##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 
 FORM 10-Q
 
 (Mark One)
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
 For the quarterly period ended March 31, 2006
 OR
 o
    
    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
    
    (I.R.S. EmployerIncorporation or Organization)
    
    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)
 
 þ o
  o þ o
 þ o




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##### 



VITRIA TECHNOLOGY, INC.
TABLE OF CONTENTS
 PagePART I: FINANCIAL INFORMATIONItem 1.
    
    Condensed Consolidated Financial Statements and NotesCondensed Consolidated Balance Sheets at March 31, 2006 and December 31, 2005
    
    
    3Condensed Consolidated Statements of Operations for the three months ended March 31, 2006 and 2005
    
    
    4Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2006 and 2005
    
    
    5Notes to the Condensed Consolidated Financial Statements
    
    
    6Item 2:
    
    Management's Discussion and Analysis of Financial Condition and Results of Operations
    
    
    16Item 3:
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    28Item 4:
    
    Controls and Procedures
    
    
    29PART II: OTHER INFORMATIONItem 1:
    
    Legal Proceedings
    
    
    31Item 1A:
    
    Risk Factors
    
    
    31Item 2:
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    37Item 3:
    
    Defaults Upon Senior Securities
    
    
    37Item 4:
    
    Submission of Matters to a Vote of Security Holders
    
    
    37Item 5:
    
    Other Information
    
    
    37Item 6:
    
    Exhibits
    
    
    37Signatures
    
    
    
    
    38EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2
  2




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##### Table of Contents



PART I. FINANCIAL INFORMATION
 
 ITEM 1. Financial Statements
 
 
 March 31,
    
    
    December 31,2006
    
    
    2005AssetsCurrent Assets:Cash and cash equivalents
    
    $
    34,828
    
    
    $
    26,503Short-term investments
    
    
    20,228
    
    
    
    34,979Accounts receivable, net
    
    
    11,547
    
    
    
    7,846Other current assets
    
    
    1,746
    
    
    
    2,181Total current assets
    
    
    68,349
    
    
    
    71,509Property and equipment, net
    
    
    996
    
    
    
    1,136Other assets
    
    
    753
    
    
    
    743Total assets
    
    $
    70,098
    
    
    $
    73,388Liabilities and Stockholders EquityCurrent Liabilities:Accounts payable
    
    $
    1,462
    
    
    $
    1,051Accrued compensation
    
    
    2,566
    
    
    
    3,059Other accrued liabilities
    
    
    4,333
    
    
    
    4,184Accrued restructuring expenses
    
    
    2,563
    
    
    
    3,460Deferred revenue
    
    
    11,897
    
    
    
    10,242Total current liabilities
    
    
    22,821
    
    
    
    21,996Long-Term Liabilities:Accrued restructuring expenses
    
    $
    3,626
    
    
    $
    3,960Other long-term liabilities
    
    
    1,267
    
    
    
    1,330Total long-term liabilities
    
    
    4,893
    
    
    
    5,290Commitments and ContingenciesStockholders Equity:Common Stock: $0.001 par value; 150,000
shares authorized; 33,709 shares outstanding
at March 31, 2006 and December 31, 2005,
respectively
    
    $
    34
    
    
    $
    34Additional paid-in capital
    
    
    276,359
    
    
    
    276,128Unearned stock-based compensation
    
    
    
    
    
    
    (271
    )Accumulated other comprehensive income
    
    
    520
    
    
    
    515Accumulated deficit
    
    
    (234,033
    )
    
    
    (229,808
    )Treasury stock, at cost
    
    
    (496
    )
    
    
    (496
    )Total stockholders equity
    
    
    42,384
    
    
    
    46,102Total liabilities and stockholders equity
    
    $
    70,098
    
    
    $
    73,388
  3




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##### Table of Contents



Three Months EndedMarch 31,2006
    
    
    2005Revenue:License
    
    $
    2,521
    
    
    $
    5,422Service and other
    
    
    8,193
    
    
    
    11,123Total revenue
    
    
    10,714
    
    
    
    16,545Cost of revenue:License
    
    
    123
    
    
    
    121Service and other
    
    
    3,950
    
    
    
    5,682Total cost of revenue
    
    
    4,073
    
    
    
    5,803Gross profit
    
    
    6,641
    
    
    
    10,742Operating expenses:Sales and marketing
    
    
    4,118
    
    
    
    4,973Research and development
    
    
    4,213
    
    
    
    4,542General and administrative
    
    
    3,098
    
    
    
    3,637Stock-based compensation
    
    
    
    
    
    
    62Restructuring
    
    
    145
    
    
    
    136Total operating expenses
    
    
    11,574
    
    
    
    13,350Loss from operations
    
    
    (4,933
    )
    
    
    (2,608
    )Interest income
    
    
    572
    
    
    
    389Other income (expense), net
    
    
    170
    
    
    
    (151
    )Net loss before income taxes
    
    
    (4,191
    )
    
    
    (2,370
    )Provision for income taxes
    
    
    34
    
    
    
    47Net loss
    
    $
    (4,225
    )
    
    $
    (2,417
    )Basic and diluted net loss per share
    
    $
    (0.13
    )
    
    $
    (0.07
    )Weighted average shares used in computing basic
and diluted net loss per share
    
    
    33,585
    
    
    
    33,373
  4




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##### Table of Contents



Three Months EndedMarch 31,2006
    
    
    2005Operating activities:Net loss
    
    $
    (4,225
    )
    
    $
    (2,417
    )Adjustments to reconcile net loss to net cash
used in operating activities:Loss on disposal of fixed assets
    
    
    1
    
    
    
    Depreciation
    
    
    143
    
    
    
    333Stock-based compensation
    
    
    502
    
    
    
    Amortization of stock-based compensation
    
    
    
    
    
    
    62Provision for doubtful accounts
    
    
    53
    
    
    
    148Changes in assets & liabilities:Accounts receivable
    
    
    (3,754
    )
    
    
    (4,637
    )Other current assets
    
    
    435
    
    
    
    (448
    )Other assets
    
    
    (10
    )
    
    
    62Accounts payable
    
    
    411
    
    
    
    (443
    )Accrued liabilities
    
    
    (310
    )
    
    
    (667
    )Accrued restructuring charges
    
    
    (1,231
    )
    
    
    (1,892
    )Deferred revenue
    
    
    1,655
    
    
    
    3,951Other long term liabilities
    
    
    (63
    )
    
    
    344Net cash used in operating activities
    
    
    (6,393
    )
    
    
    (5,604
    )Investing activities:Purchases of property and equipment
    
    
    (4
    )
    
    
    (355
    )Purchases of investments
    
    
    (4,866
    )
    
    
    (8,052
    )Maturities of investments
    
    
    19,630
    
    
    
    13,356Net cash provided by investing activities
    
    
    14,760
    
    
    
    4,949Financing activities:Issuance of common stock, net
    
    
    
    
    
    
    11Reduction of lease payable
    
    
    (33
    )
    
    
    Net cash provided by financing activities
    
    
    (33
    )
    
    
    11Effect of exchange rates
    
    
    (9
    )
    
    
    (36
    )Net increase (decrease) in cash and cash equivalents
    
    
    8,325
    
    
    
    (680
    )Cash and cash equivalents at beginning of period
    
    
    26,503
    
    
    
    32,106Cash and cash equivalents at end of period
    
    $
    34,828
    
    
    $
    31,426Supplemental disclosures of cash flow information:Income taxes paid
    
    $
    33
    
    
    $
    106Interest paid
    
    $
    3
    
    
    $
    9
  5




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##### Table of Contents



1. BASIS OF PRESENTATION
 Basis of Presentation
    2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 Stock-based Compensation
 Share-Based
Payment Accounting for Stock-Based Compensation Accounting for Stock Issued to
Employees
  Revenue Recognition
 Software Revenue Recognition
 Accounting for Performance of Construction Type and Certain
Production Type Contracts.
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##### Table of Contents



Accounting for Performance of Construction Type and Certain Production Type
Contracts.
  Accounts Receivable
  .
  Allowance for Doubtful Accounts
 .
 7




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##### Table of Contents



Restructuring Charges
  Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activities Accounting for Costs Associated with Exit or Disposal
Activities
   Deferred tax valuation allowance.
 8




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##### Table of Contents



3. Net Loss Per Share
   Three Months EndedMarch 31,2006
    
    
    2005Numerator for basic and diluted net loss per share:Net loss
    
    $
    (4,225
    )
    
    $
    (2,417
    )Denominator for basic and diluted net loss per share:Weighted average shares of common stock outstanding
    
    
    33,585
    
    
    
    33,373Denominator for basic and diluted net loss per share
    
    
    33,585
    
    
    
    33,373Basic and diluted net loss per share
    
    $
    (0.13
    )
    
    $
    (0.07
    )
  Three Months EndedMarch 31,2006
    
    
    2005Weighted average effect of anti-dilutive securities:Employee stock options (using the treasury stock method)
    
    
    4
    
    
    
    297Unvested restricted stock
    
    
    75
    
    
    
    Total
    
    
    79
    
    
    
    297
 4. Comprehensive Loss
  Three Months EndedMarch 31,2006
    
    
    2005Net loss
    
    $
    (4,225
    )
    
    
    (2,417
    )Other comprehensive income (loss):Foreign currency translation adjustment
    
    
    (8
    )
    
    
    (36
    )Unrealized gain (loss) on securities
    
    
    13
    
    
    
    14Comprehensive loss
    
    $
    (4,220
    )
    
    $
    (2,439
    )
 9




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##### Table of Contents



March 31,
    
    
    March 31,2006
    
    
    2005Foreign currency translation
    
    $
    553
    
    
    $
    451Unrealized gain (loss) on marketable debt
securities
    
    
    (33
    )
    
    
    (91
    )Total accumulated other comprehensive income
    
    $
    520
    
    
    $
    360
 5. Stock Benefit Plans & Stock-Based Compensation
 Stock Benefit Plans
 1999 Employee Stock Purchase Plan
  Equity Incentive Plans
  10




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##### Table of Contents



Three Months Ended March 31,Weighted AverageOptions
    
    
    Exercise PriceOutstanding at beginning of period
    
    
    5,775
    
    
    $
    6.11Granted
    
    
    49
    
    
    $
    2.71Exercised
    
    
    
    
    
    
    Canceled
    
    
    (480
    )
    
    $
    6.33Outstanding at end of period
    
    
    5,344
    
    
    $
    6.06Options exercisable at end of period
    
    
    3,336
    
    
    $
    7.59
  Weighted
    
    
    Weighted
    
    
    
    
    
    
    WeightedNumber
    
    
    average
    
    
    average
    
    
    
    
    
    
    averageoutstanding at
    
    
    remaining
    
    
    exercise
    
    
    Exercisable as of
    
    
    exerciseRange of exercise prices
    
    March 31, 2006
    
    
    contractual term
    
    
    price
    
    
    March 31, 2006
    
    
    price$0.25 - $2.99
    
    
    568,029
    
    
    
    8.65
    
    
    $
    2.82
    
    
    
    107,352
    
    
    $
    2.78$3.00 - $3.04
    
    
    543,555
    
    
    
    8.41
    
    
    
    3.03
    
    
    
    224,257
    
    
    
    3.03$3.05 - $3.41
    
    
    406,302
    
    
    
    8.50
    
    
    
    3.31
    
    
    
    141,302
    
    
    
    3.30$3.42 - $3.42
    
    
    630,791
    
    
    
    9.02
    
    
    
    3.42
    
    
    
    137,291
    
    
    
    3.42$3.43 - $4.59
    
    
    272,166
    
    
    
    8.01
    
    
    
    3.80
    
    
    
    139,692
    
    
    
    3.94$4.60 - $4.60
    
    
    680,988
    
    
    
    5.21
    
    
    
    4.60
    
    
    
    568,486
    
    
    
    4.60$4.65 - $5.36
    
    
    534,224
    
    
    
    6.96
    
    
    
    4.71
    
    
    
    350,224
    
    
    
    4.71$5.38 - $7.92
    
    
    26,129
    
    
    
    7.72
    
    
    
    6.44
    
    
    
    19,696
    
    
    
    6.64$8.00 - $8.00
    
    
    758,250
    
    
    
    3.28
    
    
    
    8.00
    
    
    
    758,250
    
    
    
    8.00$8.12 - $188.00
    
    
    923,839
    
    
    
    5.28
    
    
    
    13.75
    
    
    
    919,790
    
    
    
    13.73$0.25 - $188.00
    
    
    5,344,273
    
    
    
    6.67
    
    
    $
    6.06
    
    
    
    3,366,340
    
    
    $
    7.59
 11




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##### Table of Contents



Stock-based compensation
  Three Months Ended March 31,(SFAS 123R)
    
    
    (APB 25)Employee stock-based compensation in:Cost of
license
    
    $
    41
    
    
    $
    Cost of
service and other
    
    
    15
    
    
    
    Research and development
    
    
    100
    
    
    
    Sales and marketing
    
    
    152
    
    
    
    General and administrative
    
    
    173
    
    
    
    Total employee stock-based compensation:
    
    $
    481
    
    
    $
    Total amortization of employee
stock-based compensation:
    
    
    21
    
    
    
    62Total stock-based compensation:
    
    $
    502
    
    
    $
    62
   Three Months Ended,March 31, 2005Net Loss
    
    
    (2,417
    )Add: stock-based compensation included in reported net loss
    
    
    62Deduct: total stock based compensation expense determined under fair value
based method for all awards
    
    
    (1,002
    )Pro forma net loss
    
    
    (3,357
    )Basic and diluted net loss per share
    
    
    (0.07
    )Pro forma basic and diluted net loss per share
    
    
    (0.10
    )Weighted-average shares used in calculation
    
    
    33,373
 Fair Value Disclosure
  Three
Months Ended March 31,Stock option plan
    
    
    ESPP2006
    
    
    2005
    
    
    2006
    
    
    2005Expected term (in
years)
    
    
    6.25
    
    
    
    3.0
    
    
    
    6.25
    
    
    
    1.0Expected Volatility
    
    
    68
    %
    
    
    64
    %
    
    
    68
    %
    
    
    91
    %Dividend yield
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Risk free interest rate
    
    
    4.91
    %
    
    
    3.96
    %
    
    
    4.91
    %
    
    
    2.73
    %Forfeiture
rate
    
    
    8.86
    %
    
    
    
    
    
    
    8.86
    %
    
    
    
 6. Restructuring, Impairments and Other Charges
  12




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Accounting for
Costs Associated with Exit or Disposal Activities
       Facilities Consolidation
    
    
    Severance
    
    
    TotalBalance at December 31, 2003
    
    $
    18,482
    
    
    $
    330
    
    
    $
    18,812Cash Payments
    
    
    (6,295
    )
    
    
    (330
    )
    
    
    (6,625
    )Facility adjustments
    
    
    1,236
    
    
    
    
    
    
    
    1,236Balance at December 31, 2004
    
    
    13,423
    
    
    
    
    
    
    
    13,423Cash Payments
    
    
    (6,400
    )
    
    
    
    
    
    
    (6,400
    )Facility adjustments
    
    
    397
    
    
    
    
    
    
    
    397Balance at December 31, 2005
    
    
    7,420
    
    
    
    
    
    
    
    7,420Cash Payments
    
    
    (1,376
    )
    
    
    
    
    
    
    (1,376
    )Facility adjustments
    
    
    145
    
    
    
    
    
    
    
    145Balance at March 31, 2006
    
    $
    6,189
    
    
    $
    
    
    
    $
    6,189
 13




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Total2011 and
    
    
    Estimated2006
    
    
    2007
    
    
    2008
    
    
    2009
    
    
    2010
    
    
    Thereafter
    
    
    Net PaymentsUndiscounted future lease payments and estimated
operating costs for restructured facilities
    
    $
    2,362
    
    
    $
    2,239
    
    
    $
    865
    
    
    $
    865
    
    
    $
    865
    
    
    $
    2,117
    
    
    $
    9,313Less: contractual future sublease income
    
    
    (511
    )
    
    
    (512
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,023
    )Gross estimated future payments
    
    $
    1,851
    
    
    $
    1,727
    
    
    $
    865
    
    
    $
    865
    
    
    $
    865
    
    
    $
    2,117
    
    
    $
    8,290Less: Discount factor due to fair value treatment of
facilities restructured in 2003
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,101
    )Net future payments on restructured facilities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    6,189
 7. Deferred Revenue
  8. Related Party Transactions
   14




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Three Months Ended
    
    
    Three Months EndedMarch 31,
    
    
    March 31,2006
    
    
    2005Revenue from QilinSoft LLC
    
    $
    74
    
    
    $
    50R&D and Consulting expense
incurred with QilinSoft LLC
    
    $
    856
    
    
    $
    419Trade A/R with QilinSoft LLC
    
    $
    
    
    
    $
    Trade A/P and accruals with
QilinSoft LLC
    
    $
    216
    
    
    $
    113
  9. Credit Facilities with Silicon Valley Bank
   10. Segment Information
   15




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11. Cash, Cash Equivalents and Short-term Investments
  As of March 31, 2006
    
    
    As of December 31, 2005Carrying
    
    
    Unrealized
    
    
    Unrealized
    
    
    Estimated
    
    
    Carrying
    
    
    Unrealized
    
    
    Unrealized
    
    
    EstimatedValue
    
    
    Gains
    
    
    Losses
    
    
    Fair Value
    
    
    Value
    
    
    Gains
    
    
    Losses
    
    
    Fair ValueCash
    
    $
    7,720
    
    
    
    
    
    
    
    
    
    
    $
    7,720
    
    
    $
    7,679
    
    
    
    
    
    
    
    
    
    
    $
    7,679Money market funds
    
    
    2,406
    
    
    
    
    
    
    
    
    
    
    
    2,406
    
    
    
    1,285
    
    
    
    
    
    
    
    
    
    
    
    1,285Government securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0
    
    
    
    800
    
    
    
    
    
    
    
    
    
    
    
    800Corporate bonds
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0Commercial paper
    
    
    24,699
    
    
    
    3
    
    
    
    
    
    
    
    24,702
    
    
    
    16,739
    
    
    
    
    
    
    
    
    
    
    
    16,739Total cash equivalents
    
    
    27,105
    
    
    
    3
    
    
    
    
    
    
    
    27,108
    
    
    
    18,824
    
    
    
    
    
    
    
    
    
    
    
    18,824Total cash and cash
equivalents
    
    
    34,825
    
    
    
    3
    
    
    
    
    
    
    
    34,828
    
    
    
    26,503
    
    
    
    
    
    
    
    
    
    
    
    26,503Money market funds
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Government securities
    
    
    11,450
    
    
    
    
    
    
    
    (21
    )
    
    
    11,429
    
    
    
    13,754
    
    
    
    
    
    
    
    (23
    )
    
    
    13,731Corporate bonds
    
    
    8,814
    
    
    
    
    
    
    
    (15
    )
    
    
    8,799
    
    
    
    13,794
    
    
    
    
    
    
    
    (26
    )
    
    
    13,768Commercial paper
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0
    
    
    
    7,477
    
    
    
    3
    
    
    
    
    
    
    
    7,480Total short-term
investments
    
    
    20,264
    
    
    
    
    
    
    
    (36
    )
    
    
    20,228
    
    
    
    35,025
    
    
    
    3
    
    
    
    (49
    )
    
    
    34,979Total cash, cash
equivalents, and
short-term
investments
    
    $
    55,089
    
    
    $
    3
    
    
    $
    (36
    )
    
    $
    55,056
    
    
    $
    61,528
    
    
    $
    3
    
    
    $
    (49
    )
    
    $
    61,482
 
 ITEM 2 MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
  Overview
    16




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##### Table of Contents



Product Overview
 BusinessWare
 BusinessWare
  
    
    Process automation
    
    Management of human workflow
    
    Message transport and routing
    
    Data transformation and vocabulary management
    
    Web services integration and orchestration
    
    Compatibility with specific data transport protocols
    
    Tools for building custom connectors
    
    Various pre-built services for business process integration
    
    Modeling environment for development
    
    Solution life cycle management
  
    
    Connectors for various packaged software applications (e.g., SAP, Siebel, Oracle
Applications, Peoplesoft) and databases (e.g., Oracle, Microsoft SQL Server, Sybase,
DB2)
    
    Connectors for various technology standards and transport protocols (e.g., Java
Messaging Service, WebSphere MQ, IBM CICS)
    
    Specialized data transformation and validation products (e.g., HIPAA, HL7, SWIFT)
    
    Business process monitoring and analysis
    
    EDI and various other business-to-business integration standards
 BusinessWare BusinessWare
 
    
    Order Accelerator This process application, initially released in March 2004,
automates business processes across a telecommunications service providers existing
systems and is designed to provide faster, more cost-effective, and more accurate order
management. Order Accelerator includes pre-built business processes and other content
based on the Telemanagement Forums eTOM (Enhanced Telecom Operations Map) standard.
 17




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##### Table of Contents




    
    Resolution Accelerator This process application, initially released in June 2005,
manages the resolution of business process exceptions. Such exceptions occur when
automated business transactions are diverted from their normal process path due to
incomplete or erroneous data, specific business policies, or factors external to the
process. Resolution Accelerator provides capabilities to automatically fix many
problems, guide manual resolution of other problems, and reinsert affected transactions
back into the normal process flow. While a majority of our sales to date of this
product have been to the telecommunications sector, it is applicable to other sectors as
well.
    
    Smart Claims This process application for health insurance payers was initially
released in late 2003. Smart Claims augments existing claims processing systems by
applying automated business rules to reduce off-line manual processing, by intelligently
routing claims between different systems, and by providing a unified view of the claims
processing lifecycle across multiple systems. Potential benefits to Smart Claims
customers include fewer delays in claims processing and payment, reduced errors, faster
changes to claims processing logic, and faster response to customer and partner
inquiries.
    
    Smart Gateway for Healthcare This new process application manages the intake,
splitting, validation, transformation, aggregation, and routing of health insurance
claims and other electronic business documents exchanged with multiple external parties.
By consolidating multiple document exchange processes into a single electronic document
gateway, this product can reduce operational complexity and costs, increase visibility
within a complex document exchange process, and make the automated business logic
governing these processes easier to implement, manage and modify. Vitria released the
first part of this solution in December 2005 and we expect to release the second part of
this solution in mid-2006.
     CRITICAL ACCOUNTING POLICIES
  18




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##### Table of Contents




    
    Revenue Recognition
    
    Allowances for Doubtful Accounts
    
    Restructuring Costs
  Share-Based Payment
       19




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##### Table of Contents



RESULTS OF OPERATIONS
 For the three months ended March 31, 2006 and March 31, 2005
  Three Months EndedMarch 31,2006
    
    
    2005RevenueLicense
    
    
    24
    %
    
    
    33
    %Service and other
    
    
    76
    %
    
    
    67
    %Total revenue
    
    
    100
    %
    
    
    100
    %Cost of revenueLicense
    
    
    0
    %
    
    
    1
    %Service and other
    
    
    38
    %
    
    
    34
    %Total cost of revenue
    
    
    38
    %
    
    
    35
    %Gross profit
    
    
    62
    %
    
    
    65
    %Operating expensesSales and marketing
    
    
    38
    %
    
    
    30
    %Research and development
    
    
    39
    %
    
    
    28
    %General and administrative
    
    
    29
    %
    
    
    22
    %Amortization of stock-based compensation
    
    
    0
    %
    
    
    0
    %Restructuring charges
    
    
    1
    %
    
    
    1
    %Total operating expenses
    
    
    107
    %
    
    
    81
    %Loss from operations
    
    
    (46
    %)
    
    
    (16
    %)Interest income
    
    
    5
    %
    
    
    2
    %Other income (expenses), net
    
    
    2
    %
    
    
    (1
    )%Net loss before income taxes
    
    
    (39
    %)
    
    
    (15
    %)Provision for income taxes
    
    
    0
    %
    
    
    0
    %Net loss
    
    
    (39
    %)
    
    
    (15
    %)
 Revenue
  License
  20




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##### Table of Contents



Service and other
  Cost of Revenue
 License.
 Service and other
 Operating Expenses
 Sales
and marketing
 Research and development.
 21




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##### Table of Contents



General
and administrative
 Stock-based
compensation.
   Three Months Ended March 31,2006
    
    
    2005(SFAS 123R)
    
    
    (APB 25)Employee stock-based compensation in:Cost of goods sold
    
    $
    56
    
    
    $
    Research and development
    
    
    100
    
    
    
    Sales and marketing
    
    
    152
    
    
    
    General and administrative
    
    
    173
    
    
    
    Total employee stock-based compensation:
    
    $
    481
    
    
    $
    Total other stock-based compensation:
    
    
    21
    
    
    
    62Total stock-based compensation:
    
    $
    502
    
    
    $
    62
 Restructuring charges.
  22




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##### Table of Contents



Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activities Accounting for Costs Associated with Exit or Disposal
Activities
  Interest income and other income (expense), net.
 Provision for income taxes
 Accounting for Income
Taxes
 Liquidity and Capital Resources
 For the three months ended
    
    
    Percent ChangeMarch 31,
    
    
    2006 vs.2006
    
    
    2005
    
    
    2005(in thousands)Cash, cash equivalents and short- term
investments
    
    $
    55,056
    
    
    $
    72,593
    
    
    
    (24
    %)Short-term liabilities
    
    
    22,821
    
    
    
    29,910
    
    
    
    (24
    %)Long-term liabilities
    
    
    4,893
    
    
    
    6,687
    
    
    
    (27
    %)Net cash provided by (used in) operating
activities
    
    
    (6,393
    )
    
    
    (5,604
    )
    
    
    14
    %Net cash provided by investing activities
    
    
    14,760
    
    
    
    4,949
    
    
    
    198
    %Net cash provided by financing activities
    
    
    (33
    )
    
    
    11
    
    
    
    (400
    %)
 23




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##### Table of Contents



Three Months Ended March 31,2006
    
    
    2005Beginning cash and investment balances
    
    $
    61,482
    
    
    $
    78,563Cash receipts from customers
    
    
    8,765
    
    
    
    15,793Miscellaneous cash receipts
    
    
    641
    
    
    
    239Investment income
    
    
    572
    
    
    
    389Cash payments to vendors and employees
    
    
    (16,404
    )
    
    
    (22,391
    )Ending cash and investment balances
    
    $
    55,056
    
    
    $
    72,593Net decrease in cash and investment
balances
    
    $
    (6,426
    )
    
    $
    (5,970
    )Payments to vendor and employees in
excess of cash receipts from
customers
    
    $
    (7,639
    )
    
    $
    (6,598
    )
 24




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##### Table of Contents



PercentThree Months Ended
    
    
    Change
    
    
    ChangeMarch 31,
    
    
    2005 to
    
    
    2005 to2006
    
    
    2005
    
    
    2006
    
    
    2006Operating activities:Net loss
    
    $
    (4,225
    )
    
    $
    (2,417
    )
    
    $
    (1,808
    )
    
    
    75
    %Adjustments to reconcile net
loss to net cash used in operating activities:Loss on disposal of fixed assets
    
    
    1
    
    
    
    
    
    
    
    1
    
    
    
    Depreciation and amortization
    
    
    143
    
    
    
    333
    
    
    
    (190
    )
    
    
    -57
    %Stock-based compensation
    
    
    502
    
    
    
    62
    
    
    
    440
    
    
    
    710
    %Provision for doubtful accounts
    
    
    53
    
    
    
    148
    
    
    
    (95
    )
    
    
    -64
    %Changes in assets and liabilities:Accounts receivable
    
    
    (3,754
    )
    
    
    (4,637
    )
    
    
    883
    
    
    
    -19
    %Other current assets
    
    
    435
    
    
    
    (448
    )
    
    
    883
    
    
    
    -197
    %Other assets
    
    
    (10
    )
    
    
    62
    
    
    
    (72
    )
    
    
    -116
    %Accounts payable
    
    
    411
    
    
    
    (443
    )
    
    
    854
    
    
    
    -193
    %Accrued liabilities
    
    
    (310
    )
    
    
    (667
    )
    
    
    357
    
    
    
    -54
    %Accrued restructuring and other charges
    
    
    (1,231
    )
    
    
    (1,892
    )
    
    
    661
    
    
    
    -35
    %Deferred revenue
    
    
    1,655
    
    
    
    3,951
    
    
    
    (2,296
    )
    
    
    -58
    %Other long-term liabilities
    
    
    (63
    )
    
    
    344
    
    
    
    (407
    )
    
    
    -118
    %Net cash used in operating activities
    
    $
    (6,393
    )
    
    $
    (5,604
    )
    
    $
    (789
    )
    
    
    14
    %
    25




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##### Table of Contents



Contractual Cash Obligations and Commitments
  Off-Balance Sheet Arrangements
  Credit Facilities with Silicon Valley Bank
   Operating Capital and Capital Expenditure Requirements
   26




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##### Table of Contents




    
    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;
    
    timing of the development and release of new products or 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;
    
    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.
  27




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##### Table of Contents



Related Party Transactions
    Three Months Ended
    
    
    Three Months EndedMarch 31,
    
    
    March 31,2006
    
    
    2005Revenue from QilinSoft LLC
    
    $
    74
    
    
    $
    50R&D and Consulting expense
incurred with QilinSoft LLC
    
    $
    856
    
    
    $
    419Trade A/R with QilinSoft LLC
    
    $
    
    
    
    $
    Trade A/P and accruals with
QilinSoft LLC
    
    $
    216
    
    
    $
    113
  
 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
 Interest Rate Risk
     28




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##### Table of Contents



2006
    
    
    
    
    
    
    2005Weighted Average
    
    
    
    
    
    
    Weighted AverageFair Value
    
    
    Interest Rate
    
    
    Fair Value
    
    
    Interest RateCash
    
    $
    7,720
    
    
    
    0.12
    %
    
    $
    31,426
    
    
    
    0.35
    %Cash equivalents
and Short-term
investments
    
    
    47,336
    
    
    
    1.89
    %
    
    
    41,167
    
    
    
    2.66
    %Total Cash, Cash
equivalents and
Short-term
investments
    
    $
    55,056
    
    
    
    
    
    
    $
    72,593
 Foreign Exchange Risk
    
 ITEM 4. CONTROLS AND PROCEDURES
 Disclosure controls and procedures
  29




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##### Table of Contents



Vitria didnt have adequate staffing to perform needed reviews.
 Documentation supporting our control assessment was not adequate
 Internal controls over our subsidiary in Japan were not proven to be effective as of
December 31, 2005.
  Changes in Internal Control over Financial Reporting
  30




---



##### Table of Contents



PART II. OTHER INFORMATION
 
 ITEM 1. Legal Proceedings
 In re Vitria Technology, Inc. IPO Securities Litigation
    
 ITEM 1A. RISK FACTORS
 Our operating results fluctuate significantly and an unanticipated decline in revenue may
result in a decline in our stock price and may disappoint securities analysts or investors, and may
also harm our relationship with our customers.
    31




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##### Table of Contents



We have incurred substantial operating losses since inception and we cannot guarantee that we will
become profitable in the future.
  Our operating results are substantially dependent on license revenue from BusinessWare and our
business could be materially harmed by factors that adversely affect the pricing and demand for BusinessWare.
 BusinessWare BusinessWare BusinessWare BusinessWare BusinessWare
 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
revenue.
  
    
    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.
  The reluctance of companies to make significant expenditures on information technology could reduce
demand for our products and cause our revenue to decline.
  We experience long and variable sales cycles, which could have a negative impact on our results of
operations for any given quarter.
  32




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##### Table of Contents



Because a small number of customers have in the past accounted for a substantial portion of our
revenue, our revenue could decline due to the loss or delay of a single customer order.
  If we are not successful in developing industry specific pre-built process applications based on BusinessWare , our ability to increase future revenue could be harmed.
 BusinessWare
  Our products may not achieve market acceptance, which could cause our revenue to decline.
  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.
  33




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##### Table of Contents



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.
   If our products do not operate with the many hardware and software platforms used by our customers,
our business may fail.
  
    
    our ability to integrate our product with multiple platforms and existing, or legacy,
systems and to modify our products as new versions of packaged applications are
introduced;
    
    the portability of our products, particularly the number of operating systems and
databases that our products can source or target;
    
    our ability to anticipate and support new standards, especially Internet standards;
    
    the integration of additional software modules under development with our existing products; and
    
    our management of software being developed by third parties for our customers or use with our products.
 If we fail to introduce new versions and releases of our products in a timely manner, our revenue
may decline.
 BusinessWare
 34




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##### Table of Contents



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 revenue could decline.
  The use of Open Source Software in our products may expose us to additional risks and harm our
intellectual property our intellectual property position.
  We could suffer losses and negative publicity if new versions and releases of our products contain
errors or defects.
  If we fail to attract and retain qualified personnel, our ability to compete will be harmed.
  If we fail to adequately protect our proprietary rights, we may lose these rights and our business
may be seriously harmed.
  35




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##### Table of Contents



Our products could infringe the intellectual property rights of others causing costly litigation
and the loss of significant rights.
  Our significant international operations may fail to generate significant product revenue or
contribute to our drive toward profitability, which could result in slower revenue growth and harm
our business.
  We are at risk of securities class action litigation due to our expected stock price volatility.
  We have implemented anti-takeover provisions which could discourage or prevent a takeover, even if
an acquisition would be beneficial to our stockholders.
  
    
    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.
 36




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##### Table of Contents



ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
  
 ITEM 3. Defaults Upon Senior Securities
  
 ITEM 4. Submission of Matters to Vote of Security Holders
  
 ITEM 5. Other Information
  
 ITEM 6. Exhibits
  Exhibit 31.1
    
    Certification of Chief Executive Officer as required by Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended.Exhibit 31.2
    
    Certification of Chief Financial Officer as required by Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended.Exhibit 32.1
    
    Certification of Chief Executive
Financial Officer as required by Rule 13a-14(b) of the
Securities Exchange Act of 1934, as amended. *Exhibit 32.2
    
    Certification of Chief Financial
Officer as required by Rule 13a-14(b) of the Securities Exchange
Act of 1934, as amended. *
 
  37




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##### Table of Contents



SIGNATURES
  Vitria Technology, Inc.
 Date: May 10, 2006
    
    By:
    
    /s/ MICHAEL D. PERRYMichael D. PerrySenior Vice President and Chief Financial Officer
 38




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##### Table of Contents



Exhibit 31.1
    
    Certification of Chief Executive Officer as required by Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended.Exhibit 31.2
    
    Certification of Chief Financial Officer as required by Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended.Exhibit 32.1
    
    Certification of Chief Executive Financial Officer as required by Rule 13a-14(b) of the Securities Exchange Act of 1934, as amended. *Exhibit 32.2
    
    Certification of Chief Financial Officer as required by Rule 13a-14(b) of the Securities Exchange Act of 1934, as amended. *