades, failure of these third parties to support
these technologies, or other difficulties with our third-party technology
partners could lead to delays in product shipment and could cause our revenues
to decline.
We could suffer losses and negative publicity if new versions and releases of
our product contain errors or defects.
Our product and its interactions with customers' software applications and
IT systems are complex and, accordingly, there may be undetected errors or
failures when products are introduced or as new versions are released. We have
in the past discovered software errors in our new releases and new products
after their introduction which has resulted in additional research and
development expenses. To date, these additional expenses have not been
material. We may in the future discover errors in new releases or new products
after the commencement of commercial shipments. Since many customers are using
our product for mission- critical business operations, any of these occurrences
could seriously harm our business and generate negative publicity.
26
Our growth continues to place a significant strain on our management systems
and resources and if we fail to manage our growth our ability to market and
sell our product and develop new products may be harmed.
We must plan and manage our growth effectively in order to offer our product
and services and achieve revenue growth and profitability in a rapidly evolving
market. Our growth has and will continue to place a significant strain on our
management systems and resources, and we may not be able to effectively manage
our growth in the future. We continue to increase domestically the scope of our
operations, and have added a number of employees. For us to effectively manage
our growth, we must continue to do the following:
. install new management and information control systems; and
.expand, train and motivate our workforce.
In particular, we continue to add new software systems to complement and
enhance our existing accounting, human resource and sales and marketing
software systems. If we fail to install these software systems in an efficient
and timely manner, or if the new systems fail to adequately support our level
of operations, then we could incur substantial additional expenses to remedy
these failures.
If we do not keep pace with technological change, our product may be rendered
obsolete and our operating results may suffer.
Our industry is characterized by very rapid technological change, frequent
new product introductions and enhancements, changes in customer demands and
evolving industry standards. Our existing product will be rendered obsolete if
we fail to introduce new products or product enhancements that meet new
customer demands, support new standards or integrate with new or upgraded
versions of packaged applications. We have also found that the technological
life cycle of our product is difficult to estimate. We believe that we must
continue to enhance our current product while we concurrently develop and
introduce new products that anticipate emerging technology standards and keep
pace with competitive and technological developments. Failure to do so will
harm our ability to compete. As a result, we are required to continue to make
substantial product development investments.
If we fail to attract and retain qualified personnel, our ability to compete
will be harmed.
We depend on the continued service of our key technical, sales and senior
management personnel. None of these persons are bound by an employment
agreement. The loss of senior management or other key research, development,
sales and marketing personnel could have a material adverse effect on our
future operating results. In particular Dr. JoMei Chang, our President and
Chief Executive Officer, and Dr. M. Dale Skeen, our Chief Technology Officer,
would be difficult to replace.
In addition, we must attract, retain and motivate highly skilled employees.
We face significant competition for individuals with the skills required to
develop, market and support our products and services. We cannot assure that we
will be able to recruit and retain sufficient numbers of these highly skilled
employees.
We depend on the increasing use of the Internet and on the growth of electronic
commerce. If the use of the Internet and electronic commerce does not grow as
anticipated, our revenues could decline and our business will be seriously
harmed.
We depend on the increased acceptance and use of the Internet as a medium
for electronic commerce and the adoption by businesses of ebusiness solutions.
Rapid growth in the use of the Internet is a recent occurrence. As a result,
acceptance and use may not continue to develop at historical rates and a
sufficiently broad base of business customers may not adopt or continue to use
the Internet as a medium of commerce. Demand and market acceptance for recently
introduced services and products over the Internet are subject to a high level
of uncertainty, and there exist few proven services and products.
27
Business-to-business electronic commerce networks, including Vitria's Business
Network, are at an early stage of development and market acceptance.
We are in the first year of offering subscriptions to the Vitria Business
Network. The revenues associated may be a combination of license and/or annual
subscription fees. Our future prospects could be adversely impacted if the
Vitria Business Network is not commercially successful.
Our future results may depend significantly on the use of our electronic
commerce platform in independent Internet marketplaces.
We have entered into agreements with licensees who are forming networks that
will be powered by our business-to-business electronic commerce platform. These
networks have been recently formed and are at an early stage of development.
There is no guarantee regarding the level of activity of different companies in
these networks, the effectiveness of the interaction among companies using our
business-to-business electronic commerce platform and of the attractiveness of
offerings of our competitors. If these networks are not successful, our
business, operating results and financial position could be affected.
If we fail to adequately protect our proprietary rights, we may lose these
rights and our business may be seriously harmed.
We depend upon our ability to develop and protect our proprietary technology
and intellectual property rights to distinguish our product from our
competitor's products. The use by others of our proprietary rights could
materially harm our business. We rely on a combination of copyright, trademark
and trade secret laws, as well as confidentiality agreements and licensing
arrangements, to establish and protect our proprietary rights. We have no
issued patents. Despite our efforts to protect our proprietary rights, existing
laws afford only limited protection. Attempts may be made to copy or reverse
engineer aspects of our product or to obtain and use information that we regard
as proprietary. Accordingly, there can be no assurance that we will be able to
protect our proprietary rights against unauthorized third-party copying or use.
Furthermore, policing the unauthorized use of our product is difficult, and
expensive litigation may be necessary in the future to enforce our intellectual
property rights.
If our source code is released to our customers, our ability to protect our
proprietary rights could be jeopardized and our revenues could decline.
Some of our license agreements require us to place the source code for our
product in escrow. These agreements generally provide these customers with a
limited, non-exclusive license to use this code if:
. we fail to provide the product or maintenance and support;
. we cease to do business without a successor; or
. there is a bankruptcy proceeding by or against Vitria.
Our revenues could decline and our business could be seriously harmed if
customers were granted this access.
Our product could infringe the intellectual property rights of others causing
costly litigation and the loss of significant rights.
Software developers in our market will increasingly be subject to
infringement claims as the number of products in different software industry
segments overlap. Any claims, with or without merit, could be time-consuming,
result in costly litigation, prevent product shipment or cause delays, or
require us to enter into royalty or licensing agreements, any of which could
harm our business. Patent litigation in particular has complex technical issues
and inherent uncertainties. In the event an infringement claim against us is
successful and we cannot obtain a license on acceptable terms or license a
substitute technology or redesign our product to
28
avoid infringement, our business would be harmed. Furthermore, former
employers of our current and future employees may assert that our employees
have improperly disclosed to us or are using confidential or proprietary
information.
We may not successfully enter international markets or generate significant
product revenues abroad, which could result in slower revenue growth and harm
our business.
We have opened international offices in countries including the United
Kingdom, Japan, Germany, France, Italy, Canada, Australia and The Netherlands
and intend to establish additional international offices. We anticipate
devoting significant resources and management attention to expanding
international opportunities. There are a number of challenges to establishing
operations outside of the United States and we may be unable to successfully
generate significant international revenues. If we fail to successfully
establish our products in international markets, we could experience slower
revenue growth and our business could be harmed. It may be difficult to
protect our intellectual property in certain international jurisdictions.
We may not be able to efficiently integrate the operations of our acquisitions
which may harm our business.
We recently announced that we have entered into a definitive agreement to
acquire XMLSolutions Corporation, a provider of EDI and XML technology. We may
make additional acquisitions of, or significant investments in, businesses
that offer complementary products, services, technologies or market access. If
we are to realize the anticipated benefits of these acquisitions, the
operations of these companies must be integrated and combined efficiently.
Customer relationships and strategic partnerships may be disrupted during the
integration process which could result in lost sales and lost customers, and
could harm our business. We may also incur significant expenses during the
integration process. In addition, the dedication of management resources to
integration may detract attention from our day-to-day business. The successful
integration of any acquisition will also depend in part on the retention of
key personnel. There can be no assurance that the integration process will be
successful or that the anticipated benefits of any business integration will
be fully realized. Achieving the benefits of any acquisition will depend in
part on our ability to continue to successfully develop and sell our products
and integrate new technologies to develop new products and product features,
in a timely and efficient manner. If we are not successful in these efforts,
our business may be harmed.
Failure to raise additional capital or generate the significant capital
necessary to expand our operations and invest in new products could reduce our
ability to compete and result in lower revenues.
We may need to raise additional funds, and we cannot be certain that we
will be able to obtain additional financing on favorable terms, or at all. If
we need additional capital and cannot raise it on acceptable terms, we may not
be able to, among other things:
. develop or enhance our products and services;
. acquire technologies, products or businesses;
. expand operations, in the United States or internationally;
. hire, train and retain employees; or
. respond to competitive pressures or unanticipated capital requirements.
Our failure to do any of these things could result in lower revenues and
could seriously harm our business
We are at risk of securities class action litigation due to our expected stock
price volatility.
In the past, securities class action litigation has often been brought
against a company following a decline in the market price of its securities.
This risk is especially acute for us because technology companies have
29
experienced greater than average stock price volatility in recent years and, as
a result, have been subject to, on average, a greater number of securities
class action claims than companies in other industries. We may in the future be
the target of similar litigation. Securities litigation could result in
substantial costs and divert management's attention and resources, and could
seriously harm our business.
We have implemented anti-takeover provisions which could discourage or prevent
a takeover, even if an acquisition would be beneficial to our stockholders.
Provisions of our amended and restated certificate of incorporation and
bylaws, as well as provisions of Delaware law, could make it more difficult for
a third party to acquire us, even if doing so would be beneficial to our
stockholders. These provisions include:
. establishment of a classified Board of Directors of directors requiring
that not all members of the Board of Directors may be elected at one
time;
. authorizing the issuance of "blank check" preferred stock that could be
issued by our Board of Directors of directors to increase the number of
outstanding shares and thwart a takeover attempt;
. prohibiting cumulative voting in the election of directors, which would
otherwise allow less than a majority of stockholders to elect director
candidates;
. limitations on the ability of stockholders to call special meetings of
stockholders;
. prohibiting stockholder action by written consent, thereby requiring all
stockholder actions to be taken at a meeting of our stockholders; and
. establishing advance notice requirements for nominations for election to
the Board of Directors of directors or for proposing matters that can be
acted upon by stockholders at stockholder meetings
In addition, Section 203 of the Delaware General Corporations Law and the
terms of our stock option plans may discourage, delay or prevent a change in
control of Vitria.
30
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements required by this item are submitted as a separate
section of this Form 10-K. See Item 14. The chart entitled "Financial
Information by Quarter (Unaudited)" contained in Item 7 of Part II hereof is
hereby incorporated by reference into this Item 8 of Part II of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On March 23, 2000, we filed a Current Report on Form 8-K disclosing that
PricewaterhouseCoopers LLP was dismissed as our independent accountants and
replaced by Ernst & Young LLP. This decision to dismiss PricewaterhouseCoopers
LLP was approved by our Board of Directors upon recommendation by our Audit
Committee. The reports of PricewaterhouseCoopers LLP on our financial
statements as of December 31, 1999 and for each of the years in the three-year
period ended December 31, 1999, contained no adverse opinion or disclaimer of
opinion and were not qualified or modified as to uncertainty, audit scope or
accounting principles. During the two years ended December 31, 1999, there were
no disagreements with PricewaterhouseCoopers LLP on any matter of accounting
principles or practices, financial statement disclosure or auditing scope or
procedure, which disagreements if not resolved to the satisfaction of
PricewaterhouseCoopers LLP would have caused them to make reference thereto in
their report.
31
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information concerning our directors will be contained in our definitive
Proxy Statement with respect to our Annual Meeting of Stockholders, to be held
on May 18, 2001 in the section entitled "Proposal 1-Election of Directors" and
is incorporated into this report. Information concerning our Executive Officers
is set forth under "Executive Officers of the Registrant" in Part I of this
Annual Report on Form 10-K and is incorporated herein by reference. Information
concerning compliance with Section 16(a) of the Securities Exchange Act of 1934
is incorporated by reference to the section entitled "Section 16(a) Beneficial
Ownership Reporting Compliance" contained in our Proxy Statement.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item will be contained in our definitive
Proxy Statement with respect to our Annual Meeting of Stockholders, to be held
on May 18, 2001, under the caption "Executive Compensation", and is
incorporated by reference into this report.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item will be contained in our definitive
Proxy Statement with respect to our Annual Meeting of Stockholders, to be held
on May 18, 2001, under the caption "Security Ownership of Certain Beneficial
Owners and Management" and is incorporated by reference into this report.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item will be contained in our definitive
Proxy Statement with respect to our Annual Meeting of Stockholders, to be held
on May 18, 2001, under the caption "Certain Transactions" and is incorporated
by reference into this report.
32
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
Page
----
1. Consolidated Financial Statements and Reports of Independent 34
Auditors...........................................................
2. Notes to the Consolidated Financial Statements..................... 41
3. Consolidated Financial Statement Schedule:
Schedule II--Valuation and Qualifying Accounts..................... 57
All other schedules are omitted because they are not required, or
are not applicable, or the required information is shown in the
financial statements or notes thereto.
4. Exhibits
The exhibits listed in the accompanying index to exhibits are filed or
incorporated by reference as a part of this annual report.
(a) Reports on Form 8-K
No reports on Form 8-K were filed during the fourth quarter ended December
31, 2000.
33
VITRIA TECHNOLOGY, INC.
INDEX TO THE CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Report of Ernst & Young LLP, Independent Auditors.......................... 35
Report of Independent Accountants.......................................... 36
Consolidated Balance Sheets................................................ 37
Consolidated Statements of Operations...................................... 38
Consolidated Statement of Stockholders' Equity............................. 39
Consolidated Statements of Cash Flows...................................... 40
Notes to the Consolidated Financial Statements............................. 41
34
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
To the Board of Directors and Stockholders of Vitria Technology, Inc.
We have audited the accompanying consolidated balance sheet of Vitria
Technology, Inc. and subsidiaries as of December 31, 2000, and the related
consolidated statements of operations, stockholders'equity and cash flows for
the year then ended. Our audit also included the financial statement schedule
listed in the Index at Item 14(a) of this Annual Report for the year ended
December 31, 2000. These financial statements and schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and schedule based on our audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States. 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 audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred above present fairly, in
all material respects, the consolidated financial position of Vitria
Technology, Inc. at December 31, 2000, and the consolidated results of its
operations and its cash flows for the year then ended, in conformity with
accounting principles generally accepted in the United States. Also, in our
opinion, the related financial statement schedule for the year ended December
31, 2000, when considered in relation to the basic financial statements taken
as a whole, presents fairly in all material respects the information set forth
therein.
/s/ Ernst & Young LLP
Palo Alto, California
January 19, 2001
35
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of Vitria Technology, Inc.
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, of stockholders' equity and of cash
flows present fairly, in all material respects, the financial position of
Vitria Technology, Inc. at December 31, 1999, and the results of its operations
and its cash flows for the years ended December 31, 1999 and 1998, in
conformity with accounting principles generally accepted in the United States.
These financial statements are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for the
opinion expressed above.
/s/ PricewaterhouseCoopers LLP
San Jose, California
January 21, 2000
36
VITRIA TECHNOLOGY, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share amounts)
December 31,
------------------
2000 1999
-------- --------
ASSETS
------
Current assets:
Cash and cash equivalents................................ $154,826 $ 52,218
Short-term investments................................... 69,312 13,231
Accounts receivable, net................................. 36,889 11,443
Other current assets..................................... 9,138 4,389
-------- --------
Total current assets................................... 270,165 81,281
Restricted investments................................... 18,757 --
Property and equipment, net.............................. 15,164 4,452
Other assets............................................. 6,106 761
-------- --------
Total assets........................................... $310,192 $ 86,494
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable......................................... $ 1,396 $ 401
Accrued liabilities...................................... 25,040 11,016
Deferred revenue......................................... 46,611 15,627
-------- --------
Total current liabilities.............................. 73,047 27,044
-------- --------
Commitments and contingencies (Note 5)
Stockholders' equity:
Convertible preferred stock: issuable in series, $0.001
par value; 5,000 shares authorized; no shares issued and
outstanding............................................. -- --
Common stock: $0.001 par value; 600,000 shares
authorized; 128,224 shares issued and outstanding at
December 31, 2000; 123,502 shares issued and outstanding
at December 31, 1999.................................... 128 124
Additional paid-in capital................................. 266,591 91,228
Accumulated other comprehensive loss....................... (68) (54)
Unearned stock-based compensation.......................... (3,603) (7,223)
Notes receivable from stockholders......................... (291) (291)
Accumulated deficit........................................ (25,612) (24,334)
-------- --------
Total stockholders' equity............................. 237,145 59,450
-------- --------
Total liabilities and stockholders' equity............. $310,192 $ 86,494
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
37
VITRIA TECHNOLOGY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
Year Ended December 31,
---------------------------
2000 1999 1998
-------- -------- -------
Revenues:
License........................................ $102,287 $ 21,790 $ 5,198
Service and other.............................. 32,442 9,751 2,429
-------- -------- -------
Total revenues................................. 134,729 31,541 7,627
-------- -------- -------
Cost of revenues:
License........................................ 935 407 --
Service and other.............................. 22,051 7,315 2,905
-------- -------- -------
Total cost of revenues....................... 22,986 7,722 2,905
-------- -------- -------
Gross profit................................. 111,743 23,819 4,722
-------- -------- -------
Operating expenses:
Sales and marketing............................ 78,361 20,009 6,572
Research and development....................... 29,441 10,736 4,794
General and administrative..................... 14,230 3,991 1,807
Amortization of stock-based compensation....... 3,420 4,525 1,424
-------- -------- -------
Total operating expenses..................... 125,452 39,261 14,597
-------- -------- -------
Loss from operations............................. (13,709) (15,442) (9,875)
Interest income.................................. 13,165 1,218 306
Other income (expenses), net..................... (150) 118 --
-------- -------- -------
Net loss before income taxes..................... (694) (14,106) (9,569)
Provision for income taxes....................... 584 -- --
-------- -------- -------
Net loss......................................... (1,278) (14,106) (9,569)
Deemed preferred stock dividend.................. -- (1,908) --
-------- -------- -------
Net loss available to common stockholders........ $ (1,278) $(16,014) $(9,569)
======== ======== =======
Basic and diluted net loss per share............. $ (0.01) $ (0.21) $ (0.20)
======== ======== =======
Weighted average shares used in calculating basic
and diluted net loss per share.................. 122,365 75,748 48,012
======== ======== =======
The accompanying notes are an integral part of these consolidated financial
statements.
38
VITRIA TECHNOLOGY, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands)
Convertible
Preferred Notes Accumulated
Stock Common Stock Additional Unearned Receivable Other Total
--------------- --------------- Paid-In Stock-based from Comprehensive Accumulated Stockholders
Shares Amount Shares Amount Capital Compensation Stockholders Loss Deficit Equity
------- ------ -------- ------ ---------- ------------ ------------ ------------- ----------- ------------
Balance at
December 31,
1997............. 7,708 $ 8 52,996 $ 53 $ 10,697 $ -- $ -- $-- $ (659) $ 10,099
Comprehensive
loss:
Net loss........ -- -- -- -- -- -- -- -- (9,569) (9,569)
--------
Total
comprehensive
loss............ (9,569)
Issuance of
common stock,
net.............. -- -- 8,076 8 609 -- -- -- -- 617
Issuance of
Series C
convertible
preferred stock,
net.............. 2,737 3 -- -- 10,964 -- -- -- -- 10,967
Unearned stock-
based
compensation..... -- -- -- -- 6,788 (6,788) -- -- -- --
Amortization of
stock-based
compensation..... -- -- -- -- -- 1,277 -- -- -- 1,277
------- ---- -------- ---- -------- ------- ----- ---- -------- --------
Balance at
December 31,
1998............. 10,445 11 61,072 61 29,058 (5,511) -- -- (10,228) 13,391
Comprehensive
loss:
Net loss........ -- -- -- -- -- -- -- -- (14,106) (14,106)
Other
comprehensive
loss--foreign
currency
translation..... -- -- -- -- -- -- -- (3) -- (3)
Unrealized loss
on marketable
debt
securities...... -- -- -- -- -- -- -- (51) -- (51)
--------
Total
comprehensive
loss............ -- -- -- -- -- -- -- -- -- (14,160)
Issuance of
Series C
convertible
preferred stock,
net.............. 107 -- -- -- 420 -- -- -- -- 420
Issuance of
Series D
convertible
preferred stock,
net.............. 1,004 1 -- -- 4,513 -- -- -- -- 4,514
Conversion of
preferred stock
to common stock.. (11,556) (12) 46,224 47 (35) -- -- -- -- --
Allocation of
discount on
preferred stock.. -- -- -- -- 1,908 -- -- -- -- 1,908
Deemed preferred
stock dividend... -- -- -- -- (1,908) -- -- -- -- (1,908)
Issuance of
common stock,
net.............. -- -- 15,940 16 50,744 -- -- -- -- 50,760
Unearned stock-
based
compensation,
net.............. -- -- -- -- 6,237 (6,237) -- -- -- --
Amortization of
stock-based
compensation..... -- -- -- -- -- 4,525 -- -- -- 4,525
Notes
receivable....... -- -- 266 -- 291 -- (291) -- -- --
------- ---- -------- ---- -------- ------- ----- ---- -------- --------
Balance at
December 31,
1999............. -- -- 123,502 124 91,228 (7,223) (291) (54) (24,334) 59,450
Comprehensive
loss:
Net loss........ -- -- -- -- -- -- -- -- (1,278) (1,278)
Other
comprehensive
loss--foreign
currency
translation..... -- -- -- -- -- -- -- (72) -- (72)
Unrealized gain
on marketable
debt
securities...... -- -- -- -- -- -- -- 58 -- 58
--------
Total
comprehensive
loss............ -- -- -- -- -- -- -- -- -- (1,292)
Issuance of
common stock,
net.............. -- -- 4,722 4 175,563 -- -- -- -- 175,567
Amortization of
stock-based
compensation..... -- -- -- -- (200) 3,620 -- -- -- 3,420
------- ---- -------- ---- -------- ------- ----- ---- -------- --------
Balance at
December 31,
2000............. -- $-- 128,224 $128 $266,591 $(3,603) $(291) $(68) $(25,612) $237,145
======= ==== ======== ==== ======== ======= ===== ==== ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
39
VITRIA TECHNOLOGY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Year Ended December 31,
----------------------------
2000 1999 1998
--------- -------- -------
Operating activities:
Net loss........................................ $ (1,278) $(14,106) $(9,569)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Gain on sale of fixed assets.................. -- (114) --
Depreciation.................................. 3,210 1,138 255
Provision for doubtful accounts............... 2,922 246 350
Amortization of deferred stock-based
compensation................................. 3,420 4,571 1,424
Changes in assets and liabilities:
Accounts receivable......................... (28,368) (5,716) (4,723)
Other current assets........................ (4,749) (4,209) (140)
Other assets................................ (246) (673) --
Accounts payable............................ 995 (356) 546
Accrued liabilities......................... 14,024 8,038 2,370
Deferred revenue............................ 30,984 12,753 2,651
--------- -------- -------
Net cash provided by (used in) operating
activities............................... 20,914 1,572 (6,836)
--------- -------- -------
Investing activities:
Purchases of property and equipment........... (13,922) (4,623) (947)
Sales of property and equipment............... -- 114 --
Purchases of investments...................... (220,393) (13,282) --
Proceeds from maturities of investments....... 145,614 -- --
Purchases of equity investments............... (5,100) -- --
--------- -------- -------
Net cash used in investing activities..... (93,801) (17,791) (947)
--------- -------- -------
Financing activities:
Issuance of convertible preferred stock,
net.......................................... -- 4,934 10,967
Issuance of common stock, net................. 175,567 50,714 470
--------- -------- -------
Net cash provided by financing
activities............................... 175,567 55,648 11,437
--------- -------- -------
Effect of exchange rate changes on cash and cash
equivalents.................................... (72) (3) --
Net increase in cash and cash equivalents....... 102,608 39,426 3,654
Cash and cash equivalents at beginning of
year........................................... 52,218 12,792 9,138
--------- -------- -------
Cash and cash equivalents at end of year........ $ 154,826 $ 52,218 $12,792
========= ======== =======
Supplemental non-cash financing activities:
Issuance of common stock for services......... $ 320 $ 46 $ 147
========= ======== =======
Issuance of common stock for notes
receivable................................... $ -- $ 291 $ --
========= ======== =======
Income taxes paid............................. $ 35 $ -- $ --
========= ======== =======
Interest paid................................. $ 23 $ -- $ --
========= ======== =======
The accompanying notes are an integral part of these consolidated financial
statements.
40
VITRIA TECHNOLOGY, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note 1--The Company and Summary of Significant Accounting Policies:
The Company
Vitria Technology, Inc. (the "Company"), develops, markets and supports a
software product, BusinessWare, which enables customers to deploy sophisticated
ebusiness solutions across the extended enterprise. The Company was
incorporated in California in October 1994. The Company reincorporated in
Delaware in September 1999.
Principles of consolidation
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries. All significant intercompany accounts have
been eliminated. Certain prior period amounts have been reclassified to conform
to the current period presentation.
Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Foreign currency
The functional currency of the Company's subsidiaries are the local
currencies. Balance sheet accounts are translated into United States dollars at
exchange rates prevailing at the balance sheet dates. Revenues, costs and
expenses are translated into United States dollars at average rates for the
period. Gains and losses resulting from translation are included as other
comprehensive loss. Net gains and losses resulting from foreign exchange
transactions are included in the consolidated statement of operations and were
not significant during any of the periods presented.
Cash, cash equivalents, short-term investments and restricted investments
The Company considers all highly liquid investments with maturities of three
months or less from the date of purchase to be cash equivalents and investments
with original maturities greater than three months to be short-term
investments. All of the Company's short-term investments are classified as
available-for-sale and are reported at fair value with unrealized gains and
losses included in other comprehensive loss. Fair values are based upon quoted
prices in an active market, or if that information is not available, on quoted
market prices of instruments of similar characteristics. All of the Company's
short-term available-for-sale securities have a contractual maturity of one
year or less. Realized gains and losses and declines in value judged to be
other than temporary are included in other expense. To date, there have been no
gains or losses realized on the Company's short-term investments.
Certain of the Company's investments are restricted from use in operations
for the purpose of securing standby letters of credit issued in conjunction
with certain leased facilities with varying expiration dates, through June
2013. These investments consist of commercial paper and certificates of
deposit.
Property and equipment
Property and equipment are stated at cost. Depreciation is computed using
the straight-line method over the estimated useful lives of the related assets.
Useful lives of three years are used for computer equipment,
41
VITRIA TECHNOLOGY, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
software licenses and furniture and fixtures. Leasehold improvements are
amortized using the straight-line method over the term of the lease or the
estimated useful lives, whichever is shorter.
Revenue recognition
The Company derives revenues from software licenses to end users for its
BusinessWare product and related services, which include maintenance and
support, consulting and training services. The Company follows Statement of
Position ("SOP") 97-2, "Software Revenue Recognition," as amended. In
accordance with the provisions of SOP 97-2 as amended, the Company records
revenue from software licenses when a license agreement is signed by both
parties, the fee is fixed or determinable, collection of the fee is probable
and delivery of the product has occurred. For electronic delivery, the product
is considered to have been delivered when the access code to download the
software from the Internet has been provided to the customer. If an element of
the license agreement has not been delivered, revenue for the element is
deferred based on vendor-specific objective evidence of fair value. If vendor-
specific objective evidence of fair value does not exist, all revenue is
deferred until sufficient objective evidence exists or all elements have been
delivered. 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. The Company considers all arrangements with payment terms longer
than normal not to be fixed or determinable. Revenue on arrangements with
customers who are not the ultimate users (primarily systems integrators) is not
recognized until evidence of sell through to an end user has been received.
Payments received in advance of revenue recognition are recorded as deferred
revenue. When the software license arrangement requires the Company to provide
consulting services for significant production, customization or modification
of the software, or when the customer considers these services essential to the
functionality of the software product, both the product license revenue and
consulting services revenue are recognized in accordance with the provisions of
Statement of Position 81-1, "Accounting for Performance of Construction Type
and Certain Production Type Contracts." The Company recognizes revenue from
these arrangements using the percentage of completion method based on cost
inputs and, therefore, both product license and consulting services revenue are
recognized as work progresses.
Revenues from maintenance and support are deferred and recognized ratably
over the term of the contract. Revenues related to the Vitria Business Network
are also deferred and recognized ratably over the term of the subscription
period. Revenues from consulting and training are deferred and recognized when
the services are performed and collectibility is deemed probable.
A portion of the Company's revenues are also derived from government grants.
Government grant revenues are recognized as the research is performed and
allowable costs are incurred. Revenues from government grants were $128,000,
$1.2 million and $796,000 for the years December 31, 2000, 1999 and 1998,
respectively.
Fair value of financial instruments
The Company's financial instruments, including cash and cash equivalents,
accounts receivable, accounts payable, and accrued liabilities are carried at
cost, which approximates their fair value because of the short-term maturity of
these financial instruments.
42
VITRIA TECHNOLOGY, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Advertising costs
Advertising costs are expensed as incurred and totaled approximately $6.3
million and $21,000 for the years ended December 31, 2000 and 1999. There were
no advertising costs throughout fiscal 1998.
Research and development
Research and development expenses include costs incurred by the Company to
develop and enhance the Company's software. Research and development costs are
charged to expense as incurred.
Software development costs for external use
Software development costs incurred prior to the establishment of
technological feasibility are charged to research and development expense as
incurred. Material software development costs incurred subsequent to the time a
product's technological feasibility has been established, using the working
model approach, through the time the product is available for general release
to customers, are capitalized. Amortization of capitalized software development
costs begins when the product is available for general release to customers,
and is computed as the greater of (1) the ratio of current gross revenues for a
product to the total of current and anticipated future gross revenues for the
product, or (2) the straight-line method over the estimated economic life of
the product. To date, development costs qualifying for capitalization have been
immaterial and therefore have been expensed as incurred.
Software development costs for internal use
Effective January 1, 1999, the Company adopted Statement of Position ("SOP")
No. 98-1, "Accounting for the Costs of Computer Software Developed or Obtained
for Internal Use." Historically, internal use software costs were
insignificant. During fiscal 2000, the Company began capitalizing certain
external costs incurred to acquire or create internal use software, principally
related to software coding, designing system interfaces, installation and
testing of the software. As of December 31, 2000, we had accumulated $2.0
million in software development costs for internal use. These costs will be
amortized over their estimated useful lives (generally three years), beginning
when the computer software is ready for its intended use.
Stock-based compensation
The Company accounts for stock-based employee compensation arrangements in
accordance with the provisions of Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB No. 25") as amended by FASB
Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation," issued by the Financial Accounting Standards Board, and complies
with the disclosure provisions of Statement of Financial Accounting Standards
("SFAS") No. 123, "Accounting for Stock-Based Compensation" ("SFAS No. 123").
Under APB No. 25 and related interpretations, unearned compensation is based on
the difference, if any, on the date of the grant, between the fair value of the
Company's stock and the exercise price. Unearned compensation is amortized and
expensed in accordance with Financial Accounting Standards Board Interpretation
No. 28 using the multiple option approach. The Company accounts for stock-based
compensation issued to non-employees in accordance with the provisions of SFAS
No. 123 and Emerging Issues Task Force No. 96-18, "Accounting for Equity
Instruments That Are Issued to Other Than Employees for Acquiring, or in
Conjunction with Selling, Goods or Services."
Income taxes
Income taxes are accounted for using an asset and liability approach that
requires the recognition of taxes payable or refundable for the current year
and deferred tax liabilities and assets for the future tax consequences
43
VITRIA TECHNOLOGY, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
of events that have been recognized in the Company's financial statements or
tax returns. The measurement of current and deferred tax liabilities and assets
are based on provisions of the enacted tax law; the effects of future changes
in tax laws or rates are not anticipated. The measurement of deferred tax
assets is reduced, if necessary, by the amount of any tax benefits that, based
on available evidence, are not expected to be realized.
Net loss per share
The Company computes net income (loss) per share in accordance with SFAS
No.128, "Earnings Per Share," and Securities and Exchange Commission Staff
Accounting Bulletin No. 98, "Earnings Per Share." Basic earnings per share is
calculated by dividing net income (loss) available to common stockholders by
the weighted-average number of shares of common stock outstanding. Basic
earnings per share does not include shares subject to the Company's right of
repurchase, which lapses ratably over the related vesting term. Diluted
earnings per share is calculated by dividing net income (loss) available to
common stockholders by the weighted-average number of shares of common stock
outstanding plus potential common stock. Potential common stock is composed of
common stock subject to the Company's right of repurchase and common stock
issuable upon the exercise of stock options (using the treasury stock method).
The calculation of diluted net loss per share excludes potential common shares
if the effect is anti-dilutive.
The following table sets forth the computation of basic and diluted net loss
per share for the periods indicated (in thousands, except per share amounts):
Year Ended December 31,
---------------------------
2000 1999 1998
-------- -------- -------
Numerator:
Net loss.................................... $ (1,278) $(14,106) $(9,569)
Deemed preferred stock dividend............. -- (1,908) --
-------- -------- -------
Net loss available to common stockholders..... $ (1,278) $(16,014) $(9,569)
======== ======== =======
Denominator:
Weighted average shares of common stock..... 127,193 85,328 55,524
Less weighted shares subject to repurchase
........................................... (4,828) (9,580) (7,512)
-------- -------- -------
Denominator for basic and diluted
calculation.................................. 122,365 75,748 48,012
-------- -------- -------
Net loss per share available to common
stockholders:
Basic and diluted........................... $ (0.01) $ (0.21) $ (0.20)
======== ======== =======
The deemed preferred stock dividend reflects the beneficial conversion price
of convertible preferred stock issued in 1999 prior to the Company's initial
public offering in September 1999.
The following table sets forth the weighted average potential shares of
common stock that are not included in the diluted net loss per share
calculation above because to do so would be anti-dilutive for the periods
indicated (in thousands):
Year Ended December
31,
--------------------
2000 1999 1998
------ ------ ------
Weighted average effect of anti-dilutive securities:
Preferred stock..................................... -- 26,760 32,432
Employee stock options (using the treasury stock
method)............................................ 11,965 9,562 6,496
Common stock subject to repurchase agreements....... 4,828 9,580 7,512
------ ------ ------
Total............................................. 16,793 45,902 46,440
====== ====== ======
44
VITRIA TECHNOLOGY, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Comprehensive loss
Comprehensive loss is comprised of the net loss and other comprehensive
earnings such as foreign currency translation gains and losses and unrealized
gains or losses on available-for-sale securities. Vitria's total comprehensive
loss was as follows (in thousands):
Year Ended December 31,
--------------------------
2000 1999 1998
------- -------- -------
Net loss........................................ $(1,278) $(14,106) $(9,569)
Other comprehensive loss
Foreign currency translation adjustment....... (72) (3) --
Unrealized gain (loss) on securities.......... 58 (51) --
------- -------- -------
Comprehensive loss.............................. $(1,292) $(14,160) $(9,569)
======= ======== =======
Segment information
The Company follows the provisions of SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information." During each of the three
years ended December 31, 2000 the Company's management considers its business
activities to be focused on the license of its product and related services to
end-user customers. Since management's primary form of internal reporting is
aligned with the offering of products and services, the Company believes it
operates in one segment. Vitria sells its products primarily to the
telecommunications, manufacturing, financial services and energy markets in the
United States and in foreign countries through its direct sales personnel and
its alliance partners. The Company's customers have primarily been located in
the United States. The Company recognized approximately 13% of its revenue from
customers located outside the United States for the year ended December 31,
2000.
Concentration of credit risks
Financial instruments that potentially subject the Company to a
concentration of credit risk consist of cash and cash equivalents, short-term
investments and accounts receivable. All of the Company's available funds at
December 31, 2000 and 1999, were deposited in money market accounts with
financial institutions which management believes are of high credit quality or
in commercial paper. The Company's accounts receivable are derived primarily
from transactions with customers located in the United States. The Company
performs ongoing credit evaluations of its customer's financial condition and
generally requires no collateral from its customers. The Company maintains an
allowance for doubtful accounts receivable based upon the expected
collectibility of accounts receivable. At December 31, 2000, the Company had
$16.0 million in outstanding letters of credit which were issued in conjunction
with certain leased facilities. The leased facilities have varying expiration
dates through June 2013.
The following table summarizes the revenue from customers in excess of 10%
of total revenues:
Year Ended
December 31,
-----------------
2000 1999 1998
---- ---- ----
Company A................................................... -- % -- % 12%
Company B................................................... -- % -- % 30%
Company C................................................... -- % 11% -- %
Government grant............................................ -- % -- % 10%
45
VITRIA TECHNOLOGY, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following table summarizes receivables from customers in excess of 10%
of total accounts receivable:
December 31,
----------------
2000 1999
------ ------
Company E................................................. -- % 18%
Company F................................................. -- % 14%
Recent accounting pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Financial
Instruments and Hedging Activities," or "SFAS 133," which provides a
comprehensive and consistent standard for the recognition and measurement of
derivatives and hedging activities. SFAS 133, as amended, is required to be
adopted by the Company effective January 1, 2001 and is not anticipated to
have a material impact on the Company's results of operations, financial
position or cash flows when adopted. The Company currently holds no derivative
financial instruments and does not currently engage in hedging activities.
In December 1999, the Security and Exchange Commission issued Staffing
Accounting Bulletin No. 101, Revenue Recognition in Financial Statements ("SAB
101"), and amended it in March and June 2000. SAB 101 provides guidance on the
recognition, presentation and disclosure of revenue in financial statements
for all public registrants. We adopted SAB 101 in the fourth quarter of 2000
and the adoption did not have a material impact on our financial position or
results of operations.
In March 2000, the Financial Accounting Standards Board issued
Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation--an Interpretation of APB No.25," or FIN 44. FIN 44 clarifies the
application of APB No. 25 and, among other issues, clarifies the following:
the definition of an employee for purposes of applying APB No. 25; the
criteria for determining whether a plan qualifies as a non-compensatory plan;
the accounting consequence of various modifications to the terms of the
previously fixed stock options or awards; and the accounting for an exchange
of stock compensation awards in a business combination. FIN 44 is effective
July 1, 2000, but certain conclusions in FIN 44 cover specific events that
occurred after either December 15, 1998 or January 12, 2000. The application
of FIN 44 has not had a material impact on our financial position or our
results of operations.
46
VITRIA TECHNOLOGY, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 2--Balance Sheet Components (in thousands):
December 31,
----------------
2000 1999
------- -------
Accounts receivable........................................ $40,390 $12,022
Less: Allowance for doubtful accounts.................... (3,501) (579)
------- -------
$36,889 $11,443
======= =======
Property and equipment, net:
Computer equipment....................................... $ 8,209 $ 1,851
Software licenses........................................ 1,653 859
Furniture and fixtures................................... 2,501 1,149
Leasehold improvements................................... 7,108 1,690
------- -------
19,471 5,549
Less: Accumulated depreciation and amortization.......... (4,307) (1,097)
------- -------
$15,164 $ 4,452
======= =======
Accrued liabilities:
Payroll and related expense.............................. $14,882 $ 5,266
Professional services.................................... 2,433 1,191
Other.................................................... 7,725 4,559
------- -------
$25,040 $11,016
======= =======
At December 31, 2000, the Company's gross accounts receivable balance was
$40.4 million. Of this balance, 31% or $12.7 million represents revenue that
has not yet been recognized and is included in the deferred revenue balance. At
December 31, 2000, the Company's deferred revenue balance was $46.6 million. Of
this balance, 9%, or $4.3 million has been deferred due to customer credit
issues. In accordance with the provisions of SOP 97-2, the Company records
revenue from software licenses when the following criteria have been met: a
license agreement has been signed by both parties, the fee is fixed or
determinable, collection of the fee is probable and delivery of the product has
occurred. In those cases where all other elements for revenue recognition have
been met except customer credit criteria, the Company defers recognizing
revenue until the customer pays or other evidence of probable collection is
obtained.
47
VITRIA TECHNOLOGY, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 3--Investments
The following is a summary of available-for-sale securities (in thousands):
Year Ended December 31, 2000
----------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- --------
Money market funds................ $ 90,968 $ -- $ -- $ 90,968
Certificate of deposit............ 358 -- -- 358
Commercial paper.................. 117,030 -- -- 117,030
Auction paper..................... 15,000 -- -- 15,000
-------- ----- ----- --------
$223,356 $ -- $ -- $223,356
======== ===== ===== ========
Included in cash and cash
equivalent investments........... $135,287 $ -- $ -- $135,287
Restricted investments............ 18,757 -- -- 18,757
Short-term investments............ 69,312 -- -- 69,312
-------- ----- ----- --------
$223,356 $ -- $ -- $223,356
======== ===== ===== ========
Year Ended December 31, 1999
----------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- --------
Money market funds................ $ 41,728 $ -- $ -- $ 41,728
Commercial paper.................. 19,962 -- (51) 19,911
-------- ----- ----- --------
$ 61,690 $ -- $ (51) $ 61,639
======== ===== ===== ========
Included in cash and cash
equivalent investments........... $ 48,408 $ -- $ -- $ 48,408
Short-term investments............ 13,282 -- (51) 13,231
-------- ----- ----- --------
$ 61,690 $ -- $ (51) $ 61,639
======== ===== ===== ========
Note 4--Equity Investments
At December 31, 2000, the Company held approximately $5.1 million of common
stock of various private companies. These investments are accounted for using
the cost method and are classified as long-term investments as the Company has
an ownership interest of less than twenty percent and does not have the ability
to exercise significant influence. These investments are reviewed each
reporting period for impairment and, if appropriate, written down to their
estimated fair value. No such impairment indicators have been identified to
date.
Note 5--Commitments and Contingencies:
Leases
The Company leases office space and certain equipment under non-cancelable
operating leases through 2013. Some of them have options to renew at varying
terms. Some of the leases require payment of property taxes, insurance,
maintenance and utilities.
The terms of the headquarters office leases in California provide for rental
payments on a graduated scale. The Company recognizes rent expense on a
straight-line basis over the lease period. Total rent expense under operating
lease agreements was $6.7 million, $1.6 million and $546,000 for the years
ended December 31, 2000, 1999 and 1998, respectively.
48
VITRIA TECHNOLOGY, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In December 2000, the Company entered into agreements to sublease one of its
leased buildings. The subleases commence in January 2001 and expire in March
2002 and June 2002. Aggregate future minimum rental sublease income to be
received is $4.0 million for fiscal year 2001 and $1.7 million for fiscal year
2002.
Future net minimum lease payments, reduced by minimum sublease income, under
non-cancelable operating leases at December 31, 2000, are as follows (in
thousands):
Operating
Year ending December 31, Leases
------------------------ ---------
2001............................................................... $ 4,653
2002............................................................... 6,838
2003............................................................... 7,515
2004............................................................... 6,533
2005............................................................... 6,491
2006 and thereafter................................................ 10,856
-------
Total minimum lease payments....................................... $42,886
=======
Contingencies
From time to time, the Company may have certain contingent liabilities that
arise in the ordinary course of its business activities. The Company accrues
contingent liabilities when it is probable that future expenditures will be
made and such expenditures can be reasonably estimated. In the opinion of
management, there are no pending claims of which the outcome is expected to
result in a material adverse effect on the financial position or results of
operations or cash flows of the Company.
Note 6--Common Stock:
In September 1999, the Company completed an initial public offering of
13,800,000 shares of common stock at $4.00 per share, raising proceeds of
approximately $50.0 million, net of underwriting discounts, commissions and
other issuance costs. Immediately prior to the completion of the Company's
initial public offering, all outstanding shares of convertible preferred stock
converted into an aggregate of 23,111,230 shares of common stock.
In February 2000, the Company completed a follow-on public offering of
3,000,000 shares of common stock at $60.00 per share and realized proceeds, net
of underwriting discounts, commissions and other issuance costs, of $171.2
million.
In March 2000, the Company's Board of Directors approved a two-for-one stock
split. The stock split was effected in the form of a stock dividend to all
holders of the Company's common stock as of March 22, 2000 and was distributed
in April 2000. All share and per share amounts have been restated for all
periods presented to reflect the stock split.
49
VITRIA TECHNOLOGY, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 7--Income Taxes:
The provision for income taxes for 2000 consists of the following (in
thousands):
Year Ended
December 31,
2000
------------
Current:
Federal....................................................... $ --
State......................................................... 119
Foreign....................................................... 465
-----
Total provision for taxes....................................... $ 584
=====
The tax provision is reconciled to the amount computed using the federal
statutory rate of 35% for December 31, 2000 and 34% for December 31, 1999 and
1998 as follows (in thousands):
Year Ended December 31,
-------------------------
2000 1999 1998
------- ------- -------
Federal statutory benefit........................ $ (243) $(4,796) $(3,254)
State taxes, net of federal benefit.............. 77 (635) (287)
R&D Credits...................................... (1,176) -- --
Future benefits not currently recognized......... -- 3,621 2,971
Nondeductible compensation....................... 1,197 1,810 570
Other permanent items............................ 176 -- --
Foreign losses and tax credits not benefited..... 618 -- --
Other............................................ (65) -- --
------- ------- -------
Provision for taxes.............................. $ 584 $ -- $ --
======= ======= =======
At December 31, 2000, the Company had approximately $13.1 million and $7.6
million of federal and state net operating loss carryforwards available to
offset future taxable income which expire at various dates through 2020. The
Company also has available tax credit carryforwards of $2.4 million and $1.2
million for federal and California, respectively, which expire at various dates
through 2020. Deferred tax assets and liabilities consist of the following (in
thousands):
December 31,
---------------
2000 1999
------- ------
Deferred tax assets:
Net operating loss carryforwards.......................... $ 5,555 $5,059
Credits................................................... 3,551 1,369
Accruals and allowances................................... 10,126 1,338
Capitalized expenses...................................... 176 673
------- ------
Net deferred tax assets................................... 19,408 8,439
Valuation allowance....................................... (19,408) (8,439)
------- ------
$ -- $ --
======= ======
The Company has incurred losses for each of the three years ended December
31, 2000. Management believes that, based on the history of such losses and
other factors, the weight of available evidence indicates that it is more
likely than not that the Company will not be able to realize its deferred tax
assets and thus a full
50
VITRIA TECHNOLOGY, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
valuation reserve has been recorded at December 31, 2000 and 1999. The increase
in valuation allowance was $11.0 million and $4.8 million for the years ended
December 31, 2000 and 1999, respectively. Approximately $9.4 million of the
valuation allowance for deferred tax assets is attributable to unbenefitted
stock option deductions, the benefit of which will be credited to equity when
realized.
Due to the "Change of Ownership" provisions of the Internal Revenue Code,
the availability of the Company's net operating loss carryforwards and tax
credit may be subject to an annual limitation against taxable income in future
periods. The annual limitation may result in the expiration of the net
operating loss and tax credit carryforwards before utilization.
Note 8--Segment Reporting
The Company operates in one segment, business-to-business electronic
commerce solutions. Identifiable assets are classified based on the location of
the Company's facilities. Revenues are assigned based on the location of the
customer. Long-lived assets represent those material long-lived assets that can
be associated with a particular geographic area. Information regarding
operations in different geographic areas is as follows (in thousands):
Year Ended December 31,
-----------------------
2000 1999 1998
-------- ------- ------
Revenues:
United States...................................... $117,142 $31,541 $7,627
International...................................... 17,587 -- --
-------- ------- ------
Total............................................ $134,729 $31,541 7,627
======== ======= ======
Long-lived assets:
United States...................................... $ 19,883 $ 5,176 $1,056
International...................................... 1,387 37 --
-------- ------- ------
Total............................................ $ 21,270 $ 5,213 $1,056
======== ======= ======
Note 9--Related Party Transaction
In August 1999, certain employees of the Company exercised their stock
options prior to vesting by issuance of full recourse promissory notes to the
Company. The aggregate notes face value of the $291,000 bear interest at a rate
of 4% per annum and are due in August 2004. The net amount outstanding has been
reflected as a separate component of stockholders' equity.
Note 10--Employee Benefit Plan
Deferred Compensation
In December 1998, the Company established a nonqualified, unfunded deferred
compensation plan for certain key executives providing for payments upon
retirement, death or disability. Under the plan, certain employees receive
payments equal to the sum of all amounts deferred at the election of the
employee and any corporate contributions credited to the plan and due and owing
to the employee, together with earning adjustments, minus any distributions.
Through December 31, 2000, the Company did not make any contributions to the
plan.
The Company has recorded the assets and liabilities for the deferred
compensation at gross amounts in the accompanying balance sheet because such
assets are not protected from the Company's general creditors and,
51
VITRIA TECHNOLOGY, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
as such, these assets could be used to meet the obligations of the Company in
the event of bankruptcy. The assets are recorded at fair value. Any changes in
fair value are recognized as a reduction or increase in compensation expense.
Plan assets and liabilities were $352,000 at December 31, 2000 and $182,000 at
December 31, 1999.
Equity Incentive Plans
In March 1995, the Company adopted the 1995 Equity Incentive Plan, which
provides for the granting of stock options, stock appreciation rights, stock
bonuses and restricted stock to employees, directors and consultants of the
Company. In October 1998, the Company adopted the 1998 Executive Incentive Plan
which provides for the granting of stock options to employees, directors and
consultants. Options granted under the 1995 Equity Incentive Plan and the 1998
Executive Incentive Plan (the "Plans") may be either incentive stock options
("ISO") or nonqualified stock options ("NSO"). ISOs may be granted only to
employees (including officers and directors who are also employees) of the
Company. NSOs may be granted to employees and consultants of the Company. In
January 1999 and December 1998, the Company sold 95,000 of the Series C
convertible preferred stock to employees under the 1995 Equity Incentive Plan.
In June 1999, the Board of Directors adopted and, in July 1999 the
stockholders approved, the 1999 Equity Incentive Plan, which amended the 1995
Equity Incentive Plan, and amended the 1998 Executive Incentive Plan (the
"Amended Plans"). The Amended Plans provide for the granting of stock options,
stock appreciation rights, stock bonuses, and restricted stock purchase awards
to employees, including officers, directors or consultants. The Company has
reserved 57,017,648 shares of common stock for issuance under the Amended
Plans. On December 31 of each year for 10 years, starting with the year 1999,
the number of shares reserved automatically increases by 6.5% of the
outstanding common stock calculated on a fully-diluted basis, with the number
of options granted which qualify as incentive stock options never to exceed
32,000,000. Fully diluted common stock includes common stock subject to
Vitria's right of repurchase and common stock issuable upon the exercise of
stock options. The remaining number of authorized shares that could be issued
under the Amended Plans was 22,604,127 at December 31, 2000.
On October 26, 2000, the Board of Directors adopted the 1999 Equity
Incentive Plan for French Employees (the "French Plan") which is a sub-plan to
the 1999 Equity Incentive Plan. The French Plan only provides for the granting
of stock options.
Options under the Amended Plans may be granted for periods of up to ten
years and at prices no less than 85% of the estimated fair value of the shares
on the date of grant as determined by the Board of Directors, provided,
however, that (i) the exercise price of an ISO and NSO shall not be less than
100% and 85% of the estimated fair value of the shares on the date of grant,
respectively, and (ii) the exercise price of an ISO or NSO granted to a 10%
shareholder shall not be less than 110% of the estimated fair value of the
shares on the date of grant. Furthermore, under the 1998 Executive Incentive
Plan, no employee shall be eligible to be granted options to purchase more than
1,600,000 shares of common stock during any calendar year. Options granted
generally vest over a five year or four year period. A portion of the shares
sold to employees are subject to a right of repurchase by the Company subject
to vesting, which is generally over a five year period from the earlier of
grant date or employee hire date, as applicable, until vesting is complete. At
December 31, 2000 and 1999, there were approximately 3,490,000 and 6,342,000
shares, respectively, subject to repurchase.
52
VITRIA TECHNOLOGY, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following table summarizes information about stock option transactions
under the Amended Plans (in thousands, except per share amounts):
Year Ended December 31,
--------------------------------------------------
2000 1999 1998
---------------- ---------------- ----------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------ -------- ------ -------- ------ --------
Outstanding at beginning of
period.................... 14,552 $ 3.37 7,508 $ 0.09 6,508 $0.06
Granted below fair value... 140 45.75 11,586 1.47 13,032 0.08
Granted at fair value...... 7,045 31.04 1,768 18.96 -- --
Grant above fair value..... 195 34.75 -- -- -- --
Exercised.................. (1,617) 0.72 (4,998) 0.30 (8,056) 0.06
Canceled................... (2,145) 11.56 (1,312) 0.53 (3,976) 0.06
------ ------ ------
Outstanding at end of
period.................... 18,170 14.04 14,552 3.37 7,508 0.09
====== ====== ======
Options vested............. 14,896 9,160 240
Weighted average fair value
of options granted below
fair value................ $45.38 $ 2.75 $1.67
Weighted average fair value
of options granted at fair
value..................... $28.70 $17.87 $--
Weighted average fair value
of options granted above
fair value................ $ 0.63 $ -- $ --
The following table summarizes the information about stock options
outstanding and exercisable as of December 31, 2000 (in thousands, except per
share amounts):
Options Outstanding and Exercisable
----------------------------------------------------
Number Weighted Average
Outstanding Remaining Contractual Weighted Average
Range of Exercise Price in thousands Life in years Exercise Price
----------------------- ------------- --------------------- ----------------
$0.06--$0.26 3,545 7.58 $ 0.13
$2.00 4,641 8.54 2.00
$2.50--$13.25 4,545 9.27 7.81
$13.41--$56.88 5,439 9.27 38.58
------
18,170
======
53
VITRIA TECHNOLOGY, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Fair value disclosures
The Company applies the measurement principles of APB No. 25 in accounting
for its stock option plan. Had compensation expense for options granted for the
years ended December 31, 2000, 1999 and 1998 been determined based on the fair
value at the grant dates as prescribed by SFAS No. 123, the Company's net loss
and net loss per share would have been increased to the pro forma amounts
indicated below.
Year Ended December 31,
---------------------------
2000 1999 1998
-------- -------- -------
Net loss available to common stockholders:
As reported................................. $ (1,278) $(16,014) $(9,569)
-------- -------- -------
Pro forma................................... $(77,779) $(24,438) $(9,628)
-------- -------- -------
Net loss per share available to common
stockholders:
As reported:
Basic and diluted........................... $ (0.01) $ (0.21) $ (0.20)
-------- -------- -------
Pro forma:
Basic and diluted........................... $ (0.64) $ (0.32) $ (0.20)
-------- -------- -------
Because the determination of fair value of all options granted after the
time the Company became a public entity includes volatility factors, the above
results may not be representative of future periods.
The Company calculated the fair value of each option grant on the date of
grant using the Black-Scholes option pricing model as prescribed by SFAS No.
123 and the following assumptions:
Year Ended December 31,
--------------------------
2000 1999 1998
---- --------- ---------
Risk-free interest rates......................... 6.00% 4.60-6.19% 4.13-5.46%
Expected lives (in years)........................ 5 5 5
Dividend yield................................... 0% 0% 0%
Expected volatility.............................. 160% 230% 0%
1999 Employee Stock Purchase Plan
In June 1999, the Board of Directors adopted, and in July 1999 the
stockholders approved, the 1999 Employee Stock Purchase Plan ("Purchase Plan").
Under the plan, eligible employees can have up to 10% of their earnings
withheld to be used to purchase shares of common stock on specified dates
determined by the Board of Directors. The price of common stock purchased under
the Purchase Plan will be equal to 85% of the lower of the fair market value of
the common stock on the commencement date of each offering period or the
specified purchase date. The Board of Directors may specify a look-back period
of up to 27 months.
The Purchase Plan provides for the issuance of shares of common stock
pursuant to purchase rights granted to employees. At the time it was adopted by
the Board of Directors, 6,000,000 shares were reserved for issuance under the
Purchase Plan. On August 14 of each year for 10 years, starting with the year
2000, the number of shares reserved for issuance under the Purchase Plan
automatically increases by the greater of (i) 2% of the outstanding shares on a
fully-diluted basis, or (ii) the number of shares required to restore the
reserve to 6,000,000 shares. Such automatic share reserve increases may not
exceed 66,000,000 shares in the aggregate over a 10-year period. On August 14,
2000, 2,756,131 shares were added to the reserve. At December 31, 2000, 705,214
shares had been issued to date and 8,050,917 shares were reserved for future
issuance.
54
VITRIA TECHNOLOGY, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Unearned stock-based compensation
In connection with certain stock option grants, the Company recorded
approximately $6.2 million and $6.8 million of unearned stock compensation for
the excess of the deemed fair market value over the exercise price at the date
of grant for the years ended December 31, 1999 and 1998, respectively. Stock-
based compensation is being recognized, using the multiple option method as
prescribed by FASB Interpretation No. 28, over the option vesting period of
generally five years. As a result, amortization of stock-based compensation was
$3.4 million, $4.5 million, and $1.4 million for the years ended December 31,
2000, 1999, and 1998, respectively, and is expected to be $1.9 million in 2001,
$1.1 million in 2002, $500,000 in 2003 and $100,000 in 2004. Unearned
compensation expense will be reduced in future periods to the extend that
options are terminated prior to vesting. We recorded expenses of $320,000,
$46,000 and $147,000 for the years ended December 31, 2000, 1999 and 1998,
respectively, in connection with stock issued for services rendered.
The breakdown of the amortization of stock-based compensation is as follows
(in thousands):
Year Ended December
31,
--------------------
2000 1999 1998
------ ------ ------
Sales and marketing.................................... $1,306 $1,905 $ 800
Research and development............................... 1,233 1,537 370
General and administrative............................. 609 739 154
Cost of sales.......................................... 272 344 100
------ ------ ------
Total amortization of stock-based compensation......... $3,420 $4,525 $1,424
====== ====== ======
401(k) Plan
In May 1996, the Board of Directors adopted an employee savings and
retirement plan (the "401(k) Plan") covering substantially all of the Company's
employees. Pursuant to the 401(k) Plan, eligible employees may elect to reduce
their current compensation by up to the statutory prescribed limit and have the
amount of such reduction contributed to the 401(k) Plan. The Company may make
contributions to the 401(k) Plan on behalf of eligible employees. To date, the
Company has not made any contributions to the 401(k) Plan.
Note 11--Subsequent Events (Unaudited)
On February 28, 2001, the Company announced that its Board of Directors had
approved a voluntary stock option exchange program for its employees. Under the
program, employees will have the opportunity to cancel outstanding stock
options granted to them on or after September 17, 1999 in exchange for a new
option grant for an equal number of shares to be granted at a future date. The
new options would be issued no earlier than six months and one day after the
cancellation date. The exercise price of the new options will be based on the
market price of the Company's common stock as reported on the Nasdaq National
Market at the time the new options are granted. Members of the Company's Board
of Directors, executive staff and vice presidents will not be eligible to
participate in this program.
On March 26, 2001, the Company announced that it has entered into a
definitive agreement to acquire XMLSolutions Corporation, a provider of EDI and
XML transformation technology. The total purchase price will be approximately
$15 million, of which $7 million will be paid at the closing in cash to
preferred shareholders and $8 million will be used to retire short-term debt
and other liabilities of XMLSolutions. The closing of the acquisition is
subject to the approval of the shareholders of XMLSolutions, as well as the
satisfaction of certain closing conditions. The Company expects to complete the
transaction in April 2001.
55
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, on March 28, 2001.
Vitria Technology, Inc.
/s/ JoMei Chang, Ph.D.
/s/ JoMei Chang, Ph.D.
By___________________________________
JoMei Chang, Ph.D.
President and Chief Executive
Officer
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.
Signatures Title Date
---------- ----- ----
/s/ JoMei Chang, Ph.D. President, Chief Executive March 28, 2001
______________________________________ Officer and Director
JoMei Chang, Ph.D. (Principal Executive
Officer)
/s/ Paul R. Auvil, III Vice President, Finance March 28, 2001
______________________________________ and Chief Financial
Paul R. Auvil, III Officer (Principal
Financial and Accounting
Officer)
/s/ M. Dale Skeen, Ph.D. Chief Technology Officer March 28, 2001
______________________________________ and Director
M. Dale Skeen, Ph.D.
/s/ Robert M. Halperin Director March 28, 2001
______________________________________
Robert M. Halperin
/s/ William H. Younger, Jr. Director March 28, 2001
______________________________________
William H. Younger, Jr.
/s/ John L. Walecka Director March 28, 2001
______________________________________
John L. Walecka
56
Schedule II
Valuation and Qualifying Accounts
(in thousands)
Balance at Amount
beginning charged to Balance at
of year profit and loss Deductions end of year
---------- --------------- ---------- -----------
Allowance for Bad Debts
Year ended December 31,
1998.................... $ 35 $ 350 $ (52) $ 333
Year ended December 31,
1999.................... 333 256 (10) 579
Year ended December 31,
2000.................... 579 2,922 -- 3,501
57
EXHIBIT INDEX
Exhibit
Number Description of Document
------- -----------------------
3.1(1) Amended and Restated Certificate of Incorporation of Vitria.
3.2(2) Certificate of Amendment of Restated Certificate of Incorporation.
3.3(3) Bylaws of Vitria.
4.1 Reference is made to Exhibits 3.1 through 3.3.
4.2(3) Specimen Stock Certificate.
4.3(3) Second Amended and Restated Investor Rights Agreement, dated May 20,
1999.
10.1(3) Form of Indemnity Agreement.
10.2(4) Amended and Restated 1999 Equity Incentive Plan.
10.3(5) 1998 Executive Incentive Plan.
10.4(6) 1999 Employee Stock Purchase Plan.
10.5(3) 1998 Nonqualified Deferred Compensation Plan.
10.6(3) Standard Industrial/Commercial Single-Tenant Lease-Net by and
between Portola Land Company and Vitria, dated January 28, 1997.
10.7(3) Sublease by and between Applied Materials, Inc. and Vitria, dated
April 6, 1999.
10.8(7) First Amendment to Sublease by and between Applied Materials, Inc.
and Vitria, dated December 14, 1999.
10.9(8) Lease by and between Opus/AEW Office Development Company, L.L.C. and
Vitria, dated March 20, 2000.
10.10(9) Sublease by and between Lattice Semiconductor Corporation and
Vitria, dated May 30, 2000.
10.11 1999 Equity Incentive Plan for French Employees.
16.1(10) Letter re: Change in Certifying Accountants.
23.1 Consent of Ernst & Young LLP, Independent Auditors.
23.2 Consent of PricewaterhouseCoopers LLP, Independent Accountants.
- --------
(1) Filed as Exhibit 3.2 to our Registration Statement on Form S-1, as
amended, File No. 333-81297, filed on June 22, 1999, and incorporated
herein by reference.
(2) Filed as Exhibit 3.5 to our Quarterly Report on Form 10-Q for the quarter
ended June 30, 2000, filed on August 14, 2000, and incorporated herein by
reference.
(3) Previously filed as the like-numbered Exhibit to our Registration
Statement on Form S-1, as amended, File No. 333-81297, filed on June 22,
1999, and incorporated herein by reference.
(4) Filed as Exhibit 99.1 to our Registration Statement on Form S-8, as
amended, File No. 333-91325, filed on November 19, 1999, and incorporated
herein by reference.
(5) Filed as Exhibit 99.2 to our Registration Statement on Form S-8, as
amended, File No. 333-91325, filed on November 19, 1999, and incorporated
herein by reference.
(6) Filed as Exhibit 99.3 to our Registration Statement on Form S-8, as
amended, File No. 333-91325, filed on November 19, 1999, and incorporated
herein by reference.
(7) Previously filed as the like-numbered Exhibit to our Registration
Statement on Form S-1, as amended, File No. 333-95319, filed on January
25, 2000, and incorporated herein by reference.
(8) Filed as Exhibit 10.1 to our Quarterly Report on Form 10-Q for the quarter
ended March 31, 2000, filed on May 15, 2000, and incorporated herein by
reference.
(9) Previously filed as the like-numbered Exhibit to our Quarterly Report on
Form 10-Q for the quarter ended June 30, 2000, filed on August 14, 2000,
and incorporated herein by reference.
(10) Filed as Exhibit 16.1 to our Current Report on Form 8-K filed on March 23,
2000, and incorporated herein by reference.
58