Back to GetFilings.com
================================================================================
UNITED STATES OF AMERICA
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
FORM 10-K
----------------
(Mark One)
[ ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
OR
[X] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the ten months ended October 31, 2001
Commission file number: 0-29757
VERSATA, INC.
(Exact name of registrant as specified in its charter)
Delaware 68-0255203
State or other jurisdiction of (I.R.S. Employer
incorporation or organization Identification No.)
300 Lakeside Drive
Suite 1500
Oakland, CA 94612
(510) 238-4100
(Address including zip code, of principal executive offices and
Registrant's telephone number including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.001 par value
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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of voting stock held by non-affiliates of the
registrant as of March 20, 2002 was $23,475,345 based on the last reported sale
price of the registrant's common stock as reported by the Nasdaq National Market
for the last trading day prior to that date.
On March 20, 2002, 44,078,124 shares of the registrant's common stock were
outstanding.
================================================================================
VERSATA, INC.
FORM 10-K
For The Ten Months Ended October 31, 2001
TABLE OF CONTENTS
Page
----
PART I
Item 1. Business........................................................................................................ 3
Item 2. Properties...................................................................................................... 19
Item 3. Legal Proceedings............................................................................................... 19
Item 4. Submission of Matters to a Vote of Security Holders............................................................. 19
PART II
Item 5. Market for Registrant's Common Stock and Related Stockholder Matters............................................ 20
Item 6. Selected Financial Data and Supplementary Data.................................................................. 20
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations........................... 21
Item 7A. Quantitative and Qualitative Disclosures About Market Risk...................................................... 31
Item 8. Financial Statements and Supplementary Data..................................................................... 33
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure............................ 33
PART III
Item 10. Directors and Executive Officers of the Registrant.............................................................. 34
Item 11. Executive Compensation.......................................................................................... 36
Item 12. Security Ownership of Certain Beneficial Owners and Management.................................................. 40
Item 13. Certain Relationships and Related Transactions.................................................................. 41
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K................................................ 42
Signatures............................................................................................................... 44
2
FORWARD-LOOKING STATEMENTS
In addition to historical information, this report on Form 10-K contains
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. These statements are subject to risks and
uncertainties and are based on the beliefs and assumptions of management of the
Company, based on the information currently available to the Company's
management. These statements may contain words such as "expects," "anticipates,"
"intends," "plans," "believes," "estimates," or other words indicating future
results. These statements are based on judgments with respect to, among other
things, information available to us, future economic, competitive and market
conditions and future business decisions. All are difficult or impossible to
predict accurately and many of which are beyond our control. Accordingly,
although we believe that the assumptions underlying the forward-looking
statements are reasonable, any such assumption could prove to be inaccurate and
therefore there can be no assurance that the results contemplated in the
forward-looking statements will be realized. Factors that could cause or
contribute to these differences include, but are not limited to, those discussed
in the sections entitled "Risk Factors That May Affect Future Results" and
"Management's Discussion and Analysis of Financial Position and Results of
Operation." We undertake no obligation to revise or publicly release the results
of any revision to these forward-looking statements. Given these risks and
uncertainties, readers are cautioned not to place undue reliance on the
forward-looking statements.
PART I
Item 1. Business
Overview
Versata, Inc. was incorporated in California on August 27, 1991, and was
reincorporated in the State of Delaware on February 24, 2000. Versata, Inc.
("Versata" or the "Company") provides a way for companies to manage the logic in
their business systems at the business level, rather than at the code level.
In today's "e-Business" world, for a company to take a business idea from
conception to reality, it must have a responsive software infrastructure that
provides the most flexibility with the best performance. Out of this need has
arisen the Service Oriented Architecture ("SOA") leveraging a Java 2 Enterprise
Edition ("J2EE") application server like IBM WebSphere or BEA WebLogic. The SOA
is comprised of six layers: presentation, process, transactions, data logic,
integration, & the back-office value chain (financial, customer, and resource
management systems). The middle layers of this architecture, process,
transactions, & data logic, are called the business logic layers. Versata
provides the most productive solution for creating, managing, reusing, and
executing these business logic layers.
Versata fundamentally changes the way that a company manages its business
logic. Traditional development & execution approaches follow these steps;
business analysts document the business logic as application requirements; these
requirements are then used by the programmers to draw models, sketch out
psuedo-code, and write programs that are intended to meet the original
specifications; and, these programs are then integrated with the rest of the
company's infrastructure resources and deployed to a production environment.
With Versata, the middle-steps are eliminated: the business analyst specifies
the business logic, and that business logic is executed by the Versata server.
This fundamental difference enables companies to react faster to business
demands by developing applications faster and change applications as the
business changes. This can be accomplished using existing IT resources rather
than hiring expensive Java consultants.
Versata's solution is well suited for large, enterprise applications with
multiple data sources and database tables, multiple user interfaces, with
complex business transactions used by thousands of users. Many applications
built today are departmental in nature and don't require the power of Versata;
for those we recognize that hand-coding Java is an acceptable solution. But,
when the system is mission-critical to a company's operations and supports
thousands of transactions, more power and productivity is needed, and this is
where Versata fits best.
Our objective is to establish the Versata Logic Suite as an extension to the
leading application servers for managing a company's business logic. We intend
to do this by extending our technology leadership, continuing to grow our
multi-channel distribution network, and leveraging our technology alliances.
We market our products primarily through a direct sales force in the United
States and in Europe. We also work with a network of consulting and systems
integration partners, companies selling pre-packaged software applications,
companies developing and
3
integrating custom software applications, and companies selling software
applications over the Internet on a subscription services basis. These companies
are trained in Versata's technology to provide the knowledge and resources
necessary to rapidly deploy a Versata-based solution.
An important element of our sales and marketing strategy is to leverage
relationships with key technology and business partners. Our most important
strategic relationship to date has been with IBM. Our strategic marketing, sales
and development relationship with IBM provided a single product offering that
integrated our software with IBM's WebSphere(R) Application Server Advanced
Edition on an OEM basis. In September 2000, at our request, we changed our
relationship with IBM by entering into a software re-marketing agreement with
IBM to allow them to resell some of our products. As a result, IBM now offers
the Versata Logic Suite product under the Versata brand name through IBM's
Passport Advantage Program, IBM's volume licensing program. Versata product
availability on Passport Advantage eliminates special handlings, such as
separate contracts with Versata for license maintenance and support. Versata
expects that this arrangement will improve Versata's visibility within IBM and
may help increase the volume of software sold through IBM.
Versata has also entered into agreements with leading technology companies
such as ILOG and MetaMatrix. In addition, we have continued to invest in our
alliances with BEA and Rational Software. Our network of technology partners
provides complementary solutions to Versata's products.
We also offer comprehensive professional services from training, mentoring,
ROI analysis, staff augmentation and project management to complete turnkey
solution services, as well as customer support.
Versata Solution
We believe Versata Logic Suite provides the most productive solution for
delivering large, enterprise applications. Versata's approach - the declarative
creation, execution, reuse, and change of business logic (the "heart" of the
application) for a distributed Java infrastructure, provides a strategic
advantage for enterprise Information Technology (IT) shops. We believe our
solution, which consists of a comprehensive suite of software and services,
provides the following benefits to our customers:
Achieve better collaboration between business and IT organizations
Our products allow non-programmer, business-domain experts to actively
participate in and guide the translation of business requirements into
differentiated e-business software applications and processes. Developers can
reduce the time it takes to implement application changes and provide
application maintenance, enabling them to elevate their focus to new business
demands.
Reduce operating costs
Our solution improves operational efficiencies associated with application
development and maintenance by enhancing the productivity of a company's IT
resources. First, our product reduces the lines of code that needs to be
hand-written, debugged, and tested. Second, the applications that are delivered
more accurately meet the user requirements, so there are fewer change requests.
Third, existing programmers can be transitioned from other programming
technologies like Visual Basic, PowerBuilder, or COBOL, so that companies can
take advantage of the existing business domain knowledge. And, because they can
transition existing IT programmers, they can reduce the number of outside
consultants that have to be hired.
Reduce project risks
Our solution reduces the risk by taking out the error-prone translation
cycles that occur between the business user, business analyst, and the
programmer. Rather than translating the requirements, step-by-step, in Versata,
the requirements are directly executable. In addition, the use of an iterative
development approach enables the business users to identify issues sooner with
running incremental implementations, which reduce the amount of re-writing that
occurs during the project development phase.
Reduce the risk of selecting the wrong technology
Versata implements and layers its technology on top of industry standards
and migrates existing business logic to new versions of these standards. This is
important because application developers won't have to re-write their
applications as each edition of the J2EE, EJB, or other standard changes.
Versata enables a company to invest in designing and managing their business
logic without concern for the underlying technology.
4
Inject agility and flexibility into business efforts
With the Versata approach, organizations employ their business logic, the
business rules and processes, to knit complex business transactions and
interactions together. This business logic penetrates far deeper into business
transactions than simply the price, availability and size of a product. They
reach into the manner, behavior patterns and conditions under which customers,
suppliers, employees and intermediaries interact. Business logic is an integral
component of and exists throughout the framework of commerce and business
transactions.
Our products enable organizations to map their business policies and
processes in the language of easy-to-understand business rules and process
models (i.e., "An account balance cannot exceed a customer's credit limit" and
"When orders exceed $30,000, send to sales manager for approval"). The Versata
"declarative business logic" approach embeds business rules and business process
into the core foundation of software applications, making it easier and quicker
to a) build those software applications and b) make system-wide changes to these
software applications once the application has been launched.
By driving key business logic, the core business rules and processes, into
the foundation of application development activities, our products address the
market need created by expensive, elongated business application development
cycles, difficulty of changing/updating applications to reflect business needs,
business manager/ IT developer collaboration issues, and complexity of
implementing large-scale, distributed Java applications.
In addition, we believe, our products facilitate rapid response to business
challenges, enabling constant innovation of processes and applications to stay
in step with technology - and ahead of competition. When changes are required to
a business application, the Versata approach allows users to systematically
implement those changes by modifying a few business rules or process models -
versus first finding, then changing, thousands of lines of programmer-developed
code. Non-programmers and business-domain experts can also actively participate
in and guide the translation of business requirements into differentiated
e-business software applications and processes.
Improve IT development staff
By making it much less complex to create and modify complicated business
applications, Versata enables companies to make their programmers more
productive in a Java-technology environment. Efficiencies associated with
developers are achieved through savings in time, re-training and outsourcing
costs. In addition, we believe our solution optimizes the use of a company's
more advanced Java developers. Rather than wasting time hand-coding every line
of an application, they can be focused on the really difficult tasks such as
custom integration and legacy interaction.
Speed time to market
Our solutions help companies shave time off application development and
maintenance. And, in the rapidly changing economy, early-to-market companies are
rewarded with increasing returns on investment. In addition, we believe
companies using our solutions can rapidly reduce their application backlog,
enabling IT to keep up with the constant demand from the business side of the
house.
Leverage standard, high-performance platforms
Our products are based on open industry standards (J2EE, EJB, XML, etc.) and
industry leading platforms such as IBM WebSphere Application Server and BEA Web
Logic Server.
Our products interact with a number of sources including leading relational
database systems, legacy software applications, and various standards-based
middleware solutions. In this way, our solution makes it possible for companies
to build and deploy new business applications using existing technology
infrastructure and systems, and with confidence that our products will prove
compatible with other infrastructures that might be installed in the future.
Strategy
Our mission is to lead Global 2000 companies seeking to build large,
distributed applications within a J2EE infrastructure to conclude that Versata
is an essential part of their Distributed Java infrastructure (J2EE and Web
Services) alongside their Application Server and Integrated Development
Environment (IDE) of choice. This strategy is based on five pillars:
5
Provide an Integrated Business Logic Offering
A key differentiator for Versata is the integration of transaction and
process logic in a declarative environment. Both transaction and process logic
contribute to the value provided by Versata of allowing the business user to be
involved from the ground up, mapping his business problems effectively to the
application, and being able to see, monitor and manage the logic as a business
asset. This integrated offering is the Versata Logic Suite.
Offer Versata Logic Suite as a J2EE Infrastructure Component Plug-in
While many of our customers use and derive value from our presentation
layer, we are now selling to companies more literate in J2EE, with already
established Java Server Pages (JSP) tools for the front end. We are seen as a
mainstream J2EE vendor and as a plug-in component to a company's distributed
Java infrastructure. A part of reaching mainstream J2EE vendor status is market
visibility, which we will continue to enhance by participation in standards
groups, conferences, and other venues.
Target WebSphere Accounts who are Developing Large Applications
We believe companies developing large applications best realize our value.
Such companies are most likely found in large enterprises or Federal, State, and
Local government agencies. IBM has strong relationships in these accounts and
has an inclusive strategy with its "open" source WebSphere Studio Tooling
initiative. We intend to target IBM WebSphere customers who plan to build large
applications or are building a smaller application as the first of many within
an IT SOA.
Narrow the Market Focus
Approximately 121 companies have deployed complex applications with our
solutions. These deployments span 24 industry sectors, with no predominant
industry emerging. In 2002 we intend to narrow the market focus in three ways:
o Continue a sales and marketing focus on Independent Software Vendors
(ISVs) with the integrated Versata Logic Suite offering.
o Develop whole product offerings for up to two Target Markets - we plan
to develop an offering for a specific Line-of Business (LoB) within an
industry to gain a foothold into an account and industry, with our end
objective being to be included as a key element in the J2EE
infrastructure.
o Continually seek to leverage individual account opportunities into
tactical sales programs involving industries and/or solutions. Examples
include legacy integration with WRQ, State and Local government with
American Management Systems, Inc. and Courts applications with the
State of Utah.
Further, we intend to emphasize in the sales process the requirement of
reaching the economic buyer. In addition, we intent to initiate a longer term
strategy aimed at positioning Versata as a "Business Logic Management System,"
used by the business user to create, monitor, and manage business Logic as a
corporate strategic asset. With this strategy Versata does not leave behind the
IT organization in the pursuit of the Business user. The message is the
capability to interact at the Business Level, and execute at the IT level.
Without execution, the value diminishes to simply documentation (e.g., Computer
Aided Software Engineering (CASE)). Without operating at the business level,
system operation remains the sole purview of IT. Combining both empowers
business users, and builds bridges between IT and business users.
Customers
In 2001, we licensed our products to 61 customers worldwide for use in a
wide range of e-business software applications in diverse markets such as
financial services and insurance, telecommunications, energy, government,
manufacturing, health care, and retail, and 30 of which were new customers
including Bank of America, Fiserv, Inc., Mercator Software, Inc., Northeastern
University, Interpath, and WRQ, Inc. In addition, 31 repeat customers licensed
more software from Versata including Federal Home Loan Bank of Pittsburgh,
American Management Systems, IBM, and Micro General Corporation.
We intend to continue our sales efforts to increase both the number of new
customers and the percentage of repeat customers. We target Global 2000
companies in the U.S. or their equivalents abroad. El Paso Energy Corporation
accounted for 12% of our revenue
6
for the year ended December 31, 1999; no single customer accounted for more than
10% of total revenues for the year ended December 31, 2000. British
Telecommunication accounted for 17% and Micro General Corporation accounted for
16% of our total revenues for the ten months ended October 31, 2001. The
following are examples of the application of Versata's products by selected new
and repeat customers during the ten months ended 2001:
o American Management Systems (AMS), with revenues of $1.28 billion in
2000, manages complex IT, eBusiness and systems integration projects
for 43 state governments, many federal agencies and hundreds of Fortune
500 companies. AMS used our technology to develop and deploy the
financial and tax applications in its Advantage suite, which is a host
of fully integrated Web applications for state and local government
administrative functions.
o British Telecommunications plc (BT) has increased its investment in
Versata software and maintenance to continue developing new customer
service applications to be deployed across BT's operations. In the
multi-year strategic deal, BT is employing our unique business logic
approach in automating the business logic that drives the customers'
experience with BT's operations. The Versata Logic Server is serving as
a strategic component of BT's core customer service architecture that
includes the BEA WebLogic platform. By significantly reducing the
complexity of developing and maintaining Java-based applications, BT
believes that Versata will allow them to enhance customer service by
increasing response time, reducing costs and bringing to market
additional customer products and services. Because of our ability to
create and change applications in real time, BT's initial pilot
projects have already shown significant time-to-market benefits
compared to standard Java development methods, enabling applications to
be delivered faster and gain commercial competitive advantage quicker.
o Mercator Software announced the release of their Process Integrator
1.0, based on the Versata process and workflow technology in January of
2002. Their Process Integrator graphically models and automates
business processes that coordinate human activities with enterprise
applications, corporate data, Internet resources, and trading partner
interactions. It is part of Mercator Software's intelligent business
integration solutions unifying any internal operations and connecting
them with partners and customers while leveraging current technology
investments. Over 7,000 businesses, including more than 1,100
enterprise customers in financial services, healthcare,
telecommunications, energy, utilities, manufacturing, retail, and
distribution, use Mercator software to maximize their performance.
o United Bank of California (UBOC), the third largest chartered bank in
California, has used the Versata Logic Server to build their customer
relationship management system that will allow over 700 UBOC employees
at 115 branches throughout California to significantly enhance service
to their retail and small business customers. UBOC's new system
leverages the unique business logic-based technology of the Versata
Logic Server. UBOC believes Versata allowed them to deploy its customer
relationship management system more quickly than other methods. United
California Bank was looking to transition to the new Web-centric
technologies-Java, HTML and application servers-while leveraging
existing application infrastructures. To accomplish this, UBOC used the
Versata Logic Server to automate the business logic behind the system.
The system was rolled out using Versata's CORBA edition, but was
recently upgraded to the IBM WebSphere EJB edition. The UBOC project
began the project at the end of 1999. Representative of how it helps
speed customers to market, UBOC was able to rollout phase one in
just over two months. In June 2000, a contact management system, part
of the overall customer relationship management system, was rolled out.
Along the way additional components, such as a customer survey and
mortgage applications, were quickly and easily added, highlighting the
flexibility of working with Versata's rules-based technology.
o National Wildfire Coordination Group (NWCG) has begun deployment of a
new automated dispatching system that operates using the Versata Logic
Server. NWCG agencies include: Bureau of Indian Affairs, Bureau of Land
Management, Fish and Wildlife Service, National Park Service, US Forest
Service, Tribal Council, and State Forestry Agencies. The name of the
application is ROSS, which stands for National Interagency Resource
Ordering and Status System. ROSS provides automated support to dispatch
and coordination offices for all member agencies of the NWCG. The ROSS
application will automate the current manual resource ordering and
status process. It is estimated that due to improvements in efficiency
alone, the cost savings will amount to more than $15.7 million a year.
The ROSS Project is the first information systems project to be
sponsored by the NWCG and is also the first and largest wildland fire
management information systems project of its kind in the nation. In
addition to wildland fires, the ROSS application will be used in
support of flood, hurricane, earthquake, volcanic, and other national
disaster relief efforts. Nearly 400 interagency dispatch offices
throughout the nation will operate the ROSS application. The ROSS
application, built using the Versata Logic Server (by Lockheed Martin
Information Support Services), is being used in the Rocky Mountain Area
and at the National Interagency Coordination Center (in Boise, ID).
7
Products
The Versata Logic Suite provides the most productive solution for delivering
large, enterprise applications. Versata's approach - the declarative creation,
execution, reuse and change of business logic for a distributed Java
infrastructure, within IBM WebSphere and BEA WebLogic servers, provides a
strategic advantage for enterprise Information Technology (IT) shops. Following
is a current list of Versata products:
Products Description
Main Products:
Versata Logic Server The Versata Logic Server (VLS) is
an application server extension,
which manages and executes business
logic. The VLS has two core
engines, the Transaction Logic
Engine and the Process Logic
Engine.
The Versata Transaction Logic
Engine enables business rules
execution for transactional
business logic and provides a J2EE
framework for the necessary,
reusable services such as
cross-object navigation,
transaction sequencing,
event-action synchronization and
more.
The Versata Process Logic Engine is
the runtime component that enacts
business processes, routes work to
participants, and provides
integration points with external
enterprise systems. By facilitating
on-the-fly process changes,
involving external customers in the
processes, and delivering the work
to the right place at the right
time the Process Logic Engine
enables customers to maximize
business execution.
Versata Interaction Server The Versata Interaction Server
(VIS) is a stand-alone version of
the Versata Process Logic Engine
and is a process automation engine
and design environment that extends
core business processes across
people, systems and time. VIS is
sold exclusively through our ISV
Sales Channel. VIS is principally
concerned with the way activities
are planned, sequenced, delivered,
and performed over time. VIS
automates process across software
applications without programming.
Like VLS, VIS runs stand-alone or
on standard application server
platforms-- including IBM and BEA.
Supporting Products:
Versata Logic Studio The Versata Logic Studio houses the
designers for both the Transaction
Logic and Process Logic Engines.
The Transaction Logic components
start from data object designs with
business logic and rule
specifications. The Logic Studio
then compiles and deploys the data
objects as transactional components
(EJB's) into the pre-built J2EE
pattern framework hosted within the
Versata Logic Server. The Process
Logic components, defined
graphically in the language of the
business analysts as activity
diagrams or work-flows, contain the
sequences of activities,
sub-processes and transitions that
define the sequence, delivery and
execution of transactional
interactions over time, people and
systems.
Versata Presentation Server and The Versata Presentation Server
Presentation Designer provides a rich presentation
interface to VLS. It supports both
HTML and Java clients including
browsers, applets in browsers,
standalone applets, and
applications as they interact with
the Versata Logic Server. This
includes server-side state and
session management and presentation
services for HTML clients.
The Versata Presentation Designer
provides an automated,
template-based environment for
designing HTML or Java clients.
Versata JSP Integration Toolkit The Versata JSP Integration Toolkit
will allow for Java Server Pages
(JSP) developers to access Versata
resources via several different
methods: in-line Java within the
HTML of the JSP page, Java Beans,
or custom tags.
8
Versata Design Adapter for Rational Rose The Versata Design Adapter for
Rational Rose allows for greater
integration with the Rose modeling
environment during development
time. The Unified Modeling Language
(UML) is the industry-standard
language for specifying,
visualizing, constructing, and
documenting object-oriented
applications by providing a
graphical representation of the
business objects and their
relationship to other business
objects. The Versata Design Adapter
for Rational Rose synchronizes the
view of the application(s) business
objects represented as a UML Class
Diagram (an analysis/high-level
design view) in Rational Rose and
their design/implementation
representation in the Versata Logic
Studio.
Services
An important component of our overall solution is our ability to provide our
customers with comprehensive professional services -- from training, mentoring,
customer support, staff augmentation and project management or rapid
requirements development to complete turnkey solution services. Through this
comprehensive suite of services, we enable our customers to automate e-business
software applications without regard for internal staffing constraints. As of
October 31, 2001, our services organization consisted of 63 professionals,
comprised of our consulting services organization and contractors, 14 of which
were in customer support and 5 in training.
Consulting Services
We provide mentoring, staff augmentation and project management services to
assist customers in developing and deploying large, enterprise applications with
multiple data sources and database tables, multiple user interfaces, with
complex business transactions used by thousands of users. Many applications
built today are departmental in nature and don't require the power of Versata;
for those we recognize that hand-coding Java is an acceptable solution. But,
when the system is mission-critical to a company's operations and supports
thousands of transactions, more power is needed and this is where we believe we
fit best.
Our services include system architecture, data modeling, system design,
software application development, testing, configuration and installation, and
performance tuning. These services can be provided at our customers' sites as
well as via remote electronic connection, offering our customers the balance
between personal interaction and speed of responsiveness.
Training Services
We offer our customers introductory and advanced training in the use of our
products. These training services are offered in several geographic locations,
either as standard public training classes located throughout the U.S. and
Europe or on-site private training classes. We price these services per course
or on a per day basis.
Customer Support
We believe that a high level of customer support services is essential to
our success. We offer a range of customer support services including business
hour telephone and e-mail support from our Oakland, Australia, German and United
Kingdom facilities, 24-hour-a-day/seven-day-a-week production system support and
on-site support on request. We also provide our customers with access to a
developers knowledge base news group, discussion groups and other repositories
of information regarding our products. Our customers typically purchase annual
customer support contracts at prices dependent upon their desired level of
customer service.
Services Partners
In addition to our internal services organization, we have relationships
with resellers, professional service organizations and global system integrators
that offer consulting, training and customer support services including IBM
Global Services, Online Business Systems, Cap Gemini, Atos Origin, and Logica,
to cooperate in the deployment of our products to customers. Our service
partners are encouraged to attend and complete a series of Versata training
courses. These relationships expose the customer base of these companies to our
software and we intend to develop them further.
Sales and Marketing
9
Sales
We sell our products through a multi-channel distribution model, which
includes both direct and indirect channel sales. As of October 31, 2001, our
sales organization consisted of 49 professionals throughout North America,
Europe and the Pacific Rim. Our direct sales teams typically include a sales
representative, a solutions architect and are supported by a regional service
manager.
At the end of October 31, 2001, we had 22 quota-carrying sales teams,
including 17 direct teams and 5 indirect channel focused teams.
We utilize sales teams consisting of both sales and technical professionals
to create organization-specific proposals, presentations and demonstrations that
address the specific needs of each potential customer. Our sales model can
include a proof of concept and/or return on investment (ROI) approach to winning
competitive sales opportunities. In many of these competitive situations, the
tangible results of our proof of concept/ ROI substantiate the time-to-market
advantage, ability to support business flexibility and ease of use, which often
lead to a full project implementation.
We complement our direct sales force with channel sales through various
types of relationships that either sell, or help us sell, our products and
services. These include:
o IBM. A significant sales channel is our strategic relationship with IBM.
This includes a re-selling agreement in which the Versata Logic Suite is
available through IBM's Passport Advantage Program, IBM's volume licensing
program. Versata product availability on Passport Advantage eliminates the
special handlings, such as separate contracts with Versata for license
maintenance and support. Versata expects that this arrangement will improve
Versata's visibility within IBM and may help increase the volume of
software sold through IBM.
o System Integrator Partners. Our system integrator partners include
companies that custom develop and integrate software applications, such as
global system integrators as well as regional consulting partners. These
partners refer our products to new customers and then typically provide the
customers with consulting and system integration services. Our Systems
Integrator partners include IBM Global Services, Online Business Systems,
Cap Gemini, EDS, Atos Origin, Logica, KPMG, American Management Systems,
and Lockheed Martin Services. In 2002, we intend to expand our relationship
with System Integrator Partners.
o Independent Software Vendors and Application Service Providers (ISV/ASPs).
Our partners that sell pre-packaged software applications, often referred
to as independent software vendors, and our application service provider
partners use our software to create and maintain their integrated software
products. We typically receive a royalty from these partners for every
software sale that integrates the Versata products. Some of these partners
included Mercator Software, WRQ, Inc., Fiserv Solutions, Inc., and Cap
Gemini.
o International Distributors. Our international distributors include vendors
that sell business software products to companies in Europe, Middle East,
and Australia.
With the addition of Versata's new product release, Versata Logic Suite 5.5,
the first product on the market to combine business logic for both transaction
processing and process automation, we believe our sales teams will be able to
sell a comprehensive solution that will enable our clients to increase their
return on investment.
We have rolled out a new third party sales force automation system. This
system will provide our sales force and management with real time account data
and allow us to better manage our sales cycles. This software will also allow us
to do customized marketing to our current and prospective customers.
Marketing
We support our sales efforts through a variety of marketing initiatives
implemented through both our corporate headquarters and our regional offices.
Our marketing organization, which consisted of 9 employees as of October 31,
2001, focuses on creating market awareness for the Versata System, generating
sales leads, forming relationships with leading technology companies, promoting
our e-business automation leadership and educating industry analysts about our
solution. We conduct a variety of marketing initiatives worldwide to educate our
target market. We have engaged in marketing activities such as business
seminars, trade shows, press relations, industry analyst programs, ongoing
public relations, advisory councils, direct mailings and telemarketing, managing
and maintaining our Website, and producing and distributing sales support
materials. Our marketing organization also serves an integral
10
role in acquiring, organizing and prioritizing customer and industry feedback in
order to help provide product direction to our development organizations. We
formalized this customer-driven approach by establishing advisory council
meetings to provide forums for discussing customer needs and requirements.
Advisory council meetings provide a useful forum in which to share information,
test product concepts and collect data on customer and industry needs. We intend
to continue to pursue these programs in the future.
Product Development
The Internet infrastructure industry is characterized by extremely rapid
technological change, which requires constant attention to computing technology
trends, shifting consumer demand, and rapid product innovation.
Most of the Versata's software products are developed internally. We also
license software technology from third parties. Internal development enables us
to maintain closer technical control over the products and gives us the freedom
to designate which modifications and enhancements are most important and when
they should be implemented. Product documentation is also generally created
internally. We believe that a crucial factor in the success of a new product is
getting it to market quickly without compromising product quality. Before
releasing new software, the product undergoes extensive quality assurance and
testing.
Product development expenses, excluding stock-based compensation, totaled
approximately $3.3 million for the year ended December 31, 1998; $4.8 million
for the year ended December 31, 1999; $9.7 million for the year ended December
31, 2000; and $8.8 million for the ten months ended October 31, 2001.
As of October 31, 2001, Versata employed 52 technical professionals in
product development including quality assurance and technical documentation
positions. The Versata product development team has benefited from a low
turnover rate despite the intensely competitive environment for software
engineers.
Competition
The Internet infrastructure software market is intensely competitive,
subject to technological changes and significantly affected by new product
introductions and other market activities of industry participants. We expect
the competition in this industry to persist and intensify in the future. Our
primary competition comes from companies developing their software applications
internally using traditional programming approaches. We also compete with a
number of other sources including:
o vendors of application server development products and services such as
IBM, BEA Systems, Inc., Microsoft, Sun Microsystems, Inc. and Oracle
Corporation;
o vendors of traditional workflow and process applications such as
FileNet, Saviion and Fujitsu;
o vendors of Web integrated development environments such as IBM,
Borland, and WebGain; and
o companies that market business application software such as Oracle
Corporation, PeopleSoft, and SAP.
We believe that the principal competitive factors in our market are:
o product functionality and features;
o ease of product implementation;
o responsiveness to business and technical changes;
o performance, scalability and availability;
o use of standards-based technology;
o ease of integration with customers' existing legacy data, software
applications and middleware computing infrastructure;
o quality of professional services offerings;
11
o quality of customer support services;
o price; and
o Company reputation.
Although we believe that we currently compete favorably with respect to most
of these factors, our market is just reaching the mainstream customer and is
evolving rapidly. We may not be able to maintain our competitive position
against current and potential competitors, especially those with greater
financial, sales, marketing, professional services, technical support, training
and other resources. The risks associated with competition are more fully
discussed in the "Risk Factors" section contained below in this Item 1 of this
Report.
Intellectual Property and Licensing
Intellectual Property
We rely on a combination of patent, copyright, trademark, trade secret laws
and licensing arrangements to establish and protect our intellectual property.
These legal protections afford only limited protection for our technology, and
we cannot provide any assurance that other companies will not develop
technologies that are similar or superior to our technology. If we fail to
protect our proprietary technology, our business could be seriously harmed.
We currently have a U.S. patent relating to our automated development tool
that uses a drag-and-drop metaphor. This patent is scheduled to expire on April
9, 2016. In addition, we have a U.S. patent pending relating to our business
rules automation in database application development and maintenance. It is
possible that other companies could successfully challenge the validity or scope
of our patents and that our patents may not provide a competitive advantage to
us. We cannot predict whether this patent application will result in an issued
patent, or if a patent is issued, whether it will provide any meaningful
protection. We enforce our trademark, service mark and trade name rights. We
have used and applied to register certain trademarks to distinguish our products
from those of its competitors in the U.S. and abroad. Furthermore, as part of
our proprietary protection procedures, we enter into non-disclosure agreements
with our employees, customers, distributors and business partners and into
license agreements with respect to our software, documentation and other
proprietary information. We further seek to avoid disclosure of our intellectual
property by restricting access to our source code. Despite these precautions,
third parties could copy or otherwise obtain and use our products or technology
without authorization, or develop similar technology independently. In addition,
the laws of many countries do not protect our proprietary rights to as great an
extent as do the laws of the U.S.
Currently, we are not aware of any pending claims that our products,
trademarks or other proprietary rights infringe upon the proprietary rights of
third parties. While we rely on patent, copyright, trademark, trade secret laws
and contractual restrictions to protect our technology, we believe that factors
such as the creativity and technological skills of our personnel, new product
developments, frequent product enhancements and reliable customer service and
product maintenance are more essential to establishing and maintaining a
technology leadership position. See the "Risk Factors" section under Item 1 for
a discussion of the risks associated with proprietary rights.
Third Party Licensing
We integrate third-party software into our products. While we believe that
alternative sources of such third-party software is available and based upon
past experience and standard industry practice such licenses generally could be
obtained on commercially reasonable terms, any significant interruption in the
supply of such products could adversely impact our sales of our Products unless
and until we could secure another supplier.
International Operations
We have established international subsidiaries, namely in the British Virgin
Islands, Canada, United Kingdom, Hong Kong, Germany, Australia, France, and
India. All but one of our subsidiaries is wholly owned.
Employees
12
As of October 31, 2001, we had 200 employees and 6 contractors. Of these
individuals, 58 employees and 4 contractors were in sales and marketing, 52
employees were in development and engineering services, 63 employees and 1
contractor were in professional services and customer support, and 30 employees
and 1 contractor were in finance and administration. Our employees are not
represented by any collective bargaining unit, and we believe our relations with
employees are satisfactory.
Risk Factors That May Affect Future Results
We operate in a rapidly changing environment that involves numerous risks,
some of which are beyond our control. The following discussion highlights some
of these risks.
Weakening of World Wide Economic Conditions Realized in the Internet
Infrastructure Software Market May Result in Decreased Revenues or Lower Revenue
Growth Rates.
The revenue growth of our business depends on the overall demand for
computer software, particularly in the product segments in which we compete. Any
slowdown, including the current slowdown, of the worldwide economy affects the
buying decision of corporate customers. Specifically since our sales are
primarily to Global 2000 customers, our business also depends on general
economic and business conditions within specific industries. A reduction in
demand for computer software, caused by a weakening of the economy, such as
occurred in 2001, or otherwise, has resulted in decreased revenues and lower
revenue growth rates.
The Internet Infrastructure Software Market is Highly Competitive and We May
Lose Market Share to Larger Competitors With Greater Resources.
The Internet infrastructure software market in general, and the market for
our software and related services in particular, are new, rapidly evolving and
highly competitive. Many of our competitors have longer operating histories and
significantly greater financial, technical, marketing and other resources than
we do. As a result, they may be able to respond more quickly to new or changing
opportunities, technologies and customer requirements. Many of our competitors
also have more extensive customer bases, broader customer relationships and
broader industry alliances that they could leverage, thereby establishing
relationships with many of our current and potential customers. These companies
also have significantly more established customer support and professional
service organizations. In addition, these companies may adopt aggressive pricing
policies or offer more attractive terms to customers, may bundle their
competitive products with broader product offerings or may introduce new
products and enhancements. Furthermore, current and potential competitors may
establish cooperative relationships among themselves or with third parties to
enhance their products. As a result, it is possible that new competitors or
alliances among competitors may emerge and rapidly acquire significant market
share. If we fail to compete successfully with our competitors, the demand for
our products would decrease. Any reduction in demand could lead to loss of
market share, a decrease in the price of our products, fewer customer orders,
reduced revenues, reduced margins, and increased operating losses. These
competitive pressures could seriously harm our business and operating results.
New Versions and Releases of Our Products May Contain Errors or Defects and
Result in Loss of Revenue.
The software products we offer are complex and, despite extensive testing
and quality control, may have had, and in the future could have errors or
defects, especially when we first introduce them. Typically we need to issue
corrective releases of our software products to fix any defects or errors.
Defects or errors could also cause damage to our reputation, loss of revenues,
product returns or order cancellations, lack of market acceptance of our
products, and expose us to litigation. Accordingly, defects or errors
particularly if they are more numerous than expected could have a material and
adverse effect on our business, results of operations and financial condition.
Our Failure to Accurately Forecast Sales May Lead to a Disappointment of Market
Expectations.
Our Company uses a "pipeline" system, a common industry practice, to
forecast sales and trends in our business. Our sales personnel monitor the
status of all proposals, such as the date when they estimate that a customer
will make a purchase decision and the potential dollar amount of the sale. We
aggregate these estimates periodically in order to generate a sales pipeline. We
compare the pipeline at various points in time to look for trends in our
business. While this pipeline analysis may provide us with some guidance in
business planning and budgeting, these pipeline estimates are necessarily
speculative and may not consistently correlate to revenues in a particular
quarter or over a longer period of time. A variation in the conversion of the
pipeline into contracts or in the pipeline itself
13
could cause our Company to improperly plan or budget and thereby adversely
affect our business or results of operations. In particular, the current
slowdown in the economy is causing purchasing decisions to be delayed, reduced
in amount or cancelled which will therefore reduce the overall license pipeline
conversion rates in a particular period of time.
The Price of Our Common Stock is Volatile and It May Fluctuate Significantly.
The market price of our common stock has fluctuated significantly and has
declined sharply since our initial public offering in March 2000 and more
recently in 2001. Our Company's stock price is affected by a number of factors,
some of which are beyond our control including:
o quarterly variations in results, announcements that our revenue or
income are below analysts' expectations;
o the competitive landscape;
o technological innovations by us or our competitors;
o changes in earnings estimates or recommendations by analysts;
o sales of large blocks of our common stock, sales or the intention to
sell stock by our executives and directors;
o general economic and market conditions;
o additions or departures of key personnel;
o estimates and projections by the investment community; and
o fluctuations in our stock trading volume, which is particularly common
among highly volatile securities of software companies.
As a result, our stock price is subject to significant volatility. In the
past, following periods of volatility or decline in the market price of a
company's securities, securities class action litigation has at times been
instituted against that company. We are currently subject to securities
litigation, and may be subject to additional litigation. This could cause us to
incur substantial costs and experience a diversion of management's attention and
resources.
Our Quarterly Revenues and Operating Results May Fluctuate in Future Periods.
Our revenues are relatively difficult to forecast and vary from quarter to
quarter due to various factors including the:
o relatively long sales cycles for our products;
o size and timing of individual license transactions, the closing of
which tend to be delayed by customers until the end of a fiscal quarter
as a negotiating tactic;
o introduction of new products or product enhancements by us or our
competitors;
o potential for delay or deferral of customer implementations of our
software;
o changes in customer budgets;
o seasonality of technology purchases and other general economic
conditions; and
o changes in our pricing policies or those of our competitors.
Accordingly, our quarterly results are difficult to predict until the end of
the quarter. Delays in product delivery or closing of sales near the end of a
quarter could cause quarterly revenues and net income to fall significantly
short of anticipated levels; and given the current economic slowdown, may well
occur in the foreseeable future.
14
Our license revenues in any quarter are substantially dependent on orders
booked and shipped in that quarter. We typically receive and fulfill a majority
of our orders within the quarter, with the substantial majority of our orders
received in the last month of each fiscal quarter. As a result, we may not learn
of revenue shortfalls until late in a fiscal quarter, after it is too late to
adjust expenses for that quarter. Since our operating expenses are relatively
fixed and are based on anticipated revenue levels, a delay in bookings from even
a small number of license transactions could cause significant variations in
revenues quarter to quarter and could cause net income to fall significantly
short of anticipated levels. As an example, the dollar amounts of large orders
for our products have been increasing and therefore the operating results for a
quarter could be materially adversely affected if a number of large orders are
either not received or are delayed, due to cancellations, delays, or deferrals
by customers. Revenue shortfalls below our expectations could have an immediate
and significant adverse effect on our results of operations.
Our services revenue in any quarter is substantially dependent on our
license revenue. Services are normally purchased in conjunction with software,
although it is not a requirement. Should our license revenues decrease, there
will be a reduced market for our services. Any revenue shortfall in services
could have an immediate and significant adverse effect on our results of
operations.
Our operating results have in the past been, and will continue to be, subject to
quarterly fluctuations as a result of a number of factors. These factors
include:
o competition in the Internet infrastructure software market;
o the integration of people, operations, and products from acquired
businesses and technologies;
o the overall trend toward industry consolidation;
o the introduction and market acceptance of new technologies and
standards;
o variations in mix of products sold; and
o changes in general economic conditions and specific economic conditions
in the Internet infrastructure software market.
Any of the above factors could have a material adverse impact on our
operations and financial results.
The Private Securities Class Action Lawsuits and State Derivative Action Against
Us and Certain of Our Directors and Officers Could Have a Material Adverse
Effect On Our Business, Financial Condition and Results of Operations.
We and certain of our former officers and a director have been named as
defendants in a private securities class action lawsuit. In addition, two
derivative actions on behalf of our Company were filed against certain current
and former officers and directors in the Superior Court for Alameda County,
California. Depending on the outcome of such litigation, we may be required to
pay substantial damages or settlement costs, which could have a material adverse
effect on our financial condition or results of operations. Regardless of the
outcome of these matters, we may incur substantial defense costs and that such
actions may cause a diversion of management time and attention.
Our liability insurance for actions taken by officers and directors provides
only limited liability protection. To the extent that these policies do not
adequately cover our expenses related to any shareholder lawsuits, our business
and financial condition could be seriously harmed. Under Delaware law, in
connection with our charter documents and indemnification agreements we entered
into with our executive officers and directors, we must indemnify our current
and former officers and directors to the fullest extent permitted by law.
Subject to certain conditions, the indemnification may cover expenses and
liabilities reasonably incurred in connection with the investigation, defense,
settlement, or appeal of legal proceedings.
Any Potential Delisting of Versata's Common Stock From the Nasdaq National
Market Could Harm Our Business.
Versata's common stock trades on the Nasdaq National Market, which has
certain compliance requirements for continued listing of common stock, including
a requirement that Versata's common stock have a minimum bid price of $1.00 per
share.
Our Company's common stock has not maintained a minimum bid price of $1.00
over the last consecutive 30 trading days as required by the Nasdaq National
Market. On February 19, 2002 we received a notice on the minimum bid price non-
compliance from Nasdaq National Market. We have until May 20, 2002 to regain
compliance or be subject to delisting procedures subject to Versata's right to
15
appeal. The company does not intend to have the stock delisted and is reviewing
its options, which may include, subject to our stockholders' approval, a reverse
stock split which our board of directors has approved.
If any appeal we file receives an unfavorable determination by NASD and we
are unsuccessful with our reverse stock split, our common stock would be removed
from listing on the Nasdaq National Market that could have a material adverse
effect on us and on the price of our common stock.
We Have Incurred Increasing Operating Losses Since Our Inception and are Likely
to Incur Net Losses and Negative Cash Flows for the Foreseeable Future.
We have experienced operating losses in each quarterly and annual period
since inception. If our revenue grows less than we anticipate or if our
operating expenses increase more than expected or are not reduced in the event
of lower revenue, we may never achieve profitability. As of October 31, 2001, we
had an accumulated deficit of $184.2 million. Although we have an objective of
achieving profitability as soon as practical, we cannot assure you that we will
be successful. In order to achieve and maintain profitability, we will need to
increase revenues while decreasing expenses.
We May Require Future Additional Funding to Stay in Business.
We may require additional financing for our operations. We have not been
operating on a profitable basis and have relied on the sale of stock to finance
our operations. We may need to return to the capital markets in order to receive
additional financing.
This additional financing may not be available to us on a timely basis if at
all, or, if available, on terms acceptable to us. Moreover, additional financing
will cause dilution to existing stockholders.
If We Do Not Develop and Enhance New and Existing Products to Keep Pace With
Technological, Market and Industry Changes, Our Revenues May Decline.
Rapid technological advances in software development, evolving standards in
software technology and frequent new product introductions and enhancements,
characterize the markets for our products. Product introductions and short
product life cycles necessitate high levels of expenditures for research and
development. To maintain our competitive position, we must:
o enhance and improve existing products and continue to introduce new
products that keep pace with technological developments;
o satisfy increasingly sophisticated customer requirements; and
o achieve market acceptance.
The success of new products is dependent on several factors including proper
new product definition, product cost, timely completion and introduction of new
products, differentiation of new products from those of our competitors, and
market acceptance of these products. There can be no assurance that we will
successfully identify new product opportunities, develop and bring new products
to market in a timely manner, and achieve market acceptance of our products or
that products and technologies developed by others will not render our products
or technologies obsolete or noncompetitive. Our inability to run on new or
increasingly popular operating systems, and/or our failure to successfully
enhance and improve our products in a timely manner could have a material
adverse effect on our business, results of operations, financial condition or
cash flows.
If the Versata Products and Related Services Do Not Achieve Widespread Market
Acceptance, the Source of Substantially All of Our Revenue Will be at Risk.
We cannot predict the level of market acceptance that will be achieved or
maintained by our products and services. If either the Internet infrastructure
software market in general, or the market for our software or related services
in particular, fails to grow or grows more slowly than we anticipate, or if
either market fails to accept our products and related services, the source of
substantially all of our revenue will be at risk. We expect to continue to
derive substantially all our revenue from and be dependent upon the Versata
products and related services in the future. The market for the Versata products
and related services is new, rapidly evolving and highly competitive, and we
cannot be certain that a viable market for our products will ever develop or be
sustained. Our future financial performance will depend in large part on the
successful development, introduction and customer acceptance of our new
16
products, product enhancements and related services in a timely and cost
effective manner. We expect to continue to commit significant resources to
market and further develop our products and related services and to enhance the
brand awareness of our software and services.
If Java Technology Does Not Continue to be Widely Adopted for E-business
Application Development, Our Business Will Suffer.
Our products are based on Java technology, an object-oriented software
programming language and distributed computing platform developed by Sun
Microsystems. Java is a relatively new language and was developed primarily for
the Internet and corporate intranet applications. It is still too early to
determine whether Java will achieve greater acceptance as a programming language
and platform for enterprise applications. Alternatives to Java include
Microsoft's C+ language and .net computing platform. Should Java not continue to
be widely adopted, or is adopted more slowly than anticipated, our business will
suffer. Alternatively, if Sun Microsystems makes significant changes to the Java
language or its proprietary technology, or fails to correct defects and
limitations in these products, our ability to continue improving and shipping
our products could be impaired. In the future, our customers also may require
the ability to deploy our products on platforms for which technically acceptable
Java implementations either do not exist or are not available on commercially
reasonable terms.
We Depend On Increased Business From Our Current and New Customers and If We
Fail to Generate Repeat and Expanded Business or Grow Our Customer Base, Our
Product and Services Revenue Will Likely Decline.
In order to be successful, we need to broaden our business by selling
product licenses and services to current and new customers. Many of our
customers initially make a limited purchase of our products and services for
pilot programs. These customers may not choose to purchase additional licenses
to expand their use of our products. These and other potential customers also
may not yet have developed or deployed initial software applications based on
our products. If these customers do not successfully develop and deploy these
initial software applications, they may choose not to purchase deployment
licenses or additional development licenses. In addition, as we introduce new
versions of our products or new products, our current customers may not require
the functionality of our new products and may not license these products.
If we fail to add new customers who license our products, our services
revenue will also likely decline. Our service revenue is derived from fees for
professional services and customer support related to our products. The total
amount of services and support fees we receive in any period depends in large
part on the size and number of software licenses that we have previously sold as
well as our customers electing to renew their customer support agreements. In
the event of a further downturn in our software license revenue or a decline in
the percentage of customers who renew their annual support agreements, our
services revenue could become flat or further decline.
Our Failure to Maintain Ongoing Sales Through Distribution Channels Will Result
in Lower Revenues.
To date, we have sold our products principally through our direct sales
force, as well as through indirect sales channels, such as packaged application
software vendors (ISVs), systems integrators and independent consultants,
application service providers (ASPs) and distributors, particularly IBM. Our
ability to achieve revenue growth in the future will depend in part on our
success in making our direct sales force more efficient and in further
establishing and expanding relationships with distributors, ASPs, ISVs, OEMs and
systems integrators. We intend to seek distribution arrangements with additional
ISVs to embed our Versata Logic Suite and Versata Interaction Suite in their
products. It is possible that we will not be able to increase the efficiency of
our direct sales force or other distribution channels, or secure license
agreements with additional ISVs on commercially reasonable terms. Moreover, even
if we succeed in these endeavors, it still may not increase our revenues. If we
invest resources in these types of expansion and our revenues do not
correspondingly increase, our business, results of operations and financial
condition will be materially and adversely affected.
We rely on informal relationships with a number of consulting and systems
integration firms to enhance our sales, support, service and marketing efforts,
particularly with respect to implementation and support of our products as well
as lead generation and assistance in the sales process. We will need to expand
our relationships with third parties in order to support license revenue growth.
Many such firms have similar, and often more established, relationships with our
principal competitors. It is possible that these and other third parties will
not provide the level and quality of service required to meet the needs of our
customers, that we will not be able to maintain an effective, long term
relationship with these third parties, and that these third parties will not
successfully meet the needs of our customers.
Our Business is Subject to Risks From International Operations.
17
We conduct business internationally. Accordingly, a portion of our revenues
is derived from international sales and is therefore subject to the related
risks including the general economic conditions in each country, the overlap of
different tax structures, the difficulty of managing an organization spread over
various countries, changes in regulatory requirements, compliance with a variety
of foreign laws and regulations, longer payment cycles and volatilities of
exchange rates in certain countries. There can be no assurances that we will be
able to successfully address each of these challenges. Other risks associated
with international operations include import and export licensing requirements,
trade restrictions and changes in tariff rates.
Recent terrorist activities and related military and security operations could
adversely affect our revenues and operations.
As a result of the recent terrorist activities and related military and
security operations, economic activity throughout the United States and much of
the world was substantially disrupted. These events temporarily impacted our
operations and our ability to generate revenues. Any future terrorist activities
or any continued military or security operations involving the U.S. could have a
similar or worse effect on our operating results, particularly if such attacks
or operations occur in the last month or weeks of our fiscal quarter or are
significant enough to further weaken the U.S. or global economy. In particular,
such activities and operations could result in reductions in information
technology spending, and deferrals, reductions or cancellations of customer
orders for our products and services.
If We Infringe the Patents or Proprietary Rights of Others Our Business,
Financial Condition and Operating Results Would be Harmed.
We do not believe our products infringe the proprietary rights of third
parties, but third parties may nevertheless assert infringement claims against
us in the future. Regardless of whether these claims have merit, they can be
time consuming and expensive to defend or settle, and can harm our business and
reputation. Furthermore, we may initiate claims or litigation against third
parties for infringement of our proprietary rights or to establish the validity
of our proprietary rights. Litigation, whether resolved in our favor or not,
could be time-consuming to defend, result in increased costs, divert
management's attention and resources, cause product shipment delays or require
us to enter into unfavorable royalty or licensing agreements.
We May Incur Substantial Expenses If We are Sued for Product Liability.
Our license agreements with our customers typically contain provisions
designed to limit our exposure to potential product liability claims. It is
possible, however, that the limitation of liability provisions contained in our
license agreements may not be effective as a result of existing or future
federal, state or local laws or ordinances or unfavorable judicial decisions.
Although we have not experienced any product liability claims to date, sale and
support of our products entails the risk of such claims, which could be
substantial in light of customers' use of such products in mission-critical
applications. If a claimant brings a product liability claim against us, it
could have a material adverse effect on our business, results of operations and
financial condition. Our products interoperate with many parts of complicated
computer systems, such as mainframes, servers, personal computers, application
software, databases, operating systems and data transformation software. Failure
of any one of these parts could cause all or large parts of computer systems to
fail. In such circumstances, it may be difficult to determine which part failed,
and it is likely that customers will bring a lawsuit against several suppliers.
Even if our software was not at fault, we could suffer material expense and
material diversion of management time in defending any such lawsuits.
Since the Licensing of Our Technology is a Key Component of Sales, Our Business
May Suffer If We Cannot Protect Our Intellectual Property.
Approximately 47% of our revenue for the ten months ended October 31, 2001,
was derived from the license of software products. We rely on a combination of
contractual provisions, confidentiality procedures, and patent, trademark, trade
secret and copyright laws to protect the proprietary aspects of our technology.
We currently have a U.S. patent relating to our automated development tool that
uses a drag-and-drop metaphor. This patent is scheduled to expire on April 9,
2016. In addition, we have a U.S. patent pending relating to our business rules
automation in database application development and maintenance. We cannot
predict whether this patent application will result in an issued patent, or if a
patent is issued, whether it will provide any meaningful protection. Moreover,
these legal protections afford only limited protection, and competitors may gain
access to our intellectual property, which may result in the loss of our
customers.
Despite our efforts to protect our proprietary rights, unauthorized parties
may attempt to copy aspects of our products or to obtain and use our proprietary
information. Litigation may be necessary to enforce our intellectual property
rights, to protect our trade secrets and to determine the validity and scope of
the proprietary rights of others. Any litigation could result in substantial
costs and diversion
18
of resources with no assurance of success and could seriously harm our business
and operating results. In addition, we sell our products internationally, and
the laws of many countries do not protect our proprietary rights as well as do
the laws of the United States. Our patent and future patents, if any, may be
successfully challenged or may not provide us with any competitive advantages.
Item 2. Properties
Our principal executive and administrative offices are located in
approximately 75,000 square feet of office space in Oakland, California, and we
have subleased approximately 50,000 square fee of this space, including 25,000
square feet of which is subleased for the remaining term of our lease. Our
monthly net lease payments on the Oakland facility are approximately $90,000.
This lease expires in August 2008. We also maintain leased offices or an
"executive suite" in Hamburg, Frankfurt, and Neuss (Germany), London and Paris.
We believe that our existing facilities are adequate to meet our current and
projected needs, or that suitable additional or substitute space will be
available as needed.
Item 3. Legal Proceedings
Securities Class Action
Since April 11, 2001, several securities class action complaints were filed
against us, and certain of our current and former officers and directors. In
August 2001, the class action lawsuits were consolidated before one judge in the
United States District Court for the Northern District of California. On October
19, 2001 the lead plaintiffs filed an amended class action complaint naming us,
certain of our former officers and a current director, as defendants. The
amended class action complaint alleges claims under section 10(b) and section
20(a) of the Securities Exchange Act of 1934 and claims under section 11 and 15
of the Securities Act of 1933. The amended complaint seeks an unspecified amount
of damages on behalf of persons who purchased our stock during the class period.
It is premature to come to any conclusions as to the allegations and potential
damages. We intend to defend these actions vigorously. The hearing for our
motion to dismiss the action is set for May 10, 2002. We expensed the deductible
amount of directors' and officers' liability insurance of $350,000 in April
2001.
State Derivative Action
Since June 11, 2001, two derivative actions were filed on our behalf against
certain current and former officers and directors in Superior Court of Alameda
County, California. The complaints also name us as a nominal defendant. The
complaints allege that the defendants breached their fiduciary duties, abused
their control of the corporation, and engaged in gross mismanagement of the
corporation, by allegedly making or permitting the Company to make false
financial statements and seek, among other things, compensatory damages. On
November 7, 2001, the state court issued an Order granting Versata's Motion to
Stay Proceedings in the consolidated derivative action until the earlier of the
filing of an answer by Versata in the Federal action or dismissal of that
action.
With the exception of the $350,000 discussed above, no estimate can be made
of the ultimate loss or possible range of ultimate loss associated with the
resolution of these contingencies.
Litigation and other claims
We are also subject to legal proceedings and claims, either asserted or
unasserted, which arise in the ordinary course of business. While the outcome of
these proceedings and claims cannot be predicted with certainty, management does
not believe that the outcome of any of these legal matters will have a material
adverse effect on our consolidated results of operations or consolidated
financial position. We intend to defend these actions vigorously.
Item 4. Submission of Matters to a Vote of Security Holders
None.
19
PART II
Item 5. Market for Registrant's Common Stock and Related Stockholder Matters
(a) Price Range of Common Stock
Our common stock is listed on the Nasdaq National Market under the symbol
"VATA." Public trading of our common stock commenced on March 3, 2000. Prior to
that date, there was no public market for our common stock. The following table
sets forth, for the periods indicated, the high and low sale price per share of
our common stock on the Nasdaq National Market:
High Low
---- ---
Ten Months Ended October 31, 2001:
First Quarter (from January 1 through March 31, $ 9.38 $ 0.20
2001..............................................
Second Quarter (from April 1 through June 30, 1.75 0.20
2001).............................................
Third Quarter (July 1 through September 30, 2001) 0.85 0.20
High Low
---- ---
Year Ended December 31, 2000:
First Quarter (from March 3, 2000).............. $100.94 $52.13
Second Quarter.................................. 60.19 12.00
Third Quarter................................... 47.50 19.13
Fourth Quarter.................................. 26.38 3.88
We believe that a number of factors may cause the market price of our common
stock to fluctuate. See "Item 1. Business-- Risk Factors." As of March 20, 2002,
there were 461 holders of record of our common stock.
We have never paid or declared any cash dividends on our common stock or
other securities and do not anticipate paying cash dividends in the foreseeable
future. We currently intend to retain all future earnings, if any, for use in
the operations of our business.
(b) Use of Proceeds from Sales of Registered Securities
On March 2, 2000 the Securities and Exchange Commission declared effective
our Registration Statement on Form S-1 (File No. 333-92451) relating to our
initial public offering of our common stock. The 4,427,500 shares offered by us
under the Registration Statement were sold at a price of $24.00 per share. The
aggregate proceeds to the Company from the offering were $97,100,000 after
deducting the underwriting discounts and commissions of $7,438,200 and expenses
incurred in connection with the offering of approximately $1,721,800. The
Company closed its initial public offering on March 8, 2000.
Versata has invested the net proceeds from its initial public offering in
interest-bearing investment-grade instruments. The net proceeds generated from
the offering have been used primarily to fund the Company's working capital,
capital expenditures and general corporate needs. In addition, the Company paid
approximately $1,176,000 in connection with the acquisition of Verve, Inc.
Recent Sales of Unregistered Securities
None.
Item 6. Selected Financial Data and Supplementary Data
You should read the following selected financial data in conjunction with
the consolidated financial statements and related notes and "Management's
Discussion and Analysis of Financial Condition and Results of Operations." The
statement of operations data for the years ended December 31, 2000, 1999, and
1998 and for the ten months ended October 31, 2001, and the balance sheet data
at December 31, 1999 and 2000 and October 31, 2001 are derived from the audited
financial statements included elsewhere in this Transition Report on Form 10-K.
The statement of operations data for the years ended December 31, 1996, 1997 and
1998, and the balance sheet data at December 31, 1996, 1997, 1998 and 1999 are
derived from audited financial statements not included in this Transition Report
on Form 10-K.
20
Ten Months Year Ended December 31,
Ended --------------------------------------------------------------------
October 31, 2000 1999 1998 1997 1996
------------ ----------- ----------- ---------- ----------- ----------
2001 (a)
--------
(In thousands)
Consolidated Statement of
Operations Data:
Revenue............................ $ 29,380 $ 56,608 $ 12,582 $ 3,950 $ 1,406 $ 1,124
---------- ---------- ---------- --------- ---------- ---------
Loss from operations............... (64,317) (72,903) (21,496) (7,883) (10,012) (9,203)
Net loss........................... (62,876) (67,901) (21,800) (8,134) (9,844) (9,013)
Net loss attributable to common
Stockholders..................... (62,876)(c) (67,901) (32,600) (8,134) (9,844) (9,013)
---------- ---------- ---------- --------- ---------- ---------
Basic and diluted net loss per
share............................ $ (1.56) $ (2.06) $ (9.18) $ (3.99) $ (5.72) $ (6.05)
========== ========== ========== ========= ========== =========
As of As of December 31,
------------------------------------------------------
October 2000 1999 1998 1997 1996
-------- ----------- --------- -------- -------- ------
31, 2001
--------
(In thousands)
Balance Sheet Data:
Cash and cash equivalents............. $ 21,871 $ 39,272(b) $ 20,655 $ 5,767 $ 2,388 $ 1,332
Working capital....................... 14,824 57,958 16,215 3,878 835 54
Total assets.......................... 45,782 119,839 33,660 8,468 4,235 3,374
Total long-term liabilities........... 1,850 218 320 498 1,175 612
Stockholders' equity.................. 28,790 87,545 19,418 4,356 889 820
----------
(a) In December 2001, we changed our fiscal year-end from December 31 to
October 31.
(b) Cash and cash equivalents rose as a result of net cash raised during
Initial Public Offering of $97.1 million, offset by increasing
operating expenses.
(c) Net loss for the ten months ended October 31, 2001 reflects
restructuring and other non-recurring expenses of $19.7 million and
impairment charge of $4.1 million.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Overview
We provide software and services that accelerate and simplify the way
business logic is developed and maintained for enterprise applications. Business
logic is an umbrella term referring to the aggregated set of business rules and
business processes that govern and define a business' operations. Business logic
is a critical part of today's new generation of enterprise applications, which
are increasingly built in the Java 2 Enterprise Edition (J2EE) programming
language.
From our incorporation in August 1991 through December 1994, we were a
professional services company and generated revenue from technical consulting
projects. In January 1995, we commenced development efforts on our initial
software products, from which we generated revenue from in late 1995 through
early 1998. In September 1996, we began development of our first Web-based
software product, which we began shipping commercially in September 1997. In
September 1998, we introduced the first generation of what is now our suite of
software products. To date, we have licensed our products and provided services
to over 500 customers around the world.
21
On December 31, 2001, Versata announced a change in its fiscal year end from
December 31 to October 31. The change was effective for the ten-month period
ended October 31, 2001. Versata had previously released results for the three
months ended March 31, June 30 and September 30 of 2001. The comparisons in this
transition report will be for the ten-month period ended October 31, 2001 and
the twelve-month periods ended December 31, 2000, 1999 and 1998.
We derive our revenue from the sale of software product licenses and from
related services. Our software is generally priced on a per central processing
unit (CPU) basis. Software license revenue also includes product maintenance,
which provides the customer with unspecified software upgrades over a specified
term, typically twelve months. Services revenue consists of fees from
professional services, and customer support. Professional services include
consulting, training, mentoring, staff augmentation and project management or
rapid requirements development to complete turnkey solution services. Customers
typically purchase these professional services from us to enlist our support by
way of training and mentoring activities directed at optimizing the customer's
use of our software product. Professional services are sold generally on a
time-and-materials basis, while customer support is priced based on the
particular level of support chosen by the customer.
As of October 31, 2001, we had deferred revenue of $6.2 million, a decrease
of $2.5 million from $8.7 million at December 31, 2000. The decrease is
principally attributable to slow sales during the period.
We market our products and services through our direct sales force,
international distributors, consulting and system integration partners,
companies that sell pre-packaged software applications, companies that custom
develop and integrate software applications and companies that sell software
applications over the Internet on a subscription services basis, often referred
to as application service providers.
While revenues from international sales have increased during the years
ended December 31, 2000, 1999 and 1998 and for the ten months ended October 31,
2001, our revenues to date have been derived predominantly from customers in the
United States. Net revenues from international sales represented 31%, 22%, 14%
and 9% of our total revenue for the ten months ended October 31, 2001, and the
years ended December 31, 2000, 1999 and 1998, respectively.
Our cost of software license revenue consists of royalty payments to third
parties for technology incorporated into our products, the cost of manuals and
product documentation, as well as packaging, distribution and electronic
delivery costs. Our cost of service revenue consists of salaries of professional
service personnel and payments to third party consultants incurred in providing
customer support, training, and consulting services. Cost of services revenue as
a percentage of services revenue is likely to vary significantly from period to
period depending on overall utilization rates, the mix of services we provide
and whether these services are provided by us or by third-party contractors.
Since our inception, we have incurred substantial costs to develop our
technology and products, to recruit and train personnel for our product
development, sales and marketing and professional services departments, and to
establish our administrative infrastructure. To date, all software development
costs have been expensed in the period incurred. Historically, our operating
expenses have exceeded the revenue generated by our products and services. As a
result, we have incurred net losses in each quarter since inception and had an
accumulated deficit of $184.2 million as of October 31, 2001 and $121.3 million
and $53.4 million as of December 31, 2000, and December 31, 1999, respectively.
In January 2001, we implemented a cost cutting initiative that included a
reduction in total staff of approximately 70 people, or 13% of the total
workforce. This reduction impacted all departments, but primarily reflected a
shift in the strategy of our services organization.
In March 2001, we announced a restructuring effort to realign our expenses
with a business plan geared to the changing economy. This restructuring was
designed to align the workforce with customer needs and focus on core business
products. The restructuring plan included the discontinuation of further
development of non-core business products, facility consolidations, and a
reduction in total staff, including domestic and international employees and
contractors, including staff in our subsidiaries, of approximately 107 positions
across all departments. We expensed $6.9 million for restructuring and other
expenses in the three months ended March 31, 2001.
In May 2001, we further reduced staff by approximately 50 positions, across
all departments, and closed additional field offices. We expensed $3.5 million
for restructuring and other expenses in the three months ended June 30, 2001.
22
In August 2001, we again reduced staff by 20%, 43 positions in the United
States and 17 positions internationally. We expensed an additional $5.3 million
in restructuring and other costs.
In October 2001 an additional 46 positions were eliminated, 25 in the United
States and 21 positions internationally.
In January 2002, we eliminated 40 positions, or 23% of our workforce. We
expensed an additional $309,000 in restructuring and other expenses relating to
this reduction.
Results of Operations
The following table sets forth, for the periods indicated, certain items
from the consolidated statements of operations of Versata expressed as a
percentage of total revenues:
Ten Months Year Ended
Ended -------------------------------------------
October December December 31, December 31,
31, 2001 31, 2000 1999 1998
-------- -------- ---- ----
Revenue:
Software license............................... 47.3% 47.4% 53.5% 48.7%
Services....................................... 52.7 52.6 46.5 51.3
--------- --------- ---------- ----------
Total Revenue.......................... 100.0 100.0 100.0 100.0
Cost of revenue
Software license............................... 0.7 1.9 4.0 5.9
Services....................................... 59.8 53.9 48.6 56.9
--------- --------- ---------- ----------
Total cost of revenue.................. 60.5 55.8 52.6 62.8
--------- --------- ---------- ----------
Gross profit..................................... 39.5 44.2 47.4 37.2
--------- --------- ---------- ----------
Operating expense:
Sales and marketing............................ 90.2 82.5 124.1 113.8
Product development............................ 29.9 17.2 37.9 82.9
General and administrative..................... 36.0 22.4 24.8 34.9
Stock-based compensation....................... 5.6 45.1 31.4 5.1
Amortization of intangibles.................... 29.6 2.4 - -
Impairment of investment....................... - 1.8 - -
Restructuring and other nonrecurring expenses.. 67.0 1.6 - -
--------- --------- ---------- ----------
Total operating expense................ 258.3 173.0 218.2 236.7
--------- --------- ---------- ----------
Loss from operations............................. (218.9) (128.8) (170.8) (199.5)
Other income (expense), net...................... 4.9 8.9 (2.5) (6.4)
--------- --------- ---------- ----------
Net loss......................................... (214.0)% (119.9)% (173.3)% (205.9)%
========= ========= ========== ==========
Ten Months Ended October 31, 2001 Compared to Twelve Months Ended December 31,
2000
On December 31, 2001, we announced a change in our fiscal year from December 31
to October 31. The change was effective for the ten-month period ended October
31, 2001. We had previously released results for the three months ended March
31, June 30, and September 30 of 2001. The comparisons in the comments below are
comparing the ten months ended October 31, 2001 to the twelve months ended
December 31, 2000.
Revenue
Total Revenue. Total revenue consists of software license revenue and
services revenue. Total revenue for the ten months ended October 31, 2001
decreased by $27.2 million, or 48%, to $29.4 million from $56.6 million for the
year ended December 31, 2000. This decrease was principally attributable to
decreased Information Technology (IT) spending and overall economic and market
conditions. As a percentage of total revenue, software license revenue was 47%
for the ten months ended October 31, 2001 and 47% for the year ended December
31, 2000, respectively, while services revenue was 53% and 53%, respectively.
Software License Revenue. Software license revenue decreased by $12.9
million, or 48%, from $26.8 million in 2000 to $13.9 million for the ten months
ended October 31, 2001. This decrease was primarily attributable to decreased IT
spending and overall
23
economic and market conditions. License revenue from international sales
decreased by $1.2 million or approximately 17% from $7.0 million in 2000 to $5.8
million for the ten months ended October 31, 2001.
Services Revenue
Services Revenue. Services revenue decreased by $14.3 million, or 48.0%,
from $29.8 million in 2000 to $15.5 million for the ten months ended October 31,
2001. This trend for professional services, and more specifically for our
consulting unit, represents our ongoing efforts to reduce our volatility within
this business by referring work to third parties and accepting only profitable
assignments. The level of our new software sales also impacts our services
revenue.
Cost of Revenue
Total Cost of Revenue. Total cost of revenue consists of cost of software
license revenue and cost of service revenue. Total cost of revenue decreased by
$13.8 million, or 44%, from $31.6 million in 2000 to $17.8 million for the ten
months ended October 31, 2001. This decrease was mainly attributable to a lower
volume of sales for the ten months ended October 31, 2001 as compared to the
year ended December 31, 2000.
Cost of Software License Revenue. Cost of software license revenue consists
of royalty payments to third parties for technology incorporated into our
product, the cost of manuals and product documentation, as well as packaging and
distribution costs. Cost of software license revenue decreased by $882,000 or
81%, from $1.1 million in 2000 to $206,000 for the ten months ended October 31,
2001. These decreases were attributable to lower direct costs associated with
lower volume of sales.
Cost of Services Revenue. Cost of service revenue consists of salaries and
overhead costs of professional service personnel and payments to third-party
consultants incurred in providing customer support, training and consulting
services. Cost of service revenue decreased by $13.0 million, or 42%, from $30.5
million in 2000 to $17.6 million in the ten months ended October 31, 2001. This
decrease is as a result of the restructuring initiatives initiated by management
in January 2001 in response to the revenue declines.
Gross Profit
Gross profit. Gross profit decreased by $13.4 million, or 54%, from $25.0
million in 2000 to $11.6 million for the ten months ended October 31, 2001. As a
percentage of total revenue, gross margin decreased by 4% from 44% in 2000 to
40% for the ten months ended October 31, 2001. The decrease in gross profit
results primarily from fixed costs, such as customer support personnel, and the
higher percentage of third-party partners employed on our jobs at higher cost
than company employees.
Operating Expenses
Operating expenses. Operating expenses decreased by $22.0 million, or 22%,
from $97.9 million in 2000 to $75.9 million in the ten months ended October 31,
2001. The majority of this decrease was due to cost-cutting initiatives and
reductions in force. As a percentage of revenue, operating expenses increased
from 173.0% in 2000 to 258.5% for the ten months ended October 31, 2001.
Excluding the restructuring and other nonrecurring expenses, operating expenses
for the ten months ended October 31, 2001 were $56.2 million, a 41% decrease
from $95.6 million in 2000.
Sales and Marketing. Sales and marketing expense includes salaries,
commissions, expense from our sales offices, travel and entertainment expense,
marketing programs and recruitment expenses. Sales and marketing expenses
decreased by $20.2 million, or 43%, from $46.7 million in 2000 to $26.5 million
for the ten months ended October 31, 2001. These decreases were largely
attributable to a $4.8 million reduction in salary expense and $3.3 million
reduction in travel and entertainment expense due to reduction in workforce. In
addition, these expenses decreased as a result of decreased spending on
marketing programs of $4.1 million and $4.2 million reduction in sales
commissions related to the decrease in revenue. As a percentage of revenue,
sales and marketing expense increased from 82.5% in 2000 to 90.2% for the ten
months ended October 31, 2001 due to the fixed nature of marketing costs that
were not proportionate to lower sales volume.
Product Development. Product development expenses include costs associated
with the development of new products, enhancements to existing products, quality
assurance and technical publication activities. These costs consist primarily of
employee salaries and the cost of consulting resources that supplement our
product development teams. Product development expense decreased by $934,000, or
10%, from $9.7 million in 2000 to $8.8 million for the ten months ended October
31, 2001. This decrease was
24
primarily attributable to the reduction in workforce, including use of
third-party consultants, during the ten months ended October 31, 2001. As a
percentage of total revenue, product development expense increased from 17.2% in
2000 to 29.9% in the ten months ended October 31, 2001, as product development
expense was spread across a significantly smaller revenue base in the ten months
ended October 31, 2001. To date, all software development costs have been
expensed in the period incurred.
General and Administrative. General and administrative expenses consist of
salaries for executive, finance and administrative personnel, information
systems costs and bad debt expense. General and administrative expenses
decreased by $2.1 million, or 16%, from $12.7 million in 2000 to $10.6 million
for the ten months ended October 31, 2001. This decrease was primarily due to a
reduction in salary expense of $290,000 related to reduction in force and a
decrease in bad debt expense of $624,000 as a result of lower sales volume and
focused collection efforts. As a percentage of total revenue, general and
administrative expenses increased from 22.4% in 2000 to 36.0% for the ten months
ended October 31, 2001, as we continue to spread our relatively fixed costs
across a significantly smaller revenue base during the ten months ended October
31, 2001.
Stock-Based Compensation. Stock-based compensation expense includes the
amortization of unearned employee stock-based compensation offset by reversals
of previously expensed amounts for cancellations of the related options. The
impact of variable accounting for the stock appreciations rights assumed on the
acquisition of Verve is also included in this caption. Employee stock-based
compensation expense is amortized on an accelerated basis over the vesting
period of the related options, generally 50 months. Stock-based compensation
expense also includes expenses for stock granted to consultants in exchange for
services. We incurred a non-cash charge of $1.7 million for the ten months
ended October 31, 2001 as compared to $25.5 million in 2000. The decrease
primarily relates to the impact of option cancellations for terminated
employees. As of October 31, 2001, additional unvested outstanding options were
scheduled to vest over the next 31 months, which will result in additional
compensation expenses of approximately $2.6 million in the aggregate in periods
subsequent to October 31, 2001. This future expense will be reduced in the event
of related option cancellations for employee terminations in the future.
Amortization of Intangibles and Impairment Charge. We incurred non-cash
amortization charges of $4.6 million for the ten months ended October 31, 2001.
This included straight-line amortization of intangible assets from the
acquisitions of Verve, Inc., our French distributor, and several consulting
groups. In addition, we had an impairment writedown under SFAS No.121 of $4.1
million. The charge was based upon the estimated discounted cash flows over the
remaining useful life of the goodwill using a discount rate of 20%. The
assumptions supporting the cash flows, including the discount rate, were
determined using the Company's best estimate as of such date. Intangible assets
(purchased technology) of approximately $3.9 million, attributable to the Verve
acquisition, will continue to be charged to operations ratably over the period
of benefit, which is three years.
Restructuring and Other Nonrecurring Expenses. Restructuring and other
nonrecurring expenses consists of severance, expenses relating to office
closures, write-down of fixed assets, and other one-time charges. We had
nonrecurring expenses of $19.7 million for the ten months ended October 31,
2001, and $1.9 million for the year ended December 31, 2000.
Interest income (expense), net. Interest income (expense), net is primarily
comprised of interest income from our cash and investments, offset by interest
paid on our equipment loan and capital lease obligations. We had interest income
of $1.8 million for the ten months ended October 31, 2001, compared to interest
income of $5.2 million for 2000. This decrease was principally due to the
gradually reduced cash balance for the ten months ended October 31, 2001.
Provision for Income Taxes. We have incurred operating losses for all
periods from inception through October 31, 2001. We have recorded a valuation
allowance for the full amount of our deferred tax assets, as the future
realization of the tax benefits is uncertain.
Year Ended December 31, 2000 Compared to Year Ended December 31, 1999
Revenue
Total Revenue. Total revenue consists of software license revenue and
services revenue. Total revenue increased by $44.0 million, or 349.9%, from
$12.6 million for the year ended December 31, 1999 to $56.6 million in 2000.
This increase was principally attributable to the continued growth in new
customers, repeat business from existing customers and rapid growth in
international markets. As a percentage of total revenue, software license
revenue was 47.4% and 53.5% in 2000 and 1999, respectively, while services
revenue was 52.6% and 46.5%, respectively.
Software License Revenue. Software license revenue increased by $20.1
million, or 298.5%, from $6.7 in 1999 to $26.8 million in 2000. This increase
was primarily attributable to growth in both the number of licenses sold as well
as higher average sales prices realized for software licenses. Software license
revenue also benefited from the expansion of our distribution channels through
the
25
addition of several consulting and system integration partners. Software license
revenue in the fourth quarter in 2000 declined from the third quarter in 2000.
As a result of the rapid growth of our international operations, software
license revenue from international sales increased by $5.4 million or 335% from
$1.6 million in 1999 to $7.0 million in 2000.
Services Revenue. Services revenue increased by $23.9 million, or 409.0%,
from $5.8 million in 1999 to $29.8 million in 2000. This increase was
attributable to growth in the number of customers and support contracts and is
also due to the expansion of our professional services organization as a result
of our hiring additional consultants and acquiring two consulting firms in early
2000. Service revenue declined significantly in fourth quarter 2000 from third
quarter 2000. Services revenue from international sales increased by $5.1
million or approximately 2,380% from $215,000 in 1999 to $5.3 million in 2000.
Cost of Revenue
Total Cost of Revenue. Total cost of revenue consists of cost of software
license revenue and cost of service revenue. Total cost of revenue increased by
$25.0 million, or 377.4%, from $6.6 million in 1999 to $31.6 million in 2000.
This increase was attributable to a larger volume of sales in 2000 as compared
to 1999.
Cost of Software License Revenue. Cost of software license revenue consists
of royalty payments to third parties for technology incorporated into our
product, the cost of manuals and product documentation, as well as packaging and
distribution costs. Cost of software license revenue increased by $589,000 or
118.0%, from $499,000 in 1999 to $1.1 million in 2000. These increases were
attributable to a larger volume of sales in 2000 as compared to 1999.
Cost of Services Revenue. Cost of service revenue consists of salaries of
professional service personnel and payments to third party consultants incurred
in providing customer support, training, and consulting services. Cost of
services revenue excludes stock-based compensation of $7.4 million in 2000 and
$515,000 in 1999 related to option grants to employees and consultants engaged
in services activities. Cost of service revenue increased by $24.4 million, or
398.5%, from $6.1 million in 1999 to $30.5 million in 2000. This increase was
principally due to an increase in the number of our consulting, training and
customer support personnel and due to the expansion of our consulting services
organization through additions of two consulting and training services
organizations during the first quarter of 2000.
Gross Profit
Gross profit. Gross profit increased $19.0 million, or 319.4%, from $6.0
million in 1999 to $25.0 million in 2000. As a percentage of total revenue,
gross margin decreased slightly by 3.2% from 47.4% in 1999 to 44.2% in 2000. The
decrease in gross profit results primarily from greater fixed costs in the cost
of services such as customer support personnel and certain costs to fulfill
obligations related to a small number of fixed price engagements.
Operating Expenses
Operating expenses. Operating expenses increased by $70.5 million, or
256.6%, from $27.5 million in 1999 to $97.9 million in 2000. The majority of
this increase was due to increased investments in our sales and marketing
operations and an increase in the amortization of unearned non-cash stock-based
compensation of $25.5 million. The balance of the increases was due to increased
investments in product development and general and administrative
infrastructure. As a percentage of revenue, operating expenses decreased from
218.2% in 1999 to 173.0% in 2000, as we continued to spread our operating
expenses across a significantly larger revenue base. Excluding the non-cash
charges relating to stock-based compensation of $25.5 million, impairment of
investment of $1.0 million, and nonrecurring expenses of $937,000, operating
expense in 2000 was $70.5 million, a 199.8% increase over $23.5 million in 1999.
Sales and Marketing. Sales and marketing expenses consist of salaries,
commissions, and sales offices, travel and entertainment expense and marketing
programs. Sales and marketing expenses exclude stock-based compensation of $13.2
million in 2000 and $2.4 million in 1999 related to option grants to employees
engaged in sales and marketing activities. Sales and marketing expenses
increased by $31.1 million, or 199.3%, from $15.6 million in 1999 to $46.7
million in 2000. This increase was attributable to growth in the number of sales
employees in North America, an increase in commissions and travel expense
resulting from an increase in revenue, and expansion of our international sales
operations during 2000. As a percentage of total revenue, sales and marketing
expense decreased from 124.1% in 1999 to 82.5% in 2000, due to higher overall
sales productivity and a significantly larger revenue base in the year 2000.
26
Product Development. Product development expenses include costs associated
with the development of new products, enhancements to existing products, quality
assurance and technical publication activities. These costs consist primarily of
employee salaries and the cost of consulting resources that supplement our
product development teams. Product development expense excludes stock-based
compensation of $3.1 million in 2000 and $815,000 in 1999 related to option
grants to employees engaged in product development activities. Product
development expense increased by $4.9 million, or 104%, from $4.8 million in
1999 to $9.7 million in 2000. This increase was primarily attributable to an
increase in the number of personnel in Versata's product development and
engineering organization. As a percentage of total revenue, product development
expense decreased from 37.9% in 1999 to 17.2% in 2000, as product development
expense was spread across a significantly larger revenue base in the year 2000.
To date, all software development costs have been expensed in the period
incurred.
General and Administrative. General and administrative expenses consist of
salaries for executive, finance and administrative personnel, information
systems costs and allowance for doubtful accounts. General and administrative
expenses exclude stock-based compensation of $1.8 million in 2000 and $274,000
in 1999 related to option grants to employees engaged in general and
administrative activities. General and administrative expenses increased by $9.6
million, or 305.6%, from $3.1 million in 1999 to $12.7 million in 2000. This
increase was primarily attributable to a growing number of employees, as well as
an increase in the provision for bad debts of $300,000 as our revenue and
accounts receivable grew. As a percentage of total revenue, general and
administrative expense decreased from 24.8% in 1999 to 22.4% in 2000, as we
continued to spread our costs across a significantly larger revenue base in the
2000 period.
Stock-Based Compensation. Stock-based compensation expenses include the
amortization of unearned employee stock-based compensation and expenses for
stock granted to consultants in exchange for services. Employee stock-based
compensation expenses are amortized on an accelerated basis over the vesting
period of the related options, generally 50 months. We incurred a non-cash
charge of $25.5 million for year ended December 31, 2000 as compared to $4.0
million in 1999. The increase relates to the issuance of stock options with
exercise prices below fair market value on the date of grant throughout 1999 and
the first quarter of 2000.
Amortization of Intangibles. We incurred non-cash charges of $1.3 million in
2000 for the amortization of intangibles related to the acquisitions of Pragma 6
in the fourth quarter of 1999, the acquisitions of McGilly and Webink in the
first quarter of 2000 and the acquisition of Verve, Inc. in the fourth quarter
of 2000. There were no such charges in the comparable periods in 1999.
Impairment of Investment. Impairment of investment consists of an impairment
charge for an investment in the preferred stock of a privately held corporation
of $1.0 million.
Restructuring and Other Nonrecurring Expenses. Nonrecurring expenses
primarily consist of expenses relating to office relocation costs. We had
nonrecurring expenses of $900,000 in 2000. There were no such charges in 1999.
Interest income (expense), net. Interest income (expense), net is primarily
comprised of interest income from our cash and investments, offset by interest
paid on our equipment loan and capital lease obligations. We had interest
expense of $304,000 in 1999 compared to net interest income of $5.1 million for
year ended December 31, 2000. This increase was principally due to interest
income earned from higher cash balances resulting from our initial public
offering in the first quarter of 2000.
Provision for Income Taxes
We have incurred operating losses for all periods from inception through
December 31, 2000. We have recorded a valuation allowance for the full amount of
our deferred tax assets, as the future realization of the tax benefits is
uncertain.
Year Ended December 31, 1999 Compared to the Year Ended December 31, 1998
Revenue
Total revenue. Total revenue consists of software license revenue and
services revenue. Total revenue increased by $8.6 million, or 218.5%, from $4.0
million in 1998 to $12.6 million in 1999. This increase was primarily
attributable to an increase in our customer base and in the average sales prices
of the software we sold, which was largely the result of the release of an
upgrade of our software product in September 1998. As a percentage of total
revenue, software license revenue was 53.5% and 48.7% in 1999 and 1998,
respectively, while services revenue was 46.5% and 51.3%, respectively.
27
Software License Revenue. Software license revenue increased by $4.8
million, or 249.7%, from $1.9 million in 1998 to $6.7 million in 1999. This
increase was primarily attributable to growth in both the number of licenses
sold as well as higher average sales prices realized for software licenses.
Software license revenue also benefited from the expansion of our distribution
channels, through the addition of consulting partners, systems integrators and
value added resellers. As a result of an increase in the number of international
distributors selling our product, revenue from international sales increased by
$1.3 million, or 428.1%, from $295,000 in 1998 to $1.6 million in 1999. As a
percentage of software license revenue, international sales increased from 15.3%
in 1998 to 23.2% in 1999.
Services Revenue. Services revenue increased by $3.8 million, or 188.9%,
from $2.0 million in 1998 to $5.8 million in 1999. This increase was
attributable to growth in the number of our customers and support contracts from
direct sales efforts. Services revenue from international customers increased by
$154,000, or 252.5%, from $61,000 in 1998 to $215,000 in 1999.
Cost of Revenue
Total cost of revenue. Total cost of revenue consists of cost of software
license revenue and cost of services revenue. Total cost of revenue increased by
$4.1 million, or 166.7%, from $2.5 million in 1998 to $6.6 million in 1999. This
increase was attributable to a larger volume of sales in the current year as
compared to the same period last year.
Cost of Software License Revenue. Cost of software license revenue consists
of royalty payments to third parties for technology incorporated into our
product, the cost of manuals and product documentation, as well as packaging and
distribution costs. Cost of software license revenue increased by $265,000, or
113.2%, from $234,000 in 1998 to $499,000 in 1999. This increase was
attributable to a larger volume of sales orders in 1999. Gross profit on
software license revenue increased by $4.5 million, or 268.6%, from $1.7 million
in 1998 to $6.2 million in 1999. Gross profit as a percentage of software
license revenue increased from 87.8% in 1998 to 92.6% in 1999. This increase
reflected our lower third-party royalty fees associated with the new version of
our software released in September 1998.
Cost of Services Revenue. Cost of services revenue consists of salaries of
professional services personnel and payments to third-party consultants incurred
in providing customer support, training, and consulting services. Cost of
services revenue excludes stock based compensation of $515,000 in 1999 and
$64,000 in 1998 related to option grants to employees and consultants engaged in
services activities. Cost of services revenue increased by $3.9 million, or
172.2%, from $2.2 million in 1998 to $6.1 million in 1999. This increase was
principally due to an increase in the number of our consulting, training and
customer support personnel from 15 at December 31, 1998 to 57 at December 31,
1999, reflecting the increase in consulting services that we provided in 1999.
Gross Profit
Gross profit. Gross profit increased $4.5 million, or 306.1%, from $1.5
million in 1998 to $6.0 million in 1999. As a percentage of total revenue, gross
margin increased from 37.2% to 47.4% in 1998 and 1999, respectively. This
increase reflects the efficiencies gained in connection with an increase in
revenue base and higher average rates charged for the services.
Operating Expenses
Operating expenses. Operating expenses increased by $18.1 million, or
193.6%, from $9.4 million in 1998 to $27.5 million in 1999. This increase was
principally due to increased investment in our sales and marketing operations
and amortization of unearned stock-based compensation of $4.0 million. As a
percentage of revenue, operating expenses decreased from 236.7% in 1998 to
218.2% in 1999, as we spread our operating expenses across a significantly
larger revenue base in 1999.
Sales and Marketing. Sales and marketing expenses consist of salaries,
commissions, sales offices, travel and entertainment expense and marketing
programs. Sales and marketing expenses exclude stock-based compensation of
$74,000 in 1998 and $2.4 million in 1999 related to option grants to employees
engaged in sales and marketing activities. Sales and marketing expenses
increased by $11.1 million, or 247.3%, from $4.5 million in 1998 to $15.6
million in 1999. Of this increase, $6.5 million was due to increases in payroll
and related costs, travel costs and costs related to the growth in the number of
sales and marketing personnel, $1.3 million was due to increased marketing
programs to increase market awareness of our products, and $1.2 million was due
to increased commissions as a result of higher sales volumes. As a percentage of
total revenue, sales and marketing expense increased from 113.8% in 1998 to
124.1% in 1999.
28
Product Development. Product development expenses include costs associated
with the development of new products, enhancements to existing products, quality
assurance and technical publication activities. These costs consist primarily of
employee salaries and the cost of consulting resources that supplement our
product development teams. Product development expense excludes stock-based
compensation of $49,000 in 1998 and $815,000 in 1999 related to option grants to
employees engaged in product development activities. Product development expense
increased by $1.5 million, or 45.6%, from $3.3 million in 1998 to $4.8 million
in 1999. This increase was primarily attributable to increases in the number of
personnel to support product development and engineering activities, from 20 at
December 31, 1998 to 32 at December 31, 1999. As a percentage of total revenue,
product development expense decreased from 82.9% in 1998 to 37.9% in 1999, as
product development expense was spread across a significantly larger revenue
base in the 1999 period.
General and Administrative. General and administrative expenses consist of
salaries for executive, administrative and finance personnel, information
systems costs, professional service fees and allowance for doubtful accounts.
General and administrative expenses exclude stock-based compensation of $15,000
in 1998 and $274,000 in 1999 related to option grants to employees engaged in
general and administrative activities. General and administrative expenses
increased by $1.7 million, or 126.6%, from $1.4 million in 1998 to $3.1 million
in 1999. This increase was primarily attributable to the increases in legal and
accounting fees and in our allowance for doubtful accounts, which we increased
to $886,000 as of December 31, 1999. This increase occurred in response to the
broadening of our customer base and related increase in our accounts receivable
balance. As a percentage of total revenue, general and administrative expense
decreased from 34.9% in 1998 to 24.8% in 1999, as our costs were spread across a
significantly larger revenue base in 1999.
Stock-Based Compensation. Stock-based compensation expenses include the
amortization of unearned employee stock-based compensation and expenses for
stock granted to consultants in exchange for services. Employee stock-based
compensation expenses are amortized on an accelerated basis over the vesting
period of the related options, generally 50 months. Total stock-based
compensation expenses for 1999 was $4.0 million compared to $202,000 in 1998.
These increases relates to additional issuance of stock options with exercise
prices below fair market value on the date of grant in 1999.
Interest Income (Expense), Net
Interest income (expense), net. Interest income (expense), net decreased
slightly from $(365,000) in 1998 to $(304,000) in 1999. During 1999 we paid
slightly higher interest expense on debt, which was partially offset by an
increase in interest income over prior year.
Liquidity and Capital Resources
Since inception, we have funded our operations primarily through the private
sale of our equity securities, and our initial public offering, resulting in the
aggregate, net proceeds of approximately $167.2 million. We have also funded our
operations through equipment financing. As of October 31, 2001, we had $24.9
million in cash and cash equivalents and short-term investments and $14.8
million in working capital. Net cash used in operating activities was $46.6
million, $34.5 million, $14.5 million, and $7.4 million for the ten months ended
October 31, 2001, and the years ended December 31, 2000, 1999 and 1998,
respectively. Net cash flows used in operating activities in each period reflect
increasing net losses, offset by non-cash expenses including stock-based
compensation, depreciation and amortization.
Net cash provided by investing activities was $22.9 million for the ten
months ended October 31, 2001, and net cash used in investing activities was
$49.6 million, $2.1 million and $299,000 for the years ended December 31, 2000,
1999 and 1998, respectively. Cash provided by investing activities during the
ten months ended October 31, 2001 primarily reflects maturities of short-term
investments of $26.9 million offset by purchases of $3.7 million of property and
equipment. Cash used in investing activities during the years ended December 31,
2000, 1999 and 1998 primarily reflect purchases of property and equipment. Our
capital expenditures consisted of purchases of operating resources to manage our
operations including computer hardware and software, office furniture and
equipment and leasehold improvements relating to our new headquarters.
Net cash provided by financing activities was $445,000 for the ten months
ended October 31, 2001, and $102.6 million, $31.5 million and $10.7 million for
the years ended December 31, 2000, 1999 and 1998, respectively. Cash provided by
financing activities includes net proceeds from the issuance of preferred and
common stock including that from our initial public offering in March 2000.
29
We believe that our cash in the bank as of October 31, 2001 , will be
sufficient to meet our general expenses, working capital and capital expenditure
requirements for at least the next twelve months. However, we may find it
necessary to obtain additional equity or debt financing in fiscal 2002 or
beyond. In the event additional financing is required, we may not be able to
raise it on acceptable terms or at all.
Our Company has entered into leases for certain office space and equipment
with original terms ranging from 36 months to the year 2008. The lease for
office space includes scheduled base rent increases over the term of the lease.
The total amount of the base rent payments is charged to expense over the term
of the lease using the straight-line method. In addition, the lease for office
space contains an escalation clause to recover increases in future operating
costs and real estate taxes over the base year. The future minimum lease
payments shown below are exclusive of such escalation.
We have also entered into sub-lease agreements for certain office space and
equipment.
Future minimum lease payments under all noncancelable leases at October 31,
2001 are as follows (in thousands):
Operating Leases
----------------------------------------
Contractual
Capital Gross Sub-lease Net
Leases Commitments Income Commitments
------- ------------ ----------- ------------
Year Ending October 31,
2002......................................... $ 88 $ 3,276 1,714 1,562
2003......................................... 78 3,253 1,829 1,424
2004......................................... 78 3,306 1,563 1,743
2005......................................... 78 3,418 962 2,456
2006......................................... 57 3,538 991 2,547
2007 and thereafter.......................... -- 6,838 1,895 4,943
----- --------- ----- ------
Total minimum lease payments......... 379 $ 23,629 8,954 14,675
========= ===== ======
Less interest................................ (80)
-----
Present value of minimum lease payments...... 299
Less current portion......................... (56)
-----
$ 243
=====
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 of America. 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 disclosure of contingent assets
and liabilities. On an on-going basis, we evaluate our estimates. We base our
estimates on historical experience and on various other assumptions that are
believed to be reasonable under the circumstances. Actual results may differ
from these estimates under different assumptions or conditions.
We believe the following are critical accounting policies and estimates used
in the preparation of our consolidated financial statements.
Revenue Recognition
We derive revenue from two sources as follows: (i) sale of software licenses
to end users, value added resellers (VARs), distributors, system integrators,
independent software vendors, and application service providers; and (ii)
services which include consulting, training, and post-contract customer support.
We recognize revenue in accordance with Statement of Position 97-2, "Software
Revenue Recognition." We record revenue from licensing of software products to
end-users when both parties sign a license agreement, the fee is fixed or
determinable, collection is reasonably assured and delivery of the product has
occurred. Generally, we provide payment terms that range from thirty days to
ninety days from the invoice date. Accordingly, payment terms that exceed ninety
days are not considered fixed or determinable and revenue is recognized as
payments become due. When contracts contain multiple elements, and for which
vendor specific objective evidence ("VSOE") of fair value exists for the
undelivered elements, we recognize revenue for the delivered elements based upon
the residual method. VSOE is generally the price for products sold separately or
the renewal rate in the agreement for PCS. Undelivered elements consist
primarily of post contract customer support ("PCS") and other services such as
consulting, mentoring and training. Services are generally not considered
essential to the functionality of the software. We recognize revenue allocated
to post-contract customer support ratably over the period of the contracts,
which is generally twelve months. For revenue related to consulting services, we
recognize revenue as the related services are performed. In instances where
services are deemed essential to the software, both the software license fee and
consulting fees are recognized using the percentage-of-completion method of
contract accounting.
Determining Functional Currencies for the Purpose of Consolidation
We have several foreign subsidiaries, which together account for
approximately 31% of our net revenues for the ten months ended October 31, 2001,
and 7% of our assets and 7% of our total liabilities as of October 31, 2001.
In preparing our consolidated financial statements, we are required to
translate the financial statements of the foreign subsidiaries from the currency
in which they keep their accounting records, generally the local currency, into
United States dollars. This process results in exchange gains and losses which,
under the relevant accounting guidance, are either included within the statement
of operations or as a separate part of our net equity under the caption
"cumulative translation adjustment."
If any subsidiary's functional currency is deemed to be the local currency,
then any gain or loss associated with the translation of that subsidiary's
financial statements is included in cumulative translation adjustments. If we
dispose of any of our subsidiaries, any cumulative translation gains or losses
would be realized in our statement of operations. If we determine that there has
been a change in the functional currency of a subsidiary to the United States
dollar, any translation gains or losses arising after the date of change would
be included within our statement of operations.
30
The magnitude of these gains or losses is dependent upon movements in the
exchange rates of the foreign currencies in which we transact business against
the United States dollar. These currencies include the United Kingdom Pound
Sterling, the Euro, the Indian Rupee, Australian and Canadian dollars. Any
future translation gains or losses could be significantly higher than those
noted in each of these periods. In addition, if we determine that a change in
the functional currency of one of our subsidiaries has occurred at any point in
time, we would be required to include any translation gains or losses from the
date of change in our statement of operations.
Allowance for Doubtful Accounts
We must make estimates as to the overall collectibility of accounts
receivable and provide an allowance for amounts deemed to be uncollectible.
Specifically, we analyze our accounts receivable and historical bad debt
pattern, customer concentrations, customer credit-worthiness, current economic
trends and changes in its customer payment terms when evaluating the adequacy of
our allowance for doubtful accounts.
Contingencies
With the exception of the $350,000 deductible amount of directors' and
officers' liability insurance expensed in April 2001, no estimate can be made of
the ultimate loss or possible loss associated with the resolution of these
contingencies. As additional information becomes available, we will assess the
potential liability related to our pending litigation and revise our estimates.
Such revisions in our estimates of the potential liability could materially
impact our results of operations and financial position.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
We are exposed to a variety of risks including changes in interest rates
affecting the return on its investments and, to a lesser extent, foreign
currency fluctuations. In the normal course of business, we establish policies
and procedures to manage our exposure to fluctuations in interest rates and
foreign currency values.
Interest rate risks. We invest our cash in a variety of financial
instruments, consisting principally of investments in commercial paper,
interest-bearing demand deposit accounts with financial institutions, money
market funds and highly liquid debt securities of corporations, municipalities
and the U.S. Government. These investments are denominated in U.S. dollars. Cash
balances in foreign currencies overseas are operating balances and are invested
in short-term time deposits of the local operating bank.
All of the cash equivalents, short-term and long-term investments are
treated as "available-for-sale." Investments in both fixed rate and floating
rate interest earning instruments carry a degree of interest rate risk. Fixed
rate securities may have their market value adversely impacted due to a rise in
interest rates, while floating rate securities may produce less income than
expected if interest rates fall. Due in part to these factors, our future
investment income may fall short of expectations due to changes in interest
rates or we may suffer losses in principal if forced to sell securities that
have seen a decline in market value due to changes in interest rates. However,
the Company reduces its interest rate risk by investing its cash in instruments
with short maturities. Our exposure, on our portfolio of marketable investments,
to changes in short term interest rates is insignificant as of October 31, 2001
because the average holding period until maturity of our cash equivalents and
short-term investments was approximately 25 days.
The table below presents the principal amount and related weighted average
interest rates for our investment portfolio. Short-term investments are all in
fixed rate instruments.
Table of investment securities (in thousands) at October 31, 2001:
Weighted
Average
Fair Value Interest Rate (%)
---------- -----------------
Cash & cash equivalents:
Cash $9,377 2.44
Commercial Paper $4,992 2.44
Auction Floater $6,005 2.69
Money Market Funds $1,497 2.69
------
$21,871
31
Short-term investments:
Corporate debt securities $497 2.33
Debt securities issued by the
U.S. government $2,539 3.98
------
$3,036
Foreign currency risks. As of October 31, 2001, Versata had operating
subsidiaries located in the United Kingdom, Germany, France, Belgium, Canada,
India and Australia. Our revenue outside the United States was 31 percent for
the ten months ended October 31, 2001. The only geographic sub-region with
revenue greater than 10 percent of total revenue in fiscal 2001 was the United
Kingdom with 28 percent. International sales were made mostly from the Company's
foreign sales subsidiaries in the local countries and are typically denominated
in the local currency of each country. These subsidiaries also incur most of
their expenses in the local currency. Accordingly, foreign subsidiaries use the
local currency as their functional currency.
The Company's international business is subject to risks typical of an
international business, including, but not limited to, differing economic
conditions, changes in political climate, differing tax structures, other
regulations and restrictions, and foreign exchange volatility. Accordingly, the
Company's future results could be materially adversely impacted by changes in
these or other factors.
The Company is also exposed to foreign exchange rate fluctuations as the
financial results of foreign subsidiaries are translated into U.S. dollars in
consolidation. As exchange rates vary, these results, when translated, may vary
from expectations and adversely impact overall financial results. We do not
currently enter into foreign currency hedge transactions. Through October 31,
2001, foreign currency fluctuations have not had a material impact on our
financial position or results of operations.
We do not currently use derivative financial instruments. We generally place
our cash and cash equivalents in high quality money-market securities. We do not
expect any material loss from these investments and therefore believe that our
potential interest rate exposure is not material. We do not currently enter into
foreign currency hedge transactions.
Recent Accounting Pronouncements
In July 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 141 ("SFAS No. 141"), "Business
Combinations." SFAS No. 141 requires the purchase method of accounting for
business combinations initiated after June 30, 2001 and eliminates the
pooling-of-interests method. In addition, the FASB issued SFAS No. 142,
"Goodwill and Other Intangible Assets," which is effective for fiscal years
beginning after December 15, 2001. SFAS No. 142 requires, among other things,
the discontinuance of goodwill amortization. In addition, the standard includes
provisions upon adoption for the reclassification of certain existing recognized
intangibles as goodwill, reassessment of the useful lives of existing recognized
intangibles, reclassification of certain intangibles out of previously reported
goodwill and the testing for impairment of existing goodwill and other
intangibles. Versata adopted SFAS No. 142 effective November 1, 2001. The
adoption of SFAS No. 142 did not have a significant impact on our consolidated
financial statements as we had no goodwill recorded on our balance sheet on the
date of adoption.
In October 2001, the FASB issued SFAS No. 144, Accounting for the Impairment
or Disposal of Long-Lived Assets. SFAS No. 144 supersedes SFAS No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of. SFAS No. 144 applies to all long-lived assets (including
discontinued operations) and consequently amends Accounting Principles Board
Opinion No. 30. SFAS No. 144 develops one accounting model for long-lived assets
that are to be disposed of by sale. SFAS No. 144 requires that long-lived assets
that are to be disposed of by sale be measured at the lower of book value or
fair value less cost to sell. Additionally, SFAS No. 144 expands the scope of
discontinued operations to include all components of an entity with operations
that (1) can be distinguished from the rest of the entity and (2) will be
eliminated from the ongoing operations of the entity in a disposal transaction
SFAS No. 144 is effective for the Company for all financial statements issued in
fiscal 2002. We will adopt SFAS No. 144 effective November 1, 2001. The adoption
is not anticipated to have a significant impact on the Company's consolidated
financial statements.
In November 2001, the FASB Emerging Task Force ("EITF") reached a consensus
on EITF Issue 01-09, Accounting for Consideration Given by a Vendor to a
Customer or a Reseller of the Vendor's Products, which is a codification of EITF
00-14, 00-22 and 00-25. This issue presumes that consideration from a vendor to
a customer or reseller of the vendor's products to be a reduction of the selling
prices of the vendor's products and, therefore, should be characterized as a
reduction of revenue when recognized in the vendor's income statement and could
lead to negative revenue under certain circumstances. Revenue reduction is
required unless consideration relates to a separate identifiable benefit and the
benefit's fair value can be established. This issue should be applied no later
than in annual or interim financial statements for periods beginning after
December 15, 2001, which is our second quarter ending
32
April 30, 2002. Upon adoption we are required to reclassify all prior period
amounts to conform to the current period presentation. We are in the process of
evaluating the effects of these changes on our consolidated financial
statements.
In November 2001, the FASB issued EITF Issue 01-14, Income Statement
Characterization of Reimbursements Received for out-of-pocket Expenses Incurred,
which will require companies to report reimbursements of "out-of-pocket"
expenses as revenues and the corresponding expenses incurred as costs of
revenues within the income statement. We expect to adopt the provisions of D-103
during the first quarter of fiscal 2002.
Item 8. Financial Statements and Supplementary Data
Our consolidated financial statements are located on the pages below.
Page
----
Report of Independent Accountants..................................................... F-2
Consolidated Balance Sheets as of October 31, 2001, December 31, 2000 and 1999........ F-3
Consolidated Statements of Operations and Comprehensive Loss for the ten months
ended October 31, 2001 and the years ended December 31, 2000, 1999 and 1998......... F-4
Consolidated Statement of Stockholders' Equity for the ten months ended October 31,
2001 and the years ended December 31, 2000, 1999 and 1998........................... F-5
Consolidated Statements of Cash Flows for the ten months ended October 31, 2001 and
the years ended December 31, 2000, 1999 and 1998................................... F-6
Notes to Consolidated Financial Statements............................................ F-7
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Not applicable.
33
PART III
Item 10. Directors and Executive Officers of the Registrant
The following table sets forth certain information regarding our executive
officers and other officers and directors.
Name Age Position
---- --- --------
Douglas L. Roberts (4).......................... 45 Chief Executive Officer, President, Director
James A. Doehrman............................... 44 Executive Vice President, Chief Operating and Financial
Officer
Val Huber....................................... 52 Vice President, Development and Chief Technology Officer
Rahul Patel..................................... 37 Vice President, Research and Development
Lisa Tomlinson.................................. 44 Vice President, Human Resources
Iain Grant...................................... 38 Vice President, Worldwide Professional Services
Rocco Quaglietti................................ 49 Vice President, Sales America
Nicholas Birtles............................... 57 Vice President, Sales Europe
Gary Morgenthaler(1)(2)(5)...................... 53 Chairman of the Board
Robert Davoli(3)................................ 53 Director
Donald W. Feddersen(1)(2)(5).................... 67 Director
John W. Larson(1)(3)............................ 66 Director
Kanwal Rekhi(2)(4).............................. 56 Director
Eugene Wong (4)................................. 67 Director
(1) Member of Audit Committee.
(2) Member of Compensation Committee.
(3) Term of office expires at 2002 Annual Meeting of Stockholders.
(4) Term of office expires at 2003 Annual Meeting of Stockholders.
(5) Term of office expires at 2004 Annual Meeting of Stockholders.
Douglas L. Roberts. Mr. Roberts joined Versata in December of 2000 as
Executive Vice President of Worldwide Field Operations. In March 2001, Mr.
Roberts was appointed as Versata's interim Chief Executive Officer and became
Versata's Chief Executive Officer and President in September 2001. Prior to
joining Versata, from July 2000 to October 2000, Mr. Roberts was Senior Vice
President of the Global e-Business Group for Peregrine Systems in Atlanta, GA.
From October 1999 to July 2000, Mr. Roberts was Senior Vice President/General
Manager of Worldwide Sales for Harbinger Corporation. From September 1995 to
October 1999, Mr. Roberts was Senior Vice President, Sales at BellSouth
Wireless. In addition, Mr. Roberts has held strategic positions at Software AG
of North America, Inc. (Vice President and General Manager, Federal &
International Operations), and Applied Business Technology (Regional Director).
Mr. Roberts earned a degree in Finance from Furman University in Greenville, SC,
with advanced studies at George Washington University and the University of
Maryland.
James A. Doehrman. Mr. Doehrman serves as Versata's Executive Vice
President, Chief Operating and Financial Officer. Mr. Doehrman joined Versata in
February 2001 as Executive Vice President and Chief Financial Officer and was
appointed as Chief Operating Officer in March 2001. From June 2000 through
February 2001, Mr. Doehrman served as Executive Vice President, Chief
Administrative Officer and Treasurer at E.piphany, Inc. From January 2000
through May 2000, Mr. Doehrman was Senior Vice President and Chief Financial and
Administrative Officer at Octane Software, a web-centric customer relationship
management software company that merged with E.piphany in May 2000. From July
1997 to January 2000 Mr. Doehrman was the Vice President and Chief Financial
Officer of technology publisher IDG Books Worldwide. Mr. Doehrman's previous
experience includes over 18 years of progressive management, financial and
operational assignments with companies like Simon & Schuster, Federated
Department Stores and Arthur Andersen & Co. Mr. Doehrman holds a B.A. degree
from Southern Methodist University. He is also a Certified Public Accountant.
Val Huber. Mr. Huber joined Versata in 1995 as Vice President, Development
and Chief Technology Officer. Prior to joining Versata, from 1989 to 1994, Mr.
Huber served as a lead architect on various technology projects at Sybase. Prior
to working with
34
Sybase, from 1980 to 1989, Mr. Huber served as Director of Business Computer
Systems at Wang Labs. Mr. Huber holds a B.A. in Chemistry from Vanderbilt
University.
Rahul Patel. Mr. Patel serves as Versata's Vice President of Research and
Development. Mr. Patel joined Versata in 1995 as a Lead Engineer. Mr. Patel was
promoted to Director of Research and Development and the Lead Architect for
Versata in 1998, prior to becoming the Vice President of Research and
Development in June 2000. Before joining Versata, from December 1990 to April
1992, Mr. Patel was a Senior Software Engineer for Sun Microsystems. From 1992
to January 1995, Mr. Patel was a Lead Engineer in the advanced tools technology
group for Sybase. Mr. Patel holds a Master of Science degree in Computer
Engineering from the University of Florida in Gainesville. He also holds a
Bachelor of Science degree in Engineering from Gujarat University in Ahmedabad,
India.
Lisa Tomlinson. Ms. Tomlinson joined Versata in March 2001 as Vice President
of Worldwide Human Resources. From 1999 through 2001 Ms. Tomlinson served as
Vice President of Human Resource at PacPizza, LLC a franchisee of Pizza Hut, and
from 1997 through 1999, Ms. Tomlinson served as Vice President of Human Resource
at Pizza Hut. From May 1992 through November 1996 Ms. Tomlinson was Director of
Human Resources at Marriott Corporation, a hospitality company. Ms. Tomlinson's
previous experience includes over sixteen years of Human Resources management
with companies like Bendix Corporation and the CIS Corporation. Ms. Tomlinson
holds a B.A. degree from Western Michigan University.
Iain Grant. Mr. Grant joined Versata in April 2001 as Vice President of
World Wide Professional Services. Prior to joining Versata, from November 1998
through April 2001, Mr. Grant served as CEO at @tlas e-Solutions Inc., a San
Francisco based firm that developed XML based integration and collaboration
software. From April 1997 through November 1998 Mr. Grant served as a Principal
Consultant for IBM Global Services. From November 1990 through April 1997, Mr.
Grant served as a senior manager with PricewaterhouseCoopers. Mr. Grant holds an
honors degree in Mathematics, Statistics, and Operational Research from the
University of Exeter, England.
Rocco Quaglietti. Mr. Quaglietti joined Versata in January 2000 as Vice
President of Channel Sales. In October 2001, Mr. Quaglietti was promoted to Vice
President, Sales Americas. Prior to joining Versata, from October 1997 to
December 1999 Mr. Quaglietti was Vice President of Sales at Cloudscape, producer
of a Java-based Object Relational Database Management System. Mr. Quaglietti was
Director of Channels Sales at Pilot Software from October 1995 through September
1997. Mr. Quaglietti also served as Director of Channel Sales at Ingres for 6
years. Mr. Quaglietti previous experience includes over 10 years of sales with
companies like GEISCO and Pansophic Systems. Mr. Quaglietti holds a BS degree
from North Adams State College and an MBA from Golden Gate University.
Nicholas Birtles. Mr. Birtles recently joined Versata in February 2002 as
Vice President of Sales, Europe. From March 2001 through March 2002 , Mr.
Birtles served as Vice President, International at Support.com a Support
Automation Software company. From October 1996 through July 2001 Mr. Birtles was
Chief Operating Officer and then the CEO at Constellar Corp, a leading
Enterprise Applications Integration company. Mr. Birtles' previous experience
includes over 25 years of International Sales and Sales management with
companies like Ingres, Gupta, and Comshare. Mr. Birtles attended Manchester
University and studied Mathematics and Chemistry.
Gary Morgenthaler. Mr. Morgenthaler has served as a director of Versata
since 1997. Mr. Morgenthaler is a general partner of Morgenthaler Ventures. Mr.
Morgenthaler is a co-founder and former Chairman of Illustra Information
Technologies, Inc., a database applications Company. Prior to becoming a partner
of Morgenthaler Ventures, Mr. Morgenthaler was Chairman, Chief Executive Officer
and a co-founder of Ingres, a relational database management systems company.
Mr. Morgenthaler is a director of Catena Networks, Nuance Communications,
Westwave, and Yotta Networks. Mr. Morgenthaler holds a B.A. in International
Relations from Harvard University.
Robert Davoli. Mr. Davoli has served as a director of Versata since November
1999. Prior to becoming a director, Mr. Davoli served as a technical consultant
to Versata from 1995. Since November 1995, Mr. Davoli has served as a general
partner at Sigma, a venture capital firm. From February 1993 to September 1994,
Mr. Davoli served as President and Chief Executive Officer of Epoch Systems, a
software vendor. Previous to working with Epoch Systems, Mr. Davoli served as
President and Chief Executive Officer of SQL Solutions, a services and tools
provider for the relational database market. From 1990 to 1992, Mr. Davoli
served as an executive officer of Sybase. Mr. Davoli is a director of Internet
Security Systems, Inc., StorageNetworks, Inc., and Vignette Corporation. Mr.
Davoli holds a B.A. in History from Ricker College and studied Computer Science
at Northeastern University for two years.
35
Donald W. Feddersen. Mr. Feddersen has served as a director of Versata since
1997. Mr. Feddersen has been a private investor since July 1997. In April 2001,
Mr. Feddersen joined Bessemer Venture Partners as a private investor and a
Venture Partner. From 1984 to 1996, Mr. Feddersen was a General Partner of
Charles River Ventures. Before joining Charles River Ventures, Mr. Feddersen was
President and Chief Executive Officer at Applicon from 1978 to 1984. Mr.
Feddersen also served as President and Chief Executive Officer at Entrex. Mr.
Feddersen holds an M.B.A. from The University of Chicago and a B.S. in
Engineering from Purdue University.
John W. Larson. Mr. Larson has served as a director of Versata since 1998.
Mr. Larson has served as senior partner at the law firm of Brobeck, Phleger &
Harrison LLP since March 1996. From 1988 until March 1996, Mr. Larson was Chief
Executive Officer of the firm. He has been a partner with the firm since 1969,
except for the period from July 1971 to September 1973 when he was in government
service as Assistant Secretary of the United States Department of the Interior
and Counselor to George P. Shultz, Chairman of the Cost of Living Council. Mr.
Larson is a director of Sangamo Biosciences Inc., a biotechnology Company. Mr.
Larson holds a B.A., with distinction, in Economics, and an L.L.B. from Stanford
University.
Kanwal Rekhi. Mr. Rekhi has served as a director of Versata since 1995.
Since 1994, Mr. Rekhi has been a mentor to and investor in early-stage
technology companies. From March 1998 to September 1998, Mr. Rekhi served as
Chief Executive Officer and Chairman of the Board of Cybermedia, a software
Company. Prior to 1994, Mr. Rekhi served as Executive Vice President and Chief
Technology Officer at Novell, Inc. From 1989 to 1995 Mr. Rekhi also served as a
director of Novell. Mr. Rekhi holds an M.S. in Electrical Engineering from
Michigan Technical University and a degree in Electrical Engineering from the
Indian Institute of Technology in Bombay.
Eugene Wong. Dr. Wong has served as a director of Versata since May 1998.
Since 1997, Dr. Wong has served as a technical consultant and chief scientist to
Versata. Dr. Wong has served as Professor Emeritus at the University of
California on assignment with the National Science Foundation since June 1998.
Dr. Wong acted as Associate Director of the office of Science and Technology
Policy in the Bush White House from 1990 to 1993. Dr. Wong holds a B.S.E., an
A.M., and a Ph.D., all in Electrical Engineering, all from Princeton University.
Our officers are elected by the board of directors on an annual basis and
serve until their successors have been duly elected and qualified.
Compliance With Section 16(a) Of The Securities Exchange Act Of 1934
Section 16(a) of the Securities Exchange Act of 1934 (the "Exchange
Act") requires our directors and executive officers, and persons who own more
than ten percent of a registered class of our equity securities to file with the
SEC initial reports of ownership and reports of changes in ownership of our
common stock and other equity securities. Officers, directors and greater than
10% stockholders are required by SEC regulation to furnish us with copies of all
Section 16(a) forms they file. To our knowledge, all of these filing
requirements have been satisfied with the following exceptions: as a result of
the Company's change of fiscal year end from December 31 to October 31, a Form 5
for Mr. Doehrman, Mr. Huber, Mr. Patel, Mr. Roberts and Ms. Tomlinson were late
in filing in connection with issuance of restricted stock in April 2001. In
making this statement, we have relied solely upon review of the copies of such
reports furnished to us and written representations from its officers and
directors that no other reports were required.
Item 11. Executive Compensation
Summary of Cash and Certain Other Compensation
The following table sets forth the compensation for the two most recent
completed fiscal years and the transition period from January 1, 2001 to October
31, 2001 (the "Transition Period") of (i) each person that served as our Chief
Executive Officer during the fiscal year 2001, and (ii) our four other most
highly compensated executive officers whose aggregate cash compensation exceeded
$100,000 during the ten months ended 2001. These officers are referred to herein
as the Named Executive Officers.
Annual compensation listed in the following table excludes other
compensation in the form of perquisites and other personal benefits that
constitutes the lesser of $50,000 or 10% of the total annual salary and bonus of
each of the Named Executive Officers in 2001. The options listed in the
following table were granted under our 1997 Stock Option Plan or our 2000 Stock
Incentive Plan.
36
Annual compensation Long term compensation
-------------------------------------------------------------------------------------------------------
Award Payouts
---------------------------------------------------------
Securities
Name and principal Other Annual Restricted underlying LTIP All other
position Year Salary Bonus compensation stock award(s) options/SARs payouts compensation
- --------------------------------------------------------------------------------------------------------------------------------
Douglas L. Roberts 2001 (1) $217,800 $20,000 $206,821(2) $209,250(3) - (4)
Chief Executive Officer 2000 - - - - - - -
1999 - - - - - - -
John A. Hewitt 2001 (1) $92,380 -0- - - 200,000(5) - -
Former President 2000 $213,750 $164,500 - - - - -
and Chief Executive 1999 $180,000 $110,000 - - - - --
Officer
James A. Doehrman 2001 (1) $145,500 $30,000 $206,821(2) $209,250(3) - (4) - -
Chief Operating Officer, 2000 - - - - - - -
Chief Financial Officer 1999 - - - - - - -
and Secretary
Val Huber 2001 (1) $140,800 $20,000 $55,800(2) $ 55,800(3) - (4) - -
Vice President, 2000 $155,000 $99,500 - - - 25,000 -
Development and Chief 1999 $145,000 $64,000 - - - - -
Technology Officer
Manish Chandra (6) 2001 (1) $151,500 $20,000 $47,839(2) $ 55,800(3) - (4) - -
Former Vice President, 2000 $140,000 $60,000 - - - - -
Marketing 1999 122,500 $23,500 - - - - -
Rahul Patel 2001 (1) $140,800 $20,000 $47,839(2) $ 55,800(3) - (4) - -
Vice President, 2000 $140,000 $62,800 - - - - -
Research and 1999 $120,000 $28,000 - - - - -
Development
(1) Represents the Transition Period from January 1, 2001 to October 31,
2001.
(2) Represents amounts paid in connection with the grant of restricted
stock as described below in this item under the section entitled "Grant
of Restricted Stock to the Named Executive Officers" and as a retention
measure for our Named Executives, in April 2001, we paid the Named
Executives a bonus to cover the estimated personal income tax impact of
making an IRS Code Section 83b election following the grant of the
restricted shares. At that time we determined that this plan was a
preferable form of executive retention than if the Company had issued a
comparable number of options, in lieu of restricted stock, to the Named
Executives and then advanced them funds to "early exercise" the
options, which has been a practice for executive retention in the
industry, but which, in hindsight, in our opinion it is generally an
ineffective form of executive retention.
(3) Represents the grant of restricted common stock as described below in
this item under the Section entitled "Grant of Restricted Stock to the
Named Executive Officers." In order to calculate the aggregate value of
the shares in the table, we used the closing price of our common stock
as traded on the Nasdaq National Market on April 16, 2001, the grant
date. Each officer received 2 grants of restricted shares of common
stock, which are subject to our repurchase right. The first grants vest
over a period of 50 months, with 12.5% of the shares vesting six months
from the date of issuance (April 16, 2001), and the balance vesting in
equal monthly installments thereafter. The second grants vest as
follows: 25% of the shares vest six months from the date of issuance,
another 25% vest one year from the date of issuance and the balance
vest monthly over the next 12 months. Mr. Roberts received 750,000
shares of common stock, which had an aggregate value of $307,500 as of
October 31, 2001. Mr. Doehrman received 750,000 shares of common stock,
which had an aggregate value of $307,500 as of
37
October 31, 2001. Mr. Huber received 200,000 shares of common stock,
which had an aggregate value of $82,000 as of October 31, 2001. Mr.
Chandra received 200,000 shares of common stock, which had an aggregate
value of $82,000 as of October 31, 2001. Mr. Patel received 200,000
shares of common stock, which had an aggregate value of $82,000 as of
October 31, 2001.
(4) All the options granted in the Transition Period were cancelled as more
fully set forth below in this item under the Section entitled "Option
Grants in Ten Months Ended October 31, 2001."
(5) Mr. Hewitt's options were cancelled upon his termination on April 6,
2001.
(6) Mr. Chandra resigned subsequent to October 31, 2001.
Potential Realizable
Option Grants in Ten Months Ended October 31, 2001
The following table sets forth information regarding option grants to each
of the Named Executive Officers during the ten months ended October 31, 2001. No
stock appreciation rights were granted to the Named Executive Officers during
the Transition Period. The options described in the table below were granted to
the Named Executive Officers on February 9, 2001. The options granted to Messrs.
Roberts, Doehrman, Huber, Chandra and Patel were cancelled on April 16, 2001 in
connection with the grant of restricted stock. The options granted to Mr. Hewitt
were cancelled upon his termination on April 6, 2001.
Stock Option Grants in Ten Months Ended October 31, 2001
Potential Realizable
Individual Grants Value
-------------------------- at Assumed Annual
Percent of Rates (1)
Number or Total Of Stock Price
Securities Options Appreciation for Option
Underlying Granted to Term
Options Employees Exercise Price Expiration --------------------------
Name Granted(#) in 2001 ($/Sh) Date 5%($) 10%($)
---- ---------- ------- ------ ---- ----- ------
Douglas Roberts 2,650 < 1 5.50 2/9/2011 N/A N/A
John A. Hewitt, Jr. 200,000 3.1 5.50 2/9/2011 N/A N/A
James Doehrman 450,000 6.9 5.50 2/9/2011 N/A N/A
Val Huber 80,375 1.2 5.50 2/9/2011 N/A N/A
Manish Chandra 125,000 1.9 5.50 2/9/2011 N/A N/A
Rahul Patel 81,343 1.2 5.50 2/9/2011 N/A N/A
(1) Not Applicable because all the options granted in the Transition
Period were cancelled as set forth above.
In 2001, we granted options to purchase up to a total of 6,490,374 shares to
employees under our 2000 Stock Incentive Plan at exercise prices equal to the
fair market value of our common stock on the date of grant, as determined by the
closing price of our common stock as traded on the Nasdaq National Market.
Grant of Restricted Stock to the Named Executive Officers
On April 16, 2001, the Compensation Committee of our Board of Directors
approved an Equity Incentive Program ("EIP") to retain the services of the
Executive Officers essential to the Company's future financial success. Under
the terms of the EIP, certain officers of the Company were given the opportunity
to exchange certain "underwater" outstanding unexercised options for a
restricted share grant. As a condition to participation in the EIP, all stock
options granted after October 16, 2000 were replaced by a restricted share
grant. The purchase price of the restricted stock was $0.001 per share.
The following table sets forth the grants of restricted shares of common stock
made under the EIP:
38
Restricted
shares subject
Number of to repurchase as
Securities of October 31,
Name Granted 2001 Granted
---- ----------- ----------------
Douglas Roberts............... 252,600 (1) 221,025
Douglas Roberts............... 497,400 (2) 373,050
James Doehrman................ 450,000 (1) 393,750
James Doehrman................ 300,000 (2) 225,000
Val Huber..................... 100,000 (1) 75,000
Val Huber..................... 100,000 (2) 87,500
Manish Chandra................ 100,000 (1) 75,000
Manish Chandra................ 100,000 (2) 87,500
Rahul Patel................... 100,000 (1) 75,000
Rahul Patel................... 100,000 (2) 87,500
(1) These grants vest over a period of 50 months, with 12.5% of the
shares vesting six months from the date of issuance (April 16,
2001), and the balance vesting in equal monthly installments
thereafter.
(2) These grants vest as follows: 25% of the shares vest six months
from the date of issuance, another 25% vest one year from the date
of issuance and the balance vest monthly over the next 12 months.
Option Exercises in Transition Period and Option Values at End of Transition
Period
The following table sets forth information concerning the number and value
of shares of common stock underlying the unexercised options held by the Named
Executive Officers as of October 31, 2001. The table also sets forth the value
realized upon the exercise of stock options during the Transition Period which
is calculated based on the fair market value of our common stock on the date of
exercise, as determined by the closing price of our common stock as traded on
the Nasdaq National Market, less the exercise price paid for the shares. The
value of unexercised in-the-money options represents the positive spread between
the exercise price of the stock options and the fair market value of our common
stock as of October 31, 2001, which was $0.41 per share. No stock appreciation
rights were exercised during the Transition Period and no stock appreciation
rights were outstanding as of October 31, 2001.
Aggregated Option Exercises in Transition Period and
Option Values at End of Transition Period
Shares Number of Securities Value of Unexercised
Acquired Underlying Unexercised In-the-Money Options at
on Options at Year-End(#) Year-End($)(2)
Exercise Value ------------------------------- ------------------------------
Name (#) Realized($)(1) Exercisable Unexercisable Exercisable Unexercisable
---- --------- -------------- -------------- --------------- -------------- --------------
Manish Chandra................ -- -- 30,000 -- 6,300 --
James Doehrman................ -- -- -- -- -- --
John A. Hewitt, Jr............ -- -- -- -- -- --
Val Huber..................... -- -- 37,500 -- 7,875 --
Rahul Patel................... -- -- 35,000 -- 7,350 --
Douglas Roberts............... -- -- -- -- -- --
- ----------
(1) Calculated by multiplying the number of shares acquired on exercise by the
difference between the fair market value of the shares on the date of
exercise and the exercise price.
(2) Calculated by determining the difference between the fair market value of
our common stock as of October 31, 2001 and the exercise price of the
option.
Director Compensation
We currently do not compensate any non-employee member of the board for
their service as board members, except in some cases through the grant of stock
options. Directors who are also employees do not receive additional compensation
for serving as directors.
Under our 2000 Stock Incentive Plan, which was adopted by our board in
November 1999 and was approved by our stockholders in February 2000,
non-employee directors will receive automatic option grants covering 36,000
shares of common stock upon becoming directors and 12,000 shares of common stock
on the date of each annual meeting of stockholders beginning in 2001. The 2000
Stock Incentive Plan also contains a director fee option grant program. Should
this program be activated in the future, each
39
non-employee board member will have the opportunity to apply all or a portion of
any annual retainer fee otherwise payable in cash to the acquisition of an
option with an exercise price below the then fair market value of our shares.
Non-employee directors will also be eligible to receive discretionary option
grants and direct stock issuances under our 2000 Stock Incentive Plan.
Severance Agreements
In April 2001, we entered into severance agreements with our executive
officers (the "Executive Severance Agreement"). The Executive Severance
Agreement provides for certain benefits including the payment of equivalent of 6
months base salary, if the executive's employment with Versata is involuntarily
terminated without cause or if the executive resigns from Versata due to an
involuntary change in the executive's responsibilities. Additionally, if an
executive's employment with the Company is involuntarily terminated without
cause or terminated after a change in control of the Company, the executive will
receive one hundred percent (100%) accelerated vesting of restricted stock and
stock options.
Compensation Committee Interlocks and Insider Participation
The Compensation Committee of the board of directors was formed in July
1998, and the current members of the Compensation Committee are Messrs.
Morgenthaler, Feddersen and Rekhi. None of the members of the compensation
committee of the board of directors was at any time since the formation of
Versata an officer or employee of Versata. No executive officer serves as a
member of the board of directors or compensation committee of any entity that
has one or more executive officers serving on our board of directors or our
compensation committee of the board of directors.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The table below sets forth information regarding the beneficial ownership of
our common stock as of December 31, 2001 by the following individuals or groups:
o each person or entirety who is known by us to own beneficially more
than 5% of our outstanding stock;
o each of the named executive officers appearing in the Summary
Compensation table above (the "Named Executive Officers");
o each of our directors; and
o all directors and Named Executive Officers as a group.
Each stockholder's percentage ownership in the following table is based on
43,752,484 shares of common stock outstanding as of December 31, 2001. Unless
otherwise indicated, the principal address of each of the stockholders below is
c/o Versata, Inc., 300 Lakeside Drive, Suite 1500, Oakland, California 94612.
Except as otherwise indicated, and subject to applicable community property
laws, except to the extent authority is shared by both spouses under applicable
law, we believe the persons named in the table have sole voting and investment
power with respect to all shares of common stock held by them.
Shares Acquirable
-----------------
within 60 Days Percentage of Shares
-------------- --------------------
Name of Beneficial Owner Shares Owned of December 31, 2001 Beneficially Owned
- ------------------------ ------------ -------------------- ------------------
Morgenthaler Venture Partners IV, L.P. (1) 5,720,749 -- 13.1%
Sigma Management V, LLC (2) 5,430,105 -- 12.4%
Douglas Roberts (3) 750,000 -- 1.7%
James Doehrman (4) 750,000 -- 1.7%
Val Huber (5) 605,050 37,500 1.5%
Rahul Patel (6) 370,500 35,000 *
Manish Chandra (7) 345,000 30,000 *
John A. Hewitt, Jr. (8) 228,535 -- *
Donald Feddersen 56,084 42,997 *
John W. Larson (9) 91,201 6,997 *
Kanwal Rekhi (10) 534,362 42,997 1.3%
Eugene Wong (11) 220,891 35,597 *
40
Robert Davoli (12) (2) 5,430,105 27,997 12.5%
Gary Morgenthaler (1) 5,720,749 42,997 13.2%
All directors and executive officers as a group 15,102,477 302,082 35.0%
(12 people)
* Less than 1%
- -------------------------------------------------
1. Principal address is 2730 Sand Hill Road, Suite 280, Menlo Park, CA 94025.
Includes 3,000 shares held by Morgenthaler Management Partners. Mr. Morgenthaler
disclaims beneficial ownership of all of these shares except to the extent of
his pecuniary interest in these shares. Includes 2,000 shares held by Mr.
Morgenthaler. The general partner of Morgenthaler Venture Partnership IV, L.P.
is Morgenthaler Management Partners IV, L.P. The general partners of
Morgenthaler Management Partners IV, L.P. are Gary Morgenthaler, a director of
Versata, J. Morgenthaler, Robert Pavey, Robert Bellas, Jr., and John Lutsi, who
have dispositive and voting powers with respect to the shares held by
Morgenthaler Venture Partnership IV, L.P.
2. Principal address is 1600 El Camino Real, Suite 280, Menlo Park, CA 94025.
3. Includes 583,971 shares of common stock subject to the Company's right of
repurchase.
4. Includes 600,750 shares of common stock subject to the Company's right of
repurchase.
5. Includes 100,000 shares in the Huber Family Trust. Mr. Huber disclaims
beneficial ownership of these shares except to the extent of his pecuniary
interest in these shares. Also includes 183,700 shares of common stock subject
to the company's right of repurchase.
6. Includes 177,860 shares of common stock subject to the Company's right of
repurchase.
7. Includes 171,700 shares of common stock subject to the Company's right of
repurchase.
8. Principal address is 333 Bush Street, Unit 3905, San Francisco, CA 94104.
Includes 71,633 shares held by H&W Development Corp. and 31,902 shares held by
H&R Development Corp. Includes 75,000 shares held by the spouse of the reporting
person and 50,000 shares held in a retirement account for the benefit of the
reporting person. Mr. Hewitt disclaims beneficial ownership of these shares
except to the extent of his pecuniary interest in these shares.
9. Does not include 38,198 shares held by Brobeck, Phleger & Harrison LLP. Mr.
Larson disclaims beneficial ownership of these shares except to the extent of
his pecuniary interest in these shares.
10. Includes 534,362 shares held by the Rekhi Family Trust, 62,111 shares held
by the Benjamin Rekhi Trust and 62,111 shares of the Raj-Ann Kaur Rekhi Trust of
which Mr. Rekhi is a trustee. Mr. Rekhi disclaims beneficial ownership except to
the extent of his pecuniary interest in these shares.
11. Shares held in the Wong Family Trust of which Mr. Wong is a Trustee.
12. Includes 5,188,844 shares held by entities affiliated with Sigma Partners.
Mr. Davoli disclaims beneficial ownership of these shares except to the extent
of his pecuniary interest in these shares.
Item 13. Certain Relationships and Related Transactions.
The following is a description of transactions since January 1, 2001 to
which we have been a party and in which the amount involved exceeded $60,000 and
any director, executive officer, or security holder that we know owns more than
five percent of our capital stock had or will have a direct or indirect material
interest.
During 2000, we held a $1,000,000 investment in the preferred stock of
TruMarkets, Inc., a privately held corporation. Our Chairman of the Board of
Directors held a membership interest in the general partner of a partnership
that owned a controlling interest in the outstanding capital stock of
TruMarkets, Inc. In January 2001, we provided the investee with a $500,000
bridge loan. As of December 31, 2000, the investee was in the process of
developing its products and was actively negotiating with third parties for
additional financing to fund its operations. During March 2001, the investee's
attempts to obtain additional financing failed and the investee began efforts to
sell the company. The $500,000 loan was recorded in restructuring and other
expenses in the first quarter of
41
2001. In June 2001, TruMarkets, Inc. was acquired by MortgageSight Holding LLC
("MortgageSight") and our investment and loan were converted to 22,122 shares of
preferred stock, or less than 1% of MortgageSight. It is our understanding that
MortgageSight has ceased its operations; therefore, the value of these shares is
uncertain, so no amount has been recorded on the balance sheet.
In November 1999, our former Chief Financial Officer, Kevin Ferrell,
delivered a full-recourse promissory note to us in payment for 100,000 shares of
Series F preferred stock. The principal amount secured under the note was
$556,000. The note bore interest at the rate of 7.00% per annum, compounded
annually, and was secured by the purchased shares. The principal balance would
become due and payable in one lump sum on the third anniversary of the signing
of the note (November 2002). In 2000, Mr. Ferrell paid down approximately
$103,000 in principle and $35,000 in interest towards this note.
In December 1999, Mr. Ferrell delivered a full-recourse promissory note to
us in payment of the exercise price of 400,000 outstanding stock options under
our 1997 stock option plan. The principal amount secured under the note was
$1,200,000. In 2000, Mr. Ferrell paid down $84,000 approximately in interest
towards this note. Mr. Ferrell resigned in February 2001. In February 2001, we
exercised our right to repurchase 240,000 unvested shares of Mr. Ferrell's
400,000 option shares. We paid par value to repurchase the shares, which reduced
the principal amount of the note by $720,000. The offset to the reduction in the
note was recorded as a reduction in paid in capital.
In October 2001, we wrote down $632,000 in principal in connection with both
of Mr. Ferrell's notes. At October 31, 2001, $301,000 remains in notes
receivable as a component of stockholders' equity, all of which relates to Mr.
Ferrell's two notes.
In January 2000, Mr. Hewitt delivered a full recourse promissory note to us
in payment of the exercise price of stock options issued pursuant to our 1997
Stock Option Plan. The principal amount secured under the note was $1,015,000.
The note had a term of three years and bore interest at the rate of 7.00% per
annum, compounded annually. The note was secured by the purchased shares and
additional collateral. The entire unpaid balance of the note was due and payable
upon termination of employment, failure to pay any installment of principal or
interest when due, or insolvency or bankruptcy, or in the event we are acquired.
None of the shares serving as security for the note could have been sold unless
the principal portion of the note attributable to those shares and the accrued
interest on that principal portion was paid to us. In December 2000, Mr. Hewitt
delivered to us another full recourse promissory note in the amount of $375,000.
The note was secured by shares of our common stock held by us for the previous
loan. The note was due and payable on January 31, 2002, and bore interest at the
prime rate as reported in The Wall Street Journal from time to time and
compounded annually. Accrued interest was due on each anniversary of the signing
of the note. Mr. Hewitt resigned in March 2001. In June 2001, in connection with
Mr. Hewitt's termination of employment, we cancelled both promissory notes and
related accrued interest totaling $1,517,000 in exchange for a pledge of 770,009
shares of our Company's common stock owned by the officer. On that date, the
fair market value of the 770,009 shares was $919,000 and was recorded as
treasury stock and $598,000 was included in restructuring and other
non-recurring expenses.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) The following documents are filed as a part of this Annual Report on
Form 10-K:
1. Financial Statements.
The consolidated financial statements contained herein are as listed on
the "Index" on page
2. Financial Statement Schedule.
Reference is made to Schedule II following the signature pages hereto.
3. Exhibits. Reference is made to Item 14(c) of this Annual Report on
Form 10-K.
(b) Reports on Form 8-K.
42
Versata filed the following reports on Form 8-K:
The Company filed a Form 8-K on January 4, 2002, announcing Versata's change
of fiscal year end from December 31 to October 31.
(c) Exhibits
Exhibits submitted with the Annual Report on Form 10-K as filed with the
Securities and Exchange Commission and those incorporated by reference to other
filings are listed on the Exhibit Index.
Exhibit Index
EXHIBIT INDEX
Exhibit
Number Description of Document
------ -----------------------
2.1(1) Agreement and Plan of Reorganization by and among Versata,
Inc., VATA Acquisition Corp., Verve, Inc. and Certain
Shareholders of Verve, Inc., dated October 18, 2000.
3.1(2) Amended and Restated Certificate of Incorporation of
Versata.
3.2(2) Amended and Restated Bylaws of Versata.
4.1(2) Form of Specimen Common Stock Certificate.
10.1(2)* 2000 Stock Incentive Plan of Versata.
10.2(2)* Employee Stock Purchase Plan of Versata.
10.3(2) Fourth Amended and Restated Investors' Rights Agreement,
among Versata and some of its stockholders, dated November
30, 1999.
10.4(2) Form of Indemnification Agreement entered into between
Versata and each of its directors and executive officers.
10.5(2) Agreement of Sublease dated October 18, 1999, between
Versata and ICF Kaiser International, Inc.
10.6(2) Senior Loan and Security Agreement, dated August 20, 1999,
between Versata and Phoenix Leasing Incorporated, as amended
on October 1, 1999.
10.7(2)+ Joint Product and Marketing Agreement, dated September 27,
1999, between Versata and IBM.
10.8(3) Lease agreement, dated as of April 10, 2000, by and between
Versata and Kaiser Center, Inc. for the sublease of office
space in Oakland, CA.
10.9(4) Software Remarketing Agreement, effective September 27,
2000, between Versata and International Business Machines
Corporation.
21.1 Subsidiaries of Versata.
23.1 Consent of PricewaterhouseCoopers LLP, Independent
Accountants.
- ----------
+ Specified portions of this agreement have been omitted and have been filed
separately with the Securities and Exchange Commission pursuant to a request
for confidential treatment.
* Management contract or compensatory plan or arrangement.
(1) Incorporated by reference from the Company's Form 8-A dated December 1,
2000.
(2) Incorporated by reference from the Company's Registration Statement on Form
S-1 (File No. 333-92451).
(3) Incorporated by reference from the Company's Form 10-Q dated August 14,
2000.
(4) Incorporated by reference from the Company's Form 10-Q dated September 24,
2000.
43
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, on March 29, 2002.
VERSATA
By: /s/ DOUGLAS ROBERTS
----------------------
Chief Executive Officer, President and Director
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below
constitutes and appoints Douglas Robert and James Doehrman, and each of them, as
his true and lawful attorneys-in-fact and agents, with full power of
substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities, to sign any and all amendments (including post-effective
amendments) to this Annual Report on Form 10-K, and to file the same, with
exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, and each of them, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in connection therewith,
as fully to all intents and purposes as he might or could do in person, hereby
ratifying and confirming all that said attorneys-in-fact and agents, or any of
them, or their or his substitutes, may lawfully do or cause to be done by virtue
thereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
NAME TITLE DATE
- ---- ----- ----
/S/ DOUGLAS ROBERTS Chief Executive Officer, President and March 29, 2001
- ----------------------------------------- Director (Principal Executive Officer)
Douglas Roberts
/S/ JAMES DOEHRMAN Executive Vice President, Chief March 29, 2001
- ----------------------------------------- Operating and Financial Officer
James Doehrman (Principal Accounting Officer)
/S/ GARY MORGENTHALER Chairman of the Board March 29, 2001
- -----------------------------------------
Gary Morgenthaler
/S/ ROBERT DAVOLI Director March 29, 2001
- -----------------------------------------
Robert Davoli
/S/ DONALD W. FEDDERSEN Director March 29, 2001
- -----------------------------------------
Donald W. Feddersen
/S/ JOHN W. LARSON Director March 29, 2001
- -----------------------------------------
John W. Larson
/S/ KANWAL REKHI Director March 29, 2001
- -----------------------------------------
Kanwal Rekhi
/S/ EUGENE WONG Director March 29, 2001
- -----------------------------------------
Eugene Wong
44
INDEX TO FINANCIAL STATEMENTS
Page
----
Report of Independent Accountants........................................ F-2
Consolidated Balance Sheets.............................................. F-3
Consolidated Statements of Operations and Comprehensive Loss............. F-4
Consolidated Statement of Stockholders' Equity........................... F-5
Consolidated Statements of Cash Flows.................................... F-6
Notes to Consolidated Financial Statements............................... F-7
F-1
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders of Versata, Inc.:
In our opinion, the consolidated financial statements listed in the index
appearing under Item 14(a) 1 on page 42 present fairly, in all material
respects, the financial position of Versata, Inc. and its subsidiaries at
October 31, 2001, December 31, 2000 and 1999, and the results of their
operations and their cash flows for the ten months ended October 31, 2001 and
each of the three years in the period ended December 31, 2000, in conformity
with accounting principles generally accepted in the United States of America.
In addition, in our opinion, the financial statements schedule listed in the
index appearing under Item 14(a) 2 on page 42 presents fairly, in all material
respects, the information set forth therein when read in conjunction with the
related consolidated financial statements. These financial statements and
financial statement schedule are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements and
financial statement schedule based on our audits. We conducted our audits of
these statements in accordance with auditing standards generally accepted in the
United States of America, which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers, LLP
PricewaterhouseCoopers, LLP
San Jose, California
February 27, 2002
F-2
VERSATA, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands except share data)
ASSETS
October 31, December 31, December 31,
2001 2000 1999
--------------- ------------- -----------
Current assets:
Cash and cash equivalents..................................... $ 21,871 $ 39,272 $ 20,655
Short-term investments........................................ 3,036 29,926 --
Accounts receivable, net...................................... 3,975 14,177 5,587
Unbilled receivables.......................................... 236 3,584 1,584
Prepaid expenses and other.................................... 848 3,075 2,311
----------- ----------- -----------
Total current assets.................................. 29,966 90,034 30,137
Restricted cash................................................. 5,445 5,189 --
Property and equipment, net..................................... 6,257 11,901 1,902
Note receivable from related parties............................ -- 156 134
Intangibles, net................................................ 3,898 12,205 1,389
Other assets.................................................... 216 354 98
----------- ----------- -----------
Total assets.......................................... $ 45,782 $ 119,839 $ 33,660
=========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.............................................. $ 1,062 $ 9,040 $ 2,025
Accrued liabilities........................................... 6,177 13,146 7,298
Accrued restructuring 1,420 -- --
Accrued stock-based compensation.............................. -- 1,095 --
Current portion of equipment line and capital lease........... 237 134 166
Deferred revenue.............................................. 6,246 8,661 4,433
----------- ----------- -----------
Total current liabilities............................. 15,142 32,076 13,922
Accrued restructuring, less current portion 1,513 -- --
Equipment line and capital lease, less current portion and other 337 218 320
----------- ----------- -----------
Total liabilities..................................... 16,992 32,294 14,242
----------- ----------- -----------
Commitments and contingencies (Note 14)
Stockholders' equity:
Convertible preferred stock, $0.001 par value; 30,580,000
shares authorized; nil, nil and 26,572,909 shares issued
and outstanding as of October 31, 2001, December 31, 2000
and 1999, respectively...................................... -- -- 26
Common stock, $0.001 par value; 150,000,000 shares
authorized, 42,280,565, and 41,142,180 and 7,204,111
shares issued and outstanding as of October 31, 2001 and
December 31, 2000 and 1999, respectively.................... 42 41 7
Additional paid-in capital...................................... 217,379 226,352 89,905
Treasury stock (1,383) -- --
Notes receivable from stockholders.............................. (301) (3,868) (2,413)
Unearned stock-based compensation............................... (2,585) (13,870) (14,732)
Accumulated other comprehensive income (loss)................... (210) 166 --
Accumulated deficit............................................. (184,152) (121,276) (53,375)
----------- ----------- -----------
Total stockholders' equity............................ 28,790 87,545 19,418
----------- ----------- -----------
Total liabilities and stockholders' equity............ $ 45,782 $ 119,839 $ 33,660
=========== =========== ===========
The accompanying notes are an integral part of these
consolidated financial statements.
F-3
VERSATA, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(In thousands, except per share data)
Ten Months Year Ended
Ended ------------------------------------------
October 31, December December 31, December
2001 31, 2000 1999 31, 1998
--------------- ------------- -------------- -------------
Revenue:
Software license.................................................. $ 13,886 $ 26,814 $ 6,729 $ 1,924
Services.......................................................... 15,494 29,794 5,853 2,026
---------- ---------- ---------- ----------
Total revenue............................................. 29,380 56,608 12,582 3,950
Cost of revenue:
Software license.................................................. 206 1,088 499 234
Services (excluding stock-based compensation of $1,866 for the
ten months ended October 31, 2001; $7,437, $515 and $64 for
for the years ended December 31, 2000, 1999 and 1998,
respectively)................................................... 17,558 30,514 6,121 2,248
---------- ---------- ---------- ----------
Total cost of revenue..................................... 17,764 31,602 6,620 2,482
---------- ---------- ---------- ----------
Gross profit........................................................ 11,616 25,006 5,962 1,468
---------- ---------- ---------- ----------
Operating expense:
Sales and marketing (excluding stock-based compensation of
$4,317 for the ten months ended October 31, 2001; $13,245,
$2,351 and $74 for the years ended December 31, 2000, 1999 26,500 46,717 15,609 4,495
and 1998, respectively)........................................
Product development (excluding stock-based compensation of
$87 for the ten months ended October 31, 2001; $3,064, $815
and $49, for the years ended December 31, 2000, 1999 8,793 9,727 4,769 3,275
and 1998, respectively)........................................
General and administrative (excluding stock-based
compensation of $493 for the ten months ended
October 31, 2001; 1,766, $274 and $15 for the years ended 10,589 12,675 3,125 1,379
December 31, 2000, 1999 and 1998 respectively).................
Stock-based compensation.......................................... 1,659 25,512 3,955 202
Amortization of intangibles and impairment charge................. 8,696 1,341 -- --
Impairment of investment.......................................... -- 1,000 -- --
Restructuring and other non-recurring expenses (exclusive of the.. 19,696 937 -- --
benefit of $5,104 for the ten months ended October 31, 2001,
relating to the reversal of previously recorded stock-based
compensation related to employees terminated in the
restructuring)
Total operating expense................................... 75,933 97,909 27,458 9,351
---------- ---------- ---------- ----------
Loss from operations................................................ (64,317) (72,903) (21,496) (7,883)
Interest income..................................................... 1,836 5,150 377 106
Interest expense.................................................... (64) (86) (655) (365)
Other non-operating, net............................................ (331) (62) (26) 8
---------- ---------- ---------- ----------
Net loss............................................................ (62,876) (67,901) (21,800) (8,134)
Deemed preferred stock dividend..................................... -- -- (10,800) --
---------- ---------- ---------- ----------
Net loss attributable to common stockholders........................ $ (62,876) $ (67,901) $ (32,600) $ (8,134)
========== ========== ========== ==========
Other comprehensive income (loss):
Change in unrealized gain (loss) on marketable
securities..................................................... (2) 35 -- --
Change in foreign currency translation adjustments................ 378 131 -- --
---------- ---------- ---------- ----------
Comprehensive loss.................................................. $ (62,500) $ (67,735) $ (21,800) $ (8,134)
========== ========== ========== ==========
Basic and diluted net loss per share................................ $ (1.56) $ (2.06) $ (9.18) $ (3.99)
========== ========== ========== ==========
Weighted-average common shares outstanding.......................... 40,216 32,891 3,552 2,038
========== ========== ========== ==========
The accompanying notes are an integral part of these
consolidated financial statements.
F-4
VERSATA, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(In thousands, except share data)
Additional
----------
Convertible Preferred Stock Common Stock Paid-in Treasury Stock
--------------------------- ------------------- ------- --------------
Shares Amount Shares Amount Capital Shares Amount
------------ ----------- ---------- -------- -------- ------------ -------
Balances at December 31, 1997 ..................... 12,087,508 $ 12 1,729,586 $ 1 $ 24,317 -- $ --
Series D convertible preferred stock issued
for cash, net of issuance costs of $38 ............ 5,160,116 5 -- -- 8,265 -- --
Series D convertible preferred stock issued upon
conversion and cancellation of bridge loans and
accrued interest .................................. 1,823,013 2 -- -- 2,933 -- --
Warrants issued in connection with Series D
convertible preferred stock financing ............. -- -- -- -- 137 -- --
Common stock issued for cash upon exercise of
stock options and warrants ........................ -- -- 514,113 -- 101 -- --
Unearned stock-based compensation ................. -- -- -- -- 1,306 -- --
Amortization of unearned stock-based compensation . -- -- -- -- -- -- --
Net loss .......................................... -- -- -- -- -- -- --
----------- ------- ---------- ------ --------- --------- -------
Balances at December 31, 1998 ..................... 19,070,637 $ 19 2,243,699 $ 1 $ 37,059 -- $ --
Convertible preferred stock issued upon exercise
of warrants ....................................... 104,534 -- -- -- 198 -- --
Series E convertible preferred stock issued for
cash, net of issuance costs of $70 ................ 3,607,967 3 -- -- 12,554 -- --
Series E convertible preferred stock issued upon
conversion and cancellation of bridge loans and
accrued interest .................................. 873,626 1 -- -- 3,057 -- --
Warrants issued in connection with Series E
convertible preferred stock financing ............. -- -- -- -- 521 -- --
Common stock issued upon exercise of stock options -- -- 1,177,953 2 550 -- --
Common stock repurchased .......................... -- -- (9,930) -- -- -- --
Restricted common stock issued in exchange for
notes receivable upon exercise of options ......... -- -- 3,715,535 4 1,863 -- --
Payments on notes receivable from stockholders .... -- -- -- -- -- -- --
Common stock issued upon exercise of warrants ..... -- -- 76,854 -- 87 -- --
Series F convertible preferred stock issued for
cash, net of issuance costs of $25 ................ 2,777,698 3 -- -- 15,416 -- --
Issuance of Series F convertible preferred stock
in exchange for notes receivable .................. 100,000 -- -- -- 556 -- --
Series F convertible preferred stock issued in
connection with acquisition ....................... 38,447 -- -- -- 461 -- --
Allocation of discount on preferred stock ......... -- -- -- -- 10,800 -- --
Deemed preferred stock dividend ................... -- -- -- -- (10,800) -- --
Stock-based compensation expense .................. -- -- -- -- 815 -- --
Unearned stock-based compensation ................. -- -- -- -- 16,768 -- --
Amortization of unearned stock-based compensation . -- -- -- -- -- -- --
Net loss .......................................... -- -- -- -- -- -- --
----------- ------- ---------- ------ --------- --------- -------
Balance at December 31, 1999 ...................... 26,572,909 $ 26 7,204,111 $ 7 $ 89,905 -- $ --
=========== ======= ========== ====== ========= ========= =======
Common stock issued in initial public offering,
net of issuance costs of $2.2 million ............. -- -- 4,427,500 4 96,651 -- --
Conversion of preferred stock on date of
public offering ................................... (26,950,287) (26) 26,950,287 26 -- -- --
Common stock issued for notes receivable
from stockholders ................................. -- -- 589,000 1 1,812 -- --
Common stock issued upon exercise of stock
options and warrants .............................. -- -- 1,624,001 2 2,499 -- --
Repurchase of stock from stockholder .............. -- -- (188,080) -- (37) -- --
Issuance of common stock under employee
stock purchase plan ............................... -- -- 86,894 -- 1,773 -- --
Issuance of common stock in connection
with Verve acquisition ............................ -- -- 448,467 1 4,502 -- --
Assumption of stock options in connection
with Verve acquisition ............................ -- -- -- -- 2,098 -- --
Loans provided to stockholders .................... -- -- -- -- -- -- --
Payments on notes receivable from stockholders .... -- -- -- -- -- -- --
Series F convertible preferred stock issues in
connection with acquisition ....................... 72,000 -- -- -- 1,087 -- --
Series F convertible preferred stock issues
for cash .......................................... 269,784 -- -- -- 1,500 -- --
Convertible preferred stock issued upon
exercise of warrants .............................. 35,594 -- -- -- 90 -- --
Accumulated other comprehensive income ............ -- -- -- -- -- -- --
Unearned stock-based compensation ................. -- -- -- -- 27,829 -- --
Amortization of unearned stock-based compensation . -- -- -- -- (3,357) -- --
Net loss .......................................... -- -- -- -- -- -- --
----------- ------- ---------- ------ --------- --------- -------
Balance at December 31, 2000 ...................... -- $ -- 41,142,180 $ 41 $ 226,352 -- $ --
=========== ======= ========== ====== ========= ========= =======
Common stock issued upon exercise of stock
options and warrants .............................. -- -- 300,710 -- 118 -- --
Issuance of common stock under employee
stock purchase plan ............................... -- -- 352,134 -- 1,480 -- --
Cancellation of notes receivable and
repurchase of common stock at par value ........... -- -- (354,000) (1) (1,517) -- --
Repurchase of common stock ........................ -- -- (146,150) -- (29) -- --
Issuance of restricted stock to officers .......... -- -- 2,305,000 2 (2) -- --
Repurchase of common stock of former officer
in connection with guarantee of loan and
cancellation of promissory note ................... -- -- -- -- -- (1,319,309) (1,383)
Write-off of note receivable in connection
with settlement agreement ......................... -- -- -- -- -- -- --
Accumulated other comprehensive income ............ -- -- -- -- -- -- --
Unearned stock-based compensation ................. -- -- -- -- (9,023) -- --
Amortization of unearned stock-based compensation . -- -- -- -- -- -- --
Net loss .......................................... -- -- -- -- -- -- --
----------- ------- ---------- ------ --------- --------- -------
Balance at October 31, 2001 ....................... -- $ -- 43,599,874 $ 42 $ 217,379 (1,319,309) $(1,383)
=========== ======= ========== ====== ========= ========= =======
Accumulated
-----------
Notes Deferred Other Total
----- -------- ----- -----
Receivable from Stock-Based Comprehensive Accumulated Stockholders'
--------------- ----------- ------------- ----------- -------------
Stockholders Compensation Income Deficit Equity
--------------- ------------ ------------- ----------- -------------
Balances at December 31, 1997 ..................... $ -- $ -- $ -- $ (23,441) $ 889
Series D convertible preferred stock issued
for cash, net of issuance costs of $38 ............ -- -- -- -- 8,270
Series D convertible preferred stock issued upon
conversion and cancellation of bridge loans and
accrued interest .................................. -- -- -- -- 2,935
Warrants issued in connection with Series D
convertible preferred stock financing ............. -- -- -- -- 137
Common stock issued for cash upon exercise of
stock options and warrants ........................ (44) -- -- -- 57
Unearned stock-based compensation ................. -- (1,306) -- -- --
Amortization of unearned stock-based compensation . -- 202 -- -- 202
Net loss .......................................... -- -- -- (8,134) (8,134)
----------- ----------- ----------- ----------- -----------
Balances at December 31, 1998 ..................... $ (44) $ (1,104) $ -- $ (31,575) $ 4,356
Convertible preferred stock issued upon exercise
of warrants ....................................... -- -- -- -- 198
Series E convertible preferred stock issued for
cash, net of issuance costs of $70 ................ -- -- -- -- 12,557
Series E convertible preferred stock issued upon
conversion and cancellation of bridge loans and
accrued interest .................................. -- -- -- -- 3,058
Warrants issued in connection with Series E
convertible preferred stock financing ............. -- -- -- -- 521
Common stock issued upon exercise of stock options -- -- -- -- 552
Common stock repurchased .......................... -- -- -- -- --
Restricted common stock issued in exchange for
notes receivable upon exercise of options ......... (1,867) -- -- -- --
Payments on notes receivable from stockholders .... 54 -- -- -- 54
Common stock issued upon exercise of warrants ..... -- -- -- -- 87
Series F convertible preferred stock issued for
cash, net of issuance costs of $25 ................ -- -- -- -- 15,419
Issuance of Series F convertible preferred stock
in exchange for notes receivable .................. (556) -- -- -- --
Series F convertible preferred stock issued in
connection with acquisition ....................... -- -- -- -- 461
Allocation of discount on preferred stock ......... -- -- -- -- 10,800
Deemed preferred stock dividend ................... -- -- -- -- (10,800)
Stock-based compensation expense .................. -- -- -- -- 815
Unearned stock-based compensation ................. -- (16,768) -- -- --
Amortization of unearned stock-based compensation . -- 3,140 -- -- 3,140
Net loss .......................................... -- -- -- (21,800) (21,800)
----------- ----------- ----------- ----------- -----------
Balance at December 31, 1999 ...................... $ (2,413) $ (14,732) $ -- $ (53,375) $ 19,418
=========== =========== =========== =========== ===========
Common stock issued in initial public offering,
net of issuance costs of $2.2 million ............. -- -- -- -- 96,655
Conversion of preferred stock on date of
public offering ................................... -- -- -- -- --
Common stock issued for notes receivable
from stockholders ................................. (1,813) -- -- -- --
Common stock issued upon exercise of stock
options and warrants .............................. -- -- -- -- 2,501
Repurchase of stock from stockholder .............. 31 -- -- -- (6)
Issuance of common stock under employee
stock purchase plan ............................... -- -- -- -- 1,773
Issuance of common stock in connection
with Verve acquisition ............................ -- -- -- -- 4,503
Assumption of stock options in connection
with Verve acquisition ............................ -- -- -- -- 2,098
Loans provided to stockholders .................... (1,025) -- -- -- (1,025)
Payments on notes receivable from stockholders .... 1,352 -- -- -- 1,352
Series F convertible preferred stock issues in
connection with acquisition ....................... -- -- -- -- 1,087
Series F convertible preferred stock issues
for cash .......................................... -- -- -- -- 1,500
Convertible preferred stock issued upon
exercise of warrants .............................. -- -- -- -- 90
Accumulated other comprehensive income ............ -- -- 166 -- 166
Unearned stock-based compensation ................. -- (27,829) -- -- --
Amortization of unearned stock-based compensation . -- 28,691 -- -- 25,334
Net loss .......................................... -- -- -- (67,901) (67,901)
----------- ----------- ----------- ----------- -----------
Balance at December 31, 2000 ...................... $ (3,868) $ (13,870) $ 166 $ (121,276) $ 87,545
=========== =========== =========== =========== ===========
Common stock issued upon exercise of stock
options and warrants .............................. -- -- -- -- 118
Issuance of common stock under employee
stock purchase plan ............................... -- -- -- -- 1,480
Cancellation of notes receivable and
repurchase of common stock at par value ........... 1,518 -- -- --
Repurchase of common stock ........................ -- -- -- -- (29)
Issuance of restricted stock to officers .......... -- -- -- --
Repurchase of common stock of former officer
in connection with guarantee of loan and
cancellation of promissory note ................... 1,419 -- -- -- 36
Write-down of note receivable in connection
with settlement agreement ......................... 630 -- -- -- 630
Accumulated other comprehensive income ............ -- -- (376) -- (376)
Unearned stock-based compensation ................. -- 4,522 -- -- (4,501)
Amortization of unearned stock-based compensation . -- 6,753 -- -- 6,763
Net loss .......................................... -- -- -- (62,876) (62,876)
----------- ----------- ----------- ----------- -----------
Balance at October 31, 2001 ...................... $ (301) $ (2,585) $ (210) $ (184,152) $ 28,790
=========== =========== =========== =========== ===========
The accompanying notes are an integral part of these
consolidated financial statements.
F-5
VERSATA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Ten Months Year Ended
Ended ------------------------------------------
October 31, December December December 31,
2001 31, 2000 31, 1999 1998
------------ ------------- ------------- --------------
Cash flows from operating activities:
Net loss................................................................. $ (62,876) $ (67,901) $ (21,800) $ (8,134)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization.......................................... 11,436 2,937 495 537
Provision for doubtful accounts........................................ 2,223 2,844 586 223
Warrants issued in connection with bridge loans recorded as interest
expense.............................................................. -- -- 521 137
Stock-based compensation expense....................................... 1,659 25,512 3,955 202
Cancellation of promissory notes........................................... 1,287 -- -- --
Write-down of leasehold improvements and office furniture due to
restructuring............................................................ 6,574 -- -- --
Change in operating assets and liabilities:
Accounts receivable.................................................. 7,979 (10,946) (4,662) (1,198)
Unbilled receivables................................................. 736 (2,000) (1,584) --
Prepaid expenses and other assets.................................... 2,227 (660) (2,005) (68)
Other assets......................................................... 138 (256) (68) --
Accounts payable and accrued liabilities............................. (14,947) 11,979 6,606 933
Accrued restructuring ............................................... 2,933 -- -- --
Deferred revenues.................................................... 197 4,001 3,523 654
Other long-term liabilities.......................................... -- -- (112) (285)
------------- ----------- ---------- ----------
Net cash used in operating activities.............................. (40,434) (34,490) (14,545) (6,999)
------------- ----------- ---------- ----------
Cash flows from investing activities:
Maturities (purchases) of short-term investments......................... 26,865 (29,890) -- --
Purchase of restricted cash.............................................. (256) (5,189) -- --
Purchase of property and equipment....................................... (3,670) (12,495) (1,469) (299)
(Decrease) in notes receivable from related parties...................... -- (22) (34) --
Net cash used in connection with acquisitions, net of cash acquired...... -- (2,048) (586) --
------------- ----------- ---------- ----------
Net cash provided by (used in) investing activities................ 22,939 (49,644) (2,089) (299)
------------- ----------- ---------- ----------
Cash flows from financing activities:
Principal payments on capital lease obligations and loan................. (136) (218) (707) (416)
Proceeds from equipment line............................................. -- -- 362 --
Net proceeds from issuance of convertible preferred stock................ -- 1,500 27,976 8,270
Net proceeds from issuance of common stock............................... -- 96,655 552 57
Proceeds from issuance of common stock under employee stock purchase
plan................................................................... 1,480 1,773 -- --
Proceeds from exercise of stock options and warrants..................... 118 2,560 285 --
Repurchase of common stock from stockholders............................. (29) (6) -- --
Repurchase of common stock from former officers.......................... (988) -- -- --
Payments from stockholders on notes receivable........................... -- 1,383 54 --
Loans provided to stockholders........................................... -- (1,025) -- --
Proceeds from bridge loans............................................... -- -- 3,000 2,816
------------- ----------- ---------- ----------
Net cash provided by financing activities.......................... 445 102,621 31,522 10,727
------------- ----------- ---------- ----------
Effects of exchange rate changes on cash and cash equivalents.............. (351) 130 -- --
------------- ----------- ---------- ----------
Decrease (increase) in cash and cash equivalents................... (17,401) 18,617 14,888 3,429
Cash and cash equivalents at beginning of period........................... 39,272 20,655 5,767 2,338
------------- ----------- ---------- ----------
Cash and cash equivalents at end of period................................. $ 21,871 $ 39,272 $ 20,655 $ 5,767
============= =========== ========== ==========
Supplemental Disclosures of Cash Flow information
Cash paid during the period for interest................................... $ 28 $ 96 $ 72 $ 110
============= =========== ========== ==========
Supplemental Schedule of Noncash Investing and Financing Activities
Common stock issued for notes receivable from stockholders................. $ -- $ 1,813 $ 1,867 $ 44
============= =========== ========== ==========
Convertible preferred stock issued for notes receivable from stockholders.. $ -- $ -- $ 556 $ --
============= =========== ========== ==========
Issuance of preferred stock upon conversion and cancellation
of bridge loans and accrued interest..................................... $ -- $ -- $ 3,058 $ 2,935
============= =========== ========== ==========
Issuance of convertible preferred stock in connection with acquisition..... $ -- $ 1,087 $ 461 $ --
============= =========== ========== ==========
Issuance of common stock in connection with acquisition.................... $ -- $ 4,503 $ -- $ --
============= =========== ========== ==========
Assumption of stock options in connection with acquisition................. $ -- $ 2,098 $ -- $ --
============= =========== ========== ==========
Property and equipment acquired through capital leases..................... $ -- $ 30 $ 49 $ --
============= =========== ========== ==========
Acquisition of treasury stock in exchange for cancellation of note......... $ 919 $ -- $ -- $ --
============= =========== ========== ==========
Notes receivable and interest receivable deductible cancelled
in exchange for repurchase of common stock from stockholder................ $ 1,518 $ -- $ -- $ --
============= =========== ========== ==========
The accompanying notes are an integral part of these
consolidated financial statements.
F-6
VERSATA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. The Company
Versata, Inc. was incorporated in California on August 27, 1991, and was
reincorporated in the State of Delaware on February 24, 2000. Versata, Inc.
provides a business logic management system that enables the creation,
execution, change and re-use of business logic (the "heart" of the application)
for companies to build large, distributed applications in the J2EE (Java 2
Enterprise Edition) infrastructure. Versata, Inc. provides a declarative
approach for transaction and process logic, which enables companies to deliver
business logic as a key strategic asset of their enterprise architecture.
On December 31, 2001, we announced a change in our fiscal year from December
31 to October 31. The change was effective for the ten-month period ended
October 31, 2001.
2. Basis of Presentation
The consolidated financial statements include the accounts of Versata, Inc.
and its subsidiaries, all of which are wholly owned and located in North
America, Europe, Australia and Asia. All intercompany accounts and transactions
have been eliminated in consolidation. Versata, Inc. and its subsidiaries are
collectively referred to as the "Company" or "Versata."
We have an accumulated deficit of $184.2 million as of October 31, 2001 and
we have generated losses and negative cash flows from operations in current and
prior periods. We may incur additional operating losses and negative cash flows
in the future. The Company may find it necessary to obtain additional equity or
debt financing in the future. Certain costs could be reduced if working capital
decreased significantly. Failure to generate sufficient revenue, raise
additional capital or reduce certain discretionary spending could have a
material adverse affect on our ability to achieve our intended business
objectives.
3. Summary of Significant Accounting Policies
Use of estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting periods. Actual results could differ from those
estimates.
Revenue recognition
We derive revenue from two sources as follows: (i) sale of software licenses
to end users, value added resellers (VARs), distributors, system integrators,
independent software vendors, and application service providers; and (ii)
services which include consulting, training, and post-contract customer support.
We recognize revenue in accordance with Statement of Position 97-2, Software
Revenue Recognition. We record revenue from licensing of software products to
end-users when a license agreement is signed by both parties, the fee is fixed
or determinable, collection is reasonably assured and delivery of the product
has occurred. Generally, we provide payment terms that range from thirty days to
ninety days from the invoice date. Accordingly, payment terms that exceed ninety
days are not considered fixed or determinable and revenue is recognized as
payments become due. When contracts contain multiple elements, and for which
vendor specific objective evidence ("VSOE") of fair value exists for the
undelivered elements, we recognize revenue for the delivered elements based upon
the residual method. VSOE is generally the price for products sold separately
or, the renewal rate in the agreement for PCS. Undelivered elements consist
primarily of post contract customer support ("PCS") and other services such as
consulting, mentoring and training. Services are generally not considered
essential to the functionality of the software. We recognize revenue allocated
to post-contract customer support ratably over the period of the contracts,
which is generally twelve months. For revenue related to consulting services, we
recognize revenue as the related services are performed. In instances where
services are deemed essential to the software, both the software license fee and
consulting fees are recognized using the percentage-of-completion method of
contract accounting. The portion of fees related to either products delivered or
services rendered which are not due under our Company's standard payment terms
are reflected in deferred revenue and in unbilled receivables.
F-7
Cash and cash equivalents and short-term investments
We consider all highly liquid investments purchased with an original
maturity of three months or less to be cash equivalents. Our short-term
investments consist of debt securities with maturities greater than three months
at the date of purchase. We classify all short-term investments as available for
sale in accordance with Statement of Financial Accounting Standards ("SFAS") No.
115, Accounting for Certain Investments in Debt and Equity Securities.
Accordingly, our short-term investments are carried at fair value as of the
balance sheet date. Unrealized gains and losses are reported net of taxes as a
component of shareholders' equity. The cost of securities sold is based upon the
specific identification method. At each period end presented, amortized cost
approximated fair value and unrealized gross gains or losses were insignificant,
and during each of the periods presented, realized gains were insignificant.
The portfolio of cash, cash equivalents and short-term investments consisted
of the following (in thousands):
As of As of As of
October 31, 2001 December 31, 2000 December 31, 1999
---------------- ----------------- -----------------
Cash and cash equivalents:
Cash................................................ $ 9,377 $ 11,493 $ 1,329
Commercial paper.................................... 4,992 19,102 --
Auction floater..................................... 6,005 8,677 --
Money market funds.................................. 1,497 -- 6,826
US Agencies:
Certificates of deposit............................. -- -- 12,500
---------- -------------- --------------
$ 21,871 $ 39,272 $ 20,655
============== ============== ==============
Short-term Investments:
Corporate debt securities........................... $ 497 $ 25,871 $ --
Debt securities issued by the U.S. government....... 2,539 4,055 --
---------- -------------- --------------
$ 3,036 $ 29,926 $ --
============== ============== ==============
Fair value of financial instruments
The reported amounts of certain of our Company's financial instruments
including cash and cash equivalents and short-term investments, receivables, and
accounts payable approximate fair value due to their short maturities. The
reported amounts of loans payable approximate fair value due to the market
interest rates, which these debts bear.
Concentration of credit risk
Financial instruments, which potentially subject our Company to
concentrations of credit risk, consist primarily of cash, investments,
certificates of deposit, money market accounts, and accounts receivable. Our
Company places its cash investments with three major financial institutions. At
October 31, 2001, December 31, 2000 and December 31, 1999 our Company had
deposits in excess of federally insured limits of $24,707,000, $68,898,000 and
$20,555,000, respectively.
Our Company performs ongoing customer credit evaluations within the context
of the industry in which it operates, does not require collateral, and maintains
allowances for potential credit losses on customer accounts when deemed
necessary.
The following table sets forth customers comprising 10% or more of our
Company's total revenue for each of the periods presented:
Ten Months
Ended
October 31, Year Ended December 31,
-------------------------
Customer 2001 2000 1999 1998
-------- -------- -------- -------- ------
A......... 17% -- -- 18%
B......... 16% -- -- 13%
C......... -- -- 12% --
F-8
We had two single customers that accounted for 28% of our accounts
receivable as of October 31, 2001. No single customer accounted for greater than
10% of our accounts receivable as of December 31, 2000, and one customer
accounted for 12% of our accounts receivable as of December 31, 1999.
Property and equipment
Property and equipment is stated at cost and is depreciated using the
straight-line method over the estimated useful lives of the related assets,
which range from two to five years. Leasehold improvements are amortized on a
straight-line basis over the life of the lease or the estimated useful life of
the asset, whichever is shorter. Equipment under capital lease is amortized
using the straight-line method over the lesser of the lease term or their
estimated useful lives.
Major additions and improvements are capitalized, while replacements,
maintenance, and repairs that do not improve or extend the life of the assets
are charged to expense. In the period assets are retired or otherwise disposed
of, the cost and related accumulated depreciation and amortization are removed
from the accounts, and any gain or loss on disposal is included in results of
operations.
Goodwill and other acquisition-related intangibles
Goodwill is recorded when the consideration paid for acquisition exceeds the
fair value of identifiable net tangible and intangible assets acquired. Goodwill
and other acquisition-related intangibles are amortized on a straight-line basis
over three years.
Stock-based compensation
Our Company accounts for stock-based employee compensation arrangements in
accordance with provisions of Accounting Principles Board Opinion ("APB") No.
25, Accounting for Stock Issued to Employees, and Financial Accounting Standards
Board Interpretation ("FIN") No. 28, Accounting for Stock Appreciation Rights
and Other Variable Stock Option or Award Plans, and complies with the disclosure
provisions of SFAS No. 123, Accounting for Stock-Based Compensation. Under APB
No. 25, compensation expense is based on the difference, if any, on the date of
grant, between the fair value of our Company's common stock and the exercise
price. SFAS 123 defines a "fair value" based method of accounting for an
employee stock option or similar equity investment. The pro forma disclosures of
the difference between the compensation expense included in net loss and the
related cost measured by the fair value method are presented in Note 13. Our
Company accounts for equity instruments issued to nonemployees in accordance
with the provisions of SFAS No. 123 and Emerging Issues Task Force ("EITF")
96-18, Accounting for Equity Instruments That Are Issued to Other Than Employees
for Acquiring, or in Conjunction with Selling Goods or Services.
Software development costs
Software development costs are included in product development and are
expensed as incurred. After technological feasibility is established, material
software development costs are capitalized in accordance with SFAS No. 86,
Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise
Marketed. The capitalized cost is then amortized on a straight-line basis over
the estimated product life, or in the ratio of current revenues to total
projected product revenues, whichever is greater. To date, the period between
achieving technological feasibility, which the Company has defined as the
establishment of a working model, and typically occurs when the beta testing
commences, and the general availability of such software has been short and
software development costs qualifying for capitalization have been
insignificant. Accordingly, the Company has not capitalized any software
development costs.
Foreign currency translation
Assets and liabilities of foreign operations where the functional currency
is the local currency, are translated into U.S. dollars at the balance sheet
date exchange rate. Revenues and expenses are translated at the average rate
prevailing during the period. The related gains and losses from translation are
recorded as a translation adjustment in a separate component of stockholders'
equity, which were not significant for the ten months ended October 31, 2001,
and for the years ended December 31, 2000, 1999 and 1998. Foreign currency
transaction gains and losses have been immaterial to date.
Comprehensive loss
Comprehensive loss consists of net loss, the net changes in foreign currency
translation adjustment and the net unrealized gains and losses on
available-for-sale securities. For the years ended December 31, 1999 and 1998,
the net change in foreign currency translation adjustments was insignificant.
There were no other items of comprehensive income in 1999 or 1998.
F-9
Income taxes
Our Company has accounted for income taxes using an asset and liability
approach which requires the recognition of taxes payable or refundable for the
current year and deferred tax liabilities and assets for the future tax
consequences of events that have been recognized in our Company's financial
statements or tax returns. The measurement of current and deferred tax
liabilities and assets are based on provisions of the enacted tax law. The
measurement of deferred tax assets is reduced, if necessary, by the amount of
any tax benefits that, based on available evidence, are not expected to be
realized.
Long-lived assets
Our Company accounts for long-lived assets under SFAS No. 121, Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
of, which requires our Company to review for impairment of long-lived assets
whenever events or changes in circumstances indicate that the carrying amount of
an asset might not be recoverable. When such an event occurs, our Company
estimates the future cash flows expected to result from the use of the asset and
its eventual disposition. If the undiscounted expected future cash flows are
less than the carrying amount of the asset, an impairment loss is recognized.
Net loss per share
Basic and diluted net loss per share is computed by dividing the net loss
available to holders of common stock for the period by weighted average number
of shares of common stock outstanding during the period. The calculation of
diluted net loss per share excludes potential common stock if their effect is
antidilutive. Potential common stock consists of unvested restricted common
stock, and incremental common or preferred shares issuable upon the exercise of
stock options, warrants and common stock issuable upon conversion of convertible
preferred stock.
The following table sets forth the computation of basic and diluted net loss
per share (in thousands, except share and per share data):
Year Ended December 31,
Ten Months Ended -------------------------------------------------
October 31, 2001 2000 1999 1998
-------------- -------------- ------------- -------------
Numerator:
Net loss................................................ $ (62,876) $ (67,901) $ (21,800) $ (8,134)
Deemed preferred stock dividend......................... -- -- (10,800) --
-------------- -------------- ------------- -------------
Net loss attributable to common stockholders............ $ (62,876) $ (67,901) $ (32,600) $ (8,134))
============== ============== ============= ==============
Denominator:
Weighted average shares outstanding..................... 42,337 34,881 4,737 2,038
Weighted average unvested shares of common stock
subject to repurchase................................ (2,121) (1,990) (1,184) --
-------------- -------------- ------------- ------------
Denominator for basic and diluted calculation........... 40,216 32,891 3,552 2,038
============== ============== ============= =============
Net loss per share attributable to common stockholders:
Basic and diluted....................................... $ (1.56) $ (2.06) $ (9.18) $ (3.99)
============== ============== ============= =============
The following table sets forth potential shares of common stock that are not
included in the diluted net loss per share calculation above because to do so
would be antidilutive for the periods (in thousands).
Shares at End of Period
December 31,
-------------------------------------
October 31, 2001 2000 1999 1998
---------------- --------- --------- --------
Effect of common stock equivalents:
Unvested common stock subject to repurchase................. 2,132 1,186 2,165 --
Stock options outstanding................................... 7,923 8,379 4,963 5,409
Convertible preferred stock................................. -- -- 26,573 19,093
Warrants to purchase convertible preferred stock............ -- -- 217 78
Warrants to purchase common stock........................... -- -- 538 615
---------- --------- --------- --------
Total common stock equivalents excluded from
the computation of earnings per share as
their effect was antidilutive............................... 10,055 9,565 34,456 25,195
========== ========= ========= =========
F-10
Segment information
We identify our operating segments based on business activities, management
responsibility and geographical location. For all periods presented, we operated
in a single business segment, primarily in the United States. Through December
31, 1998, foreign operations have not been significant in either revenue or
investment in long-lived assets. Revenue for geographic regions reported below
is based upon the customers' locations. Following is a summary of the geographic
information related to revenues (in thousands):
Year Ended December 31,
Ten Months Ended ------------------------------
October 31, 2001 2000 1999
------------- ------------- -------------
Software license revenue:
United States...................... $ 8,131 $ 19,848 $ 5,129
Europe............................. 5,755 6,237 1,429
Other international................ -- 729 171
------------- ------------- -------------
13,886 26,814 6,729
Services revenue:
United States...................... $ 12,271 $ 24,461 $ 5,638
Europe............................. 3,223 4,621 121
Other international................ -- 712 94
------------- ------------- -------------
15,494 29,794 5,853
Total revenue:
United States...................... $ 20,402 $ 44,309 $ 10,767
Europe............................. 8,978 10,858 1,550
Other international................ -- 1,441 265
------------- ------------- -------------
$ 29,380 $ 56,608 $ 12,582
============= ============= =============
Long-lived assets, predominantly intangibles and property and equipment, is
based on the location of the assets, or, for intangibles, the location of the
entity owning the intangible asset. As of October 31, 2001, approximately
$15,065,000 of long-lived assets were located in the United States, $644,000
were located in Europe, and $107,000 were located elsewhere. As of December 31,
2000, approximately $28,497,000 of long-lived assets were located in the United
States, $1,054,000 were located in Europe, and $254,000 were located elsewhere.
As of December 31, 1999, long-lived assets located outside of the United States
were insignificant.
Certain risks and uncertainties
The Company's products are concentrated in the industry segment for internet
infrastructure software that is characterized by rapid technological advances,
changes in customer requirements and evolving regulatory requirements and
industry standards. These products depend in part on third-party technology that
the Company licenses from a limited number of suppliers. Also, the Company has
depended on a limited number of products for substantially all revenue to date.
Failure by the Company to anticipate or to respond adequately to technological
developments in its industry, changes in customer or supplier requirements or
changes in regulatory requirements or industry standards, or any significant
delays in the development or introduction of products or services, could have a
material adverse effect on the Company's business, cash flows and operations.
Recent accounting pronouncements
In July 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 141 ("SFAS No. 141"), "Business
Combinations." SFAS No. 141 requires the purchase method of accounting for
business combinations initiated after June 30, 2001 and eliminates the
pooling-of-interests method. In addition, the FASB issued SFAS No. 142,
"Goodwill and Other Intangible Assets," which is effective for fiscal years
beginning after December 15, 2001. SFAS No. 142 requires, among other things,
the discontinuance of goodwill amortization. In addition, the standard includes
provisions upon adoption for the reclassification of certain existing recognized
intangibles as goodwill, reassessment of the useful lives of existing recognized
intangibles, reclassification of certain intangibles out of previously reported
goodwill and the testing for impairment of existing goodwill and other
intangibles. Versata adopted SFAS No. 142 effective November 1, 2001. The
adoption of SFAS No. 142 did not
F-11
have a significant impact on our consolidated financial statements as we had no
goodwill recorded on our balance sheet on the date of adoption.
In October 2001, the FASB issued SFAS No. 144, Accounting for the Impairment
or Disposal of Long-Lived Assets. SFAS No. 144 supersedes SFAS No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of. SFAS No. 144 applies to all long-lived assets (including
discontinued operations) and consequently amends Accounting Principles Board
Opinion No. 30. SFAS No. 144 develops one accounting model for long-lived assets
that are to be disposed of by sale. SFAS No. 144 requires that long-lived assets
that are to be disposed of by sale be measured at the lower of book value or
fair value less cost to sell. Additionally, SFAS No. 144 expands the scope of
discontinued operations to include all components of an entity with operations
that (1) can be distinguished from the rest of the entity and (2) will be
eliminated from the ongoing operations of the entity in a disposal transaction
SFAS No. 144 is effective for the Company for all financial statements issued in
fiscal 2002. We will adopt SFAS No. 144 effective November 1, 2001. The adoption
is not anticipated to have a significant impact on the Company's consolidated
financial statements.
In November 2001, the FASB Emerging Task Force ("EITF") reached a consensus
on EITF Issue 01-09, Accounting for Consideration Given by a Vendor to a
Customer or a Reseller of the Vendor's Products, which is a codification of EITF
00-14, 00-22 and 00-25. This issue presumes that consideration from a vendor to
a customer or reseller of the vendor's products to be a reduction of the selling
prices of the vendor's products and, therefore, should be characterized as a
reduction of revenue when recognized in the vendor's income statement and could
lead to negative revenue under certain circumstances. Revenue reduction is
required unless consideration relates to a separate identifiable benefit and the
benefit's fair value can be established. This issue should be applied no later
than in annual or interim financial statements for periods beginning after
December 15, 2001, which is our second quarter ended April 30, 2002. Upon
adoption we are required to reclassify all prior period amounts to conform to
the current period presentation. We have not yet evaluated the effects of these
changes on our consolidated financial statements.
In November 2001, the FASB issued EITF Issue 01-14, Income Statement
Characterization of Reimbursements Received for out-of-pocket Expenses Incurred,
which will require companies to report reimbursements of "out-of-pocket"
expenses as revenues and the corresponding expenses incurred as costs of
revenues within the income statement. We expect to adopt the provisions of D-103
during the first quarter of fiscal 2002.
4. Balance Sheet Components (in thousands):
Accounts receivable
As of
October 31, As of December 31,
2001 2000 1999
---------- --------- ---------
Accounts receivable...................... $ 6,078 $ 15,972 $ 6,473
Less: allowance for doubtful accounts.... (2,103) (1,795) (886)
---------- --------- ---------
$ 3,975 $ 14,177 $ 5,587
========= ========= =========
Property and equipment
Estimated As of
Useful life October 31, As of December 31,
(years) 2001 2000 1999
------- ---- ---- ----
Equipment.............................................. 3 $ 6,923 $ 8,479 $ 3,006
Furniture and fixtures................................. 5 1,007 1,950 336
Leasehold improvements................................. 2 1,268 4,488 80
Equipment under capital leases......................... 3 - 5 39 598 525
-------- --------- --------
9,237 15,515 3,947
Less: Accumulated depreciation and amortization........ (2,980) (3,614) (2,045)
-------- --------- --------
$ 6,257 $ 11,901 $ 1,902
======== ========= ========
Accumulated amortization related to equipment under capital lease at October
31, 2001, December 31, 2000 and 1999 totaled approximately $605,000, $517,000,
and $427,000, respectively.
During the ten months ended October 31, 2001, property, leasehold
improvements and equipment relating to subleased offices were disposed of as
part of our restructuring efforts. The charge was $6.3 million.
F-12
Intangibles
As of
October 31, As of December 31,
2001 2000 1999
--------- -------- --------
Goodwill.................................... $ -- $ 6,584 $ 1,139
Purchased technology........................ 5,680 5,680 --
Workforce in place.......................... -- 1,250 250
Other intangibles........................... 67 60 --
--------- -------- --------
5,747 13,574 1,389
Less: Accumulated amortization.............. (1,849) (1,369) --
--------- -------- --------
$ 3,898 $ 12,205 $ 1,389
========= ======== ========
During the ten months ended October 31, 2001, we performed an impairment
assessment of the identifiable intangibles and goodwill recorded in connection
with the acquisition of Verve, Inc. and our French distributor. The assessment
was performed primarily due to 1) the sustained decline in the Company's stock
price since the valuation date of the shares issued in the Verve, Inc.
acquisition, resulting in the net book value of its assets prior to the
impairment charge exceeding the Company's market capitalization; 2) the overall
decline in the industry growth rates; and, 3) projected operating results. As a
result, we recorded a $4.1 million impairment charge to reduce goodwill and
other identifiable intangibles. The charge was based upon the estimated
discounted cash flows over the remaining useful life of the goodwill using a
discount rate of 20%. The assumptions supporting the cash flows, including the
discount rate, were determined using the Company's best estimate as of such
date. There is no remaining goodwill balance at October 31, 2001.
Accrued liabilities
As of
October 31, As of December 31,
2001 2000 1999
--------- --------- ---------
Accrued payroll and related liabilities....... $ 2,720 $ 9,083 $ 2,573
Accrued royalties............................. -- 208 365
Accrued professional fees..................... 1,156 1,863 2,045
Accrued sales tax............................. 68 378 --
Other accrued liabilities..................... 2,233 1,614 2,315
--------- --------- ---------
$ 6,177 $ 13,146 $ 7,298
========= ========= =========
5. Restructuring and other non-recurring expenses
In January 2001, we implemented a cost cutting initiative that included a
reduction in total staff of approximately 70 people, or 13% of the total
workforce. This reduction impacted all departments, but primarily reflected a
shift in the strategy of our services organization.
In March 2001, we announced a restructuring effort to realign our expenses
with a business plan geared to the changing economy. This restructuring was
designed to align the workforce with customer needs and focus on core business
products. The restructuring plan included the discontinuation of further
development of non-core business products, facility consolidations, and a
reduction in total staff, including domestic and international employees and
contractors, including staff in our subsidiaries, of approximately 107 positions
across all departments. We expensed $6.9 million for restructuring and other
expenses in the three months ended March 31, 2001.
In May 2001, we further reduced staff by approximately 50 positions, across
all departments, and closed additional field offices. We expensed $3.5 million
for restructuring and other expenses in the three months ended June 30, 2001.
In August 2001, we again reduced staff by 20%, 43 positions in the United
States and 17 positions internationally. We expensed an additional $5.3 million
in restructuring and other costs.
In October 2001 an additional 46 positions were eliminated, 25 in the United
States and 21 positions internationally.
The following table summurizes the restructuring activity during the ten months
ended October 31, 2001 (in thousands):
Office Closure
and Asset Non-
Subleasing Disposal recoverable Settlement Other
Employee Severance Costs Losses Loan Agreement Costs Total
------------------ --------------- --------- ----------- ---------- ------- -----
Accrual balance, December 31, $ -- $ -- $ -- $ -- $ -- $ -- $ --
2000
Additions 4,266 4,295 7,393 504 1,823 1,315 18,596
Cash paid (3,361) (2,613) (484) -- (534) (859) (7,841)
Non-cash costs -- -- (6,909) (604) (1,299) (110) (8,922)
------- ------- ------- ------ ------- ------- --------
Accrual balance, October 31,
2001 $ 905 $ 1,662 $ -- $ -- $ -- $ 348 $ 2,933
======= ======= ======= ====== ======= ======= ========
6. Related Party Transactions
During 2000, we held a $1,000,000 investment in the preferred stock of
TruMarkets, Inc., a privately held corporation. Our Chairman of the Board of
Directors held a membership interest in the general partner of a partnership
that owned a controlling interest in the outstanding capital stock of
TruMarkets, Inc. In January 2001, we provided the investee with a $500,000
bridge loan. As of December 31, 2000, the investee was in the process of
developing its products and was actively negotiating with third parties for
additional financing to fund its operations. During March 2001, the investee's
attempts to obtain additional financing failed and the investee began efforts to
sell the company. The $500,000 loan was recorded in restructuring and other
expenses in the first quarter of 2001. In June 2001, TruMarkets, Inc. was
acquired by MortgageSight Holding LLC ("MortgageSight") and our investment and
loan were converted to 22,122 shares of preferred stock, or less than 1% of
MortgageSight. It is our understanding that MortgageSight has ceased its
operations; therefore, the value of these shares is uncertain, so no amount has
been recorded on the balance sheet.
In November 1999, our former Chief Financial Officer, Kevin Ferrell,
delivered a full-recourse promissory note to us in payment for 100,000 shares of
Series F preferred stock. The principal amount secured under the note was
$556,000. The note bore interest at the rate of 7.00% per annum, compounded
annually, and was secured by the purchased shares. The principal balance would
become due and payable in one lump sum on the third anniversary of the signing
of the note (November 2002). In 2000, Mr. Ferrell paid down approximately
$103,000 in principle and $35,000 in interest towards this note.
In December 1999, Mr. Ferrell delivered a full-recourse promissory note to
us in payment of the exercise price of 400,000 outstanding stock options under
our 1997 stock option plan. The principal amount secured under the note was
$1,200,000. In 2000, Mr. Ferrell paid down $84,000 approximately in interest
towards this note. Mr. Ferrell resigned in February 2001. In February 2001,
F-13
we exercised our right to repurchase 240,000 unvested shares of Mr. Ferrell's
400,000 option shares. We paid par value to repurchase the shares, which reduced
the principal amount of the note by $720,000. The offset to the reduction in the
note was recorded as a reduction in paid in capital.
In October 2001, we wrote down $632,000 in principal in connection with both
of Mr. Ferrell's notes. At October 31, 2001, $301,000 remains in notes
receivable as a component of stockholders' equity, all of which relates to Mr.
Ferrell's two notes.
In January 2000, Mr. Hewitt delivered a full recourse promissory note to us
in payment of the exercise price of stock options issued pursuant to our 1997
Stock Option Plan. The principal amount secured under the note was $1,015,000.
The note had a term of three years and bore interest at the rate of 7.00% per
annum, compounded annually. The note was secured by the purchased shares and
additional collateral. The entire unpaid balance of the note was due and payable
upon termination of employment, failure to pay any installment of principal or
interest when due, or insolvency or bankruptcy, or in the event we are acquired.
None of the shares serving as security for the note could have been sold unless
the principal portion of the note attributable to those shares and the accrued
interest on that principal portion was paid to us. In December 2000, Mr. Hewitt
delivered to us another full recourse promissory note in the amount of $375,000.
The note was secured by shares of our common stock held by us for the previous
loan. The note was due and payable on January 31, 2002, and bore interest at the
prime rate as reported in The Wall Street Journal from time to time and
compounded annually. Accrued interest was due on each anniversary of the signing
of the note. Mr. Hewitt resigned in March 2001. In June 2001, in connection with
Mr. Hewitt's termination of employment, we cancelled both promissory notes and
related accrued interest totaling $1,517,000 in exchange for a pledge of 770,009
shares of our Company's common stock owned by the officer. On that date, the
fair market value of the 770,009 shares was $919,000 and was recorded as
treasury stock and $598,000 was included in restructuring and other
non-recurring expenses.
7. Borrowings
Equipment line
In August 1999, our Company obtained a capital financing line (the
"Equipment Line"), which provides for the purchase of up to $1,000,000 in
property and equipment with any amounts borrowed due within 36 months of the
date of the agreement. Any borrowings under the Equipment Line are payable over
36 months, with an effective interest rate of approximately 17%. Borrowings are
collateralized by the equipment being financed. In October 1999, our Company
increased the borrowing limit under this line to a total of $2,000,000 and
extended the effective date of the equipment line to September 30, 2000. As of
October 31, 2001, December 31, 2000 and December 31, 1999, borrowings of
approximately $181,000, $270,000 and $362,000, respectively, were outstanding
against the Equipment Line. At October 31, 2001 all future minimum payments on
the equipment line are due within one year.
8. Income Taxes
The primary components of the net deferred tax asset are as follows (in
thousands):
December 31,
October 31, ---------------------------------------
2001 2000 1999 1998
----------- ----------- ----------- -----------
Net operating loss carryforwards....... $ 45,808 $ 27,267 $ 18,155 $ 11,181
Research and experimentation credit
carryforwards........................ 1,680 1,245 1,050 822
Capital loss carryforward.............. 398 400 -- --
Restructuring costs.................... 1,168 -- -- --
Other long-term liabilities............ 1,035 2,237 555 322
Deferred revenue....................... -- 28 (32) 7
Property and equipment................. 1,798 (656) 54 (127)
---------- ---------- ---------- ----------
51,887 30,521 19,782 12,205
Less: Valuation allowance.............. (51,887) (30,521) (19,782) (12,205)
---------- ---------- ---------- ----------
$ -- $ -- $ -- $ --
========== ========== ========== ==========
F-14
Due to uncertainty surrounding the realization of the favorable tax
attributes in future tax returns, our Company has recorded a valuation allowance
against its net deferred tax asset. The valuation allowance increased by
$21,366,000, $10,739,000, $12,205,000 and $7,577,000 during the ten months ended
October 31, 2001, and the years ended 2000, 1999 and 1998, respectively.
Differences between the federal statutory and effective tax rates are
primarily due to the nonrealizability of net operating losses and the resulting
increase in the valuation allowance.
At October 31, 2001 our Company has the following approximate net operating
loss carryforwards and research and experimentation credit carryforwards
available to reduce future taxable income, if any (in thousands):
October 31, 2001
-------------------------------
Federal State Foreign
--------- --------- --------
Net operating loss carryforwards....... $ 114,121 $ 74,237 $ 13,544
Research and experimentation credit
carryforwards........................ 1,207 473 --
The federal net operating loss and research and experimentation credit
carryforwards expire through 2010 (through 2021 for state net operating loss
carryforwards) if not used beforehand to offset taxable income or tax
liabilities. For federal and state tax purposes, our Company's net operating
loss and research and experimentation credit carryforwards may be subject to
certain limitations on annual utilization in the event of changes in ownership,
as defined by federal and state tax laws.
9. Transition Period Comparative Data:
The following table presents certain financial information for the ten-month
period ended October 31, 2001 and 2000, respectively. Amounts in thousands.
Ten Months Ten Months
Ended Ended
October 31, 2001 October 31, 2000
---------------- ----------------
(unaudited)
Revenue............................ $ 29,380 $ 44,064
Gross profit....................... 11,616 19,068
---------- -----------
Income before income taxes......... $ (62,649) $ (52,279)
Income taxes....................... (227) (18)
---------- ------------
Net loss......................... $ (62,876) $ (56,297)
========== ===========
10. Convertible Preferred Stock:
In March 2000, Versata completed an initial public offering and upon this
offering, each outstanding share of Versata's convertible preferred stock was
automatically converted into one share of common stock of Versata resulting in
the issuance of 26,950,287 shares of common stock.
11. Common Stock
Our Company's Certificate of Incorporation, as amended, authorizes our
Company to issue 150,000,000 shares of common stock, and 30,580,000 shares of
preferred stock.
On April 6, 2001, the Company issued 2,305,000 shares of common stock to
certain executive officers of the company. The purchase price per share was
$0.001 per share. The shares are subject to a repurchase right held by our
Company. In addition, certain other common stock option holders exercised
unvested options, subject to a repurchase right held by our Company, in the
event of voluntary or involuntary termination of employment of the stockholder.
As of October 31, 2001, December 31, 2000 and December 31, 1999, 2,132,657,
1,185,776 and 2,164,582 shares of common stock, respectively, were subject to
repurchase by our Company. No shares were subject to repurchase as of December
31, 1998.
F-15
12. Stock Options and Purchase Plan
In November 1999, the Board of Directors of our Company approved the 2000
Stock Option Plan ("the 2000 Plan"), which became effective on March 3, 2000 in
connection with the initial public offering of the common stock. The 2000 Plan
serves as the successor to the Corporation's 1994, 1996, and 1997 Stock Option
Plans (the "Predecessor Plans"). All options outstanding under the Predecessor
Plans have been incorporated into the 2000 Plan, and no further option grants or
stock issuances will be made under the Predecessor Plans. Each option so
incorporated will continue to be governed by the terms of the agreement
evidencing that option, and no provision of the 2000 Plan will adversely affect
or otherwise modify the rights of the holders of such incorporated options with
respect to their acquisition of shares of common stock thereunder.
The 2000 Plan is comprised of five separate equity incentive programs: (i)
the Discretionary Option Grant Program under which options may be granted to
individuals in the Corporation's service which will provide them with the right
to purchase shares of common stock at a fixed price per share equal to the fair
market value of the common stock on the grant date; (ii) the Stock Issuance
Program under which such individuals may be issued shares of common stock
directly, either through the purchase of those shares at fair market value or as
a bonus for services rendered to the Corporation; (iii) the Salary Investment
Option Grant Program under which the Corporation's officers and other
highly-compensated executives may elect to invest a portion of their base salary
each year in special option grants with a below-market exercise price; (iv) the
Automatic Option Grant Program under which non-employee Board members will
automatically receive special option grants at designated intervals over their
period of Board service; and (v) the Director Fee Option Grant Program under
which non-employee Board members may elect to have all or any portion of their
annual cash retainer fee applied to special stock option grants with a
below-market exercise price.
The following table summarizes activity under our Company's stock option
plans:
Options Outstanding
-----------------------
Weighted
Average
Options Exercise
Available Price Per
for Grant Shares Share
----------- ----------- ---------
Balance at December 31, 1997........................ 217,289 2,954,438 $ 0.20
Additional options authorized................... 3,759,813 -- --
Options granted................................. (1,159,200) 1,159,200 0.20
Options granted below intrinsic value........... (2,253,135) 2,253,135 0.20
Options exercised............................... -- (498,113) 0.20
Options canceled................................ 459,451 (459,451) 0.21
----------- -----------
Balance at December 31, 1998........................ 1,024,218 5,409,209 0.20
Additional options authorized................... 4,866,694 -- --
Repurchase of common stock...................... 9,930 -- --
Options granted below intrinsic value........... (4,752,250) 4,752,250 2.39
Options exercised............................... -- (4,893,488) 0.49
Options canceled................................ 304,874 (304,874) 0.32
----------- -----------
Balance at December 31, 1999........................ 1,453,466 4,963,097 2.00
Additional options authorized................... 6,866,514 -- --
Repurchase of common stock 188,080 -- --
Options granted below intrinsic value........... (3,236,900) 3,236,900 --
Options granted................................. (2,895,942) 2,895,942 13.12
Options exercised............................... -- (1,500,175) 2.30
Options canceled................................ 1,217,166 (1,217,166) 8.15
----------- -----------
Balance at December 31, 2000........................ 3,592,384 8,378,598 9.19
----------- -----------
Additional options authorized................... 4,934,964 -- --
Repurchase of common stock 146,150 -- --
Options and restricted stock granted............ (8,877,374) 6,572,374 2.31
Options exercised............................... -- (300,710) 0.40
Options canceled................................ 6,727,756 (6,727,756) 7.12
----------- ------------
Balance at October 31, 2001......................... 6,523,880 7,922,506
=========== ===========
F-16
The following table summarizes information concerning outstanding and
exercisable options as of October 31, 2001:
Options Vested and
Options Outstanding Exercisable
----------------------------------- ---------------------
Weighted Weighted Weighted
Average Average Average
Remaining Exercise Exercise
Contractual Price Per Price Per
Range of Exercise Prices Shares Life (years) Share Shares Share
--------------------------- ----------- ----------------------- ----------- ---------
$ 0.20 - $ 0.90 3,603,496 9.1 $ 0.29 1,108,947 $ 0.28
1.00 - 2.94 771,530 8.4 2.39 350,703 2.58
3.00 - 6.88 1,535,566 8.7 5.25 576,533 5.24
7.00 - 25.00 1,552,694 8.6 10.45 582,038 10.44
25.75 - 42.25 271,190 8.6 31.49 92,810 30.43
44.25 - 71.75 188,030 8.7 46.11 57,790 45.24
---------- ----------
As of October 31, 2001 7,922,506 8.8 5.60 2,768,821 5.69
========== ==========
We had 1,753,092 and 796,143 options vested and exercisable at December 31,
2000 and 1999, respectively.
Fair value disclosures
Pro forma information regarding net loss and net loss per share is required
by SFAS No. 123, which also requires that the information be determined as if
our Company has accounted for its employee stock options granted under the fair
value method. The fair value for these options was estimated using the minimum
value method to the date of our initial public offering and the Black-Scholes
option-pricing model thereafter.
Our Company calculated the minimum fair value of each option grant on the
date of grant using the Black-Scholes option-pricing method as prescribed by
SFAS No. 123 using the following assumptions:
Year Ended December 31,
Ten Months Ended -----------------------------------------------------------
October 31, 2001 2000 1999 1998
---------------- ------------------ ------------------ ------------------
Risk-free rates...................... 3.61% - 5.20% 5.17% - 6.73% 4.91% - 6.19% 4.18% - 5.63%
Expected lives (in years)............ 5.0 5.0 5.0 5.0
Dividend yield....................... 0.0% 0.0% 0.0% 0.0%
Expected volatility.................. 240% 155% 0.0% 0.0%
The weighted average fair value of these options granted in the ten months
ended October 31, 2001, and the years ended December 31, 2000, 1999 and 1998 was
$2.31, $14.04, $4.16 and $0.044, respectively.
Had compensation costs been determined based upon the fair value at the
grant date for awards granted under our stock option and stock purchase plans,
consistent with the methodology prescribed under SFAS No. 123, our Company's pro
forma net loss attributable to common stockholders and pro forma basic and
diluted net loss per share under SFAS No. 123 would have been (in thousands,
except per share data):
F-17
------------- --------------------------------------
Ten Months
Ended Year Ended December 31,
October 31, --------------------------------------
2001 2000 1999 1998
---- ---- ---- ----
Net loss attributable to common stockholders
As reported.................................... $ (62,876) $ (67,901) $ (32,600) $ (8,134)
Pro forma...................................... $ (96,740) $ (77,189) $ (33,073) $ (8,214)
Net loss per share attributable to common
stockholders
As reported.................................... $ (1.56) $ (2.06) $ (9.18) $ (3.99)
Pro forma...................................... $ (2.41) $ (2.35) $ (9.31) $ (4.03)
Unearned stock-based compensation
In connection with certain stock option grants, our Company recognized
unearned compensation that is being amortized over the vesting periods of the
related options, usually 50 months, using an appropriate accelerated basis. The
total unearned compensation recorded by our Company from January 1, 1997 through
October 31, 2001 was $45.9 million. Amortization expense recognized during the
ten months ended October 31, 2001, and the years ended December 31, 2000, 1999
and 1998 was $1.7 million, $25.5 million, $4.0 million and $200,000
respectively.
Employee stock purchase plan
Versata's Employee Stock Purchase Plan (the "Purchase Plan") was adopted by
our Board of Directors in November 1999 and was approved by the stockholders in
February 2000. A total of 500,000 shares of common stock has been reserved for
issuance under the Purchase Plan. The reserve will automatically increase on the
first trading day of the second fiscal quarter each year, by an amount equal to
one percent (1%) of the total number of shares of our common stock outstanding
on the last trading day of the immediately preceding first fiscal quarter. In no
event will any annual reserve increase exceed 1,000,000 shares.
The Purchase Plan enables eligible employees to designate up to 15% of their
compensation for the purchase of stock. The purchase price is 85% of the lower
of the fair market value of Versata's common stock on the first day or the last
day of each six-month purchase period. No compensation expense is recorded in
connection with the plan. We issued 352,134 shares of common stock under the
Purchase Plan during the ten months ended October 31, 2001 for an aggregate
purchase price of $1.5 million.
Compensation cost (included in pro forma net loss attributable to common
stockholders and net loss per share attributable to common stockholders) is
recognized for the fair value of the employees' purchase rights, which was
estimated using the Black-Scholes option pricing model with the following
weighted average assumptions for the ten months ended October 31, 2001 and year
ended December 31, 2000: risk-free rate of 4.72% and 5.52%, respectively;
expected life of six months; divided yield of 0%, and expected volatility of
240% to 155%, respectively. The weighted average grant date fair value of those
purchase rights granted during the ten months ended October 31, 2001 and year
ended December 31, 2000, as defined by SFAS No. 123, was $33.75 and $7.44,
respectively.
In August 2001, the Company suspended employee participation in the Purchase
Plan.
13. Employee Benefit Plans
In May 1995, our Company established a 401(k) Profit Sharing Plan (the
"Plan") which covers substantially all employees. Under the Plan, employees are
permitted to contribute up to 20% of gross compensation not to exceed the annual
402(g) limitation for any Plan year. Discretionary contributions may be made by
our Company. Our Company made no contributions during the ten months ended
October 31, 2001, or the years ended December 31, 2000, 1999 and 1998.
Effective September 1, 1998, our Company adopted a nonqualified deferred
compensation plan, which permits eligible officers and key employees to defer a
portion of their compensation. At October 31, 2001, December 31, 2000 and
December 31, 1999 the deferred compensation amounts, together with accumulated
interest, which are distributable in cash after retirement or termination of
employment, amounted to approximately $193,000, $546,000, and $310,000,
respectively.
In December 2001, the Company suspended employee participation in the
deferred compensation plan.
231,731 stock options assumed by us in connection with the acquistion of
Verve, Inc. are subject to stock appreciation rights that allow the optionee to
elect to receive cash compensation that approximates the increase in value of
the stock option, in lieu of exercising the option. On November 20, 2000, we
granted 19,610 options to some of the optionees at $12.27 exercise price, and
212,121 options to the other optionees at $2.88 exercise price. The stock
appreciation rights must be exercised by the optionees at $2.88 exercise price.
The stock appreciation rights must be exercised by the optionee in whole or in
part no more than nine months after vesting of the options. As of October 31,
2001, the stock appreciation rights for a total of 5,070 shares issued at $12.27
exercise price were outstanding, and the stock appreciation rights for a total
of 118,509 shares issued at $2.88 exercise price were outstanding.
F-18
14. Commitments and Contingencies
Our Company has entered into leases for certain office space and equipment
with original terms ranging from 36 months to the year 2008. The lease for
office space includes scheduled base rent increases over the term of the lease.
The total amount of the base rent payments is charged to expense over the term
of the lease using the straight-line method. In addition, the lease for office
space contains an escalation clause to recover increases in future operating
costs and real estate taxes over the base year. The future minimum lease
payments shown below are exclusive of such escalation.
We have also entered into sub-lease agreements for certain office space and
equipment.
Future minimum lease payments under all noncancelable leases at October 31,
2001 are as follows (in thousands):
Operating Leases
----------------------------------------
Contractual
Capital Gross Sub-lease Net
Leases Commitments Income Commitments
------- ------------ ----------- ------------
Year Ending October 31,
2002......................................... $ 88 $ 3,276 1,714 1,562
2003......................................... 78 3,253 1,829 1,424
2004......................................... 78 3,306 1,563 1,743
2005......................................... 78 3,418 962 2,456
2006......................................... 57 3,538 991 2,547
2007 and thereafter.......................... -- 6,838 1,895 4,943
----- --------- ----- ------
Total minimum lease payments......... 379 $ 23,629 8,954 14,675
========= ===== ======
Less interest................................ (80)
-----
Present value of minimum lease payments...... 299
Less current portion......................... (56)
-----
$ 243
=====
Rent expense for the ten months ended October 31, 2001, and years ended
December 31, 2000, 1999 and 1998 was approximately $3.5 million, $2.8 million,
$529,000 and $477,000, respectively.
Legal Proceeding
Securities Class Action
Since April 11, 2001, several securities class action complaints were filed
against us, and certain of our current and former officers and directors. In
August 2001, the class action lawsuits were consolidated before one judge in the
United States District Court for the Northern District of California. On October
19, 2001 the lead plaintiffs filed an amended class action complaint naming us,
certain of our former officers and a current director, as defendants. The
amended class action complaint alleges claims under section 10(b) and section
20(a) of the Securities Exchange Act of 1934 and claims under section 11 and 15
of the Securities Act of 1933. The amended complaint seeks an unspecified amount
of damages on behalf of persons who purchased our stock during the class period.
It is premature to come to any conclusions as to the allegations and potential
damages. We intend to defend these actions vigorously. The hearing for our
motion to dismiss the action is set for May 10, 2002. We expensed the deductible
amount of directors' and officers' liability insurance of $350,000 in April
2001.
State Derivative Action
Since June 11, 2001, two derivative actions were filed on our behalf against
certain current and former officers and directors in Superior Court of Alameda
County, California. The complaints also name us as a nominal defendant. The
complaints allege that the defendants breached their fiduciary duties, abused
their control of the corporation, and engaged in gross mismanagement of the
corporation, by allegedly making or permitting the Company to make false
financial statements and seek, among other things, compensatory damages. On
November 7, 2001, the state court issued an Order granting Versata's Motion to
Stay Proceedings in the consolidated derivative action until the earlier of the
filing of an answer by Versata in the Federal action or dismissal of that
action.
F-19
With the exception of the $350,000 discussed above, no estimate can be made
of the ultimate loss or possible range of ultimate loss associated with the
resolution of these contingencies.
Litigation and other claims
The Company is also subject to legal proceedings and claims, either asserted
or unasserted, which arise in the ordinary course of business. While the outcome
of these proceedings and claims cannot be predicted with certainty, management
does not believe that the outcome of any of these legal matters will have a
material adverse effect on the Company's consolidated results of operations or
consolidated financial position. We intend to defend these actions vigorously.
F-20
VERSATA, INC.
UNAUDITED QUARTERLY INFORMATION
The following table sets forth our historical unaudited quarterly
information for our most recent seven quarters, both in absolute dollars and as
a percentage of total revenue for each quarter. This quarterly information has
been prepared on a basis consistent with our audited financial statements and,
we believe, includes all adjustments, consisting of normal recurring
adjustments, necessary for a fair presentation of the information shown. Our
quarterly operating results have fluctuated and may continue to fluctuate
significantly as a result of a variety of factors and operating results for any
quarter are not necessarily indicative of results for a full fiscal year.
On December 31, 2001 Versata announced a change in its fiscal year to
October 31, 2001. The Company previously reported results as of March 31, 2001,
June 30, 2001 and September 30, 2001.
September 30, June 30, March 31, December 31, September 30, June 30, March 31,
2001 2001 2001 2000 2000 2000 2000
------------- ------------ ------------ ------------- ------------- ----------- -----------
Revenue:
Software license................$ 3,276 $ 5,991 $ 4,140 $ 8,029 $ 8,572 $ 6,077 $ 4,136
Services........................ 2,968 4,868 6,892 6,995 9,031 7,798 5,970
----- ---------- ---------- --------- --------- ---------- ----------
Total revenue............. 6,244 10,859 11,032 15,024 17,603 13,875 10,106
----- ---------- ---------- --------- --------- ---------- ----------
Cost of Revenue:
Software license................ 79 149 157 297 376 221 194
Services........................ 3,155 5,136 8,388 9,048 8,392 7,596 5,478
----- ---------- ---------- --------- --------- ---------- ----------
Total cost of revenue..... 3,234 5,285 8,545 9,345 8,768 7,817 5,672
----- ---------- ---------- --------- --------- ---------- ----------
Gross profit..................... 3,010 5,574 2,487 5,679 8,835 6,058 4,434
----- ---------- ---------- --------- --------- ---------- ----------
Operating expense:
Sales and marketing............. 4,675 8,657 11,940 12,965 12,070 11,493 10,189
Product development............. 1,748 2,650 3,895 2,964 2,740 2,166 1,857
General and administrative...... 2,824 3,045 3,992 4,341 3,285 3,048 2,001
Stock-based compensation........ 941 717 (141) 3,210 4,493 6,735 11,074
Amortization of intangibles..... 1,987 1,152 1,145 681 233 237 190
Restructuring and other
non-recurring expenses......... 5,149 3,504 6,909 1,693 243 -- --
----- ---------- ---------- --------- --------- ---------- ----------
Total operating expense... 17,324 19,725 27,740 25,854 23,064 23,679 25,311
------ ---------- ---------- --------- --------- ---------- ----------
Loss from operations............. (14,314) (14,151) (25,253) (20,175) (14,229) (17,621) (20,877)
Interest income (expense),
Net............................ 303 489 909 1,293 1,487 1,619 665
Other non-operating, net........ (215) (53) -- (62) (1) -- --
---- ---------- ---------- --------- ---------- ---------- ----------
Net loss.........................$ (14,226) $ (13,715) $ (24,344) $ (18,944) $ (12,743) $ (16,002) $ (20,212)
========= ========== ========== ========= ========= ========== ==========
Basic and diluted net
Loss per share..................$ (0.35) $ (0.34) $ (0.61) $ (0.48) $ (0.33) $ (0.42) $ (1.33)
========= ========= ========= ========= ========= ========= =========
Weighted average common
shares used in computing
basic and diluted net
loss per share.................. 39,888 40,164 39,821 39,159 38,424 37,698 15,203
As a percentage of revenue:
Revenue:
Software license................ 52.5% 55.2% 37.5% 53.4% 48.7% 43.8% 40.9%
Services........................ 47.5% 44.8% 62.5% 46.6% 51.3% 56.2% 59.1%
----- ---------- ---------- --------- ---------- ---------- ----------
Total revenue............. 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
----- ---------- ---------- --------- ---------- ---------- ----------
Cost of Revenue:
Software license................ 1.3% 1.4% 1.4% 2.0% 2.1% 1.6% 1.9%
Services........................ 50.5% 47.3% 76.0% 60.2% 47.7% 54.7% 54.2%
----- ---------- ---------- --------- ---------- ---------- ----------
Total cost of revenue..... 51.8% 48.7% 77.5% 62.2% 49.8% 56.3% 56.1%
----- ---------- ---------- --------- ---------- ---------- ----------
Gross profit..................... 48.2% 51.3% 22.5% 37.8% 50.2% 43.7% 43.9%
----- ---------- ---------- --------- ---------- ---------- ----------
Operating expense:
Sales and marketing............. 74.9% 79.7% 108.2% 86.3% 68.6% 82.8% 100.8%
Product development............. 28.0% 24.4% 35.3% 19.7% 15.6% 15.6% 18.4%
General and administrative...... 45.2% 28.0% 36.2% 28.9% 18.7% 22.0% 19.8%
Stock-based compensation........ 15.1 % 6.6% -1.3% 21.4% 25.5% 48.5% 109.6%
Amortization of intangibles..... 31.8% 10.6% 10.4% 4.5% 1.3% 1.7% 1.9%
Impairment of investment........ -- -- -- 6.7% -- -- --
Nonrecurring expenses........... 82.5% 32.3% 62.6% 4.6% 1.4% -- --
----- ---------- ---------- --------- ---------- --------- ----------
Total operating expense... 227.5% 181.6% 251.4% 172.1% 131.1% 170.6% 250.5%
----- ---------- ---------- --------- ---------- ---------- ----------
Loss from operations............. -229.3% -130.3% -228.9% -134.3% -80.9% -126.9% -206.6%
Interest income 4.9%
(expense), net................. 4.5% 8.2% 8.6% 8.4% 11.7% 6.6%
Other non-operating, net........ -3.4% -0.5% -0.2% -0.4% 0.1% -0.1% 0.0%
----- ---------- ---------- --------- ---------- ---------- ----------
Net loss.................. -227.8% -126.3% -220.7% -126.1% -72.4% -115.3% -200.0%
====== ========== ========== ========= ========== ========== ==========
F-21
Schedule II Valuation and qualifying accounts
(in thousands)
Balance at Balance at
Description beginning of Additions Deductions end of
----------- period --------- ---------- period
------ ------
Allowance for doubtful accounts for the years ended:
December 31, 1999............................................. 300 689 (103) 886
December 31, 2000............................................. 886 2,844 (1,935) 1,795
October 31, 2001.............................................. 1,795 2,223 (1,915) 2,103
Allowance for deferred tax asset accounts for the years ended:
December 31, 1999............................................. 12,205 7,577 -- 19,782
December 31, 2000............................................. 19,782 10,739 -- 30,521
October 31, 2001.............................................. 30,521 21,366 -- 51,887
F-22
EXHIBIT INDEX
Exhibit
Number Description of Document
------- -----------------------
2.1(1) Agreement and Plan of Reorganization by and among Versata,
Inc., VATA Acquisition Corp., Verve, Inc. and Certain
Shareholders of Verve, Inc., dated October 18, 2000.
3.1(2) Amended and Restated Certificate of Incorporation of
Versata.
3.2(2) Amended and Restated Bylaws of Versata.
4.1(2) Form of Specimen Common Stock Certificate.
10.1(2)* 2000 Stock Incentive Plan of Versata.
10.2(2)* Employee Stock Purchase Plan of Versata.
10.3(2) Fourth Amended and Restated Investors' Rights Agreement,
among Versata and some of its stockholders, dated November
30, 1999.
10.4(2) Form of Indemnification Agreement entered into between
Versata and each of its directors and executive officers.
10.5(2) Agreement of Sublease dated October 18, 1999, between
Versata and ICF Kaiser International, Inc.
10.6(2) Senior Loan and Security Agreement, dated August 20, 1999,
between Versata and Phoenix Leasing Incorporated, as
amended on October 1, 1999.
10.7(2)+ Joint Product and Marketing Agreement, dated September 27,
1999, between Versata and IBM.
10.8(3) Lease agreement, dated as of April 10, 2000, by and
between Versata and Kaiser Center, Inc. for the sublease
of office space in Oakland, CA.
10.9(4) Software Remarketing Agreement, effective September 27,
2000, between Versata and International Business Machines
Corporation.
21.1 Subsidiaries of Versata.
23.1 Consent of PricewaterhouseCoopers LLP, Independent
Accountants.
- ----------
+ Specified portions of this agreement have been omitted and have been filed
separately with the Securities and Exchange Commission pursuant to a request
for confidential treatment.
* Management contract or compensatory plan or arrangement.
(1) Incorporated by reference from the Company's Form 8-A dated December 1,
2000.
(2) Incorporated by reference from the Company's Registration Statement on Form
S-1 (File No. 333-92451).
(3) Incorporated by reference from the Company's Form 10-Q dated August 14,
2000.
(4) Incorporated by reference from the Company's Form 10-Q dated September 24,
2000.
F-23