10-K 1 d10k.htm FORM 10-K Form 10-K
Table of Contents

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 


 

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, 2002

 

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

 


 

VITRIA TECHNOLOGY, INC.

(Exact name of registrant as specified in its charter)

 

Delaware

 

77-0386311

(State or other jurisdiction

of incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

945 Stewart Drive

Sunnyvale, CA 94085

(Address, including zip code, of principal executive offices)

 

Registrant’s telephone number, includes area code: (408) 212-2700

 


 

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

 


 

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. ¨

 

Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes  x  No  ¨

 

The aggregate market value of the voting stock held by non-affiliates of the registrant as of June 28, 2002 was approximately: $82,665,000. Shares of common stock held by each executive officer and director and their affiliates as of June 28, 2002 have been excluded from this computation.

 

Number of shares of common stock outstanding as of February 28, 2003: 130,423,230

 

DOCUMENTS INCORPORATED BY REFERENCE

 

The Registrant has incorporated by reference into Part III hereof portions of its Proxy Statement for its 2003 Annual Meeting of Stockholders to be filed by April 30, 2003.

 



Table of Contents

 

VITRIA TECHNOLOGY, INC.

 

TABLE OF CONTENTS

 

         

Page


    

PART I

    

ITEM 1.

  

BUSINESS

  

3

ITEM 2.

  

PROPERTIES

  

12

ITEM 3.

  

LEGAL PROCEEDINGS

  

12

ITEM 4.

  

SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

  

13

    

PART II

    

ITEM 5.

  

MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

  

14

ITEM 6.

  

SELECTED FINANCIAL DATA

  

15

ITEM 7.

  

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

  

16

ITEM 7A.

  

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

  

30

ITEM 8.

  

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

  

38

ITEM 9.

  

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

  

38

    

PART III

    

ITEM 10.

  

DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

  

39

ITEM 11.

  

EXECUTIVE COMPENSATION

  

39

ITEM 12.

  

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

  

39

ITEM 13.

  

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

  

39

ITEM 14.

  

CONTROLS AND PROCEDURES

  

39

    

PART IV

    

ITEM 15.

  

EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K

  

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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 30 through 38 of this report on Form 10-K. These business risks should be considered in evaluating our prospects and future financial performance.

 

PART I

 

ITEM 1.    BUSINESS

 

Overview

 

Vitria is a leading provider of business process, integration, and management solutions. Our products and services enable corporations in healthcare, finance, telecommunications and other markets to gain greater real-time operational visibility and control of strategic business processes that are currently fragmented across multiple systems, manual processes and trading partner interactions. To accomplish this, we develop and deliver the BusinessWare® business process integration software platform together with pre-built and configurable content to solve industry-specific problems, such as healthcare claims transaction management, straight-through processing in capital markets, telecommunications service provisioning, consolidated order management, and manufacturing and logistics. Vitria was incorporated in California in October 1994 and reincorporated in Delaware in July 1999.

 

Our flagship BusinessWare integration platform uses graphically modeled business process logic as the foundation for orchestrating complex, real-time interactions between dissimilar software applications, Web services, individuals, and trading partners over corporate networks and the Internet. By automating and measuring previously fragmented business processes from start to finish, our solutions are designed to:

 

    Accelerate process cycle times by removing delays caused by manual processes,

 

    Enhance executive and information technology, or IT, visibility into operational business performance by displaying process information in real time,

 

    Reduce time-consuming and error-prone manual processes,

 

    Enforce industry and company-specific best practices with automated business rules and workflows, and

 

    Ensure greater consistency and accuracy of data.

 

Solutions and Products

 

    Vitria’s Business Process Integration Solutions

 

Vitria combines technology leadership with industry domain expertise in healthcare, finance and telecommunications to improve strategic business processes across systems, people and trading partners. Through pre-built and specifically configured business process integration solutions that preserve and extend a company’s existing technology investments, Vitria solutions are designed to provide real-time visibility and streamlined control over processes and data to reduce costs, increase revenues, improve customer experience, and ensure regulatory compliance.

 

Vitria has developed years of intellectual property around automating industry-specific business processes in the healthcare, finance and telecommunications markets that can be either pre-built and pre-packaged in

 

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software and bundled with the BusinessWare platform, or used by Vitria’s professional services to rapidly design and configure solutions. This focus on business process solutions allows Vitria to concentrate its product development and marketing efforts on demonstrating the measurable business value of process integration to business executives, in addition to demonstrating the technical value of our platform to information technology professionals. Examples of business process integration problems that Vitria has developed solutions for include:

 

    Claims Transaction Management: designed to provide healthcare insurance payers with greater visibility and acceleration of complete “submit-to-remit” claims lifecycle in order to reduce administrative costs and improve customer service.

 

    SWIFT Management: allows banks and brokerages to automatically generate messages that are compliant with the ever-changing requirements of the SWIFT financial network, convert between formats and repair failed trades in order to cut operational costs and optimize operations.

 

    Service Provisioning: allows telecommunications service providers to take and fulfill an order or change order efficiently and effectively, resulting in higher customer satisfaction, lower inventory costs and optimal use of service labor resources.

 

While each Vitria customer has unique aspects of their business processes, there are also many common elements to recurring business integration problems that lend themselves to a more standardized approach. A pre-built solutions approach is designed to satisfy customers’ desire for faster time-to-value, lower cost of implementation, and leveraging industry best practices. Pre-built solution components can include:

 

    business process models,

 

    human task automation,

 

    executive and other operational business dashboards,

 

    exception handling rules and workflows,

 

    data validation rules and data translations for common electronic documents,

 

    data translations between common applications,

 

    and application connectors.

 

Because these solution components are built on our general-purpose BusinessWare integration platform, each is fully configurable to meet customers’ specific business and technology requirements.

 

Vitria’s Health Insurance Portability and Accountability Act, or HIPAA, Compliance solution is an example of a pre-built solution. It provides transaction and code set compliance with federal HIPAA regulations that provides a pre-built, re-usable foundation for other business process improvements such as claims transaction management. Vitria intends to develop more pre-built solutions, including co-developing pre-built solutions with select systems integrators.

 

    Vitria’s BusinessWare Platform

 

BusinessWare unifies the five elements that we believe are essential for business process integration software, all in a single platform:

 

  (1)   Business Process Management, or BPM: BPM manages the steps of a cross-functional business process to ensure optimal completion of the process (e.g., from submission of a healthcare claim by a care provider to the remittance of payment). It uses graphical business process models together with automated human workflows to define, automate and orchestrate transactions and the exchange of information between internal business applications, people and external trading partners.

 

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  (2)   Business Analysis and Monitoring, or BAM: BAM provides real-time monitoring and analysis of business processes, providing greater visibility and business intelligence needed to optimize operational efficiency. Our two key BAM components, Cockpit and Analyzer, are designed to continuously gather business process data across applications, human workflows and trading partner interactions; analyze and visualize this data in real time; and enable business executives and process owners to identify and respond to both business and integration problems or opportunities as they occur.

 

  (3)   Business Vocabulary Management, or BVM: BVM is comprised of content and tools that enable the flexible, scalable management of translations between industry-specific and application-specific data formats and meanings (vocabularies) as represented in electronic transactions between businesses (e.g. via Electronic Data Interchange, or EDI, or eXtensible Markup Language, or XML), and between a company’s internal applications. BVM uses automated exception handling, business rules-based validation and advanced data transformation designed to ensure that differences in how data is represented does not interfere with successful completion of a business transaction (e.g. fulfilling a customer’s order, processing a healthcare claim, or settling a financial transaction). To address the specific needs of each industry, BVM provides packaged vocabularies for various industries based on the specific business terms used within those industries.

 

  (4)   Business-to-Business Integration, or B2B: B2B enables the secure and reliable completion of transactions and the exchange of business information between customers and partners over the Internet to support collaborative business processes. Combined with BPM and BAM, B2B helps companies manage their value chain interactions from end to end as an integrated part of their larger business processes.

 

  (5)   Enterprise Application Integration, or EAI: EAI enables the secure and reliable movement of information in and out of internal business applications. By enabling internal applications to communicate with one another, EAI helps unify and improve enterprise processes while maximizing the value of a company’s application investments. Companies may use BusinessWare’s BPM, BAM and BVM capabilities to control business processes on top of industry-standard methods of transporting data from application to application (such as Web services and Java Messaging Service) or third-party EAI infrastructures.

 

BusinessWare allows customers to solve their business problems using graphical models rather than developing custom programs. Rather than writing new 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.

 

Once customers use BusinessWare to define their business process models and integrate the underlying IT systems, people and partners, 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.

 

We believe that BusinessWare provides the following benefits to customers:

 

Easy for Business Managers to Use.    Our graphical process modeling foundation allows customers to visualize and focus more on business process objectives rather than the mechanics of application integration.

 

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.

 

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Leverages IT Investment.    We help companies 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 Unified Solution.    BusinessWare combines the five elements of an business process integration 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’ strategic business process initiatives demands that our software satisfies high standards for performance, security and reliability. BusinessWare is designed for superior performance to accommodate the high transaction volumes enabled by the Internet. In addition, our solution ensures 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 become the leading provider of business process integration solutions through a two-part strategy:

 

  (1)   Drive innovation of the BusinessWare platform in the areas of business process integration that provide highest business value to our customers.

 

  (2)   Target segments of the healthcare, finance and telecommunications markets with pre-defined and pre-built solutions that address recurring, complex, high-value business process problems to drive BusinessWare innovation and market penetration.

 

Key elements of our strategy to achieve this objective include:

 

Accelerate Development Of Integration Solutions.    We are accelerating the definition and development of pre-built industry solutions built on BusinessWare. We intend to leverage the industry expertise of system integrators and customers to rapidly build these industry-specific solutions. We believe customers and system integrators will derive significant time-to-market benefits and reduce their implementation and maintenance costs by deploying these out-of-the-box business solutions.

 

Target Complex Problems With High Business Value.    Integration opportunities vary from the very simple to the very complex. We believe the sophistication and maturity of our BusinessWare platform enable us to target problems with a higher degree of business and technical complexity where the potential for business value and return on investment is high. We can help customers mitigate risk inherent in complex projects by breaking down the business problem and technical implementation into discrete phases, each with its own identifiable and measurable business value. BusinessWare’s use of componentized services is designed to maximize and accelerate the re-use of integration work allowing each phase of the project to quickly build upon the proven components of the previous project phase.

 

Develop and Leverage Deep Systems Integrator Relationships.    Vitria is also developing relationships with a select number of systems integrators with extensive presence and deep domain expertise in our target markets

 

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in order to add further value to our customers and extend our presence in the marketplace. We believe the business process integration focus of our BusinessWare platform makes it particularly attractive for systems integrators to capture and productize their business process domain expertise in pre-built software, furthering their value proposition to their customers.

 

Continue Product and Technology Leadership.    We intend to continue to introduce innovative products and enhancements to our core platform that enable our customers to extract greater business value from their existing IT investments while rapidly deploying complex business solutions more easily and cost-effectively. As an example, in December 2002, we released BusinessWare 4, a significantly enhanced integration platform designed to simplify and accelerate process-driven integration. Innovations include:

 

    Transport Independence: enables BusinessWare’s higher business value functions to run on top of industry standard and third-party transports;

 

    Componentized Services: encapsulate processes and other integration components such as Web services for greater re-use; and

 

    Solution-Level Modeling and Solution Lifecycle Management: enables greater simplicity and lower cost of development and maintenance of unified integration solutions.

 

We have assembled a team of prominent developers and engineers with expertise in business process logic and modeling, Internet communication protocols, messaging technologies, and enterprise software and have established a corporate culture that fosters continuous product innovation.

 

Leverage Industry Standards.    By promoting and embracing emerging and established Internet standards such as Web services and XML, as well as legacy de-facto standards such as EDI and mainframe connectivity, we are able to provide our customers with a bridge between legacy and future investments.

 

Extend Relationships with Customers.    Once BusinessWare is deployed as a platform for business process automation and improvement, it is designed to be quickly and cost-effectively used to solve subsequent new business problems or further optimize solutions to previous problems while maximizing the re-use of previous work product. 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.

 

Sales and Marketing

 

We license our products and sell services through our direct sales organization, complemented by the selling and support efforts of our system integrators and other strategic partners. As of December 31, 2002, our sales force consisted of sales professionals and system engineers located in 12 domestic locations, one location in Canada, one in Mexico, five locations in Europe, four locations in Asia, one in Australia and one in South America. System engineers who provide pre-sales support to potential customers on product information and deployment capabilities complement our direct sales professionals.

 

Our sales process requires that we work closely with targeted customers to identify short-term technical needs and long-term business 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 business cases for 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

 

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from two to nine months. We expect that future results may be affected by the fiscal or quarterly budgeting cycles of our customers. To date, we have not experienced significant seasonality of revenue.

 

Our marketing efforts are focused on educating potential customers, generating new sales opportunities, and creating awareness of our product and its 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 assist us in delivering solutions to our customers and meeting their business needs, we have established relationships with system integrators, technology vendors and independent software vendors.

 

System Integrators.    We have increased the focus on our relationships with leading consulting firms, including: Accenture, BearingPoint, Cap Gemini Ernst & Young, Deloitte Consulting, and IBM Business Services. These system integrators have deep relationships across a broad range of enterprise customers and extensive domain expertise. Through these relationships, we deliver comprehensive solutions for healthcare, financial services, telecommunications and other vertical markets.

 

Technology Vendors.    We collaborate with leading application software, database and hardware vendors to ensure compatibility of BusinessWare with their software and hardware platforms. We have established strategic relationships with leading companies such as BEA, Hewlett-Packard, IBM, Microsoft, Sybase, Oracle, PeopleSoft, Portal Software, Siebel Systems, and Sun Microsystems. We focus on marketing and development activities with these vendors to ensure we are delivering competitive products to our joint customers.

 

Independent Software Vendors (ISV).    Many ISVs have developed connectors and applications to the BusinessWare platform. Most of these ISVs are focused in a particular vertical market and together we offer solutions for our joint customers.

 

Service and Support

 

The primary function of our professional services organization is to deliver the high quality deployment of our technology. We provide consulting services in the areas of project planning, architecture design, implementation, operational management and performance management.

 

Research and Development

 

As of December 31, 2002, our engineering department 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.

 

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Documentation.    This group is responsible for creating and maintaining customer and system integrator documentation for our products.

 

Solutions.    Our solutions group is responsible for developing our collaborative applications.

 

Our research and development expenses were $31.0 million in 2002, $41.0 million in 2001 and $29.4 million in 2000.

 

Competition

 

The market for our products is extremely competitive, evolving and subject to rapid technological change. The intensity of competition is expected to increase in the future. We believe that business process integration software must address five requirements: (1) BPM, (2) BAM, (3) BVM, (4) B2B integration, and (5) EAI. We believe BusinessWare’s ability to address all five requirements is an important differentiating factor. While we offer a comprehensive suite of application integration solutions, we compete with various providers of general application integration products including BEA, IBM, IONA, Mercator Software, Microsoft, SeeBeyond Technology, Sybase, Tibco Software and webMethods. We expect additional competition from other established and emerging companies, including those focused on specific vertical markets like telecommunications, healthcare and financial services. In addition, we may face increased pricing pressures from our current competitors and new market entrants in the future. “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 products. We expect that internally developed application integration and process automation efforts will continue to be a significant source of competition for the foreseeable future. Finally, major enterprise application companies including Oracle, PeopleSoft, Siebel and SAP AG have announced their intent to offer some integration products to supplement their existing product lines, and several have already done so.

 

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 property rights. We rely primarily on a combination of licensing provisions, confidentiality procedures, and the

 

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protections afforded by the law relating to patents, copyrights, trademarks and trade secrets to accomplish these goals.

 

We typically license our software solutions pursuant to non-exclusive license agreements that govern and impose restrictions on our customers’ ability to utilize the software. In addition, we seek to avoid disclosure of our trade secrets by taking steps that are customary in the industry, 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, patent and copyright laws.

 

We pursue an active patent prosecution program. To date, we have been awarded two patents relating to our technology, and we have numerous patent applications pending. Of course, it is possible that the patents we have received could be successfully challenged or invalidated, and that the patents we have applied for or our potential future patents will not be granted or may be successfully challenged. 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, and 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. Unauthorized use 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.

 

It is also possible that third parties will claim that we have infringed their current or future intellectual property. We expect that software 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 could be harmed.

 

Employees

 

As of December 31, 2002, we had a total of 549 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 process integration solutions. We recognized approximately 35% of our revenue from customers located outside the United States in 2002 compared to approximately 33% in 2001 and approximately 13% in 2000. No one region or country other than the U.S. accounted for more than 10% of revenues in 2002, 2001 or 2000. The information included in Note 1 (under the heading “Segment information”) and Note 15 of Notes to the Consolidated Financial Statements, is incorporated herein by reference from Item 8 of Part II hereof.

 

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Executive Officers of the Registrant

 

The executive officers of Vitria and their ages as of February 28, 2003 are as follows:

 

Name


  

Age


  

Position


JoMei Chang, Ph.D.

  

50

  

Chief Executive Officer and Director

M. Dale Skeen, Ph.D.

  

48

  

Chief Technology Officer and Director

Gary Velasquez

  

42

  

President, Chief Operating Officer and Chief Financial Officer

Frank Yu

  

38

  

Senior Vice President, Engineering and Services

John Philpin

  

48

  

Vice President, Marketing

William McGrath

  

39

  

Vice President, General Counsel and Secretary

 

JoMei Chang, Ph.D., co-founded Vitria in 1994 and has been our Chief Executive Officer and a Director since Vitria’s inception. Dr. Chang also served as Vitria’s President from 1994 to 2002. From 1986 to 1994, Dr. Chang was Vice President and General Manager, Trader Workstation and General Manager, Emerging Technologies 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. From 1986 to 1994, Dr. Skeen served as Chief Scientist at TIBCO. From 1984 to 1986, Dr. Skeen was a research scientist at IBM’s Almaden Research Center. From 1981 to 1984, Dr. Skeen was on the faculty at Cornell University. 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.

 

Gary Velasquez is Vitria’s President, Chief Operating Officer and Chief Financial Officer. Mr. Velasquez joined Vitria as Executive Vice President in July 2002, was promoted to President of Americas Operations in November 2002, and assumed his current roles and responsibilities in January 2003. From February 2001 to June 2002, he served as President of the Business Transformation and Innovation Services Division of HealthNet, Inc., a managed health care organization. From November 1999 to January 2001, Mr. Velasquez served as President of the HealthNet’s New Ventures Group. From 1994 to 2002, Mr. Velasquez also served in various senior managerial positions with HealthNet and Foundation Health. From 1990 to 1994, Mr. Velasquez served as Chief Financial Officer and General Manager of Managed Health Network, Inc. (now a HealthNet subsidiary). From 1985 to 1990, he served as Vice President and Controller of Equicor, a joint venture between the Equitable Life Assurance Company and the Hospital Corporation of America. Mr. Velasquez holds a B.A. in Business Administration and an M.B.A. from the University of California, Los Angeles.

 

Frank Yu is our Senior Vice President, Engineering and Services. Mr. Yu joined Vitria as Vice President, Engineering in 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.A. in Computer and Information Sciences from the University of California, Santa Cruz.

 

John Philpin has been our Vice President of Marketing since August 2002. From 1998 to July 2002, Mr. Philpin served as Vice President of Sales, Marketing and Professional Services at Flypaper Corporation, a collaborative application software company. From 1996 to 1998, Mr. Philpin worked as an independent marketing consultant with a number of technology companies. From 1995 to 1996, Mr. Philpin served as a Vice

 

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President at Citicorp. Prior to that, Mr. Philpin worked for Oracle Corporation, a database and applications software company, in various capacities over eight years in both Europe and the United States. Mr. Philpin holds a B.Sc. in Mathematics from the University of East Anglia, United Kingdom.

 

William McGrath has been our Vice President, General Counsel and Secretary since November 2002. From June 1999 to October 2002, he served as General Counsel at eGain Communications Corp., a provider of customer interaction software. From January 1997 to May 1999, Mr. McGrath was an associate with Perkins Coie LLP, a national law firm. Mr. McGrath has also worked for other national law firms and held positions with various branches of the federal government. Mr. McGrath holds a B.A. in Political Science from Claremont McKenna College and a J.D. from the University of Chicago Law School.

 

Available Information

 

We make available free of charge through our Internet website, http://www.vitria.com, our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and, if applicable, amendments to those reports filed or furnished pursuant to Section 13(a) of the Exchange Act as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC.

 

ITEM 2.    PROPERTIES

 

At December 31, 2002, our principal sales, marketing, research and development and administrative offices consist of approximately 108,000 square feet of leased space located in Sunnyvale, California under leases that expire in August 2003 and October 2007. We also have leases for sales offices in various locations in the U.S. and twelve foreign countries expiring on various dates through June 2013.

 

In addition, we have approximately 93,000 square feet of leased space in locations in the U.S. and in the United Kingdom that were exited as part of restructuring actions taken in 2002. We expect to exit approximately 79,000 square feet of additional office space in the U.S. and the United Kingdom in the first quarter of 2003 as part of further restructuring actions. After these office closures our principal offices in Sunnyvale, California will consist of approximately 64,000 square feet of office space under a lease agreement that will expire in August 2003.

 

ITEM 3.    LEGAL PROCEEDINGS

 

In November 2001, Vitria and certain of its officers and directors were named as defendants in a class action shareholder complaint filed in the United States District Court for the Southern District of New York, and captioned Kideys, et al., v. Vitria Technology, Inc., et al., Case No. 01-CV-10092. The plaintiffs allege that Vitria, certain of its officers and directors and the underwriters of its initial public offering, or IPO, violated federal securities laws because Vitria’s IPO registration statement and prospectus contained untrue statements of material fact or omitted material facts regarding the compensation to be received by, and the stock allocation practices of, the IPO underwriters. The plaintiffs seek unspecified monetary damages and other relief. Similar complaints were filed in the same court beginning in January 2001 against numerous public companies that first sold their common stock since the mid-1990s. All of these IPO-related lawsuits were consolidated for pretrial purposes before United States Judge Shira Scheindlin of the Southern District of New York. Defendants filed a global motion to dismiss the IPO-related lawsuits on July 15, 2002. Subsequent settlement discussions between the parties have resulted in an agreement by the plaintiffs to dismiss the named individual officers and directors of Vitria who were named as defendants in the IPO-related lawsuit. Judge Scheindlin entered a court order detailing this dismissal on October 9, 2002. On February 19, 2003, Judge Scheindlin issued a ruling denying in part and granting in part the Defendants’ motions to dismiss. We believe that the lawsuit against Vitria is without merit and intend to defend it vigorously.

 

In February 2003, Vitria and certain of our officers and directors were named as defendants in a class action shareholder complaint filed in the United States District Court for the Southern District of Florida, captioned

 

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Liu v. Credit Suisse First Boston Corporation (“CSFB”), et al., Case No. 03-20459. In the complaint, the plaintiffs allege that CSFB knowingly conspired with dozens of issuers, including Vitria, to conduct initial public offerings based on misinformation about our future prospects and the proper pricing of their shares, in violation of the anti-fraud provisions of section 10(b) of the Securities Exchange Act of 1934. The plaintiffs seek unspecified monetary damages and other relief. Neither Vitria nor our individual officers and directors have yet been served with the complaint. We believe that this lawsuit is without merit and we intend to defend it vigorously.

 

With the exception of the above lawsuits, we are not currently party to any other material pending legal proceedings, except routine legal proceedings arising in the ordinary course of and incidental to our business. We do not believe that these other proceedings, individually or collectively, will harm our business.

 

ITEM 4.    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

 

None.

 

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PART II

 

ITEM 5.    MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

 

Common Stock

 

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 2001

             

March 31, 2001

  

$

9.31

  

$

3.19

June 30, 2001

  

$

6.57

  

$

2.44

September 30, 2001

  

$

4.53

  

$

1.75

December 31, 2001

  

$

6.64

  

$

1.98

Fiscal 2002

             

March 31, 2002

  

$

8.36

  

$

3.75

June 30, 2002

  

$

3.86

  

$

0.91

September 30, 2002

  

$

1.27

  

$

0.62

December 31, 2002

  

$

1.20

  

$

0.66

 

As of December 31, 2002, there were approximately 371 stockholders of record of our common stock.

 

Dividend Policy

 

We have never paid any cash dividends on our common stock and do not expect to pay cash dividends for the foreseeable future. In addition, our credit facility with Silicon Valley Bank prohibits the payment of cash dividends.

 

Equity Compensation Plan Information

 

Information regarding our equity compensation plans will be contained in our definitive Proxy Statement with respect to our Annual Meeting of Stockholders, to be held on May 27, 2003, under the caption “Securities Authorized for Issuance Under Equity Compensation Plans” and is incorporated by reference in this report.

 

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ITEM 6.    SELECTED FINANCIAL DATA

 

The consolidated statement of operations data for the years ended December 31, 2002, 2001 and 2000, and the consolidated balance sheet data as of December 31, 2002 and 2001, have been derived from our audited financial statements included elsewhere in this Annual Report on Form 10-K. The consolidated statement of operations data for the years ended December 31, 1999 and 1998, and the consolidated balance sheet data as of December 31, 2000, 1999 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 has 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,


 
    

2002


    

2001


    

2000


    

1999


    

1998


 
    

(in thousands, except per share data)

 

Consolidated Statement of Operations Data:

                                            

Revenues:

                                            

License

  

$

36,009

 

  

$

77,518

 

  

$

102,287

 

  

$

21,790

 

  

$

5,198

 

Service and other

  

 

61,318

 

  

 

57,466

 

  

 

32,442

 

  

 

9,751

 

  

 

2,429

 

    


  


  


  


  


Total revenues

  

 

97,327

 

  

 

134,984

 

  

 

134,729

 

  

 

31,541

 

  

 

7,627

 

    


  


  


  


  


Cost of revenues:

                                            

License

  

 

2,845

 

  

 

1,607

 

  

 

935

 

  

 

407

 

  

 

—  

 

Service and other

  

 

32,719

 

  

 

29,759

 

  

 

22,051

 

  

 

7,315

 

  

 

2,905

 

    


  


  


  


  


Total cost of revenues

  

 

35,564

 

  

 

31,366

 

  

 

22,986

 

  

 

7,722

 

  

 

2,905

 

    


  


  


  


  


Gross profit

  

 

61,763

 

  

 

103,618

 

  

 

111,743

 

  

 

23,819

 

  

 

4,722

 

    


  


  


  


  


Operating expenses:

                                            

Sales and marketing

  

 

72,709

 

  

 

96,535

 

  

 

78,361

 

  

 

20,009

 

  

 

6,572

 

Research and development

  

 

30,970

 

  

 

40,978

 

  

 

29,441

 

  

 

10,736

 

  

 

4,794

 

General and administrative

  

 

20,736

 

  

 

20,168

 

  

 

14,230

 

  

 

3,991

 

  

 

1,807

 

Stock-based compensation

  

 

1,616

 

  

 

1,820

 

  

 

3,420

 

  

 

4,525

 

  

 

1,424

 

Amortization and impairment of intangible assets

  

 

2,748

 

  

 

3,608

 

  

 

—  

 

  

 

—  

 

  

 

—  

 

Impairment of goodwill

  

 

7,047

 

  

 

—  

 

  

 

—  

 

  

 

—  

 

  

 

—  

 

Restructuring charges

  

 

19,516

 

  

 

—  

 

  

 

—  

 

  

 

—  

 

  

 

—  

 

Acquired in-process technology

  

 

—  

 

  

 

1,500

 

  

 

—  

 

  

 

—  

 

  

 

—  

 

    


  


  


  


  


Total operating expenses

  

 

155,342

 

  

 

164,609

 

  

 

125,452

 

  

 

39,261

 

  

 

14,597

 

    


  


  


  


  


Loss from operations

  

 

(93,579

)

  

 

(60,991

)

  

 

(13,709

)

  

 

(15,442

)

  

 

(9,875

)

Other income, net

  

 

3,083

 

  

 

8,415

 

  

 

13,015

 

  

 

1,336

 

  

 

306

 

    


  


  


  


  


Net loss before income taxes

  

 

(90,496

)

  

 

(52,576

)

  

 

(694

)

  

 

(14,106

)

  

 

(9,569

)

Provision for income taxes

  

 

1,187

 

  

 

1,046

 

  

 

584

 

  

 

—  

 

  

 

—  

 

Deemed preferred stock dividend

  

 

—  

 

  

 

—  

 

  

 

—  

 

  

 

(1,908

)

  

 

—  

 

    


  


  


  


  


Net loss available to common stockholders

  

$

(91,683

)

  

$

(53,622

)

  

$

(1,278

)

  

$

(16,014

)

  

$

(9,569

)

    


  


  


  


  


Net loss per share available to common stockholders:

                                            

Basic and diluted

  

$

(0.71

)

  

$

(0.42

)

  

$

(0.01

)

  

$

(0.21

)

  

$

(0.20

)

Weighted average shares used in computation of net loss per share available to common stockholders:

                                            

Basic and diluted

  

 

129,586

 

  

 

126,851

 

  

 

122,365

 

  

 

75,748

 

  

 

48,012

 

 

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December 31,


    

2002


  

2001


  

2000


  

1999


  

1998


    

(in thousands)

Consolidated Balance Sheet Data:

                                  

Cash, cash equivalents and short-term investments

  

$

117,863

  

$

157,213

  

$

224,138

  

$

65,449

  

$

12,792

Working capital

  

 

101,258

  

 

147,574

  

 

197,118

  

 

54,237

  

 

12,336

Total assets

  

 

146,624

  

 

245,511

  

 

310,192

  

 

86,494

  

 

20,000

Deferred revenue

  

 

13,430

  

 

27,309

  

 

46,611

  

 

15,627

  

 

2,874

Stockholders’ equity

  

 

101,948

  

 

190,511

  

 

237,145

  

 

59,450

  

 

13,391

 

Beginning on January 1, 2002 the Company adopted FASB Emerging Issues Task Force No. 01-14, which requires companies to account for reimbursements received for incurred out-of-pocket expenses as revenue and the related expenses as cost of revenue (see Note 1). Adjustments to prior period financial statements have not been made because the amounts have not been material.

 

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 California October 1994 and reincorporated in Delaware in July 1999. We initially generated revenues exclusively through consulting contracts with third parties and government grants. In June 1997, we commercially released our first product and in September 1999, we had an initial public offering of common stock. We have incurred significant losses since inception, and as of December 31, 2002, we had an accumulated deficit of $170.9 million.

 

We derive revenues primarily from two sources: licenses, and services and other. Our products are typically licensed directly to customers for a perpetual term, with pricing based on the number of copies licensed, or 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 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 or per class basis and recognized as the classes are attended.

 

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We market our products through our direct sales force and augment our marketing efforts through relationships with system integrators and technology vendors. Our revenues to date have been derived primarily from accounts in the United States. We have international sales offices in Australia, Brazil, Canada, France, Germany, Italy, Japan, Korea, Mexico, Singapore, Spain, Taiwan and the United Kingdom.

 

Critical Accounting Policies and Estimates

 

Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures. We evaluate our estimates, on an on-going basis, including those related to revenue recognition, allowances for doubtful accounts, goodwill and purchased intangibles—impairment assessments and restructuring charges. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

 

We believe the following critical accounting policies affect the more significant judgments and estimates used in the preparation of our consolidated financial statements.

 

Revenue Recognition

 

We derive revenues from software licenses to end users for BusinessWare and other products and related services, which include maintenance and support, consulting and training services. In accordance with the provisions of Statement of Position 97-2, “Software Revenue Recognition,” as amended, we record 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 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 for the undelivered element, all revenue is deferred until sufficient objective evidence exists or all elements have been delivered. We treat all arrangements with payment terms longer than normal not to be fixed or determinable. Our normal payment terms currently range from “net 30 days” to “net 90 days” for domestic and international customers, respectively. Revenue is deferred for those agreements which exceed our normal payment terms and are therefore assessed as not being fixed or determinable. Revenue under these agreements is recognized as payments become due unless collectibility concerns exist, in which case revenue is deferred until payments are received. Our assessment of collectibility is particularly critical in determining whether revenue should be recognized in the current market environment. If collectibility is not considered probable, revenue is recognized when the fee is collected. Revenue on arrangements with customers who are not the ultimate users, primarily third-party systems integrators, is not recognized until evidence of sell-through arrangement to an end user has been received.

 

Service and other revenues include product maintenance, consulting, and training. Customers who license BusinessWare normally purchase maintenance contracts. These contracts provide 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 or per class basis and recognized as the classes are attended.

 

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Payments received in advance of revenue recognition are recorded as deferred revenue. When the software license arrangement requires us 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 provision of Statement of Position 81-1, Accounting for Performance of Construction Type and Certain Production Type Contracts. We recognize 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. These arrangements have not been common and, therefore, the significant majority of the Company’s license revenue in the past three years has been recognized under SOP 97-2.

 

Allowance for Doubtful Accounts

 

We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to deliver required payments to us. These allowances are established through analysis of the credit worthiness of each customer, which is based on credit reports from third parties, analysis of published or publicly available financial information and customer specific experience including payment practices and history. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. When we believe a collectibility issue exists with respect to a specific receivable, we record an allowance to reduce that receivable to the amount that we believe is collectible.

 

Goodwill and Purchased Intangibles—Impairment Assessments

 

In 2002, we recorded impairment charges of $7.0 million related to goodwill and $1.4 million related to acquired intangible assets. Under current accounting standards, which changed significantly at the start of 2002, we make judgments about the recoverability of goodwill and purchased intangible assets whenever events or changes in circumstances indicate impairment in the remaining value of the assets recorded on our balance sheet may exist. In order to estimate the fair value of these assets, we make various assumptions about the future prospects for the assets and typically estimate future cash flows to be generated. Based on these assumptions and estimates, we determine whether we need to take an impairment charge to reduce the value of the asset stated on our balance sheet to reflect its estimated fair value. Assumptions and estimates about future values and remaining useful lives are complex and often subjective. They can be affected by a variety of factors, including external factors such as industry and economic trends, and internal factors such as changes in our business strategy and our internal forecasts. Although we believe the assumptions and estimates we have made in the past have been reasonable and appropriate, different assumptions and estimates could materially impact our reported financial results. See Note 7 “Goodwill,” Note 8 “Intangible Assets” and Note 1 “Recent Accounting Pronouncements,” of the financial statements for more information about how we make these judgments.

 

Restructuring Charges

 

During 2002, we recorded $19.5 million of restructuring charges related to the realignment of our business operations. These charges represent expenses incurred in connection with certain cost reduction programs that we have undertaken, and consist primarily of the cost of involuntary termination benefits and remaining contractual lease payments and other costs associated with closed facilities, net of anticipated sublease income.

 

Only costs resulting from a restructuring plan that are not associated with, or that do not benefit activities that will be continued, are eligible for recognition as liabilities at the commitment date.

 

The charges for facility closure costs require the extensive use of estimates, including estimates and assumptions related to future maintenance costs, our ability to secure sub-tenants and anticipated sublease income to be received in the future. If we fail to make accurate estimates or to complete planned activities in a timely manner, we might record additional charges or reverse previous charges in the future. Such additional charges or reversals will be recorded to the restructuring charges line in our statement of operations in the period in which additional information becomes available to indicate our estimates should be adjusted.

 

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Table of Contents

 

Quarterly Results of Operations

 

The following tables set forth statement of operations data for each of the eight quarters ended December 31, 2002, 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,

2001


   

Jun. 30,

2001


   

Sep. 30,

2001


   

Dec. 31,

2001


   

Mar. 31,

2002


   

Jun. 30,

2002


   

Sep. 30,

2002


   

Dec. 31,

2002


 
   

(in thousands, except per share data)

 

Statement of Operation Data:

                                                               

Revenues:

                                                               

License

 

$

20,861

 

 

$

19,942

 

 

$

15,763

 

 

$

20,952

 

 

$

9,954

 

 

$

10,047

 

 

$

10,005

 

 

$

6,003

 

Service and other

 

 

14,477

 

 

 

14,459

 

 

 

14,324

 

 

 

14,206

 

 

 

14,695

 

 

 

16,471

 

 

 

16,038

 

 

 

14,114

 

   


 


 


 


 


 


 


 


Total revenues

 

 

35,338

 

 

 

34,401

 

 

 

30,087

 

 

 

35,158

 

 

 

24,649

 

 

 

26,518

 

 

 

26,043

 

 

 

20,117

 

Cost of revenues:

                                                               

License

 

 

325

 

 

 

297

 

 

 

420

 

 

 

565

 

 

 

455

 

 

 

1,974

 

 

 

112

 

 

 

304

 

Service and other

 

 

8,224

 

 

 

7,363

 

 

 

7,050

 

 

 

7,122

 

 

 

9,154

 

 

 

7,994

 

 

 

8,353

 

 

 

7,218

 

   


 


 


 


 


 


 


 


Total cost of revenues

 

 

8,549

 

 

 

7,660

 

 

 

7,470

 

 

 

7,687

 

 

 

9,609

 

 

 

9,968

 

 

 

8,465

 

 

 

7,522

 

   


 


 


 


 


 


 


 


Gross profit

 

 

26,789

 

 

 

26,741

 

 

 

22,617

 

 

 

27,471

 

 

 

15,040

 

 

 

16,550

 

 

 

17,578

 

 

 

12,595

 

   


 


 


 


 


 


 


 


Operating expenses:

                                                               

Sales and marketing

 

 

24,208

 

 

 

26,106

 

 

 

23,615

 

 

 

22,606

 

 

 

25,699

 

 

 

19,460

 

 

 

15,035

 

 

 

12,515

 

Research and development

 

 

9,782

 

 

 

11,027

 

 

 

10,914

 

 

 

9,255

 

 

 

9,508

 

 

 

8,717

 

 

 

6,922

 

 

 

5,823

 

General and administrative

 

 

3,845

 

 

 

4,562

 

 

 

4,082

 

 

 

7,679

 

 

 

5,924

 

 

 

5,590

 

 

 

4,614

 

 

 

4,608

 

Stock-based compensation

 

 

563

 

 

 

503

 

 

 

403

 

 

 

351

 

 

 

1,009

 

 

 

276

 

 

 

213

 

 

 

118

 

Amortization and impairment of intangible assets

 

 

—  

 

 

 

1,103

 

 

 

1,252

 

 

 

1,253

 

 

 

518

 

 

 

213

 

 

 

341

 

 

 

1,676

 

Impairment of goodwill

 

 

—  

 

 

 

—  

 

 

 

—  

 

 

 

—  

 

 

 

—  

 

 

 

7,047

 

 

 

—  

 

 

 

—  

 

Restructuring charges

 

 

—  

 

 

 

—  

 

 

 

—  

 

 

 

—  

 

 

 

—  

 

 

 

17,346

 

 

 

1,665

 

 

 

505

 

Acquired in-process technology

 

 

—  

 

 

 

1,500

 

 

 

—  

 

 

 

—  

 

 

 

—  

 

 

 

—  

 

 

 

—  

 

 

 

—  

 

   


 


 


 


 


 


 


 


Total operating expenses

 

 

38,398

 

 

 

44,801

 

 

 

40,266

 

 

 

41,144

 

 

 

42,658

 

 

 

58,649

 

 

 

28,790

 

 

 

25,245

 

Loss from operations

 

 

(11,609

)

 

 

(18,060

)

 

 

(17,649

)

 

 

(13,673

)

 

 

(27,618

)

 

 

(42,099

)

 

 

(11,212

)

 

 

(12,650

)

Other income, net

 

 

3,369

 

 

 

2,855

 

 

 

1,939

 

 

 

252

 

 

 

641

 

 

 

1,329

 

 

 

340

 

 

 

773

 

   


 


 


 


 


 


 


 


Net loss before income taxes

 

 

(8,240

)

 

 

(15,205

)

 

 

(15,710

)

 

 

(13,421

)

 

 

(26,977

)

 

 

(40,770

)

 

 

(10,872

)

 

 

(11,877

)

Provision for income taxes

 

 

240

 

 

 

170

 

 

 

398

 

 

 

238

 

 

 

191

 

 

 

206

 

 

 

237

 

 

 

553

 

   


 


 


 


 


 


 


 


Net loss

 

$

(8,480

)

 

$

(15,375

)

 

$

(16,108

)

 

$

(13,659

)

 

$

(27,168

)

 

$

(40,976

)

 

$

(11,109

)

 

$

(12,430

)

   


 


 


 


 


 


 


 


Basic and diluted net loss per share

 

$

(0.07

)

 

$

(0.12

)

 

$

(0.13

)

 

$

(0.11

)

 

$

(0.21

)

 

$

(0.32

)

 

$

(0.09

)

 

$

(0.10

)

   


 


 


 


 


 


 


 


 

19


Table of Contents
    

Mar. 31,

2001


    

Jun. 30,

2001


    

Sep. 30,

2001


    

Dec. 31,

2001


    

Mar. 31,

2002


    

Jun. 30,

2002


    

Sep. 30,

2002


    

Dec. 31,

2002


 

As a Percentage of Total Revenues:

                                                       

Revenues:

                                                       

License

  

59

%

  

58

%

  

52

%

  

60

%

  

40

%

  

38

%

  

38

%

  

30

%

Service and other

  

41

%

  

42

%

  

48

%

  

40

%

  

60

%

  

62

%

  

62

%

  

70

%

    

  

  

  

  

  

  

  

Total revenues

  

100

%

  

100

%

  

100

%

  

100

%

  

100

%

  

100

%

  

100

%

  

100

%

Cost of revenues:

                                                       

License

  

1

%

  

1

%

  

1

%

  

2

%

  

2

%

  

8

%

  

1

%

  

2

%

Service and other

  

23

%

  

21

%

  

24

%

  

20

%

  

37

%

  

30

%

  

32

%

  

36

%

    

  

  

  

  

  

  

  

Total cost of revenues

  

24

%

  

22

%

  

25

%

  

22

%

  

39

%

  

38

%

  

33

%

  

38

%

    

  

  

  

  

  

  

  

Gross profit

  

76

%

  

78

%

  

75

%

  

78

%

  

61

%

  

62

%

  

67

%

  

62

%

    

  

  

  

  

  

  

  

Operating expenses:

                                                       

Sales and marketing

  

68

%

  

76

%

  

78

%

  

64

%

  

104

%

  

73

%

  

58

%

  

62

%

Research and development

  

28

%

  

32

%

  

36

%

  

26

%

  

39

%

  

33

%

  

27

%

  

29

%

General and administrative

  

11

%

  

13

%

  

14

%

  

22

%

  

24

%

  

21

%

  

18

%

  

23

%

Stock-based compensation

  

2

%

  

2

%

  

1

%

  

1

%

  

4

%

  

1

%

  

1

%

  

1

%

Amortization and impairment of intangible assets

  

0

%

  

3

%

  

4

%

  

4

%

  

2

%

  

1

%

  

1

%

  

8

%

Impairment of goodwill

  

0

%

  

0

%

  

0

%

  

0

%

  

0

%

  

27

%

  

0

%

  

0

%

Restructuring charges

  

0

%

  

0

%

  

0

%

  

0

%

  

0

%

  

65

%

  

6

%

  

2

%

Acquired in-process technology

  

0

%

  

4

%

  

0

%

  

0

%

  

0

%

  

0

%

  

0

%

  

0

%

    

  

  

  

  

  

  

  

Total operating expenses

  

109

%

  

130

%

  

133

%

  

117

%

  

173

%

  

221

%

  

111

%

  

125

%

Loss from operations

  

(33

)%

  

(52

)%

  

(58

)%

  

(39

)%

  

(112

)%

  

(159

)%

  

(44

)%

  

(63

)%

Other income, net

  

10

%

  

8

%

  

6

%

  

1

%

  

3

%

  

5

%

  

1

%

  

4

%

    

  

  

  

  

  

  

  

Net loss before income taxes

  

(23

)%

  

(44

)%

  

(52

)%

  

(38

)%

  

(109

)%

  

(154

)%

  

(43

)%

  

(59

)%

Provision for income taxes

  

1

%

  

0

%

  

1

%

  

1

%

  

1

%

  

1

%

  

1

%

  

3

%

    

  

  

  

  

  

  

  

Net loss

  

(24

)%

  

(44

)%

  

(53

)%

  

(39

)%

  

(110

)%

  

(155

)%

  

(44

)%

  

(62

)%

    

  

  

  

  

  

  

  

 

Beginning on January 1, 2002 the Company adopted FASB EITF 01-14, which requires companies to account for reimbursements received for incurred out-of-pocket expenses as revenue and the related expenses as cost of revenue (see Note 1). Adjustments to prior period financial statements have not been made because the amounts have not been material.

 

Revenues

 

During 2002, our revenues from customers outside the United States increased to 35% from 33% in 2001. In 2001, revenues from customers outside the United States increased to 33% from 13% in 2000. In 2003, we believe international revenues will decrease as a percentage of total revenues. To date, we have not experienced significant seasonality of revenue. We expect that future results may be affected by the fiscal or quarterly budget cycles of our customers.

 

Sales to our ten largest customers accounted for 30% of total revenues in 2002, 31% of total revenues in 2001 and 25% of total revenues in 2000. In all three years, no single customer accounted for more than 10% of total revenues. As of December 31, 2002, BP Oil International accounted for 13% of our accounts receivable balance. As of December 31, 2001, AT&T Corporation and Bell Canada accounted for 15% and 13%, respectively, of our accounts receivable balance. 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.

 

License.    License revenues decreased 54% from $77.5 million in 2001 to $36.0 million in 2002. License revenues decreased 24% from $102.3 million in 2000 to $77.5 million in 2001. Both of these decreases were due to fewer total orders and a decrease in our average deal size caused by the ongoing slowdown in information technology spending in our vertical markets. During fiscal year 2003, we expect license revenues to increase slightly from those in 2002.

 

20


Table of Contents

 

Service and other.    Service and other revenues increased 7% from $57.5 million in 2001 to $61.3 million in 2002. Service and other revenues increased 77% from $32.4 million in 2000 to $57.5 million in 2001. These increases in service revenues were due to the growth of consulting revenues associated with license agreements signed in earlier periods. Although we have been adding new customers over the past two years, some customers have not renewed their maintenance agreements and thus support revenues have remained flat during both 2001 and 2002. During 2003, we expect service and other revenues to decrease slightly from 2002. We expect consulting revenue to decline slightly and support revenue to remain flat in 2003 due the decrease in license revenue in 2002, the relatively low new customer installations in 2002 and our expectation of only a slight increase in license revenue in 2003.

 

Included in deferred revenue as of December 31, 2002 is approximately $1.1 million of unrecognized revenues from Government grants which are subject to the resolution of outstanding audits with the Government. We expect some of these audits will be resolved in 2003 which may result in repaying some amount to the Government and/or recognition of certain deferred Government grant revenues.

 

Cost of Revenues

 

License.    Cost of license revenues consists of royalty payments to third parties for technology incorporated into our product. Cost of license revenues increased 77% from $1.6 million in 2001 to $2.8 million in 2002. This increase was due primarily to the write-off during 2002 of a non-cancelable royalty agreement that we determined will have no future utility to us. Cost of license revenues increased 72% from $935,000 in 2000 to $1.6 million in 2001. This increase was due to an increase in sales of those particular license products which incorporate third-party technology. We expect cost of license revenues to continue to fluctuate in the future as it is dependent upon the third-party technology incorporated into our products and the buying patterns of our customers.

 

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 increased 10% from $29.8 million in 2001 to $32.7 million in 2002. This increase was primarily due to increased travel expenses of $2.5 million incurred by our professional services group related to increased consulting revenues in the current year. Cost of service and other revenues increased 35% from $22.1 million in 2000 to $29.8 million in 2001. This increase resulted from $6.6 million in additional salary costs from hiring additional service personnel, including the addition of employees that resulted from the acquisition of XMLSolutions in 2001, as well as increased facility costs of $1.7 million associated with additional personnel. We expect that the cost of service and other expenses will decrease slightly in 2003 due to the restructuring and cost savings efforts we undertook in 2002.

 

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 decreased 25% from $96.5 million in 2001 to $72.7 million in 2002. This decrease was primarily due to decreased salary expenses of $8.9 million due to our workforce reductions in the current fiscal year, decreased commissions of $7.8 million due to lower license revenue, decreased facilities costs of $3.1 million and decreased travel expense of $2.5 million. Sales and marketing expenses increased 23% from $78.4 million in 2000 to $96.5 million in 2001. This increase was primarily the result of increases in salary costs of $22.1 million from hiring additional sales and marketing personnel, increased facilities costs of $3.2 million as we expanded our domestic and international field offices, and increased travel expenses of $1.9 million associated with our larger sales force as we expanded our operations, which was offset by a decrease in advertising expenses of $3.9 million, a decrease in commission expense of $3.5 million and a decrease in external recruiting expenditures of $1.7 million. In 2003, we expect that sales and marketing expenses will be lower as compared to 2002 due to cost saving efforts initiated in 2002.

 

21


Table of Contents

 

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. Research and development expenses decreased 24% from $41.0 million in 2001 to $31.0 million in 2002. This decrease was primarily due to decreased salary expenses of $6.7 million arising from our workforce reductions in 2002, as well as related decreases in most other expense areas. Research and development expenses increased 39% from $29.4 million in 2000 to $41.0 million in 2001. This increase was primarily the result of increased salary expenses of $9.3 million related to additional personnel, including the addition of XMLSolutions employees, and increased facilities costs of $1.2 million associated with the increase in personnel as we expanded our operations. In 2003, we anticipate that research and development expenses will decrease due to reduced headcount and other cost saving efforts initiated in 2002.

 

General and Administrative.    General and administrative expenses consist of salaries for administrative, executive and finance personnel, information systems costs, outside professional service fees and our provision for doubtful accounts. General and administrative expenses increased 3% from $20.2 million in 2001 to $20.7 million in 2002. This slight increase is primarily attributable to an increase in outside consulting expenses of $1.0 million associated with the implementation of our internal computer systems. General and administrative expenses increased 42% from $14.2 million in 2000 to $20.2 million in 2001. The increase was primarily attributable to increases in personnel expenses of $5.2 million to support our expanding operations and a $2.0 million loss on disposal of a software asset in 2001 offset by decrease in bad debt expense of $1.8 million. In 2003, we expect that general and administrative expenses will decrease slightly as compared to 2002 due to reduced headcount and other cost saving efforts initiated in 2002.

 

Stock-based compensation.    Total stock-based compensation expenses were $1.6 million in 2002, $1.8 million in 2001 and $3.4 million in 2000. Stock-based compensation includes the amortization of unearned employee stock-based compensation on options issued to employees prior to Vitria completing its initial public offering in September 1999 and is being amortized over a five-year vesting period. During 2002, we modified the stock option vesting terms of option grants made to two former executives. In accordance with APB 25, “Accounting for Stock Issued to Employees,” we recorded $695,000 additional non-cash stock-based compensation expense in 2002 as a result of these grant modifications. We expect to record employee stock-based compensation expenses of approximately $400,000 and $100,000 for the years ending December 31, 2003 and 2004, respectively. Unearned compensation expense will be reduced in future periods to the extent that options are terminated prior to vesting. For the year ended December 31, 2002, we did not incur any stock-based compensation expense in connection with stock issued to non-employees for services. For the years ended December 31, 2001 and 2000, we recorded $120,000 and $320,000, respectively, of stock-based compensation expense in connection with stock issued for services.

 

Amortization and impairment of intangible assets.    Amortization and impairment of purchased intangible assets associated with the acquisition of XML Solutions in April 2001 resulted in charges to earnings of $2.7 million for the year ended December 31, 2002 and $3.6 million in the year ended December 31, 2001. The $3.6 million amortized in 2001 also includes $2.0 million of amortized goodwill. During the year ended December 31, 2002, we performed an assessment of the carrying value of our intangible assets under the provision of SFAS 144 (see Note 8 of Notes to Consolidated Financial Statements) in light of sustained negative economic conditions which impacted our operations and expected future revenues. As a result of this assessment, we recorded an impairment charge of $1.4 million in the fourth quarter of 2002, effectively reducing the carrying value of all intangible assets to zero. This charge was based on a comparison of the fair value of the underlying intangible assets, which was calculated based on the discounted cash flows expected during their remaining useful lives, to their carrying value. While our cash flow assumptions are consistent with the plans and estimates we are using to manage our underlying businesses, there is significant judgment in attributing cash flows to our intangible assets over their respective estimated useful lives.

 

 

22


Table of Contents

Impairment of Goodwill.    We accounted for the acquisition of XMLSolutions in April 2001 under the purchase method of accounting which resulted in $8.3 million of goodwill being recorded at the time of purchase. Goodwill associated with this purchase was amortized over its estimated life of three years in 2001. However, in accordance with SAFS 142, as referenced in Note 7 in the Notes to Consolidated Financial Statements, beginning January 1, 2002, we discontinued the amortization of goodwill. During the year ended December 31, 2002, we performed an assessment of the carrying value of our goodwill. The assessment was performed because our market capitalization had declined significantly, on what was considered to be an-other-than temporary basis, and because sustained negative economic conditions have impacted our operations and expected future revenues. We evaluated goodwill under the provisions of SFAS 142 (See Note 7 of Notes to Consolidated Financial Statements) during the second quarter of 2002. Goodwill was tested for impairment by calculating the fair value of Vitria as a whole, based on our market capitalization at June 30, 2002, and comparing the fair value to the book value of Vitria, and then comparing the implied fair value of the goodwill with its carrying value. As a result of this assessment, we recorded an impairment charge of $7.0 million related to goodwill in the quarter ended June 30, 2002, effectively reducing the carrying value of goodwill to zero.

 

Restructuring Charges.    In the year ended December 31, 2002 we initiated actions to reduce our cost structure due to sustained negative economic conditions that have impacted our operations and resulted in lower than anticipated revenues. In April and August 2002, we reduced our workforce and consolidated our facilities. The restructuring actions in 2002 resulted in a reduction in workforce of approximately 285 employees or 33% of our workforce measured as of the beginning of 2002. The workforce reductions affected all functional areas. We also consolidated facilities in the United States and the United Kingdom and wrote-off related leasehold improvement and equipment. We closed two buildings at our Sunnyvale headquarters location and significantly reduced occupied space in our sales offices in Dallas and Herndon in the United States and in Bracknell in the United Kingdom. As a result of the restructuring actions, we incurred a charge of $19.5 million in the year ended December 31, 2002. The restructuring charge included approximately $4.2 million of severance related charges and $15.4 million of committed excess facilities payments which included $463,000 of written-off leasehold improvements and equipment. We expect to achieve annualized cost savings of approximately $38.0 million from the restructuring actions initiated in the year ended December 31, 2002.

 

The facilities consolidation charge of $15.4 million was calculated using our best estimates and was based upon the remaining future lease commitments for vacated facilities from the date of facility consolidation, net of estimated future sublease income. The estimated costs of vacating these leased facilities were based on market information and trend analyses, including information obtained from third party real estate sources. We have engaged brokers to locate tenants to sublease these facilities, however, none of these facilities have been sublet to date. As of December 31, 2002, $13.1 million of committed facilities payments, net of anticipated sublease income, remains accrued and is expected to be fully utilized by 2013. In calculating the charge for facilities consolidation, certain assumptions were made with respect to the estimated time periods of vacancy and sublease rates and opportunities. Actual future circumstances could be materially different from our estimates and accordingly, the actual total charges associated with the vacated facilities could be materially higher or lower than estimated. Adjustments to the facilities consolidation charges will be made in future periods, if necessary, based upon then current actual events and circumstances.

 

23


Table of Contents

 

The following is an estimated lease payout schedule, net of estimated sublease income (in thousands):

 

    

Year ending December 31,


    

Total estimated net payments


 
    

2003


    

2004


    

2005


    

2006


    

2007


    

Future lease payments for restructured facilities

  

$

4,590

 

  

$

5,029

 

  

$

4,555

 

  

$

1,802

 

  

$

2,163

 

  

$

18,139

 

Estimated future sublease income

  

 

(285

)

  

 

(1,221

)

  

 

(1,312

)

  

 

(583

)

  

 

(1,688

)

  

 

(5,089

)

    


  


  


  


  


  


Net future lease payments on restructured facilities

  

$

4,305

 

  

$

3,808

 

  

$

3,243

 

  

$

1,219

 

  

$

475

 

  

$

13,050

 

    


  


  


  


  


  


 

We expect to undertake additional restructuring actions in 2003 to further reduce expenses and better align our cost structure with anticipated revenue levels. In January 2003, we further reduced our workforce by approximately 90 employees or 16% of our workforce measured as of the beginning of 2003. The workforce reduction affected all functional areas. We also plan to close additional facilities and write off related leasehold improvements in the quarter ending March 31, 2003. Due to this restructuring action, we expect to take an additional charge of $10 to $15 million in the first quarter of 2003.

 

Acquired In-Process Technology.  In-process technology represents that portion of the purchase price of an acquisition related to the research and development activities which have not demonstrated their technological feasibility and have no alternative future uses. Accordingly, we recognized an expense of $1.5 million in 2001 in conjunction with the completion of the acquisition of XMLSolutions for in-process technology relating to XMLSolutions’ Collaborative Enablement Program.

 

Other Income, net.    Interest and other income decreased $5.3 million, or 63%, from $8.4 million in 2001 to $3.1 million in 2002. Interest and other income decreased $4.6 million, or 35%, from $13.0 million in 2000 to $8.4 million in 2001. These decreases were mainly due to lower interest rates on our short-term investments and lower interest generating cash and investment balances. Also in 2002, we incurred a charge of $164,000 associated with an other-than-temporary decline in value of our equity in a private company. In 2001, we wrote off $2.6 million from the value of our equity investments in two private companies, which was offset by a gain of $2.0 million realized from the sale of another equity investment in a private company.

 

Provision for Income Taxes

 

We recorded income tax provisions of $1.2 million, $1.0 million and $584,000 for the years ended December 31, 2002, 2001 and 2000, respectively. The provisions relate 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. We have not recognized the benefits of deferred tax assets for any period, since inception, because the realization of such benefits cannot be reasonably assured.

 

24


Table of Contents

 

Liquidity and Capital Resources

 

    

Year ended December 31,


    

Percent Change 2002 vs. 2001


    

Percent Change 2001 vs. 2000


 
    

2002


    

2001


    

2000


       
    

(in thousands)

               

Working Capital

  

$

101,258

 

  

$

147,574

 

  

$

197,118

 

  

(31

%)

  

(26

%)

Cash, cash equivalents and short term investments

  

 

117,863

 

  

 

157,213

 

  

 

224,138

 

  

(25

%)

  

(30

%)

Net cash provided by (used in) operating activities

  

 

(56,129

)

  

 

(60,979

)

  

 

20,914

 

  

(8

%)

  

392

%

Net cash provided by (used in) investing activities

  

 

36,491

 

  

 

(38,420

)

  

 

(93,801

)

  

195

%

  

(59

%)

Net cash provided by financing activities

  

 

643

 

  

 

5,341

 

  

 

175,567

 

  

(88

%)

  

(97

%)

 

As of December 31, 2002, we had approximately $42.4 million of cash and cash equivalents, $75.4 million of short-term investments, $101.3 million of working capital, and $9.9 million of long-term liabilities. As of December 31, 2001, we had $60.5 million of cash and cash equivalents, $96.7 million of short-term investments, $147.6 million of working capital and $811,000 of long-term liabilities.

 

We used $4.9 million less in operating activities in 2002 than we did in 2001. This was due to a larger net loss in 2002 than 2001, offset by a decrease in our accounts receivable balances (due to higher cash collections as well as lowered revenues), and an increase in our accrued restructuring balance (due to the restructuring actions we undertook in 2002). In 2001, we used $82.0 million more cash in our operating activities than we did in 2000. This was primarily due to an increase in our net loss over the prior year and a decrease in our deferred revenue balance.

 

During the year ended December 31, 2002, our net accounts receivable decreased $22.1 million from $37.2 million at December 31, 2001 to $15.1 million at December 31, 2002. The reason for the decline was due to strong collections in 2002 and to lower revenues in the twelve months ended December 31, 2002. The lower revenue trend is likely to have a negative impact our future cash flows through at least the next quarter. At December 31, 2002, our gross accounts receivable balance is $17.4 million with an allowance for doubtful accounts of $2.3 million.

 

During the year ended December 31, 2002, our deferred revenue balance decreased $13.9 million from $27.3 million at December 31, 2001 to $13.4 million at December 31, 2002. The primary reason for the significant decline is a decrease in our deferred revenue relating to support due to lower than anticipated license revenues in 2002 and declining maintenance renewal rates. In addition, our deferred revenue relating to consulting has decreased due to the completion of projects that were initiated in 2001.

 

Net cash provided by investing activities increased $74.9 million or 195% in 2002 compared to 2001. In 2001, net cash used in investing activities decreased $55.4 million, or 59%, compared to 2000. These changes in investing activities reflect the fact that in both 2002 and 2001 we used more cash from the maturities of our investments to fund our operations than we had in each preceding year, rather than re-investing the funds when the investments matured.

 

Net cash generated from financing activities consists primarily of net proceeds from the issuance of common stock offset in 2002 by the purchase of treasury stock. Net cash generated from financing activities decreased $4.7 million, or 88%, from 2001 to 2002. This decrease was due to a lower number of stock option exercises during 2002. Net cash generated from financing activities decreased $170.2 million, or 97%, from 2000 to 2001. The large decrease from 2000 to 2001 was due to our follow-on offering of common stock in 2000, which raised approximately $171.2 million.

 

25


Table of Contents

 

Contractual Obligations and Commitments

 

At December 31, 2002, we had contractual obligations and commercial commitments of approximately $34.1 million as shown in the table below. The table below excludes obligations related to accounts payable and accrued liabilities incurred in the ordinary course of business.

 

    

Year ending December 31,


  

2008 and thereafter


  

Total
minimum lease payment


    

2003


  

2004


  

2005


  

2006


  

2007


     

Operating Leases

  

$

8,899

  

$

6,968

  

$

6,608

  

$

4,738

  

$

2,179

  

$

4,426

  

$

33,818

Capital Leases

  

 

84

  

 

95

  

 

70

  

 

—  

  

 

—  

  

 

—  

  

 

249

    

  

  

  

  

  

  

Total

  

$

8,983

  

$

7,063

  

$

6,678

  

$

4,738

  

$

2,179

  

$

4,426

  

$

34,067

    

  

  

  

  

  

  

 

Operating lease commitments shown above include $16.2 million of operating lease commitments under leases for abandoned facilities which were recorded as accrued restructuring expenses in the accompanying balance sheet as of December 31, 2002. We do not have any material commercial commitments under lines of credit, standby lines of credit, guarantees, standby repurchase obligations or other such arrangements.

 

Off-Balance Sheet Arrangements

 

At December 31, 2002 and 2001, Vitria did not have any off-balance sheet arrangements or relationships with unconsolidated entities or financial partnerships, such as entities often refereed to as structured finance or special purposes entities, which are typically established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.

 

Credit Facilities with Silicon Valley Bank

 

In June 2002, we entered into a $15.0 million revolving line of credit agreement with Silicon Valley Bank. We amended this agreement in November 2002. Interest on outstanding borrowings accrues at the bank’s prime rate of interest. The facility is secured by all of Vitria’s assets. The agreement includes restrictive covenants which require us to maintain, among other things, a minimum cash, cash equivalents, and short-term investments balance of $90.0 million. The line of credit serves as collateral for letters of credit and other commitments, even though these items do not constitute draws on the line of credit. Available advances under the line of credit are reduced by the amount of outstanding letters of credit and other commitments.

 

As of December 31, 2002, we had not borrowed against this line of credit. In connection with the line of credit agreement, we have outstanding letters of credit of approximately $13.5 million related to certain office leases at December 31, 2002.

 

Stock Repurchase Program

 

In July 2002, our Board of Directors announced a stock repurchase program under which we may repurchase up to an aggregate of five million shares of our common stock beginning on July 29, 2002. Under the program the repurchases will be made from time to time on the open market at prevailing market prices or in negotiated transactions off the market. The repurchases will be funded from available working capital. As of December 31, 2002, 495,600 shares had been repurchased in the open market at a total cost of approximately $496,000.

 

Operating Capital and Capital Expenditure Requirements

 

 

Estimated future uses of cash over the next twelve months are primarily to fund operations and to a lesser extent to fund capital expenditures. For the next twelve months, we expect to fund these uses from available cash

 

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balances, cash generated from operations, if any, and interest on available cash and investment balances. Our ability to generate cash from operations is dependent upon our ability to sell our products and services and generate revenue, as well as our ability to manage our operating costs. In turn, our ability to sell our products is dependent upon both the economic climate and the competitive factors of the marketplace in which we operate.

 

In the past, we have invested significantly in our operations. For the next year, we expect that operating expenses will decrease in absolute dollars due to restructuring actions and other cost reduction efforts. However, we anticipate that operating expenses and planned capital expenditures will continue to constitute a material use of our cash resources. We expect our capital expenditures in the next year to be at approximately the same level of spending as in fiscal year 2002. The lease for our headquarters building in Sunnyvale expires in August 2003; if we were to move to a different location, we believe we will incur up to $1 million in leasehold improvements and moving expense in 2003. Our actual expenses could be higher. In addition, we may utilize cash resources to fund acquisitions or investments in other businesses, technologies or products lines. We believe that our available cash, cash equivalents and short-term investments 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 we need 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.

 

We believe our success requires expanding our customer base and continuing to enhance our BusinessWare products. We intend to continue to invest selectively in sales, marketing and research and development and expect to incur operating losses for at least the first half of 2003. Our revenues, operating results and cash flows 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 and cash flows. 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. 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 revenue 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 and cash flows 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;

 

    ability to protect our intellectual property;

 

    actions taken by our competitors, including new product introductions and pricing changes;

 

    costs of maintaining and expanding our operations;

 

    introduction of new products;

 

    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;

 

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    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 revenue as a result of the decision by our customers to postpone software delivery, or because of changes in the timing of when delivery of products or services is completed;

 

    customer budget cycles and changes in these budget cycles;

 

    external economic conditions;

 

    availability of customer funds for software purchases given external economic factors;

 

    costs related to acquisition of technologies or businesses;

 

    ability to successfully integrate acquisitions;

 

    changes in strategy and capability of our competitors; and

 

    liquidity and timeliness of payments from international customers.

 

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.

 

Recently Issued Accounting Pronouncements

 

We adopted Statement of Financial Accounting Standards No. 141 (SFAS 141), Business Combination, on January 1, 2002. SFAS 141 requires that all business combinations be accounted for under the purchase method only and that certain acquired intangible assets in a business combination be recognized as assets apart from goodwill. The adoption of this Statement did not have a material impact on our results of operations, financial position or cash flows.

 

We adopted Statement of Financial Accounting Standards No. 142 (SFAS 142), Goodwill and Other Intangible Assets, on January 1, 2002. Under this pronouncement, goodwill and those intangible assets with indefinite lives are no longer amortized but rather are tested for impairment at least annually and when events and circumstances indicate that their fair value has been reduced below carrying value (see Notes 7 and 8 of Notes to Consolidated Financial Statements). SFAS 142 also requires that goodwill be tested for impairment upon adoption. Furthermore, upon adoption, approximately $1.0 million classified as assembled workforce was reclassified to goodwill. SFAS 142 requires that goodwill be tested for impairment using a two-step impairment analysis. In addition, certain disclosures are required to be presented until all periods are accounted for in accordance with SFAS 142. Pro-forma financial information presented in Note 7 of Notes to Consolidated Financial Statements reflects consolidated results adjusted as if SFAS 142 had been adopted for all periods presented.

 

We adopted Statement of Financial Accounting Standards No. 144 (SFAS 144), Accounting for the Impairment or Disposal of Long-Lived Assets, on January 1, 2002. SFAS 144 establishes an accounting model for impairment or disposal of long-lived assets to be disposed of by sale. The adoption of this Statement did not have a material impact on our results of operations, financial position or cash flows.

 

In June 2002, the FASB issued Statement of Financial Accounting Standards No. 146 (SFAS 146), Accounting for Costs Associated with Exit or Disposal Activities. SFAS 146 eliminates the Emerging Issues Task Force Issue No. 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (Including Certain Costs Incurred in a Restructuring). Under SFAS 146, liabilities for costs

 

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associated with an exit or disposal activity are recognized when the liabilities are incurred, and fair value is the objective for initial measurement of the liabilities. SFAS 146 will be effective for exit or disposal activities that are initiated after December 31, 2002. The provisions of SFAS 146 are required to be applied prospectively after the adoption date to newly initiated exit activities, and may affect the timing of recognizing future restructuring costs, as well as the amounts recognized. Existing restructuring initiatives will not be affected by the adoption of this Statement.

 

In November 2002, the FASB issued FASB Interpretation No. 45 (FIN 45), Guarantor’s Disclosure Requirements for Guarantees, Including Indirect Guarantees of Others. FIN 45 clarifies the guarantor’s requirements relating to the guarantor’s accounting for, and disclosure of, the issuance of certain types of guarantees and requires the guarantor to recognize at the inception of a guarantee a liability for the fair value of the guarantee obligation. FIN 45 also requires additional disclosures by a guarantor in its interim and annual financial statements about the obligation associated with guarantees issued. The provisions for the initial recognition and measurement of guarantees are effective on a prospective basis for guarantees that are issued or modified after December 31, 2002. The disclosure requirements are effective for financial statements of interim or annual periods ending after December 15, 2002. We have adopted the disclosure requirements for our financial statements included in this Form 10-K. The accounting profession continues to discuss various provisions of this pronouncement with the objective of providing additional guidance on its application. These discussions and the issuance of any new interpretations, once finalized, could lead to an unanticipated impact on our future financial results. Therefore, although we currently do not believe these provisions will have a material effect on our operating results or financial position, we will continue to evaluate the impact of FIN 45.

 

In December 2002, the FASB issued Statement of Financial Accounting Standards No. 148 (SFAS 148), Accounting for Stock-Based Compensation—Transition and Disclosure. SFAS 148 amends Statement of Financial Accounting Standard No. 123 (SFAS 123), Accounting for Stock-Based Compensation, to provide alternative methods of transition for a voluntary change to the fair value method of accounting for stock-based employee compensation, and to require expanded and more prominent disclosure of the effects of an entity’s accounting policy with respect to stock-based employee compensation. While SFAS 148 does not amend SFAS 123 to require companies to account for employee stock options using the fair value method, the disclosure provisions of SFAS 148 are applicable to all companies with stock-based employee compensation, regardless of whether they account for that compensation using the fair value method of SFAS 123 or the intrinsic value method of APB 25. Since we account for our stock-based compensation under APB 25, and have no current plans on switching to SFAS 123, the impact of SFAS 148 will be limited to the interim reporting of the effects on net loss and loss per share if we accounted for stock-based compensation under SFAS 123. SFAS 148 is effective for fiscal years ending after December 15, 2002.

 

In January 2003, the FASB issued Interpretation No. 46 (FIN 46), Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51. FIN 46 requires certain variable interest entities to be consolidated by the primary beneficiary of the entity if the equity investors in the entity do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. FIN 46 is effective for all new variable interest entities created or acquired after January 31, 2003. For variable interest entities created or acquired prior to February 1, 2003, the provision of FIN 46 must be applied for the first interim or annual period beginning after June 15, 2003. We do not expect that the adoption of FIN 46 will have a material effect on our operations results or financial condition.

 

Beginning on January 1, 2002 we adopted FASB Emerging Issues Task Force No. 01-14 (EITF 01-14), Income Statement Characterization of Reimbursements Received for ‘Out-of-Pocket’ Expenses Incurred. EITF 01-14 requires companies to account for reimbursements received for incurred out-of-pocket expenses as revenue and the related expenses as cost of revenue. Previously they were not included in the statement of operations. Adjustments to prior period financial statements have not been made because the amounts have not been material. The Announcement has had no impact on gross profit or net income but has minimally increased services revenue and cost of services revenue.

 

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Other Information

 

Consistent with Section 10A(i)(2) of the Securities Exchange Act of 1934, as added by Section 202 of the Sarbanes-Oxley Act of 2002, Vitria is responsible for disclosing the nature of the non-audit services approved by our Audit Committee during a quarter to be performed by Ernst & Young LLP, our independent auditor. Non-audit services are services other than those provided by Ernst & Young LLP in connection with an audit or a review of Vitria’s financial statements. During the fourth quarter of 2002 our Audit Committee did not approve any non-audit services to be performed by Ernst & Young LLP.

 

ITEM 7A.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

The following discussion about our risk management activities includes “forward-looking statements” that involve risks and uncertainties. Actual results could differ materially from those projected in the forward-looking statements for the reasons described under the caption “Risks Associated with Vitria’s Business and Future Operating Results.”

 

Interest Rate Risk

 

Our exposure to market risk for changes in interest rates relates to our investment portfolio, which consists of short-term money market instruments and debt securities with maturities between 90 days and one year. We do not use derivative financial instruments in our investment portfolio. We place our investments with high credit quality issuers and, by policy, we limit the amount of credit exposure to any one issuer.

 

We mitigate default risk by investing in high credit quality securities and by monitoring the credit rating of investment issuers. The portfolio includes only marketable securities with active secondary or resale markets to ensure portfolio liquidity. These securities are generally classified as available for sale, and consequently, are recorded on the balance sheet at fair value with unrealized gains or losses reported, as a separate component of stockholders’ equity, net of tax. Unrealized gains and losses at December 31, 2002 were not material.

 

We have no cash flow exposure due to rate changes for cash equivalents and short-term investments as all of these investments are at fixed interest rates.

 

The table below presents the principal amount of related weighted average interest rates for our investment portfolio. Short-term investments are all in fixed rate instruments and have maturities of one year or less.

 

Table of investment securities (in thousands) as of December 31:

 

    

Fair Value


    

2002

Weighted Average

Interest Rate


    

Fair Value


    

2001

Weighted Average

Interest Rate


 

Cash and cash equivalents

  

$

42,427

    

1.62

%

  

$

60,479

    

4.28

%

Short-term investments

  

 

75,436

    

2.28

%

  

 

115,059

    

4.65

%

    

           

        

Total cash and investment securities

  

$

117,863

           

$

175,538

        
    

           

        

 

Foreign Exchange Risk

 

As a global concern, we face exposure to adverse movements in foreign currency exchange rates. These exposures may change over time as business practices evolve and could have a material adverse impact on our financial position and results of operations. Historically, our primary exposures have related to non-U.S. dollar-denominated currencies, receivables, and inter-company receivables or payables with our foreign subsidiaries. Additionally, we provide funding to our foreign subsidiaries in Europe, Asia Pacific and Latin America.

 

In order to reduce the effect of foreign currency fluctuations, from time to time, we utilize foreign currency forward exchange contracts (forward contracts) to hedge certain foreign currency transaction exposures outstanding during the period. The gains and losses on the forward contracts help to mitigate the gains and losses on our outstanding foreign currency transactions. We do not enter into forward contracts for trading purposes. All foreign currency transactions and all outstanding forward contracts are marked-to-market at the end of the period with unrealized gains and losses included in other income, net.

 

Our outstanding forward contracts as of December 31, 2002 are presented in the table below. This table presents the net notional amount in U.S. dollars using the spot exchange rate in December 2002 and the weighted

 

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average contractual foreign currency exchange rates. Notional weighted average exchange rates are quoted using market conventions where the currency is expressed in units per U.S. dollar. All of these forward contracts mature within 35 days or less as of December 31, 2002.

 

Currency sold forward

    

Net Notional Amount


    

Notional Weighted Average Exchange Rate


      

(in thousands)

      

Euros

    

$

1,143

    

0.965

British pounds

    

 

2,331

    

0.632

      

      

Total

    

$

3,474

      
      

      

 

RISKS ASSOCIATED WITH VITRIA’S BUSINESS AND FUTURE OPERATING RESULTS

 

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.

 

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.

 

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 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 operating results are also dependent upon our ability to manage our cost structure.

 

We have incurred substantial operating losses since inception and we cannot guarantee that we will become profitable 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 $170.9 million as of December 31, 2002. During 2002, we reduced our workforce by 285 employees and consolidated certain facilities as part of our restructuring plan. As a result of these actions, we incurred a charge of $19.5 million, of which approximately $4.2 million is comprised of severance related charges and $15.4 million of committed excess facilities payments. In addition, in January 2003, we further reduced our workforce by 90 employees and in March 2003 we took additional measures to consolidate our facilities. Despite these recent measures in order to remain competitive we intend to continue investing heavily in sales, marketing and research and development. As a result, we are likely to continue report future operating losses and cannot guarantee whether we will report net income in the future.

 

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Our operating results are substantially dependent on license revenues from essentially one product, BusinessWare and our business could be materially harmed by factors that adversely affect the pricing and demand for BusinessWare.

 

Since 1998, a majority of our total revenues has been, and is expected to be, derived from the license of our BusinessWare product and for applications built using that product. Accordingly, our future operating results will depend on the demand for BusinessWare by existing and 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.

 

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.

 

During 2002, we had a net loss of $91.7 million and our operating activities used $56.1 million of cash. As of December 31, 2002, we had approximately $117.9 million in cash and cash equivalents and short-term investments, $101.3 million in working capital, and $9.9 million in long-term liabilities. 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.

 

The challenging economic environment in the United States and abroad, and especially the continued reluctance of companies to make significant expenditures on information technology, could reduce demand for our products and cause our revenues to continue to decline.

 

The downturn in the U.S. and the world economy may cause a further 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. Over approximately the past two years, we have experienced a general slow-down in the level of capital spending by some of our customers due to the general economic downturn, which has resulted in lower revenues. This slow-down in capital spending, if sustained in future periods, could result in reduced sales or the postponement of sales to our customers. There can be no assurance that the level of spending on information technology in general, or on business integration software by our customers and potential customers, will increase or remain at current levels in future periods. Lower spending on information technology could result in reduced license sales to our customers, reduced overall revenues, diminished margin levels, and could impair our operating results in future periods.

 

In addition, international events threaten to deepen and prolong the challenging economic environment. Terrorism and the threat thereof, as well as actual or threatened war or hostilities in various regions, could cause companies further to delay or moderate their capital expenditures, thereby harming our financial performance.

 

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 products,

 

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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 products 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 six to nine months, and in some cases even longer, and it is very difficult to predict whether and when any particular license transaction might be completed. In addition, the downturn in the U.S. economy has caused some customers to increase budgetary controls or require additional management approvals within the customers’ organization prior to committing to significant capital purchases, either of which could result in an increased sales cycle.

 

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 30% of total revenues in the fiscal year ended December 31, 2002. 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.

 

If we are not successful in developing industry specific solutions based on BusinessWare, our ability to increase future revenues could be harmed.

 

We have developed and intend to continue to develop solutions based on BusinessWare which incorporate business processes, connectivity and document transformations specific to the needs of particular industries, including telecommunications, manufacturing, financial services, energy, insurance and healthcare industries. This presents technical and sales challenges and requires collaboration with third parties, including system integrators and standard organizations, and the commitment of significant resources. Specific industries may experience economic downturns or regulatory changes that may result in delayed spending decisions by customers or require changes to our products. If we are not successful in developing these targeted solutions or these solutions do not achieve market acceptance, our ability to increase future revenues could be harmed.

 

To date we have concentrated our sales and marketing efforts toward companies in the telecommunications, manufacturing, financial services, energy, insurance and healthcare industries. 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.

 

Our products may not achieve market acceptance, which could cause our revenues to decline.

 

Deployment of our products 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 products fail 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.

 

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We are currently not in compliance with the Nasdaq National Market’s listing criterion requiring us to maintain a minimum bid price of $1.00, and our common stock could be delisted from the Nasdaq National Market.

 

On October 21, 2002, we received a letter from Nasdaq advising us that our common stock had not met Nasdaq’s minimum bid price requirement of $1.00 for 30 consecutive trading days and that, if we were unable to demonstrate compliance with this requirement for at least 10 consecutive trading days during the 90 calendar days ending January 21, 2003, our common stock may be subject to delisting from the Nasdaq National Market. On February 3, 2003, we received another letter from Nasdaq, notifying us that we had failed to regain compliance with the minimum bid price requirement. On March 18, 2003, we received a letter from Nasdaq extending the compliance period to April 21, 2003.

 

If we are unable to regain compliance with the Nasdaq National Market requirements before April 21, 2003, we have several alternatives that may be available to us in order to avoid being delisted. For example, in January 2003, we filed with the SEC a preliminary proxy relating to a special stockholders meeting we intended to convene to seek authorization from our stockholders to allow the Board of Directors to implement a reverse stock split with a ratio in the range of 2-to-1 to 6-to-1. That proxy was never finalized or mailed to stockholders and the Board does not today have authority to implement a reverse stock split. We could again seek such authorization from our stockholders, and if such authorization were to be granted, the Board could choose to implement a reverse stock split. While there is no guarantee that our stock price would continue to trade above $1.00 for any period of time, a reverse stock split could allow us to forestall, at least temporarily, a delisting action by Nasdaq.

 

In addition, upon our request and at the discretion of Nasdaq, we could seek to have our common stock transferred to the Nasdaq SmallCap Market. Transferring to the Nasdaq SmallCap Market would provide us with an additional grace period to satisfy the minimum bid price requirement; however, we would nevertheless be subject to certain adverse consequences described below. In addition, in such event we would still be required to satisfy various listing maintenance standards for our common stock to be quoted on the Nasdaq SmallCap Market, including the minimum bid price requirement after expiration of any grace periods. If we fail to meet such standards, our common stock would likely be delisted from the Nasdaq SmallCap Market and trade on the over-the-counter bulletin board, commonly referred to as the “pink sheets”. Such alternatives are generally considered as less efficient markets and would seriously impair the liquidity of our common stock and limit our potential to raise future capital through the sale of our common stock, which could materially harm our business.

 

If we are delisted from the Nasdaq National Market, we will face a variety of legal and other consequences that will likely negatively affect us including, without limitation, the following:

 

    we may lose our exemption from the provisions of Section 2115 of the California Corporations Code which imposes aspects of California corporate law on certain non-California corporations operating within California. As a result, (i) our Board of Directors would no longer be classified and our stockholders would elect all of our directors at each annual meeting, (ii) our stockholders would be entitled to cumulative voting, and (iii) we would be subject to more stringent stockholder approval requirements and more stockholder-favorable dissenters’ rights in connection with certain strategic transactions;

 

    the state securities law exemptions available to us would be more limited and, as a result, future issuances of our securities may require time-consuming and costly registration statements;

 

    due to the application of different securities law exemptions and provisions, we may be required to amend our stock option and stock purchase plans and comply with time-consuming and costly administrative procedures;

 

    the coverage of Vitria by securities analysts may decrease or cease entirely; and

 

    we may lose current or potential investors and customers.

 

 

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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 products 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 BEA, IBM Corporation, IONA, Microsoft Corporation, Mercator Software, Sybase, SeeBeyond Technology, Tibco Software, and webMethods. In the future, some of these companies may expand their products to provide or enhance existing business process management, business analysis and monitoring, and business vocabulary management functionality. 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. In addition, “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 products. 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. Finally, we also face or may soon face direct and indirect competition from major enterprise software developers that offer integration products as a complement to their other enterprise software products. These companies may also modify their applications to be more easily integrated with other applications through web services or other means. Some of these vendors include JD Edwards, Oracle, PeopleSoft, Siebel Systems and SAP AG.

 

Many of our competitors have more resources and broader customer and partner 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.

 

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 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 harmed if these efforts do not generate license and service revenues necessary to offset this investment.

 

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 products are 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 products, or the failure

 

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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 products 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 products and the quality of customer service provided to organizations which license our software.

 

If our products do 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 products fail to gain broad market acceptance, due to their 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 products as new versions of packaged applications are introduced;

 

    the portability of our products, particularly the number of operating systems and databases that our products 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 products; and

 

    our management of software being developed by third parties for our customers or use with our products.

 

If we fail to introduce new versions and releases of our products 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 products. 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 products in anticipation of future releases. If customers defer material orders in anticipation of new releases or new product introductions, our revenues may decline.

 

Our products rely on third-party programming tools and applications. If we lose access to these tools and applications, or are unable to modify our products 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.

 

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We could suffer losses and negative publicity if new versions and releases of our products contain errors or defects.

 

Our products and their 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 products for mission-critical business operations, any of these occurrences could seriously harm our business and generate negative publicity.

 

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 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.

 

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 products 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, patent, trademark and trade secret laws, as well as confidentiality agreements and licensing arrangements, to establish and protect our proprietary rights. 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 products 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 products is difficult, and expensive litigation may be necessary in the future to enforce our intellectual property rights.

 

Our products 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 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.

 

Our significant international operations may fail to generate significant product revenues or contribute to our drive toward profitability, 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, Brazil, Taiwan, Korea, Mexico, Singapore, Canada, Australia and Spain and intend to establish additional international offices. During 2002, 35% of our revenue was derived from international markets. 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

 

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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 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 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. In November 2001 and in February 2003, Vitria and certain of our officers and directors were named as defendants in class action shareholder complaints. This litigation could result in substantial costs and divert management’s attention and resources, and could seriously harm our business. See Item 3 “Legal Proceedings” for more information regarding this litigation.

 

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 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.

 

Section 203 of the Delaware General Corporations Law and the terms of our stock option plans may also discourage, delay or prevent a change in control of Vitria. In addition, as of December 31, 2002, our executive officers, directors and their affiliates beneficially own approximately 36% of our outstanding common stock. This could have the effect of delaying or preventing a change of control of Vitria and may make some transactions difficult or impossible without the support of these stockholders.

 

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

 

None.

 

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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 27, 2003 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” 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 27, 2003, under the caption “Executive Compensation,” and is incorporated by reference into this report.

 

ITEM 12.    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

AND RELATED STOCKHOLDER MATTERS

 

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 27, 2003, under the caption “Security Ownership of Certain Beneficial Owners and Management,” and “Securities Authorized for Issuance Under Equity Compensation Plans” 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 27, 2003, under the caption “Certain Relationships and Related Transactions,” and is incorporated by reference into this report.

 

ITEM 14.    CONTROLS AND PROCEDURES

 

Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we have evaluated the effectiveness of the design and operation of our disclosure controls and procedures pursuant to the Securities Exchange Act Rule 13a-14 within 90 days of the filing date of this quarterly report. Based on their evaluation, our principal executive officer and principal financial officer have concluded that these controls and procedures are effective. There were no significant changes in our internal controls or in other factors that could significantly affect these controls subsequent to the date of evaluation.

 

Our management, including our chief executive officer and chief financial officer, does not expect that our disclosure controls and procedures or our internal controls will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within Vitria have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion

 

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of two or more people, or by management override of the control. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, control may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

 

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PART IV

 

ITEM 15.     EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

 

         

Page


1.

  

Consolidated Financial Statements and Reports of Independent Auditors

  

43

2.

  

Notes to Consolidated Financial Statements

  

48

3.

  

Consolidated Financial Statement Schedule

    
    

Schedule II—Valuation and Qualifying Accounts

  

76

    

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 – None.

 

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VITRIA TECHNOLOGY, INC.

 

INDEX TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

    

Page


Report of Ernst & Young LLP, Independent Auditors

  

43

Consolidated Balance Sheets

  

44

Consolidated Statements of Operations

  

45

Consolidated Statement of Stockholders’ Equity

  

46

Consolidated Statements of Cash Flows

  

47

Notes to the Consolidated Financial Statements

  

48

 

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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 sheets of Vitria Technology, Inc. as of December 31, 2002 and 2001, and the related consolidated statements of operations, stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2002. Our audit also included the financial statement schedule listed in the Index at Item 15 of this Annual Report for the year ended December 31, 2002 and 2001. These financial statements and the financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and the financial statement schedule based on our audits.

 

We conducted our audits 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 audits provide a reasonable basis for our opinion.

 

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Vitria Technology, Inc. at December 31, 2002 and 2001, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2002, 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, 2002 and 2001, 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 22, 2003

 

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VITRIA TECHNOLOGY, INC.

 

CONSOLIDATED BALANCE SHEETS

(in thousands, except per share amounts)

 

    

December 31,


 
    

2002


    

2001


 

ASSETS


             

Current Assets:

                 

Cash and cash equivalents

  

$

42,427

 

  

$

60,479

 

Short-term investments

  

 

75,436

 

  

 

96,734

 

Accounts receivable, net

  

 

15,108

 

  

 

37,215

 

Other current assets

  

 

3,111

 

  

 

6,251

 

    


  


Total current assets

  

 

136,082

 

  

 

200,679

 

Restricted investments

  

 

—  

 

  

 

18,325

 

Property and equipment, net

  

 

9,179

 

  

 

14,000

 

Intangible assets, net

  

 

—  

 

  

 

2,752

 

Goodwill, net

  

 

—  

 

  

 

7,247

 

Other assets

  

 

1,363

 

  

 

1,424

 

    


  


Total assets

  

$

146,624

 

  

$

244,427

 

    


  


LIABILITIES AND STOCKHOLDERS’ EQUITY


             

Current Liabilities:

                 

Accounts payable

  

$

2,264

 

  

$

3,569

 

Accrued liabilities

  

 

14,872

 

  

 

22,227

 

Accrued restructuring expenses

  

 

4,258

 

  

 

—  

 

Deferred revenue

  

 

13,430

 

  

 

27,309

 

    


  


Total current liabilities

  

 

34,824

 

  

 

53,105

 

    


  


Long-Term Liabilities:

                 

Accrued restructuring expenses

  

 

8,936

 

  

 

—  

 

Other long-term liabilities

  

 

916

 

  

 

811

 

    


  


Total long-term liabilities

  

 

9,852

 

  

 

811

 

Commitments and contingencies

                 

Stockholders’ Equity:

                 

Preferred stock: issuable in series $0.001 par value; 5,000 shares authorized; no shares issued or outstanding

  

 

—  

 

  

 

—  

 

Common stock: $0.001 par value; 600,000 shares authorized; 130,904 and 130,249 shares issued; 130,408 and 130,249 shares outstanding at December 31, 2002 and 2001, respectively

  

 

131

 

  

 

130

 

Additional paid-in capital

  

 

273,320

 

  

 

271,596

 

Unearned stock-based compensation

  

 

(517

)

  

 

(1,547

)

Notes receivable from stockholders

  

 

(193

)

  

 

(193

)

Accumulated other comprehensive income (loss)

  

 

620

 

  

 

(241

)

Accumulated deficit

  

 

(170,917

)

  

 

(79,234

)

Treasury stock, at cost, 496 shares

  

 

(496

)

  

 

—  

 

    


  


Total stockholders’ equity

  

 

101,948

 

  

 

190,511

 

    


  


Total liabilities and stockholders’ equity

  

$

146,624

 

  

$

244,427

 

    


  


 

The accompanying notes are an integral part of these consolidated financial statements.

 

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VITRIA TECHNOLOGY, INC.

 

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share amounts)

 

    

Year Ended December 31,


 
    

2002


    

2001


    

2000


 

Revenues:

                          

License

  

$

36,009

 

  

$

77,518

 

  

$

102,287

 

Service and other

  

 

61,318

 

  

 

57,466

 

  

 

32,442

 

    


  


  


Total revenues

  

 

97,327

 

  

 

134,984

 

  

 

134,729

 

    


  


  


Cost of revenues:

                          

License

  

 

2,845

 

  

 

1,607

 

  

 

935

 

Service and other

  

 

32,719

 

  

 

29,759

 

  

 

22,051

 

    


  


  


Total cost of revenues

  

 

35,564

 

  

 

31,366

 

  

 

22,986

 

    


  


  


Gross profit

  

 

61,763

 

  

 

103,618

 

  

 

111,743

 

Operating expenses:

                          

Sales and marketing

  

 

72,709

 

  

 

96,535

 

  

 

78,361

 

Research and development

  

 

30,970

 

  

 

40,978

 

  

 

29,441

 

General and administrative

  

 

20,736

 

  

 

20,168

 

  

 

14,230

 

Stock-based compensation

  

 

1,616

 

  

 

1,820

 

  

 

3,420

 

Amortization and impairment of intangible assets

  

 

2,748

 

  

 

3,608

 

  

 

—  

 

Impairment of goodwill

  

 

7,047

 

  

 

—  

 

  

 

—  

 

Restructuring charges

  

 

19,516

 

  

 

—  

 

  

 

—  

 

Acquired in-process technology

  

 

—  

 

  

 

1,500

 

  

 

—  

 

    


  


  


Total operating expenses

  

 

155,342

 

  

 

164,609

 

  

 

125,452

 

    


  


  


Loss from operations

  

 

(93,579

)

  

 

(60,991

)

  

 

(13,709

)

Interest income

  

 

2,888

 

  

 

9,221

 

  

 

13,165

 

Other income (expenses), net

  

 

195

 

  

 

(806

)

  

 

(150

)

    


  


  


Net loss before income taxes

  

 

(90,496

)

  

 

(52,576

)

  

 

(694

)

Provision for income taxes

  

 

1,187

 

  

 

1,046

 

  

 

584

 

    


  


  


Net loss

  

$

(91,683

)

  

$

(53,622

)

  

$

(1,278

)

    


  


  


Basic and diluted net loss per share

  

$

(0.71

)

  

$

(0.42

)

  

$

(0.01

)

    


  


  


Weighted average shares used in calculating basic and diluted net loss per share

  

 

129,586

 

  

 

126,851

 

  

 

122,365

 

    


  


  


 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

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VITRIA TECHNOLOGY, INC.

 

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

(in thousands)

 

    

Common Stock


  

Additional Paid-In Capital


    

Unearned Stock-based Compensation


      

Notes Receivable from Shareholders


      

Accumulated Other Comprehensive Loss


    

Accumulated Deficit


    

Treasury Stock


    

Total Stockholders Equity


 
    

Shares


    

Amount


                        

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 (loss) 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 deferred stock compensation

  

—  

 

  

 

—  

  

 

—  

 

  

 

3,620

 

    

 

—  

 

    

 

—  

 

  

 

—  

 

  

 

—  

 

  

 

3,620

 

Reversal of deferred stock compensation due to employees termination

  

—  

 

  

 

—  

  

 

(200

)

  

 

—  

 

    

 

—  

 

    

 

—  

 

  

 

—  

 

  

 

—  

 

  

 

(200

)

    

  

  


  


    


    


  


  


  


Balance at December 31, 2000

  

128,224

 

  

 

128

  

 

266,591

 

  

 

(3,603

)

    

 

(291

)

    

 

(68

)

  

 

(25,612

)

  

 

—  

 

  

 

237,145

 

Comprehensive loss:

                                                                                

Net loss

  

—  

 

  

 

—  

  

 

—  

 

  

 

—  

 

    

 

—  

 

    

 

—  

 

  

 

(53,622

)

  

 

—  

 

  

 

(53,622

)

Other comprehensive loss—  

                                                                                

Foreign currency translation

  

—  

 

  

 

—  

  

 

—  

 

  

 

—  

 

    

 

—  

 

    

 

(288

)

  

 

—  

 

  

 

—  

 

  

 

(288

)

Unrealized gain (loss) on marketable debt securities

  

—  

 

  

 

—  

  

 

—  

 

  

 

—  

 

    

 

—  

 

    

 

115

 

  

 

—  

 

  

 

—  

 

  

 

115

 

                                                                            


Total comprehensive loss

  

—  

 

  

 

—  

  

 

—  

 

  

 

—  

 

    

 

—  

 

    

 

—  

 

  

 

—  

 

  

 

—  

 

  

 

(53,795

)

Issuance of common stock, net

  

2,025

 

  

 

2

  

 

5,241

 

  

 

—  

 

    

 

—  

 

    

 

—  

 

  

 

—  

 

  

 

—  

 

  

 

5,243

 

Amortization of deferred stock compensation

  

—  

 

  

 

—  

  

 

—  

 

  

 

2,056

 

    

 

—  

 

    

 

—  

 

  

 

—  

 

  

 

—  

 

  

 

2,056

 

Reversal of deferred stock compensation due to employees termination

  

—  

 

  

 

—  

  

 

(236

)

  

 

—  

 

    

 

—  

 

    

 

—  

 

  

 

—  

 

  

 

—  

 

  

 

(236

)

Repayment of notes receivable from shareholders

  

—  

 

  

 

—  

  

 

—  

 

  

 

—  

 

    

 

98

 

    

 

—  

 

  

 

—  

 

  

 

—  

 

  

 

98

 

    

  

  


  


    


    


  


  


  


Balance at December 31, 2001

  

130,249

 

  

 

130

  

 

271,596

 

  

 

(1,547

)

    

 

(193

)

    

 

(241

)

  

 

(79,234

)

  

 

—  

 

  

 

190,511

 

Comprehensive loss:

                                                                                

Net loss

  

—  

 

  

 

—  

  

 

—  

 

  

 

—  

 

    

 

—  

 

    

 

—  

 

  

 

(91,683

)

  

 

—  

 

  

 

(91,683

)

Other comprehensive loss—  

                                                                                

Foreign currency translation

  

—  

 

  

 

—  

  

 

—  

 

  

 

—  

 

    

 

—  

 

    

 

943

 

  

 

—  

 

  

 

—  

 

  

 

943

 

Unrealized gain (loss) on marketable debt securities

  

—  

 

  

 

—  

  

 

—  

 

  

 

—  

 

    

 

—  

 

    

 

(82

)

  

 

—  

 

  

 

—  

 

  

 

(82

)

                                                                            


Total comprehensive loss

  

—  

 

  

 

—  

  

 

—  

 

  

 

—  

 

    

 

—  

 

    

 

—  

 

  

 

—  

 

  

 

—  

 

  

 

(90,822

)

Issuance of common stock, net

  

655

 

  

 

1

  

 

1,138

 

  

 

—  

 

    

 

—  

 

    

 

—  

 

  

 

—  

 

  

 

—  

 

  

 

1,139

 

Amortization of deferred stock compensation

  

—  

 

  

 

—  

  

 

695

 

  

 

1,030

 

    

 

—  

 

    

 

—  

 

  

 

—  

 

  

 

—  

 

  

 

1,725

 

Reversal of deferred stock compensation due to employees termination

  

—  

 

  

 

—  

  

 

(109

)

  

 

—  

 

    

 

—  

 

    

 

—  

 

  

 

—  

 

  

 

—  

 

  

 

(109

)

Treasury stock purchases

  

(496

)

  

 

—  

  

 

—  

 

  

 

—  

 

    

 

—  

 

    

 

—  

 

  

 

—  

 

  

 

(496

)

  

 

(496

)

    

  

  


  


    


    


  


  


  


Balance at December 31, 2002

  

130,408

 

  

$

131

  

$

273,320

 

  

$

(517

)

    

$

(193

)

    

$

620

 

  

$

(170,917

)

  

$

(496

)

  

$

101,948

 

    

  

  


  


    


    


  


  


  


 

The accompanying notes are an integral part of these consolidated financial statements.

 

46


Table of Contents

VITRIA TECHNOLOGY, INC.

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

 

    

Year Ended December 31,


 
    

2002


    

2001


    

2000


 

Operating activities:

                          

Net loss

  

$

(91,683

)

  

$

(53,622

)

  

$

(1,278

)

Adjustments to reconcile net loss to net cash (used in) provided by operating activities:

                          

Amortization of goodwill and intangible assets

  

 

2,748

 

  

 

3,608

 

  

 

—  

 

Acquired in-process technology

  

 

—  

 

  

 

1,500

 

  

 

—  

 

Impairment of goodwill

  

 

7,047

 

  

 

—  

 

  

 

—  

 

Loss on write-down of equity investments

  

 

164

 

  

 

2,636

 

  

 

—  

 

Gain on sale of equity investments

  

 

—  

 

  

 

(2,000

)

  

 

—  

 

Loss on disposal of fixed assets

  

 

966

 

  

 

2,070

 

  

 

—  

 

Depreciation

  

 

6,905

 

  

 

6,486

 

  

 

3,210

 

Stock-based compensation

  

 

1,616

 

  

 

1,820

 

  

 

3,420

 

Provision for doubtful accounts

  

 

351

 

  

 

1,165

 

  

 

2,922

 

Changes in assets and liabilities:

                          

Accounts receivable

  

 

21,756

 

  

 

(720

)

  

 

(28,368

)

Other current assets

  

 

3,140

 

  

 

1,925

 

  

 

(4,749

)

Other assets

  

 

(103

)

  

 

46

 

  

 

(246

)

Accounts payable

  

 

(1,305

)

  

 

314

 

  

 

995

 

Accrued liabilities

  

 

(7,151

)

  

 

(6,237

)

  

 

14,024

 

Accrued restructuring charges

  

 

13,194

 

  

 

—  

 

  

 

—  

 

Deferred revenue

  

 

(13,879

)

  

 

(19,970

)

  

 

30,984

 

Other long-term liabilities

  

 

105

 

  

 

—  

 

  

 

—  

 

    


  


  


Net cash (used in) provided by operating activities

  

 

(56,129

)

  

 

(60,979

)

  

 

20,914

 

    


  


  


Investing activities:

                          

Acquisition of XMLSolutions, net of cash acquired

  

 

—  

 

  

 

(8,869

)

  

 

—  

 

Purchases of property and equipment

  

 

(3,050

)

  

 

(6,677

)

  

 

(13,922

)

Purchases of investments

  

 

(149,462

)

  

 

(397,072

)

  

 

(220,393

)

Proceeds from maturities of investments

  

 

189,003

 

  

 

370,198

 

  

 

145,614

 

Sales (purchases) of equity investments

  

 

—  

 

  

 

4,000

 

  

 

(5,100

)

    


  


  


Net cash provided by (used in) investing activities

  

 

36,491

 

  

 

(38,420

)

  

 

(93,801

)

    


  


  


Financing activities:

                          

Collection of notes receivable

  

 

—  

 

  

 

98

 

  

 

—  

 

Issuance of common stock, net

  

 

1,139

 

  

 

5,243

 

  

 

175,567

 

Acquisition of treasury stock

  

 

(496

)

  

 

—  

 

  

 

—  

 

    


  


  


Net cash provided by financing activities

  

 

643

 

  

 

5,341

 

  

 

175,567

 

    


  


  


Effect of exchange rate changes on cash and cash equivalents

  

 

943

 

  

 

(289

)

  

 

(72

)

    


  


  


Net (decrease) increase in cash and cash equivalents