SEC Info  
    Home      Search      My Interests      Help      Sign In      Please Sign In

Vitria Technology Inc – ‘10-Q’ for 9/30/02

On:  Wednesday, 11/13/02, at 6:21pm ET   ·   As of:  11/14/02   ·   For:  9/30/02   ·   Accession #:  1021408-2-13950   ·   File #:  0-27207

Previous ‘10-Q’:  ‘10-Q’ on 8/14/02 for 6/30/02   ·   Next:  ‘10-Q’ on 5/14/03 for 3/31/03   ·   Latest:  ‘10-Q’ on 11/9/06 for 9/30/06

Find Words in Filings emoji
 
  in    Show  and   Hints

  As Of                Filer                Filing    For·On·As Docs:Size              Issuer               Agent

11/14/02  Vitria Technology Inc             10-Q        9/30/02    6:621K                                   Donnelley R… Fin’l/NY/FA

Quarterly Report   —   Form 10-Q
Filing Table of Contents

Document/Exhibit                   Description                      Pages   Size 

 1: 10-Q        Quarterly Report for Period Ended 09/30/2002        HTML    493K 
 2: EX-10.15    Loan and Security Agmt Dated 06/28/2002               31    114K 
 3: EX-10.16    Loan Modification Agmt Dated 11/06/2002                2     11K 
 4: EX-10.17    Severance Agreement for J. Wheeler                    12     59K 
 5: EX-99.1     Certification of CEO                                HTML      8K 
 6: EX-99.2     Certification of CFO                                HTML      8K 


10-Q   —   Quarterly Report for Period Ended 09/30/2002
Document Table of Contents

Page (sequential) | (alphabetic) Top
 
11st Page   -   Filing Submission
"Table of Contents
"Part I: Financial Information
"Condensed Consolidated Financial Statements and Notes
"Condensed Consolidated Balance Sheets at September 30, 2002 and December 31, 2001
"Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2002 and September 30, 2001
"Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2002 and September 30, 2001
"Notes to the Condensed Consolidated Financial Statements
"Management's Discussion and Analysis of Financial Condition and Results of Operations
"Quantitative and Qualitative Disclosures About Market Risk
"Controls and Procedures
"Part Ii: Other Information
"Legal Proceedings
"Changes in Securities and Uses of Proceeds
"Defaults Upon Senior Securities
"Submission of Matters to a Vote of Security Holders
"Other Information
"Exhibits and Reports on Form 8-K
"Signature
"Certifications

This is an HTML Document rendered as filed.  [ Alternative Formats ]



  Quarterly Report for period ended 09/30/2002  
Table of Contents

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 

 
FORM 10-Q
 
(Mark One)
x
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
 
For the quarterly period ended September 30, 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, California 94085
(408) 212-2700
(Address, including Zip Code, of Registrant’s Principal Executive Offices
and Registrant’s Telephone Number, including Area Code)
 

 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.  Yes  x    No  ¨
 
The number of shares of Vitria’s common stock, $0.001 par value, outstanding as of October 31, 2002 was 130,870,415 shares.
 


Table of Contents
VITRIA TECHNOLOGY, INC.
 
INDEX
 
         
Page

    
Item 1.
       
       
3
       
4
       
5
       
6
Item 2:
     
13
Item 3:
     
26
Item 4:
     
36
    
Item 1:
     
37
Item 2:
     
37
Item 3:
     
37
Item 4:
     
37
Item 5:
     
37
Item 6:
     
38
  
39
  
40

2


Table of Contents
PART I.  FINANCIAL INFORMATION
 
ITEM 1.  Financial Statements
 
VITRIA TECHNOLOGY, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
 
    
    
 
    
(unaudited)
    
(Note 1)
 
ASSETS
                 
Current Assets:
                 
Cash and cash equivalents
  
$
65,919
 
  
$
60,479
 
Short-term investments
  
 
62,941
 
  
 
96,734
 
Accounts receivable, net
  
 
20,616
 
  
 
37,215
 
Other current assets
  
 
4,612
 
  
 
7,335
 
    


  


Total current assets
  
 
154,088
 
  
 
201,763
 
Restricted investments
  
 
—  
 
  
 
18,325
 
Property and equipment, net
  
 
10,779
 
  
 
14,000
 
Intangible assets, net
  
 
1,680
 
  
 
2,752
 
Goodwill
  
 
—  
 
  
 
7,247
 
Other assets
  
 
1,433
 
  
 
1,424
 
    


  


Total assets
  
$
167,980
 
  
$
245,511
 
    


  


LIABILITIES AND STOCKHOLDERS’ EQUITY
                 
Current Liabilities:
                 
Accounts payable
  
$
3,500
 
  
$
3,569
 
Accrued payroll and related
  
 
9,894
 
  
 
13,232
 
Other accrued liabilities
  
 
9,120
 
  
 
10,890
 
Accrued restructuring expenses
  
 
4,818
 
  
 
—  
 
Deferred revenue
  
 
17,241
 
  
 
27,309
 
    


  


Total current liabilities
  
 
44,573
 
  
 
55,000
 
Long Term Liabilities:
                 
Accrued restructuring expenses
  
 
9,207
 
  
 
—  
 
Commitments and Contingencies
                 
Stockholders’ Equity:
                 
Common Stock
  
 
130
 
  
 
130
 
Additional paid-in capital
  
 
273,178
 
  
 
271,596
 
Unearned stock-based compensation
  
 
(699
)
  
 
(1,547
)
Notes receivable from stockholders
  
 
(193
)
  
 
(193
)
Accumulated other comprehensive income (loss)
  
 
480
 
  
 
(241
)
Accumulated deficit
  
 
(158,487
)
  
 
(79,234
)
Treasury stock, at cost
  
 
(209
)
  
 
—  
 
    


  


Total stockholders’ equity
  
 
114,200
 
  
 
190,511
 
    


  


Total liabilities and stockholders’ equity
  
$
167,980
 
  
$
245,511
 
    


  


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

3


Table of Contents
VITRIA TECHNOLOGY, INC.
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(In thousands, except per share amounts)
(unaudited)
 
    
Three Months Ended September 30,

    
Nine Months Ended

 
    
    
2001

    
2002

    
2001

 
Revenues:
                                   
License
  
$
10,005
 
  
$
15,763
 
  
$
30,006
 
  
$
56,566
 
Service and other
  
 
16,038
 
  
 
14,324
 
  
 
47,204
 
  
 
43,260
 
    


  


  


  


Total revenues
  
 
26,043
 
  
 
30,087
 
  
 
77,210
 
  
 
99,826
 
Cost of revenues:
                                   
License
  
 
112
 
  
 
420
 
  
 
2,541
 
  
 
1,042
 
Service and other
  
 
8,353
 
  
 
7,050
 
  
 
25,501
 
  
 
22,637
 
    


  


  


  


Total cost of revenues
  
 
8,465
 
  
 
7,470
 
  
 
28,042
 
  
 
23,679
 
    


  


  


  


Gross profit
  
 
17,578
 
  
 
22,617
 
  
 
49,168
 
  
 
76,147
 
Operating expenses:
                                   
Sales and marketing
  
 
15,035
 
  
 
23,615
 
  
 
60,194
 
  
 
73,929
 
Research and development
  
 
6,922
 
  
 
10,914
 
  
 
25,147
 
  
 
31,723
 
General and administrative
  
 
4,614
 
  
 
4,082
 
  
 
16,128
 
  
 
12,489
 
Stock-based compensation
  
 
213
 
  
 
403
 
  
 
1,498
 
  
 
1,469
 
Amortization of goodwill and intangible assets
  
 
341
 
  
 
1,252
 
  
 
1,072
 
  
 
2,355
 
Impairment of goodwill
  
 
—  
 
  
 
—  
 
  
 
7,047
 
  
 
—  
 
Restructuring costs
  
 
1,665
 
  
 
—  
 
  
 
19,011
 
  
 
—  
 
Acquired in-process research and development
  
 
—  
 
  
 
—  
 
  
 
—  
 
  
 
1,500
 
    


  


  


  


Total operating expenses
  
 
28,790
 
  
 
40,266
 
  
 
130,097
 
  
 
123,465
 
    


  


  


  


Loss from operations
  
 
(11,212
)
  
 
(17,649
)
  
 
(80,929
)
  
 
(47,318
)
Interest income
  
 
648
 
  
 
1,920
 
  
 
2,377
 
  
 
7,945
 
Other income (expenses), net
  
 
(308
)
  
 
19
 
  
 
(67
)
  
 
219
 
    


  


  


  


Net loss before income taxes
  
 
(10,872
)
  
 
(15,710
)
  
 
(78,619
)
  
 
(39,154
)
Provision for income taxes
  
 
237
 
  
 
398
 
  
 
634
 
  
 
809
 
    


  


  


  


Net loss
  
$
(11,109
)
  
$
(16,108
)
  
$
(79,253
)
  
$
(39,963
)
    


  


  


  


Basic and diluted net loss per share
  
$
(0.09
)
  
$
(0.13
)
  
$
(0.61
)
  
$
(0.32
)
    


  


  


  


Weighted average shares used in computing basic and diluted net loss per share
  
 
129,793
 
  
 
127,368
 
  
 
129,445
 
  
 
126,383
 
    


  


  


  


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

4


Table of Contents
VITRIA TECHNOLOGY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
 
    
Nine months ended

 
    
    
2001

 
Operating activities:
                 
Net loss
  
$
(79,253
)
  
$
(39,963
)
Adjustments to reconcile net loss to net cash used in operating activities:
                 
Amortization of goodwill and intangible assets
  
 
1,072
 
  
 
2,355
 
Acquired in-process technology
  
 
—  
 
  
 
1,500
 
Impairment of goodwill
  
 
7,047
 
  
 
—  
 
Gain on sale of equity investments
  
 
—  
 
  
 
(1,960
)
Loss on write-down of equity investments
  
 
164
 
  
 
1,200
 
Loss on disposal of fixed assets
  
 
452
 
  
 
491
 
Depreciation
  
 
5,164
 
  
 
4,801
 
Stock-based compensation
  
 
1,498
 
  
 
1,469
 
Changes in assets & liabilities:
                 
Accounts receivable
  
 
16,599
 
  
 
5,083
 
Other current assets
  
 
2,723
 
  
 
(2,754
)
Other assets
  
 
(173
)
  
 
(139
)
Accounts payable
  
 
(69
)
  
 
468
 
Accrued liabilities
  
 
(4,908
)
  
 
(2,459
)
Accrued restructuring charges
  
 
14,025
 
  
 
—  
 
Deferred revenue
  
 
(10,068
)
  
 
(17,167
)
    


  


Net cash used in operating activities
  
 
(45,727
)
  
 
(47,075
)
    


  


Investing activities:
                 
Acquisition of subsidiary, net of cash acquired
  
 
—  
 
  
 
(8,869
)
Purchases of property and equipment
  
 
(2,395
)
  
 
(5,913
)
Purchases of investments
  
 
(110,774
)
  
 
(318,703
)
Maturities of investments
  
 
162,804
 
  
 
278,670
 
Proceeds from sales of equity investments
  
 
—  
 
  
 
4,000
 
    


  


Net cash provided by (used in) investing activities
  
 
49,635
 
  
 
(50,815
)
    


  


Financing activities:
                 
Collection of notes receivable from shareholders
  
 
—  
 
  
 
98
 
Issuance of common stock, net
  
 
931
 
  
 
2,954
 
Acquisition of treasury stock
  
 
(209
)
  
 
—  
 
    


  


Net cash provided by financing activities
  
 
722
 
  
 
3,052
 
    


  


Effect of exchange rates on changes on cash and cash equivalents
  
 
810
 
  
 
(117
)
    


  


Net increase (decrease) in cash and cash equivalents
  
 
5,440
 
  
 
(94,955
)
Cash and cash equivalents at beginning of period
  
 
60,479
 
  
 
154,826
 
    


  


Cash and cash equivalents at end of period
  
$
65,919
 
  
$
59,871
 
    


  


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

5


Table of Contents
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 
1)    Basis of Presentation
 
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim consolidated financial information and with the instructions for Form 10-Q and Article 10 of Regulation S-X. In the opinion of the management of Vitria Technology, Inc., these unaudited condensed consolidated financial statements include all adjustments, consisting only of normal recurring adjustments, which we consider necessary to fairly state Vitria’s financial position and the results of its operations and its cash flows. The balance sheet at December 31, 2001 has been derived from the audited consolidated financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. The accompanying condensed consolidated financial statements should be read in conjunction with the financial statements and notes thereto included in Vitria’s Annual Report on Form 10-K for the year ended December 31, 2001. The results of Vitria’s operations for any interim period are not necessarily indicative of the results of the operations for any other interim period or for a full fiscal year.
 
Certain prior period amounts have been reclassified to conform to the current period presentation. Such reclassifications did not change the previously reported operating loss or net loss amounts.
 
2)    Net Loss Per Share
 
Basic net loss per share is calculated by dividing net loss by the weighted-average number of shares of common stock outstanding. Basic net loss per share does not include shares subject to Vitria’s right of repurchase, which lapses ratably over the related vesting term. Diluted net loss per share is calculated by dividing net loss by the weighted-average number of shares of common stock outstanding plus shares of potential common stock. Shares of potential common stock are composed of shares of common stock subject to Vitria’s right of repurchase and shares of common stock issuable upon the exercise of stock options (using the treasury stock method). The calculation of diluted net loss per share excludes shares of potential common stock if their effect is anti-dilutive.
 
The following table sets forth the computation of basic and diluted net loss per share for the periods indicated (in thousands, except per share amounts):
 
    
Three months ended

    
Nine months ended

 
    
    
    
    
 
Numerator for basic and diluted net loss per share:
                                   
Net loss
  
$
(11,109
)
  
$
(16,108
)
  
$
(79,253
)
  
$
(39,963
)
    


  


  


  


Denominator for basic and diluted net loss per share:
                                   
Weighted average shares of common stock outstanding
  
 
130,389
 
  
 
129,568
 
  
 
130,359
 
  
 
129,075
 
Less shares subject to repurchase
  
 
(596
)
  
 
(2,200
)
  
 
(914
)
  
 
(2,692
)
    


  


  


  


Denominator for basic and diluted net loss per share
  
 
129,793
 
  
 
127,368
 
  
 
129,445
 
  
 
126,383
 
Basic and diluted net loss per share
  
$
(0.09
)
  
$
(0.13
)
  
$
(0.61
)
  
$
(0.32
)
    


  


  


  


6


Table of Contents
 
The following table sets forth the weighted average potential shares of common stock that are not included in the diluted net loss per share calculation above because to do so would be anti-dilutive for the periods indicated (in thousands):
 
      
Three months ended

    
Nine months ended

      
    
    
    
Weighted average effect of anti-dilutive securities:
                           
Employee stock options (using the Treasury Stock Method)
    
325
    
3,112
    
3,920
    
5,035
Common stock subject to repurchase agreements
    
596
    
2,200
    
914
    
2,692
      
    
    
    
Total
    
921
    
5,312
    
4,834
    
7,727
      
    
    
    
 
3)  Comprehensive Loss
 
Comprehensive loss is comprised of net loss and other comprehensive income (loss) such as foreign currency translation gains (losses) and unrealized gains (losses) on available-for-sale marketable securities. Vitria’s total comprehensive loss was as follows (in thousands):
 
    
Three months ended

    
Nine months ended

 
    
    
    
    
 
Net loss
  
$
(11,109
)
  
$
(16,108
)
  
$
(79,253
)
  
$
(39,963
)
Other comprehensive income (loss):
                                   
Foreign currency translation adjustment
  
 
24
 
  
 
12
 
  
 
810
 
  
 
(117
)
Unrealized gain (loss) on securities
  
 
14
 
  
 
114
 
  
 
(88
)
  
 
217
 
    


  


  


  


Comprehensive loss
  
$
(11,071
)
  
$
(15,982
)
  
$
(78,531
)
  
$
(39,863
)
    


  


  


  


 
4)  Stock-Based Compensation
 
Stock-based compensation is broken down as follows (in thousands):
 
      
Three months ended

    
Nine months ended

      
    
    
    
Cost of revenues
    
$
17
    
$
32
    
$
64
    
$
116
Sales and marketing
    
 
78
    
 
151
    
 
653
    
 
557
Research and development
    
 
78
    
 
145
    
 
292
    
 
526
General and administrative
    
 
40
    
 
75
    
 
489
    
 
270
      

    

    

    

Total stock-based compensation
    
$
213
    
$
403
    
$
1,498
    
$
1,469
      

    

    

    

7


Table of Contents
As a result of changes made to our management structure, 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 an additional non-cash stock-based compensation expense of $695,000 as a result of these modifications in the quarter ended March 31, 2002.
 
5)  Restricted Investments
 
In June 2002, we entered into a new standby letter of credit, replacing a previous standby letter of credit that restricted certain investments from use in operations. The new standby letter of credit no longer requires such restriction therefore the investments were subsequently reclassified as cash and cash equivalents or short-term investments.
 
6)  Derivative Financial Instruments
 
In accordance with Financial Accounting Standards No. 133 (SFAS No. 133) “Accounting for Derivative Instruments and Hedging Activities”, Vitria recognizes all of our derivative instruments as either assets or liabilities in the balance sheet at fair value. The accounting for changes in the fair value (i.e., unrealized gains or losses) of a derivative instrument depends on whether it has been designated and qualifies as part of a hedging relationship and on the type of hedging relationship. Derivatives that are not hedges must be adjusted to fair value through current earnings.
 
To protect against possible changes in values of certain foreign currency denominated receivables, primarily resulting from sales outside the United States, from time to time we enter into foreign currency forward contracts which qualify for and are designated as fair value hedges. The gains and losses on these forward contracts as well as the offsetting losses and gains on the hedged receivables are recognized in current earnings. The effectiveness test for these contracts is determined by using the forward-to-forward rate comparison for currency forward contracts, which makes same-currency hedges perfectly effective. In the three and nine months ended September 30, 2002, we did not engage in any hedging activities.
 
7)  Goodwill
 
During the quarter ended June 30, 2002, we made an adjustment to reduce the purchase price of XMLSolutions Corporation by $200,000. The reduction in purchase price was due to revised estimates of acquisition related expenses. The adjustment to the purchase price reduced both goodwill and other accrued liabilities by $200,000. In addition, in accordance with SFAS 142, approximately $1.0 million in assembled workforce, classified as intangible assets, was transferred to goodwill as of January 1, 2002. For comparative purposes we made this reclassification in the balance sheet as of December 31, 2001.
 
Also during the quarter ended June 30, 2002, we performed an assessment of the carrying value of goodwill, which was recorded in connection with our acquisition of XMLSolutions in April 2001. The assessment was performed because our market capitalization had declined significantly, and sustained negative economic conditions impacted our operations and expected future revenues. We evaluated goodwill under the provisions of Statement of Financial Accounting Standards No. 142 (SFAS No. 142) “Goodwill and Other Intangible Assets” (See Note 10). 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 to its carrying value. As a result of the assessment, we recorded impairment charges of $7.0 million related to goodwill in the quarter ended June 30, 2002.

8


Table of Contents
The following pro-forma financial information reflects consolidated results adjusted as if SFAS 142 had been adopted for all periods presented (in thousands, except per share amounts):
 
    
Three months ended

    
Nine months ended

    
Twelve months

 
    
    
    
    
    
Reported net loss
  
$
(11,109
)
  
$
(16,108
)
  
$
(79,253
)
  
$
(39,963
)
  
$
(53,622
)
Add back: goodwill amortization (including assembled workforce)
  
 
—  
 
  
 
975
 
  
 
—  
 
  
 
1,834
 
  
 
2,083
 
    


  


  


  


  


Adjusted net loss
  
$
(11,109
)
  
$
(15,133
)
  
$
(79,253
)
  
$
(38,129
)
  
$
(51,539
)
    


  


  


  


  


Basic and diluted net loss per share:
                                            
Reported net loss per share
  
$
(0.09
)
  
$
(0.13
)
  
$
(0.61
)
  
$
(0.32
)
  
$
(0.42
)
Add back: goodwill amortization (including assembled workforce)
  
 
—  
 
  
 
0.01
 
  
 
—  
 
  
 
0.02
 
  
 
0.01
 
    


  


  


  


  


Adjusted net loss per share
  
$
(0.09
)
  
$
(0.12
)
  
$
(0.61
)
  
$
(0.30
)
  
$
(0.41
)
    


  


  


  


  


Weighted average shares
  
 
129,793
 
  
 
127,368
 
  
 
129,445
 
  
 
126,383
 
  
 
126,851
 
    


  


  


  


  


 
8)  Intangible Assets
 
At September 30, 2002, intangible assets, resulting from the acquisition of XMLSolutions Corporation, consist of the following (in thousands):
 
      
Gross Carrying Amount September 30, 2002

    
Accumulated Amortization September 30, 2002

    
Net Carrying Amount September 30, 2002

Developed Technology
    
$
2,500
    
$
1,227
    
$
1,273
Trademarks
    
 
800
    
 
393
    
 
407
      

    

    

Total
    
$
3,300
    
$
1,620
    
$
1,680
      

    

    

 
In accordance with Statement of Financial Accounting Standards No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”, the carrying values of our intangible assets are tested for impairment whenever events or changes in circumstances indicate that we may not be able to recover the assets’ carrying amount. An analysis for

9


Table of Contents
impairment was conducted in June 2002 due to sustained negative economic conditions that have impacted our operations. No impairment was identified for the intangible assets at that time. There were no significant events in the quarter ended September 30, 2002 to cause us to test again for impairment.
 
SFAS 142 (see Note 10) requires that intangible assets that do not meet the criteria for recognition apart from goodwill must be reclassified as of January 1, 2002. In accordance with SFAS 142, we transferred approximately $1.0 million of net assembled workforce to goodwill as of January 1, 2002. For comparative purposes we have made this reclassification as of December 31, 2001.
 
9)  Credit Agreements
 
In June 2002, we entered into a $15 million revolving line of credit agreement with Silicon Valley Bank. 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 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 September 30, 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.
 
10)  Recent Accounting Pronouncements
 
We adopted Statement of Financial Accounting Standards No. 142 (SFAS No. 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). 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 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 No. 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. Adoption did not have a material impact on our results of operations, financial position or cash flows.
 
In November 2001, the staff of FASB issued Staff Announcement Topic No. D-103, “Income Statement Characterization of Reimbursements Received for Out of Pocket Expenses Incurred”, or the “Announcement”. The Announcement requires companies to characterize reimbursements received for out of pocket expenses incurred as revenue in the income statement. Vitria has adopted the Announcement beginning on January 1, 2002. 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.
 
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 associated with an exit or

10


Table of Contents
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. We do not believe that the adoption of SFAS 146 will have a material affect on our operating results or financial position.
 
11)  Restructuring and Asset Impairments
 
In April 2002, we initiated actions to reduce our cost structure. The plan was a combination of a reduction in workforce of approximately 150 employees, or 17% of the existing workforce, consolidations of facilities in the United States and United Kingdom and fixed asset write-offs of leasehold improvements and equipment. The workforce reduction affected all functional areas and was largely completed in the quarter ended June 30, 2002. As a result of the restructuring plan, we incurred a charge of $17.3 million in the quarter ended June 30, 2002. The restructuring charge included approximately $2.4 million of severance related charges, $14.5 million of committed excess facilities payments, and $463,000 in fixed asset write-offs of leasehold improvements and equipment. The facilities consolidation charge 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 independent real estate sources. We have engaged brokers to locate tenants to sublease these facilities. As of September 30, 2002, $13.6 million of lease termination costs, net of anticipated sublease income, remains accrued and is expected to be fully utilized by fiscal 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.
 
In August 2002, we initiated actions to further reduce our cost structure. The plan consisted entirely of a reduction in workforce of approximately 135 employees, or 20% of the existing workforce. The workforce reduction affected all functional areas and was largely completed in the quarter ended September 30, 2002. As a result of the restructuring plan, we incurred a charge of $1.7 million in the quarter ended September 30, 2002.
 
As of September 30, 2002, $14.0 million of restructuring costs remained accrued for payment in future periods, as follows (in thousands):
 
2002 Restructuring Reserve

  
Facilities
consolidation

    
Severance

    
Total

 
Total charges
  
14,983
 
  
2,363
 
  
17,346
 
Cash payments
  
(477
)
  
(2,201
)
  
(2,678
)
Fixed asset writeoffs
  
(463
)
  
—  
 
  
(463
)
Reclassification of deferred rent
  
705
 
  
—  
 
  
705
 
    

  

  

Balance at June 30, 2002
  
14,748
 
  
162
 
  
14,910
 
Total charges
  
(112
)
  
1,777
 
  
1,665
 
Cash payments
  
(1,013
)
  
(1,537
)
  
(2,550
)
    

  

  

  
13,623
 
  
402
 
  
14,025
 

11


Table of Contents
At September 30, 2002, $4.8 million related to the 2002 restructuring activities remained in current liabilities and $9.2 million remained in long term liabilities. During 2002, we have made cash payments for restructuring activities totaling $5.2 million. Cash payments totaling approximately $14.0 million, primarily consisting of lease payments, will be made through 2013. The accrued severance balance of $402,000 is expected to be paid out by December 31, 2003.
 
In the three months ended June 30, 2002 we also incurred a charge to cost of license revenues for approximately $2.0 million related to a non-cancelable royalty agreement that will have no future utility to us. The charge resulted from the write-off of approximately $1.1 million of prepaid assets and the accrual of approximately $875,000 relating to a remaining guaranteed future payment to be made in January 2003.
 
12)  Treasury Stock
 
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 September 30, 2002, 222,900 shares had been repurchased in the open market at a total cost of approximately $209,000.

12


Table of Contents
 
ITEM 2: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
The information in this discussion 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 risks outlined under “Business Risks” in this report on Form 10-Q. These business risks should be considered in evaluating our prospects and future financial performance. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements.
 
OVERVIEW
 
We are a leading provider of innovative business process integration solutions. We develop and deliver software products and services that enable corporations to gain real-time visibility and control of strategic business processes. These processes typically involve complex interactions between different software applications, software platforms, web services, people and trading partners. Our flagship BusinessWare® integration platform orchestrates real-time interactions over corporate networks and the Internet between systems, people and trading partners according to graphically defined business processes. BusinessWare’s benefits include faster business insight through real-time analysis of data in multiple systems. It also is designed to accelerate cycle times for key business processes, enforce best practices and regulatory compliance, and ensure greater consistency and accuracy of data.
 
In addition to providing the integration platform, we offer pre-packaged integration solutions, known as collaborative applications. These are pre-built, configurable solutions for solving common integration problems by managing collaborative processes within and across enterprises. The Vitria Collaborative Applications (VCA) family of products is built on and leverages the BusinessWare integration platform and provides significant out-of-the-box capabilities for addressing specific integration problems. For example, our VCA for HIPAA (Health Insurance Portability and Accountability Act) provides a quick-start solution for managing transaction, validation and security requirements between healthcare payers, providers, clearinghouses and government agencies in order to meet new regulatory standards in the healthcare sector.
 
The BusinessWare integration platform and our family of collaborative applications are currently licensed by more than 500 companies worldwide in such diverse industries as healthcare, manufacturing, financial services, insurance, telecommunications and energy.
 
BusinessWare combines in a single solution the five elements that we believe are essential for ebusiness infrastructure software:
 
 
(1)
 
Business Process Management, or BPM: BPM manages the steps of a cross-functional business process to ensure completion of the process (e.g., the sales through collection cycle). It uses graphical business process models to define, automate and orchestrate transactions and the exchange of information between internal business applications, people and external trading partners.
 
 
(2)
 
Business-to-Business Integration, or B2Bi: B2Bi enables the secure and reliable completion of transactions and the exchange of business information between customers and partners over

13


Table of Contents
 
    
 
the Internet to support collaborative business processes. B2Bi helps companies manage their value chain interactions from end to end.
 
 
(3)
 
Business Analysis and Monitoring, or BAM: BAM provides real-time monitoring and analysis of business processes thereby enabling optimization of operational efficiency. Our two key BAM components—Cockpit and Analyzer—continuously gather business process data, analyze and visualize it in real time, and enable process owners to identify and respond to both business and integration problems or opportunities as they occur.
 
 
(4)
 
Business Vocabulary Management, or BVM: BVM is comprised of content and tools that enable more flexible, scalable management of translations between application-specific and industry-specific data formats and meanings (vocabularies). BVM is designed to make integration easier, reduce cost, minimize the risk of change and enable efficient exception handling. BVM includes a comprehensive set of extended markup language, industry-specific vocabularies (words and meanings) and documents required to conduct business over the Internet. 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.
 
 
(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 each other, EAI helps unify and improve extended enterprise processes.
 
Companies may use BusinessWare’s capabilities to orchestrate interactions between both emerging industry-standard and legacy third-party application integration infrastructures.
 
Once customers use BusinessWare to define their business process models and integrate the underlying information technology (IT) systems, BusinessWare automatically controls the flow of information across the IT systems as specified by the process models. BusinessWare continuously analyzes the customer’s business processes and can automatically change the processes in response to this analysis. This capability allows companies to transform the information flowing through their IT systems into “actionable intelligence” that enables business managers to optimize their business operations.
 
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 market our products through our direct sales force and augment our marketing efforts through relationships with system integrators and technology vendors. To date, we have not experienced significant seasonality of revenue. We expect that future results may be affected by the fiscal or quarterly budgeting cycles of our customers.
 
CRITICAL ACCOUNTING POLICIES
 
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 allowances for bad debts, investments, intangible assets, income taxes, contingencies and litigation. 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.

14


Table of Contents
 
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, 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. Revenue is deferred for those agreements which exceed normal payment terms. If the fee due from the customer is not fixed or determinable, revenue is recognized as payments become due from the customer. 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.
 
Marketing assistance fees are commissions which are paid to partners who have contributed to the successful completion of a license transaction in accordance with a written agreement and specific project executed with Vitria. Such fees are offset against the end customer license revenue.
 
Service and other revenues include product maintenance and support, consulting, training and government grants. Revenues from maintenance and support are deferred and recognized ratably over the term of the contract. Revenues from consulting and training are recognized when the services are performed and collectibility is deemed probable. 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.
 
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.
 
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

15


Table of Contents
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. The use of different estimates or assumptions could produce materially different allowance balances. 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.
 
Valuation of Equity Investments
 
We record an investment impairment charge when we believe an investment in corporate debt securities or in equity securities of private companies has experienced a decline in value that is other than temporary. Future adverse changes in market conditions or poor operating results of the underlying companies could result in losses or an inability to recover the carrying value of the investments that may not be reflected in an investment’s current carrying value, thereby possibly requiring an impairment charge in the future.
 
Accounting for Income Taxes
 
We record a valuation allowance to reduce our deferred tax assets to the amount that is more likely than not to be realized. While we have considered future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for the valuation allowance, in the event we were to determine that we would be able to realize our deferred tax assets in the future in excess of its net recorded amount, an adjustment to the deferred tax asset would increase income in the period such determination was made. Likewise, should we determine that we would not be able to realize all or part of our net deferred tax asset in the future, an adjustment to the deferred tax asset would be charged to income in the period such determination was made.
 
Special Charges
 
During the first nine months of 2002, we recorded significant special charges related to non-recurring events and the realignment and restructuring of our business operations. These charges represent expenses incurred in connection with certain cost reduction programs that we have undertaken, and consist of the cost of involuntary termination benefits, facilities charges and other costs of exiting activities. We will record a liability in the period management approves a restructuring plan if:
 
 
-
 
Management having the appropriate level of authority approves and commits Vitria to the specific plan involving involuntary terminations and/or the exit from certain activities;
 
 
-
 
The period of time to complete the plan indicates that significant changes to the plan of termination are not likely;
 
 
-
 
The plan involving terminations identifies the number of employees and positions to be terminated, and the termination benefit arrangement is communicated to employees at the commitment date.
 
Only costs resulting from an exit 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.
 
These charges, for both severance and exit costs, require the extensive use of estimates primarily about the number of employees to be paid severance, the amount of severance and related benefits to be paid, and the cost of exiting facilities, including estimates and assumptions related to future maintenance costs, our ability to secure sub-tenants (if applicable) and any 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 in the future, and might not be permitted to accrue such charges at the time a restructuring plan is approved, but may have to recognize such costs as incurred.
 
Contingencies and Litigation
 
We are subject to various proceedings, lawsuits and claims relating to product, technology, labor, shareholder and other matters. We are required to assess the likelihood of any adverse outcomes and the potential range of probable losses in these matters. The amount of loss accrual, if any, is determined after careful analysis of each matter, and is subject to adjustment if warranted by new developments or revised strategies.

16


Table of Contents
RESULTS OF OPERATIONS
For the three and nine months ended September 30, 2002
 
The following table sets forth the results of operations for the three and nine months ended September 30, 2002, expressed as a percentage of total revenues.
 
    
Three Months Ended September 30,

    
Nine Months Ended September 30,

 
    
    
2001

    
2002

    
2001

 
Revenues:
                           
License
  
38
%
  
52
%
  
39
%
  
57
%
Service and other
  
62
%
  
48
%
  
61
%
  
43
%
    

  

  

  

Total revenues
  
100
%
  
100
%
  
100
%
  
100
%
Cost of revenues:
                           
License
  
1
%
  
1
%
  
3
%
  
1
%
Service and other
  
32
%
  
24
%
  
33
%
  
23
%
    

  

  

  

Total cost of revenues
  
33
%
  
25
%
  
36
%
  
24
%
Gross profit
  
67
%
  
75
%
  
64
%
  
76
%
Operating expenses:
                           
Sales and marketing
  
58
%
  
78
%
  
78
%
  
74
%
Research and development
  
27
%
  
36
%
  
33
%
  
32
%
General and administrative
  
18
%
  
14
%
  
21
%
  
13
%
Stock-based compensation
  
1
%
  
1
%
  
2
%
  
1
%
Amortization of goodwill and intangible assets
  
1
%
  
4
%
  
1
%
  
2
%
Impairment of goodwill
  
0
%
  
0
%
  
9
%
  
0
%
Restructuring costs
  
6
%
  
0
%
  
25
%
  
0
%
Acquired in-process research and development
  
0
%
  
0
%
  
0
%
  
2
%
    

  

  

  

Total operating expenses
  
111
%
  
133
%
  
169
%
  
124
%
Loss from operations
  
(44
)%
  
(58
)%
  
(105
)%
  
(48
)%
Interest income
  
2
%
  
6
%
  
3
%
  
8
%
Other income, net
  
(1
)%
  
0
%
  
0
%
  
0
%
    

  

  

  

Net loss before income taxes
  
(43
)%
  
(52
)%
  
(102
)%
  
(40
)%
Provision for income taxes
  
1
%
  
1
%
  
1
%
  
1
%
    

  

  

  

Net loss
  
(44
)%
  
(53
)%
  
(103
)%
  
(41
)%
    

  

  

  

17


Table of Contents
 
REVENUES
 
We recognized approximately 43% of our revenues from customers outside the United States in the three months ended September 30, 2002 and 34% of our revenues from customers outside the United States in the nine months ended September 30, 2002, compared to 31% in the three months ended September 30, 2001 and 25% in the nine months ended September 30, 2001. For the next quarter, we believe international revenues will remain at approximately the same percentage of total revenues as the three months ended September 30, 2002.
 
Sales to our ten largest customers accounted for 41% of total revenues in the three months ended September 30, 2002 and 30% of total revenues in the nine months ended September 30, 2002. Sales to our ten largest customers accounted for 42% of total revenues in the three months ended September 30, 2001 and 30% of total revenues in the nine months ended September 30, 2001. One customer accounted for 11% of our revenues in the three months ended September 30, 2002 and a different customer accounted for 15% of our revenues in the three months ended September 30, 2001. No one single customer accounted for more that 10% of total revenues in either of the nine months ended September 30, 2002 or 2001. 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 37% to $10.0 million in the three months ended September 30, 2002 from $15.8 million in the three months ended September 30, 2001. License revenues decreased 47% to $30.0 million in the nine months ended September 30, 2002 from $56.6 million in the nine months ended September 30, 2001. These decreases were the result of a decrease in the number of licenses sold, which we believe has been caused primarily by a general slowdown in information technology spending in our target markets.
 
SERVICE AND OTHER. Service and other revenues increased 12% to $16.0 million in the three months ended September 30, 2002 from $14.3 million in the three months ended September 30, 2001. Service and other revenues increased 8% to $47.2 million in the nine months ended September 30, 2002 from $43.3 million in the nine months ended September 30, 2001. The increases for both periods are due to an increase in consulting revenues as projects initiated in prior quarters were completed. This increase is offset in part by a decrease in support revenues due to declining renewal rates among early customers who have gone out of business or are experiencing financial difficulties as well as a decrease in training revenues due to the current economic environment which is curtailing many of our customer’s training budgets.
 
COST OF REVENUES
 
LICENSE. Cost of license revenues consists of royalty payments to third parties for technology incorporated into our products. Cost of license revenues varies as it is dependent upon the third-party technology incorporated into our products and the buying patterns of our customers. As a percentage of license revenues, cost of license revenues decreased to 1% in the three months ended September 30, 2002 from 3% for the three months ended September 30, 2001. This fluctuation is due to the buying patterns of our customers, as cost of license revenues is dependent upon which products our customers purchase, and which of those purchased products have third-party technology incorporated into them. As a percentage of license revenues, cost of license revenues increased to 8% in the nine months ended September 30, 2002 from 2% in the nine months ended September 30, 2001. This increase is due to the write off of a $2.0 million non-cancelable prepaid royalty which was written off in the second quarter of 2002. We wrote off the prepaid royalty because we do not expect the royalty agreement to have any future utility to us.
 
SERVICE AND OTHER. Cost of service and other revenues consists of salaries, facility costs, travel expenses and third party consultant fees incurred in providing customer support, training and implementation related services. Cost of service and other revenues was $8.4 million in the three months ended September 30, 2002, an increase of 18%

18


Table of Contents
over cost of service and other revenues of $7.1 million in the three months ended September 30, 2001. This increase is primarily due to increased travel expenses incurred by our professional services group related to increased consulting revenues in the current quarter. Cost of service and other revenues was $25.5 million in the nine months ended September 30, 2002, an increase of 13% over cost of service and other revenues of $22.6 million in the nine months ended September 30, 2001. This increase is primarily due to increased travel expenses incurred by our professional services group related to increased consulting revenues in the current quarter and to higher salary costs over the same period a year ago. As a percentage of service and other revenues, these costs increased 3% to 52% in the three months ended September 30, 2002 from 49% in the three months ended September 30, 2001. As a percentage of service and other revenues, these costs increased 2% to 54% in the nine months ended September 30, 2002 from 52% in the nine months ended September 30, 2001. These percentage changes remained essentially flat due to increasing expenses at the same time that service and other revenues have increased. For the next quarter, we expect that cost of service and other revenues will remain consistent with previous periods in absolute dollars.
 
OPERATING EXPENSES
 
SALES AND MARKETING. Sales and marketing expenses consist of salaries, commissions, field office expenses, travel and entertainment, and promotional expenses. During the three months ended September 30, 2002, sales and marketing expenses were $15.0 million, a decrease of 36% over sales and marketing expenses of $23.6 million for the three months ended September 30, 2001. This decrease was primarily due to lower salary and related expenses, lower travel expenses and lower facilities costs all as a result of our headcount reductions and sales office closures. During the nine months ended September 30, 2002, sales and marketing expenses were $60.2 million, a decrease of 19% over sales and marketing expenses of $73.9 million for the nine months ended September 30, 2001. This decrease is primarily attributable to a decrease in commission expense due to reduced revenues, lower salary and related expenses and lower facilities costs as a result of our headcount reduction and sales office closures. As a percentage of revenues, sales and marketing expenses decreased 20% to 58% in the three months ended September 30, 2002 from 78% in the three months ended September 30, 2001. This decrease is primarily due to reduction in headcount and related sales office closures in the last two quarters. As a percentage of revenues, sales and marketing expenses increased 4% to 78% in the nine months ended September 30, 2002 from 74% in the nine months ended September 30, 2001. This slight increase is due to our reduced revenues in the current period which has been offset by our reduction in headcount and related sales office closures in the last two quarters. For the next quarter, we expect that sales and marketing expenses will decrease in absolute dollars as a result of the August 2002 reduction in workforce and further efforts to control costs.
 
RESEARCH AND DEVELOPMENT. Research and development expenses include costs associated with the development of new products, enhancements to existing products, and quality assurance activities. These costs consist primarily of employee salaries, benefits, and the cost of consulting resources that supplement the internal development team. Costs of developing software for external use that may have been eligible for capitalization have not been material and we have expensed all of these costs as incurred. During the three months ended September 30, 2002, research and development expenses were $6.9 million, a decrease of 37% from research and development expenses of $10.9 million for the three months ended September 30, 2001. This decrease is mainly attributable to a decrease in salary and related expenses as a result of our headcount reduction in August 2002, lower overhead costs as headcount was decreased, and a decrease in third party consulting expenses. During the nine months ended September 30, 2002, research and development expenses were $25.1 million, a decrease of 21% over research and development expense of $31.7 million for the nine months ended September 30, 2001. This decrease is mainly attributable to a decrease in salary and related expenses as a result of headcount reductions in 2002 and decreases in recruiting expenses, travel expenses and facilities costs due to our cost containment efforts. As a percentage of total revenues, research and development expenses decreased 9% to 27% in the three months ended September 30, 2002 from 36% in the three months ended September 30, 2001. This decrease over the same period of the prior year is attributed to a significant decrease in expenses as a result of our cost containment efforts. As a percentage of total revenues, research and development expense increased 1% to 33% in the nine months ended September 30, 2002 from 32% in the nine months ended September 30, 2001. Research and development expenses as a percentage of revenues remained essentially flat compared to

19


Table of Contents
the same period of the prior year due to our ability to reduce research and development expenses proportionately with the decrease in revenues experienced during the same period. For the next quarter, we expect that research and development expenses will decrease in absolute dollars as a result of the August 2002 reduction in workforce and further efforts to control costs.
 
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. During the three months ended September 30, 2002, general and administrative expenses were $4.6 million, an increase of 13% over general and administrative expenses of $4.1 million for the three months ended September 30, 2001. This increase is mainly due to a decrease in sublease rental income and an increase in bad debt expenses, offset by a decrease in salary and related expenses as a result of our headcount reduction in August 2002. During the nine months ended September 30, 2002, general and administrative expenses were $16.1 million, an increase of 29% over general and administrative expenses of $12.5 million for the nine months ended September 30, 2001. This increase is primarily attributable to an increase in outside consulting expenses associated with the implementation of internal systems and a decrease in sublease rental income. As a percentage of revenues, general and administrative expenses increased 4% to 18% in the three months ended September 30, 2002 from 14% in the three months ended September 30, 2001. As a percentage of revenues, general and administrative expenses increased 8% to 21% in the nine months ended September 30, 2002 from 13% in the nine months ended September 30, 2001. These increases as a percentage of revenues are due to both the increases in general and administrative expenses in absolute dollars as explained above, as well as the decreases in revenues in the three and nine months ended September 30, 2002 from the same periods in the prior year. For the next quarter, we expect that general and administrative expenses will decrease in absolute dollars as a result of the August 2002 reduction in workforce and further efforts to control costs.
 
STOCK-BASED COMPENSATION. Stock-based compensation represents the difference between the exercise price and the deemed fair value of our common stock on the date certain stock options were granted or modified. During the three months ended September 30, 2002, stock-based compensation was $213,000, a decrease of 47% over stock-based compensation of $403,000 for the three months ended September 30, 2001. During the nine months ended September 30, 2002, stock-based compensation was $1.5 million, an increase of 2% over stock-based compensation of $1.47 million for the nine months ended September 30, 2001. As a result of changes in our top management structure, we modified the stock option vesting terms of option grants made to two former executives who left the company in the quarter ended March 31, 2002. In accordance with APB 25, “Accounting for Stock Issued to Employees,” we recorded $695,000 in additional non-cash stock-based compensation expense in the three months ended March 31, 2002 as a result of these grant modifications. Stock-based compensation also includes the amortization of unearned employee stock-based compensation on options issued to employees which were exercised prior to Vitria filing its initial public offering in September 1999. This unearned employee stock-based compensation is being amortized over a five-year vesting period. We expect to recognize employee stock-based compensation expenses of approximately $181,000 for the three months ending December 31, 2002, $434,000 for the year ending December 31, 2003 and $85,000 for the year ending December 31, 2004. This unearned compensation expense will be reduced in future periods to the extent that options are terminated prior to vesting. The amount of compensation expense recorded for options that are cancelled prior to vesting will be credited to the income statement at the time of termination.
 
AMORTIZATION OF GOODWILL AND OTHER PURCHASED INTANGIBLE ASSETS. We purchased XMLSolutions in April 2001 under the purchase method of accounting which resulted in goodwill and intangible assets being recorded at the time of purchase. Goodwill associated with this purchase was amortized over its estimated life in 2001. However, in accordance with SAFS 142, as referenced in Note 10 in the Notes to Condensed Consolidated Financial Statements, beginning January 1, 2002, we discontinued the amortization of goodwill. Amortization of other purchased intangible assets associated with the acquisition of XMLSolutions resulted in charges to earnings of $341,000 for the three months ended September 30, 2002 and $1.1 million for the nine months ended September 30, 2002. Amortization of goodwill and intangible assets was

20


Table of Contents
$1.3 million in the three months ended September 30, 2001 and $2.4 million in the nine months ended September 30, 2001. The purchased intangible assets will continue to be amortized over their estimated useful lives subject to periodic review for impairment.
 
IMPAIRMENT OF GOODWILL. During the quarter ended June 30, 2002, we performed an assessment of the carrying value of our goodwill, which was recorded in connection with our acquisition of XMLSolutions in April 2001. The assessment was performed because our market capitalization had declined significantly and because sustained negative economic conditions have impacted our operations and expected future revenues. Current economic indicators suggest that these conditions will continue for the foreseeable future. We evaluated goodwill under the provisions of SFAS 142 (See Note 10). 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 impairment charges of $7.0 million related to goodwill.
 
INTANGIBLE ASSETS. Our purchase of XMLSolutions Corporation resulted in intangible assets. Intangible assets, which have a net carrying amount of approximately $1.7 million at September 30, 2002, include developed technology and trademarks. In accordance with Statement of Financial Accounting Standards No. 144, “Accounting for the Impairment of Disposal of Long-Lived Assets”, the carrying values of our intangible assets are tested for impairment whenever events or changes in circumstances indicate that we may not be able to recover the assets carrying amount. An analysis for impairment was conducted in June 2002 due to sustained negative economic conditions that impacted our operations. No impairment was identified for the intangible assets at that time. There were no significant events in the quarter ended September 30, 2002 to cause us to test again for impairment. As required by SFAS 142, intangible assets that do not meet the criteria for recognition apart from goodwill must be reclassified. In accordance with SFAS 142, we transferred approximately $1.0 million of net assembled workforce to goodwill as of January 1, 2002.
 
RESTRUCTURING COSTS. In April 2002, we initiated actions to reduce our cost structure. The plan was a combination of a reduction in workforce of approximately 150 employees, or 17%, of the existing workforce, consolidations of facilities in the United States and United Kingdom and fixed asset write-offs of leasehold improvement and equipment. The workforce reduction affected all functional areas and was largely completed in the quarter ended June 30, 2002. As a result of the restructuring plan, we incurred a charge of $17.3 million in the quarter ended June 30, 2002. The restructuring charge included approximately $2.4 million of severance related charges, $14.5 million of committed excess facilities payments, and $463,000 in fixed asset write-offs of leasehold improvements and equipment. The facilities consolidation charge 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 independent real estate sources. We have engaged brokers to locate tenants to sublease these facilities. As of September 30, 2002, $13.6 million of lease termination costs, net of anticipated sublease income, remains accrued and is expected to be fully utilized by fiscal 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.
 
In August 2002, we initiated actions to further reduce our cost structure. The plan consisted of a reduction in workforce of approximately 135 employees, or 20% of the existing workforce. The workforce reduction affected all functional areas and was largely completed in the quarter ended September 30, 2002. As a result of the restructuring plan, we incurred a charge of $1.7 million in the quarter ended September 30, 2002. We expect to achieve $38 million in annual cost savings as a result of our April, 2002 and August, 2002 restructuring actions.

21


Table of Contents
 
INTEREST AND OTHER INCOME, NET.  Interest and other income, net, decreased by 82% to $340,000 in the three months ended September 30, 2002 from $1.9 million in the three months ended September 30, 2001. Interest and other income, net, decreased by 72% to $2.3 million in the nine months ended September 30, 2002 from $8.2 million in the nine months ended September 30, 2001. The decrease in both periods is primarily attributable to lower interest income due to lower interest rates and lower cash and investment balances, as well as losses due to fluctuations in foreign currencies on foreign denominated assets and liabilities.
 
PROVISION FOR INCOME TAXES
 
We recorded an income tax provision of $237,000 and $634,000, respectively, for the three-month and nine- month periods ended September 30, 2002. The provision relates to income taxes currently payable on income generated in non-U.S. tax jurisdictions, state income taxes, and foreign withholding taxes incurred on software license revenue. We recorded an income tax provision of $398,000 and $809,000, respectively, for the three-month and nine-month periods ended September 30, 2001. The 2001 provision relates to income taxes payable on income generated in non-U.S. jurisdictions, state income taxes, and foreign withholding taxes incurred on software license revenue.
 
LIQUIDITY AND CAPITAL RESOURCES
 
    
Nine months ended September 30,

    
Percent Change

 
    
2002

  
2001

    
    
(in thousands)
        
Working Capital
  
$
  109,485
  
$
  152,295
 
  
(28
%)
Cash, cash equivalents and short term investments
  
$
128,860
  
$
169,746
 
  
(24
%)
Net cash used in operating activities
  
$
45,727
  
$
47,075
 
  
(3
%)
Net cash provided by (used in) investing activities
  
$
49,635
  
$
(50,815
)
  
198
%
Net cash provided by financing activities
  
$
722
  
$
3,052
 
  
(76
%)
 
As of September 30, 2002, we had approximately $128.9 million in cash, cash equivalents and short-term investments, and $109.5 million in working capital with no outstanding long-term debt, compared to approximately $169.7 million in cash, cash equivalents and short-term investments and $152.3 million in working capital with no outstanding long-term debt at September 30, 2001.
 
Net cash used in operating activities decreased $1.3 million or 3% during for the nine months ended September 30, 2002 compared to the nine months ended September 30, 2001. This decrease was primarily due to an increase in our net loss, which was offset almost entirely by the addition of accrued restructuring expenses, a decrease in accounts receivable, a decrease in deferred revenue, and an impairment of goodwill, a non-cash item.
 
Net cash provided by investing activities increased $100.4 million or 198% or in the nine months ended September 30, 2002 compared to the nine months ended September 30, 2001. This increase in the current year was primarily due the fact that we sold more investments than we purchased to fund our operations, as compared to the prior year when we purchased more investments than we sold.

22


Table of Contents
 
Net cash provided by financing activities decreased $2.3 million or 76% in the nine months ended September 30, 2002 as compared to the nine months ended September 30, 2001. Net cash provided by financing activities in both the current and prior periods has been primarily from the issuance of common stock.
 
During the nine months ended September 30, 2002, our net accounts receivable decreased $16.6 million from $37.2 million at December 31, 2001 to $20.6 million at September 30, 2002. The reason for the decline was due to strong collections in the first two quarters of the current year and to lower revenues in the nine months ended September 30, 2002. The lower revenue trend is likely to have a negative impact our future cash flows through at least the next quarter. At September 30, 2002, our gross accounts receivable balance is $22.7 million with an allowance for doubtful accounts of $2.1 million.
 
During the nine months ended September 30, 2002, our deferred revenue balance decreased $10.1 million from $27.3 million at December 31, 2001 to $17.2 million at September 30, 2002. The primary reason for this decline is a decrease in our deferred support balances due to lower than anticipated license revenues in both the current and prior quarters and declining renewal rates among some of our customers who have ceased operations or are experiencing financial difficulties. In addition, our deferred consulting balances have decreased due to the completion of projects which were initiated in prior quarters.
 
Contractual Cash Obligations
 
At September 30, 2002, we had operating lease commitments of approximately $35.6 million, payable through 2013 as noted in the table below.
 
    
Year ending December 31,

  
2007 and Thereafter

  
Total Minimum Lease Payment

    
2002

  
2003

  
2004

  
2005

  
2006

     
Operating Leases
  
$
2,383
  
$
8,664
  
$
6,903
  
$
6,578
  
$
4,708
  
$
6,411
  
$
35,647
 
Off-Balance Sheet Arrangements
 
At September 30, 2002, Vitria did not have any off-balance sheet arrangements or relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which are typically established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.
 
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 September 30, 2002, 222,900 shares had been repurchased in the open market at a total cost of approximately $209,000.
 
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

23


Table of Contents
balances, cash generated from operations, if any, and interest on available cash 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 quarter, we expect that operating expenses will decrease in absolute dollars as a result of reductions in workforce and continued efforts to control costs. However, we anticipate that operating expenses and planned capital expenditures will continue to constitute a material use of our cash resources. We believe that our available cash and cash equivalents will be sufficient to meet our working capital and operating expense requirements for at least the next twelve months. At some point in the future we may require additional funds to support our working capital and operating expense requirements or for other purposes and may seek to raise these additional funds through public or private debt or equity financings. If 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 have a limited operating history that makes it difficult to predict future operating results. We believe our success requires expanding our customer base and continuing to enhance our products. Subject to a number of factors, some of which are difficult to project, such as the timing of the improvement of both the U.S. economy and of information technology spending in our target markets, we expect to reach profitability sometime during fiscal 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;
 
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;

24


Table of Contents
 
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.

25


Table of Contents
ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURE 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 September 30, 2002 were not material.
 
We have no cash flow exposure due to rate changes for cash equivalents and cash investments as all of these investments are at fixed interest rates.
 
There has been no material change in our interest rate exposure since December 31, 2001.
 
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 sales and expenses 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. There were no outstanding forward contracts as of September 30, 2002.
 
RISKS ASSOCIATED WITH VITRIA’S BUSINESS AND FUTURE OPERATING RESULTS
 
Since our short operating history makes it difficult to evaluate our prospects, our future financial performance may disappoint securities analysts or investors and result in a decline in our stock price.
 
We were incorporated in October 1994. Until November 1997, we were engaged primarily in research and development of our initial product. We licensed our first product in November 1997. Because of our limited operating history, we have limited insight into trends that may emerge in our market and affect our business. The revenue and income potential of our market is unproven. As a result of our limited operating history, we have limited financial data

26


Table of Contents
that available to evaluate our business. Our prospects should be considered in light of the risks, expenses and challenges we might encounter because we are in the early stages of development in a new and rapidly evolving market.
 
Although we have in the past reported net income, we cannot guarantee we will do so in the future.
 
We have incurred substantial losses since inception as we funded the development of our products and the growth of our organization. We have an accumulated deficit of $158.5 million as of September 30, 2002. We intend to continue investing selectively in sales, marketing and research and development. As a result, we are likely to report future operating losses and cannot guarantee we will report net income in the future.
 
Our operating results fluctuate significantly and an unanticipated decline in revenue may disappoint securities analysts or investors and result in a decline in our stock price.
 
Although we have had significant revenue growth in the past, we may not be able to grow our revenues or match prior growth rates, consequently prospective investors should not use past results to predict future operating margins or results. Our quarterly operating results have fluctuated significantly in the past and may vary significantly in the future. If our operating results are below the expectations of securities analysts or investors, our stock price is likely to decline. Period-to-period comparisons of our historical results of operations are not necessarily a good predictor of our future performance.
 
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 has 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 unexpected results.
 
Our quarterly results will depend primarily upon entering into new or follow-on contracts to generate revenues for that quarter. New contracts may not result in revenue in the quarter in which the contract is 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 received a letter from Nasdaq stating that if we are unable to comply with the minimum bid price of $1.00, our common stock will 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. If we are unable to meet the Nasdaq National Market requirements, at the discretion of Nasdaq our common stock may be 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

27


Table of Contents
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.
 
Our product may not achieve market acceptance, which could cause our revenues to decline.
 
Deployment of our product requires interoperability with a variety of software applications and systems and, in some cases, the ability to process a high number of transactions per second. If our product fails to satisfy these demanding technological objectives, our customers will be dissatisfied and we may be unable to generate future sales. Failure to establish a significant base of customer references will significantly reduce our ability to license our product to additional customers.
 
Our revenues will likely decline if we do not develop and maintain successful relationships with system integrators.
 
System integrators install and deploy our products and those of our competitors, and perform custom integration of systems and applications. Some system integrators engage in joint marketing and sales efforts with us. If these relationships fail, we will have to devote substantially more resources to the sales and marketing, and implementation and support of our product than we would otherwise have to, and our efforts may not be as effective as those of the system integrators. In many cases, these parties have extensive relationships with our existing and potential customers and influence the decisions of these customers. We rely upon these firms for recommendations of our product during the evaluation stage of the purchasing process, as well as for implementation and customer support services. A number of our competitors have strong relationships with these system integrators and, as a result, these system integrators may recommend competitors’ products and services. In addition, a number of our competitors have relationships with a greater number of these system integrators and, therefore, have access to a broader base of enterprise customers. Our failure to establish or maintain these relationships would significantly harm our ability to license and successfully implement our software product. In addition, we rely on the industry expertise and reach of these firms. Therefore, this failure would also harm our ability to develop industry-specific products. We are currently investing, and plan to continue to invest, significant resources to develop and maintain these relationships. Our operating results could be adversely affected if these efforts do not generate license and service revenues necessary to offset this investment.

28


Table of Contents
 
We may suffer product deployment delays, a lower quality of customer service and increased expenses if sufficient system integrator implementation teams are not available.
 
System integrators help our customers install and deploy our product. These system integrators are not contractually required to implement our product, and competition for these resources may preclude us from obtaining sufficient resources to provide the necessary implementation services to support our needs. If the number of installations of our product exceeds our access to the resources provided by these system integrators, we will be required to provide these services internally, which would significantly limit our ability to meet our customers’ implementation needs and increase our expenses. In addition, we cannot control the level and quality of service provided by our current and future implementation partners.
 
Because a small number of customers have in the past accounted for a substantial portion of our revenues, our revenues could decline due to the loss or delay of a single customer order.
 
Sales to our ten largest customers accounted for 41% of total revenues in the three months ended September 30, 2002 and 30% of total revenues in the nine months ended September 30, 2002. Sales to our ten largest customers accounted for 42% of total revenues in the three months ended September 31, 2001 and 30% of total revenues in the nine months ended September 30, 2001. One customer accounted for 11% of our revenues in the three months ended September 30, 2002 and a different customer accounted for 15% of our revenues in the three months ended September 30, 2001. No one single customer accounted for more that 10% of total revenues in either of the nine months ended September 30, 2002 or 2001. Our license agreements do not generally provide for ongoing license payments. Therefore, we expect that revenues from a limited number of customers will continue to account for a significant percentage of total revenues in future quarters. Our ability to attract new customers will depend on a variety of factors, including the reliability, security, scalability, breadth and depth of our products, and cost-effectiveness of our products. The loss or delay of individual orders could have a significant impact on revenues and operating results. Our failure to add new customers that make significant purchases of our product and services would reduce our future revenues.
 
Our sales are concentrated in the telecommunications, manufacturing, financial services, energy, insurance and healthcare industries, and if our customers in these markets decrease their information technology spending, or we fail to penetrate other industries, our revenues may decline.
 
We expect to continue to direct our sales and marketing efforts toward companies in the telecommunications, manufacturing, financial services, energy, insurance and healthcare industries. Given the high degree of competition and the rapidly changing environment in these industries, there is no assurance that we will be able to continue sales in these industries at current levels. In addition, we intend to market our product in new vertical markets. Customers in these new vertical markets are likely to have different requirements and may require us to change our product design or features, sales methods, support capabilities or pricing policies. If we fail to successfully address these new vertical markets we may experience decreased sales in future periods.
 
During the fourth quarter of 2000, companies in the telecommunications industry began sharply decreasing their capital expenditures as the U.S. economy contracted. This decrease in spending and the overall contraction in the U.S. economy negatively impacted our revenues in 2001 and in the nine months ended September 30, 2002, and may continue to negatively impact our revenues for the foreseeable future.
 
Failure of our current or potential small to mid-sized customers to receive necessary funding could harm our business.
 
Some of our customers include small to mid-size companies. Most privately and publicly held small to mid-size companies require outside cash sources to continue operations. To the extent additional funding is less available for small to mid-sized companies as a result of a stock market decline, a downturn in the U.S. economy or other

29


Table of Contents
factors, demand for our products may decline significantly, thereby reducing our sales. On sales we do generate from small to mid-size companies, we may need to defer recognizing revenue until payment is received.
 
The downturn in the U.S. economy may continue to cause a decline in capital allocations, thus reducing our revenue and affecting our accounts receivable.
 
The downturn in the U.S. 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. In addition, if our customers seek protection from creditors through formal bankruptcy filings, we may experience an increase in delinquent accounts receivable.
 
Our markets are highly competitive and, if we do not compete effectively, we may suffer price reductions, reduced gross margins and loss of market share.
 
The market for our product is intensely competitive, evolving and subject to rapid technological change. The intensity of competition is expected to increase in the future. Increased competition is likely to result in price reductions, reduced gross margins and loss of market share, any one of which could significantly reduce our future revenues. Our current competitors include:
 
B2Bi, Application and EAI Vendors. We face direct and indirect competition from vendors offering Business-to-Business Integration, (B2Bi), and Enterprise Application Integration (EAI), which deliver some of the functionality of our products. Some of these vendors 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. Additionally, 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.
 
Process Automation and Workflow Vendors. We face direct and indirect competition from vendors offering process automation and/or workflow, which deliver some of the functionality of our products. Some of these vendors include Savvion, Fuego, and Intalio. In the future, some of these companies may expand their products to add new or enhance existing EAI and B2Bi functionality. Additionally, these or other competitors may merge to attempt the creation of a more competitive entity, or one that offers a broader solution that we provide.
 
Internal IT Departments. “In-house” information technology departments of potential customers have developed or may develop systems that provide for some or all of the functionality of our 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.
 
Other Software Vendors. 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.

30


Table of Contents
 
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.
 
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, 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 two to nine months and is difficult to predict for any particular license transaction. 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.
 
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 by us or third-party consultants to ensure customer satisfaction, could damage our reputation with existing and future customers and reduce future revenues. In many cases, our customers must interact with, modify, or replace significant elements of their existing computer systems. The costs of our product and services represent only a portion of the related hardware, software, development, training and consulting costs. The significant involvement of third parties, including system integrators, reduces the control we have over the implementation of our products and the quality of customer service provided to organizations which license our software.
 
If we are not successful in continuing to develop industry specific solutions based on our products, 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. 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.
 
If our new VCA products are not commercially successful, our revenues may decline.
 
The market for our family of VCA products may not develop as quickly or broadly as we anticipate. Our future prospects could be harmed and our revenues could decline if our family of VCA products do not achieve market acceptance and commercial success.
 
If we are not successful in selling products in specific industries, our ability to increase future revenues may be harmed.

31


Table of Contents
 
We have developed and intend to continue to develop products for specific industries, including telecommunications, healthcare, insurance, manufacturing, financial services and energy. Specific industries may experience economic downturns or regulatory changes that may result in delayed spending decisions by customers or require changes to our products. We may be unable to meet the needs of specific industries or adapt our products to the changing needs of specific industries. If our products are not accepted in specific industries, our ability to increase future revenues could be harmed.
 
Our operating results are substantially dependent on license revenues from one product and our business could be materially harmed by factors that adversely affect the pricing and demand for our product.
 
Since 1998, a substantial portion of our total revenues has been derived from the license of our BusinessWare product and for applications for that product. Accordingly, our future operating results will depend on the demand for BusinessWare by future customers, including new and enhanced releases that are subsequently introduced. If our competitors release new products that are superior to BusinessWare in performance or price, or we fail to enhance BusinessWare and introduce new products in a timely manner, demand for our product may decline. A decline in demand for BusinessWare as a result of competition, technological change or other factors would significantly reduce our revenues.
 
If our product does not operate with the many hardware and software platforms used by our customers, our business may fail.
 
We currently serve a customer base with a wide variety of constantly changing hardware, packaged software applications and networking platforms. If our 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 product 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

32


Table of Contents
applications. If the application provider denies or delays our access to APIs, our business may be harmed. Some application providers may become competitors or establish alliances with our competitors, increasing the likelihood that we would not be granted access to their APIs. We also license technology related to the connectivity of our product to third-party database and other applications and we incorporate some third-party technology into our product offerings. Loss of the ability to use this technology, delays in upgrades, failure of these third parties to support these technologies, or other difficulties with our third-party technology partners could lead to delays in product shipment and could cause our revenues to decline.
 
We could suffer losses and negative publicity if new versions and releases of our 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 product for mission- critical business operations, any of these occurrences could seriously harm our business and generate negative publicity.
 
If we fail to develop the management system and infrastructure to support our growth, our ability to market and sell our products and develop new products may be harmed.
 
We must plan and manage our growth effectively in order to offer our products and services and achieve revenue growth and profitability in a rapidly evolving market. For us to effectively manage our growth, we must continue to do the following:
 
 
 
install new management and information control systems; and
 
 
expand, train and motivate our workforce.
 
In particular, we continue to add new software systems to complement and enhance our existing accounting, human resource and sales and marketing software systems. If we fail to install these software systems in an efficient and timely manner, or if the new systems fail to adequately support our level of operations, then we could incur substantial additional expenses to remedy these failures.
 
If we do not keep pace with technological change, our products may be rendered obsolete and our operating results may suffer.
 
Our industry is characterized by very rapid technological change, frequent new product introductions and enhancements, changes in customer demands and evolving industry standards. Our existing products will be rendered obsolete if we fail to introduce new products or product enhancements that meet new customer demands, support new standards or integrate with new or upgraded versions of packaged applications. We have also found that the technological life cycle of our product is difficult to estimate. We believe that we must continue to enhance our current product while we concurrently develop and introduce new products that anticipate emerging technology standards and keep pace with competitive and technological developments. Failure to do so will harm our ability to compete. As a result, we are required to continue to make substantial product development investments.
 
If we fail to attract and retain qualified personnel, our ability to compete will be harmed.
 
We depend on the continued service of our key technical, sales and senior management personnel. None of these persons are bound by an employment agreement. The loss of senior management or other key research, development, sales and marketing personnel could have a material adverse effect on our future operating results. In

33


Table of Contents
 
particular, Dr. JoMei Chang, our President and Chief Executive Officer, and Dr. M. Dale Skeen, our Chief Technology Officer, would be difficult to replace.
 
In addition, we must attract, retain and motivate highly skilled employees. We face significant competition for individuals with the skills required to develop, market and support our products and services. We cannot be sure that we will be able to recruit and retain sufficient numbers of these highly skilled employees.
 
We depend on the increasing use of the Internet and on the growth of electronic commerce. If the use of the Internet and electronic commerce does not grow as anticipated, our revenues could decline and our business will be seriously harmed.
 
We depend on the increased acceptance and use of the Internet as a medium for electronic commerce and the adoption by businesses of ebusiness solutions. Rapid growth in the use of the Internet is a recent occurrence. As a result, acceptance and use may not continue to develop at historical rates and a sufficiently broad base of business customers may not adopt or continue to use the Internet as a medium of commerce. Demand and market acceptance for recently introduced services and products over the Internet are subject to a high level of uncertainty, and there exist few proven services and products.
 
Our future results may depend significantly on the use of our electronic commerce platform in electronic marketplaces.
 
We have entered into agreements with licensees who are forming networks that will be powered by our business-to-business electronic commerce platform. These networks have been recently formed and are at an early stage of development. There is no guarantee regarding the level of activity of different companies in these networks, the effectiveness of the interaction among companies using our business-to-business electronic commerce platform and of the attractiveness of offerings of our competitors. If these networks are not successful, our business, operating results and financial position could be affected.
 
If we fail to adequately protect our proprietary rights, we may lose these rights and our business may be seriously harmed.
 
We depend upon our ability to develop and protect our proprietary technology and intellectual property rights to distinguish our 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.
 
If our source code is released to our customers, our ability to protect our proprietary rights could be jeopardized and our revenues could decline.
 
Some of our license agreements require us to place the source code for our products in escrow. These agreements generally provide these customers with a limited, non-exclusive license to use this code if:
 
 
 
we fail to provide the product or maintenance and support;
 
 
we cease to do business without a successor; or
 
 
there is a bankruptcy proceeding by or against Vitria.

34


Table of Contents
 
Our revenues could decline and our business could be seriously harmed if customers were granted this access.
 
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.
 
We may not successfully enter international markets or generate significant product revenues abroad, which could result in slower revenue growth and harm our business.
 
We have opened international offices in countries including Australia, Brazil, Canada, France, Germany, Japan, Korea, Italy, Singapore, Spain, Taiwan, and the United Kingdom, and may establish additional international offices. There are a number of challenges to establishing operations outside of the United States and we may be unable to successfully generate significant international revenues. If we fail to successfully establish our products in international markets, we could experience slower revenue growth and our business could be harmed. It may be difficult to protect our intellectual property in certain international jurisdictions.
 
We may not be able to efficiently integrate the operations of our acquisitions which may harm our business.
 
We may make additional acquisitions of, or significant investments in, businesses that offer complementary products, services, technologies or market access. If we are to realize the anticipated benefits of these acquisitions, the operations of these companies must be integrated and combined efficiently. Customer relationships and strategic partnerships may be disrupted during the integration process which could result in lost sales and lost customers, and could harm our business. We may also incur significant expenses during the integration process. In addition, the dedication of management resources to integration may detract attention from our day-to-day business. The successful integration of any acquisition will also depend in part on the retention of key personnel. There can be no assurance that the integration process will be successful or that the anticipated benefits of any business integration will be fully realized. Achieving the benefits of any acquisition will depend in part on our ability to continue to successfully develop and sell our products and integrate new technologies to develop new products and product features, in a timely and efficient manner. If we are not successful in these efforts, our business may be harmed.
 
Failure to raise additional capital or generate the significant capital necessary to expand our operations and invest in new products could reduce our ability to compete and result in lower revenues.
 
We may need to raise additional funds, and we cannot be certain that we will be able to obtain additional financing on favorable terms, or at all. If we need additional capital and cannot raise it on acceptable terms, we may not be able to, among other things:
 
 
 
develop or enhance our products and services;
 
 
acquire technologies, products or businesses;
 
 
expand operations, in the United States or internationally;
 
 
hire, train and retain employees; or
 
 
respond to competitive pressures or unanticipated capital requirements.

35


Table of Contents
 
Our failure to do any of these things could result in lower revenues and could seriously harm our business.
 
We are at risk of securities class action litigation due to our expected stock price volatility.
 
In the past, securities class action litigation has often been brought against a company following a decline in the market price of its securities. This risk is especially acute for us because technology companies have 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, Vitria and certain of our officers and directors were named as defendants in a class action stockholder complaint. This litigation could result in substantial costs and divert management’s attention and resources, and could harm our business. See Part II, Item 1 “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 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 or for proposing matters that can be acted upon by stockholders at stockholder meetings.
 
In addition, Section 203 of the Delaware General Corporations Law and the terms of our stock option plans may discourage, delay or prevent a change in control of Vitria.
 
Item 4.    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 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.

36


Table of Contents
PART II
OTHER INFORMATION
 
Item 1.    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 our officers and directors and the underwriters of our initial public offering, or IPO, violated the 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 publicly since the mid-1990s. We believe that this lawsuit is without merit and intend to defend against it vigorously.
 
On August 8, 2001, all of these IPO-related lawsuits were consolidated for pretrial purposes before United States Judge Shira Scheindlin of the Southern District of New York. Judge Scheindlin held an initial case management conference on September 7, 2001, at which time she ordered, among other things, that the time for all defendants to respond to any complaint be postponed until further order of the Court. Thus, neither Vitria nor any of our officers or directors has been required to answer the complaint, and no discovery has been served on Vitria.
 
In accordance with Judge Scheindlin’s orders at further status conferences in March and April 2002, appointed lead plaintiffs’ counsel filed amended, consolidated complaints in these IPO-related lawsuits on April 19, 2002. Defendants then 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. Oral arguments on issuers’ motion to dismiss the complaints were held on November 1, 2002. As of the date of this filing, the court has not yet ruled on this motion.
 
Vitria is currently a party to various legal actions arising out of the normal course of business, none of which is expected to harm Vitria’s financial position, cash flows or results of operations.
 
Item 2.    Changes in Securities and Use of Proceeds.
 
None.
 
Item 3.    Defaults Upon Senior Securities.
 
None.
 
Item 4.    Submission of Matters to a Vote of Security Holders.
 
None.
 
Item 5.    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 third quarter of 2002 our Audit Committee did not approve any non-audit services to be performed by Ernst & Young LLP.

37


Table of Contents
 
Item 6.    Exhibits and Reports on Form 8-K.
 
a)
 
Exhibits
 
10.15 Loan and Security Agreement, by and between Silicon Valley Bank and Vitria, dated June 28, 2002.
 
10.16 Loan Modification Agreement, by and between Silicon Valley Bank, dated November 6, 2002.
 
10.17 Separation Agreement, by and between John Wheeler and Vitria, dated July 31, 2002.
 
99.1 Certification of Chief Executive Officer.
 
99.2 Certification of Chief Financial Officer.
 
b)
 
Reports on Form 8-K
 
No reports on Form 8-K were filed during the quarter ended September 30, 2002.

38


Table of Contents
SIGNATURES
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
       
VITRIA TECHNOLOGY, INC.
Date:
       
By:
 
/s/    GRAHAM SMITH

               
Graham Smith,
Senior Vice President, Chief Financial Officer and Secretary

39


Table of Contents
CERTIFICATION
 
I, JoMei Chang, President and Chief Executive Officer, certify that:
 
 
(1)
 
I have reviewed this quarterly report on Form 10-Q of Vitria Technology, Inc.;
 
 
(2)
 
Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
 
 
(3)
 
Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
 
 
(4)
 
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
 
(a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
 
(b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and
 
(c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
 
 
(5)
 
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):
 
(a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and
 
(b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and
 
 
(6)
 
The registrant’s other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
 
     
By:
 
/s/    JOMEI CHANG, PH.D.        

               
JoMei Chang
President and Chief Executive Officer

40


Table of Contents
CERTIFICATION
 
I, Graham Smith, Senior Vice President, Chief Financial Officer and Secretary, certify that:
 
 
(1)
 
I have reviewed this quarterly report on Form 10-Q of Vitria Technology, Inc.;
 
 
(2)
 
Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
 
 
(3)
 
Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
 
 
(4)
 
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
 
(a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
 
(b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and
 
(c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
 
 
(5)
 
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):
 
(a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and
 
(b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and
 
 
(6)
 
The registrant’s other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
 
     
By:
 
/s/    GRAHAM SMITH        

               
Graham Smith
Senior Vice President, Chief Financial Officer
and Secretary

41

Dates Referenced Herein   and   Documents Incorporated by Reference

This ‘10-Q’ Filing    Date    Other Filings
12/31/07
12/31/0410-K,  NT 10-K
12/31/0310-K,  4/A,  5/A
1/21/03
12/31/0210-K,  5/A
Filed as of:11/14/02
Filed on:11/13/02
11/6/02
11/1/02
10/31/02
10/21/02
10/9/02
For Period End:9/30/02
7/31/02
7/29/02
7/15/02
6/30/0210-Q
6/28/02
4/19/02
3/31/0210-Q
1/1/02
12/31/0110-K
9/30/0110-Q
9/7/01
8/8/01
 List all Filings 
Top
Filing Submission 0001021408-02-013950   –   Alternative Formats (Word / Rich Text, HTML, Plain Text, et al.)

Copyright © 2024 Fran Finnegan & Company LLC – All Rights Reserved.
AboutPrivacyRedactionsHelp — Fri., Mar. 29, 1:25:36.2am ET