<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 28, 2000
REGISTRATION NO. 333-92451
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 4
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
VERSATA, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE
7372 68-0255203
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>
2101 WEBSTER STREET
OAKLAND, CA 94612
(510) 238-4100
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF THE
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
JOHN A. HEWITT, JR.
PRESIDENT AND CHIEF EXECUTIVE OFFICER
VERSATA, INC.
2101 WEBSTER STREET
OAKLAND, CA 94612
(510) 238-4100
(NAME AND ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA
CODE, OF AGENT FOR SERVICE)
COPIES TO:
<TABLE>
<S> <C>
JOHN W. LARSON, ESQ. PETER V. LEPARULO, ESQ.
ELIZABETH H. LEFEVER, ESQ. BRADFORD E. MONKS, ESQ.
PATRICK J. SHEA, ESQ. THOMAS R. BRIDA, ESQ.
ANGELA C. HILT, ESQ. ORRICK, HERRINGTON & SUTCLIFFE LLP
BROBECK, PHLEGER & HARRISON LLP 400 SANSOME STREET
ONE MARKET SAN FRANCISCO, CA 94111
SPEAR STREET TOWER (415) 392-1123
SAN FRANCISCO, CA 94105
(415) 442-0900
</TABLE>
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the effective date of this Registration Statement.
If the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
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CALCULATION OF REGISTRATION FEE
<TABLE>
<S> <C> <C>
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TITLE OF EACH CLASS OF PROPOSED MAXIMUM AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED OFFERING PRICE(1) REGISTRATION FEE(2)
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Common Stock, $.001 par value............... $57,557,500 $15,196
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</TABLE>
(1) Estimated solely for purposes of calculating the amount of the registration
fee pursuant to Rule 457(o) under the Securities Act of 1933.
(2) $15,180 was paid at time of the initial filing of this Registration
Statement.
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT THAT SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION,
ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
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<PAGE> 2
The information contained in this preliminary prospectus is not complete
and may be changed. We may not sell these securities until the registration
statement filed with the Securities and Exchange Commission is effective.
This preliminary prospectus is not an offer to sell these securities, and
it is not soliciting an offer to buy these securities in any state where
the offer or sale is not permitted.
SUBJECT TO COMPLETION, DATED FEBRUARY 28, 2000
PROSPECTUS
[VERSATA LOGO]
3,850,000 Shares
Common Stock
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This is an initial public offering of shares of common stock of Versata, Inc. We
are offering 3,850,000 shares in this offering. No public market currently
exists for our common stock. We anticipate that the initial public offering
price will be between $12.00 and $14.00 per share.
We have applied to have our common stock approved for quotation on the Nasdaq
National Market under the symbol "VATA."
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INVESTING IN OUR COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" ON PAGE 5.
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<TABLE>
<CAPTION>
PER SHARE TOTAL
<S> <C> <C>
Public offering price $ $
Underwriting discounts and commissions $ $
Proceeds to us $ $
</TABLE>
The underwriters have an option to purchase 577,500 additional shares of common
stock from us at the initial public offering price, less underwriting discounts
and commissions, to cover any over-allotments of shares at any time until 30
days after the date of this prospectus.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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THOMAS WEISEL PARTNERS LLC
DAIN RAUSCHER WESSELS
SG COWEN
DLJDIRECT INC.
The date of this prospectus is , 2000
<PAGE> 3
The inside front cover contains a brief description of the Versata
E-Business Automation System and a graphic showing several classes of e-business
software applications that can be deployed with the E-Business Automation
System.
<PAGE> 4
TABLE OF CONTENTS
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PAGE
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<S> <C>
Prospectus Summary................... 1
Risk Factors......................... 5
Cautionary Note on Forward-Looking
Statements......................... 17
Trademarks........................... 17
Use of Proceeds...................... 18
Dividend Policy...................... 18
Capitalization....................... 19
Dilution............................. 21
Selected Financial Data.............. 22
Management's Discussion and Analysis
of Financial Condition and Results
of Operations...................... 23
</TABLE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Business............................. 34
Management........................... 51
Related Party Transactions........... 63
Principal Stockholders............... 71
Description of Securities............ 75
Shares Eligible for Future Sale...... 79
Underwriting......................... 82
Legal Matters........................ 85
Experts.............................. 85
Where You Can Find Additional
Information........................ 85
Index to Consolidated Financial
Statements......................... F-1
</TABLE>
-------------------------
You should rely only on the information contained in this document or to
that which we have referred you. We have not authorized anyone to provide you
with information that is different. This document may be used only where it is
legal to sell these securities. The information in this prospectus is accurate
only on the date of this document.
<PAGE> 5
PROSPECTUS SUMMARY
This summary highlights information found in greater detail elsewhere in
this prospectus. In addition to this summary, we urge you to read the entire
prospectus carefully, especially the risks of investing in our common stock
discussed under "Risk Factors" and the consolidated financial statements, before
you decide to buy our common stock.
OUR COMPANY
Our comprehensive suite of software and services enables our customers to
rapidly deploy e-business software applications that can be modified quickly to
meet constantly changing business requirements. The migration of the commercial
marketplace to the Internet and the movement of corporate communication and
information management to intranets has resulted in a new operating model known
as e-business. Our E-Business Automation System utilizes a unique business rules
automation technology that redefines how companies create, deploy and modify the
critical e-business software applications used to transact their online
business. We believe our solution enables our customers to achieve a substantial
time-to-market and business flexibility advantage compared to companies using
traditional Web-based software application development tools.
As of December 31, 1999, we had licensed our product to approximately 500
customers worldwide for use in a wide range of business-to-business,
business-to-employee and business-to-consumer software applications. More than
35 customers have purchased our products and services for over $100,000,
including Canadian Pacific Ships, El Paso Energy, Hilton Hotels, IBM, IM Group,
Interim Services and ITT Fluid Technology. We have entered into a strategic
marketing and development relationship with IBM to provide a single product
offering that integrates our software with IBM's WebSphere(TM) Application
Server Advanced Edition. This integrated product will be offered under both of
our respective brand names. To complement our direct sales efforts, we have
developed relationships with a variety of indirect sales channels and
partnerships, and we plan to continue to develop more of these relationships in
the future.
With our solution, companies can:
- rapidly create, deploy and maintain e-business software applications
required to execute or modify their e-business strategy, even with few or
no skilled Java programmers;
- rapidly change the business rules required to implement critical shifts
in their strategy, achieving a time-to-market and business flexibility
advantage over traditional programming methods;
- create and deploy e-business software applications that are compatible
with various programming languages and that are readily integrated into
legacy computing environments; and
- utilize our comprehensive suite of professional services to automate
e-business software applications without regard for internal staffing
constraints.
We intend to establish our solution as the foundation for the next
generation of business-to-business Web-based software applications. To achieve
this objective, our key growth strategies are to:
- define the new paradigm for e-business automation and establish our
E-Business Automation System as the industry standard;
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<PAGE> 6
- enhance our position as a technology leader by increasing the
functionality, performance, ease of use and scalability of our E-Business
Automation System;
- expand our sales efforts by adding more direct sales teams in North
America, Europe and the Pacific Rim;
- continue to complement our direct sales efforts with multiple indirect
channels to provide additional marketing and sales support for our
products and accelerate the successful deployment of e-business software
applications using our solution;
- establish additional marketing and technology relationships with leading
vendors to increase our visibility in the marketplace and broaden the
functionality of our solution; and
- increase the size of our service and support organization to further
expand our professional services capabilities and to provide high quality
customer support.
For the year ended December 31, 1999, our total revenue was $12.6 million
compared to $4.0 million in the year ended December 31, 1998 and $1.4 million in
the year ended December 31, 1997. Our net loss for the year ended December 31,
1999 was $21.8 million compared to $8.1 million in the year ended December 31,
1998 and $9.8 million in the year ended December 31, 1997. Our accumulated
deficit was $53.4 million as of December 31, 1999.
Versata, Inc., through its predecessors Vision Software Tools, Inc. and
Image Innovation Solutions, Inc., was incorporated in California on August 27,
1991. We reincorporated in Delaware in February 2000. In September 1996, we
began development of our first Web-based software product, which we began
shipping commercially in September 1997. We plan to reincorporate in Delaware
prior to the commencement of this offering.
Our principal executive offices are located at 2101 Webster Street,
Oakland, California 94612 and our telephone number is (510) 238-4100. Our Web
site can be found at www.versata.com. Information contained in our Web site does
not constitute a part of this prospectus.
2
<PAGE> 7
THE OFFERING
Common stock offered by us.......... 3,850,000 shares
Common stock outstanding after this
offering............................ 37,896,804 shares
Use of proceeds..................... For general corporate purposes,
including working capital, technology
and product development and sales and
marketing. See "Use of Proceeds" for
more information regarding our planned
use of the proceeds from this offering.
Proposed Nasdaq National Market
symbol............................ VATA
The number of shares of common stock to be outstanding after this offering
is based on the number of shares outstanding as of December 31, 1999. It also
reflects the automatic conversion into common stock upon completion of this
offering of (i) all series of preferred stock outstanding as of December 31,
1999 and (ii) 269,784 shares of Series F preferred stock issued in January 2000.
In addition to the shares of common stock to be outstanding after this offering,
there are:
- 6,399,197 shares that could be issued upon the exercise of options
outstanding as of January 31, 2000 at a weighted average exercise price
of $3.03 per share;
- 2,517,366 shares reserved for issuance under our option plans at January
31, 2000;
- 537,982 shares that could be issued upon the exercise of warrants
outstanding as of December 31, 1999 at a weighted average exercise price
of $0.43 and 216,745 shares issuable upon conversion of preferred stock
issuable upon the exercise of warrants outstanding as of December 31,
1999 at a weighted average exercise price of $3.41; and
- 500,000 shares that could be issued to employees who elect to buy stock
in the future under our employee stock purchase plan.
Except as otherwise specified in this prospectus, all information in this
prospectus:
- assumes no exercise of the underwriters' over-allotment option; and
- reflects our reincorporation into Delaware in February 2000.
3
<PAGE> 8
SUMMARY FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
You should read the following summary financial data together with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the accompanying consolidated financial statements and related
notes which are included in this prospectus.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------
1997 1998 1999
---------- ---------- -----------
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Total revenue.................................. $ 1,406 $ 3,950 $ 12,582
Gross profit................................... 95 1,468 5,962
Loss from operations........................... (10,012) (7,883) (21,496)
Net loss....................................... (9,844) (8,134) (21,800)
Net loss attributable to common stockholders... $ (9,844) $ (8,134) $ (32,600)
Net loss per share attributable to common
stockholders:
Basic and diluted............................ $ (5.72) $ (3.99) $ (9.18)
Weighted average shares outstanding.......... 1,720,649 2,038,393 3,552,409
Unaudited pro forma net loss per share:
Basic and diluted............................ $ (0.87)
Weighted average shares outstanding.......... 24,923,904
</TABLE>
The unaudited pro forma net loss information gives effect to the conversion
into common stock of all series of preferred stock outstanding as of December
31, 1999.
<TABLE>
<CAPTION>
DECEMBER 31, 1999
---------------------------------
PRO PRO FORMA
ACTUAL FORMA AS ADJUSTED
------- ------- -----------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents............................... $20,655 $22,155 $66,912
Working capital......................................... 16,215 17,715 62,472
Total assets............................................ 33,660 35,160 79,917
Total long-term liabilities............................. 320 320 320
Stockholders' equity.................................... 19,418 20,918 65,675
</TABLE>
The pro forma information reflects the net proceeds of $1.5 million from
the sale of 269,784 shares of Series F preferred stock on January 19, 2000.
The pro forma as adjusted information also gives effect to:
- the automatic conversion of all outstanding series of preferred stock
into common stock upon completion of this offering; and
- the receipt of the estimated net proceeds of $44.9 million from the sale
of 3,850,000 shares of common stock in this offering at an assumed public
offering price of $13.00 per share after deducting underwriting discounts
and commissions and offering expenses. See "Use of Proceeds" and
"Capitalization."
4
<PAGE> 9
RISK FACTORS
An investment in our common stock involves a high degree of risk. You
should carefully consider the following information about these risks, together
with the other information contained in this prospectus, before you decide
whether to buy our common stock. If any of the events described in the following
risks actually occurs, the market price of our common stock could decline, and
you may lose all or part of the money you paid to buy our common stock.
RISKS RELATED TO OUR BUSINESS
WE HAVE INCURRED CONSISTENT OPERATING LOSSES SINCE OUR INCEPTION AND EXPECT TO
INCUR NET LOSSES AND NEGATIVE CASH FLOWS FOR AT LEAST THE NEXT TWENTY-FOUR
MONTHS.
We have never been profitable. We have experienced operating losses in each
quarterly and annual period since inception, and we expect to incur significant
losses in the future. If our revenue grows more slowly than we anticipate or if
our operating expenses increase more than we expect or are not reduced in the
event of lower revenue, we may never achieve profitability. We incurred net
losses of $3.9 million for the year ended December 31, 1995, $9.0 million for
the year ended December 31, 1996, $9.8 million for the year ended December 31,
1997, $8.1 million for the year ended December 31, 1998 and $21.8 million for
the year ended December 31, 1999. As of December 31, 1999, we had an accumulated
deficit of $53.4 million. We expect to incur additional net losses and negative
cash flows from operations on a quarterly and annual basis for at least the next
twenty-four months. We expect our operating expenses will increase substantially
as we continue to expand our business. We also expect to significantly increase
our product development, sales and marketing, and general and administrative
expenses in future periods. As a result, we will need to significantly increase
our revenue to achieve and maintain profitability. See "Selected Financial Data"
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations."
BECAUSE WE HAVE ONLY SOLD WEB-BASED SOFTWARE PRODUCTS SINCE SEPTEMBER 1997, OUR
HISTORICAL OPERATING RESULTS MAY NOT BE MEANINGFUL TO AN INVESTOR EVALUATING OUR
COMPANY.
We shifted the focus of the company toward developing Web-based software
products in late 1996 and began commercial shipments of our Web-based software
in September 1997. Accordingly, you must consider the risks, expenses and
uncertainties that an early stage company like ours faces, particularly in the
new and rapidly evolving Internet infrastructure software market. These
considerations include our ability to:
- continue to expand our customer base;
- generate repeat business from existing customers;
- maintain our current and develop new strategic relationships;
- attract, train, retain and motivate qualified personnel; and
- manage our growth.
Because we have only recently commenced commercial sales of our Web-based
software, our past results and rates of growth may not be meaningful, and you
should not rely on them as an indication of our future performance.
5
<PAGE> 10
OUR OPERATING RESULTS WILL SUFFER IF WE CANNOT ACCURATELY FORECAST OUR REVENUE.
We began to derive our revenue exclusively from Web-based software products
and services in early 1998. As a result of our limited operating history in the
Internet infrastructure software market, it is difficult to forecast our revenue
accurately, and we have limited historical financial data upon which to base
planned operating expenses. Our operating expenses are largely based on
anticipated revenue projections, and a high percentage of our expenses are and
will continue to be fixed in the short-term. As a result, we may not be able to
quickly reduce spending if revenue is lower than we projected. If our revenue
falls short of our expectations in any quarter, our operating results would be
harmed. In addition, the revenue and income potential of our products and
services are unproven, and the market we are addressing is rapidly evolving.
THE UNPREDICTABILITY OF OUR QUARTERLY OPERATING RESULTS MAY CAUSE THE PRICE OF
OUR COMMON STOCK TO DECLINE.
Our quarterly operating results have not been predictable and are likely to
vary from expectations in the future, making it difficult to predict future
performance. These variations result from a number of factors beyond our control
such as:
- the size and timing of individual sales orders;
- unexpected delays in introducing new products and services;
- customer budget constraints;
- the mix of product license and services revenue;
- the mix of direct and indirect channel sales;
- the level of product competition in our market and the timing and market
acceptance of new product introductions and upgrades by us or our
competitors;
- changes in the rapidly evolving Internet infrastructure software market;
- costs related to possible acquisitions of new technology and businesses;
and
- general economic conditions.
We believe that period-to-period comparisons of our operating results will
not necessarily be meaningful in predicting future performance. If we do not
achieve our expected revenue, it is possible that our operating results will
fall below the expectations of market analysts or investors in some future
quarter or quarters. Our failure to meet these expectations would likely
adversely affect the trading price of our common stock.
Although we have limited historical financial data, we believe that our
quarterly operating results may experience seasonal fluctuations. For instance,
quarterly results may fluctuate based on our clients' calendar year budgeting
cycles, deferral of customer orders in anticipation of product enhancements or
new products, slow summer purchasing patterns particularly in Europe and our
compensation policies that tend to compensate sales personnel for achieving
annual sales quotas, typically in the latter half of the year.
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<PAGE> 11
IF OUR E-BUSINESS AUTOMATION SYSTEM 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. Software license revenue from
our E-Business Automation System was $1.9 million, or 48.7% of total revenue in
1998, and $6.7 million, or 53.5% of total revenue, in 1999. We derived the
balance of our revenue in those periods from related services. We expect to
continue to derive substantially all our revenue from and be dependent upon our
E-Business Automation System and related services in the future. The market for
our E-Business Automation System 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 products, product enhancements and related
services in a timely and cost effective manner. After this offering, we expect
to commit significant resources to market and further develop our E-Business
Automation System and related services and to enhance the brand awareness of our
software and services.
FAILURE TO EXPAND OR GROW THE SERVICE OFFERINGS THAT COMPLEMENT OUR E-BUSINESS
AUTOMATION SYSTEM WOULD PUT AT RISK A SUBSTANTIAL COMPONENT OF OUR REVENUE.
We believe that growth in our product license revenue depends on our
ability to provide our customers with comprehensive services and to educate
third-party resellers, instructors and consultants on how to provide similar
services. These services include customer support, training, mentoring, staff
augmentation and project management services. If we fail to attract, train and
retain the skilled persons who deliver these services, our business and
operating results could be seriously harmed. We plan to increase the number of
our services personnel to meet these needs. However, competition for qualified
service personnel is intense, and we may not be able to attract, train or
retain, or employ through acquisition, the number of highly qualified service
personnel that our business needs.
We expect our services revenue to increase in dollar amount as we continue
to provide consulting, training and customer support services that complement
our products and as our installed base of customers grows. A decline in the
price of or demand for our service offerings could put at risk a substantial
component of our revenue.
OUR MANAGEMENT MAY NOT BE ABLE TO INCREASE THE NUMBER OF OUR EMPLOYEES FAST
ENOUGH TO KEEP PACE WITH OUR GROWTH, WHICH MAY LEAD TO A FLATTENING OR DECLINE
IN OUR REVENUE.
We have expanded our operations rapidly in the last nine months. To keep
pace with this expansion, we have increased our overall personnel from 90
employees and independent contractors devoting substantially all of their time
to us as of December 31, 1998 to 333 as of February 1, 2000. We anticipate
continued rapid expansion of our operations in the foreseeable future to pursue
existing and potential market opportunities. This rapid growth is placing, and
will continue to place, significant demands on management and operational
resources. To be successful, we will need to:
- implement additional management information systems;
- improve our operating, administrative, financial and accounting systems,
procedures and controls;
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<PAGE> 12
- attract, train and retain new employees; and
- maintain close coordination among our executive, engineering,
professional services, accounting, finance, marketing, sales and
operations organizations.
Our growth has resulted, and any future growth will result, in increased
responsibilities for management personnel, many of whom have been employed by us
for a relatively short period of time. In addition, we may not adequately
anticipate all the demands that growth may impose on our systems, procedures and
structure. Any failure to anticipate and respond adequately to these demands or
manage our growth effectively could cause our revenue to flatten or decline.
FAILURE TO ATTRACT, TRAIN AND RETAIN KEY PERSONNEL COULD PREVENT OUR BUSINESS
FROM GROWING.
If we are unable to hire and retain qualified employees, our business could
be impaired, including our ability to develop new products and enhance existing
products. Our success depends largely on the skills, experience and performance
of the members of our senior management and other key personnel. If we lose one
or more of the members of our senior management or other key employees, our
business and operating results could be seriously harmed. In addition, our
future success will depend largely on our ability to continue to attract highly
skilled personnel. Competition is intense for highly qualified technical, sales
and marketing and management personnel and cash compensation for these employees
is likely to increase after the offering because prospective employees may
perceive that the stock option component of our compensation package is not as
valuable as it was prior to the offering. None of our senior management or other
key personnel in the United States are bound by employment agreements. Like
other software companies in the San Francisco Bay Area, we face intense
competition for qualified personnel including software engineering, service and
support, and sales and marketing personnel.
THE INTERNET INFRASTRUCTURE SOFTWARE MARKET IS HIGHLY COMPETITIVE AND WE MAY
LOSE MARKET SHARE TO COMPANIES DEVELOPING THEIR OWN SOFTWARE AND 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. We expect competition in this market to persist and
intensify in the future. While our primary competition comes from companies
developing their e-business software applications internally using traditional
programming approaches, we also compete with a number of other sources,
including vendors of application server products and services, vendors of Web
integrated development environments and companies that market software
applications for businesses.
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
services 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. In addition, 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. See "Business -- Competition" for more information about our competition.
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WE MAY FACE ADDITIONAL COMPETITIVE PRESSURE AS A RESULT OF OUR AGREEMENT TO
CO-BRAND AN INTEGRATED PRODUCT WITH IBM, IBM'S PROMOTION OF TECHNOLOGIES THAT
ARE NOT COMPATIBLE WITH OUR TECHNOLOGY, AND INCREASING CONSOLIDATION IN THE
APPLICATION SERVER MARKET.
As a result of an agreement with IBM, we are integrating our E-Business
Automation System with IBM's WebSphere(TM) Application Server Advanced Edition.
We and IBM will offer the new product under our respective brand names. Although
we will receive license fees from IBM, this co-branding will likely result in a
situation where we compete with IBM in the market for e-business automation
products and services while simultaneously maintaining a working relationship
with IBM. IBM has a longer operating history, a significantly larger installed
base of customers and substantially greater financial, distribution, marketing
and technical resources than we do. As a result, we may not be able to compete
effectively with IBM in the future, and our business, operating results and
financial condition may be materially adversely affected.
We expect that IBM's commitment to and presence in the market for
technology that allows for flexible creation, deployment and modification of
e-business software applications will substantially increase competitive
pressure in the market. Many of our customers use IBM-based hardware and
software platforms, so it is critical to our success that our products be
closely integrated with IBM technologies. Notwithstanding our current agreement,
IBM may in the future promote technologies and standards more directly
competitive with or not compatible with our business rules automation
technology.
In addition, increasing consolidation in the application server market
around major software suppliers such as BEA Systems, IBM, Microsoft, Oracle and
Sun Microsystems could create new competitive forces in the market for
e-business automation. Our failure to maintain and enhance our competitive
position will limit our ability to retain and increase our market share,
resulting in serious harm to our business and operating results.
IF INTERNET USAGE FAILS TO GROW OR DECLINES, OR IF COMMERCE CONDUCTED OVER THE
INTERNET IS NOT ACCEPTED BY CONSUMERS AND BUSINESSES, OUR FUTURE SALES AND
FUTURE PROFITS WILL DECLINE.
If e-commerce does not continue to grow or grows more slowly than expected,
demand for our products and services will be reduced. Our products enhance
companies' abilities to transact business and conduct Web-based operations. As a
result, our future sales and any future profits are substantially dependent upon
the widespread acceptance and use of the Internet as an effective medium of
commerce by consumers and businesses. To be successful we must rely on emerging
Internet companies as well as consumers and businesses who have not historically
used the Internet to transact business and exchange information.
Consumers and businesses may reject the Internet as a viable commercial
medium for a number of reasons, including potentially inadequate network
infrastructure, slow development of enabling technologies, insufficient
commercial support or privacy concerns. The Internet's infrastructure may not be
able to support the demands placed on it by increased usage. In addition, delays
in the development or adoption of new standards and protocols required to handle
increased levels of Internet activity, or increased government regulation, could
cause the Internet to lose its viability as a commercial medium. Even if the
required infrastructure, standards, protocols and complementary products,
services or facilities are developed, we may incur substantial expenses adapting
our solutions to changing or emerging technologies.
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<PAGE> 14
OUR BUSINESS IS DEPENDENT UPON ENHANCEMENTS TO OUR E-BUSINESS AUTOMATION SYSTEM,
AND FAILURE TO DO SO SUCCESSFULLY COULD CAUSE FUTURE SALES TO DECLINE.
Our future financial performance depends significantly on revenue from
future enhancements to our E-Business Automation System that we are currently
developing and plan to develop. Any delay or difficulties in completing these
enhancements could seriously harm our business and operating results. We are
currently developing a new release of our E-Business Automation System, which
will include functionality that we do not currently have, including integration
with IBM's WebSphere(TM) Application Server Advanced Edition which provides
support for computing standards such as Enterprise Java Beans and Java2, and
third party development tools. While we anticipate that this version will be
released in the second quarter of 2000, this version still requires significant
additional development that could result in delay, and we cannot predict with
certainty the date of commercial release. In addition, we cannot be certain that
enhanced versions of our E-Business Automation System will meet customers'
expectations.
IF WE FAIL TO RESPOND TO RAPID TECHNOLOGICAL CHANGE AND EVOLVING INDUSTRY
STANDARDS, OUR PRODUCTS MAY BECOME OBSOLETE.
If we are unable to develop and release new products or product
enhancements in a timely manner, we may lose existing customers or fail to
attract new customers, resulting in a decline in revenue. The market for our
products and services is characterized by rapid technological change, frequent
new product introductions and enhancements, uncertain product life cycles,
changes in customer demands and evolving industry standards. New products based
on new technologies or new industry standards may quickly render an existing
product obsolete and unmarketable. Our growth and future operating results
depend in part upon our ability to enhance existing products and develop and
introduce new products that conform to prevailing industry standards, meet or
exceed technological advances in the marketplace, meet changing customer
requirements, achieve market acceptance, and respond to competitive products.
Our technology is complex, and new products and product enhancements can require
substantial investment and long development and testing periods.
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 customer base by selling
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 not choose 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 product, our services
revenue will also likely decline. Our services revenue is derived from fees for
professional services and customer support. 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
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 decline.
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<PAGE> 15
BECAUSE A SMALL NUMBER OF CUSTOMERS ACCOUNT FOR A SUBSTANTIAL PORTION OF OUR
REVENUE, OUR REVENUE COULD SUFFER IF WE LOSE A MAJOR CUSTOMER.
Our top ten customers for the years ended December 31, 1998 and 1999 in
total accounted for approximately 71% and 48%, respectively, of our revenue.
Shell Energy/Noble Software and Harcourt General accounted for 17.5% and 12.8%,
respectively, of our revenue for the year ended December 31, 1998 and El Paso
Energy Corporation accounted for 11.5% of our revenue for the year ended
December 31, 1999. We expect that a small number of customers will continue to
account for a substantial portion of revenue in any given quarter in the
foreseeable future, although it is unusual for the same customer to account for
a substantial amount of revenue in each of several quarters. As a result, our
inability to secure major customers during a given period or the loss of any one
major customer could cause our revenue to drop quickly and unexpectedly.
WE RELY ON COMPANIES THAT CUSTOM DEVELOP AND INTEGRATE SOFTWARE APPLICATIONS TO
HELP SUPPORT OUR PRODUCTS AND, ACCORDINGLY, OUR FAILURE TO MAINTAIN GOOD
RELATIONSHIPS WITH THESE SYSTEMS INTEGRATORS MAY HURT SALES.
Our potential customers often use third-party systems integrators to
develop, deploy and manage their Web sites. In order to reach these customers,
we cultivate relationships with systems integrators, encouraging them to support
our products and recommend them to customers. If we do not adequately train a
sufficient number of systems integrators or if systems integrators were to
devote their efforts to integrating or co-selling competitive products, our
revenue could be reduced and our operating results could be harmed.
BECAUSE WE RELY ON THIRD-PARTY DISTRIBUTORS TO HELP SELL OUR PRODUCTS, OUR
FAILURE TO MAINTAIN OR INCREASE THE NUMBER OF RELATIONSHIPS WITH THIRD-PARTY
DISTRIBUTORS MAY REDUCE OUR REVENUE.
We rely on distributors to complement our direct sales force and sell our
products and services. We have agreements with a limited number of third-party
distributors, and we may not be able to increase the number of our distribution
relationships or maintain our existing relationships. In addition, our current
agreements with our distribution partners do not prevent these companies from
selling products of other companies, including products that may compete with
our products, and do not require these partners to purchase minimum quantities
of our products. These distributors could give higher priority to the products
of other companies or to their own products than they give to our products. As a
result, the loss of, or a significant reduction in sales volume from our current
or future distribution partners could seriously harm our revenue and operating
results.
OUR BUSINESS WILL BE HARMED IF THIRD-PARTY SOFTWARE AND TECHNOLOGY, WHICH WE
INTEGRATE INTO OUR PRODUCTS, PROVES UNRELIABLE OR IS UNAVAILABLE ON COMMERCIALLY
REASONABLE TERMS.
Our products integrate third-party object middleware, Web servers and Java
Virtual Machine(TM). Our business would be seriously harmed if the providers
from whom we license software and technology ceased to deliver and support
reliable products, enhance their current products in a timely fashion or respond
to emerging industry standards. In addition, the third-party software may not
continue to be available to us on commercially reasonable terms or at all. For
example, we license some of the components of our products from limited or sole
source suppliers. Many of these licenses are subject to periodic renewal. The
loss of, or inability to maintain or obtain this software for any reason could
result in significant shipment delays or reductions. Furthermore, we might be
forced to limit the features available in our current or future product
offerings.
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<PAGE> 16
Almost all of our products are written in Java and require a Java Virtual
Machine(TM) made available by Sun Microsystems in order to operate. Sun may not
continue to make the Java Virtual Machine(TM) available at commercially
reasonable terms or at all. Furthermore, if Sun were to make significant changes
to the Java language or its Java Virtual Machine(TM), or fail to correct defects
and limitations in these products, our ability to continue to improve and ship
our products could be impaired. In the future, our customers may also 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.
OUR LIMITED EXPERIENCE IN MANAGING A LARGE SALES FORCE MAY IMPAIR OUR ABILITY TO
EXPAND SALES AND GENERATE INCREASED REVENUE.
Until recently, we did not have a large direct sales force. Over the past
year, we have rapidly expanded our direct sales force and plan to hire
additional sales personnel commensurate with our sales objectives. We may
experience difficulty in integrating the new members of our sales team into our
operations. Our products and services require a sophisticated sales effort
targeted at the senior management of our prospective customers. Newly hired
employees will require extensive training and generally take at least nine
months to achieve full productivity. Moreover, each sales team typically
includes a sales representative, a system engineer and an inside salesperson. We
have limited experience in managing a large, expanding, geographically dispersed
sales force. In addition, we have limited experience marketing our products
broadly to a large number of potential customers. We cannot be certain that we
will be able to hire enough qualified individuals in the future or that newly-
hired employees will achieve necessary levels of productivity.
OUR SALES CYCLE IS LONG AND VARIABLE, WHICH LIMITS OUR ABILITY TO FORECAST
SPECIFIC SALES AND MAY CAUSE OUR OPERATING RESULTS TO FLUCTUATE SIGNIFICANTLY
FROM QUARTER TO QUARTER.
The length of time between the date of initial contact with a potential
customer and the execution of a license agreement typically ranges from two to
four months, and is subject to delays over which we have little or no control.
The sale of our products is subject to delays from our customers' lengthy
budgeting, approval and competitive evaluation processes that typically
accompany significant information technology purchasing decisions. For example,
customers frequently begin by evaluating our products on a limited basis and
devote time and resources to testing our products before they decide whether or
not to purchase a license for deployment. We generally need to commit
substantial time and resources to educate potential customers on the use and
benefits of business rules automation and on the performance features of our
E-Business Automation System. Customers may also defer orders as a result of
anticipated releases of new products or enhancements by us or our competitors.
As a result, our ability to forecast the timing and amount of specific sales is
limited, and the delay or failure to complete one or more large transactions
could cause our operating results to vary significantly from quarter to quarter.
OUR SOFTWARE PRODUCTS ARE COMPLEX AND MAY CONTAIN UNKNOWN DEFECTS THAT COULD
DECREASE MARKET ACCEPTANCE OF OUR PRODUCTS, RESULT IN PRODUCT LIABILITY OR HARM
OUR REPUTATION.
Since our customers use our products for the critical e-business software
applications used to transact their online business, errors, defects or other
performance problems could result in damage to our customers' businesses.
Complex software such as ours often contains errors or defects, particularly
when first introduced or when new versions or enhancements are released. We
cannot be certain that current versions or enhanced versions of our E-Business
Automation System will be free of significant software defects or bugs. Despite
our own testing and testing by customers, our current and future products may
contain serious defects. Serious defects or errors could result in lost revenue
or a delay
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<PAGE> 17
in market acceptance. Customers could seek significant compensation from us for
losses. Even if not successful, a product liability claim brought against us
would likely be time-consuming, costly and damaging to our reputation.
WE PLAN TO COMMIT SIGNIFICANT RESOURCES TO EXPAND OUR INTERNATIONAL SALES AND
MARKETING ACTIVITIES, WHICH COULD PROVE TO BE UNPROFITABLE DUE TO OUR
INEXPERIENCE IN SUCH ACTIVITIES AS WELL AS OTHER RISKS INHERENT IN INTERNATIONAL
BUSINESS ACTIVITIES.
We have limited experience in marketing, selling and distributing our
products and services internationally. For the year ended December 31, 1999,
only approximately 14.1% of revenue was derived from international accounts. As
we expand international sales, we expect to become subject to a number of risks
which may increase our costs, lengthen our sales cycle and require significant
management attention. These risks generally include:
- increased expenses associated with customizing products for foreign
countries;
- general economic conditions, including instability, in international
markets;
- currency exchange rate fluctuations;
- unexpected changes in regulatory requirements resulting in unanticipated
costs and delays;
- tariffs, export controls and other trade barriers;
- longer accounts receivable payment cycles and difficulties in collecting
accounts receivable;
- reduced or less certain protection for intellectual property rights; and
- potentially adverse tax consequences, including restrictions on the
repatriation of earnings.
We currently invoice customers primarily in U.S. dollars and we maintain
only nominal foreign currency cash balances. In the future, however, we may
shift financial and administrative control of our foreign operations from the
U.S. to our international offices. If that occurs, we may have increased
exposure to international currency fluctuations.
ANY ACQUISITIONS WE MAKE COULD DISRUPT OUR BUSINESS AND CONSEQUENTLY HARM OUR
FINANCIAL CONDITION.
As part of our business strategy, we review on an ongoing basis acquisition
prospects that we believe would be advantageous to the development of our
business. While we have no current agreements with respect to any major
acquisitions, we may make acquisitions of businesses, products, consulting
organizations or technologies in the future. If we make any acquisitions, we
could take any or all of the following actions, any of which could materially
and adversely affect our financial results and the price of our common stock:
- issue equity securities that would dilute existing stockholders'
percentage ownership;
- use a substantial portion of our available cash, including proceeds from
this offering;
- incur substantial debt, which may not be available on favorable terms;
- assume contingent liabilities; or
- take substantial charges in connection with the amortization of goodwill
and other intangible assets.
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<PAGE> 18
Acquisitions also entail numerous risks, including:
- difficulties in assimilating acquired operations, products and personnel
with our pre-existing business and operations;
- unanticipated costs;
- diversion of management's attention from other business concerns;
- adverse effects on existing business relationships with suppliers and
customers;
- risks of entering markets in which we have limited or no prior
experience; and
- potential loss of key employees from either our preexisting business or
the acquired organization.
We may not be able to successfully integrate any businesses, products,
technologies or personnel that we might acquire in the future, and our failure
to do so could harm our business and operating results.
SINCE THE LICENSING OF OUR AUTOMATION TECHNOLOGY IS A KEY COMPONENT OF SALES,
OUR BUSINESS MAY SUFFER IF WE CANNOT PROTECT OUR INTELLECTUAL PROPERTY.
Approximately 58% of our revenue in the fourth quarter of 1999 was derived
from the sale of software product licenses. 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 one U.S. patent related to our automated development tool that
uses a drag-and-drop metaphor. This patent is scheduled to expire in April 9,
2016. In addition, we have one 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 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 the laws of the United States do. Our future
patents, if any, may be successfully challenged or may not provide us with any
competitive advantages.
WE COULD INCUR SUBSTANTIAL COSTS DEFENDING OUR INTELLECTUAL PROPERTY FROM
INFRINGEMENT OR A CLAIM OF INFRINGEMENT.
Other companies, including our competitors, may obtain patents or other
proprietary rights that would prevent, limit or interfere with our ability to
make, use or sell our products. As a result, we may be found to infringe on the
proprietary rights of others. In the event that a successful claim of
infringement is brought against us and we fail or are unable to license the
infringed technology, our business and operating results would be significantly
harmed. Companies in the Internet infrastructure software market are
increasingly bringing suits alleging infringement of their proprietary rights,
particularly patent rights. Although we are not currently subject to any
litigation or claims, any future
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<PAGE> 19
claims, whether or not valid, could result in substantial costs and diversion of
resources with no assurance of success. Intellectual property litigation or
claims could force us to do one or more of the following:
- cease selling, incorporating or using products or services that
incorporate the challenged intellectual property;
- obtain a license from the holder of the infringed intellectual property
right, which license may not be available on reasonable terms; and
- redesign products or services.
WE COULD STILL FACE PROBLEMS RELATED TO THE YEAR 2000 ISSUE.
To date, our customers have not reported any problems with our software
products as a result of the commencement of the year 2000 and we have not
experienced any impairment in our internal operations with the year 2000 issue.
Nevertheless, computer experts have warned that there may still be residual
consequences stemming from the change in centuries and, if these consequences
become widespread, they could result in claims against us, a decrease in sales
of our products and services, increased operating expenses and other business
interruptions. We have not developed any specific contingency plan for year 2000
issues.
RISKS RELATED TO THIS OFFERING
OUR STOCK PRICE MAY BE VOLATILE, WHICH COULD RESULT IN SUBSTANTIAL LOSSES FOR
INVESTORS PURCHASING SHARES IN THIS OFFERING.
The market prices of securities of other technology-based companies,
particularly Internet-related companies, currently are highly volatile. The
market price of our common stock may fluctuate significantly in response to the
following factors, some of which are beyond our control:
- variations in our quarterly operating results;
- deviations in our results of operations from the estimates of securities
analysts;
- changes in securities analysts' estimates of our financial performance;
- changes in market valuations of similar companies and stock market price
and volume fluctuations generally;
- economic conditions specific to online commerce and e-business automation
products and services;
- announcements by us or our competitors of new or enhanced products,
technologies or services or significant contracts, acquisitions,
strategic relationships, joint ventures or capital commitments;
- regulatory developments;
- additions or departures of key personnel; and
- future sales of our common stock or other securities.
Our initial public offering price may not be indicative of the price of our
stock that will prevail in the trading market. You may be unable to sell your
shares of common stock at or above the initial public offering price, which may
result in substantial losses to you. Moreover, in the past, securities class
action litigation has often been brought against a company following periods of
volatility in the
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<PAGE> 20
market price of its securities. We may in the future be the target of similar
litigation. Securities litigation could result in substantial costs and divert
management's attention and resources.
OUR STOCK PRICE COULD BE ADVERSELY AFFECTED BY SHARES BECOMING AVAILABLE FOR
SALE UNDER RULE 144 AND AS A RESULT OF REGISTRATION RIGHTS AGREEMENTS WE HAVE
ENTERED INTO WITH SOME OF OUR INVESTORS.
Sales of a substantial number of shares of our common stock under Rule 144,
or the perception that these sales could occur, could depress the market price
of our common stock and could impair our ability to raise capital through the
sale of additional equity securities. In addition, we have entered into
registration rights agreements with some investors that entitle these investors
to have their shares registered for sale in the public market. The exercise of
these rights could affect the market price of our common stock. See "Shares
Eligible for Future Sale" for further information concerning potential sales of
our shares after this offering, including information concerning Rule 144 and
the registration rights we have granted.
YOU WILL EXPERIENCE IMMEDIATE AND SUBSTANTIAL DILUTION AND PAY A HIGHER PRICE
FOR OUR COMMON STOCK THAN EXISTING STOCKHOLDERS.
If you purchase common stock in this offering, you will pay more for your
shares than the amounts paid by existing stockholders for their shares. As a
result, you will experience immediate and substantial dilution of approximately
$11.30 per share. See "Dilution."
ANTI-TAKEOVER PROVISIONS IN OUR CHARTER DOCUMENTS AND DELAWARE LAW COULD PREVENT
OR DELAY A CHANGE IN CONTROL OF OUR COMPANY.
We have anti-takeover provisions that could prevent or delay an acquisition
of our business at a premium price. Some of the provisions of our certificate of
incorporation and bylaws could discourage, delay or prevent an acquisition of
our company at a premium price or at all. These provisions:
- provide for a staggered board;
- prevent stockholders from taking action by written consent;
- limit the persons who may call special meetings of stockholders;
- authorize the issuance of preferred stock in one or more series; and
- require advance notice for stockholder proposals and director
nominations.
In addition, Section 203 of the Delaware General Corporation law also imposes
restrictions on mergers and other business combinations between us and any
holder of 15% or more of our common stock. See "Description of Capital
Stock -- Preferred Stock" and "Description of Capital Stock -- Antitakeover
Effects of Provisions of the Certificate of Incorporation, Bylaws and Delaware
Law" for a more detailed discussion of these anti-takeover provisions.
INSIDERS WILL CONTINUE TO HAVE SUBSTANTIAL CONTROL OVER VERSATA AFTER THIS
OFFERING AND THEIR INTERESTS MAY BE DIFFERENT FROM AND CONFLICT WITH YOURS.
The interest of management could conflict with the interest of our other
stockholders. Upon completion of this offering, our executive officers,
directors and principal stockholders will beneficially own, in total, 58.0% of
our outstanding common stock. As a result, these stockholders will be able to
exercise control over all matters requiring stockholder approval, including the
election of directors and
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<PAGE> 21
approval of significant corporate transactions. This could have the effect of
delaying or preventing a change of control of Versata, which in turn could
reduce the market price of our stock.
OUR FAILURE TO OBTAIN ADDITIONAL FINANCING IN THE NEAR FUTURE MAY SUBSTANTIALLY
HARM THE FUTURE GROWTH OF OUR BUSINESS.
We expect that the net proceeds from this offering, together with cash
generated from operations, will be sufficient to meet our working capital and
capital expenditure needs for at least the next 12 months. After that, we may
need to raise additional funds, and we cannot be certain that we will be able to
obtain additional financing on favorable terms, if at all. Furthermore, if we
issue additional equity securities, stockholders may experience additional
dilution or the new equity securities may have rights, preferences or privileges
senior to those of existing holders of common stock. If we cannot raise funds on
acceptable terms if and when needed, we may not be able to develop or enhance
our products and services, take advantage of future opportunities, grow our
business or respond to competitive pressures or unanticipated requirements,
which could seriously harm our business.
CAUTIONARY NOTE ON FORWARD-LOOKING STATEMENTS
This prospectus may contain forward-looking statements based on our current
expectations, assumptions, estimates and projections about us and our industry.
Forward-looking statements relate to future events or to our future financial
performance. In some cases, you can identify forward-looking statements by
terminology such as "may," "will," "should," "expects," "plans," "anticipates,
"could," "believes," "estimates," "predicts," "potential" or similar
expressions. Our actual results could differ materially from those anticipated
in these forward-looking statements as a result of factors more fully described
in the "Risk Factors" section and elsewhere in this prospectus.
Although we believe that the expectations reflected in any forward-looking
statements are reasonable, we cannot guarantee future events or results. Readers
are cautioned not to place undue reliance on these forward-looking statements,
which reflect management's view only as of the date of this prospectus. Except
as required by law, we undertake no obligation to update any forward-looking
statement, even if new information becomes available or other events occur.
TRADEMARKS
We have filed for several trademarks, including the Versata E-Business
Automation System(TM), the Versata Logic Server(TM), the Versata Studio(TM) and
the Versata Connectors(TM), as well as the Versata logo. Java is a registered
trademark of Sun Microsystems. Trademarks, trade names and service marks of
other companies appearing in this prospectus are the property of the respective
holders. Use or display by Versata of other parties' trade names, trademarks or
service marks is not intended to and does not imply a relationship with, or
endorsement or sponsorship of Versata by, the trade name or trademark owners.
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USE OF PROCEEDS
We estimate the net proceeds from the sale of the 3,850,000 shares of
common stock offered will be $44.9 million, assuming an initial public offering
price of $13.00 per share, after deducting the estimated underwriting discounts
and commissions and offering expenses. If the underwriters' over-allotment
option is exercised in full, we estimate that we will receive approximately
$51.8 million in net proceeds from this offering.
We currently intend to use the net proceeds of this offering, along with
our existing cash balances, primarily to fund working capital, technology and
product development and sales and marketing. We anticipate using between $8
million and $10 million of the net proceeds during the next twelve months for
product development and investment in our technology infrastructure. Also, we
intend to use between $38 million and $43 million during the next twelve months
for sales and marketing expenses. As of the date of this prospectus, we have not
allocated any specific amount of the proceeds for the purposes listed in this
paragraph. A portion of the net proceeds may also be used to acquire or invest
in complementary businesses, technologies, product lines or products. Pending
our use of the proceeds, the net proceeds of this offering will be invested in
short term, interest-bearing, investment-grade securities.
As of the date of this prospectus, we can only estimate the particular uses
for the net proceeds to be received upon completion of the offering. Our actual
expenditures may vary substantially from these estimates. The amounts and timing
of our actual expenditures will depend on numerous factors, including the status
of our technology development efforts, the progress of our sales and marketing
activities, the amount of cash generated or used by our operations and other
competitive factors. We currently have no formal plan for use of the expected
offering proceeds, nor have we sought the advice of or received reports from any
of our professional advisors regarding the use of the offering proceeds. We may
find it necessary or advisable to use portions of the proceeds for other
purposes, and our management will have broad discretion in the allocation of the
net proceeds of this offering. You will not have the opportunity to evaluate the
economic, financial or other information on which we base our decisions on how
to use the proceeds.
DIVIDEND POLICY
We have never declared or paid dividends on our capital stock and do not
anticipate declaring or paying cash dividends in the foreseeable future.
Payments of future dividends, if any, will be at the discretion of our board of
directors after taking into account various factors our board of directors deems
relevant, including our financial condition, operating results, current and
anticipated cash needs, plans for expansion and debt covenants.
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CAPITALIZATION
The following table sets forth our cash and cash equivalents and total
capitalization as of December 31, 1999. This table should be read in conjunction
with the "Selected Financial Data," "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and our consolidated financial
statements and the related notes appearing elsewhere in this prospectus. This
information is presented:
- on an actual basis;
- on a pro forma basis to reflect the net proceeds of $1.5 million from the
sale of 269,784 shares of Series F preferred stock in January 2000; and
- on a pro forma as adjusted basis to also give effect to:
- the automatic conversion of all outstanding series of preferred stock
into common stock upon completion of this offering; and
- the receipt of the estimated net proceeds of $44.9 million from the
sale of 3,850,000 shares of common stock in this offering at an
assumed initial public offering price of $13.00 per share after
deducting underwriting discounts and commissions and offering
expenses.
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1999
-------------------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
----------- ------------ --------------
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<S> <C> <C> <C>
Cash and cash equivalents........................ $ 20,655 $ 22,155 $ 66,912
======== ======== ========
Total long-term liabilities...................... 320 320 320
Stockholders' equity:
Convertible preferred stock, issuable in
series, $0.001 par value, 30,580,000 shares
authorized, actual and pro forma; 26,572,909
shares issued and outstanding, actual;
26,842,693 shares issued and outstanding,
pro forma; 5,000,000 shares authorized, no
shares issued and outstanding, pro forma as
adjusted.................................... 26 28 --
Common stock, $0.001 par value, 40,000,000
authorized, actual and pro forma; 7,204,111
shares issued and outstanding, actual and
pro forma; 150,000,000 shares authorized,
37,896,804 shares issued and outstanding,
pro forma as adjusted....................... 7 7 38
Additional paid-in capital..................... 89,905 91,403 136,157
Notes receivable from stockholders............. (2,413) (2,413) (2,413)
Unearned stock-based compensation.............. (14,732) (14,732) (14,732)
Accumulated deficit............................ (53,375) (53,375) (53,375)
-------- -------- --------
Total stockholders' equity................ 19,418 20,918 65,675
-------- -------- --------
Total capitalization...................... $ 19,738 $ 21,238 $ 65,995
======== ======== ========
</TABLE>
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The common stock outstanding as shown above is based on shares outstanding
as of December 31, 1999 and excludes:
- 6,399,197 shares that could be issued upon the exercise of options
outstanding as of January 31, 2000 at a weighted average exercise price
of $3.03 per share;
- 2,517,366 shares reserved for issuance under our option plans at January
31, 2000;
- 537,982 shares that could be issued upon the exercise of warrants
outstanding as of December 31, 1999 at a weighted average exercise price
of $0.43 and 216,745 shares issuable upon conversion of preferred stock
issuable upon the exercise of warrants outstanding as of December 31,
1999 at a weighted average exercise price of $3.41; and
- 500,000 shares that could be issued to employees who elect to buy our
stock in the future under our employee stock purchase plan.
For additional information regarding these shares, see "Management -- Stock
Plans," "Description of Securities" and the notes to the consolidated financial
statements.
20
<PAGE> 25
DILUTION
If you invest in our common stock, your interest will be diluted to the
extent of the difference between the public offering price per share of our
common stock and the pro forma as adjusted net tangible book value per share of
our common stock after this offering. Our pro forma net tangible book value at
December 31, 1999, was approximately $19.5 million, or $0.57 per share of common
stock. Pro forma net tangible book value per share represents our total tangible
assets less total liabilities, divided by the number of shares of common stock
outstanding at December 31, 1999 after giving effect to: (i) the sale of shares
of Series F preferred stock subsequent to December 31, 1999; and (ii) the
automatic conversion of all outstanding series of preferred stock into common
stock upon completion of this offering.
After giving effect to the sale of 3,850,000 shares of our common stock, at
an assumed initial public offering price of $13.00 per share, and after
deducting estimated underwriting discounts and commissions and offering
expenses, our pro forma as adjusted net tangible book value at December 31, 1999
would have been $64.3 million, or $1.70 per share. This represents an immediate
increase in net tangible book value of $1.13 per share to existing stockholders
and an immediate and substantial dilution of $11.30 per share to new investors
purchasing shares of common stock in this offering. The following table
illustrates this dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............. $13.00
Pro forma net tangible book value per share at December
31, 1999............................................... $0.57
Increase per share attributable to new investors.......... 1.13
-----
Pro forma as adjusted net tangible book value per share
after the offering........................................ 1.70
------
As adjusted dilution per share to new investors............. $11.30
======
</TABLE>
Assuming the exercise in full of the underwriters' over-allotment option,
our pro forma as adjusted net tangible book value at December 31, 1999 would
have been approximately $1.85 per share, representing an immediate increase in
net tangible book value of $1.28 per share to our existing stockholders and an
immediate and substantial dilution in net tangible book value of $11.15 per
share to new investors.
The following table summarizes, at December 31, 1999, on a pro forma basis,
the total number of shares purchased from us, and consideration paid to us and
the average price per share paid by existing stockholders and by new investors
purchasing shares of common stock in this offering at an assumed initial public
offering price of $13.00 per share, before deducting the estimated underwriting
discounts and commissions and offering expenses:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
--------------------- ----------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
----------- ------- ------------ ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders........ 34,046,804 89.8% $ 69,098,000 58.0% $ 2.03
New investors................ 3,850,000 10.2 50,050,000 42.0% 13.00
----------- ----- ------------ -----
Totals............. 37,896,804 100.0% $119,148,000 100.0%
=========== ===== ============ =====
</TABLE>
To the extent that any of our outstanding options or warrants are
exercised, there could be further dilution to new investors. For additional
information regarding these shares, see "Capitalization," "Management -- Stock
Plans," "Description of Securities" and Note 1 of notes to consolidated
financial statements.
21
<PAGE> 26
SELECTED FINANCIAL 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"
included elsewhere in this prospectus. The statement of operations data for the
years ended December 31, 1997, 1998 and 1999, and the balance sheet data as of
December 31, 1998 and 1999, are derived from the audited consolidated financial
statements included in this prospectus, which have been audited by
PricewaterhouseCoopers LLP. The statement of operations data for the years ended
December 31, 1995 and 1996 and the balance sheet data as of December 31, 1995,
1996 and 1997, are derived from audited consolidated financial statements not
included in this prospectus. The diluted net loss per share computation excludes
potential shares of common stock (preferred stock, options and warrants to
purchase common stock and common stock subject to repurchase rights that we
hold), since their effect would be antidilutive. See the notes to our
consolidated financial statements for a detailed explanation of the
determination of the shares used to compute actual and pro forma basic and
diluted net loss per share. Our historical results are not necessarily
indicative of results to be expected for future periods.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------
1995 1996 1997 1998 1999
---------- ---------- ---------- ----------- -----------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue:
Software license............................. $ 64 $ 872 $ 526 $ 1,924 $ 6,729
Services..................................... -- 252 880 2,026 5,853
---------- ---------- ---------- ----------- -----------
Total revenue.............................. 64 1,124 1,406 3,950 12,582
---------- ---------- ---------- ----------- -----------
Cost of revenue:
Software license............................. 84 127 234 499
Services..................................... 11 825 1,184 2,248 6,121
---------- ---------- ---------- ----------- -----------
Total cost of revenue...................... 11 909 1,311 2,482 6,620
---------- ---------- ---------- ----------- -----------
Gross profit................................... 53 215 95 1,468 5,962
---------- ---------- ---------- ----------- -----------
Operating expense:
Sales and marketing.......................... 957 4,583 4,779 4,495 15,609
Product development.......................... 2,432 3,486 3,547 3,275 4,769
General and administrative................... 637 1,349 1,781 1,379 3,125
Stock-based compensation..................... -- -- -- 202 3,955
---------- ---------- ---------- ----------- -----------
Total operating expense.................... 4,026 9,418 10,107 9,351 27,458
---------- ---------- ---------- ----------- -----------
Loss from operations........................... (3,973) (9,203) (10,012) (7,883) (21,496)
Other income (expense), net.................... 42 190 168 (251) (304)
---------- ---------- ---------- ----------- -----------
Net loss....................................... (3,931) (9,013) (9,844) (8,134) (21,800)
Deemed preferred stock dividend................ -- -- -- -- (10,800)
---------- ---------- ---------- ----------- -----------
Net loss attributable to common stockholders... $ (3,931) $ (9,013) $ (9,844) $ (8,134) $ (32,600)
---------- ---------- ---------- ----------- -----------
Net loss per share attributable to common
stockholders:
Basic and diluted............................ $ (3.14) $ (6.05) $ (5.72) $ (3.99) $ (9.18)
========== ========== ========== =========== ===========
Weighted average shares outstanding.......... 1,251,691 1,489,294 1,720,649 2,038,393 3,552,409
========== ========== ========== =========== ===========
Unaudited pro forma net loss per share:
Basic and diluted............................ $ (0.87)
===========
Weighted average shares outstanding.......... 24,923,904
===========
</TABLE>
The unaudited pro forma net loss information in the table above gives effect to
the conversion into common stock of all series of preferred stock outstanding as
of December 31, 1999.
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------------
1995 1996 1997 1998 1999
------ ------ ------ ------ -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................... $4,764 $1,332 $2,338 $5,767 $20,655
Working capital............................................. 4,405 54 835 3,878 16,215
Total assets................................................ 5,665 3,374 4,235 8,468 33,660
Total long-term liabilities................................. 720 612 1,175 498 320
Stockholders' equity........................................ 4,435 820 889 4,356 19,418
</TABLE>
22
<PAGE> 27
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion and analysis in conjunction with
"Selected Financial Data" and the consolidated financial statements and notes
attached to those statements included elsewhere in this prospectus. This
discussion contains forward-looking statements. Please see "Risk Factors" and
"Cautionary Note on Forward-Looking Statements."
OVERVIEW
We provide a comprehensive suite of software and services that enables our
customers to rapidly deploy e-business software applications that can be
modified quickly to meet constantly changing business requirements. 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 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 Versata E-Business Automation System. To
date, we have licensed our products and provided services to approximately 500
customers around the world. Since the second quarter of 1998, we have derived
our revenue exclusively from our Web-based software products and related
services.
We derive our revenue from the sale of software product licenses and from
related services. Software license revenue is derived from the sale of software
licenses for our Versata E-Business Automation System. Our software licenses are
priced based on the size of the customer's project. Software license revenue
also includes product maintenance, which provides the customer with software
upgrades over a specified term, typically twelve months. Services revenue
consists of fees from professional services and customer support. Professional
services include consulting and training. Customers typically purchase these
professional services from us to enlist our support in implementation
activities, generally when the sale is made through direct sales efforts.
Professional services are sold on either a time-and-materials or on a
fixed-price basis, while customer support is priced based on the particular
level of support chosen by the customer. Software license revenue accounted for
approximately 48.7% and 53.5% of our total revenue in 1998 and 1999,
respectively, while services revenue accounted for 51.3% and 46.5%,
respectively.
We recognize revenue in accordance with Statement of Position 97-2,
"Software Revenue Recognition." Software license revenue is recognized when a
license agreement is signed by both parties, the fee is fixed, determinable,
collection is probable and delivery of the product has occurred. Our customers
usually purchase maintenance agreements for product upgrades, and revenue is
recognized ratably over the term of the agreement, typically one year, as a
component of software license revenue. We bill professional services fees either
on a time-and-materials or on a fixed-price basis and recognize revenue as the
services are performed. We offer differing levels of customer support and
revenue is recognized ratably over the term of the customer support agreement,
typically one year. Fees from arrangements which provide for extended payment
terms are recognized as revenue when payments become due.
The portion of fees related to either products delivered or services
rendered which are not due under our standard payment terms is reflected in
deferred revenue and in unbilled receivable until payments become due. Deferred
revenue balances also include contracts for which right of product exchanges
were granted for an extended period and the level of future product returns
cannot be reasonably estimated, as well as contracts for which professional
services have not yet been
23
<PAGE> 28
performed. Costs associated with services rendered which are not due under our
standard payment terms have been deferred. As of December 31, 1999, deferred
costs amounted to $130,000.
As of December 31, 1999, we had deferred revenue of $4.4 million, an
increase of $3.5 million from $910,000 as of December 31, 1998. This increase is
principally attributable to three contracts for which rights of return were
granted for an extended period of time. We do not believe that we can reasonably
estimate the future level of returns. As a result, a total balance of $1.7
million was deferred and will not be recognized until a reasonable estimate can
be made or until the return right lapses.
We market our products and services through our direct sales force,
consulting 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 our revenue to
date has been derived predominantly from customers in the United States, we
believe international revenue will represent a more meaningful component of our
total revenue as we expand our direct and indirect international sales efforts.
Revenue from international sales represented 9.0% of our total revenue in 1998,
and 14.1% of our total revenue in 1999.
Our cost of software license revenue consists of royalty payments to third
parties for technology incorporated in our product, the cost of manuals and
product documentation, as well as packaging and distribution costs. Our 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. We currently generate positive gross margins
from our consulting and training services; our fixed cost of customer support
services exceeds our revenue generated from support activities. We expect this
trend to continue for the next several quarters. 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 $53.4 million as of December 31, 1999. We anticipate that
our operating expenses will increase substantially in future quarters as we
increase sales and marketing operations, expand distribution channels, establish
additional domestic and international sales offices, increase product
development, broaden professional services, expand facilities and support, and
improve operational and financial systems. We expect to incur additional net
losses and negative cash flows from operations on a quarterly and annual basis
for at least the next twenty-four months. In addition, our limited operating
history as a company focused on Web-based software products makes it difficult
for us to predict future operating results and, accordingly, there can be no
assurance that we will achieve or sustain revenue growth or profitability.
We increased our number of employees and independent contractors devoting
substantially all of their time to us from 90 as of December 31, 1998 to 333 as
of February 1, 2000. This rapid growth places a significant demand on our
management and operational resources. In order to manage growth effectively, we
must implement and improve our operational systems, procedures and controls on a
timely basis. In addition, we expect that future expansion will continue to
challenge our ability to attract, train and retain our employees. Competition is
intense for highly qualified technical, sales and marketing and management
personnel and cash compensation for these employees is likely to
24
<PAGE> 29
increase after this offering because prospective employees may perceive that the
stock option component of our compensation package is not as valuable as it was
prior to this offering. If our total revenue does not increase relative to our
operating expenses, our management systems do not expand to meet increasing
demands, we fail to attract and retain qualified personnel, or our management
otherwise fails to manage our expansion effectively, there would be a material
adverse effect on our business, operating results and financial condition.
As a result of stock options granted in 1998 and 1999 with exercise prices
below fair value, we recognized a total unearned compensation expense of $18.1
million which will be amortized on an accelerated basis over the vesting periods
of the options, usually 50 months. In January 2000, we will record an additional
$9.2 million in unearned stock-based compensation which will be amortized over
the vesting schedule of the options.
RESULTS OF OPERATIONS
The following table presents selected financial data for the periods
indicated as a percentage of total revenue. Data for the period from inception
through December 31, 1996 is not presented because revenue during that period
was not material.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1997 1998 1999
------- ------- -------
<S> <C> <C> <C>
Revenue:
Software license........................................ 37.4% 48.7% 53.5%
Services................................................ 62.6 51.3 46.5
------- ------- -------
Total revenue........................................ 100.0 100.0 100.0
Cost of revenue:
Software license........................................ 9.0 5.9 4.0
Services................................................ 84.2 56.9 48.6
------- ------- -------
Total cost of revenue................................ 93.2 62.8 52.6
------- ------- -------
Gross profit.............................................. 6.8 37.2 47.4
------- ------- -------
Operating expense:
Sales and marketing..................................... 339.9 113.8 124.1
Product development..................................... 252.3 82.9 37.9
General and administrative.............................. 126.7 34.9 24.8
Stock-based compensation................................ -- 5.1 31.4
------- ------- -------
Total operating expense.............................. 718.9 236.7 218.2
------- ------- -------
Loss from operations...................................... (712.1) (199.5) (170.8)
Other income (expense), net............................... 11.9 (6.4) (2.4)
------- ------- -------
Net loss.................................................. (700.2)% (205.9)% (173.2)%
======= ======= =======
</TABLE>
YEAR ENDED DECEMBER 31, 1999 COMPARED TO THE YEAR ENDED DECEMBER 31, 1998
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 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
25
<PAGE> 30
1998. As a percentage of total revenue, software license revenue was 48.7% and
53.5% in 1998 and 1999, respectively, while services revenue was 51.3% and
46.5%, respectively.
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 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.
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 $64,000 in 1998 and
$515,000 in 1999 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.
Cost of consulting and training services as a percentage of services revenue
decreased from 99.7% in 1998 to 94.3% in 1999, primarily as a result of higher
billing rates. As a percentage of total services revenue, cost of services
revenue decreased from 111.0% in 1998 to 104.6% in 1999.
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 improved margins in both software license revenue and services revenue
for the reasons explained above.
26
<PAGE> 31
OPERATING EXPENSE
Operating expense 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 to increase our market position
and expand our distribution channels, as well as amortization of unearned
stock-based compensation. As a percentage of revenue, operating expense
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 expense consists of salaries,
commissions, expenses from our sales offices, travel and entertainment expense
and marketing programs. Sales and marketing expense excludes 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 expense 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. We had 31 sales and marketing professionals at December 31, 1998
compared to 114 at December 31, 1999. As a percentage of total revenue, sales
and marketing expense increased from 113.8% in 1998 to 124.1% in 1999. We
anticipate that our sales and marketing expense will continue to increase in
future periods as we continue to expand our sales and marketing efforts,
establish additional domestic and international sales offices and increase
promotional activities related to our branding of the Versata name. We also
expect that sales and marketing expenses may fluctuate as a percentage of total
revenue from period to period as new sales personnel are hired and begin to
achieve productivity.
Product Development. Product development expense includes 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. We believe that continued investment in product
development is critical to attaining our strategic objectives, and, as a result,
we expect product development expense to increase significantly in future
periods.
General and Administrative. General and administrative expense consists of
salaries for executive, administrative and finance personnel, information
systems costs, professional service fees and allowance for doubtful accounts.
General and administrative expense excludes 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 expense
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 the 1999 period. We believe general
27
<PAGE> 32
and administrative expense will increase in future periods, as we expect to add
personnel to support our expanding operations and assume the responsibilities of
a public company.
Stock-Based Compensation. Stock-based compensation expense includes the
amortization of unearned employee stock-based compensation and expenses for
stock granted to consultants in exchange for services. Employee stock-based
compensation expense is amortized on an accelerated basis over the vesting
period of the related options, generally 50 months. Total stock-based
compensation expense for 1999 was $4.0 million.
Other income (expense), net. Other income (expense), net is primarily
comprised of interest expense, interest income and foreign currency adjustments.
We had net expense of $251,000 for 1998 as compared to net expense of $304,000
in 1999. This increase was principally due to higher interest expense paid on
debt, partially offset by interest income.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO THE YEAR ENDED DECEMBER 31, 1997
REVENUE
Total revenue increased by $2.6 million, or 180.9%, from $1.4 million in
1997 to $4.0 million in 1998. This increase was largely attributable to an
increase in our customer base in 1998, resulting from the September 1997 launch
of the first generation of what is now our Versata E-Business Automation System.
We released the current version of our Versata E-Business Automation System in
September 1998. Prior to the 1997 release, we generated revenue from software
licenses and services associated with a non-Web-based software product, which we
discontinued in early 1998. As a percentage of total revenue, software license
revenue was 37.4% and 48.7% in 1997 and 1998, respectively, while services
revenue was 62.6% and 51.3%, respectively.
Software License Revenue. Software license revenue increased by $1.4
million, or 265.8% from $526,000 in 1997 to $1.9 million in 1998. This increase
was primarily due to an increase in our customer base resulting from the
September 1997 launch of the first generation of our Versata E-Business
Automation System as well as the September 1998 introduction of the current
version of the software.
Services Revenue. Services revenue increased by $1.1 million, or 130.2%,
from $880,000 in 1997 to $2.0 million in 1998. This increase was principally due
to an increase in training and consulting as a result of our expansion of our
software license revenue.
COST OF REVENUE
Total cost of revenue increased by $1.2 million, or 89.3%, from $1.3
million in 1997 to $2.5 million in 1998.
Cost of Software License Revenue. Cost of software license revenue
increased by $107,000, or 84.3%, from $127,000 in 1997 to $234,000 in 1998. This
increase is attributable to a larger amount of royalties paid on third-party
software incorporated into our products due to an increase in software license
revenue.
Cost of Services Revenue. Cost of services revenue increased by $1.1
million, or 89.9% from $1.2 million in 1997 to $2.3 million in 1998. This
increase was principally due to an increase in our support organization and our
professional consulting services organization.
28
<PAGE> 33
GROSS PROFIT
Gross profit increased by $1.4 million, or 1,445.3%, from $95,000 in 1997
to $1.5 million in 1998. This increase reflects significantly higher software
license revenue in 1998, which generated higher gross margins resulting from
higher average sales prices, as well as improved margins on our new software
released in late 1997. Gross profit as a percentage of total revenue was 6.8%
and 37.2% for 1997 and 1998, respectively.
OPERATING EXPENSE
Operating expense decreased by $756,000, or 7.5%, from $10.1 million in
1997 to $9.4 million in 1998. This decrease was principally due to a
restructuring of our business that occurred in late 1997, which led to a
subsequent decline in each component of operating expense. As a percentage of
revenue, operating expense decreased from 718.9% in 1997 to 236.7% in 1998.
Sales and Marketing. Sales and marketing expense decreased by $284,000 or
5.9%, from $4.8 million in 1997 to $4.5 million in 1998. This decrease was
principally due to the decreased level of spending on marketing programs in
1998. Sales and marketing as a percentage of revenue was 339.8% and 113.8% for
1997 and 1998, respectively.
Product Development. Product development expense decreased by $272,000, or
7.7%, from $3.5 million in 1997 to $3.3 million in 1998. Personnel related to
product engineering and development increased in 1998 as compared to 1997. This
increase was more than offset by the reduction in consulting resources in late
1997. Product development as a percentage of revenue was 252.3% and 82.9% for
1997 and 1998, respectively.
General and Administrative. General and administrative expense decreased by
$402,000, or 22.6%, from $1.8 million in 1997 to $1.4 million in 1998. The 1997
amount includes a restructuring charge of $182,000. In addition, we had lower
outside consulting expenses and a decrease in the funding of our allowance for
doubtful accounts in 1998. General and administrative expense as a percentage of
revenue was 126.7% and 34.9% for 1997 and 1998, respectively.
Stock-Based Compensation. Total stock-based compensation expense in 1998
was $202,000.
Other income (expense), net. Other income (expense), net amounted to
$168,000 income in 1997 as compared to an expense of $251,000 in 1998. This
change is principally due to an increase of $269,000 in interest expense and a
decrease of $150,000 in interest income in 1998.
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<PAGE> 34
QUARTERLY RESULTS OF OPERATIONS
The following table sets forth our historical unaudited quarterly
information for our most recent eight 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.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
--------------------------------------------------------------------------------------------
MAR. 31, JUN. 30, SEP. 30, DEC. 31, MAR. 31, JUN. 30, SEP. 30, DEC. 31,
1998 1998 1998 1998 1999 1999 1999 1999
-------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue:
Software license.............. $ 233 $ 346 $ 774 $ 572 $ 961 $ 1,099 $ 1,673 $ 2,996
Services...................... 292 417 647 669 817 1,370 1,496 2,170
------- ------- ------- ------- ------- ------- ------- -------
Total revenue........... 525 763 1,421 1,241 1,778 2,469 3,169 5,166
------- ------- ------- ------- ------- ------- ------- -------
Cost of revenue:
Software license.............. 28 63 79 64 66 187 122 124
Services...................... 356 399 672 821 1,002 1,292 1,486 2,341
------- ------- ------- ------- ------- ------- ------- -------
Total cost of revenue... 384 462 751 885 1,068 1,479 1,608 2,465
------- ------- ------- ------- ------- ------- ------- -------
Gross profit.................... 141 301 670 356 710 990 1,561 2,701
------- ------- ------- ------- ------- ------- ------- -------
Operating expense:
Sales and marketing........... 704 901 1,301 1,589 2,157 2,836 4,071 6,545
Product development........... 769 817 880 809 915 1,036 1,082 1,736
General and administrative.... 253 289 340 497 407 696 864 1,158
Stock-based compensation...... -- -- -- 202 326 457 709 2,463
------- ------- ------- ------- ------- ------- ------- -------
Total operating
expense............... 1,726 2,007 2,521 3,097 3,805 5,025 6,726 11,902
------- ------- ------- ------- ------- ------- ------- -------
Loss from operations............ (1,585) (1,706) (1,851) (2,741) (3,095) (4,035) (5,165) (9,201)
Other income (expense), net..... (13) (64) (214) 40 28 (35) (442) 145
------- ------- ------- ------- ------- ------- ------- -------
Net loss.............. $(1,598) $(1,770) $(2,065) $(2,701) $(3,067) $(4,070) $(5,607) $(9,056)
======= ======= ======= ======= ======= ======= ======= =======
AS A PERCENTAGE OF REVENUE:
Revenue:
Software license.............. 44.4% 45.3% 54.5% 46.1% 54.0% 44.5% 52.8% 58.0%
Services...................... 55.6 54.7 45.5 53.9 46.0 55.5 47.2 42.0
------- ------- ------- ------- ------- ------- ------- -------
Total revenue........... 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
------- ------- ------- ------- ------- ------- ------- -------
Cost of revenue:
Software license.............. 5.3 8.3 5.6 5.2 3.7 7.6 3.8 2.4
Services...................... 67.8 52.3 47.3 66.1 56.4 52.3 46.9 45.3
------- ------- ------- ------- ------- ------- ------- -------
Total cost of revenue... 73.1 60.6 52.9 71.3 60.1 59.9 50.7 47.7
------- ------- ------- ------- ------- ------- ------- -------
Gross profit.................... 26.9 39.4 47.1 28.7 39.9 40.1 49.3 52.3
------- ------- ------- ------- ------- ------- ------- -------
Operating expense:
Sales and marketing........... 134.1 118.1 91.6 128.0 121.3 114.9 128.5 126.7
Product development........... 146.5 107.0 61.9 65.2 51.5 42.0 34.1 33.6
General and administrative.... 48.2 37.9 23.9 40.1 22.9 28.1 27.3 22.4
Stock-based compensation...... -- -- -- 16.3 18.3 18.5 22.4 47.7
------- ------- ------- ------- ------- ------- ------- -------
Total operating
expense............... 328.8 263.0 177.4 249.6 214.0 203.5 212.3 230.4
------- ------- ------- ------- ------- ------- ------- -------
Loss from operations............ (301.9) (223.6) (130.3) (220.9) (174.1) (163.4) (163.0) (178.1)
Other income (expense), net..... (2.5) (8.4) (15.0) 3.2 1.6 (1.4) (13.9) 2.8
------- ------- ------- ------- ------- ------- ------- -------
Net loss.............. (304.4)% (232.0)% (145.3)% (217.7)% (172.5)% (164.8)% (176.9)% (175.3)%
======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
30
<PAGE> 35
Our limited operating history as a company focused on Web-based software
products, as well as the emerging nature of the Internet infrastructure software
market, make it difficult for us to accurately forecast our revenue. Our revenue
could fall short of our expectations if we experience delays or cancellations of
even a small number of product licenses. A number of factors are likely to cause
fluctuations in our operating results, including, but not limited to:
- the size and timing of individual sales orders;
- unexpected delays in introducing new products and services;
- customer budget constraints;
- the mix of product license and services revenue;
- the mix of direct and indirect channel sales;
- the level of product competition in our market and the timing and market
acceptance of new product introductions and upgrades by us or our
competitors;
- changes in the rapidly evolving Internet infrastructure software market;
- costs related to possible acquisitions related to new technology and
businesses; and
- general economic conditions.
Please see "Risk Factors -- Because we have only sold Web-based software
products since September 1997, our historical operating results may not be
meaningful to an investor evaluating our company" and "-- The unpredictability
of our quarterly operating results may cause the price of our common stock to
decline."
NET OPERATING LOSSES AND TAX CREDIT CARRYFORWARDS
As of December 31, 1999, we had net operating losses and research and
experimentation credit carryforwards of approximately $45.0 million and
$635,000, respectively, for federal tax purposes, and approximately $25.9
million and $415,000, respectively, for state tax purposes. The federal net
operating loss and research and experimentation credit carryforwards are
available through 2019 (through 2004 for state net operating loss carryforwards)
if not used beforehand to offset taxable income or tax liabilities. Under the
provisions of the Internal Revenue Code, substantial changes in our ownership
may limit the amount of net operating loss and tax credit carryforwards that
could be utilized annually in the future to offset taxable income. A valuation
allowance has been established in our financial statements to reflect the
uncertainty of future taxable income required to utilize available tax loss
carryforwards and other deferred tax assets.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, we have funded our operations primarily through the
private sale of our equity securities, resulting in net proceeds of
approximately $69.0 million. We have also funded our operations through
equipment financing. As of December 31, 1999, we had $20.7 million in cash and
cash equivalents and $16.2 million in working capital. We have also obtained a
capital financing line from Phoenix Leasing Incorporated to purchase up to $2.0
million in fixed assets. Any borrowings under this financing line are payable
over 36 months, with an effective interest rate of approximately 17%. At
December 31, 1999, there was a total of $362,000 outstanding under this line.
Borrowings under this line are collateralized by the equipment being financed.
In December 1999, we repaid in full our bank line of credit with the Venture
Banking Group, a division of Cupertino National Bank for amounts borrowed to
finance equipment.
Net cash used in operating activities was $8.6 million in 1997, $7.0
million in 1998 and $14.5 million in 1999. Net cash flows used in operating
activities for each period reflect net losses and
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<PAGE> 36
increasing accounts receivable offset in part by increases in accounts payable
and accrued liabilities and deferred revenue.
Net cash used in investing activities was $402,000 in 1997, $299,000 in
1998, and $2.1 million in 1999. Cash used in investing activities reflects
purchases of property and equipment in each period. 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. We expect that our capital expenditures will continue to
increase in the future.
Net cash provided by financing activities was $10.0 million in 1997, $10.7
million in 1998 and $31.5 million in 1999. Cash provided by financing activities
includes net proceeds from the issuance of preferred and common stock, offset by
the payments on long-term debt and capital lease obligations for each period, as
well as proceeds from bridge loan financings in 1998 and 1999.
We expect to experience significant growth in our operating expenses,
particularly product development and sales and marketing expenses, for the
foreseeable future to execute our business plan. As a result, we anticipate that
these operating expenses, as well as the expansion of our professional services
organization, will constitute a material use of our cash resources. In addition,
we may use cash resources to fund acquisitions of, or investments in,
complementary businesses, technologies or product lines.
We believe that the net proceeds from the sale of the common stock in this
offering, together with funds generated from operations, will be sufficient to
meet our working capital and capital expenditure requirements for at least the
next twelve months. Thereafter, we may find it necessary to obtain additional
equity or debt financing. In the event additional financing is required, we may
not be able to raise it on acceptable terms or at all.
CONVERSION TO EURO
We conduct business in eight European countries, and for the year ended
December 31, 1999, we derived 12.5% of our total revenue from our European
operations. Eleven of the fifteen member countries of the European Union have
adopted the Euro as their legal currency. We expect to be able to process
Euro-denominated transactions early in 2000. In addition, our products support
the Euro currency symbol. We are also assessing the business implications of the
conversion to the Euro, including long-term competitive implications and the
effect of market risk with respect to financial instruments. Based on the
foregoing, we do not believe the Euro will have a significant effect on our
business, financial position, cash flows or results of operations. We will
continue to assess the impact of Euro conversion issues as the applicable
accounting, tax, legal and regulatory guidance evolves.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We do not currently use derivative financial instruments. We generally
place our cash and cash equivalents in high quality money-market securities such
as 30-day certificate of deposits. We do not expect any material loss from these
investments and therefore believe that our potential interest rate exposure is
not material. Internationally, Versata invoices customers primarily in U.S.
dollars and we maintain only nominal foreign currency cash balances. Working
funds necessary to facilitate the short-term operations of our subsidiaries are
kept in local currencies in which they do business. We do not currently enter
into foreign currency hedge transactions. Through December 31, 1999, foreign
currency fluctuations have not had a material impact on our financial position
or results of operations.
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<PAGE> 37
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities. SFAS No. 133
establishes a new model for accounting for derivatives and hedging activities
and supercedes and amends a number of existing accounting standards. SFAS No.
133 requires that all derivatives be recognized in the balance sheet at their
fair market value and the corresponding derivative gains or losses be either
reported in the statement of operations or as a deferred item depending on the
type of hedge relationship that exists with respect to any derivatives. In July
1999, the Financial Accounting Standards Board issued SFAS No. 137, Accounting
for Derivative Instruments and Hedging Activities -- Deferral of the Effective
Date of FASB Statement No. 133. SFAS No. 137 deferred the effective date until
the first quarter ending June 30, 2000. The Company will adopt SFAS No. 133 in
its quarter ending June 30, 2000 and has not determined whether the adoption of
this pronouncement will have a material impact on its financial condition or
results of operations.
33
<PAGE> 38
BUSINESS
OVERVIEW
Our comprehensive suite of software and services enables our customers to
rapidly deploy e-business software applications that can be modified quickly to
meet constantly changing business requirements. Our E-Business Automation System
utilizes a unique business rules automation technology that redefines how
companies create, deploy and modify the critical e-business software
applications used to transact their online business. We believe our solution
enables our customers to achieve a substantial time-to-market and business
flexibility advantage compared to businesses using traditional Web-based
software application development tools. We intend to establish our solution as
the foundation for the next generation of business-to-business Web-based
software applications.
As of December 31, 1999, we had licensed our products to approximately 500
customers worldwide for use in a wide range of e-business software applications.
Over 35 customers have purchased our products and services for over $100,000,
including Canadian Pacific Ships, El Paso Energy, Hilton Hotels, IBM, IM Group,
Interim Services and ITT Fluid Technology. We have entered into a strategic
marketing and development relationship with IBM to provide a single product
offering that integrates our software with IBM's WebSphere(TM) Application
Server Advanced Edition. This integrated product will be offered under our
respective brand names. To complement our direct sales channel, we have
developed relationships with consulting 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. We plan to continue to develop more of these relationships in
the future.
INDUSTRY BACKGROUND
The business environment across virtually all industries is becoming
increasingly competitive and dynamic, driven by new business opportunities and
improved productivity through the use of technology. Many companies are
utilizing emerging technologies to address new markets, provide additional
services and enhance their customer relationships. New technology is also
altering the competitive landscape for many businesses, as companies are facing
loss of market share, severe price pressures and shorter product life cycles
that require them to constantly improve their efficiency.
To address these new opportunities and in response to these competitive
pressures, companies are adopting recently developed Internet technologies
throughout their organizations to improve communications and transact business
with their customers, suppliers, partners and employees. The migration of the
commercial marketplace to the Internet and the movement of corporate
communication and information management to intranets has resulted in a new
operating model known as e-business. Companies are developing new e-business
software applications that leverage the Internet's unique capabilities and are
integrating these new software applications with their mission-critical legacy
systems. The competitive advantage to be gained by implementing Internet
technology is driving companies to adopt this technology as rapidly as possible
and is fueling a major shift toward the processing of transactions over the
Internet. Evidencing the speed at which transactions are moving online,
Forrester Research estimates that the amount of global transactions completed
over the Internet could be as high as $3.2 trillion by 2003.
To keep pace in this dynamic new e-business environment, businesses must be
able to effectively manage, implement and rapidly change the way they conduct
business. Underlying every company's fundamental business strategies, policies
and procedures are a unique set of business rules. These business rules control
the execution of business decisions, processes and constraints. A typical
34
<PAGE> 39
business rule might be "A customer's account balance cannot exceed a customer's
credit limit" or "Preferred customers get a 10% discount and free shipping."
Historically, business rules were often implemented through manual procedures or
were automated to a limited extent in business software applications.
E-businesses, however, require the automation of entire business processes. As a
result, business rules need to be automated and interconnected, significantly
increasing software application complexity.
Defining, implementing and executing the thousands of business rules in
e-business software applications with the speed and efficiency demanded by
today's competitive business landscape has proven to be extremely challenging.
Companies increasingly are finding this process to be slow, labor intensive and
costly. Difficulties in carrying out this task include:
- Lengthy Implementation Cycles. Development teams are required to
understand and implement manually, in programming languages such as Java,
the many business rules that are the foundation of a company's business
strategy. Frequently this programming task requires many months of work
by skilled programmers.
- Unavailable Technical Skill. It is difficult for companies to attract and
retain qualified programmers and other technical personnel with the high
level of skill required for complex Web development projects. Competition
for skilled professionals is intense and turnover rates are high in these
types of positions.
- Rapidly Changing Technology. The technology used to develop and deploy
e-business software applications is complex and has been changing
rapidly. It is difficult for organizations to keep up with constantly
evolving industry standards and platforms. As new technologies are
developed, they must be integrated into legacy systems and architectures,
creating integration delays and implementation problems.
Once e-business software applications are created and deployed, changing a
company's business rules requires manually modifying the code within the
software applications. This is a time consuming, error-prone and expensive
process, which requires that many individual components of a software
application be modified. Once changed, these components must be reintegrated
both within that software application and with other software applications and
systems. In order to accommodate a relatively simple but crucial shift in
strategy, a business must often make hundreds of programming changes requiring
many months of work by skilled programmers familiar with the company's software
applications. To overcome these obstacles, businesses need a solution that
enables the rapid deployment and continual modification of e-business software
applications.
SOLUTION
Our E-Business Automation System allows our customers to rapidly deploy
e-business software applications that can be modified quickly to meet constantly
changing business requirements. Our E-Business Automation System utilizes a
unique business rules automation technology that redefines how companies create,
deploy and modify the critical e-business software applications used to transact
their online business. Our software eliminates the need for traditional
programming by enabling users to define their business rules in precise English
statements rather than in a technical programming language. Our software
converts these precise English statements into executable Java code. We believe
that this technology represents an advantage not available from competitors and
enables customers to achieve a substantial time-to-market and business
flexibility advantage compared to
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businesses using traditional Web-based software application development tools.
Our solution, which consists of a comprehensive suite of software and services,
provides the following benefits:
Complete E-Business Automation System
We provide companies with a complete system for automating the creation,
deployment and modification of custom, transaction processing e-business
software applications, including the user interface, business logic and data
access components of these software applications. Our unique automation
technology analyzes, optimizes and compiles business rules into executable Java
components hosted on an application server. A single business rule may require
several hundred lines of executable Java code; our system creates the code
automatically. As a result, users of our system can achieve a substantial
time-to-market and business flexibility advantage over traditional programming
methods and can rapidly deploy and maintain their critical e-business software
applications used to transact their online business even with few or no Java
skilled employees.
Flexible and Rapid Response to Changing Business Requirements
Our solution enables companies to rapidly change the business rules
required to implement critical shifts in strategy. By automating the process
through which changes in a company's business rules are reflected throughout its
e-business software applications, our customers are able to avoid highly
disruptive reprogramming required in other Web development environments. As a
result, users of our system frequently are able to modify their e-business
software applications in significantly less time compared to other programming
methods.
Technology Independence
Our solution enables companies to build and deploy e-business software
applications that are compatible with a company's technology infrastructure and
systems, and are capable of conforming to new infrastructures as they become
available. Our E-Business Automation System enables companies to both access
information and apply rules-based business logic across a number of sources,
including leading relational database systems, legacy software applications and
various standards-based middleware solutions. This open architecture allows our
customers to continue to use their existing technology infrastructure to support
new e-business software applications. We also provide customers with choices in
their application server architecture. Our Versata Logic Server is currently
available in a CORBA edition, and we expect to release the Enterprise Java Beans
edition in the second quarter of 2000.
Comprehensive Customer Service
As an essential component of our total solution, we offer our customers a
full range of professional services, including training, mentoring, staff
augmentation and project management, as well as customer support. Through this
comprehensive suite of services, we enable our customers to automate e-business
software applications without regard for internal staffing constraints. Our
primary focus is to rapidly transfer knowledge to our customers and partners,
enabling their technology professionals to quickly understand and properly apply
our technology. In cases where project demands outstrip a customer's ability or
desire to provide technical personnel, we can directly, or in conjunction with
one of our systems integration partners, provide professionals to rapidly deploy
project solutions on short notice. In addition, we can provide complete turnkey
solutions at a customer's request.
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<PAGE> 41
STRATEGY
Our objective is to establish our solution as the foundation for the next
generation of business-to-business Web-based software applications. To achieve
this objective, our key growth strategies are to:
Define the New Paradigm for E-business Automation
The market for technology that allows for flexible creation, deployment and
modification of e-business software applications is emerging rapidly. Our
E-Business Automation System utilizes a unique business rules automation
technology that redefines how companies rapidly create, deploy and modify the
critical e-business software applications used to transact their online
business. With the growth in the number of customers who continue to
successfully implement our solution, as well as the endorsement of our
technology by our OEM partner, IBM, we intend to become the industry standard
for E-Business Automation Systems. We recently changed our corporate name to
Versata and plan to launch a variety of marketing programs designed to build
brand and industry recognition of Versata as the e-business automation leader.
Extend Technology Leadership
We intend to enhance our position as a technology leader by increasing the
functionality, performance, ease of use and scalability of our E-Business
Automation System. We continue to devote substantial resources to the
enhancement of our Versata Logic Server. The next release of our E-Business
Automation System will be integrated with IBM's WebSphere(TM) Application Server
Advanced Edition. This integrated product will allow our customers to utilize
Enterprise Java Beans, a scalable industry standard solution, and will support
enterprise-level team development. We also intend to continue to support the
integration of our software with additional application servers and
technologies. Furthermore, we will continue to introduce Versata Connectors that
will enable our customers to connect to additional legacy databases, software
applications and middleware.
Expand Worldwide Direct Sales
Currently, we have 17 direct sales offices throughout North America and
additional offices in the United Kingdom, France, Germany and China. We plan to
continue to expand our sales efforts by adding more direct sales teams in North
America, Europe and the Pacific Rim. To expand our sales to both new and
existing customers, we intend to continue to develop our direct sales structure
based primarily on geographic region.
Leverage Strategic Partnerships
To increase our visibility in the marketplace and broaden the functionality
of our solution, we plan to continue to develop marketing and technology
relationships with leading vendors. We recently signed an agreement with IBM
that allows us to sell our products integrated with IBM's WebSphere(TM)
Application Server Advanced Edition. This agreement also includes international
language support by IBM and joint marketing programs. We expect our relationship
with IBM to favorably affect our sales efforts and add significantly to our
credibility and positioning. We intend to enter into additional OEM
relationships that will enhance our product development and marketing
activities.
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<PAGE> 42
Continue to Grow our Multi-Channel Distribution Network
We will continue to complement our direct sales channel with multiple
indirect channels, including consulting 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. These relationships will provide additional marketing and
sales channels for our products and accelerate the successful deployment of
software applications using our solution. We intend to leverage these channels
to establish business relationships with emerging growth companies focused on
providing transaction-oriented, business-to-business services. Finally, we
intend to continue to expand and grow our network of international distributors
in Europe, Latin America and the Pacific Rim.
Further Develop Professional Services Capabilities
We currently offer a full range of professional services, including
training, mentoring, staff augmentation and project management. These services
create significant opportunities for high quality account management and further
penetration of key customers, leading to large purchasing decisions at the
enterprise level. We also expect to complete a growing number of projects on a
turnkey basis. We intend to increase the size of our service and support
organization and to further expand our professional services capabilities
through strategic relationships with, or acquisitions of, system integrators and
consulting partners.
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<PAGE> 43
PRODUCTS
Our E-Business Automation System is a complete solution that enables
customers to rapidly deploy the critical e-business software applications used
to transact their online business. The following is a current list of our
products and list prices:
<TABLE>
<S> <C> <C>
- -----------------------------------------------------------------------------------------------
PRODUCTS DESCRIPTION LIST PRICE
- -----------------------------------------------------------------------------------------------
Versata Logic Server Integrates business rules $35,000 per deployed CPU $15,000
automation technology with a for limited use development and
scalable and reliable application test system
server. Currently available in
Common Object Request Broker
Architecture (CORBA); the
Enterprise Java Beans-based edition
is expected to be released in the
second quarter of 2000.
- -----------------------------------------------------------------------------------------------
Versata Connectors Provides enterprise-wide $10,000 per deployed CPU
connectivity between the Versata
Logic Server and a variety of data
sources, including legacy
databases, systems and software
applications. These Connectors use
our open eXtensible Data Access
architecture to enable our
customers to implement their unique
business rules across a variety of
data storage environments.
- -----------------------------------------------------------------------------------------------
Versata Studio Offers a complete graphical $3,000 per application developer
development studio with functions seat
that enable teams of developers to
describe business rules, design
user interfaces and deploy
e-business software applications.
- -----------------------------------------------------------------------------------------------
</TABLE>
A typical initial client configuration consists of two Versata Logic
Servers for deployment, one limited-use server for development and testing and
three Versata Studio seats. The average price for this basic configuration is
approximately $124,000, including approximately $30,000 for training and
consulting services, but excluding the price of additional Versata Connectors
which may be added as required. We encourage our customers, at the time they
purchase our software, to contract for customer support services and
maintenance.
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<PAGE> 44
PRODUCT ARCHITECTURE
The Versata E-Business Automation System provides customers a complete and
open solution for e-business software application development and deployment.
The architecture is illustrated below:
[VERSATA GRAPHIC]
Versata Logic Server
Our Versata Logic Server provides a complete system for deploying
e-business software applications. It includes business rules automation
technology, an integrated application server, support for leading Web-based
graphical user interfaces and enterprise data connectivity.
Our business rules automation technology consists of high level services
such as rule sequencers, rule optimizers, and rule compilers that allow
high-performance execution of business rules as Java components hosted on an
application server. Scalable e-business software applications require an
integrated application server to provide object caching, client session
management, server thread management, data source connection sharing, load
balancing, failover support and security. Our products include a sophisticated
and powerful application server that enables scalable, reliable and secure
deployment.
We provide customers with open choices in their application server
architecture. Our Versata Logic Server is currently available in a CORBA
edition, and we expect to release the Enterprise Java Beans edition in the
second quarter of 2000. At that time, our Versata Logic Server will support the
two leading component-based computing models. Our CORBA application server
option is built on an object request broker technology foundation from Inprise
Corporation. Our Enterprise Java Beans application server option is being
developed as part of a strategic relationship with IBM. Their
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<PAGE> 45
WebSphere(TM) Application Server Advanced Edition provides an Enterprise Java
Beans foundation, which we expect to be available as an integrated component of
our solution. The Versata Logic Server provides complete Web deployment by
integrating with a variety of HTTP proxy servers.
E-business software applications require sophisticated graphical interfaces
that support a variety of Internet deployment architectures and network
configurations. Our Versata Logic Server allows companies to deploy highly
graphical software applications that support both Java and HTML user interface
technologies. These two user interface technologies integrate business rules
into Web-based business software applications. Once deployed, the Versata Logic
Server includes a management console to evaluate, in real time, the performance
and reliability of an e-business software application, enabling detailed
monitoring and debugging of end user transactions through a browser-based
interface.
Our Versata Logic Server is available for Windows NT, Solaris, AIX and
HP-UX operating systems.
Versata Connectors
Our Versata Connectors enable organizations to leverage a variety of data
source and legacy systems into new e-business solutions. Our Versata Logic
Server uses the Versata Connectors to interact with and apply business rules to
a variety of data sources, including legacy databases, middleware systems and
software applications. Versata Connectors are based on our eXtensible Data
Access interface. This Java-based interface maps various data sources into a
standard format that enables business rules automation. Our Versata Logic Server
includes Versata Connectors for leading relational databases, such as Oracle,
Microsoft SQL Server, Sybase SQL Server, IBM DB2 and Informix Dynamic Server,
and standard object formats, such as COM+, CORBA and Enterprise Java Beans.
To access information and apply business rules to additional data sources,
we provide or plan to provide Versata Connectors for:
- Middleware Systems, such as Information Builders EDA SQL, IBM CICS and
IBM MQ-Series; and
- Enterprise Resource Planning (SAP, BAAN, PeopleSoft, etc.) and other
custom software applications.
Versata Studio
Our Versata Studio is an integrated suite of development tools that enables
a user to design a complete e-business software application, including user
interface design, business rules definition and application deployment. The
Versata Studio goes beyond typical graphical programming tools by providing
teams of developers the ability to directly implement business rules, automate
software application work flow and define the look and feel of an application's
interface.
Our Versata Studio stores the software application design in an XML-based
repository format. This XML format enables our customers to integrate design
information from leading modeling tools such as Rational Rose and CA-Logic
Works, and Web editing and content development products such as MacroMedia's
Dreamweaver and IBM's WebSphere(TM) Studio. This XML format is also compatible
with leading source control management systems such as Merant's PVCS and
Microsoft's SourceSafe. Our XML repository provides an open development
environment, which allows large development organizations to use our products
across multiple e-business project teams.
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Our Versata Studio also includes an integrated deployment manager, enabling
developers to correctly deploy software application components in the proper
performance configuration. These components are then compiled and executed by
our Versata Logic Server.
The Versata Developer Studio is available on Windows NT and Windows 98.
SERVICES
An important component of our overall solution is our ability to provide
our customers with comprehensive professional services, including training,
mentoring, staff augmentation and project management, as well as customer
support. Through this comprehensive suite of services, we enable our customers
to automate e-business software applications without regard for internal
staffing constraints. As of February 1, 2000, our services organization
consisted of 111 professionals, which is augmented from time-to-time by our
product development organization and our services partners.
Consulting Services
We provide mentoring, staff augmentation and project management services to
assist customers in successfully developing and deploying custom e-business
software applications using our products. These 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. We generally price these consulting services on a
time-and-materials basis.
Training Services
We offer our customers introductory and advanced training in the use of our
products and in Java programming. These training services are offered in several
geographic locations, either as standard public training classes 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 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 news groups,
internal Web sites and other non-public 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 train and promote a
broad range of partners from global system integrators to local consultants that
offer consulting, training and customer support services. We certify partners
who have completed our training programs and are qualified to support our
products. We encourage our customers to utilize these partners, particularly for
longer term implementations.
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CUSTOMERS
As of December 31, 1999, our software products were licensed to
approximately 500 customers worldwide for use in a wide range of
business-to-business, business-to-employee and business-to-consumer software
applications. The following is a representative selection of customers:
COMMUNICATIONS
Advanced Network and
Database Systems
InterNAP
MCI Worldcom
New Global Telecom
CONSULTING PARTNERS
Mastech
Online Business Systems
Performance Software
Premier Solutions
SIS Propalogica
E-COMMERCE
123 SignUp
GetOutdoors.com
firstsource.com
Insuretrade.com
IM Group
NetFreight.com
Yet2.com
ENERGY
CMS (f.k.a. Duke Energy)
EDF (France)
El Paso Energy
ENEL (Italy)
ESBI (Canada)
Shell Energy
TXU (f.k.a. Texas Utilities)
FINANCIAL SERVICES
Aegon NV (Netherlands)
Aspecta (Germany)
Chicago Title
Christiana Bank (Norway)
Group AMA (France)
JP Morgan
Mortgage Flex
PMI Mortgage Insurance
W.R. Hambrecht
Xpede
GOVERNMENT
County of Los Angeles
NAVSEA
U.S. Dept. of Forestry
HEALTHCARE
Alliance Benefit Group
Empire BlueCross
Blue Shield
Siemens Medical
Vision Service Plan
MANUFACTURING
IBM
ITT Fluid Technology
Philips Semiconductor
Tetra Pak Americas
OTHER
Avery Dennison
Domino's Pizza
Harcourt General (ASI)
Hilton Hotels
Interim Services
Monsanto Company
Tree of Life
PHARMACEUTICALS
Bausch and Lomb
Bayer
Neutrogena
SYSTEM INTEGRATORS
American Management
Systems
Context Integration
Ernst & Young LLP
KPMG LLP
Lante
Lockheed Martin
TRANSPORTATION
Canadian Pacific Ships
Herman Miles Trucking
Twin Modal
Each of the customers in the table above has accounted for at least $25,000
in revenue to us since January 1, 1998. In addition, since January 1, 1998, over
35 customers in the above table have each purchased products and services for
over $100,000. Shell Energy/Noble Software and Harcourt General accounted for
17.5% and 12.8%, respectively, of our revenue for the year ended December 31,
1998 and El Paso Energy Corporation accounted for 11.5% of our revenue for the
year ended December 31, 1999.
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The following case studies illustrate the business problems faced by
representative customers and the benefits derived from developing and deploying
their software applications using our E-Business Automation System. The
statistical and financial data in these case studies has been provided by the
respective customers.
BENEFITING FROM A CHANGING COMPETITIVE LANDSCAPE -- A BUSINESS-TO-BUSINESS
APPLICATION
TXU
TXU, formerly Texas Utilities, is a large holding company for energy
services companies with more than nine million customers and assets of over $40
billion. Rapid changes in the utility industry, coupled with accelerated
customer demand for Web-based software applications, prompted TXU to create a
comprehensive Web strategy to standardize development and deployment of its
e-business software applications across all of its domestic business units.
After evaluating 20 vendors, TXU selected Versata to provide the overall
architecture for executing its Web strategy. TXU selected our solution for our
ability to rapidly deliver high performance e-business software applications
using TXU's existing technical skills and resources.
Within three months, TXU deployed three software applications targeted at
diverse audiences -- facilities contractors, corporate utility customers and
employees. An automated contractor invoicing system, accessible from the Web,
was deployed to make the project change process significantly less costly and
more efficient. A bill presentment system was deployed to allow TXU's largest
customers to access their utility bills from the Web. Finally, an internal
resource management system was implemented to allow TXU's technology department
to schedule, track and match employee skill sets for projects. Each of these
software applications leverages the TXU Web architecture to integrate business
functions and improve customer service.
Other customers that have used our E-Business Automation System to benefit
from a changing competitive landscape include Chicago Title Company, El Paso
Energy Corporation, InterNAP, PMI Mortgage Insurance and Shell Energy/Noble
Software.
MANAGING DISTRIBUTION STRATEGY ON THE WEB -- A BUSINESS-TO-BUSINESS APPLICATION
TWIN MODAL
Since 1977, Twin Modal, Inc. has provided freight forwarding services
throughout North America. Twin Modal recently launched a load booking and
shipping status e-business site to provide 24-hour-per-day/seven-day-per-week
transportation brokering services. To accomplish this, Twin Modal deployed
e-business software applications to enable shippers, truckers and carriers to
execute transactions over the Internet.
Through this implementation, Twin Modal sought to leverage its huge carrier
network to capitalize on opportunities for matching carriers and loads, provide
greater visibility to preferred carriers, and grow its business capacity while
reducing future hires. The necessary software applications were built in under
four months by Online Business Systems, one of our integration partners. The
software applications allow truckers to view available loads and make
load-delivery commitments from any computer with Internet access. Shippers can
track the status of any shipment 24 hours a day. The Internet software
applications are run on a pool of Versata Logic Servers, accessing trucking and
railroad information stored in several SQL Servers. The secure site uses
Versata's rules technology to match trucking capabilities, such as refrigeration
or flatbed, with shipping requirements. These requirements are critical to a
self-service architecture.
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Other customers who have used our E-Business Automation System to manage
their distribution strategies on the Web include Canadian Pacific Ships, Herman
Miles Trucking NetFreight.com and Tree of Life.
MANAGING FINANCIAL RELATIONSHIPS ON THE WEB -- A BUSINESS-TO-CONSUMER
APPLICATION
XPEDE
Xpede is an emerging company in the online loan processing market. As an
application service provider, Xpede helps lenders quickly establish an online
loan presence under the lenders' own brand name. Major lending institutions use
Xpede's solution to process loans, extend their brands to the Web, and
personalize interactions with their customers. Xpede needed a highly scalable,
flexible and secure system that could process and distribute financial
information for its customers.
Xpede selected our E-Business Automation System as its development and
deployment platform because of our system's ability to facilitate the rapid
delivery and modification of complex, large-scale Web-based software
applications. Our solution enabled Xpede to rapidly customize and change its
customers' software applications by simply changing the business rules that were
to be applied to each customer. As a result, Xpede developed and delivered its
first service for a major financial institution on schedule and on budget. Using
our system, Xpede can now support multiple loan origination channels through the
Web, including consumers, loan officers and brokers. Xpede is able to quickly
bring new financial institutions online because of the flexibility provided by
the business rules automation technology underpinning our system.
Other customers that have used our E-Business Automation System to manage
financial relationships on the Web include 123 SignUp, Christiana Bank (Norway),
the County of Los Angeles, W.R. Hambrecht and Company and Yet2.com.
STRATEGIC ALLIANCES
We intend to develop and maintain strategic arrangements which complement
and expand our existing multi-channel distribution network and extend our market
reach. These arrangements include strategic marketing and technology alliances
and relationships with consulting 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.
Our most important strategic relationship to date is with IBM. In September
1999, we entered into a Joint Product Marketing Agreement with IBM, which
created a strategic marketing and development relationship to provide a single
product offering that integrates our Versata Logic Server and Versata Studio
technology with IBM's WebSphere(TM) Application Server Advanced Edition and
WebSphere(TM) Studio. We both will offer the new product under our respective
brand names. Under this agreement, IBM will translate the integrated product
into nine foreign languages. In addition, IBM will provide worldwide customer
support for customers who purchase the IBM branded version of the integrated
product. Under the IBM agreement, both parties will undertake joint marketing
activities and will make marketing investments to create awareness for
e-business automation and generate demand for the integrated product. These
activities include seminars, business shows and other marketing programs, as
well as sales and support training. In addition, IBM will promote the IBM
branded version of the integrated product as part of its portfolio of e-business
products.
Under this agreement, each party will pay the other a percentage of all
product license fees, upgrade fees and usage fees for the integrated product. In
addition, we have put our source code in a third-party escrow. If we breach the
contract or if certain other events occur, IBM will be entitled to
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use our source code, but only for the limited purpose of correcting defects in
the integrated source code which we have jointly developed with IBM. The IBM
agreement terminates on December 31, 2001, with automatic annual renewals each
January 1 until December 31, 2005, subject to earlier termination under
specified circumstances.
SALES AND MARKETING
Sales
We sell our products through a multi-channel distribution model, which
includes both direct and indirect channel sales. As of February 1, 2000, our
sales organization consisted of 130 professionals located in 21 direct sales
offices in North America, Europe and the Pacific Rim. Our direct sales teams
typically includes a sales representative, a system engineer and an inside
salesperson. In addition, we have sales personnel working to further develop our
multi-channel distribution model. We intend to expand our direct and indirect
channel sales organization on a global basis.
Our sales model often includes a proof of concept approach to winning
competitive sales opportunities. In approximately three to five days our sales
engineers can define the business rules for a portion of a company's project and
deploy it as a production software application. Also, in a proof of concept, it
is possible to modify the running software application by changing the business
rules. In these competitive situations, the tangible results of our proof of
concept substantiate the time-to-market advantage, ability to support business
flexibility and ease of use which often leads to a full project implementation.
We complement our direct sales force with channel sales through three types
of partners that either sell, or help us sell, our products. These partners
include:
- Consulting partners. Our consulting partners include companies that
custom develop and integrate software applications, such as global system
integrators and Web integrators, as well as regional consulting partners.
These partners sell our products to new customers and then provide the
customers with consulting and system integration services. As of December
31, 1999, we had 147 consulting partners, including Context Integration,
Ernst & Young, KPMG, Lante and Lockheed Martin.
- Independent Software Vendors and Application Service Providers. 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 receive a royalty from these partners for every
software sale that integrates our E-Business Automation System. As of
December 31, 1999, we had 13 ISV/ASP partners. These partners included
Prefersoft, which sells a customer relationship management system; Xpede,
which provides integrated online loan services; Performance Software,
which sells an integrated Web-based human resources system; Read Q, which
sells an integrated trading system; and Ernst & Young, which sells a risk
assessment system.
- International Distributors. Our international distributors include
vendors that sell business software products to companies in Europe,
Latin America and the Pacific Rim. As of December 31, 1999, we had 16
distributors. These partners include 2Support, Bi-Vision, Coalescent,
Grupo Informatica and LogicWay.
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 17 professionals as of February
1, 2000, focuses on creating market awareness for our E-Business Automation
System, generating sales leads, promoting our e-business automation leadership
and
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educating independent research analysts about our solution. We engage in a
variety of marketing initiatives, which include:
- conducting seminars and demonstrations;
- conducting direct mailings and telemarketing;
- managing and maintaining our Web site;
- participating in industry and technology-related trade shows and
conferences;
- conducting marketing programs in conjunction with key local and global
partners;
- ongoing public relations campaigns, including producing and distributing
brochures and white papers; and
- producing and distributing sales support materials.
We also recently changed our corporate name to Versata and plan to launch a
variety of marketing programs designed to build brand and industry recognition
of Versata as the e-business automation leader. As a result of this effort, we
intend to further promote e-business automation as the new paradigm for
creating, deploying and modifying the critical e-business software applications
used to transact companies' online business.
PRODUCT DEVELOPMENT
Since early 1995, we have devoted a significant portion of our resources to
product development. Development of our current software began in September
1996. Our future success depends on our ability to enhance our existing system
and create new products that maintain and expand our technology leadership in
e-business automation. We intend to continue making substantial investments in
product development.
We are currently developing new releases of our products. The next release
of our E-Business Automation System will integrate our Versata Logic Server with
IBM's WebSphere(TM) Application Server Advanced Edition, and add enterprise
level team development functionality. As part of our strategic relationship with
IBM, they have agreed to translate this release into nine foreign languages. In
addition, we will continue to add specific connectivity features to support our
customers' legacy computing infrastructures.
Our product development expenses totaled approximately $3.5 million for the
year ended December 31, 1997, $3.3 million for the year ended December 31, 1998
and $4.8 million for the year ended December 31, 1999. As of February 1, 2000,
we had 43 technical professionals in product development, which includes quality
assurance and technical documentation. Our product development effort is driven
by an efficient team that has benefited from a low turnover rate, even in an
intensely competitive environment for software engineers. While we have
developed most new products and enhancements to existing products internally, we
have also licensed software technology from third parties.
The markets for our products and services are characterized by rapid
technological change, frequent new product introductions and enhancements,
uncertain product life cycles, changes in customer requirements and evolving
industry standards. New products based on new technologies or new industry
standards may quickly render an existing product obsolete and unmarketable. Our
future success will depend in part on our ability to anticipate changes, enhance
our current products, develop and introduce new products that keep pace with
technological advancements and address the
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increasingly sophisticated needs of our customers. See "Risk Factors -- Risks
Relating to Our Business -- If we fail to respond to rapid technological change
and evolving industry standards, our products may become obsolete."
COMPETITION
The Internet infrastructure software market is new, rapidly evolving and
highly 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 e-business software applications internally using traditional programming
approaches. We also compete with a number of other sources, including:
- vendors of application server products and services such as BEA Systems,
Inc. and Sun Microsystems, Inc.;
- vendors of Web integrated development environments such as Bluestone,
Inc. and SilverStream Software; and
- companies that market business application software such as Oracle
Corporation.
We believe that the principal competitive factors in our market are:
- complete software platform;
- responsiveness to business and technical changes;
- performance, scalability and availability;
- use of standards-based technology;
- ease of integration with customers' existing legacy data, software
applications and middleware computing infrastructure;
- need for large numbers of skilled Java programmers;
- quality of support and services;
- price; and
- company reputation.
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
services organizations. In addition, these companies may adopt more aggressive
pricing policies or offer more attractive terms to customers than we can, may
bundle their competitive products with broader product offerings in a manner
that may discourage the purchase of our products or may introduce new products
and enhancements. In addition, 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
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emerge and rapidly acquire significant market share. We may not be able to
maintain our competitive position against current and potential competitors,
especially those with significantly greater resources.
INTELLECTUAL PROPERTY AND LICENSING
Intellectual Property
We rely on a combination of patent, copyright, trademark and trade secret
laws to protect our intellectual property. These legal protections afford only
limited protection for our technology. We currently have one U.S. patent
relating to our automated development tool that uses a drag-and-drop metaphor.
This patent is scheduled to expire in April 9, 2016. In addition, we have one
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. Finally, we seek to avoid disclosure
of our intellectual property by requiring employees and consultants with access
to intellectual property to execute confidentiality agreements with us and by
restricting access to our source code. 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. We cannot provide
any assurance that other companies will not develop technologies that are
similar or superior to our technology.
Despite our efforts to protect our proprietary rights, unauthorized parties
may attempt to copy aspects of our products or to obtain and use information
that we regard as proprietary. Policing unauthorized use of our products is
difficult and while we are unable to determine the extent to which piracy of our
software exists, software piracy can be expected to be a persistent problem. In
addition, the laws of many countries do not protect our proprietary rights to as
great an extent as do the laws of the United States. Litigation may be necessary
in the future to enforce our intellectual property rights, to protect our trade
secrets, to determine the validity and scope of the proprietary rights of others
or to defend against claims of infringement or invalidity. Any resulting
litigation could result in substantial costs and diversion of resources and
could have a material adverse effect on our business, operating results and
financial condition.
There can be no assurance that our means of protecting our proprietary
rights will be adequate or that our competitors will not independently develop
similar technology. Any failure by us to meaningfully protect our property could
have a material adverse effect on our business, operating results and financial
condition. To date, we have not been notified that our products infringe on the
proprietary rights of third parties, but there can be no assurance that third
parties will not claim infringement with respect to our current or future
products. We expect that developers of Web-based software applications will
increasingly be subject to infringement claims as the number of products and
competitors in our industry segment grows and as the functionality of products
in different segments of the software industry increasingly overlaps. Any
claims, with or without merit, could be time-consuming to defend, result in
costly litigation, divert management's attention and resources, cause product
shipment delays or require us to enter into royalty or licensing agreements.
These royalty or licensing agreements, if required, may not be available on
terms acceptable to us or at all. A successful infringement claim against us and
our failure or inability to license the infringed rights or develop or license
technology with comparable functionality could have a material adverse effect on
our business, financial condition and operating results.
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Licensing
We integrate third-party software into our products. This third-party
software may not continue to be available on commercially reasonable terms. The
third-party software that we license includes Sun's Java server, Merant's data
direct drivers, Inprise's Visi Broker for Java, IBM's WebSphere(TM) Application
Server Advanced Edition and WebSphere(TM) Studio. These licenses are
non-exclusive and their terms vary from one to two years, subject to earlier
termination under some circumstances. These licensed components enhance features
in our products. While we believe that alternative sources of these component
software products are available, any significant interruption in the supply of
these products could adversely impact our sales unless and until we could secure
another supplier. In addition, almost all of our products are written in Java
and require a Java Virtual Machine(TM) made available by Sun Microsystems in
order to operate. Our license with Sun Microsystems expires in June 2000. See
"Risk Factors -- Our business will be harmed if third-party software and
technology, which we integrate into our products, proves unreliable or is
unavailable on commercially reasonable terms."
EMPLOYEES
As of February 1, 2000, we had 333 employees and independent contractors
devoting substantially all of their time to us. Of these individuals, 147 were
in sales and marketing, 43 were in development and engineering services, 111
were in professional services and customer support, and 32 were in finance and
administration. Our employees are not represented by any collective bargaining
unit, and we believe our relations with employees are satisfactory.
PROPERTIES
Our principal executive and administrative offices are located in
approximately 43,000 square feet of office space in Oakland, California. Monthly
lease payments on the Oakland facility are approximately $77,000. This lease
expires in November 2000. We also maintain leased offices in Hamburg, London,
Paris, New Jersey, New York, Texas and Virginia. We have additional offices in
Atlanta, Boston, Calgary, Chicago, Dallas, Denver, Hong Kong, Houston, Los
Angeles, Philadelphia, Pittsburgh, Toronto and Washington, D.C. 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.
LEGAL PROCEEDINGS
We are not a party to any legal proceedings. We may, from time to time,
become a party to various legal proceedings arising in the ordinary course of
business.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth information regarding our executive officers
and directors:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
John A. Hewitt, Jr....................... 56 President, Chief Executive Officer and
Director
Kevin Ferrell............................ 52 Chief Financial Officer and Secretary
Val Huber................................ 50 Vice President, Development and Chief
Technology Officer
Peter Harrison........................... 36 Vice President, Sales
Michael DeVries.......................... 40 Vice President, Marketing
Michael Stangl........................... 33 Vice President, Professional Services
Gary Morgenthaler........................ 51 Chairman of the Board
Naren Bakshi............................. 56 Director
Robert Davoli............................ 51 Director
Donald W. Feddersen...................... 65 Director
John W. Larson........................... 64 Director
Kanwal Rekhi............................. 53 Director
Eugene Wong.............................. 64 Director
</TABLE>
- -------------------------
John A. Hewitt, Jr. Mr. Hewitt joined Versata in December 1995 as Vice
President, Services, Chief Financial Officer and Secretary and became President
and Chief Executive Officer in 1997. Mr. Hewitt has served as a director of
Versata since June 1998. Prior to joining Versata, from 1982 to 1995, Mr. Hewitt
served in several executive positions with TRW Financial Systems (TFS, formerly
Teknekron Financial Systems), a commercial systems integration company. Prior to
working with TFS, Mr. Hewitt served as the Chief Operating Officer of a
Warren-King Energy Company, UnderSecretary and Chief Financial Officer, U.S.
Department of Energy and Assistant Secretary Financial Management, U.S. Air
Force. Mr. Hewitt holds a B.S. in Engineering Management from the USAF Academy
where he graduated with distinction. Mr. Hewitt also holds an M.B.A. in
Production Management from the University of California, Los Angeles.
Kevin Ferrell. Mr. Ferrell joined Versata in November 1999 as Chief
Financial Officer and Secretary. Prior to joining Versata, from March 1999 to
November 1999, Mr. Ferrell served as Executive Vice President at EQE
International, a risk management company. From September 1996 to March 1999, Mr.
Ferrell served as a Managing Director in Investment Banking and Risk Management
Advisory at Bankers Trust. From September 1994 to September 1996, Mr. Ferrell
was Vice President and CFO at McKesson Corporation. From 1976 to 1994, Mr.
Ferrell was an officer of BankAmerica Corporation serving in positions including
Head of Treasury, Domestic and President of Seafirst Bank, a subsidiary of
BankAmerica Corporation. Mr. Ferrell holds an A.B. in Mathematics and an M.B.A.
in Finance and International Business from the University of California,
Berkeley.
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 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.
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Peter Harrison. Mr. Harrison joined Versata in 1996 as Vice President,
Sales. Prior to joining Versata, from 1990 to October 1996, Mr. Harrison
co-founded Seer Technologies, a software company, and served as Vice President
of Sales. Prior to working with Seer Technologies, from 1986 to 1990, Mr.
Harrison served in various positions at Credit Suisse First Boston. Mr. Harrison
holds a B.S. in Software Engineering from Birmingham University in the U.K.
Michael DeVries. Mr. DeVries joined Versata in 1997 as Vice President,
Marketing. Prior to joining Versata, from May 1996 to August 1997, Mr. DeVries
served as Vice President of Marketing at Persistence Software. From January 1993
to April 1996, Mr. DeVries served as Vice President, Marketing, and Director of
Production Management at Synon. Mr. DeVries holds a B.A. in Economics from the
University of California, Santa Barbara.
Michael Stangl. Mr. Stangl joined Versata in 1998 as Vice President,
Professional Services. Prior to joining Versata, from 1992 to 1998, Mr. Stangl
served in various positions, including Vice President, Professional Services,
and Channel Sales Manager at Seer Technologies, a software company. Prior to
working with Seer Technologies, Mr. Stangl served as a senior consultant with
Andersen Consulting. Mr. Stangl holds a B.S. in Hotel Administration and an
M.B.A. in Finance from Cornell University.
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 holds a B.A. in International Relations from Harvard
University.
Naren Bakshi. Mr. Bakshi, a co-founder of Versata, has served as a director
of Versata since 1995. He also served as President and Chief Executive Officer
of Versata until 1997. Currently, he is Chairman of the Board and Executive Vice
President of Xpede, a company he co-founded in 1998, a provider of e-commerce
lending services to major financial institutions, and an advisor to TekEdge and
123SignUp. Mr. Bakshi also served in various management positions at TRW from
1980 to 1991. Mr. Bakshi has also served as Vice President of Information
Services at Ameritrust Bank. Mr. Bakshi holds an M.S. in Industrial Engineering
and an M.B.A. in Finance from the University of California, Berkeley.
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. and Vignette Corporation. Mr. Davoli
holds a B.A. in History from Ricker College and studied Computer Science at
Northeastern University for two years.
Donald W. Feddersen. Mr. Feddersen has served as a director of Versata
since 1997. Mr. Feddersen has been a private investor since July 1997. From 1984
to July 1997, 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 is a director of
Policy Management Systems Corporation. Mr. Feddersen holds a B.S. in Engineering
from Purdue University and an M.B.A. from the University of Chicago.
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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 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. 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.
BOARD OF DIRECTORS
We currently have authorized eight directors divided into three classes. At
each annual meeting of stockholders, directors will be elected by the holders of
common stock to succeed the directors whose terms are expiring. The three
classes will be as nearly equal in number as possible, as determined by the
board of directors, one class (Class I) to hold office initially for a term
expiring at the annual meeting to be held in 2000, another class (Class II) to
hold office initially for a term expiring at the annual meeting of stockholders
held in 2001 and another class (Class III) to hold office initially for a term
expiring at the annual meeting of stockholders to be held in 2002. At each
annual meeting of stockholders, the successors of the class of directors whose
term expires at that meeting shall be elected to hold office for a term expiring
at the annual meeting of stockholders held in the third year following the year
of their election. Class I directors consists of Messrs. Wong and Rekhi whose
terms will expire in 2000, Class II directors consists of Messrs. Morgenthaler,
Feddersen and Bakshi whose terms will expire in 2001, and Class III directors
consists of Messrs. Hewitt, Davoli and Larson whose terms will expire in 2002.
This classification of the board of directors may delay or prevent a change in
control of our company or in our management. See "Description of Capital
Stock -- Antitakeover Effects of Provisions of the Certificate of Incorporation,
Bylaws and Delaware Law."
BOARD COMMITTEES
We have established an audit committee composed of independent directors
that reviews and supervises our financial controls, including the selection of
our auditors, reviews our books and accounts, meets with our officers regarding
our financial controls, acts upon recommendations of our auditors and takes
further actions as the audit committee deems necessary to complete an audit of
our books and accounts. The audit committee also performs other duties as may
from time to time be determined. The audit committee currently consists of three
directors, Messrs. Feddersen, Larson and Morgenthaler.
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We have also established a compensation committee that reviews and approves
the compensation and benefits for our executive officers, administers our
compensation and stock plans, makes recommendations to the board of directors
regarding these matters and performs other duties as may from time to time be
determined by the board. The compensation committee currently consists of three
directors, Messrs. Morgenthaler, Feddersen and Rekhi.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
None of our compensation committee members has been an officer or employee
of Versata at any time. None of our executive officers serves on the board of
directors or compensation committee of any entity that has one or more executive
officers serving as a member of our board or our compensation committee.
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 the stockholders in February 2000,
non-employee directors will receive automatic option grants upon becoming
directors and on the date of each annual meeting of stockholders. The 2000 stock
incentive plan also contains a director fee option grant program. Should this
program be activated in the future, each 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. See "Management -- Stock Plans."
EXECUTIVE OFFICERS
Each officer is elected by, and serves at the discretion of, the board of
directors. Each of our officers and directors, other than non-employee
directors, devotes full-time to the affairs of Versata. Our non-employee
directors devote time to the affairs of Versata as is necessary to discharge
their duties. There are no family relationships among any of our directors or
executive officers.
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EXECUTIVE COMPENSATION
The following table sets forth information concerning compensation earned
during the fiscal year ended December 31, 1999 by our Chief Executive Officer
and each of our four other most highly compensated executive officers for that
fiscal year, referred to collectively in this prospectus as the named executive
officers. In November 1999, Mr. Ferrell joined us as our Chief Financial
Officer. His annualized salary for 1999 was $150,000. No individual who would
otherwise have been includable in the table on the basis of salary and bonus
earned during 1999 has resigned or otherwise terminated his or her employment
during 1999.
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 1999. The options listed in the
following table were originally granted under our 1997 stock option plan. These
options have been incorporated into our new 2000 stock incentive plan, but will
continue to be governed by their existing terms. See "Management -- Stock
Plans."
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
------------
ANNUAL COMPENSATION SECURITIES
-------------------- UNDERLYING
NAME AND PRINCIPAL POSITION SALARY BONUS OPTIONS
--------------------------- -------- -------- ------------
<S> <C> <C> <C>
John A. Hewitt, Jr.
President, Chief Executive Officer and
Secretary........................................... $180,000 $110,000 400,000
Val Huber
Vice President, Development
and Chief Technology Officer...................... 145,000 64,000 75,000
Peter Harrison
Vice President, Sales............................. 145,000 70,000 75,000
Michael DeVries
Vice President, Marketing......................... 145,000 65,000 75,000
Michael Stangl
Vice President, Professional Services............. 145,000 54,000 75,000
</TABLE>
OPTION GRANTS IN FISCAL YEAR 1999
The following table sets forth information with respect to stock options
granted to each of our named executive officers in 1999. No stock appreciation
rights were granted during 1999.
The potential realizable value is calculated assuming the fair market value
of the common stock appreciates at the indicated rate for the entire term of the
option and that the option is exercised and sold on the last day of its term at
the appreciated price. The initial fair market value of the common stock is
deemed to be $5.00 per share. Stock price appreciation from the initial $5.00
deemed fair value of 5% and 10% is assumed pursuant to the rules of the
Securities and Exchange Commission. We can give no assurance that the actual
stock price will appreciate over the term of the options at the assumed 5% and
10% levels or at any other defined level. Actual gains, if any, on stock option
exercises will be dependent on the future performance of our common stock.
Unless the market price
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of the common stock appreciates over the option term, no value will be realized
from the option grants made to the named executive officers.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
----------------------------------------------------
PERCENTAGE OF
NUMBER OF TOTAL POTENTIAL REALIZABLE VALUE AT
SECURITIES OPTIONS ASSUMED ANNUAL RATES OF STOCK
UNDERLYING GRANTED TO EXERCISE PRICE APPRECIATION FOR OPTION TERM
OPTIONS EMPLOYEES IN PRICE PER EXPIRATION ------------------------------------
NAME GRANTED FISCAL 1999 SHARE DATE 0% 5% 10%
---- ---------- -------------- --------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
John A. Hewitt,
Jr. ................ 400,000 8.42% $2.50 10/19/09 $1,000,000 $1,257,789 $3,187,485
Val Huber............. 75,000 1.58 $2.50 10/19/09 187,500 235,835 597,653
Peter Harrison........ 75,000 1.58 $2.50 10/19/09 187,500 235,835 597,653
Michael DeVries....... 75,000 1.58 $2.50 10/19/09 187,500 235,835 597,653
Michael Stangl........ 75,000 1.58 $2.50 10/19/09 187,500 235,835 597,653
</TABLE>
In 1999, we granted options to purchase up to a total of 4,752,250 shares
to employees, directors and consultants under our 1997 stock option plan at
exercise prices equal to the fair market value of our common stock on the date
of grant, as determined in good faith by our board of directors.
The options described in the above table were granted to the named
executive officers on October 20, 1999. The options are immediately exercisable,
but any shares purchased under these options that are not vested are subject to
our right to repurchase the shares at the shares' option exercise price. This
repurchase right lapses with respect to 12.5% of the option shares on April 19,
2000 and with respect to the remaining shares in equal monthly installments over
the 42-month period following that date. All of the options will expire on
October 19, 2009.
In November 1999, in connection with his appointment as Chief Financial
Officer, we granted Mr. Ferrell two stock options, each at an exercise price of
$3.00 per share. The first option, for 400,000 shares, is immediately
exercisable but any shares purchased under the option that are not vested are
subject to our right to repurchase the shares at the shares' option exercise
price. This repurchase right will lapse with respect to 12% of the option shares
on May 28, 2000 and with respect to the remaining shares in equal monthly
installments over the 44-month period following that date. The second option,
for 50,000 shares, will become exercisable in full on January 28, 2005 but will
be subject to acceleration and will become exercisable and vested as of December
31, 2000 if we attain our annual financial target for the 2000 fiscal year, as
set forth in our operating plan for that year. Should we be acquired by merger
or asset sale before December 31, 2000, the 50,000 option shares will
immediately accelerate and become fully exercisable. The options will expire on
November 28, 2009.
OPTION EXERCISES IN LAST FISCAL YEAR AND YEAR-END OPTION VALUES
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 December 31, 1999. The table also sets forth the value
realized upon the exercise of stock options during 1999 which is calculated
based on the fair market value of our common stock on the date of exercise, as
determined by the board, less the exercise price paid for the shares. No stock
appreciation rights were exercised during 1999 and no stock appreciation rights
were outstanding as of December 31, 1999. The value of unexercised in-the-money
options at December 31, 1999 is calculated on the basis of
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<PAGE> 61
the assumed initial public offering price of $13.00, less the exercise prices of
the options, multiplied by the number of shares underlying those options.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS AT
DECEMBER 31, 1999 DECEMBER 31, 1999
NUMBER OF SHARES --------------------------- ---------------------------
NAME ACQUIRED ON EXERCISE VALUE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- -------------------- -------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
John A. Hewitt,
Jr. ............... 940,625 $ 0 400,000 150,000 $4,200,000 $1,920,000
Val Huber............ 400,000 2,500 75,000 75,000 787,500 960,000
Peter Harrison....... 148,900 0 251,100 60,000 1,466,580 768,000
Michael DeVries...... 355,000 0 75,000 75,000 787,500 960,000
Michael Stangl....... 300,000 0 75,000 75,000 787,500 960,000
</TABLE>
The named executive officers exercised their options in June 1999 when the
fair market value of our common stock, as determined in good faith by the board,
was $0.20 per share.
Shares purchased by the named executive officers in June 1999 which are not
vested are subject to our right to repurchase those shares, at the shares'
option exercise price, if the officer terminates service with us before vesting
in his shares. As of December 31, 1999, Mr. Hewitt had vested in 548,225 of his
940,625 shares, Mr. Huber had vested in 290,400 of his 400,000 shares, Mr.
Harrison had vested in all of his 148,900 shares, Mr. DeVries had vested in
164,400 of his 355,000 shares and Mr. Stangl had vested in 72,000 of his 300,000
shares.
The number of shares exercisable by the named executive officers as of
December 31, 1999 is equal to the number of vested option shares exercisable as
of that date. In the case of certain of the outstanding options held by the
named executive officers, the options may be exercised for all of the underlying
option shares but any shares purchased under those options are subject to our
right to repurchase the shares at the shares' option exercise price. The
unvested option shares subject to those options are included in the above table
in the number of option shares which are unexercisable as of December 31, 1999.
STOCK PLANS
2000 STOCK INCENTIVE PLAN
The 2000 stock incentive plan is intended to serve as the successor program
to our 1997 stock option plan. The 2000 plan was adopted by the board in
November 1999 and was approved by the stockholders in February 2000. The 2000
plan will become effective when the underwriting agreement for this offering is
signed. At that time, all outstanding options under our 1997 plan, including
options previously granted under our 1994 employee, consultant and director
stock option plan and our amended and restated 1996 stock option plan which were
incorporated into our 1997 stock option plan, will be transferred to the 2000
plan, and no further option grants will be made under the 1997 plan. The
transferred options will continue to be governed by their existing terms, unless
our compensation committee decides to extend one or more features of the 2000
plan to those options. Except as otherwise noted below, the transferred options
have substantially the same terms as will be in effect for grants made under the
discretionary option grant program of our 2000 plan.
We have authorized 8,916,563 shares of our common stock for issuance under
the 2000 plan. This share reserve consists of the number of shares we estimate
will be carried over from the 1997 plan. The share reserve under our 2000 plan
will automatically increase on the first trading day of the second fiscal
quarter each year, beginning with the year 2000, by an amount equal to three
percent
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(3%) of the total number of shares of our common stock outstanding on the last
trading day of the immediately preceding first fiscal quarter, but in no event
will this annual increase exceed 3,000,000 shares. In addition, no participant
in the plan may be granted stock options or direct stock issuances under the
2000 plan for more than 1,000,000 shares of common stock in total in any
calendar year.
Our 2000 plan has five separate programs:
- the discretionary option grant program;
- the stock issuance program;
- the salary investment option grant program;
- the automatic option grant program; and
- the director fee option grant program.
The individuals eligible to participate in our 2000 plan include our
officers and other employees, our board members and any consultants we retain.
Our compensation committee will determine which eligible individuals are to
receive option grants or stock issuances under the discretionary option grant
and stock issuance programs, the time or times when the grants or issuances are
to be made, the number of shares subject to each grant or issuance, the status
of any granted option as either an incentive stock option or a non-statutory
stock option under the federal tax laws, the vesting schedule to be in effect
for the option grant or stock issuance and the maximum term for which any
granted option is to remain outstanding. The exercise price for options granted
under the discretionary option grant program may not be less than the fair
market value of our shares of common stock on the grant date.
Our 2000 plan will include the following features:
- The exercise price for any options granted under the plan may be paid in
cash or in shares of our common stock valued at fair market value on the
exercise date or through a same-day sale program without any cash outlay
by the optionee.
- The compensation committee may cancel outstanding options under the
discretionary option grant program, including any options transferred
from our 1994, 1996 and 1997 plans, in return for the grant of new
options for the same or different number of option shares with an
exercise price per share based upon the fair market value of our common
stock on the new grant date.
- Stock appreciation rights may be issued under the discretionary option
grant program which will provide the holders with the election to
surrender their outstanding options for a payment from us equal to the
fair market value of the shares, subject to the surrendered options less
the exercise price payable for those shares. We may make the payment in
cash or in shares of our common stock. None of the options under our
1994, 1996, or 1997 plans have any stock appreciation rights.
The 2000 plan will include the following change in control provisions which
may result in the accelerated vesting of outstanding option grants and stock
issuances:
- In the event that we are acquired by merger or asset sale, each
outstanding option under the discretionary option grant program which is
not to be assumed by the successor corporation will immediately become
exercisable for all the option shares, and all outstanding unvested
shares will immediately vest, except to the extent our repurchase rights
with respect to those shares are to be assigned to the successor
corporation.
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- The compensation committee will have complete discretion to grant one or
more options which will become exercisable for all the option shares in
the event those options are assumed in the acquisition but the optionee's
service with us or the acquiring entity is subsequently terminated. The
vesting of any shares issued under our 2000 plan may be accelerated upon
similar terms and conditions.
- The compensation committee may grant options and structure repurchase
rights so that the shares subject to those options or repurchase rights
will immediately vest in connection with a successful tender offer for
more than 50% of our outstanding voting stock or a change in the majority
of our board through one or more contested elections. This accelerated
vesting may occur either at the time of this type of transaction or upon
the subsequent termination of the individual's service.
- In the event we are acquired by merger or asset sale, and the acquiring
entity assumes the outstanding options under our 1994, 1996 and 1997
plans, those options will accelerate and become exercisable and vested in
full, and any unvested option shares will immediately vest in full, if
the optionee's employment with us is involuntarily terminated within 12
months following the acquisition. If the options are not so assumed, they
will accelerate and become exercisable for fully vested shares
immediately before the acquisition and will terminate upon the completion
of the acquisition.
In the event the compensation committee decides to put the salary
investment option grant program into effect for one or more calendar years, each
of our executive officers and other highly compensated employees selected by the
compensation committee may elect to reduce his or her base salary for the
calendar year by an amount not less than $10,000 nor more than $50,000. Each
individual who makes this election will automatically be granted, on the first
trading day in January of the calendar year for which his or her salary
reduction is to be in effect, an option to purchase that number of shares of
common stock determined by dividing the salary reduction amount by two-thirds of
the fair market value per share of our common stock on the grant date. The
option will have an exercise price per share equal to one-third of the fair
market value of the option shares on the grant date. The option will become
exercisable in a series of 12 equal monthly installments over the calendar year
for which the salary reduction is to be in effect.
Under the automatic option grant program, each individual who first becomes
a non-employee board member at any time after the effective date of this
offering will receive an option grant to purchase 36,000 shares of common stock
on the date the individual joins the board. In addition, on the date of each
annual stockholders meeting held after the effective date of this offering,
beginning with the 2001 annual meeting, each non-employee board member who is to
continue to serve as a non-employee board member, including each of our current
non-employee board members, will automatically be granted an option to purchase
12,000 shares of common stock, provided the individual has served on the board
for at least six months.
Each automatic grant will have an exercise price per share equal to the
fair market value per share of our common stock on the grant date and will have
a term of 10 years, subject to earlier termination following the optionee's
cessation of board service. The option will be immediately exercisable for all
of the option shares; however, we may repurchase, at the exercise price paid per
share, any shares purchased under the option which are not vested at the time of
the optionee's cessation of board service. The shares subject to each initial
36,000-share automatic option grant will vest in a series of 36 successive equal
monthly installments upon the optionee's completion of each month of board
service measured from the grant date. The shares subject to each 12,000-share
annual option grant will vest in a series of 12 successive monthly installments
upon the optionee's
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completion of each month of board service measured from the grant date. The
shares subject to each option will immediately vest in full upon the optionee's
death or disability while a board member.
If the director fee option grant program is put into effect in the future,
then each non-employee board member may elect to apply all or a portion of any
cash retainer fee for the year to the acquisition of a below-market option
grant. The option grant will automatically be made on the first trading day in
January in the year for which the non-employee board member would otherwise be
paid the cash retainer fee in the absence of his or her election. The option
will have an exercise price per share equal to one-third of the fair market
value of the option shares on the grant date, and the number of shares subject
to the option will be determined by dividing the amount of the retainer fee
applied to the program by two-thirds of the fair market value per share of our
common stock on the grant date. The option will become exercisable in a series
of 12 equal monthly installments over the calendar year for which the election
is in effect. However, the option will become immediately exercisable for all
the option shares upon the death or disability of the optionee while serving as
a board member.
Our 2000 plan will also have the following features:
- Outstanding options under the salary investment option grant program and
the automatic and director fee option grant programs will immediately
vest if we are acquired by a merger or asset sale or if there is a
successful tender offer for more than 50% of our outstanding voting stock
or a change in the majority of our board through one or more contested
elections.
- Limited stock appreciation rights will automatically be included as part
of each grant made under the salary investment option grant program and
the automatic and director fee option grant programs, and these rights
may also be granted to one or more officers as part of their option
grants under the discretionary option grant program. Options with this
feature may be surrendered to us upon the successful completion of a
hostile tender offer for more than 50% of our outstanding voting stock.
In return for the surrendered option, the optionee will be entitled to a
cash distribution from us in an amount per surrendered option share based
upon the highest price per share of our common stock paid in that tender
offer.
The board may amend or modify the 2000 plan at any time, subject to any
required stockholder approval. The 2000 plan will terminate no later than
November 15, 2009.
EMPLOYEE STOCK PURCHASE PLAN
Our employee stock purchase plan was adopted by the board in November 1999
and was approved by the stockholders in February 2000. The plan will become
effective immediately upon the signing of the underwriting agreement for this
offering. The plan is designed to allow our eligible employees and the eligible
employees of our participating subsidiaries to purchase shares of common stock,
at semi-annual intervals, with their accumulated payroll deductions.
500,000 shares of our common stock will initially be reserved for issuance
under the plan. The reserve will automatically increase on the first trading day
of the second fiscal quarter each year, beginning in the year 2000, 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 plan will have a series of successive overlapping offering periods,
with a new offering period beginning on the first business day of February and
August each year. Each offering period will continue for a period of 24 months,
unless otherwise determined by our compensation committee.
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However, the initial offering period will start on the date the underwriting
agreement for this offering is signed and will end on the last business day of
January 2002. The next offering period will start on the first business day of
August 2000.
Employees who do not (or would not as a result of participation in the
employee stock purchase plan) own, or hold options to purchase, 5% of our
company or a parent or subsidiary of our company and who are scheduled to work
more than 20 hours per week for more than five calendar months per year may
participate in the plan and may join an offering period on the start date of
that period. Employees may participate in only one offering period at any time.
A participant may contribute up to 15% of his or her cash earnings through
payroll deductions, and the accumulated deductions will be applied to the
purchase of shares on each semi-annual purchase date. Semi-annual purchase dates
will occur on the last business day of January and July each year, with the
first purchase to occur on the last business day of July 2000. The purchase
price per share on each semi-annual purchase date will be equal to 85% of the
fair market value per share on the start date of the offering period or, if
lower, 85% of the fair market value per share on the semi-annual purchase date.
However, a participant may not purchase more than 2,500 shares on any purchase
date, and not more than 125,000 shares may be purchased in total by all
participants on any purchase date. Our compensation committee will have the
authority to change these limitations for any subsequent offering period.
If the fair market value per share of our common stock on any purchase date
is less than the fair market value per share on the start date of the 24-month
offering period, then that offering period will automatically terminate, and all
participants in the terminated offering period will automatically be transferred
to the new offering period commencing immediately thereafter.
Should we be acquired by merger or sale of substantially all of our assets
or more than 50% of our voting securities, then all outstanding purchase rights
will automatically be exercised immediately prior to the effective date of the
acquisition. The purchase price will be equal to 85% of the market value per
share on the start date of the offering period in which the acquisition occurs
or, if lower, 85% of the fair market value per share immediately prior to the
acquisition.
The following provisions will also be in effect under the plan:
- The plan will terminate no later than the last business day of January
2010.
- The board may at any time amend, suspend or discontinue the plan.
However, some amendments may require stockholder approval.
LIMITATION OF LIABILITY AND INDEMNIFICATION
Our amended and restated certificate of incorporation eliminates, to the
maximum extent allowed by the Delaware General Corporation Law, directors'
personal liability to Versata or its stockholders for monetary damages or
breaches of fiduciary duties. The amended and restated certificate of
incorporation of Versata does not, however, eliminate or limit the personal
liability of a director for the following:
- any breach of the director's duty of loyalty to Versata or its
stockholders;
- acts or omissions not in good faith or that involve intentional
misconduct or a knowing violation of law;
- unlawful payments of dividends or unlawful stock repurchases or
redemptions; or
- any transaction from which the director derived an improper personal
benefit.
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Our bylaws provide that we shall indemnify our directors and executive
officers to the fullest extent permitted under the Delaware General Corporation
Law and may indemnify our other officers, employees and other agents as set
forth in the Delaware General Corporation Law. In addition, we plan to enter
into indemnification agreements with each of our directors and executive
officers. The indemnification agreements will contain provisions that require
us, among other things, to indemnify our directors and executive officers
against liabilities (other than liabilities arising from intentional or knowing
and culpable violations of law) that may arise by reason of their status or
service as directors or executive officers of Versata or other entities to which
they provide service at our request and to advance expenses they may incur as a
result of any proceeding against them as to which they could be indemnified. We
believe that these bylaw provisions and indemnification agreements are necessary
to attract and retain qualified directors and officers.
Prior to the consummation of the offering, we expect to obtain an insurance
policy covering directors and officers for claims they may otherwise be required
to pay or for which we are required to indemnify them.
At present, there is no pending litigation or proceeding involving any of
our directors, officers, employees or agents where indemnification will be
required or permitted, and we are not aware of any threatened litigation or
proceeding that may result in a claim for indemnification.
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<PAGE> 67
RELATED PARTY TRANSACTIONS
SERIES F FINANCING
On November 30, 1999, December 27, 1999 and January 19, 2000, we issued a
total of 3,195,929 shares of Series F preferred stock at a purchase price of
$5.56 per share. Of the 3,195,929 shares of Series F preferred stock sold by us,
a total of 2,701,319 shares were sold to the following executive officers,
directors and greater than 5% stockholders of Versata and persons associated
with them for a total purchase price of approximately $15.0 million:
<TABLE>
<CAPTION>
NUMBER OF TOTAL
PURCHASER SHARES PURCHASE PRICE
--------- --------- --------------
<S> <C> <C>
Rekhi Family Trust.......................................... 53,696 $ 298,550
Kevin Ferrell............................................... 100,000 556,000
Entities affiliated with Alta V Limited Partnership......... 127,747 710,273
Charles River Partnership VII............................... 140,164 779,312
Vulcan Ventures, Inc........................................ 147,852 822,057
Entities affiliated with The Goldman Sachs Group............ 182,720 1,015,923
Morgenthaler Venture Partners IV, L.P....................... 408,533 2,271,443
Entities affiliated with Sigma Partners..................... 1,540,607 8,565,775
</TABLE>
Donald Feddersen, one of our directors, was a general partner of the
Charles River Partnership VII. Gary Morgenthaler, our Chairman, is a general
partner of Morgenthaler Venture Partners IV, L.P. Robert Davoli, one of our
directors, is a general partner of Sigma Partners.
SERIES E FINANCING
On July 8, 1999, August 8, 1999 and October 8, 1999, we issued a total of
4,481,593 shares of Series E preferred stock at a purchase price of $3.50 per
share. Of the 4,481,593 shares of Series E preferred stock sold by us, a total
of 3,382,191 shares were sold to the following executive officers, directors and
greater than 5% stockholders of Versata and persons associated with them for a
total purchase price of approximately $11.8 million:
<TABLE>
<CAPTION>
NUMBER OF TOTAL
PURCHASER SHARES PURCHASE PRICE
--------- --------- --------------
<S> <C> <C>
Val Huber................................................... 4,360 $ 15,260
Brobeck, Phleger & Harrison LLP............................. 7,143 25,000
Robert Davoli............................................... 14,538 50,882
John Larson................................................. 14,539 50,887
Michael Stangl.............................................. 14,857 52,000
H&W Development Corp........................................ 18,835 65,922
Wong Family Trust........................................... 29,685 103,896
H&R Development Corp........................................ 31,902 111,657
Entities affiliated with Hambrecht & Quist.................. 36,137 126,480
Rekhi Family Trust.......................................... 73,661 257,812
Entities affiliated with Alta V Limited Partnership......... 115,164 403,174
Charles River Partnership VII............................... 126,324 442,133
Vulcan Ventures............................................. 156,943 549,301
Morgenthaler Venture Partners IV, L.P....................... 452,389 1,583,362
Entities affiliated with The Goldman Sachs Group............ 2,285,714 7,999,999
</TABLE>
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<PAGE> 68
Eugene Wong, one of our directors, is trustee of the Wong Family Trust.
John A. Hewitt, Jr., our President, Chief Executive Officer and one of our
directors, is general partner of H&W Development Corp. and H&R Development Corp.
Kanwal Rekhi, one of our directors, is trustee of the Rekhi Family Trust. John
Larson, one of our directors, is a partner of Brobeck, Phleger & Harrison LLP.
1999 BRIDGE FINANCING
On April 21, 1999, we issued promissory notes to purchasers in the total
principal amount of $3,000,000 bearing interest at the rate per annum equal to
the Bank of America prime rate, as it exists from time to time, plus 2%,
compounded annually. We also issued warrants to purchase a total of 218,407
shares of Series E preferred stock at an exercise price of $3.50 exercisable on
or prior to April 21, 2004. Immediately upon closing of the Series E preferred
stock financing, the principal amount under the notes and accrued interest
thereon automatically converted into shares of Series E preferred stock at $3.50
per share.
Of the $3,000,000 principal amount of notes issued by us, a total principal
amount of $1,446,800 and warrants to purchase a total of 105,345 shares of
Series E preferred stock were issued to the following executive officers,
directors and greater than 5% stockholders of Versata and persons associated
with them:
<TABLE>
<CAPTION>
TOTAL PRINCIPAL
NUMBER OF AMOUNT OF
PURCHASER WARRANTS CONVERTIBLE NOTES
--------- ----------- -----------------
<S> <C> <C>
Val Huber.................................................. 1,090 $ 15,000
Wong Family Trust.......................................... 2,906 40,000
Robert Davoli.............................................. 3,634 50,000
H&W Development Corp....................................... 3,637 50,000
H&R Development Corp....................................... 6,540 89,900
Rekhi Family Trust......................................... 7,301 100,000
Charles River Partnership VII.............................. 20,479 280,859
Morgenthaler Venture Partners IV, L.P. .................... 59,758 821,041
</TABLE>
SERIES D FINANCING
From September 1998 to December 1998, we issued a total of 6,983,129 shares
of Series D preferred stock at a purchase price of $1.61 per share. Of the
6,983,129 shares of Series D preferred stock sold by us, a total of 4,305,277
shares were sold to the following executive officers, directors and
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<PAGE> 69
greater than 5% stockholders of Versata and persons associated with them for a
total purchase price of approximately $6.9 million:
<TABLE>
<CAPTION>
NUMBER OF TOTAL
PURCHASER SHARES PURCHASE PRICE
--------- --------- --------------
<S> <C> <C>
Kanwal Rekhi................................................ 6,211 $ 10,000
John W. Larson.............................................. 6,357 10,235
H&W Development Corp........................................ 18,905 30,438
Robert Davoli............................................... 25,932 41,750
Brobeck, Phleger & Harrison LLP............................. 31,055 49,999
Benjamin Rekhi Trust........................................ 62,111 100,000
Raj-Ann Kaur Rekhi Trust.................................... 62,111 100,000
Wong Family Trust........................................... 155,000 249,550
Rekhi Family Trust.......................................... 250,141 402,727
Entities affiliated with Alta V Limited Partnership......... 467,814 753,181
Charles River Partnership VII............................... 513,024 825,969
Vulcan Ventures, Inc........................................ 532,536 857,383
Entities affiliated with Hambrecht & Quist.................. 559,451 900,716
Morgenthaler Venture Partners IV, L.P....................... 1,614,629 2,599,552
</TABLE>
Kanwal Rekhi, one of our directors, is trustee of the Benjamin Rekhi Trust
and the Raj-Ann Kaur Rekhi Trust.
1998 BRIDGE FINANCING
Between March 1998 to September 1998, we issued promissory notes to
purchasers in the total principal amount of $2,875,809 bearing interest at the
rate per annum equal to the Bank of America prime rate, as it exists from time
to time, plus 2%, compounded annually. We also issued warrants to purchase a
total of 465,061 shares of common stock at an exercise price of $.20 exercisable
on or prior to September 24, 2003. Immediately upon closing of the Series D
preferred stock financing, the principal amount under the notes and accrued
interest thereon automatically converted into shares of Series D preferred stock
at $1.61 per share.
Of the $2,875,809 principal amount of the notes issued by us, a total
principal amount of $2,263,809 and warrants to purchase a total of 366,380
shares of common stock were issued to the following executive officers,
directors and greater than 5% stockholders of Versata and persons associated
with them:
<TABLE>
<CAPTION>
TOTAL PRINCIPAL
NUMBER AMOUNT OF
PURCHASER OF WARRANTS CONVERTIBLE NOTES
--------- ----------- -----------------
<S> <C> <C>
John W. Larson.............................................. 1,589 $ 10,000
H&W Development Corp........................................ 2,397 15,000
Robert Davoli............................................... 4,930 30,803
John A. Hewitt, Jr.......................................... 9,317 60,000
Rekhi Family Trust.......................................... 15,951 100,000
Entities affiliated with Alta V Limited Partnership......... 45,795 281,506
Charles River Partnership VII............................... 50,159 308,843
Entities affiliated with Hambrecht & Quist.................. 47,472 292,297
Vulcan Ventures, Inc........................................ 51,810 321,607
Morgenthaler Venture Partners IV, L.P. ..................... 136,960 843,753
</TABLE>
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<PAGE> 70
SERIES C FINANCING
From January 1997 to May 1997, we issued a total of 6,204,880 shares of
Series C preferred stock at a purchase price of $1.61 per share. Of the
6,204,880 shares of Series C preferred stock sold by us, a total of 4,903,788
shares were sold to the following executive officers, directors and greater than
5% stockholders of Versata and persons associated with them for a total purchase
price of approximately $7.9 million:
<TABLE>
<CAPTION>
NUMBER TOTAL
PURCHASER OF SHARES PURCHASE PRICE
--------- --------- --------------
<S> <C> <C>
John A. Hewitt, Jr.......................................... 4,460 $ 7,180
Val Huber................................................... 6,200 9,982
H&W Development Corp........................................ 18,634 30,000
John W. Larson.............................................. 22,716 36,572
Rekhi Family Trust.......................................... 25,426 40,936
Peter Harrison.............................................. 32,000 51,520
Entities affiliated with Alta V Limited Partnership......... 366,904 590,715
Vulcan Ventures, Inc........................................ 419,318 675,102
Charles River Partnership VII............................... 465,870 750,050
Entities affiliated with Hambrecht & Quist.................. 498,780 803,035
Morgenthaler Venture Partners IV, L.P. ..................... 3,043,480 4,900,002
</TABLE>
SERIES B FINANCING
From November 1995 to March 1996, we issued a total of 4,402,628 shares of
Series B preferred stock at a purchase price of $2.70 per share. Of the
4,402,628 shares of Series B preferred stock sold by us, a total of 2,750,741
shares were sold to the following executive officers, directors and greater than
5% stockholders of Versata and persons associated with them for a total purchase
price of approximately $7.4 million:
<TABLE>
<CAPTION>
NUMBER TOTAL
PURCHASER OF SHARES PURCHASE PRICE
--------- --------- --------------
<S> <C> <C>
John W. Larson.............................................. 10,000 $ 27,000
Rekhi Family Trust.......................................... 37,037 100,000
Robert Davoli............................................... 111,111 300,000
Entities affiliated with Hambrecht & Quist.................. 555,556 1,500,001
Entities affiliated with Alta V Limited Partnership......... 648,148 1,750,000
Charles River Partnership VII............................... 648,148 1,750,000
Vulcan Ventures, Inc........................................ 740,741 2,000,001
</TABLE>
1995 BRIDGE FINANCING
From May 1995 to September 1995, stockholders provided us bridge loans
totalling $700,000. These loans bore interest at the rate per annum equal to the
Bank of America prime rate, as it exists from time to time, plus 2%, compounded
annually. In connection with these loans, we issued warrants to purchase 42,000
shares of our Series B preferred stock at $2.70 per share. Immediately upon
closing of the Series B preferred stock financing, the principal amount under
these notes automatically converted into shares of Series B preferred stock at
$2.70 per share.
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<PAGE> 71
Of the $700,000 principal amount of notes issued by us, a total principal
amount of $100,000 and warrants to purchase a total of 6,000 shares of Series B
preferred stock were issued to the following executive officers, directors and
greater than 5% stockholders of Versata and persons associated with them:
<TABLE>
<CAPTION>
TOTAL PRINCIPAL
AMOUNT OF
NUMBER CONVERTIBLE
PURCHASER OF WARRANTS NOTES
--------- ----------- ---------------
<S> <C> <C>
Rekhi Family Trust.......................................... 6,000 $100,000
</TABLE>
SERIES A FINANCING
From August 1994 to November 1995, we issued a total of 1,480,000 shares of
Series A preferred stock at purchase prices ranging from $1.50 to $2.00 per
share. Of the 1,480,000 shares of Series A preferred stock sold by us, a total
of 115,259 shares were sold to the following executive officers, directors and
greater than 5% stockholders of Versata and persons associated with them for a
total purchase price of $205,518:
<TABLE>
<CAPTION>
TOTAL
NUMBER PURCHASE
PURCHASER OF SHARES PRICE
--------- --------- --------
<S> <C> <C>
H&W Development Corp........................................ 15,259 $ 30,518
Kanwal Rekhi................................................ 50,000 75,000
John A. Hewitt, Jr.......................................... 50,000 100,000
</TABLE>
These Series A preferred shares were issued in connection with a private
placement memorandum dated July 1, 1994. In connection with this financing, we
issued to each investor a warrant to purchase that number of additional shares
of Series A preferred stock calculated as 50% of the number of shares purchased
by such investor. The warrants were exercisable at exercise prices ranging from
$1.50 per share to $2.00 per share, depending on the time they were exercised
until they expired in December 1995.
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<PAGE> 72
The following table summarizes the description in this section of the
shares of common stock, preferred stock and warrants purchased by executive
officers, directors and 5% stockholders of Versata and persons associated with
them since August 1994, and assumes the exercise of all warrants. Each share of
preferred stock listed in the table below is convertible into one share of our
common stock, which has an assumed initial public offering price of $13.00 per
share.
<TABLE>
<CAPTION>
PREFERRED STOCK
EXECUTIVE OFFICERS, DIRECTORS COMMON -------------------------------------------------------------------
AND 5% STOCKHOLDERS STOCK SERIES A SERIES B SERIES C SERIES D SERIES E SERIES F
----------------------------- -------- -------- -------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Entities Affiliated with Alta V
Limited Partnership.............. 45,795 648,148 366,904 467,814 115,164 127,747
Brobeck, Phleger & Harrison LLP.... 31,055 7,143
Charles River Partnership VII...... 50,159 648,148 465,870 513,024 146,803 140,164
Robert Davoli...................... 4,930 111,111 25,932 18,172
Kevin Ferrell...................... 100,000
Entities Affiliated with the
Goldman Sachs Group.............. 2,285,714 182,720
Entities Affiliated with Hambrecht
& Quist.......................... 47,472 555,556 498,780 559,451 36,137
Peter Harrison..................... 32,000
John A. Hewitt, Jr. ............... 9,317 75,000 4,460 9,317
Val Huber.......................... 6,200 5,450
H&R Development Corp. ............. 38,442
H&W Development Corp. ............. 2,397 22,888 18,634 18,905 22,472
John Larson........................ 1,589 10,000 22,716 6,357 14,539
Morganthaler Venture Partners IV,
L.P. ............................ 136,960 3,043,480 1,614,629 512,147 408,533
Entities affiliated with Rekhi
Family........................... 15,951 43,037 25,426 374,363 80,962 53,696
Entities affiliated with Sigma
Partners......................... 1,540,607
Michael Stangl..................... 14,857
Vulcan Ventures.................... 51,810 740,741 419,318 532,536 156,943 147,852
Wong Family Trust.................. 155,000 32,591
Kanwal Rekhi....................... 75,000 6,211
</TABLE>
AGREEMENTS WITH OFFICERS AND DIRECTORS
In November 1999, Kevin Ferrell delivered a full-recourse promissory note
to us in payment of 100,000 shares of Series F preferred stock we issued to him.
The principal amount secured under the note is $556,000. The note bears interest
at the rate of 7.00% per annum, compounded annually, and is secured by the
purchased shares. The principal balance will become due and payable in one lump
sum on the third anniversary of the signing of the note. One half of Mr.
Ferrell's base compensation is applied to servicing the note until paid in full.
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 which he received upon joining us. The principal
amount secured under the note is $1,200,000. In June 1999, each of Messrs.
Hewitt, Huber, Harrison, DeVries and Stangl delivered a full-recourse promissory
note to us in payment of the exercise price of outstanding stock options they
held under our 1994, 1996 and 1997 stock option plans. The principal amount
secured under each note is as follows: Mr. Hewitt -- $189,663; Mr.
Huber -- $77,500; Mr. DeVries -- $71,000; Mr. Harrison -- $29,780; Mr.
Stangl -- $60,000. Each note has a term of three years, bears interest at the
rate of 7.00% per annum, compounded annually. The notes are each secured by
pledges of the purchased shares to us and pledges of collateral which, together
with the shares, have a value of twice the principal amount of each note. The
shares and collateral underlying the pledges will be released from the pledges
only as the principal balance of each note is paid down. Accrued interest
becomes due on each anniversary of the signing of each note and the principal
balance will become due and payable in one lump sum
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<PAGE> 73
on the third anniversary of the signing of each note. However, the entire unpaid
balance of the note will become due and payable upon termination of employment,
failure to pay any installment of principal or interest when due or in the event
we are acquired and receive cash or freely tradeable securities for our shares
in the acquisition. None of the shares serving as security for the note may be
sold unless the principal portion of the note attributable to those shares,
together with the accrued interest on that principal portion, is paid to us.
In September 1997, we entered into an associate services agreement with
Eugene Wong, one of our directors. The agreement, under which Mr. Wong agreed to
become a technology advisor to the company, was amended in March 1998 and is
scheduled to terminate in March 2000. Under this agreement, for each day he
works with us, Mr. Wong earns a fee of $500 and vests 800 stock options, at an
option price of $0.20. As of January 31, 1999, Mr. Wong had received
approximately $34,125 in fees and 54,600 stock options under this agreement.
In November 1995, we entered into a consulting services agreement with
Robert Davoli, under which Mr. Davoli agreed to provide business and strategic
planning services to the company. This consulting agreement went into effect in
December 1995 and was renewable each year for one year. The current term of the
agreement ends March 30, 2000. In connection with Mr. Davoli's consulting
agreement, we issued Mr. Davoli various options and warrants. On December 1,
1995, we issued Mr. Davoli a warrant to purchase up to 10,000 shares of Series A
preferred stock at an exercise price of $2.00 per share. On July 11, 1996, we
issued options to purchase 20,000 shares of common stock at $0.30 per share. On
December 1, 1996, April 1, 1998, and April 1, 1999 we issued Mr. Davoli warrants
to purchase up to 37,779 shares of Series C preferred stock at an exercise price
of $1.61 per share. On June 5, 1998, we issued a warrant to purchase 4,930
shares of common stock at $0.20 per share. The warrants issued to Mr. Davoli on
April 1, 1999 continue to vest at the rate of 1,050 shares per month.
In 1995, we established a loan facility to Naren Bakshi, a director, under
which he may borrow up to $100,000. Interest accrues under the loan at a rate of
6% per annum. In addition, in March 1998 and September 1998, Mr. Bakshi
exercised options to purchase a total of 234,000 shares of our common stock and
payment of the exercise price on each such date was made through delivery of
full-recourse promissory notes, in the amounts of $36,400 and $7,200,
respectively. The notes are secured by the purchased shares. Interest accrues at
a rate of 6% per annum, compounded semi-annually, and becomes due every six
months. With respect to all of the promissory notes delivered by Mr. Bakshi,
accrued and unpaid interest and principal were scheduled to become due in full
on November 1999. However, in September 1999, the board extended the term for an
additional year under the same terms and conditions.
In September 1994, we entered into a software development services
agreement with Duet Technologies, Inc., formerly known as Software and
Technologies, Inc. Duet is owned by Prabhu Goel, a former member of the board of
directors. Under this services agreement, Duet, acting as an independent
contractor, agreed to provide us with assistance in the development of two
products at discounted hourly rates. Duet furnished software development
resources to assist us in completing production of our technology for rapid
application development while we were responsible for source code backup,
interim deliveries and deliverables. All work performed by Duet under this
services agreement was a Work-Made-For-Hire and Assignment for Versata. As of
December 31, 1995, all services had been performed under this services
agreement. In accordance with the services agreement, we recorded a liability of
$554,000, representing the total obligation to Duet in consideration for
discounts granted to us for the services performed under the services agreement.
This amount is to be paid in the form of a royalty equal to 10% of our revenues
on some of our products. Since December 31, 1995, there has been no expense
related to the services agreement as
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<PAGE> 74
no Duet services have been used. At December 31, 1999, a net balance of $112,000
was outstanding and is recorded in current liabilities.
We have granted options and issued common stock to our executive officers
and directors. See "Management -- Executive Compensation" and "Principal
Stockholders."
We believe that all of the transactions set forth above were made on terms
no less favorable to us than could have been otherwise obtained from
unaffiliated third parties. All future transactions, including loans, if any,
between us and our officers, directors and principal stockholders and their
affiliates and any transactions between us and any entity with which our
officers, directors or 5% stockholders are affiliated will be approved by a
majority of the board of directors, including a majority of the independent and
disinterested outside directors of the board of directors and will be on terms
no less favorable to us than could be obtained from unaffiliated third parties.
RELATIONSHIPS WITH OFFICERS AND DIRECTORS
Naren Bakshi, one of our directors, is a co-founder, Chairman of the Board,
Executive Vice President and a greater than 10% owner of Xpede, Inc., one of our
customers. From January 1, 1999 to December 31, 1999, Xpede made purchases from
us of approximately $458,000.
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<PAGE> 75
PRINCIPAL STOCKHOLDERS
The table below sets forth information regarding the beneficial ownership
of our common stock as of December 31, 1999, and as adjusted for this offering
assuming no exercise of the underwriters' overallotment option, by:
- each person or entity who is known by us to own beneficially more than 5%
of our outstanding stock;
- each of the named executive officers;
- each of our directors; and
- all directors and executive officers as a group.
Each stockholder's percentage ownership in the following table is based on
34,046,804 shares of common stock outstanding as of December 31, 1999 which
reflects the automatic conversion into common stock upon completion of this
offering of (i) all series of preferred stock outstanding as of December 31,
1999 and (ii) 269,784 shares of Series F preferred stock issued in January 2000.
For purposes of calculating each stockholder's percentage ownership, all options
and warrants exercisable within 60 days of December 31, 1999 held by the
particular stockholder and that are included in the first column are treated as
outstanding shares. The numbers shown in the table below assume no exercise by
the underwriters of their over-allotment option.
Unless otherwise indicated, the principal address of each of the
stockholders below is c/o Versata, Inc., 2101 Webster Street, 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.
<TABLE>
<CAPTION>
PERCENTAGE OF SHARES
NUMBER BENEFICIALLY OWNED
OF SHARES ----------------------------
BENEFICIALLY PRIOR TO AFTER
NAME AND ADDRESS OF BENEFICIAL OWNER OWNED THE OFFERING THE OFFERING
------------------------------------ ------------ ------------ ------------
<S> <C> <C> <C>
Morgenthaler Venture Partners IV, L.P.(1).......... 5,715,749 16.7% 15.0%
Entities affiliated with The Goldman Sachs
Group(2)......................................... 2,468,434 7.3% 6.5%
Vulcan Ventures, Inc.(3)........................... 2,070,510 6.1% 5.5%
Charles River Partnership VII(4)................... 1,964,168 5.8% 5.2%
Entities affiliated with Alta V Limited
Partnership(5)................................... 1,790,241 5.3% 4.7%
Entities affiliated with Hambrecht & Quist(6)...... 1,697,396 5.0% 4.5%
John A. Hewitt, Jr.(7)............................. 1,573,344 4.6% 4.1%
Val Huber(8)....................................... 524,150 1.5% 1.4%
Peter Harrison(9).................................. 462,000 1.4% 1.2%
Michael DeVries(10)................................ 467,500 1.4% 1.2%
Michael Stangl(11)................................. 427,357 1.3% 1.1%
Kevin Ferrell(12).................................. 500,000 1.5% 1.3%
Naren Bakshi(13)................................... 810,000 2.4% 2.1%
Donald W. Feddersen(4)(18)......................... 2,000,168 5.9% 5.3%
John W. Larson(14)................................. 91,201 * *
Gary Morgenthaler(1)(18)........................... 5,751,749 16.8% 15.1%
Kanwal Rekhi(15)................................... 700,795 2.1% 1.9%
</TABLE>
71
<PAGE> 76
<TABLE>
<CAPTION>
PERCENTAGE OF SHARES
NUMBER BENEFICIALLY OWNED
OF SHARES ----------------------------
BENEFICIALLY PRIOR TO AFTER
NAME AND ADDRESS OF BENEFICIAL OWNER OWNED THE OFFERING THE OFFERING
------------------------------------ ------------ ------------ ------------
<S> <C> <C> <C>
Eugene Wong(16).................................... 297,591 * *
Robert Davoli(17).................................. 1,802,124 5.3% 4.8%
All directors and executive officers as a group (13
persons)(19)..................................... 15,407,979 43.2% 39.0%
</TABLE>
- -------------------------
* Less than one percent.
(1) Principal address is 2730 Sand Hill Road, Suite 280, Menlo Park, CA 94025.
Includes warrants to purchase 136,960 shares of common stock at an exercise
price of $0.20 and 59,758 shares of Series E preferred stock at an exercise
price of $3.50. Mr. Morgenthaler disclaims beneficial ownership of all of
these shares except to the extent of his pecuniary interest in these
shares. The general partner of Morganthaler Venture Partnership IV, L.P. is
Morganthaler Management Partners IV, L.P. The general partners of
Morganthaler Management Partners IV, L.P. are Gary Morganthaler, a director
of Versata, David Morganthaler, Robert Pavey, Robert Bellas, Jr., and John
Lutsi, who have dispositive and voting powers with respect to the shares
held by Morganthaler Venture Partnership IV, L.P.
(2) Principal address is 85 Broad Street, New York, NY 10004. Represents
2,221,591 shares of Series E preferred stock held by The Goldman Sachs
Group and 246,843 shares of Series E preferred stock held by Stone Street
Fund 1999, L.P.
(3) Principal address is 110 110th Avenue, N.E., Suite 550, Bellevue, WA 98004.
Includes warrants to purchase 51,810 shares of common stock at an exercise
price of $0.20 and 21,310 shares of Series E preferred stock at an exercise
price of $3.50.
(4) Principal address is 83 Walnut Street, Wellesley, MA 02481. Includes
warrants to purchase 50,159 shares of common stock at an exercise price of
$0.20 and 20,479 shares of Series E preferred stock at an exercise price of
$3.50. Mr. Feddersen disclaims beneficial ownership of the shares except to
the extent of his pecuniary interest in these shares. The general partner
of Charles River Partnership VII is Charles River VII, L.P. The general
partners of Charles River VII, L.P., are Richard Burnes, Jr., Michael Zak
and Ted Dintersmith who have dispositive and voting power with respect to
the shares held by the Charles River Partnership VII.
(5) Principal address is One Embarcadero Center, Suite 4050, San Francisco, CA
94111. Represents 1,707,829 shares of stock held by Alta V Limited
Partnership and 17,948 shares of stock held by Customs House Partners.
Includes warrants held by Alta V Limited Partnership to purchase 45,319
shares of common stock at an exercise price of $0.20 and 18,475 shares of
Series E preferred stock at an exercise price of $3.50, and warrants held
by Customs House Partners to purchase 476 shares of common stock at an
exercise price of $0.20 and 194 shares of Series E preferred stock an
exercise price of $3.50. The general partner of Alta V Limited Partnership
is Alta V Management Partners, L.P. The managing general partners of Alta V
Management Partners, L.P. are Craig Burr, William Egan and Jean Deleage who
have dispositive and voting power with respect to the shares held by the
Alta V Limited Partnership.
(6) Principal address is One Bush Street, San Francisco, CA 94104. Includes
warrants to purchase 47,472 shares of common stock at an exercise price of
$0.20.
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<PAGE> 77
(7) Includes 475,000 shares of common stock issuable upon exercise of
immediately exercisable options within 60 days of December 31, 1999. Also
includes 71,633 shares held by H&W Development Corp. and 31,902 shares held
by H&R Development Corp. Mr. Hewitt disclaims beneficial ownership of these
shares except to the extent of his pecuniary interest in these shares.
Includes warrants to purchase 9,317 shares of common stock at an exercise
price of $0.20, and 404,126 shares of common stock subject to Versata's
right of repurchase. Also includes warrants held by H&W Development Corp.
to purchase 2,397 shares of common stock at an exercise price of $0.20 and
3,637 shares of Series E preferred stock an exercise price of $3.50, and
warrants held by H&R Development Corp. to purchase 6,540 shares of Series E
preferred stock at an exercise price of $3.50. Subject to certain
conditions, Mr. Hewitt's right to exercise all of his options free of the
company's right of repurchase will accelerate and the company's right to
repurchase any shares Mr. Hewitt has previously purchased upon exercise of
stock options will terminate effective upon the appointment of a new Chief
Executive Officer of the company.
(8) Includes 112,500 shares of common stock issuable upon exercise of
immediately exercisable options within 60 days of December 31, 1999. Also
includes warrants to purchase 1,090 shares of Series E preferred stock at
an exercise price of $3.50 and 109,602 shares of common stock subject to
Versata's right of repurchase.
(9) Includes 281,100 shares of common stock issuable upon exercise of
immediately exercisable options within 60 days of December 31, 1999.
(10) Includes 112,500 shares of common stock issuable upon exercise of
immediately exercisable options within 60 days of December 31, 1999. Also
includes 190,600 shares of common stock subject to Versata's right of
repurchase.
(11) Includes 112,500 shares of common stock issuable upon exercise of
immediately exercisable options within 60 days of December 31, 1999. Also
includes 227,500 shares of common stock subject to Versata's right of
repurchase.
(12) Includes 400,000 shares of common stock subject to Versata's right of
repurchase.
(13) Includes 36,000 shares of common stock issuable upon exercise of
immediately exercisable options within 60 days of December 31, 1999. Also
includes 6,667 shares of common stock subject to Versata's right of
repurchase.
(14) Includes 36,000 shares of common stock issuable upon exercise of
immediately exercisable options within 60 days of December 31, 1999. Also
includes warrants to purchase 1,589 shares of common stock at an exercise
price of $0.20. 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.
(15) Includes 377,498 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.
Also includes 36,000 shares of common stock issuable upon exercise of
immediately exercisable options within 60 days of December 31, 1999 and
2,084 shares of common stock subject to Versata's right of repurchase.
(16) Includes 64,000 shares of common stock issuable upon exercise of
immediately exercisable options within 60 days of December 31, 1999. Also
includes warrants to purchase 2,906 shares of Series E preferred stock at
an exercise price of $3.50.
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<PAGE> 78
(17) Includes 1,540,607 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. Also includes 21,000
shares of common stock issuable upon exercise of immediately exercisable
options within 60 days of December 31, 1999 and 20,990 shares of preferred
stock subject to Versata's right of repurchase.
(18) Includes 36,000 shares of common stock issuable upon exercise of
immediately exercisable options within 60 days of December 31, 1999.
(19) Includes 1,653,432 shares of common stock issuable upon exercise of options
and warrants immediately exercisable or exercisable within 60 days of
December 31, 1999.
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<PAGE> 79
DESCRIPTION OF SECURITIES
GENERAL
At the closing of this offering, we will be authorized to issue 150,000,000
shares of common stock, $0.001 par value, and 5,000,000 shares of undesignated
preferred stock, $0.001 par value, after giving effect to the amendment of our
certificate of incorporation to delete references to the existing preferred
stock following conversion of that stock. Immediately following the completion
of this offering, and assuming no exercise of the underwriters' over-allotment
option, based on the number of shares outstanding as of December 31, 1999 and
269,784 shares of Series F preferred stock issued in January 2000, a total of
37,896,804 shares of common stock will be issued and outstanding, and no shares
of preferred stock will be issued and outstanding.
The following description of our securities is subject to and qualified by
our amended and restated certificate of incorporation and bylaws, which are
included as exhibits to the registration statement of which this prospectus
forms a part, and by the provisions of the applicable Delaware law.
COMMON STOCK
As of December 31, 1999, we had 357 holders of record of our common stock,
assuming the conversion of all shares of preferred stock into common stock. The
holders of our common stock are entitled to one vote per share on all matters to
be voted upon by our stockholders. Subject to preferences that may apply to any
outstanding preferred stock that we may issue, the holders of common stock are
entitled to receive ratably those dividends, if any, as may be declared from
time to time by the board of directors out of funds legally available for
dividends. See "Dividend Policy." In the event of our liquidation, dissolution
or winding up, the holders of our common stock are entitled to share ratably in
all assets remaining after payment of liabilities, subject to prior distribution
rights of preferred stock, if any, then outstanding. Our common stock has no
preemptive or conversion rights or other subscription rights. There are no
redemption or sinking fund provisions applicable to the common stock. All
outstanding shares of common stock are fully paid and nonassessable, and the
shares of common stock outstanding upon completion of this offering will be
fully paid and nonassessable.
PREFERRED STOCK
Our board of directors is authorized to issue from time to time, without
stockholder authorization, in one or more designated series, any or all of our
authorized but unissued shares of preferred stock with any dividend, redemption,
conversion and exchange provisions as may be provided in the particular series.
Any series of preferred stock may possess voting, dividend, liquidation and
redemption rights superior to those of the common stock.
The rights of the holders of our common stock will be subject to, and may
be adversely affected by, the rights of the holders of any preferred stock that
may be issued in the future. Issuance of a new series of preferred stock, while
providing desirable flexibility in connection with possible acquisitions and
other corporate purposes, could have the effect of entrenching our board of
directors and making it more difficult for a third-party to acquire, or
discourage a third-party from acquiring, a majority of our outstanding voting
stock. We have no present plans to issue any shares of or designate any series
of preferred stock.
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WARRANTS
At December 31, 1999, there were warrants outstanding to purchase a total
of 537,982 shares of our common stock and 216,745 shares of our preferred stock.
The warrants contain antidilutive provisions providing for adjustments of the
exercise price and the number of shares of common stock underlying the warrants
upon the occurrence of any recapitalization, reclassification, stock dividend,
stock split, stock combination or similar transaction. The shares of common
stock issuable upon exercise of the warrants carry registration rights, as
discussed below. Some of these warrants have net exercise provisions under which
the holder may, in lieu of payment of the exercise price in cash, surrender the
warrant and receive a net amount of shares based on the fair market value of our
common stock at the time of exercise of the warrant after deduction of the total
exercise price.
REGISTRATION RIGHTS
Upon completion of the offering, the holders of a total of approximately
26,842,693 shares of common stock and warrants to purchase up to approximately
216,745 shares of our common stock will be entitled to certain rights with
respect to the registration of the shares under the Securities Act. These rights
are provided under the terms of agreements between us and the holders of these
securities. If we propose to register any of our securities under the Securities
Act, either for our own account or for the account of other security holders
exercising registration rights, these holders are entitled to notice of the
registration and are entitled to include shares of common stock in the
registration. The rights are subject to conditions and limitations, among them
the right of the underwriters of an offering to limit the number of shares
included in the registration. At any time following 180 days after this
offering, holders of these rights may also require us to file up to two
registration statements under the Securities Act at our expense with respect to
their shares of common stock, and we are required to use our best efforts to
effect the registrations, subject to conditions and limitations. Furthermore,
stockholders with registration rights may require us to file additional
registration statements on Form S-3, subject to conditions and limitations. Upon
registration, these shares will be freely tradable in the public market without
restriction.
COMPLIANCE WITH CALIFORNIA LAW
We are currently subject to Section 2115 of the California General
Corporation Law. Section 2115 provides that, regardless of a company's legal
domicile, some provisions of California corporate law will apply to that company
if more than 50% of its outstanding voting securities are held of record by
persons having addresses in California and the majority of the company's
operations occur in California. For example, while we are subject to Section
2115, stockholders may cumulate votes in electing directors. This means that
each stockholder may vote the number of votes equal to the number of candidates
multiplied by the number of votes to which the stockholder's shares are normally
entitled in favor of one candidate. This potentially allows minority
stockholders to elect some members of the board of directors. When we are no
longer subject to Section 2115, cumulative voting will not be allowed and a
holder of 50% or more of our voting stock will be able to control the election
of all directors. In addition to this difference, Section 2115 has the following
additional effects:
- enables removal of directors with or without cause with majority
stockholder approval;
- places limitations on the distribution of dividends;
- extends additional rights to dissenting stockholders in any
reorganization, including a merger, sale of assets or exchange of shares;
and
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<PAGE> 81
- provides for information rights and required filings in the event we
effect a sale of assets or complete a merger.
We anticipate that our common stock will be qualified for trading as a
national market security on the Nasdaq National Market and that we will have at
least 800 stockholders of record by the record date for our 2000 annual meeting
of stockholders. If these two conditions occur, then we will no longer be
subject to Section 2115 as of the record date for our 2000 annual meeting of
stockholders.
ANTITAKEOVER EFFECTS OF PROVISIONS OF THE CERTIFICATE OF INCORPORATION, BYLAWS
AND DELAWARE LAW
Some provisions of our amended and certificate of incorporation and our
bylaws could discourage potential acquisition proposals and could delay or
prevent a change in control. These provisions also may have the effect of
preventing changes in the management of the company. Our amended and restated
certificate of incorporation authorizes our board to establish one or more
series of undesignated preferred stock, the terms of which can be determined by
our board at the time of issuance. Our amended and restated certificate of
incorporation also provides that all stockholder action must be effected at a
duly called meeting of stockholders and not by written consent. In addition, our
amended and restated certificate of incorporation and bylaws do not permit our
stockholders to call a special meeting of stockholders. Only our Chief Executive
Officer, President, Chairman of the Board or a majority of the board of
directors are permitted to call a special meeting of stockholders. Our amended
and restated certificate of incorporation also provides that the board of
directors is divided into three classes, with each director assigned to a class
with a term of three years, and that the number of directors may only be
determined by the board of directors. Our bylaws require that stockholders give
advance notice to our secretary of any nominations for director or other
business to be brought by stockholders at any stockholders' meeting, and that
the chairman of the board has the authority to adjourn any meeting called by the
stockholders. Our bylaws also require a supermajority vote of members of the
board of directors and/or stockholders to amend some bylaw provisions.
We are subject to Section 203 of the Delaware General Corporation Law, an
anti-takeover law. In general, Section 203 prohibits a Delaware corporation from
engaging in any business combination with any interested stockholder for a
period of three years following the date that the stockholder became an
interested stockholder, unless:
- prior to that date, the board of directors of the corporation approved
either the business combination or the transaction that resulted in the
stockholder becoming an interested stockholder;
- upon consummation of the transaction that resulted in the stockholder
becoming an interested stockholder, the interested stockholder owned at
least 85% of our voting stock outstanding at the time the transaction
commenced, excluding for purposes of determining the number of shares
outstanding those shares owned by:
(i) persons who are directors and also officers; and
(ii) employee stock plans in which employee participants do not have
the right to determine confidentially whether shares held subject
to the plan will be tendered in a tender or exchange offer; or
- on or subsequent to that date, the business combination is approved by
the board of directors of the corporation and authorized at an annual or
special meeting of stockholders, and not by
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written consent, by the affirmative vote of at least 66 2/3% of the
outstanding voting stock that is not owned by the interested stockholder.
Section 203 defines "business combination" to include the following:
- any merger or consolidation involving the corporation and the interested
stockholder;
- any sale, transfer, pledge or other disposition of 10% or more of the
assets of the corporation involving the interested stockholder;
- subject to certain exceptions, any transaction that results in the
issuance or transfer by the corporation of any stock of the corporation
to the interested stockholder;
- any transaction involving the corporation that has the effect of
increasing the proportionate share of the stock of any class or series of
the corporation beneficially owned by the interested stockholder; or
- the receipt by the interested stockholder of the benefit of any loans,
advances, guarantees, pledges or other financial benefits provided by or
through the corporation.
In general, Section 203 defines an interested stockholder as any entity or
person beneficially owning 15% or more of the outstanding voting stock of the
corporation and any entity or person affiliated with or controlling or
controlled by any of these entities or persons.
TRANSFER AGENT AND REGISTRAR
Our transfer agent and registrar for our common stock is Equiserve L.P. Its
telephone number is (781) 575-2469.
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<PAGE> 83
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no public market for our common
stock. We cannot predict the effect, if any, that sales of shares of our common
stock or the availability of shares of our common stock for sale will have on
the market price of common stock prevailing from time to time. Sales of
substantial amounts of our common stock in the public market could adversely
affect the market price of our common stock and could impair our future ability
to raise capital through the sale of our equity securities.
Upon the completion of this offering, we will have a total of 37,896,804
shares of common stock outstanding and 38,474,304 shares if the underwriters
exercise their over-allotment option in full, which excludes:
- 6,399,197 shares that could be issued upon the exercise of options
outstanding as of January 31, 2000 at a weighted average exercise price
of $3.03 per share;
- 2,517,366 shares reserved for issuance under our option plans at January
31, 2000;
- 537,982 shares that could be issued upon the exercise of warrants
outstanding as of December 31, 1999 at a weighted average exercise price
of $0.43 and 216,745 shares issuable upon conversion of preferred stock
issuable upon the exercise of warrants outstanding as of December 31,
1999 at a weighted average exercise price of $3.41; and
- 500,000 shares that could be issued to employees who elect to buy stock
in the future under our employee stock purchase plan.
Of the outstanding shares, all of the shares sold in this offering will be
freely tradable, except that any shares held by our affiliates, as that term is
defined in Rule 144 promulgated under the Securities Act, may only be sold in
compliance with the limitations described below. The remaining 34,046,804 shares
of common stock will be deemed "restricted securities" as defined under Rule
144. Restricted shares may be sold in the public market only if they are
registered under the Securities Act or if they qualify for an exemption from
registration under Rules 144, 144(k) or 701 promulgated under the Securities
Act, which rules are summarized below. Subject to the lock-up agreements
described below and the provisions of Rules 144, 144(k) and 701, shares will be
available for sale in the public market as follows:
<TABLE>
<CAPTION>
NUMBER OF
SHARES DATE
- ---------- ----
<C> <S>
3,862,106 After the date of this prospectus, freely tradable shares sold in this offering and shares
eligible for resale under Rule 144(k) that are not subject to the 180-day lock-up.
29,079,047 After 180 days from the date of this prospectus, the 180-day lock-up is released and these
shares are saleable under Rule 144 (subject, in some cases, to volume limitations) or
Rule 144(k).
1,031,438 After 180 days from the date of this prospectus, the 180-day lock-up is released and these
shares are saleable under Rule 701 (subject to repurchase by the Company).
3,924,213 After 180 days from the date of this prospectus, restricted securities that are held for less
than one year and are not yet saleable under Rule 144.
</TABLE>
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RULE 144
In general, under Rule 144 as currently in effect, a person, or group of
persons whose shares are required to be aggregated, including an affiliate who
has beneficially owned shares for at least one year, including the holding
period of any prior owner who is not an affiliate, is entitled to sell within
any three-month period commencing 90 days after the date of this prospectus, a
number of shares that does not exceed the greater of:
- 1% of the then-outstanding shares of our common stock, which will be
approximately 378,968 shares immediately after this offering; or
- the average weekly trading volume in our common stock during the four
calendar weeks preceding the date on which notice of such sale is filed
with the Commission, subject to restrictions.
Sales under Rule 144 are also subject to manner of sale provisions and
notice requirements and to the availability of current public information about
us. In addition, a person who is not deemed to have been an affiliate at any
time during the 90 days preceding a sale and who has beneficially owned the
shares proposed to be sold for at least two years, including the holding period
of any prior owner who is not an affiliate, would be entitled to sell these
shares under Rule 144(k) without regard to the requirements described above. To
the extent that shares were acquired from one of our affiliates, a person's
holding period for the purpose of effecting a sale under Rule 144 would commence
on the date of transfer from the affiliate. The foregoing summary of Rule 144 is
not a complete description.
STOCK OPTIONS
As of December 31, 1999, options to purchase a total of 4,963,097 shares of
common stock were outstanding, 796,143 of which were vested and exercisable.
Following the closing of the offering, we intend to file a Form S-8 registration
statement under the Securities Act to register for resale all shares of common
stock issuable under our 2000 stock incentive plan and our employee stock
purchase plan. Accordingly, shares of common stock underlying these options will
be eligible for sale in the public markets from time to time, subject to vesting
restrictions or the lock-up agreements described below and, in the case of our
affiliates, the volume limitations of Rule 144 described above. See
"Management -- Stock Plans."
LOCK-UP AGREEMENTS
Each of our directors and officers and substantially all of our
securityholders have agreed or have a contractual obligation to agree, subject
to specified exceptions, not to, without the prior written consent of Thomas
Weisel Partners LLC, offer, sell, otherwise dispose of any shares of our common
stock or any securities convertible into or exercisable or exchangeable for
shares of common stock or take any action to do any of the foregoing during the
180-day period following the date of this prospectus. Thomas Weisel Partners LLC
may, in its sole discretion and at any time without notice, release all or any
portion of the securities subject to lock-up agreements. We have agreed not to
offer, sell or otherwise dispose of any shares of our common stock during the
180-day period following the date of this prospectus, other than the grant of
options under our stock plans and the issuance of common stock under those
options.
REGISTRATION RIGHTS
Following this offering, under specified circumstances and subject to
customary conditions, holders of approximately 26,842,693 shares of our
outstanding common stock and warrants to
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purchase up to 216,745 shares of our common stock will have registration rights
with respect to their shares of common stock, subject to the 180-day lock-up
arrangement described above, to require us to register their shares of common
stock under the Securities Act, and rights to participate in any future
registrations of securities. If the holders of these registrable securities
request that we register their shares, and if the registration is effected,
these shares will become freely tradable without restriction under the
Securities Act. Any sales of securities by these stockholders could have a
material adverse effect on the trading price of our common stock. See
"Description of Securities -- Registration Rights."
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UNDERWRITING
GENERAL
Subject to the terms and conditions set forth in an agreement among the
underwriters and us, each of the underwriters named below, through their
representatives, Thomas Weisel Partners LLC, Dain Rauscher Incorporated, SG
Cowen Securities Corporation and DLJdirect Inc., has severally agreed to
purchase from us the aggregate number of shares of common stock set forth
opposite its name below:
<TABLE>
<CAPTION>
NUMBER
UNDERWRITER OF SHARES
----------- ---------
<S> <C>
Thomas Weisel Partners LLC..................................
Dain Rauscher Incorporated..................................
SG Cowen Securities Corporation.............................
DLJdirect Inc. .............................................
---------
Total..................................................... 3,850,000
=========
</TABLE>
The underwriting agreement provides that the obligations of the several
underwriters are subject to various conditions. The nature of the underwriters'
obligations commits them to purchase and pay for all of the shares of common
stock listed above if any are purchased.
The underwriting agreement provides that we will indemnify the underwriters
against liabilities specified in the underwriting agreement under the Securities
Act or will contribute to payments that the underwriters may be required to make
relating to these liabilities.
OVER-ALLOTMENT OPTION
We have granted a 30-day over-allotment option to the underwriters to
purchase up to a total of 577,500 additional shares of our common stock from us
at the initial public offering price, less the underwriting discounts and
commissions, as set forth on the cover page of this prospectus. If the
underwriters exercise this option in whole or in part, then each of the
underwriters will be severally committed, subject to conditions described in the
underwriting agreement, to purchase the additional shares of our common stock in
proportion to their respective commitments set forth in the table above.
COMMISSIONS AND DISCOUNTS
The underwriters propose to offer the shares of common stock directly to
the public at the public offering price set forth on the cover page of this
prospectus, and at this price less a concession not in excess of $ per share
of common stock to other dealers specified in a master agreement among
underwriters who are members of the National Association of Securities Dealers,
Inc. The underwriters may allow, and the other dealers specified may reallow,
concessions, not in excess of $ per share of common stock to these other
dealers. After this offering, the offering price, concessions and other selling
terms may be changed by the underwriters. Our common stock is offered subject to
receipt and acceptance by the underwriters and to other conditions, including
the right to reject orders in whole or in part.
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The following table summarizes the compensation to be paid to the
underwriters by us and the expenses payable by us:
<TABLE>
<CAPTION>
TOTAL
---------------------------------------------
WITHOUT WITH
PER SHARE OVER-ALLOTMENT OVER-ALLOTMENT
--------- -------------- --------------
<S> <C> <C> <C>
Underwriting discounts and commissions paid by
us........................................... $ $ $
Expenses payable by us......................... $ $ $
</TABLE>
RESERVED SHARES
The underwriters, at our request, have reserved for sale at the initial
public offering price up to 358,000 shares of common stock to be sold in this
offering for sale to our employees and other persons designated by us. The
number of shares available for sale to the general public will be reduced to the
extent that any reserved shares are purchased. Any reserved shares not purchased
in this manner will be offered by the underwriters on the same basis as the
other shares offered in this offering.
NO SALES OF SIMILAR SECURITIES
Our directors, officers and securityholders holding a total of 34,034,698
shares of common stock have agreed or have a contractual obligation to agree,
subject to specified exceptions not to offer, sell, agree to sell, directly or
indirectly, or otherwise dispose of any shares of common stock or any securities
convertible into or exchangeable for shares of common stock without the prior
written consent of Thomas Weisel Partners LLC for a period of 180 days after the
date of this prospectus.
We have agreed that for a period of 180 days after the date of this
prospectus we will not, without the prior written consent of Thomas Weisel
Partners LLC, offer, sell, or otherwise dispose of any shares of common stock,
except for the shares of common stock offered in the offering and the shares of
common stock issuable upon exercise of outstanding options and warrants on the
date of this prospectus.
INFORMATION REGARDING THOMAS WEISEL PARTNERS LLC
Thomas Weisel Partners LLC, one of the representatives of the underwriters,
was organized and registered as a broker-dealer in December 1998. Since December
1998, Thomas Weisel Partners LLC has been named as a lead or co-manager on 118
filed public offerings of equity securities, of which 86 have been completed,
and has acted as a syndicate member in an additional 57 public offerings of
equity securities. Thomas Weisel Partners LLC does not have any material
relationship with us or any of our officers, directors or controlling persons,
except with respect to its contractual relationship with us under the
underwriting agreement entered into in connection with this offering.
NASDAQ NATIONAL MARKET LISTING
Prior to this offering, there has been no public market for our common
stock. Consequently, the initial public offering price for our common stock was
determined through negotiations between us and representatives of the
underwriters. Some of the factors considered in these negotiations included our
results of operations in recent periods, estimates of our prospects and the
industry in which we compete, an assessment of our management, the general state
of the securities markets at the time of this offering and the prices of similar
securities of generally comparable companies. We have applied to have our common
stock quoted on the Nasdaq National Market under the symbol "VATA." We
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<PAGE> 88
cannot assure you that an active or orderly trading market will develop for our
common stock or that our common stock will trade in the public markets
subsequent to this offering at or above the initial offering price.
The underwriters do not expect sales of shares of common stock offered by
this prospectus to any accounts over which they exercise discretionary authority
to exceed five percent of the shares offered.
MARKET STABILIZATION, SHORT POSITIONS AND PENALTY BIDS
In order to facilitate this offering, persons participating in this
offering may engage in transactions that stabilize, maintain or otherwise affect
the price of our common stock during and after this offering. Specifically, the
underwriters may over-allot or otherwise create a short position in our common
stock for their own account by selling more shares of common stock than we have
sold to them. The underwriters may elect to cover any short position by
purchasing shares of common stock in the open market or by exercising the
over-allotment option granted to the underwriters. In addition, the underwriters
may stabilize or maintain the price of the common stock by bidding for or
purchasing shares of common stock in the open market and may impose penalty
bids. Under these penalty bids, selling concessions that are allowed to
syndicate members or other broker-dealers participating in this offering are
reclaimed if shares of common stock previously distributed in this offering are
repurchased, usually in order to stabilize the market. The effect of these
transactions may be to stabilize or maintain the market price at a level above
that which might otherwise prevail in the open market. No representation is made
as to the magnitude or effect of any stabilization or other transaction. These
transactions may be effected on the Nasdaq National Market or otherwise and may
be discontinued at any time after they are commenced.
OTHER MATTERS
An electronic prospectus will be made available on the Web site maintained
by DLJdirect. Other than the prospectus in electronic format, the information on
the Web site maintained by DLJdirect relating to this offering is not part of
this prospectus and has not been approved and/or endorsed by us or any
underwriter, other than DLJdirect.
On July 8, 1999, Dain Rauscher Wessels Investors, LLC, an affiliate of Dain
Rauscher Wessels, one of the representatives, purchased 142,857 shares of Series
E preferred stock at a price of $3.50 per share, for a total purchase price of
$500,000.
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LEGAL MATTERS
The validity of the common stock offered will be passed upon for us by
Brobeck, Phleger & Harrison LLP, San Francisco, California. An investment
partnership affiliated with Brobeck, Phleger & Harrison LLP owns a total of
38,198 shares of our preferred stock. John Larson, one of our directors, is a
senior partner of Brobeck, Phleger & Harrison LLP and owns 89,612 shares of our
preferred stock and warrants to purchase 1,589 shares of our common stock.
Orrick, Herrington & Sutcliffe LLP is acting as counsel for the underwriters in
connection with selected legal matters relating to the shares of common stock
offered by this prospectus.
EXPERTS
The consolidated financial statements of Versata, Inc., formerly "Vision
Software Tools, Inc.", as of December 31, 1998 and 1999 and for each of the
three years in the period ended December 31, 1999 included in this prospectus
have been so included in reliance on the report of PricewaterhouseCoopers LLP,
independent accountants, given upon the authority of said firm as experts in
auditing and accounting.
WHERE YOU CAN FIND ADDITIONAL INFORMATION
We have filed with the Securities and Exchange Commission, Washington, D.C.
20549, under the Securities Act a registration statement on Form S-1 relating to
the common stock offered. This prospectus does not contain all of the
information set forth in the registration statement and its exhibits and
schedules. For further information with respect to us and the shares we are
offering under this prospectus, you should refer to the registration statement
and its exhibits and schedules. With respect to statements contained in this
prospectus that refer to any contract, agreement or other document, please refer
to the copy of that contract or other document filed as an exhibit to the
registration statement. Each statement in this prospectus relating to a contract
or document filed as an exhibit is qualified in all respects by the filed
exhibit. Statements contained in this prospectus as to the contents of any
contract, agreement or other document referred to are materially complete. You
may read or obtain a copy of the registration statement, including exhibits, at
the commission's public reference room at 450 Fifth Street, N.W., Washington,
D.C. 20549. You may obtain information on the operation of the public reference
room by calling the commission at 1-800-SEC-0330. The commission maintains a Web
site that contains reports, proxy information statements and other information
regarding registrants that file electronically with the commission. The address
of this Web site is http://www.sec.gov.
As a result of the offering, the information and reporting requirements of
the Securities Exchange Act of 1934 will apply to us. We intend to furnish
holders of our common stock with annual reports containing, among other
information, audited financial statements certified by an independent public
accounting firm and quarterly reports containing unaudited condensed financial
information for the first three quarters of each fiscal year. We intend to
furnish other reports as we may determine or as may be required by law.
85
<PAGE> 90
VERSATA, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Accountants........................... F-2
Consolidated Balance Sheets................................. F-3
Consolidated Statements of Operations....................... F-4
Consolidated Statements of Stockholders' Equity............. F-5
Consolidated Statements of Cash Flows....................... F-6
Notes to Consolidated Financial Statements.................. F-7
</TABLE>
F-1
<PAGE> 91
REPORT OF INDEPENDENT ACCOUNTANTS
The reincorporation described in Note 16 to the consolidated financial
statements had not been consummated at February 9, 2000. When it has been
consummated, we will be in a position to furnish the following report:
"To the Stockholders and Board of Directors of
Versata, Inc.
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, of stockholders' equity and of
cash flows present fairly, in all material respects, the financial position of
Versata, Inc. (formerly Vision Software Tools, Inc.) and its subsidiaries at
December 31, 1998 and 1999, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 1999, in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above."
PricewaterhouseCoopers LLP
San Jose, California
February 9, 2000
F-2
<PAGE> 92
VERSATA, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA
STOCKHOLDERS'
DECEMBER 31, EQUITY AT
-------------------- DECEMBER 31,
1998 1999 1999
-------- -------- -------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 5,767 $ 20,655
Accounts receivable, net of allowance for doubtful
accounts................................................ 1,511 5,587
Unbilled receivable....................................... -- 1,584
Prepaid expenses and other current assets................. 214 2,311
-------- --------
Total current assets.................................. 7,492 30,137
Property and equipment, net................................. 853 1,902
Notes receivable from officers.............................. 100 134
Intangible assets........................................... -- 1,389
Other assets................................................ 23 98
-------- --------
$ 8,468 $ 33,660
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 804 $ 2,025
Accrued liabilities....................................... 1,504 7,298
Equipment loan, current portion........................... 333 94
Capital lease obligations, current portion................ 63 72
Deferred revenue.......................................... 910 4,433
-------- --------
Total current liabilities............................. 3,614 13,922
Equipment loan, non current................................. 298 268
Capital lease obligations, non current...................... 88 52
Other long-term liabilities................................. 112 --
-------- --------
4,112 14,242
-------- --------
Commitments (Note 3, Note 14 and 15)
Stockholders' equity:
Convertible preferred stock, issuable in series, $0.001
par value; 30,580,000 shares authorized; 28,751,180
shares designated; 19,070,637 and 26,572,909 shares
issued and outstanding, respectively, actual; no shares
issued and outstanding, pro forma....................... 19 26 $ --
Common stock, $0.001 par value: 40,000,000 shares
authorized; 2,243,699 and 7,204,111 shares issued and
outstanding, respectively, actual; 150,000,000 shares
authorized, 33,777,020 shares issued and outstanding,
pro forma............................................... 1 7 33
Additional paid-in capital................................ 37,059 89,905 89,905
Notes receivable from stockholders........................ (44) (2,413) (2,413)
Unearned stock-based compensation......................... (1,104) (14,732) (14,732)
Accumulated deficit....................................... (31,575) (53,375) (53,375)
-------- -------- --------
Total stockholders' equity............................ 4,356 19,418 $ 19,418
-------- -------- ========
$ 8,468 $ 33,660
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE> 93
VERSATA, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------
1997 1998 1999
---------- ---------- -----------
<S> <C> <C> <C>
Revenue:
Software license............................... $ 526 $ 1,924 $ 6,729
Services....................................... 880 2,026 5,853
---------- ---------- -----------
Total revenue............................. 1,406 3,950 12,582
---------- ---------- -----------
Cost of revenue:
Software license............................... 127 234 499
Services (exclusive of non-cash stock-based
compensation of $64 in 1998 and $515 in
1999)....................................... 1,184 2,248 6,121
---------- ---------- -----------
Total cost of revenue..................... 1,311 2,482 6,620
---------- ---------- -----------
Gross profit..................................... 95 1,468 5,962
---------- ---------- -----------
Operating expense:
Sales and marketing (exclusive of non-cash
stock-based compensation of $74 in 1998 and
$2,351 in 1999)............................. 4,779 4,495 15,609
Product development (exclusive of non-cash
stock-based compensation of $49 in 1998 and
$815 in 1999)............................... 3,547 3,275 4,769
General and administrative (exclusive of
non-cash stock based compensation of $15 in
1998 and $274 in 1999)...................... 1,781 1,379 3,125
Stock-based compensation....................... -- 202 3,955
---------- ---------- -----------
Total operating expense................... 10,107 9,351 27,458
---------- ---------- -----------
Loss from operations............................. (10,012) (7,883) (21,496)
Interest expense................................. (96) (365) (655)
Other income..................................... 264 114 351
---------- ---------- -----------
Net loss......................................... (9,844) (8,134) (21,800)
Deemed preferred stock dividend.................. -- -- (10,800)
---------- ---------- -----------
Net loss attributable to common stockholders..... $ (9,844) $ (8,134) $ (32,600)
========== ========== ===========
Net loss per share attributable to common
stockholders:
Basic and diluted.............................. $ (5.72) $ (3.99) $ (9.18)
========== ========== ===========
Weighted average shares outstanding............ 1,720,649 2,038,393 3,552,409
========== ========== ===========
Unaudited pro forma net loss per share
attributable to common stockholders:
Basic and diluted.............................. $ (0.87)
===========
Weighted average shares outstanding............ 24,923,904
===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE> 94
VERSATA, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
CONVERTIBLE NOTES
PREFERRED STOCK COMMON STOCK ADDITIONAL RECEIVABLE UNEARNED
------------------- ------------------ PAID-IN FROM STOCK-BASED
SHARES AMOUNT SHARES AMOUNT CAPITAL STOCKHOLDERS COMPENSATION
---------- ------ --------- ------ ---------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1997......... 5,882,628 $ 6 1,763,260 $ 1 $14,420 $ (9) $ --
Series C convertible preferred
stock issued for cash, net of
issuance costs of $90............. 5,729,110 6 -- -- 9,128 -- --
Series C convertible preferred
stock issued upon conversion and
cancellation of bridge loans and
accrued interest.................. 478,920 -- -- -- 771 -- --
Series C first closing convertible
preferred stock converted to
common stock due to non-
participation of an investor in
the second closing................ (3,150) -- 3,150 -- -- -- --
Payments from and recission of
notes receivable from
stockholders, net................. -- -- (55,000) -- (6) 9 --
Common stock issued for cash upon
exercise of stock options......... -- -- 18,176 -- 4 -- --
Net loss........................... -- -- -- -- -- -- --
---------- --- --------- --- ------- ------- --------
Balance 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 (44) --
Unearned stock-based
compensation...................... -- -- -- -- 1,306 -- (1,306)
Amortization of unearned
stock-based compensation.......... -- -- -- -- -- -- 202
Net loss........................... -- -- -- -- -- -- --
---------- --- --------- --- ------- ------- --------
Balances at December 31, 1998...... 19,070,637 19 2,243,699 1 37,059 (44) (1,104)
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 -- --
Stock-based compensation expense... -- -- -- -- 815 -- --
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 on
exercise of options............... -- -- 3,715,535 4 1,863 (1,867) --
Payments on notes receivable from
shareholders...................... -- -- -- -- -- 54 --
Common stock issued upon exercise
of warrants....................... -- -- 76,854 -- 87 -- --
Series F convertible preferred
stock issued for cash, net of
issuance cost of $25.............. 2,777,698 3 -- -- 15,416 -- --
Issuance of Series F convertible
preferred stock in exchange for
notes receivable.................. 100,000 -- -- -- 556 (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) -- --
Unearned stock-based
compensation...................... -- -- -- -- 16,768 -- (16,768)
Amortization of unearned
stock-based compensation.......... -- -- -- -- -- -- 3,140
Net loss........................... -- -- -- -- -- -- --
---------- --- --------- --- ------- ------- --------
Balance at December 31, 1999....... 26,572,909 $26 7,204,111 $ 7 $89,905 $(2,413) $(14,732)
========== === ========= === ======= ======= ========
<CAPTION>
ACCUMULATED
DEFICIT TOTAL
----------- --------
<S> <C> <C>
Balance at January 1, 1997......... $(13,597) $ 821
Series C convertible preferred
stock issued for cash, net of
issuance costs of $90............. -- 9,134
Series C convertible preferred
stock issued upon conversion and
cancellation of bridge loans and
accrued interest.................. -- 771
Series C first closing convertible
preferred stock converted to
common stock due to non-
participation of an investor in
the second closing................ -- --
Payments from and recission of
notes receivable from
stockholders, net................. -- 3
Common stock issued for cash upon
exercise of stock options......... -- 4
Net loss........................... (9,844) (9,844)
-------- --------
Balance 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.......................... -- 57
Unearned stock-based
compensation...................... -- --
Amortization of unearned
stock-based compensation.......... -- 202
Net loss........................... (8,134) (8,134)
-------- --------
Balances at December 31, 1998...... (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
Stock-based compensation expense... -- 815
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 on
exercise of options............... -- --
Payments on notes receivable from
shareholders...................... -- 54
Common stock issued upon exercise
of warrants....................... -- 87
Series F convertible preferred
stock issued for cash, net of
issuance cost of $25.............. -- 15,419
Issuance of Series F convertible
preferred stock in exchange for
notes receivable.................. -- --
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)
Unearned stock-based
compensation...................... -- --
Amortization of unearned
stock-based compensation.......... -- 3,140
Net loss........................... (21,800) (21,800)
-------- --------
Balance at December 31, 1999....... $(53,375) $ 19,418
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE> 95
VERSATA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1997 1998 1999
------- ------- --------
<S> <C> <C> <C>
Cash flows used in operating activities:
Net loss.................................................. $(9,844) $(8,134) $(21,800)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization........................... 547 537 495
Provision for doubtful accounts......................... (15) 223 586
Warrants issued in connection with bridge loans recorded
as interest expense.................................... -- 137 521
Stock-based compensation expense........................ -- 202 3,955
Change in operating assets and liabilities:
Increase in accounts receivable....................... (18) (1,198) (4,662)
Increase in unbilled receivable....................... -- -- (1,584)
Increase (decrease) in prepaid expenses and other
current assets....................................... 34 (68) (2,005)
Increase in other assets.............................. -- -- (68)
Increase in accounts payable and accrued
liabilities.......................................... 552 933 6,606
Increase in deferred revenue.......................... 145 654 3,523
Increase (decrease) in other long-term liabilities.... 30 (285) (112)
------- ------- --------
Net cash used in operating activities.............. (8,569) (6,999) (14,545)
------- ------- --------
Cash flows used in investing activities:
Purchase of property and equipment........................ (402) (299) (1,469)
Increase in notes receivable from officers................ -- -- (34)
Net cash used in connection with acquisition.............. -- -- (586)
------- ------- --------
Net cash used in investing activities.............. (402) (299) (2,089)
------- ------- --------
Cash flows from financing activities:
Principal payments under capital lease obligations........ (111) (100) (76)
Net proceeds from issuance of convertible preferred
stock................................................... 9,134 8,270 27,976
Proceeds from equipment loan.............................. 1,000 -- --
Payments on equipment loan................................ (53) (316) (631)
Proceeds from equipment line.............................. -- -- 362
Proceeds from issuance of common stock.................... 4 57 552
Proceeds from exercise of warrants........................ -- -- 285
Payments from stockholders on notes receivable............ 3 -- 54
Proceeds from bridge loans................................ -- 2,816 3,000
------- ------- --------
Net cash provided by financing activities.......... 9,977 10,727 31,522
------- ------- --------
Net increase in cash and cash equivalents.......... 1,006 3,429 14,888
Cash and cash equivalents at beginning of the year.......... 1,332 2,338 5,767
------- ------- --------
Cash and cash equivalents at end of the year................ $ 2,338 $ 5,767 $ 20,655
======= ======= ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the period for interest.................... $ 96 $ 110 $ 72
======= ======= ========
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING
ACTIVITIES
Common stock and convertible preferred stock issued for
notes receivable from stockholders........................ $ -- $ 44 $ 2,423
======= ======= ========
Issuance of preferred stock upon conversion and cancellation
of bridge loans and accrued interest...................... $ 771 $ 2,935 $ 3,058
======= ======= ========
Issuance of convertible preferred stock in connection with
acquisition............................................... $ -- $ -- $ 461
======= ======= ========
Property and equipment obtained through capital lease....... $ -- $ -- $ 49
======= ======= ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE> 96
VERSATA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- ORGANIZATION:
Versata, Inc. (the "Company") (formerly Vision Software Tools, Inc.) was
incorporated on August 27, 1991. The Company's software product and related
services enable customers to deploy e-business software applications that can be
modified to meet changing business requirements.
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries. All significant intercompany balances and
transactions have been eliminated.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. Such estimates include the allowance for doubtful accounts,
valuation of deferred tax assets and the value of the Company's common stock.
Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents are stated at cost and consist primarily
certificates of deposits and money market funds. The Company includes in cash
and cash equivalents all highly liquid investments which mature within three
months of their purchase date.
The portfolio of cash and cash equivalents consisted of the following (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1998 1999
------ -------
<S> <C> <C>
Cash........................................................ $ 223 $ 1,329
Money market funds.......................................... 5,544 6,826
Certificates of deposit..................................... -- 12,500
------ -------
$5,767 $20,655
====== =======
</TABLE>
FAIR VALUE OF FINANCIAL INSTRUMENTS
The reported amounts of certain of the Company's financial instruments
including cash and cash equivalents, receivables, accounts payable and accrued
liabilities approximate fair value due to their short maturities. The reported
amounts of loans payable and capital lease obligations approximate fair value
due to the market interest rates which these debts bear.
CONCENTRATION OF CREDIT RISK
Financial instruments which potentially subject the Company to
concentrations of credit risk consist primarily of temporary cash investments,
certificates of deposit, money market accounts, and
F-7
<PAGE> 97
VERSATA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
billed and unbilled accounts receivable. The Company places its temporary cash
investments with one major financial institution. At December 31, 1998 and 1999,
the Company had deposits in excess of federally insured limits of $5,667,000 and
$20,555,000, respectively.
The Company performs ongoing customer credit evaluations within the context
of the industry in which it operates, does not require collateral, and maintains
reserves for potential credit losses on customer accounts when deemed necessary.
To date, such losses have been within management's expectations.
The following table sets forth customers comprising 10% or more of the
Company's total revenue for each of the periods presented:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
--------------------
CUSTOMER 1997 1998 1999
-------- ---- ---- ----
<S> <C> <C> <C>
A...................................................... 14% -- --
B...................................................... 10% -- --
C...................................................... -- 18% --
D...................................................... -- 13% --
E...................................................... -- -- 12%
</TABLE>
At December 31, 1998, four customers accounted for 37% of accounts
receivable. At December 31, 1999, one customer accounts for 21% of accounts
receivable.
INTANGIBLE ASSETS
Intangible assets resulting from the acquisition of Pragma 6 S.A. ("Pragma
6") were estimated by management to be primarily associated with goodwill.
Intangible assets are amortized on a straight-line basis over the estimated
period of benefit, which is three years (see Note 3).
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.
LONG-LIVED ASSETS
The Company accounts for long-lived assets under Statement of Financial
Accounting Standards ("SFAS") No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of, which requires
the 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
F-8
<PAGE> 98
VERSATA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
be recoverable. When such an event occurs, the 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 is less than the carrying amount
of the asset, an impairment loss is recognized. To date, no impairment loss has
been recognized.
REVENUE RECOGNITION
The Company derives revenue from two sources as follows: (i) software
license revenue to end users, VARs, system integrators and OEMs and (ii)
services revenue which include consulting, training services and customer
support. To date there have been only a limited number of transactions involving
licenses with OEMs, VARs or system integrators that allow subsequent resale to
end-user customers. Effective January 1, 1998, the Company adopted SOP 97-2,
Software Revenue Recognition, with the exception of the provision deferred by
SOP 98-4, Deferral of the Effective Date of a Provision of SOP 97-2. In
accordance with the adopted provisions of SOP 97-2, the Company records revenue
from licensing of software products to end-users when a license agreement is
signed by both parties, the fee is fixed and determinable, collection is
probable and delivery of the product has occurred. The Company's business
practice is to 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 and 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, the Company recognizes revenue for the delivered elements based upon
the residual contract value as prescribed by SOP 98-9, Modifications of SOP
97-2, Software Revenue Recognition. Undelivered elements consist primarily of
postcontract customer support ("PCS") and other services such as consulting and
training. VSOE is established based on the price charged when the element is
sold separately. Services are not considered essential to the functionality of
the software. The Company recognizes revenue allocated to maintenance and
support ratably over the period of the maintenance and the support contracts,
respectively, which is generally twelve months. For revenue allocated to
consulting services, such as training, the Company recognizes revenue as the
related services are performed. For licensing of the Company's software to OEMs,
VARs and systems integrators which involve minimum non-refundable royalty
prepayment, the royalty prepayment is recognized upon delivery of the product
provided that a license agreement is signed by both parties, the fee is fixed
and determinable and collection is probable.
The Company does not generally grant a right of return to its end-user
customers or to its VARs, OEMs and system integrators. In certain limited cases,
however, the Company granted its customers the right to exchange products
purchased for future products to be made available by the Company over the term
of the agreements. When these exchange rights are available over an extended
period of time and it cannot be demonstrated that future products will have no
more than minimal differences from current products in price, functionality or
features, the Company accounts for these as product return rights. When such
returns cannot be reasonably estimated, the associated revenues are deferred.
UNBILLED RECEIVABLE
Fees from arrangements which provide for extended payment terms are
recognized as revenue when payments become due. The portion of fees related to
either products delivered or services
F-9
<PAGE> 99
VERSATA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
rendered which are not due under the Company's standard payment terms are
reflected in deferred revenue and in unbilled receivable until payments become
due.
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.
INCOME TAXES
The 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 the Company's financial
statements or tax returns. The measurement of current and deferred tax
liabilities and assets are based on provisions of the enacted tax law. The
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.
COMPREHENSIVE INCOME
The Company adopted the provisions of SFAS No. 130, Reporting Comprehensive
Income, effective January 1, 1998. This statement requires companies to classify
items of comprehensive income by their nature in the financial statements and
display the accumulated balance of comprehensive income separately from retained
earnings and additional paid-in capital in the equity section of the balance
sheet. For the years ended December 31, 1997, 1998 and 1999, foreign currency
translation adjustments included in comprehensive income were insignificant.
There were no other items of comprehensive income.
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 years ended December 31, 1997, 1998
and 1999. Foreign currency transaction gains and losses have been immaterial to
date.
F-10
<PAGE> 100
VERSATA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
CERTAIN RISKS AND UNCERTAINTIES
The Company's products are concentrated in the industry segment for
internet infrastructure software which 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
which the Company licenses from a limited number of suppliers. Also, the Company
has depended on a limited number of products and customers 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 and operating
results.
NET LOSS PER SHARE
The Company computes net loss per share in accordance with SFAS No. 128,
Earnings per Share and SEC Staff Accounting Bulletin ("SAB") No. 98. Under the
provisions of SFAS No. 128 and SAB No. 98, 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, incremental common or preferred
shares issuable upon the exercise of stock options and warrants and shares
issuable upon conversion of the Series A, Series B, Series C, Series D, Series E
and Series F convertible preferred stock.
The following table sets forth the computation of basic and diluted net
loss per share attributable to common stockholders of the period indicated (in
thousands, except share and per share data):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------
1997 1998 1999
---------- ---------- -----------
<S> <C> <C> <C>
Numerator:
Net loss........................................ $ (9,844) $ (8,134) $ (21,800)
Deemed preferred stock dividend................. -- -- (10,800)
---------- ---------- -----------
Net loss attributable to common stockholders.... $ (9,844) $ (8,134) $ (32,600)
========== ========== ===========
Denominator:
Weighted average shares outstanding............. 1,720,649 2,038,393 4,736,621
Weighted average unvested shares of common stock
subject to repurchase........................ -- -- (1,184,212)
---------- ---------- -----------
Denominator for basic and diluted calculation... 1,720,649 2,038,393 3,552,409
========== ========== ===========
Net loss per share attributable to common
stockholders:
Basic and diluted............................... $ (5.72) $ (3.99) $ (9.18)
========== ========== ===========
</TABLE>
F-11
<PAGE> 101
VERSATA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following table sets forth weighted average potential shares of common
stock that are not included in the diluted net loss per share calculation above
because to do so would be anti-dilutive for the periods indicated:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------
1997 1998 1999
---------- ---------- ----------
<S> <C> <C> <C>
Weighted average effect of common stock equivalents:
Unvested common stock subject to repurchase......... -- -- 1,184,212
Options outstanding................................. 2,624,001 3,440,635 4,486,093
Shares resulting from the conversion of the:
Series A convertible preferred stock............. 1,480,000 1,480,000 1,481,667
Series B convertible preferred stock............. 4,402,628 4,402,628 4,402,628
Series C convertible preferred stock............. 2,967,354 6,204,880 6,217,739
Series D convertible preferred stock............. -- 1,577,981 6,983,129
Series E convertible preferred stock............. -- -- 1,974,289
Series F convertible preferred stock............. -- -- 312,043
Warrants to purchase convertible preferred stock.... 55,093 58,010 230,718
Warrants to purchase common stock................... 137,850 226,332 602,347
---------- ---------- ----------
Total common stock equivalents excluded from the
computation of earnings per share as their
effect was antidilutive........................ 11,666,926 17,390,466 27,874,865
========== ========== ==========
</TABLE>
PRO FORMA STOCKHOLDERS' EQUITY (UNAUDITED)
Upon consummation of the offering, the conversion rate for all outstanding
shares of Series A, Series B, Series C, Series D, Series E and Series F
preferred stock will be a ratio of one share of common stock for each share of
preferred stock. Concurrent with the effectiveness of the offering, the shares
of preferred stock will convert into shares of common stock at such one-for-one
conversion rate. The pro forma effects of these transactions are unaudited and
have been reflected in the accompanying pro forma Stockholders' Equity at
December 31, 1999.
SEGMENT INFORMATION
Effective January 1, 1998, the Company adopted the provisions of SFAS No.
131, Disclosures about Segments of an Enterprise and Related Information. The
Company identifies its operating segments based on business activities,
management responsibility and geographical location. For all periods presented,
the Company 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 from international
sales, predominantly Europe, represented approximately 14.1% of the Company's
total revenue for the year ended December 31, 1999.
STOCK-BASED COMPENSATION
The 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
F-12
<PAGE> 102
VERSATA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 the
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 11. The 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.
RECLASSIFICATIONS
Certain reclassifications have been made to the 1997 and the 1998 financial
statements to conform to the 1999 presentation.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities. SFAS No. 133
establishes a new model for accounting for derivatives and hedging activities
and supercedes and amends a number of existing accounting standards. SFAS No.
133 requires that all derivatives be recognized in the balance sheet at their
fair market value and the corresponding derivative gains or losses be either
reported in the statement of operations or as a deferred item depending on the
type of hedge relationship that exists with respect to such derivatives. In July
1999, the Financial Accounting Standards Board issued SFAS No. 137, Accounting
for Derivative Instruments and Hedging Activities -- Deferral of the Effective
Date of FASB Statement No. 133. SFAS No. 137 deferred the effective date until
the quarter ending June 30, 2000. The Company will adopt SFAS No. 133 in its
quarter ending June 30, 2000 and has not determined whether the adoption of this
pronouncement will have a material impact on its financial condition or results
of operations.
NOTE 3 -- ACQUISITION:
Effective December 27, 1999, the Company acquired all the outstanding
shares of Pragma 6, a corporation incorporated in France. The acquisition has
been accounted for using the purchase method of accounting and accordingly, the
purchase price has been allocated to the tangible and intangible assets acquired
and liabilities assumed on the basis of their relative fair values on the
acquisition date. The total purchase consideration for Pragma 6 of approximately
$1,155,000 consisted of 33,960 shares of the Company's Series F preferred stock
with an estimated fair value of approximately $408,000, $559,000 in cash and an
estimated $188,000 in acquisition costs, including 4,487 shares of the Company's
Series F preferred stock with an estimated fair value of approximately $53,000.
The terms of the transaction also provide for contingent consideration of up to
15,140 and 7,000 shares of the Company's Series F preferred stock upon
attainment of financial goals at December 31, 2000 and December 31, 2001,
respectively. Of the total purchase price, $124,000 was allocated to tangible
assets, $358,000 to liabilities assumed and $1,389,000 to intangible assets,
comprised principally of goodwill with an estimated useful life of 36 months.
F-13
<PAGE> 103
VERSATA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following unaudited pro forma consolidated financial information
reflects the results of operations for the years ended December 31, 1998 and
1999, as if the acquisition had occurred on January 1, 1998, after giving effect
to purchase accounting adjustments. These pro forma results have been prepared
for comparative purposes only, do not purport to be indicative of what operating
results would have been had the acquisition actually taken place on January 1,
1998, and may not be indicative of future operating results (in thousands,
except share and per share amounts):
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
---------------------------
1998 1999
----------- -----------
(UNAUDITED)
<S> <C> <C>
Total revenue........................................... $ 4,172 $ 12,646
Net loss................................................ (8,703) (22,864)
Net loss per share:
Basic and diluted..................................... $ (4.19) $ (6.37)
Weighted average shares............................... 2,076,840 3,590,856
</TABLE>
NOTE 4 -- BALANCE SHEET COMPONENTS (IN THOUSANDS):
ACCOUNTS RECEIVABLE
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1998 1999
------ ------
<S> <C> <C>
Accounts receivable......................................... $1,811 $6,473
Less allowance for doubtful accounts........................ (300) (886)
------ ------
$1,511 $5,587
====== ======
</TABLE>
PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
DECEMBER 31,
ESTIMATED -------------------
USEFUL LIFE 1998 1999
----------- ------- -------
(YEARS)
<S> <C> <C> <C>
Equipment.......................................... 3 $ 1,640 $ 3,006
Furniture and fixtures............................. 5 238 336
Leasehold improvements............................. 2 49 80
Equipment under capital leases..................... 3 - 5 476 525
------- -------
2,403 3,947
Less: Accumulated depreciation and amortization.... (1,550) (2,045)
------- -------
$ 853 $ 1,902
======= =======
</TABLE>
Accumulated amortization related to equipment under capital leases at
December 31, 1998 and 1999 totaled approximately $356, and $427, respectively.
F-14
<PAGE> 104
VERSATA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
ACCRUED LIABILITIES
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1998 1999
------ ------
<S> <C> <C>
Accrued payroll and related liabilities..................... $ 603 $2,573
Accrued royalties........................................... 365 365
Accrued professional fees................................... 166 2,045
Other accrued liabilities................................... 370 2,315
------ ------
$1,504 $7,298
====== ======
</TABLE>
NOTE 5 -- RELATED PARTY TRANSACTIONS:
In September 1994, the Company entered into a Software Development Services
Agreement ("Services Agreement") with Duet Technologies, Inc. (DT, formerly
known as Software and Technologies, Inc.), which is owned by a former member of
the Board of Directors, whereby DT would provide the Company with assistance in
the development of two products at discounted hourly rates. In accordance with
the Services Agreement, the Company recorded a liability of $554,000,
representing the total obligation to DT in consideration for discounts granted
for the services performed. This amount is to be paid in a form of a royalty
equal to 10% of the Company's revenues from certain products. At December 31,
1999, a net balance of $112,000 was outstanding and is recorded in current
liabilities.
In 1995, the Company established a loan facility to the then President
pursuant to which he may borrow on an evergreen revolving basis, up to $100,000.
Amounts drawn under such facility are subject to a 6.0% interest rate. Any
amounts borrowed are secured by 200,000 shares of common stock pledged by the
individual as collateral. In September 1999, the loan facility was extended for
an additional year under the same terms and conditions. At December 31, 1999,
the principal amount outstanding on this facility was $100,000.
In March 1999, the Company loaned to an officer a sum of $45,000 for
relocation costs, repayable in three installments of $15,000 each in March 2000,
March 2001 and March 2002. The principal of the note and any unpaid interest
bear interest at a rate of 5.0% per annum. The principal and any accrued
interest will be forgiven ratably over a three year period subject to continued
employment of the officer. The note is collateralized by all stock options
granted to the officer. At December 31, 1999, a balance of $34,000 was
outstanding.
During 1999, the Company provided consulting services to Xpede, Inc. which
is partly owned by one of the Company's directors. The Company recognized
$458,000 in revenue from these consulting activities in 1999.
NOTE 6 -- BORROWINGS:
EQUIPMENT LOAN
In January 1997, the Company entered into an Equipment Loan Facility
Arrangement with a bank (the "Equipment Loan") which provides for the purchase
of fixed assets of up to $1,000,000, with any amounts borrowed generally due
within 42 months of the date of the agreement. Borrowings under the line of
credit bear interest at the bank's prime rate plus 0.75% (8.5% and 9.25% at
F-15
<PAGE> 105
VERSATA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1998 and 1999, respectively). In connection with the Equipment
Loan, the Company was required to meet certain financial covenants, the most
restrictive of which is the maintenance of tangible net worth of at least
$1,000,000. At September 30, 1998, the terms of the Equipment Loan were amended
and the bank agreed to waive the Company's non compliance with certain
covenants. In consideration for the waiver, the Company issued a warrant to
purchase 10,000 shares of Series D preferred stock at an exercise price of $1.61
per share, expiring five years from the date of issuance. The value of the
warrant as determined using the Black-Scholes option pricing model was not
significant (see Note 10.) Under the terms of the Equipment Loan, the Company is
prohibited from paying dividends while any amounts are outstanding or while the
bank is committed to fund any advances under the facility. The Equipment Loan
was fully repaid in December 1999.
EQUIPMENT LINE
In August 1999, the Company obtained a capital financing line (the
"Equipment Line") which provides for the purchase of up to $1,000,000 in fixed
assets 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, the 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
December 31, 1999, borrowings of $362,000 were outstanding against the Equipment
Line.
Future minimum payments under the Equipment Loan at December 31, 1999 are
as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
1999
------------
<S> <C>
YEAR ENDING DECEMBER 31,
2000............................................... $ 94
2001............................................... 107
2002............................................... 161
----
Total principal amounts due...................... 362
Less: Current portion.............................. (94)
----
$268
====
</TABLE>
UNSECURED CONVERTIBLE BRIDGE LOAN
In April 1999, certain existing stockholders and other new investors
provided unsecured convertible bridge loans to the Company totaling $3,000,000.
Borrowings bear interest at the prime rate plus 2% per annum. In July 1999, the
principal and accrued interest outstanding were converted into 873,626 shares of
Series E convertible preferred. In connection with these loans, the Company
issued warrants to purchase 218,407 shares of Series E preferred stock at $3.50
per share. The warrants expire five years from the date of issuance. The fair
market value of the warrants was approximately $521,000 as determined using the
Black-Scholes option pricing model (see Note 10) and was recognized as interest
expense during the period prior to the conversion of the loan into Series E
preferred stock.
F-16
<PAGE> 106
VERSATA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7 -- INCOME TAXES:
The primary components of the net deferred tax asset are as follows (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1998 1999
-------- --------
<S> <C> <C>
Net operating loss carryforwards............................ $ 11,181 $ 18,155
Research and experimentation credit carryforwards........... 822 1,050
Other long-term liabilities................................. 322 555
Deferred revenue............................................ 7 (32)
Property and equipment...................................... (127) 54
-------- --------
12,205 19,782
Less: Valuation allowance................................... (12,205) (19,782)
-------- --------
$ -- $ --
======== ========
</TABLE>
Due to uncertainty surrounding the realization of the favorable tax
attributes in future tax returns, the Company has recorded a valuation allowance
against its net deferred tax asset. The valuation allowance increased by
$3,494,000 and $7,577,000 in 1998 and 1999, 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 December 31, 1999 the 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):
<TABLE>
<CAPTION>
DECEMBER 31,
1999
------------------
FEDERAL STATE
------- -------
<S> <C> <C>
Net operating loss carryforwards............................ $45,014 $25,881
Research and experimentation credit carryforwards........... 635 415
</TABLE>
The federal net operating loss and research and experimentation credit
carryforwards expire through 2019 (through 2004 for state net operating loss
carryforwards) if not used beforehand to offset taxable income or tax
liabilities. For federal and state tax purposes, the 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.
F-17
<PAGE> 107
VERSATA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8 -- CONVERTIBLE PREFERRED STOCK:
At December 31, 1999, convertible preferred stock is comprised of the
following:
<TABLE>
<CAPTION>
NUMBER OF SHARES
-------------------------
ISSUED AND LIQUIDATION
SERIES DESIGNATED OUTSTANDING AMOUNT VALUE
------ ---------- ----------- ------- -----------
(THOUSANDS)
<S> <C> <C> <C> <C>
A....................................... 1,500,000 1,500,000 $ 2,431 $ 2,250
B....................................... 4,540,000 4,402,628 11,859 11,887
C....................................... 6,711,180 6,277,752 10,017 10,107
D....................................... 7,000,000 6,983,129 11,205 11,243
E....................................... 5,000,000 4,493,255 15,656 15,726
F....................................... 4,000,000 2,916,145 16,359 16,214
---------- ---------- ------- -------
28,751,180 26,572,909 $67,527 $67,427
========== ========== ======= =======
</TABLE>
DIVIDENDS
The holders of the outstanding preferred stock are entitled to receive in
any fiscal year, when and if declared by the Board of Directors, out of any
funds legally available, cash dividends at the annual rate of $0.15 per share
for Series A, $0.27 per share for Series B, $0.16 per share for Series C, $0.16
per share for Series D, $0.35 per share for Series E and $0.556 per share for
Series F, payable in preference and priority to any payment of any dividend on
common stock. The right to dividends on the preferred stock is not cumulative,
and no right will accrue to holders of preferred stock by reason of the fact
that dividends on such shares are not declared or paid in any prior year.
LIQUIDATION PREFERENCE
In the event of any liquidation, dissolution or winding up of the Company,
either voluntary or involuntary, the holders of Series F preferred stock shall
be entitled to receive, an amount per share equal to the sum of (i) $5.56 for
each outstanding share of Series F preferred stock (the "Original Issue Price"),
and (ii) an amount equal to declared but unpaid dividends on such share. If upon
the occurrence of such event, the assets and funds distributed among the Series
A, Series B, Series C, Series D and Series E preferred stock as specified in the
Articles of Incorporation of the Company and the Series F preferred stock as
specified above, are insufficient to permit the payment to such holders of the
full aforesaid preferential amounts, then the entire assets and funds of the
Company legally available for distribution shall be distributed ratably among
the holders of the Series A, Series B, Series C, Series D, Series E and Series F
preferred stock in proportion to the preferential amount each such holder is
otherwise entitled to.
After the distributions as described above, the remaining assets of the
Company available for distribution to shareholders shall be distributed among
the holders of Series A, Series B, Series C, Series D, Series E and Series F
preferred stock and common stock pro rata based on the number of shares of
common stock held by each (assuming full conversion of all such Series A, Series
B, Series C, Series D, Series E and Series F preferred stock). After payment has
been made to the holders of the preferred stock of the Liquidation Preference,
the holders of the preferred stock and common stock are entitled to receive the
remaining assets of the Company in proportion to the
F-18
<PAGE> 108
VERSATA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
number of shares of common stock which would be held by each such holder if all
shares of preferred stock then held by each such holder were converted into
common stock at the then effective conversion prices (as defined).
CONVERSION
Each share of preferred stock is convertible, at the option of the holder,
at any time after the date of issuance of such shares, into the number of fully
paid and nonassessable shares of common stock as is determined by dividing the
original issuance price by the conversion price, determined at the time of
conversion. The conversion rate is one share of common stock for each share of
preferred stock.
Each share of preferred stock will automatically convert into shares of
common stock at the then effective conversion price in the event of the
effectiveness of a firm commitment underwritten public offering pursuant to an
effective registration statement under the Securities Act of 1933, as amended,
(the "Securities Act") or at the election of the holders of a majority of the
outstanding shares of preferred stock, voting together as a class on an
as-converted basis or in the event that less than 20% of the preferred stock
outstanding on the purchase date (as defined) remains outstanding.
VOTING RIGHTS
Except as otherwise required by law, the holders of preferred stock and the
holders of common stock are entitled to notice of any stockholders' meeting and
to vote as a single class upon any matter submitted to the shareholders for a
vote, as follows: (i) each holder of preferred stock have one vote for each full
share of common stock into which its respective shares of preferred stock would
be convertible on the record date for the vote and (ii) the holders of common
stock have one vote per share.
For so long as at least 750,000 shares of Series A are outstanding, the
holders of shares of Series A voting as a class, are entitled to elect two
directors. For so long as at least 2,201,000 shares of Series B are outstanding,
the holders of shares of Series B voting as a class are entitled to elect two
directors. For so long as the number of shares of Series C, Series D and Series
E and Series F and any subsequently issued Series of preferred stock that remain
outstanding is greater than or equal to the sum of (i) 3,105,590 shares and (ii)
one half the number of shares of any subsequent series of preferred stock
outstanding on the final purchase date (as defined), the holders of shares of
Series C, Series D, Series E and Series F and any subsequently issued Series of
preferred stock then outstanding voting as a class are entitled to elect two
directors.
NOTE 9 -- COMMON STOCK
The Company's Certificate of Incorporation, as amended, authorizes the
Company to issue 40,000,000 shares of common stock.
Certain common stock option holders have the right to exercise unvested
options, subject to a repurchase right held by the Company, in the event of
voluntary or involuntary termination of employment of the stockholder. As of
December 31, 1999, 2,164,582 shares of common stock were subject to repurchase
by the Company at the original exercise price. Of the total shares issued with a
right of repurchase, 3,715,535 shares were issued in exchange for notes
receivable of $1,867,000
F-19
<PAGE> 109
VERSATA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
which are full recourse and additionally collateralized by the underlying shares
of common stock. These notes receivable are payable on various dates through
December 2002 and bear interest at a fixed rate of 7.0% per annum. These notes
receivable have been included in stockholders' equity.
At December 31, 1999, the Company had reserved shares of common stock for
future issuance as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
1999
-------------
<S> <C>
Conversion of Series A preferred stock............. 1,500,000
Conversion of Series B preferred stock............. 4,402,628
Conversion of Series C preferred stock............. 6,277,752
Conversion of Series D preferred stock............. 6,993,129
Conversion of Series E preferred stock............. 4,700,000
Conversion of Series F preferred stock............. 2,916,145
Exercise of options under stock option plans....... 6,416,563
----------
33,206,217
==========
</TABLE>
NOTE 10 -- WARRANTS:
In connection with certain services rendered by consultants and certain
equipment and bridge loans, the Company issued warrants to purchase shares of
the Company's preferred stock and common stock. The following warrants were
outstanding as of December 31, 1999:
<TABLE>
<CAPTION>
FISCAL FISCAL
YEAR OF NUMBER NUMBER NUMBER EXERCISE YEAR OF
GRANT ISSUED OUTSTANDING EXERCISABLE PRICE EXPIRATION VALUE
------- ------- ----------- ----------- -------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Series D preferred stock
warrants....................... 1998 10,000 10,000 10,000 $1.61 2003 de minimus
Series E preferred stock
warrants....................... 1999 218,407 206,745 206,745 $3.50 2004 $521,000
Common stock warrants............ 1997 95,400 95,400 95,400 $1.50 2002 de minimus
Common stock warrants............ 1998 465,061 442,582 442,582 $0.20 2003 $137,000
</TABLE>
The Company calculated the minimum fair value of all warrants on the date
of grant using the Black-Scholes options model as prescribed by SFAS No. 123
with the following underlying assumptions: expected volatility of 80%, risk free
interest rates ranging from 4.7% to 6.3%, zero dividends, and terms of five
years.
The fair market value of the warrants issued in conjunction with the loans
was approximately $521,000 and was recognized as interest expense during the
period prior to the conversion of the loan into shares of preferred stock. The
fair market value of the warrants issued to non-employees was $815,000 and was
recognized during the period during which the services were performed.
NOTE 11 -- STOCK OPTIONS:
The Company's original stock option plan was the Vision Software, Inc. 1994
Employee, Director and Consultant Stock Option Plan ("the 1994 Plan"), pursuant
to which key employees, directors and consultants of the Company were granted
options to purchase shares of common stock. Options granted under the Plan
include incentive stock options and nonqualified stock options. Stock options
granted under the 1994 Plan generally vest over fifty months.
F-20
<PAGE> 110
VERSATA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In July 1996, the Board of Directors of the Company approved the Vision
Software Tools, Inc. 1996 Stock Option Plan ("the 1996 Plan"). The 1996 Plan, as
amended, provides for the grant of options to purchase shares of the Company's
common stock to key employees, non-employee directors and consultants. These
options have terms similar to that of options granted under the 1994 Plan. Under
the 1994 and 1996 Plans, options granted were immediately exercisable and
unvested shares were subject to repurchase by the Company.
In November 1996, the Board of Directors of the Company approved the Vision
Software Tools, Inc. 1997 Stock Option Plan ("the 1997 Plan"). The 1997 Plan
provides for the issuance of shares (includes options granted and available for
grant) of the Company's common stock to key employees, non-employee directors
and consultants. The 1997 Plan was the successor to the Company's existing 1994
and 1996 Plans ("the Predecessor Plans"). All options outstanding under the
Predecessor Plans were incorporated into the 1997 Plan and were treated as
outstanding options under the 1997 Plan. However, each outstanding option so
incorporated continued to be governed solely by the terms of the documents
evidencing such option, and no provisions of the 1997 Plan were deemed to affect
or otherwise modify the rights or obligations of the holders of such
incorporated options with respect to their acquisition of shares of common
stock. These options have terms similar to options granted under the Predecessor
Plans.
The following table summarizes activity under the Company's stock option
plans:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
-----------------------
WEIGHTED
AVERAGE
OPTIONS EXERCISE
AVAILABLE PRICE PER
FOR GRANT SHARES SHARE
---------- ---------- ---------
<S> <C> <C> <C>
Balance at December 31, 1996......................... 63,395 2,198,831 0.21
Additional options authorized...................... 931,677 -- --
Options granted.................................... (1,437,373) 1,437,373 0.20
Options exercised.................................. -- (22,176) 0.22
Options canceled................................... 659,590 (659,590) 0.22
---------- ----------
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
========== ==========
</TABLE>
F-21
<PAGE> 111
VERSATA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following table summarizes information concerning outstanding and
exercisable options as of December 31, 1999:
<TABLE>
<CAPTION>
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
- ------------------------ --------- ------------ --------- ------- ---------
<S> <C> <C> <C> <C> <C>
$0.10 - $0.25 2,076,852 8.5 $0.20 743,305 $0.20
$0.25 - $0.50 9,950 5.1 0.30 9,950 0.30
$1.00 - $1.25 194,120 9.6 1.25 4,070 1.25
$2.25 - $2.50 1,439,950 9.8 2.50 19,756 2.50
$2.50 - $3.00 490,400 9.9 3.00 11,725 3.00
$3.00 - $5.56 751,825 10.0 5.56 7,337 5.56
--------- -------
4,963,097 9.3 2.00 796,143 0.35
========= =======
</TABLE>
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
the Company has accounted for its employee stock options granted under the fair
value method. The fair value for these options was estimated using the
Black-Scholes option pricing model.
The 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:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------
1997 1998 1999
------------ ------------ ------------
<S> <C> <C> <C>
Risk-free rates............................ 5.80% - 6.77% 4.18% - 5.63% 4.91% - 6.19%
Expected lives (in years).................. 5.0 5.0 5.0
Dividend yield............................. 0.0% 0.0% 0.0%
Expected volatility........................ 0.0% 0.0% 0.0%
</TABLE>
The weighted average fair value of these options granted in 1997, 1998 and
1999 was $0.047, $0.044 and $4.16, respectively.
F-22
<PAGE> 112
VERSATA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Had compensation costs been determined based upon the fair value at the
grant date for awards under these plans, consistent with the methodology
prescribed under SFAS No. 123, the Company's pro forma net loss attribute 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):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1997 1998 1999
------- ------- --------
<S> <C> <C> <C>
Net loss attributable to common stockholders
As reported............................................ $(9,844) $(8,134) (32,600)
Pro forma.............................................. $(9,897) $(8,214) (33,073)
Net loss per share attributable to common stockholders
As reported............................................ $ (5.72) $ (3.99) (9.18)
Pro forma.............................................. $ (5.75) $ (4.03) (9.31)
</TABLE>
In November 1999, the Board of Directors authorized, subject to
stockholders' approval, (i) establishment of the Employee Stock Purchase Plan
2000 ("ESPP") with 500,000 shares reserved for issuance and (ii) the 2000 Stock
Incentive Plan with an additional 2,500,000 shares authorized. The ESPP and the
2000 Stock Incentive Plan will become effective upon signing of the underwriting
agreement.
UNEARNED STOCK-BASED COMPENSATION
In connection with certain stock option grants, the Company recognized
unearned compensation which 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 the Company from January 1, 1997 through
December 31, 1999 was $18,074,000. Amortization expense recognized during the
year ended December 31, 1998 and 1999 was $202,000 and $3,140,000, respectively.
During January 2000, the Company granted options to purchase 1,436,100
shares of common stock to existing and new employees at a weighted average
exercise price of $6.61 per share. In connection with these grants, the Company
recognized approximately $9.2 million in unearned compensation that will be
recognized over the related vesting period.
NOTE 12 -- EMPLOYEE BENEFIT PLANS:
In May 1995, the 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
the Company. No contributions were made by the Company during the years ended
December 31, 1997, 1998 and 1999.
Effective September 1, 1998, the Company adopted a nonqualified deferred
compensation plan which permits eligible officers and key employees to defer a
portion of their compensation. At December 31, 1998 and 1999, the deferred
compensation amounts together with accumulated interest, which are distributable
in cash after retirement or termination of employment, amounted to approximately
$50,000 and $310,000, respectively.
F-23
<PAGE> 113
VERSATA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 13 -- PRO FORMA NET LOSS PER SHARE (UNAUDITED):
Pro forma net loss per share for the year ended December 31, 1999 is
computed using the weighted average number of common shares outstanding,
including the pro forma effects of the conversion of the Company's Series A,
Series B, Series C, Series D, Series E and Series F convertible preferred stock
into shares of the Company's common stock effective upon the closing of the
Company's initial public offering as if such conversion occurred on January 1,
1998, or at date of original issuance, if later. The resulting pro forma
adjustment includes an increase in the weighted average shares used to compute
basic and diluted net loss per share of 21,371,495 for the year ended December
31, 1999. The calculations of pro forma diluted net loss per share excludes
potential common shares as the effect would be anti-dilutive. Pro forma common
equivalent shares are composed of unvested restricted common stock and
incremental common shares issuable upon the exercise of stock options and
warrants.
NOTE 14 -- STRATEGIC RELATIONSHIP WITH IBM
On September 27, 1999, the Company entered into a Joint Product and
Marketing Agreement with IBM (the "Agreement") to co-sell the Company's
products. The Agreement also includes joint marketing programs.
Under the Agreement, each party will pay the other a percentage of all
product license fees for the integrated product, as defined. The Agreement
terminates on December 31, 2001 with automatic annual renewals each January 1
until December 31, 2005, subject to earlier termination under specified
circumstances.
The Company and IBM are committed to spend a total of $2,225,000 in
co-marketing programs during the first three quarters of 2000.
NOTE 15 -- COMMITMENTS:
The Company has entered into leases for certain office space and equipment
with original terms ranging from 36 to 60 months. 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.
F-24
<PAGE> 114
VERSATA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Future minimum lease payments under all noncancelable leases at December
31, 1999 are as follows (in thousands):
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
------- ---------
<S> <C> <C>
YEAR ENDING DECEMBER 31,
2000........................................................ $ 89 $811
2001........................................................ 47 6
2002........................................................ -- --
2003........................................................ -- --
---- ----
Total minimum lease payments.............................. 136 $817
====
Less interest............................................... (12)
----
Present value of minimum lease payments..................... 124
Less current portion........................................ (72)
----
$ 52
====
</TABLE>
Rent expense for the years ended December 31, 1997, 1998 and 1999 was
approximately $303,000, $477,000, and $529,000, respectively.
NOTE 16 -- SUBSEQUENT EVENTS:
REINCORPORATION
The Company intends to reincorporate in the State of Delaware prior to the
effectiveness of its initial public offering. In addition, the Company changed
its name to Versata, Inc. All references to the Company and share and par value
information included in these consolidated financial statements have been
adjusted to reflect these changes.
ACQUISITIONS
On January 20, 2000, the Company entered into two Asset Purchase Agreements
(the "Agreements") with McGilly Information Systems, Inc. and with Webink
Computer Consultants, Inc. (the "Acquired Companies") pursuant to which the
Company agreed to purchase assets from the Acquired Companies, in exchange for a
total of 72,000 shares of the Company's Series F preferred stock and $100,000 in
cash. The Agreements also provide for contingent consideration of up to
$603,700. The additional consideration will be reduced for each of the former
employees of the Acquired Companies who are no longer employees of the Company
on the first and second anniversary of the closing date. These acquisitions will
be accounted for using the purchase method of accounting, and accordingly, the
purchase price of each acquisition will be allocated to identifiable assets
acquired, including intangible assets, and liabilities assumed on the basis of
their fair values. A significant portion of the purchase price is considered to
relate to work force in place.
OFFERING OF SERIES F PREFERRED STOCK
In January 2000, the Company completed an additional offering of Series F
preferred stock. Pursuant to this offering, a total of 269,784 additional shares
of Series F preferred stock were sold at a price of $5.56 per share, for
proceeds to the Company of approximately $1.5 million. The holders of these
Series F preferred stock have the same rights as those holders of the Series F
issued prior to December 31, 1999 as discussed in Note 8.
F-25
<PAGE> 115
PROSPECTUS
[VERSATA LOGO]
3,850,000 Shares
Common Stock
THOMAS WEISEL PARTNERS LLC
DAIN RAUSCHER WESSELS
SG COWEN
DLJDIRECT INC.
- --------------------------------------------------------------------------------
NEITHER WE NOR ANY OF THE UNDERWRITERS HAVE AUTHORIZED ANYONE TO PROVIDE
INFORMATION DIFFERENT FROM THAT CONTAINED IN THIS PROSPECTUS. WHEN YOU MAKE A
DECISION ABOUT WHETHER TO INVEST IN OUR COMMON STOCK, YOU SHOULD NOT RELY UPON
ANY INFORMATION OTHER THAN THE INFORMATION IN THIS PROSPECTUS. NEITHER THE
DELIVERY OF THIS PROSPECTUS NOR THE SALE OF OUR COMMON STOCK MEANS THAT
INFORMATION CONTAINED IN THIS PROSPECTUS IS CORRECT AFTER THE DATE OF THIS
PROSPECTUS. THIS PROSPECTUS IS NOT AN OFFER TO SELL OR SOLICITATION OF AN OFFER
TO BUY THESE SHARES OF COMMON STOCK IN ANY CIRCUMSTANCES UNDER WHICH THE OFFER
OR SOLICITATION IS UNLAWFUL.
UNTIL , 2000 (25 DAYS AFTER COMMENCEMENT OF THIS OFFERING), ALL
DEALERS THAT BUY, SELL OR TRADE THESE SHARES OF COMMON STOCK, WHETHER OR NOT
PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS
AN ADDITION TO THE DEALERS' OBLIGATION TO DELIVER A PROSPECTUS WHEN ACTING AS
UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
<PAGE> 116
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the costs and expenses, other than the
underwriting discounts and commissions, payable by us in connection with the
sale of common stock being registered. All amounts are estimates except the SEC
registration fee, the NASD filing fees and the Nasdaq National Market listing
fee.
<TABLE>
<S> <C>
SEC Registration Fee........................................ $ 15,196
NASD Filing Fee............................................. 6,250
Nasdaq National Market Listing Fee.......................... 95,000
Printing and Engraving Expenses............................. 300,000
Legal Fees and Expenses..................................... 600,000
Accounting Fees and Expenses................................ 600,000
Blue Sky Fees and Expenses.................................. 3,000
Transfer Agent Fees......................................... 10,000
Miscellaneous............................................... 60,000
----------
Total............................................. 1,689,446
</TABLE>
- -------------------------
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law authorizes a court to
award or a corporation's board of directors to grant indemnification to
directors and officers in terms sufficiently broad to permit the indemnification
under some circumstances for liabilities (including reimbursement for expenses
incurred) arising under the Securities Act of 1933, as amended (the "Securities
Act"). Article VII, Section 6 of our bylaws provides for mandatory
indemnification of our directors and officers and permissible indemnification of
employees and other agents to the maximum extent permitted by the Delaware
General Corporation Law. Our certificate of incorporation provides that, subject
to Delaware law, our directors will not be personally liable for monetary
damages for breach of the directors' fiduciary duty as directors to Versata,
Inc. and its stockholders. This provision in the certificate of incorporation
does not eliminate the directors' fiduciary duty, and in appropriate
circumstances equitable remedies such as injunctive or other forms of
non-monetary relief will remain available under Delaware law. In addition, each
director will continue to be subject to liability for breach of the director's
duty of loyalty to the company or our stockholders for acts or omissions not in
good faith or involving intentional misconduct, for knowing violations of law,
for actions leading to improper personal benefit to the director, and for
payment of dividends or approval of stock repurchases or redemptions that are
unlawful under Delaware law. The provision also does not affect a director's
responsibilities under any other law, such as the federal securities laws or
state or federal environmental laws.
Prior to the consummation of the offering, we plan to enter into
indemnification agreements with our officers and directors, a form of which will
be filed with the Securities and Exchange Commission as an exhibit to our
registration statement on Form S-1 (No. 333-92451). The indemnification
agreements provide our officers and directors with further indemnification to
the maximum extent permitted by the Delaware General Corporation Law. We also
expect to obtain an insurance policy covering directors and officers for claims
they may otherwise be required to pay or for which we are required to indemnify
them. Reference is also made to the underwriting agreement contained in
II-1
<PAGE> 117
exhibit 1.1 hereto, indemnifying our officers and directors against specific
liabilities, and our Fourth Amended and Restated Registration Rights Agreement
contained in exhibit 10.3 hereto, indemnifying the parties thereto, including
controlling stockholders, against liabilities.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
During the past three years, the registrant has issued unregistered
securities to a limited number of persons as described below:
1. From November 1994 to February 1997, we issued warrants to purchase
150,775 shares of common stock at an exercise price of $1.50 per share to
various advisors and consultants.
2. In October 1996, we issued convertible promissory notes in the
principal amount of $750,000 to an accredited investor. The note and
accrued interest thereon was cancelled and converted into shares of Series
C preferred stock on January 28, 1997.
3. From December 1996 to April 1999, we issued warrants to purchase
37,779 shares of Series C preferred stock to Robert Davoli as compensation
for consulting services at an exercise price of $1.61 per share.
4. From January 1997 to May 1997, we issued 6,204,880 shares of Series
C preferred stock to accredited investors for total cash consideration of
$9,989,856, which includes conversion of the convertible promissory notes
and accrued interest thereon described in Item 2 above into a total of
478,920 shares of Series C preferred stock.
5. From March 1998 to September 1998, we issued convertible promissory
notes in the principal amount of $2,875,809 and warrants to purchase
465,061 shares of common stock at an exercise price of $0.20 per share to
accredited investors. The notes and accrued interest thereon were cancelled
and converted into a total of 1,823,013 shares of Series D preferred stock
on September 22, 1998.
6. In September 1998, we issued a warrant to purchase 10,000 shares of
Series D preferred stock to a financial institution in connection with a
working line of credit at an exercise price of $1.61 per share.
7. From September 1998 to December 1998, we issued 6,983,129 shares of
Series D preferred stock to accredited investors for total cash
consideration of $11,242,868, which includes conversion of the convertible
promissory notes and accrued interest thereon described in Item 5 above
into a total 1,748,949 shares of Series D preferred stock.
8. On April 21, 1999, we issued convertible promissory notes in the
principal amount of $3,000,000 and warrants to purchase 218,407 shares of
Series E preferred stock at an exercise price of $3.50 per share to
accredited investors. The notes and accrued interest thereon were cancelled
and converted into shares of Series E preferred stock on August 8, 1999.
9. From July 1999 to October 1999, we issued 4,481,593 shares of
Series E preferred stock to accredited investors for total cash
consideration of $15,685,583, which includes conversion of the convertible
promissory notes and accrued interest thereon described in Item 8 above
into a total of 873,628 shares of Series E preferred stock.
10. On November 30, 1999, we issued 2,877,698 shares of Series F
preferred stock to accredited investors for total cash consideration of
$16,000,000.
II-2
<PAGE> 118
11. Since inception through December 1, 1999, we have granted a total
of 9,939,114 options to purchase our common stock, excluding options
returned to our stock plans, with a weighted average price of $0.62 to a
number of our employees, directors and consultants.
12. On December 27, 1999, we issued 38,447 shares of Series F
preferred stock in connection with the acquisition of a French corporation
for aggregate consideration of $213,765.
13. On January 19, 2000, we issued 269,784 shares of Series F
preferred stock to accredited investors for a total cash consideration of
$1,500,000.
14. On January 24, 2000, we issued 72,000 shares of Series F preferred
stock in connection with the acquisition of certain assets of two
consulting services organizations for a total consideration of $400,320.
None of the foregoing transactions involved any underwriters, underwriting
discounts or commissions, or any public offering, and we believe that each
transaction was exempt from the registration requirements of the Securities Act
by virtue of Section 4(2) thereof, Regulation D promulgated thereunder or Rule
701 with respect to compensatory benefit plans and contracts relating to
compensation as provided under Rule 701. The recipients in each transaction
represented their intention to acquire the securities for investment only and
not with a view to or for sale in connection with any distribution thereof, and
appropriate legends were affixed to the share certificates and instruments
issued in these transactions. All recipients had adequate access, through their
relationships with us, to information about us.
II-3
<PAGE> 119
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------- -----------------------
<S> <C> <C>
1.1** Form of Underwriting Agreement.
3.1 Amended and Restated Certificate of Incorporation of
Versata, to be effective upon consummation of this offering.
3.2* Amended and Restated Bylaws of Versata, to be effective upon
consummation of this offering.
4.1 Form of Specimen Common Stock Certificate.
5.1* Opinion of Brobeck, Phleger & Harrison LLP regarding the
legality of the common stock being registered.
10.1** 2000 Stock Incentive Plan of Versata.
10.2** Employee Stock Purchase Plan of Versata.
10.3** Fourth Amended and Restated Investors' Rights Agreement,
among Versata and some of its stockholders, dated November
30, 1999.
10.4 Form of Indemnification Agreement to be entered into between
Versata and each of its directors and executive officers.
10.5** Office Lease dated June 17, 1997, between Versata and
Webster Street Partners, Ltd., for 2101 Webster.
10.6** Agreement of Sublease dated October 18, 1999, between
Versata and ICF Kaiser International, Inc.
10.7** Loan and Security Agreement, dated January 23, 1997, between
Versata and Venture Banking Group, a division of Cupertino
National Bank, as amended September 22, 1998.
10.8** Senior Loan and Security Agreement, dated August 20, 1999,
between Versata and Phoenix Leasing Incorporated, as amended
on October 1, 1999.
10.9+ Joint Product and Marketing Agreement, dated September 27,
1999, between Versata and IBM.
21.1** Subsidiaries of Versata.
23.1 Consent of PricewaterhouseCoopers LLP, Independent
Accountants.
23.2* Consent of Brobeck, Phleger & Harrison LLP (contained in
their opinion filed as Exhibit 5.1).
24.1** Power of Attorney.
27.1** Financial Data Schedule.
</TABLE>
- -------------------------
* To be filed by amendment
** Filed previously.
+ Confidential treatment requested as to some portions of this exhibit.
(b) FINANCIAL STATEMENT SCHEDULE
ITEM 17. UNDERTAKINGS
We undertake to provide to the underwriters at the closing specified in the
underwriting agreement, certificates in such denominations and registered in
such names as required by the underwriters to permit prompt delivery to each
purchaser.
To the extent indemnification for liabilities arising under the Securities
Act may be permitted to our directors, officers and controlling persons
according to the Delaware General Corporation Law,
II-4
<PAGE> 120
our certificate of incorporation or our bylaws, indemnification agreements
entered into between the company and our officers and directors, the
underwriting agreement, or otherwise, we have been advised that in the opinion
of the commission this indemnification is against public policy as expressed in
the Securities Act, and is, therefore, unenforceable. If a claim for
indemnification against these liabilities (other than the payment by us of
expenses incurred or paid by any of our directors, officers or controlling
persons in the successful defense of any action, suit or proceeding) is asserted
by a director, officer or controlling person in connection with the securities
being registered, we will, unless in the opinion of our counsel the matter has
been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question of whether this indemnification by us is against
public policy as expressed in the Securities Act and will be governed by the
final adjudication of the issue.
The undersigned registrant undertakes:
(1) For purposes of determining any liability under the Securities
Act, the information omitted from the form of Prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained in a
form of Prospectus filed by us under Rule 424(b)(1) or (4) or 497(h) of the
Securities Act shall be deemed to be part of this registration statement as
of the time it was declared effective;
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of those securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-5
<PAGE> 121
SIGNATURES
Under the requirements of the Securities Act of 1933, as amended, the
registrant has duly caused this registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of San
Francisco, State of California, on February 28, 2000.
VERSATA, INC.
By: /s/ JOHN A. HEWITT, JR.
------------------------------------
John A. Hewitt, Jr.
President and Chief Executive
Officer
Under the requirements of the Securities Act of 1933, this Registration
Statement has been signed by the following persons in the capacities and on the
dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ JOHN A. HEWITT, JR. President, Chief Executive February 28, 2000
- ----------------------------------------------------- Officer and Director
John A. Hewitt, Jr. (Principal Executive
Officer)
* Chief Financial Officer and February 28, 2000
- ----------------------------------------------------- Secretary (Principal
Kevin Ferrell Accounting Officer)
* Vice President, Development February 28, 2000
- ----------------------------------------------------- and Chief Technology
Val Huber Officer
* Vice President, Sales February 28, 2000
- -----------------------------------------------------
Peter Harrison
* Vice President, Marketing February 28, 2000
- -----------------------------------------------------
Michael DeVries
* Vice President, February 28, 2000
- ----------------------------------------------------- Professional Services
Michael Stangl
* Chairman of the Board February 28, 2000
- -----------------------------------------------------
Gary Morgenthaler
* Director February 28, 2000
- -----------------------------------------------------
Naren Bakshi
</TABLE>
II-6
<PAGE> 122
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
* Director February 28, 2000
- -----------------------------------------------------
Robert Davoli
* Director February 28, 2000
- -----------------------------------------------------
Donald W. Feddersen
* Director February 28, 2000
- -----------------------------------------------------
John W. Larson
Director February 28, 2000
- -----------------------------------------------------
Kanwal Rekhi
* Director February 28, 2000
- -----------------------------------------------------
Eugene Wong
*By: /s/ JOHN A. HEWITT, JR. Director February 28, 2000
- -----------------------------------------------------
John A. Hewitt, Jr., Attorney-in-Fact
</TABLE>
II-7
<PAGE> 123
REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE
The reincorporation described in Note 16 to the consolidated financial
statements had not been consummated at February 8, 2000. When it has been
consummated, we will be in a position to furnish the following report:
"To the Stockholders and Board of Directors
Versata, Inc.
In connection with our audits of the consolidated financial statements of
Versata, Inc. (formerly Vision Software Tools, Inc.) as of December 31, 1998 and
1999 and for each of the three years in the period ended December 31, 1999,
which financial statements are included in the Registration Statement, we have
also audited the financial statement schedule listed in Item 27.1 herein.
In our opinion, this financial statement schedule, when considered in
relation to the basic financial statements taken as a whole, presents fairly, in
all material respects, the information required to be included therein."
PricewaterhouseCoopers LLP
San Jose, California
February , 2000
II-8
<PAGE> 124
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE AT BALANCE AT
DESCRIPTION BEGINNING OF YEAR ADDITIONS DEDUCTIONS END OF YEAR
----------- ----------------- --------- ---------- -----------
<S> <C> <C> <C> <C>
Allowance for doubtful accounts for the
years ended:
December 31, 1996....................... $ -- 92 -- $ 92
December 31, 1997....................... 92 -- (15) 77
December 31, 1998....................... 77 223 -- 300
December 31, 1999....................... 300 689 (103) 886
Allowance for deferred tax asset accounts
for the years ended:
December 31, 1996....................... $ 1,863 3,244 -- $ 5,107
December 31, 1997....................... 5,107 3,604 -- 8,711
December 31, 1998....................... 8,711 3,494 -- 12,205
December 31, 1999....................... 12,205 7,577 -- 19,782
</TABLE>
II-9
<PAGE> 125
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------- -----------------------
<S> <C> <C>
1.1** Form of Underwriting Agreement.
3.1 Amended and Restated Certificate of Incorporation of
Versata, to be effective upon consummation of this offering.
3.2* Amended and Restated Bylaws of Versata, to be effective upon
consummation of this offering.
4.1 Form of Specimen Common Stock Certificate.
5.1* Opinion of Brobeck, Phleger & Harrison LLP regarding the
legality of the common stock being registered.
10.1** 2000 Stock Incentive Plan of Versata.
10.2** Employee Stock Purchase Plan of Versata.
10.3** Fourth Amended and Restated Investors' Rights Agreement,
among Versata and some of its stockholders, dated November
30, 1999.
10.4 Form of Indemnification Agreement to be entered into between
Versata and each of its directors and executive officers.
10.5** Office Lease dated June 17, 1997, between Versata and
Webster Street Partners, Ltd., for 2101 Webster.
10.6** Agreement of Sublease dated October 18, 1999, between
Versata and ICF Kaiser International, Inc.
10.7** Loan and Security Agreement, dated January 23, 1997, between
Versata and Venture Banking Group, a division of Cupertino
National Bank, as amended September 22, 1998.
10.8** Senior Loan and Security Agreement, dated August 20, 1999,
between Versata and Phoenix Leasing Incorporated, as amended
on October 1, 1999.
10.9+ Joint Product and Marketing Agreement, dated September 27,
1999, between Versata and IBM.
21.1** Subsidiaries of Versata.
23.1 Consent of PricewaterhouseCoopers LLP, Independent
Accountants.
23.2* Consent of Brobeck, Phleger & Harrison LLP (contained in
their opinion filed as Exhibit 5.1).
24.1** Power of Attorney.
27.1** Financial Data Schedule.
</TABLE>
- -------------------------
* To be filed by amendment
** Previously filed
+ Confidential treatment requested as to some portions of this exhibit.
<PAGE> 1
EXHIBIT 3.1
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
VERSATA, INC.
The undersigned, John A. Hewitt, Jr., hereby certifies that:
ONE: He is the duly elected, qualified and acting President and
Secretary of Versata, Inc., a Delaware corporation.
TWO: The Certificate of Incorporation of said corporation was
originally filed in the Office of the Secretary of State of the State of
Delaware on February __, 2000.
THREE: The Amended and Restated Certificate of Incorporation of
said corporation is amended and restated to read in its entirety as follows:
ARTICLE I
The name of this corporation is Versata, Inc. (the
"Corporation").
ARTICLE II
The address of the Corporation's registered office in the State
of Delaware is 1013 Centre Road, City of Wilmington, County of New Castle,
Delaware 19801. The name of the Corporation's registered agent at such address
is the Corporation Service Company.
ARTICLE III
The nature of the business or purposes to be conducted or
promoted is to engage in any lawful act or activity for which corporations may
be organized under the General Corporation Law of the State of Delaware (the
"GCL").
ARTICLE IV
The Corporation is authorized to issue two classes of stock to be
designated, respectively, "Common Stock" and "Preferred Stock." The total number
of shares that the Corporation is authorized to issue is One Hundred Fifty Five
Million (155,000,000). One Hundred Fifty Million (150,000,000) shares shall be
Common Stock, par value $0.001 per share, and Five Million (5,000,000) shares
shall be Preferred Stock, par value $0.001 per share.
The Preferred Stock may be issued from time to time in one or
more series, without further stockholder approval. The Board of Directors of the
Corporation is hereby authorized to fix or alter the rights, preferences,
privileges and restrictions granted to or imposed
<PAGE> 2
upon each series of Preferred Stock, and the number of shares constituting any
such series and the designation thereof, or of any of them. The rights,
privileges, preferences and restrictions of any such additional series may be
subordinated to, pari passu with (including, without limitation, inclusion in
provisions with respect to liquidation and acquisition preferences, redemption
and/or approval of matters by vote), or senior to any of those of any present or
future class or series of Preferred Stock or Common Stock. The Board of
Directors is also authorized to increase or decrease the number of shares of any
series prior or subsequent to the issue of that series, but not below the number
of shares of such series then outstanding. In case the number of shares of any
series shall be so decreased, the shares constituting such decrease shall resume
the status which they had prior to the adoption of the resolution originally
fixing the number of shares of such series.
ARTICLE V
In furtherance and not in limitation of the powers conferred by
statute, the Board of Directors is expressly authorized to make, repeal, alter,
amend and rescind any or all of the Bylaws of the Corporation. In addition, the
Bylaws may be amended by the affirmative vote of holders of at least sixty-six
and two-thirds percent (66 2/3%) of the outstanding shares of voting stock of
the Corporation entitled to vote at an election of directors.
ARTICLE VI
The number of directors of the Corporation shall be determined by
resolution of the Board of Directors.
Elections of directors need not be by written ballot unless the
Bylaws of the Corporation shall so provide. Advance notice of stockholder
nominations for the election of directors and of any other business to be
brought before any meeting of the stockholders shall be given in the manner
provided in the Bylaws of this Corporation.
At each annual meeting of stockholders, directors of the
Corporation shall be elected to hold office until the expiration of the term for
which they are elected, or until their successors have been duly elected and
qualified; except that if any such election shall not be so held, such election
shall take place at a stockholders' meeting called and held in accordance with
the GCL.
The directors of the Corporation shall be divided into three (3)
classes as nearly equal in size as is practicable, hereby designated Class I,
Class II and Class III. For the purposes hereof, the initial Class I, Class II
and Class III directors shall be those directors so designated by a resolution
of the Board of Directors. At the first annual meeting of stockholders following
the closing of the initial public offering of the Corporation's Common Stock,
the term of office of the Class I directors shall expire and Class I directors
shall be elected for a full term of three (3) years. At the second annual
meeting of stockholders following the closing of the initial public offering of
the Corporation's Common
2
<PAGE> 3
Stock, the term of office of the Class II directors shall expire and Class II
directors shall be elected for a full term of three (3) years. At the third
annual meeting of stockholders following the initial public offering of the
Corporation's Common Stock, the term of office of the Class III directors shall
expire and Class III directors shall be elected for a full term of three (3)
years. At each succeeding annual meeting of stockholders, directors shall be
elected for a full term of three (3) years to succeed the directors of the class
whose terms expire at such annual meeting. If the number of directors is
hereafter changed, each director then serving as such shall nevertheless
continue as a director of the Class of which he is a member until the expiration
of his current term and any newly created directorships or decrease in
directorships shall be so apportioned among the classes as to make all classes
as nearly equal in number as is practicable.
Vacancies occurring on the Board of Directors for any reason may
be filled by vote of a majority of the remaining members of the Board of
Directors, even if less than a quorum, at any meeting of the Board of Directors.
A person so elected by the Board of Directors to fill a vacancy shall hold
office for the remainder of the full term of the director for which the vacancy
was created or occurred and until such director's successor shall have been duly
elected and qualified. A director may be removed from office by the affirmative
vote of the holders of 66 2/3% of the outstanding shares of voting stock of the
Corporation entitled to vote at an election of directors, provided that such
removal is for cause.
ARTICLE VII
Stockholders of the Corporation shall take action by meetings
held pursuant to this Amended and Restated Certificate of Incorporation and the
Bylaws and shall have no right to take any action by written consent without a
meeting. Meetings of stockholders may be held within or without the State of
Delaware, as the Bylaws may provide. Special meetings of the stockholders, for
any purpose or purposes, may only be called by the Chief Executive Officer,
President, Chairman of the Board or a majority of the members of the Board of
Directors. The books of the Corporation may be kept (subject to any provision
contained in the statutes) outside the State of Delaware at such place or places
as may be designated from time to time by the Board of Directors or in the
Bylaws of the Corporation.
ARTICLE VIII
To the fullest extent permitted by applicable law, this
Corporation is authorized to provide indemnification of (and advancement of
expenses to) directors, officers, employees and agents (and any other persons to
which Delaware law permits this Corporation to provide indemnification) through
Bylaw provisions, agreements with such agents or other persons, vote of
stockholders or disinterested directors or otherwise, in excess of the
indemnification and advancement otherwise permitted by Section 145 of the GCL,
subject only to limits created by applicable Delaware law (statutory or
non-statutory), with respect to action for breach of duty to the Corporation,
its stockholders, and others.
No director of the Corporation shall be personally liable to the
Corporation or any stockholder for monetary damages for breach of fiduciary duty
as a director, except for any matter in respect of which such director shall be
liable under Section 174 of the GCL or any amendment thereto or shall be liable
by reason that, in addition to any and all other requirements for such
liability, such director (1) shall have breached the director's duty or loyalty
to the
3
<PAGE> 4
Corporation or its stockholders, (2) shall have acted in manner involving
intentional misconduct or a knowing violation of law or, in failing to act,
shall have acted in a manner involving intentional misconduct or a knowing
violation of law, or (3) shall have derived an improper personal benefit. If the
GCL is hereafter amended to authorize the further elimination or limitation of
the liability of a director, the liability of a director of the Corporation
shall be eliminated or limited to the fullest extent permitted by the GCL, as so
amended.
Each person who was or is made a party or is threatened to be
made a party to or is in any way involved in any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative (hereinafter a "proceeding"), including any appeal therefrom, by
reason of the fact that he or she, or a person of whom he or she is the legal
representative, is or was a director or officer of the Corporation or a direct
or indirect subsidiary of the Corporation, or is or was serving at the request
of the Corporation as a director or officer of another entity or enterprise, or
was a director or officer of a foreign or domestic corporation which was
predecessor corporation of the Corporation or of another entity or enterprise at
the request of such predecessor corporation, shall be indemnified and held
harmless by the Corporation, and the Corporation shall advance all expenses
incurred by any such person in defense of any such proceeding prior to its final
determination, to the fullest extent authorized by the GCL. In any proceeding
against the Corporation to enforce these rights, such person shall be presumed
to be entitled to indemnification and the Corporation shall have the burden of
proving that such person has not met the standards of conduct for permissible
indemnification set forth in the GCL. The rights to indemnification and
advancement of expenses conferred by this Article VIII shall be presumed to have
been relied upon by the directors and officers of the Corporation in serving or
continuing to serve the Corporation and shall be enforceable as contract rights.
Said rights shall not be exclusive of any other rights to which those seeking
indemnification may otherwise be entitled. The Corporation may, upon written
demand presented by a director or officer of the Corporation or of a direct or
indirect subsidiary of the Corporation, or by a person serving at the request of
the Corporation as a director or officer of another entity or enterprise, enter
into contracts to provide such persons with specified rights to indemnification,
which contracts may confer rights and protections to the maximum extent
permitted by the GCL, as amended and in effect from time to time.
If a claim under this Article VIII is not paid in full by the
Corporation within sixty (60) days after a written claim has been received by
the Corporation, the claimant may at any time thereafter bring suit against the
Corporation to recover the unpaid amount of the claim and, if successful in
whole or in part, the claimant shall be entitled to be paid also the expenses of
prosecuting such claim. It shall be a defense to any such action (other than an
action brought to enforce the right to be advanced expenses incurred in
defending any proceeding prior to its final disposition where the required
undertaking, if any, has been tendered to the Corporation ) that the claimant
has not met the standards of conduct which make it permissible under the GCL for
the Corporation to indemnify the claimant for the amount claimed, but the
claimant shall be presumed to be entitled to indemnification and the Corporation
shall have the burden of proving that the claimant has not met the standards of
conduct for permissible indemnification set forth in the GCL.
4
<PAGE> 5
If the GCL is hereafter amended to permit the Corporation to
provide broader indemnification rights than said law permitted the Corporation
to provide prior to such amendment, the indemnification rights conferred by this
Article VIII shall be broadened to the fullest extent permitted by the GCL, as
so amended.
ARTICLE IX
The Corporation reserves the right to amend, alter, change or
repeal any provision contained in this Amended and Restated Certificate of
Incorporation, in the manner now or hereafter prescribed by statute, and all
rights conferred upon stockholders herein are granted subject to this
reservation. Notwithstanding the foregoing, the provisions set forth in Articles
V, VI, VII, VIII and IX of this Amended and Restated Certificate of
Incorporation may not be repealed or amended in any respect without the
affirmative vote of holders at least 66-2/3% of the outstanding voting stock of
the Corporation entitled to vote at election of directors.
FOUR: The foregoing amendment and restatement has been duly
adopted by the Corporation's Board of Directors in accordance with the
applicable provisions of Sections 242 and 245 of the General Corporation Law of
the State of Delaware.
FIVE: The foregoing amendment and restatement was approved by the
holders of the requisite number of shares of the Corporation in accordance with
Section 228 of the General Corporation Law of the State of Delaware.
IN WITNESS WHEREOF, the undersigned has executed this certificate
on March ___, 2000.
------------------------------------------
John A. Hewitt, Jr.
President and Secretary
5
<PAGE> 1
EXHIBIT 4.1
[VERSATA LOGO]
VAT
INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE
SEE REVERSE FOR CERTAIN DEFINITIONS
CUSIP 925298 10 1
This Certifies that
is the record holder of
FULLY PAID AND NONASSESSABLE SHARES OF COMMON STOCK, $.001 PAR VALUE, OF
VERSATA, INC.
transferable on the books of the Corporation by the holder hereof in person or
by duly authorized attorney upon surrender of this certificate properly
endorsed. This certificate is not valid until countersigned by the Transfer
Agent and registered by the Registrar.
WITNESS the facsimile seal of the Corporation and the facsimile
signatures of its duly authorized officers.
Dated:
----------------------------
SECRETARY
CHIEF EXECUTIVE OFFICER
COUNTERSIGNED AND REGISTERED:
EquiServe Trust Company, N.A.
TRANSFER AGENT AND REGISTRAR
BY
-------------------------------
AUTHORIZED SIGNATURE
<PAGE> 2
The Corporation shall furnish without charge to each stockholder who so
requests a statement of the powers, designations, preferences and relative,
participating, optional, or other special rights of each class of stock of the
Corporation or series thereof and the qualifications, limitations or
restrictions of such preferences and/or rights. Such requests shall be made to
the Corporation's Secretary at the principal office of the Corporation.
The following abbreviations, when used in the inscription on the face of
this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations.
<TABLE>
<S> <C>
TEN COM - as tenants in common UNIF GIFT MIN ACT - _____________ Custodian _____________
TEN ENT - as tenants by the entireties (Cust) (Minor)
JT TEN - as joint tenants with right under Uniform Gifts to Minors
of survivorship and not as ACT _________________________________
tenants in common (State)
COM PROP - as community property UNIF TRF MIN ACT - _________ Custodian (until age ______)
(Cust)
_________ under Uniform Transfers
(Minor)
to Minors Act _______________________
(State)
</TABLE>
Additional abbreviations may also be used though not in the above list.
For value received, __________________________________________ hereby sell(s),
assign(s) and transfer(s) unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
________________________________________
________________________________________
________________________________________________________________________________
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE)
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
Shares of the common stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint
________________________________________________________________________________
Attorney to transfer the said stock on the books of the within named Corporation
with full power of substitution in the premises.
Dated ________________________ ________________________________________________
THE SIGNATURE TO THIS ASSIGNMENT MUST CORRESPOND
WITH THE NAME AS WRITTEN UPON THE FACE OF THE
NOTICE: CERTIFICATE IN EVERY PARTICULAR, WITHOUT
ALTERATION OR ENLARGEMENT OR ANY CHANGE
WHATEVER.
SIGNATURE(S) GUARANTEED BY THE SIGNATURE(S) MUST BE GUARANTEED BY AN ELIGIBLE
GUARANTOR INSTITUTION (BANKS, STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS AND
CREDIT UNIONS WITH MEMBERSHIP IN AN APPROVED SIGNATURE GUARANTEE MEDALLION
PROGRAM), PURSUANT TO S.E.C. RULE 17Ad-15.
<PAGE> 1
EXHIBIT 10.4
VERSATA, INC.
INDEMNIFICATION AGREEMENT
THIS INDEMNIFICATION AGREEMENT (this "Agreement") is made and
entered into this _____ day of February, 2000 between Versata, Inc., a Delaware
corporation (the "Company"), and <<Name>> ("Indemnitee").
WHEREAS, Indemnitee, a member of the Board of Directors or an
officer, employee or agent of the Company, performs a valuable service in such
capacity for the Company;
WHEREAS, the stockholders of the Company have adopted Bylaws (the
"Bylaws") providing for the indemnification of the officers, directors,
employees and agents of the Company to the maximum extent authorized by Section
145 of the Delaware General Corporation Law, as amended (the "Code");
WHEREAS, the Bylaws and the Code, by their non-exclusive nature,
permit contracts between the Company and the members of its Board of Directors,
officers, employees or agents with respect to indemnification of such directors,
officers, employees or agents;
WHEREAS, in accordance with the authorization as provided by the
Code, the Company either has purchased and presently maintains or intends to
purchase and maintain a policy or policies of Directors and Officers Liability
Insurance ("D & O Insurance") covering certain liabilities which may be incurred
by its directors and officers in the performance of their duties as directors
and officers of the Company;
WHEREAS, as a result of developments affecting the terms, scope
and availability of D & O Insurance there exists general uncertainty as to the
extent of protection afforded members of the Board of Directors or officers,
employees or agents by such D & O Insurance and by statutory and bylaw
indemnification provisions; and
WHEREAS, in order to induce Indemnitee to continue to serve as a
member of the Board of Directors, officer, employee or agent of the Company, the
Company has determined and agreed to enter into this contract with Indemnitee.
NOW, THEREFORE, in consideration of Indemnitee's continued
service as a director, officer, employee or agent after the date hereof, and for
other good and valid consideration, the receipt and adequacy of which is hereby
acknowledged, the parties hereto agree as follows:
1. Indemnification of Indemnitee. The Company hereby agrees to hold
harmless and indemnify Indemnitee to the fullest extent authorized or permitted
by the provisions of the Code, as may be amended from time to time.
<PAGE> 2
2. Additional Indemnity. Subject only to the exclusions set forth in
Sections 3 and 6(c) hereof, the Company hereby further agrees to hold harmless
and indemnify Indemnitee:
(a) against any and all expenses (including attorneys'
fees), witness fees, judgments, fines and amounts paid in settlement actually
and reasonably incurred by Indemnitee in connection with any threatened, pending
or completed action, suit or proceeding, whether civil, criminal, administrative
or investigative (including an action by or in the right of the Company) to
which Indemnitee is, was or at any time becomes a party, or is threatened to be
made a party, by reason of the fact that Indemnitee is, was or at any time
becomes a director, officer, employee or agent of the Company or any subsidiary
of the Company, or is or was serving or at any time serves at the request of the
Company as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust, employee benefit plan or other enterprise;
and
(b) otherwise to the fullest extent as may be provided to
Indemnitee by the Company under the non-exclusivity provisions of Article VII,
Section 6 of the Bylaws of the Company and the Code.
3. Limitations on Additional Indemnity.
(a) No indemnity pursuant to Section 2 hereof shall be
paid by the Company:
i) in respect to remuneration paid to Indemnitee if
it shall be determined by a final judgment or other final adjudication that such
remuneration was in violation of law;
ii) on account of any suit in which judgment is
rendered against Indemnitee for an accounting of profits made from the purchase
or sale by Indemnitee of securities of the Company pursuant to the provisions of
Section 16(b) of the Securities Exchange Act of 1934 and amendments thereto or
similar provisions of any federal, state or local statutory law;
iii) on account of Indemnitee's conduct which is
finally adjudged to have been knowingly fraudulent or deliberately dishonest or
to constitute willful misconduct;
iv) on account of Indemnitee's conduct which is the
subject of an action, suit or proceeding described in Section 6(c)(ii) hereof;
v) on account of any action, claim or proceeding
(other than a proceeding referred to in Section 7(b) hereof) initiated by the
Indemnitee unless such action, claim or proceeding was authorized in the
specific case by action of the Board of Directors;
vi) if a final decision by a Court having
jurisdiction in the matter shall determine that such indemnification is not
lawful (and, in this respect, both the Company and Indemnitee have been advised
that the Securities and Exchange Commission
2
<PAGE> 3
believes that indemnification for liabilities arising under the federal
securities laws is against public policy and is, therefore, unenforceable and
that claims for indemnification should be submitted to appropriate courts for
adjudication); and
vii) except to the extent the aggregate of losses
to be indemnified thereunder exceeds the sum of (a) such losses for which the
Indemnitee is indemnified pursuant to Section 1 hereof and (b) any additional
amount paid to the Indemnitee pursuant to any D & O Insurance purchased and
maintained by the Company.
(b) No indemnity pursuant to Section 1 or 2 hereof shall be paid
by the Company if the action, suit or proceeding with respect to which a claim
for indemnity hereunder is made arose from or is based upon any of the
following:
i) Any solicitation of proxies by Indemnitee, or by
a group of which he was or became a member consisting of two or more persons
that had agreed (whether formally or informally and whether or not in writing)
to act together for the purpose of soliciting proxies, in opposition to any
solicitation of proxies approved by the Board of Directors.
ii) Any activities by Indemnitee that constitute a
breach of or default under any agreement between Indemnitee and the Company.
4. Contribution. If the indemnification provided in Sections 1 and 2
hereof is unavailable by reason of a Court decision described in Section
3(a)(vi) hereof based on grounds other than any of those set forth in paragraphs
(i) through (v) of Section 3 (a) hereof, then in respect of any threatened,
pending or completed action, suit or proceeding in which the Company is jointly
liable with Indemnitee (or would be if joined in such action, suit or
proceeding), the Company shall contribute to the amount of expenses (including
attorneys' fees), judgments, fines and amounts paid in settlement actually and
reasonably incurred and paid or payable by Indemnitee in such proportion as is
appropriate to reflect (i) the relative benefits received by the Company on the
one hand and Indemnitee on the other hand from the transaction from which such
action, suit or proceeding arose, and (ii) the relative fault of the Company on
the one hand and of Indemnitee on the other in connection with the events which
resulted in such expenses, judgments, fines or settlement amounts, as well as
any other relevant equitable considerations. The relative fault of the Company
on the one hand and of Indemnitee on the other shall be determined by reference
to, among other things, the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent the circumstances resulting in
such expenses, judgments, fines or settlement amounts. The Company agrees that
it would not be just and equitable if contribution pursuant to this Section 4
were determined by pro rata allocation or any other method of allocation which
does not take account of the foregoing equitable considerations.
5. Notification and Defense of Claim. Not later than thirty (30)
days after receipt by Indemnitee of notice of the commencement of any action,
suit or proceeding, Indemnitee shall, if a claim in respect thereof is to be
made against the Company under this Agreement, notify the Company of the
commencement thereof; but Indemnitee's omission so to notify the Company will
not relieve the Company from any liability which it may have to
3
<PAGE> 4
Indemnitee otherwise than under this Agreement. With respect to any such action,
suit or proceeding as to which Indemnitee notifies the Company of the
commencement thereof:
(a) The Company will be entitled to participate therein at its
own expense.
(b) Except as otherwise provided below, to the extent that it may
wish, the Company shall, jointly with any other indemnifying party similarly
notified, be entitled to assume the defense thereof, with counsel reasonably
satisfactory to Indemnitee. After notice from the Company to Indemnitee of its
election to assume the defense thereof, the Company will not be liable to
Indemnitee under this Agreement for any legal or other expenses subsequently
incurred by Indemnitee in connection with the defense thereof, other than
reasonable costs of investigation or as otherwise provided below. Indemnitee
shall have the right to employ its own counsel in such action, suit or
proceeding, but the fees and expenses of such counsel incurred after notice from
the Company of the Company's assumption of the defense thereof shall be at the
expense of Indemnitee unless (i) the employment of counsel by Indemnitee has
been authorized by the Company; (ii) Indemnitee shall have reasonably concluded
that there may be a conflict of interest between the Company and Indemnitee in
the conduct of the defense of such action; or (iii) the Company shall not in
fact have employed counsel to assume the defense of such action; in each of
which cases the fees and expenses of Indemnitee's separate counsel shall be paid
by the Company. The Company shall not be entitled to assume the defense of any
action, suit or proceeding brought by or on behalf of the Company or as to which
Indemnitee shall have made the conclusion provided for in (ii) above.
(c) The Company shall not be liable to indemnify Indemnitee under
this Agreement for any amounts paid in settlement of any action or claim
effected without its written consent. The Company shall be permitted to settle
any action except that it shall not settle any action or claim in any manner
which would impose any penalty or limitation on Indemnitee without Indemnitee's
written consent. Neither the Company nor Indemnitee will unreasonably withhold
its consent to any proposed settlement.
6. Advancement and Repayment of Expenses.
(a) In the event that Indemnitee employs his or her own
counsel pursuant to Sections 5(b)(i) through (iii) above, the Company shall
advance to Indemnitee, prior to any final disposition of any threatened or
pending action, suit or proceeding, whether civil, criminal, administrative or
investigative, any and all reasonable expenses (including legal fees and
expenses) incurred in investigating or defending any such action, suit or
proceeding within ten (10) days after receiving from Indemnitee copies of
invoices presented to Indemnitee for such expenses.
(b) Indemnitee agrees that Indemnitee will reimburse the
Company for all reasonable expenses paid by the Company in investigating or
defending any civil or criminal action, suit or proceeding against Indemnitee in
the event and only to the extent it shall be ultimately determined by a final
judicial decision (from which there is no right of appeal) that Indemnitee is
not entitled, under the provisions of the Code, the Bylaws, this Agreement or
otherwise, to be indemnified by the Company for such expenses.
4
<PAGE> 5
(c) Notwithstanding the foregoing, the Company shall not
be required to advance such expenses to Indemnitee in respect of any action
arising from or based upon any of the matters set forth in subsection (b) of
Section 3 or if Indemnitee (i) commences any action, suit or proceeding as a
plaintiff unless such advance is specifically approved by a majority of the
Board of Directors or (ii) is a party to an action, suit or proceeding brought
by the Company and approved by a majority of the Board which alleges willful
misappropriation of corporate assets by Indemnitee, disclosure of confidential
information in violation of Indemnitee's fiduciary or contractual obligations to
the Company, or any other willful and deliberate breach in bad faith of
Indemnitee's duty to the Company or its shareholders.
7. Enforcement.
(a) The Company expressly confirms and agrees that it has
entered into this Agreement and assumed the obligations imposed on the Company
hereby in order to induce Indemnitee to continue as a director, officer,
employee or other agent of the Company, and acknowledges that Indemnitee is
relying upon this Agreement in continuing in such capacity.
(b) In the event Indemnitee is required to bring any
action to enforce rights or to collect moneys due under this Agreement and is
successful in such action, the Company shall reimburse Indemnitee for all
Indemnitee's reasonable fees and expenses, including attorney's fees, in
bringing and pursuing such action.
8. Subrogation. In the event of payment under this agreement, the
Company shall be subrogated to the extent of such payment to all of the rights
of recovery of Indemnitee, who shall execute all documents required and shall do
all acts that may be necessary to secure such rights and to enable the Company
effectively to bring suit to enforce such rights.
9. Continuation of Obligations. All agreements and obligations of
the Company contained herein shall commence upon the date that Indemnitee first
became a member of the Board of Directors or an officer, employee or agent of
the Company, as the case may be, and shall continue during the period Indemnitee
is a director, officer, employee or agent of the Company (or is or was serving
at the request of the Company as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust, employee benefit plan or
other enterprise) and shall continue thereafter so long as Indemnitee shall be
subject to any possible claim or threatened, pending or completed action, suit
or proceeding, whether civil, criminal or investigative, by reason of the fact
that Indemnitee was a director, officer, employee or agent of the Company or
serving in any other capacity referred to herein.
10. Survival of Rights. The rights conferred on Indemnitee by this
Agreement shall continue after Indemnitee has ceased to be a director, officer,
employee or other agent of the Company and shall inure to the benefit of
Indemnitee's heirs, executors and administrators.
11. Non-Exclusivity of Rights. The rights conferred on Indemnitee by
this Agreement shall not be exclusive of any other right which Indemnitee may
have or hereafter acquire under any statute, provision of the Company's
Certificate of Incorporation or Bylaws, agreement, vote of stockholders or
directors, or otherwise, both as to action in his official capacity and as to
action in another capacity while holding office; provided, however, that this
5
<PAGE> 6
Agreement shall supersede and replace any prior indemnification agreements
entered into by and between the Company and Indemnitee and that any such prior
indemnification agreement shall be terminated upon the execution of this
Agreement.
12. Separability. Each of the provisions of this Agreement is a
separate and distinct agreement and independent of the others, so that if any or
all of the provisions hereof shall be held to be invalid or unenforceable for
any reason, such invalidity or unenforceability shall not affect the validity or
enforceability of the other provisions hereof or the obligation of the Company
to indemnify the Indemnitee to the full extent provided by the Bylaws or the
Code.
13. Governing Law. This Agreement shall be interpreted and enforced
in accordance with the laws of the State of Delaware.
14. Binding Effect. This Agreement shall be binding upon Indemnitee
and upon the Company, its successors and assigns, and shall inure to the benefit
of Indemnitee, his or her heirs, personal representatives and assigns and to the
benefit of the Company, its successors and assigns.
15. Amendment and Termination. No amendment, modification,
termination or cancellation of this Agreement shall be effective unless it is in
writing and is signed by both parties hereto.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement
on and as of the day and year first above written.
VERSATA, INC.
a Delaware corporation
By:
------------------------------------
INDEMNITEE
---------------------------------------
<<Name>>, <<Title>>
Address:
---------------------------------------
---------------------------------------
6
<PAGE> 1
EXHIBIT 10.9
Joint Product and Marketing Agreement dated September 27, 1999.
<PAGE> 2
EXHIBIT 10.9
Note: Confidential treatment has been requested with respect to certain
portions of this exhibit. Such portions are marked with a "[*]" in place of the
redacted language. Omitted portions are filed separately with the Securities
and Exchange Commission.
IBM AND VISION
JOINT PRODUCT AND MARKETING AGREEMENT
This Joint Product and Marketing Agreement is entered into this 27th day of
September, 1999 ("EFFECTIVE DATE") between Vision Software Tools, Inc.
("Vision") located at 2101 Webster Street, Eighth Floor, Oakland, CA 94612, and
International Business Machines Corporation ("IBM") located at New Orchard
Road, Armonk, NY 10504. For purposes of this Agreement, all references to IBM
shall mean IBM and its Subsidiaries.
In this Agreement the parties establish a strategic marketing and development
relationship to create a single product offering that integrates Vision's
Business Logic Server technology and Developer Studio development tools with
IBM's WebSphere Application Server Advanced Edition and WebSphere Studio. The
resulting product will be offered by both parties under their own brand names,
terms conditions and prices.
SOW's and ATTACHMENTS (incorporated herein by reference)
1. JM-SOW
2. JP-SOW
3. Attachment 1: EFT Authorization Form
The parties hereby agree as follows:
1.0 DEFINITIONS
1.1 "AGREEMENT" means this Joint Product and Marketing Agreement and any
relevant Statements of Work and other agreements, attachments or
appendices specifically referenced in this Agreement.
1.2 "CODE" means computer programming code, including both "Object Code"
(computer programming code substantially in binary form that is directly
executable by a computer after processing, but without compilation or
assembly) and "Source Code" (computer programming code that may be
displayed in a form readable and understandable by a programmer of
ordinary skill, excluding Object Code).
1.3 "DELIVERABLE" means items that one party prepares for or provides to
another as described in a SOW. Deliverables include, as applicable, Code
and Documentation.
1.4 "DERIVATIVE WORK" means a work that is based on an underlying work and
that would be a copyright infringement if prepared without the
authorization of the copyright owner of the underlying work.
1.5 "DEVELOPMENT ENVIRONMENT" means the Tools, Documentation, Test Suites and
other items that are necessary to develop and maintain Integrated Code and
Derivative Works thereof.
1.6 "DOCUMENTATION" will be defined in the JP-SOW.
1.7 "ENHANCEMENTS" means all changes to Code and Documentation, including:
upgrades, new functions, Maintenance Modifications, new releases, and new
versions that the parties agree to include in future Releases, whether or
not constituting Derivative Works.
1.8 "HARMFUL CODE" is any computer Code, programming instructions, or set of
instructions that is constructed for the purpose of damaging, interfering
with, or otherwise adversely affecting computer programs, data files or
hardware, without the consent or intent of the computer user. This
definition includes, but is not limited to, self-replicating and
self-propagating programming instructions commonly called "viruses" and
"worms."
1.9 "IBM CODE" will consist of WebSphere Application Server-Advanced Edition
("WAS-AE") and WebSphere Studio ("WS") in Object Code form accompanied by
all associated Documentation as well as other Code that may be defined in
a SOW.
1.10 "INTEGRATED CODE" consists of Vision Code integrated with IBM Code in
Object Code form and accompanied by its associated Documentation.
Integrated Code will be further defined in a JP-SOW. The resulting
Integrated Code is expected to be the technology base of the parties'
strategic relationship.
Page 1 of 17
<PAGE> 3
1.11 "INVENTION" means any idea, design, concept, technique, invention,
discovery or improvement, whether or not patentable, conceived or
reduced to practice by a party.
1.12 "JOINT INVENTION" means any Invention made jointly by IBM and Vision.
1.13 "MAINTENANCE MODIFICATIONS" means revisions in either party's Object
Code to correct errors and deficiencies.
1.14 "RELEASE(S)" is a version of Integrated Code that is further described
in a SOW. Specific Releases will be designated by a number in the
relevant SOW.
1.15 "STATEMENT OF WORK" or "SOW" means any document attached to or included
in this Agreement which describes the parties responsibilities,
including, without limitation, any requirements, specifications,
Deliverables or schedules. Initially, the Agreement will include the
following SOW's:
1.15.1 "JOINT MARKETING SOW" or "JM-SOW" describes the parties' joint
marketing activities and responsibilities and is incorporated
herein by reference.
1.15.2 "JOINT PRODUCT SOW" or "JP-SOW" describes the parties'
responsibilities with respect to product development and support
and is incorporated herein by reference.
1.16 "SUBSIDIARY" means an entity that is owned or controlled directly or
indirectly (by more than 50% of its voting stock, or if not voting
stock, decision-making power) by Vision or IBM. An entity is considered
to be a Subsidiary only so long as such ownership or control exists.
1.17 "TERMINATION LEVEL CODE" is the most recent version of IBM Code or
Vision Code that exists as of the date of termination.
1.18 "TOOLS" means non-commercially available software required for the
development, maintenance or implementation of a software deliverable.
1.19 "VISION CODE" will consist of Business Logic Server ("BLS") and
Developer Studio in Object Code form accompanied by all associated
Documentation as well as other Code that may be defined in a SOW.
2.0 RESPONSIBILITIES OF THE PARTIES
2.1 IBM RESPONSIBILITIES.
2.1.1 Deliverables. IBM will provide to Vision all Deliverables as
specified in the JP-SOW.
2.1.2 Development and Support Responsibilities. IBM shall be
responsible to complete the obligations specified in the JM-SOW.
2.1.3 Marketing Responsibilities. IBM shall be responsible to complete
the obligations specified in the JM-SOW.
2.2 VISION RESPONSIBILITIES.
2.2.1 Deliverables. Vision will provide to IBM all Deliverables as
specified in the JP-SOW.
2.2.2 Development and Support Responsibilities. Vision shall be
responsible to complete the obligations specified in the JP-SOW.
2.2.3 Marketing Responsibilities. Vision shall be responsible to
complete the obligations specified in the JM-SOW.
2.3 JOINT RESPONSIBILITIES. Vision and IBM will each create a project office
to coordinate activity related to the overall success of the
relationship. This office will be staffed as follows:
2.3.1 Sponsoring Executive -- A senior executive from each party will
be assigned to provide oversight to the relationship. These
individuals will meet quarterly to review the progress, status
and plans for the relationship.
Page 2 of 17
<PAGE> 4
2.3.2 Marketing Program Manager -- Each party will assign a manager who
will be responsible for the marketing aspects of the relationship.
These individuals will monitor the execution of joint marketing
programs, facilitate agreement on "special bid" situations, and
build joint marketing plans for future use.
2.3.3 Development Manager -- Each party will assign a development manager
to oversee product definition and release scheduling. This team
will be responsible for creating the requirements and reaching
agreement for the new/changed content of each release. This team
will recommend changes potentially to both BLS/Developer Studio and
WAS-AE. The intent is to ensure that neither product introduces any
enhancements that regress the functionality of the other or
introduce any migration compatibility problems for IBM or Vision's
respective customers. In addition, meetings will be held as needed
with the product groups to discuss any new initiatives that IBM or
Vision may want to integrate into a future release.
2.3.4 Contract Coordinators -- Each party will assign a contact
coordinator who will be responsible to receive all notices and
administer the Agreement.
2.3.5 The assigned members of the project office are identified in
Section 12.0, "Project Office Staff" and will be available to
participate in the resolution of disputes per Section 9.0 "Dispute
Resolution Process."
3.0 LICENSE GRANTS
3.1. BY IBM. Subject to the terms and conditions of this Agreement:
3.1.1 For Integration. IBM grants Vision a nonexclusive, worldwide
license to use, have used, execute, reproduce, transmit, display,
test, and perform the IBM Code in Object Code form only for
integration of the IBM Code as part of the US English language
version of Release 1, the International version of Release 1, and
for distribution to IBM for the purpose of allowing IBM to perform
its proposed obligations under the JP-SOW.
3.1.2 For Distribution. IBM grants Vision a nonexclusive, worldwide
license to use, reproduce, transfer, distribute, market and
sublicense the IBM Code in Object Code form and any modifications
made to the Vision Code made by IBM solely contained as part of the
Integrated Code as part of the US English language version of
Release 1, the International version of Release 1, or any follow on
Releases as agreed to by the parties.
3.1.3 For Documentation. IBM grants Vision a nonexclusive, worldwide
license to use, have used, execute, reproduce, transmit, display,
perform, modify, prepare or have prepared Derivative Works,
transfer, distribute, market, and sublicense the IBM-modified BLS
and Developer Studio Documentation Source Code for use with the US
English language version of Release 1, the International version of
Release 1, or any follow on Releases as agreed to by the parties.
3.2 BY VISION. Subject to the terms and conditions of this Agreement.
3.2.1 For Documentation. Vision grants IBM a nonexclusive, worldwide
license to use, have used, execute, reproduce, transmit, display,
modify, prepare or have prepared Derivative Works and perform the
BLS and Developer Studio Documentation Source Code in order to
conform to IBM documentation standards and for translation and
internationalization purposes. Further Vision grants IBM the right
to distribute the resulting work to Vision for the purpose of
integration of such work into the US English language version of
Release 1, the International version of Release 1, or any follow on
Releases as agreed to by the parties.
3.2.2 For Translation and Testing. Vision grants IBM a nonexclusive,
worldwide license to use, have used, execute, reproduce, transmit,
display, prepare or have prepared Derivative Works, perform, and
test the Vision Code and other materials to be translated and
internationalized and to provide the resulting work to Vision for
integration into the US English version of Release 1, International
version of Release 1 and follow on Releases as agreed to by the
parties.
Page 3 of 17
<PAGE> 5
3.2.3 For Distribution. Vision grants IBM a nonexclusive,
worldwide license to use, reproduce, transfer, distribute,
market, prepare or have prepared Derivative Works and
sublicensed for distribution the Vision Code solely as
contained in the Integrated Code (including but not limited
to the International version of the Integrated Code), and
Documentation as modified by IBM (including but not limited
to any internationalization changes) in Object Code form
only, for use with the US English language version of
Release 1, the International version of Release 1, or any
follow on Releases as agreed to by the parties.
3.2.4 For Developer Studio. Vision grants IBM a nonexclusive,
worldwide license to use, reproduce, market, prepare or have
prepared Derivative Works of the Developer Studio code,
Documentation as may be modified by IBM (including but not
limited to any internationalization changes), and any
enhancements thereof, and to distribute, transfer and
sublicense such code and Documentation in Object Code form
only, to customers who have licensed the US English language
version of Release 1, the International version of Release
1, or any follow on Releases as agreed to by the parties.
3.1 FOLLOW-ON RELEASES. The Parties anticipate that follow-on releases of
the Integrated Code (beyond Release 1) will be mutually agreed upon
during the term of this Agreement. At such time, the appropriate SOW
and license terms will be added to this Agreement by written
Amendment.
3.2 EXERCISE OF SECTION 10.6.3 OPTION. Should IBM elect the option
specified in Section 10.6.3, and subject to the terms and conditions
of this Agreement, the following licensing terms apply to such an
engagement.
3.2.1 By IBM for Integration of Future Releases of WAS-AE with the
Termination Level Code. IBM grants Vision a nonexclusive,
worldwide license to use, execute, reproduce, transmit,
display, and perform the IBM Code in Object Code form only
for the purpose of integrating the selected level of the IBM
Code (provided by IBM to Vision pursuant IBM's exercise of
the option defined in Section 10.6.3 of this Agreement) with
the latest version or release of the Vision Code distributed
as part of the Integrated Code at the time of termination or
expiration of this Agreement.
3.2.2 By Vision for the Derivative Work of the Vision Code that
Results From the Integration. Vision grants IBM an
exclusive, worldwide, irrevocable, royalty-free license to
transfer, distribute market, prepare or have prepared
Derivative Works and sublicense the Derivative Works of the
Vision Code as part of the Integrated Code created by Vision
pursuant to IBM's exercise of the option defined in Section
10.6.3, in Object Code form only solely for distribution to
existing users of the Integrated Code at the time of
termination or expiration of this Agreement.
3.2.3 Except as otherwise provided herein, Vision shall have no
right to distribute or otherwise use and distribute the
Integrated Code created pursuant to Sections 10.6.3 and 3.4
or any Derivative Work of the Vision Code created pursuant
to IBM's exercise of the option defined in Section 10.6.3 of
the Agreement.
3.3 OWNERSHIP RIGHTS.
3.3.1 Except as otherwise provided herein, IBM shall retain
exclusive ownership of all right, title and interest,
including all intellectual property rights, in all of its
preexisting material, including, but not limited to, the IBM
Code and any IBM Documentation. IBM will also exclusively
own all right, title and interest, including all
intellectual property rights, in any Code (other than
Joint Inventions) that it creates that becomes a part of the
Integrated Code.
3.3.2 Except as otherwise provided herein, Vision shall retain
exclusive ownership of all right, title and interest,
including all intellectual property rights, in all of its
preexisting material, including, but not limited to, the
Vision Code and any Vision Documentation. Vision will also
exclusively own all right, title and interest, including all
intellectual property rights, in any Code (other than Joint
Inventions) that it creates that becomes a part of the
Integrated Code.
3.4 The parties agree that IBM may package and distribute the Vision Code
incorporated into the Integrated Code pursuant to the terms of Section
3.2.3 with other IBM or third party products subject to mutual
agreement on the appropriate royalty payments due to Vision.
Page 4 of 17
<PAGE> 6
3.5 Except as provided herein, nothing contained in this Agreement shall be
construed to grant either party any other licenses, whether express or
implied, by estoppel or otherwise, in or to any trademarks, copyrights,
patents, or other intellectual property rights of the other party.
4.0 ROYALTIES
4.1 VISION ROYALTY PAYMENTS. Subject to the terms and conditions of this
Agreement, Vision will pay IBM a percentage of all product license fees,
product upgrade fees (including fees for additional development seats) and
monthly usage fees recorded by Vision (less any applicable taxes,
shipping costs and returns) for each authorized copy of the Integrated
Code licensed and distributed by Vision pursuant to the terms of this
Agreement according to the following table:
[*]
4.2 IBM ROYALTY PAYMENTS. Subject to the terms and conditions of this
Agreement, IBM will pay Vision a percentage of all product license fees,
product upgrade fees (including fees for additional development seats)
and monthly usage fees recorded by IBM (less any applicable taxes,
shipping costs and returns) for each authorized copy of the Integrated
Code licensed and distributed by IBM pursuant to the terms of this
Agreement according to the following table:
[*]
4.3 The parties recognize that IBM does not currently have a process which
can accurately track the number of IBM employees that may use the Vision
Code for productive (non-development) purposes: However, IBM agrees to
establish a process to reduce the likelihood that the Vision Code is used
for productive internal use, and in the event that it comes to the
attention of the Contract Coordinators that IBM employees are using the
Vision Code for productive (non-development) purposes, IBM will subject to
Section 4.8, "Exceptions to Royalty Payment Obligations," pay Vision the
appropriate Minimum Royalty for each identified authorized copy of the
Vision Code used by IBM for such purposes as specified in Section 4.6. The
parties also agree that this Section 4.3 shall not be subject to any audit
conducted by Vision, provided that the foregoing shall not be deemed to
constitute a waiver of Vision's right to seek any remedies it may have at
law or in equity relating to such unauthorized use.
4.4 In the event that the content of the Integrated Code is modified by the
addition of more than an insignificant amount of IBM Code or Vision Code
not previously a part of the Integrated Code, and which materially alters
the relative value of contribution of either party, Vision and IBM agree
to, in good faith, renegotiate the royalty percentages to reflect the
value of the added Code.
4.5 ROYALTY CALCULATIONS. Royalties, if any, are paid against revenue
recorded by the party licensing to the end-user for a calendar royalty
payment quarter Payment will be made by the last day of the first
calendar month following the close of the royalty payment quarter. All
payments will be made in U.S. Dollars. Payments based on foreign revenue
will be converted to U.S. dollars on a monthly basis at the rate of
exchange published by Reuters Financial Service on approximately the same
day each month.
4.6 MINIMUM AVERAGE PER RUNTIME CPU ROYALTY. For the period beginning with the
execution of the Agreement and ending 12/31/2000, IBM will calculate the
average revenue recorded per each runtime CPU license granted during the
period (runtime CPU revenue divided by the number of runtime CPU unit
sales recorded). If the average revenue recorded per each runtime CPU
license granted is less than [*] ("Minimum Royalty" for 2000), IBM will
pay to Vision the difference multiplied by the number of runtime CPU units
sales recorded. For the period beginning 1/1/2001 and ending 12/31/2001,
IBM will calculate the average revenue recorded per each runtime CPU
license granted during that period (runtime CPU revenue divided by the
number of runtime CPU unit sales recorded). If the average CPU revenue
recorded per each runtime CPU license granted is less than [*] ("Minimum
Royalty" for 2001), IBM will pay to Vision the difference multiplied by
the number of runtime CPU units sales recorded. For subsequent years the
Minimum Royalty will be negotiated between the parties. IBM will pay such
amounts to Vision within thirty (30) days after the end of the applicable
period.
* Confidential treatment requested for redacted portion.
Page 5 of 17
<PAGE> 7
4.7 SPECIAL BIDS. The following shall not be included in the average per
runtime CPU revenue recorded calculation: (i) special bids jointly
agreed to by IBM and Vision; and (ii) royalties received from OEM
agreements or from agreements with Federal, State, Local and foreign
governments.
4.8 EXCEPTIONS TO ROYALTY PAYMENT OBLIGATIONS. Neither party has any
royalty obligation for:
4.8.1 the Integrated Code or its Derivative Works used for: (i)
development, testing, maintenance or support activities conducted
by such party or its distributors or agents; (ii) marketing
demonstrations, customer testing or trial periods (including
early support, prerelease, encrypted, locked sampler
distributions not resulting in a license for full productive use,
a reasonable number of evaluation and demonstration "not for
resale" copies provided without charge under the terms of a
party's partner programs, a reasonable number of licenses
provided to ISV's without charge under a party's standard partner
support or sales agreements without a royalty obligation, or
other similar programs), Integrated Code training or education;
or (iii) backup and archival purposes;
4.8.2 a copy of the Integrated Code installed by a licensed end user
on an alternate work station (e.g., home terminal or laptop),
provided the end user may not use the Integrated Code on both
work stations at the same time;
4.8.3 the other party's Code (or a functionally equivalent work) that
becomes available generally to third parties without a payment
obligation;
4.8.4 Documentation provided with, contained in, or derived from the
Integrated Code;
4.8.5 Maintenance Modifications; and
4.8.6 warranty replacement copies of the Integrated Code.
5.0 SOURCE CODE ESCROW
5.1 The parties will enter into a separate, written escrow agreement, at
IBM's expense, with a recognized third-party escrow agent to maintain
at least one (1) copy, for each version and release of the Vision Code,
of the following escrowed materials ("ESCROWED MATERIALS"):
5.1.1 the Vision Code in a machine-readable format, including both
Source Code and Object Code;
5.1.2 a complete set of Vision's existing user and development
documentation in both hard copy and machine-readable (as
available) formats (including design specifications, flowcharts,
etc.);
5.1.3 a complete list of all items and software required for the
development, maintenance or implementation of the Vision Code;
5.1.4 the Tools in a machine-readable format, including both Source
Code and Object Code;
5.1.5 any other not commercially available tools, instructions or
material used by Vision in the development of the Integrated
Code; and
5.1.6 a detailed, comprehensive list of all items and Source Code
(indicating module names and dates) in the Escrowed Materials.
Page 6 of 17
<PAGE> 8
Vision will update the Escrowed Materials whenever it issues a
modification to the Vision Code or Documentation to incorporate any
Maintenance Modifications and Enhancements, and to account for new
releases and versions of the Vision Code.
5.2 The terms of such escrow agreement will be mutually agreed to and will
provide for IBM's reasonable inspection of the Escrowed Materials and for
delivery of the Escrowed Materials to IBM, subject to the payment of any
agreed to fees to the escrow agent and the release procedures specified in
the escrow agreement, within thirty (30) days of IBM's notice to the escrow
agent that any of the following release events ("Release Events") has
occurred:
5.2.1 Vision refuses, fails, or is unable to fulfill its support
obligations under this Agreement;
5.2.2 Vision ceases to exist and no entity survives which continues with
all or substantially all of Vision's then-current business relating
to this Agreement (including all of the obligations of this
Agreement);
5.2.3 Vision makes an assignment for the benefit of creditors or files or
has filed against it a petition in bankruptcy and such petition is
not dismissed within ninety (90) days; or
5.2.4 more than fifty percent (50%) of Vision's shares or ownership
interest representing the right to make decisions for Vision becomes
owned or controlled, directly or indirectly, by one of the following
third parties: [*]
5.3 Vision will notify IBM within five (5) days of the occurrence of a Release
Event. Subject to the terms and conditions of this Agreement and the
Escrow Agreement, IBM is granted a nonexclusive, worldwide, perpetual,
irrevocable license to prepare and have prepared Derivative Works of
Escrowed Materials, and to use, have used, execute, reproduce, transmit,
display, perform, transfer, distribute and sublicense Escrowed Materials
and such Derivative Works, in any medium or distribution technology for the
exclusive purpose of correcting bugs and similar defects in the Integrated
Code.
5.4 IBM and Vision will treat the release of the Escrowed Materials as a
disclosure of Confidential Information under the parties' existing
Confidential Disclosure Agreement related to the Vision Code, or if none,
under IBM's then standard Confidential Disclosure Agreement. IBM's right
to access the Source Code shall survive for as long as Vision has support
obligations to IBM under this Agreement.
6.0 ONGOING WARRANTIES
6.1 Each party makes the following ongoing representations and warranties:
6.1.1 It has the right to enter into this Agreement and its performance
of this Agreement will not violate the terms of any contract,
obligation, law, regulation or ordinance to which it is or becomes
subject;
6.1.2 As of the Effective Date, no claim, lien, or action exists or is
threatened against a party that would interfere with the other
party's rights under this Agreement;
6.1.3 The Code contributed by the party to the Integrated Code will be,
when contributed by such party and combined with the Integrated
Code, Year 2000 ready such that when used in accordance with the
appropriate documentation it is capable of correctly processing,
providing, receiving and displaying date data before and after
January 1, 2000 (including without limitation leap year
calculations), provided that all products (for example, hardware,
software and firmware) used with the Code contributed by the party
properly exchange accurate date data with it;
* Confidential treatment requested for redacted portion.
Page 7 of 17
<PAGE> 9
6.1.4 The Code contributed by the party to the Integrated Code will
be, when contributed by such party and combined with the
Integrated Code, euro-ready such that it will correctly process,
send, receive, present, store, and convert monetary data in the
euro denomination, respecting the euro currency formatting
conventions (including the euro symbol);
6.1.5 The Code contributed by the party to the Integrated Code will be
tested for harmful Code and the parties will not knowingly provide
the other Harmful Code;
6.1.6 The Code contributed by the party to the Integrated Code does not
infringe any privacy, publicity, reputation or intellectual
property right of a third party, provided that the sole remedy and
a party's entire liability for breach of this warranty shall be
indemnification pursuant to Section 7; and
6.1.7 All authors of the Code contributed by the party to the Integrated
Code have agreed not to assert their moral rights (personal rights
associated with authorship of a work under applicable law, if any)
in the IBM Code and the Vision Code (respectively), to the extent
permitted by law.
6.2 THE WARRANTIES AND CONDITIONS IN THIS AGREEMENT ARE IN LIEU OF ALL OTHER
WARRANTIES AND CONDITIONS, EXPRESS OR IMPLIED AND, EXCEPT AS PROVIDED
ABOVE, CODE IS FURNISHED ON AN "AS IS" BASIS AND EACH PARTY HEREBY
DISCLAIMS ALL OTHER WARRANTIES, EXPRESS OR IMPLIED, INCLUDING WITHOUT
LIMITATION WARRANTIES OR MERCHANTABILITY AND FITNESS FOR A PARTICULAR
PURPOSE.
7.0 INDEMNIFICATION AND LIMITATION OF LIABILITY
7.1 VISION INDEMNIFICATION. Vision will defend or settle any suit, third
party claims, or proceedings brought, or threatened, against IBM based
upon a claim that any Vision Code furnished hereunder or part thereof,
alone and not in combination with any other software or product (unless
there is no non-infringing use for the Vision Code when it is functioning
in the Release, and only to the extent that the infringement is
attributable to the Vision Code) constitutes an actual or alleged
infringement or misappropriation of any copyrights, trade secrets and/or
patents worldwide, as well as any actual, alleged, or threatened
infringement of any trademark, provided that: (i) Vision is notified
promptly in writing of such claim; (ii) Vision controls the defense or
settlement of the claim; and (iii) IBM cooperates reasonably and gives all
necessary authority, information and assistance (at Vision's expense).
Vision will pay all damages and costs finally awarded against IBM, but
Vision will not be responsible for any costs, expenses or compromise
incurred or made by IBM without Vision's prior written consent. If the
use of such of the Vision Code is permanently enjoined, Vision will, in
its sole discretion and at its own expense, procure for IBM the right to
continue using said product, replace same with non-infringing Vision Code,
modify it so that it becomes non-infringing, or if Vision is unable to do
any of the above on a commercially reasonable basis and if IBM is enjoined
from distributing the Vision Code, Vision will credit IBM the sum paid to
Vision by IBM for the infringing Vision Code in a Release which is still
in IBM's inventory. The obligations set forth in this Section shall not
apply to the extent that any claim arises from modification of the Vision
Code after delivery to IBM, except for any modification mutually agreed to
by the Parties or made pursuant to Vision's unilateral, mandatory written
direction. Notwithstanding the foregoing, Vision shall have no obligation
to Indemnify IBM pursuant to this Section for a) any "Open Source"
software included in the Vision Code, which has been identified as Open
Source software by Vision and provided to IBM hereunder or b) any Vision
Code distributed by IBM one hundred and twenty (120) days after IBM has
received written notice from Vision representing that Vision has conducted
a commercially reasonable assessment of a claim of intellectual property
infringement relating to the Vision Code and as a result has elected to
withdraw the Vision Code from the entire marketplace.
7.2 IBM INDEMNIFICATION. IBM will defend or settle any suit, third party
claims, or proceedings brought, or threatened, against Vision based upon a
claim that any IBM Code furnished hereunder or part hereof, alone and not
in combination with any other software or product (unless there is no
non-infringing use for the IBM Code when it is functioning in the Release,
and only to the extent that the infringement is attributable
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<PAGE> 10
to the IBM Code) constitutes an actual or alleged infringement or
misappropriation of any copyrights, trade secrets and/or patents worldwide,
as well as any actual, alleged, or threatened infringement of any
trademark, provided that: (i) IBM is notified promptly in writing of such
claim; (ii) IBM controls the defense or settlement of the claim; and (iii)
Vision cooperates reasonably and gives all necessary authority, information
and assistance (at IBM's expense). IBM will pay all damages and costs
finally awarded against Vision, but IBM will not be responsible for any
costs, expenses or compromise incurred or made by Vision without IBM's
prior written consent. If the use of such IBM Code is permanently enjoined,
IBM will, in its sole discretion and at its own expense, procure for Vision
the right to continue using said product, replace same with non-infringing
IBM Code, modify it so that is becomes non-infringing, or if IBM is unable
to do any of the above on a commercially reasonable basis and if IBM is
enjoined from distributing the IBM Code, IBM will credit Vision the sum
paid to IBM by Vision for the infringing IBM Code in a Release which is
still in Vision's inventory. The obligations set forth in this Section
shall not apply to the extent that any claim arises from: modification of
the IBM Code after delivery to Vision, except for any modification mutually
agreed to by the Parties or made pursuant to IBM's unilateral, mandatory
written direction. Notwithstanding the foregoing, IBM shall have no
obligation to Indemnify Vision pursuant to this Section for a) any "Open
Source" software included in the IBM Code which has been identified as Open
Source software by IBM and provided to Vision hereunder or b) any IBM Code
distributed by Vision one hundred and twenty (120) days after Vision has
received written notice from IBM representing that IBM has conducted a
commercially reasonable assessment of a claim of intellectual property
infringement relating to the IBM Code and as a result has elected to
withdraw the IBM Code from the entire marketplace.
7.3 LIMITATION OF LIABILITY.
7.3.1 Intellectual Property Indemnification. IN NO EVENT WILL EITHER
PARTY BE LIABLE TO THE OTHER UNDER THIS AGREEMENT FOR ANY
INDIRECT, SPECIAL, INCIDENTAL, OR CONSEQUENTIAL DAMAGES OF ANY
KIND, INCLUDING, BUT NOT LIMITED TO LOSS OF PROFIT, LOSS OF USE,
OR INTERRUPTION OF BUSINESS, EVEN IF ADVISED OF THE POSSIBILITY
OF SUCH DAMAGES. THE PARTIES AGREE THAT IN THE EVENT OF AN
INTELLECTUAL PROPERTY INDEMNIFICATION CLAIM (covered by the
sections above), A THIRD PARTY'S DAMAGES, THAT INCLUDE LOST
PROFITS, ARE DEEMED TO BE THE DIRECT DAMAGES OF VISION OR IBM, AS
THE CASE MAY BE. NOTWITHSTANDING ANYTHING TO THE CONTRARY IN THIS
AGREEMENT, EACH PARTY'S TOTAL LIABILITY FOR INTELLECTUAL PROPERTY
INFRINGEMENT SHALL NOT EXCEED 3,750,000.
7.3.2 Other Claims. IN ANY AND ALL CASES OTHER THAN EACH PARTY'S
OBLIGATION FOR INTELLECTUAL PROPERTY INFRINGEMENT, EACH PARTY'S
TOTAL LIABILITY FOR ALL OTHER CLAIMS RELATING TO THIS AGREEMENT
SHALL NOT EXCEED 1,500,000. THIS LIMITATION EXCLUDES: i) CLAIMS
FOR MONIES DUE A PARTY UNDER THIS AGREEMENT; AND ii) CLAIMS FOR
BREACH OF A PARTY'S OBLIGATIONS OF CONFIDENTIALITY.
8.0 INTELLECTUAL PROPERTY
8.1 NAMES AND TRADEMARKS.
8.1.1 IBM grants Vision a nonexclusive, worldwide license to use the
name and trademark "WebSphere" (the Licensed Marks) in accordance
with the "WebSphere Usage Guidelines." "WebSphere Usage
Guidelines" shall mean such guidelines as may be established by
IBM and modified from time to time, upon reasonable notice by
IBM, providing for the use and display of the Licensed Marks. The
current "WebSphere Usage Guidelines" appear below in Section
8.1.2. If IBM objects to Vision's improper use of IBM's name or
trademark, Vision will take all steps necessary to resolve IBM's
objections. Any goodwill attaching to IBM's trademarks, service
marks, or trade names belongs to IBM and this Agreement does not
grant Vision any right to use them. All ownership rights in the
Licensed Marks belong exclusively to IBM. Vision has no ownership
rights in the Licensed Marks and shall acquire no ownership
rights in the Licensed
* Confidential treatment requested for redacted portion.
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<PAGE> 11
Marks as a result of its performance (or breach) of this Agreement.
All use of the Licensed Marks or variations thereon shall inure
solely to the benefit of IBM. Upon termination of this Agreement
all rights of Vision to use the Licensed Marks shall terminate
immediately.
8.1.2 WebSphere Usage Guidelines.
A. Without a trademark license from IBM, IBM's marks MAY NEVER
be incorporated as part of the name of a product or service
of another company. Vision may not include "WebSphere" or any
potentially confusing variation in the name of its product or
service.
B. The compatibility or integration of an application program
with IBM WebSphere products may be noted on packaging,
collateral material or advertising (but not included in the
product or service name) by using phrases such as "for use
with", "compatible with" or "for", or "powered by" the
WebSphere product. On all such materials, Vision's product or
service name must appear more prominently than WebSphere's
mark. WebSphere's mark should be visually distinguishable
from Vision's product or service name by putting it in a
different font, color, or on a different line. It is
important to avoid any implication that Vision's product or
service is produced, endorsed or supported by IBM.
C. Vision must attribute IBM trademarks to IBM. For example,
Vision must use the symbol "TM" with IBM's mark WebSphere and
use the R in a circle with IBM. The symbols should be placed
next to the last letter of the mark, at the upper right or at
the baseline. In advertising copy, the proper symbol should
be used as the first or most prominent mention. A proper
trademark attribution is "WebSphere is a registered [NOTE:
***waiting for official notice, so may need to leave out
registered***] trademark of the IBM Corporation."
D. Vision must acknowledge that IBM claims trademark rights in
the name WebSphere and Vision must agree not to object to or
otherwise interfere with IBM's rights or registrations (or
registration applications in this name).
8.2 INVENTIONS.
8.2.1 With respect to Inventions first conceived or reduced to practice
solely by one or more employees of one of the parties, right and
title to such Inventions shall reside solely with that party.
8.2.2 With respect to Inventions first conceived or reduced to practice
by one or more employees of IBM with one or more employees of
Vision, these inventions shall be called Joint Inventions and will
be the joint property of the parties. Title to such Joint
Inventions as well as in and to any patent application and patents
issued thereon shall be assigned jointly to IBM and Vision. Vision
and IBM shall share equally in the expenses of seeking and
maintaining patent protection, except that either party may elect
at its own expense to seek and maintain patent protection for both
parties, if the other party declines to share expenses. Each party
shall have the right to grant licenses to third parties or assign
its rights therein without accounting to the other party.
9.0 DISPUTE RESOLUTION PROCESS
In the event that either party notifies the other of a unresolved dispute
pertaining to any matter relating to the Agreement (including the SOW's), the
following dispute resolution procedure will be followed:
9.1 Each party shall promptly name, from among the staff of the project
office, a facilitator to represent such party in discussions relating to
the Agreement. The facilitators shall make a good faith effort to resolve
the dispute as soon as possible.
9.2 In the event that the facilitators cannot resolve such dispute within ten
(10) business days of receipt of notice, the matter may, at the option of
either party, be submitted for resolution to a Manager of each
facilitator. For purposes of this Section, "Manager" shall mean someone
in the management chain of the
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<PAGE> 12
applicable facilitator who is senior to such facilitator in terms of
responsibility, and who is familiar with this Agreement. The Managers
shall make a good faith effort to resolve the dispute as quickly as
possible.
9.3 In the event that the Managers cannot resolve such dispute within ten (10)
business days, the matter may, at the option of either party, be submitted
for resolution to each party's Sponsoring Executive.
9.4 If the matter is not resolved at the executive level within twenty (20)
days, the parties may then pursue any remedies available to them in law
or equity.
10.0 TERM AND TERMINATION
10.1 TERM. The initial term of this Agreement begins on the Effective Date and
ends on 12/31/2001. After that date, the Agreement will automatically be
renewed each year on January 1, unless written notice of termination is
given by one party to the other, at least ninety (90) days prior to the
beginning of the next term period. In any event, the Agreement will
expire, without automatic renewal, on 12/31/2005.
10.2 TERMINATION FOR CONVENIENCE. The Agreement may not be terminated for
convenience by either party until 12/31/2001. In the event of termination
for convenience by either party pursuant to Section 10.1, the Licensee
shall continue to have the then existing rights to the Licensor's Code
(IBM Code or Vision Code as applicable) for so long as the Licensor
receives royalties from the Licensee, but for no longer than one (1) year.
However, the Licensee shall continue to have the then existing rights to
Licensor's Code (IBM Code or Vision Code as applicable) beyond the one (1)
year period but only to allow the fulfillment of orders placed before the
end of the one (1) year period. For the purposes of this Section 10,
"Licensor" and "Licensee" shall refer to Vision or IBM, as applicable,
depending on whether the party is the licensor or licensee of the rights
granted in Sections 3.1 and 3.2.
10.3 TERMINATION FOR MATERIAL BREACH. Either party can terminate this
Agreement, after completely exercising the dispute resolution process as
specified in Section 9.0 hereunder (which shall occur concurrently with,
and not in addition to, the notice period specified herein), for material
breach by the other party that is not cured within ninety (90) days after
the breaching party receives written notice of the material breach. In the
event of termination for material breach, the Licensee shall continue to
have the then existing rights to the Licensor's Code (IBM Code or Vision
Code as applicable) for so long as the Licensor receives royalties from
the Licensee, but for no longer than nine (9) months.
10.4 TERMINATION BY IBM DUE TO CHANGE OF CONTROL OF VISION. IBM may also
terminate the Agreement if more than fifty percent (50%) of Vision's
shares or ownership interest representing the right to make decisions for
Vision becomes owned or controlled, directly or indirectly, by one of the
following third parties: Microsoft Corporation, Sun Microsystems, Inc.,
Oracle Corporation, BEA Systems, Inc., or Hewlett-Packard Company. In
addition, IBM may access the Source Code in escrow pursuant to the terms
of Section 5.0, "Source Code Escrow" hereunder. In the event of
termination by IBM under this Section 10.4, IBM shall continue to have the
then existing rights to the Vision Code as part of the Integrated Code for
so long as Vision receives royalties from IBM, but for no longer than one
(1) year. However, the Licensee shall continue to have the then existing
rights to the Vision Code as part of the Integrated Code beyond the one
year period but only to allow the fulfillment of orders placed before the
end of the one year period.
10.5 EXPIRATION. In the event that the Agreement expires, the Licensee shall
continue to have the then existing rights to the Licensors' Code (IBM
Code or Vision Code as applicable) for so long as the Licensor receives
royalties from the Licensee, but for no longer than one (1) year.
However, the Licensee shall continue to have the then existing rights to
the Licensor's Code (IBM Code or Vision Code as applicable) beyond the
one year period, but only to allow the fulfillment of orders placed
before the end of the one year period.
10.6 SURVIVAL OF VISION SUPPORT OBLIGATIONS TO IBM. In the event of expiration
or termination for any reason, Vision's support obligations are as
follows:
10.6.1 During the first two (2) years after termination, Vision will
maintain and support the Vision Termination Level Code at no
additional charge to IBM.
10.6.2 During years three, four and five after termination, and provided
that Vision is still supporting the Vision Termination Level Code
for its customers, Vision will maintain and support the Vision
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<PAGE> 13
Termination Level Code at no additional charge. If Vision is no
longer supporting the Vision Termination Level Code for its
customers, IBM may, at its option, request maintenance and
support for the Vision Termination Level Code; IBM will
reimburse Vision at [*] for providing such maintenance and
support or at a fixed rate to be negotiated.
10.6.3 For three (3) years after termination, Vision will, at IBM's
option, develop, test, certify, maintain and support the Vision
Termination Level Code with new releases of WAS-AE, operating
systems, databases and other dependent technologies at [*].
Vision will complete any such development, testing and
certification within a commercially reasonable time (subject to
a mutually agreed upon schedule) after written request from IBM
made sufficiently prior to the general availability date of the
respective IBM new release. Should IBM elect to exercise the
option specified in this Section 10.6.3, IBM and Vision shall
have the rights specified in Section 3.4 of this Agreement.
10.7 SURVIVAL OF IBM SUPPORT OBLIGATIONS TO VISION. In the event of
termination for any reason, but only for up to five (5) years after
termination, IBM's support obligations are as follows:
10.7.1 From the date of termination and for as long as IBM supports
the IBM Termination Level Code for its commercial customers,
IBM will maintain and support versions of the IBM Termination
Level Code that exist as of the date of termination at no
additional charge.
10.7.2 For maintenance and support beyond the period in which IBM
supports the IBM Termination Level Code for its commercial
customers, IBM will maintain and support versions of the IBM
Termination Level Code at [*].
10.8 VISION SURVIVING RIGHTS IN IBM-TRANSLATED MATERIALS. In the event of
expiration or termination for any reason Vision shall continue to have
the then existing rights in the IBM-translated Materials (as defined in
the JP-SOW).
11.0 IBM RIGHT OF NOTIFICATION
In the event that Vision receives an offer to merge into a third party
or to be acquired by a third party, then it shall, at least ten (10) business
days prior to signing an agreement to proceed with such a transaction, give IBM
notice in writing of Vision's intention to proceed with such a transaction
during which period IBM may submit an alternative proposal to Vision. In the
event that Vision subsequently merges with or is acquired by a third party,
then IBM will have the option to terminate the Agreement.
12.0 PROJECT OFFICE STAFF
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
FOR IBM FOR VISION
- --------------------------------------------------------------------------------
SPONSORING EXECUTIVE
- --------------------------------------------------------------------------------
<S> <C>
- --------------------------------------------------------------------------------
Name Name
- --------------------------------------------------------------------------------
Title Title
- --------------------------------------------------------------------------------
Address Address
- --------------------------------------------------------------------------------
Phone Phone
- --------------------------------------------------------------------------------
Fax Fax
- --------------------------------------------------------------------------------
Email Email
- --------------------------------------------------------------------------------
MARKETING PROGRAM MANAGER
- --------------------------------------------------------------------------------
Name Name
- --------------------------------------------------------------------------------
Title Title
- --------------------------------------------------------------------------------
Address Address
- --------------------------------------------------------------------------------
Phone Phone
- --------------------------------------------------------------------------------
</TABLE>
* Confidential treatment requested for redacted portion.
Page 12 of 17
<PAGE> 14
<TABLE>
<S> <C>
- -------------------------------------------------------------------------------------------
Fax Fax
- -------------------------------------------------------------------------------------------
Email Email
- -------------------------------------------------------------------------------------------
DEVELOPMENT MANAGER
- -------------------------------------------------------------------------------------------
Name Name
- -------------------------------------------------------------------------------------------
Title Title
- -------------------------------------------------------------------------------------------
Address Address
- -------------------------------------------------------------------------------------------
Phone Phone
- -------------------------------------------------------------------------------------------
Fax Fax
- -------------------------------------------------------------------------------------------
Email Email
- -------------------------------------------------------------------------------------------
CONTRACT COORDINATORS
- -------------------------------------------------------------------------------------------
Name Prakash Bhaskaran Name John Sweetman
- -------------------------------------------------------------------------------------------
Title Finance Director Title Contract Administrator
- -------------------------------------------------------------------------------------------
Address 2101 Webster Street, 8th Floor Address 3039 Cornwallis Road, 002/VRDA
Oakland, CA 94612 RTP, NC 27709
- -------------------------------------------------------------------------------------------
Phone (510) 238-4100 Ext. 2258 Phone 919-254-2691
- -------------------------------------------------------------------------------------------
Fax (510) 238-4101 Fax 919-543-1119
- -------------------------------------------------------------------------------------------
Email [email protected] Email [email protected]
- -------------------------------------------------------------------------------------------
</TABLE>
13.0 GENERAL
13.1 AMENDMENTS: This Agreement may only be amended or modified by a written
document specifically referencing this Agreement which has been signed by
authorized representatives of the parties.
13.2 ASSIGNMENT: Neither party may assign this Agreement, or its rights and
obligations under it without the prior written consent of the other party
except: (i) to a Subsidiary, (ii) or in connection with the sale of all
or a substantial portion of that party's business or relevant business
unit, or (iii) rights to payments. Such assignment shall not be effective
until notice of such assignment is provided to the other party.
13.3 CHOICE OF LAW; WAIVER OF JURY TRIAL; LIMITATION OF ACTION: This Agreement
and the performance of transactions under this Agreement will be governed
by the laws of the State of New York applicable to contracts executed in
and performed entirely within that State. The parties expressly waive any
right to a jury trial regarding disputes related to this Agreement.
Unless otherwise provided by local law without the possibility of
contractual waiver or limitation, any legal or other action related to a
breach of this Agreement must be commenced no later than two (2) years
from the date of the discovery of the breach.
13.4 COMMUNICATIONS: All communications between the parties regarding this
Agreement will be conducted through the parties' Project Office
representatives.
13.5 COUNTERPARTS: This Agreement may be signed in one or more counterparts,
each of which will be deemed to be an original and all of which when
taken together will constitute the same agreement. Any copy of this
Agreement made by reliable means is considered an original.
13.6 ELECTRONIC COMMERCE: The parties will conduct transactions using an
electronic commerce approach under which the parties will electronically
transmit and receive legally binding purchase and sale obligations
("DOCUMENTS"), including electronic credit entries transmitted by one
party to the other party's account specified in the relevant Attachment.
Each party, at its own expense, will provide and maintain the equipment,
software, services and testing necessary for it to effectively and
reliably transmit and receive such Documents. Either party may use a
third party service provider for network services, provided the other
party is given sixty (60) days prior written notice of any changes to
such services. A Document will be deemed received upon arrival at the
receiving party's mailbox or Internet address and the receiving party
will promptly send an acknowledgment of such receipt. The receiving party
will promptly notify the originating party if a Document is received in
an unintelligible form, provided that the originating party can be
identified. In the absence of such notice, the originating party's record
of the contents of such Document will prevail. Each party will
authenticate Documents using a digital signature or User ID, as specified
by IBM, and will maintain security procedures to prevent its unauthorized
use.
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<PAGE> 15
13.7 EXCHANGE OF INFORMATION: Unless required otherwise by law, all
information exchanged by the parties will be considered non-confidential
except as otherwise provided in this Section. If the parties require the
exchange of confidential information, such exchange will be made under
the Confidential Disclosure Agreement between the parties, dated
3/29/1999 ("CDA"). The parties will not publicize the terms or
conditions of this Agreement in any advertising, marketing or
promotional materials without the prior written consent of the other
party, such consent not to be unreasonably withheld, or except as may be
required by law, provided the party publicizing obtains any
confidentiality treatment available or as is defined in this Agreement.
13.8 EXPENSES: Except as may be expressly provided in the Agreement, each
party will bear its own expenses in connection with the Agreement and
the activities under it.
13.9 COMPLIANCE WITH EXPORT REGULATIONS: The parties acknowledge and agree
that the Integrated Code is expected to contain encryption code and
agree to comply with all U.S. export laws and regulations as well as
applicable laws and regulations governing trade in other nations in
which the Integrated Code is distributed.
13.10 FREEDOM OF ACTION: This Agreement is nonexclusive and either party may
design, develop, manufacture, acquire or market competitive products or
services provided such party does not infringe or misappropriate the
other party's patent, copyrights, trade secrets or other proprietary
rights. The parties will independently establish prices for resale of
products and, except as provided in this Agreement, are not obligated to
announce or market any products or services and do not guarantee the
success of marketing efforts, if any.
13.11 FORCE MAJEURE: Neither party will be in default or liable for any delay
or failure to comply with this Agreement due to any act beyond the
control of the affected party, excluding labor disputes, provided such
party immediately notifies the other.
13.12 INDEPENDENT CONTRACTORS: Each party's efforts in relation to this
Agreement will be as an independent contractor. Nothing contained in
this Agreement shall constitute the parties as entering upon a joint
venture or partnership, or shall constitute either party the agent for
the other party for any purpose or in any sense whatsoever.
13.13 PRIOR COMMUNICATIONS AND ORDER OF PRECEDENCE: The provisions of this
Agreement, including Attachments and the CDA, constitute the entire
agreement between the parties. This Agreement replaces any prior oral or
written agreements or other communication between the parties with
respect to the subject matter of this Agreement, excluding any
confidential disclosure agreements. In the event of any conflict in these
documents, the order of precedence will be: (i) the quantity, payment
and delivery terms of any relevant purchase order; (ii) the relevant
SOW; (iii) the Agreement; and (v) the remaining terms of any relevant
purchase order.
13.14 RECORDKEEPING AND AUDIT RIGHTS: The parties will maintain (and provide
to the other party access upon request as provided below) relevant
accounting records to support invoices and payment obligations under
this Agreement, for three (3) years following completion or termination
of the Agreement. All accounting records will be maintained in
accordance with generally accepted accounting principles. Each party
shall have the right (at its expense, upon reasonable notice and during
the other party's normal business hours) to have an independent
certified public accountant inspect and audit the books and records of
the other party for the purpose of verifying any reports, information or
payments provided or due hereunder. All under/over payments revealed buy
such audit shall be paid or returned to the affected party within thirty
(30) days of the audit results.
13.15 RESERVATION OF RIGHTS: Unless explicitly granted in this Agreement,
neither party grants the other any rights in any intellectual property,
including patents and patent applications, by implication, estoppel or
otherwise.
13.16 SEVERABILITY: If any term in this Agreement is found by competent
judicial authority to be unenforceable in any respect, the validity of
the remainder of this Agreement will be unaffected, provided that such
unenforceability does not materially affect the parties' rights under
this Agreement.
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<PAGE> 16
13.17 SURVIVAL: In addition to the survival provisions in Section 10.0, "Term
and Termination," the provisions set forth in the following Sections and
Subsections of this Agreement will survive after termination of this
Agreement and will remain in effect until fulfilled: 1.0 "Definitions,"
3.0 "License Grants," 4.0 "Royalties," 5.0 "Source Code Escrow," 6.0
"Ongoing Warranties," 7.0 "Indemnification and Limitation of Liability,"
8.0 "Intellectual Property," 10.0 "Term and Termination," and 13.0
"General."
13.18 WAIVER: An effective waiver under this Agreement must be in writing
signed by the party waiving its right. A waiver by either party of any
instance of the other party's noncompliance with any obligation or
responsibility under this Agreement will not be deemed a waiver of
subsequent instances.
ACCEPTED AND AGREED TO: ACCEPTED AND AGREED TO:
By: /s/ JOHN R. SWEETMAN 9-27-99 By: /s/ JOHN A. HEWITT, JR. 9-27-99
- -------------------------------------- -------------------------------------
IBM Signature Date Vision Signature Date
John R. Sweetman John A. Hewitt, Jr.
- -------------------------------------- -------------------------------------
Printed Name Printed Name
Contract Specialist, IBM Corporation President and CEO
- -------------------------------------- -------------------------------------
Title and Organization Title and Organization
IBM Address: Vision Address:
- -------------------------------------- -------------------------------------
IBM Corporation Vision Software Tools, Inc.
3039 Cornwallis Road, 002/VRDA 2101 Webster Street, Eighth Floor
Research Triangle Park, NC 27709 Oakland, CA 94612
USA USA
Page 15 of 17
<PAGE> 17
ATTACHMENT 1: AUTHORIZATION FOR ELECTRONIC FUNDS TRANSFER
You hereby authorize IBM to initiate credit entries to the account listed below
in connection with agreed upon Electronic Data Interchange (EDI) transactions
between our companies. You agree that such transactions will be governed by the
National Automated Clearing House Association rules. This authority is to remain
in effect until IBM has received written notification of termination in such
time and such manner as to afford IBM a reasonable opportunity to act on it. IN
NO EVENT SHALL IBM BE LIABLE FOR ANY SPECIAL, INCIDENTAL, EXEMPLARY OR
CONSEQUENTIAL DAMAGES AS A RESULT OF THE DELAY, OMISSION OR ERROR OF AN
ELECTRONIC CREDIT ENTRY, EVEN IF IBM HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH
DAMAGES. This Agreement shall be governed by the laws of the State of New York.
Trading Partner Name VISION SOFTWARE TOOLS, INC.
--------------------------------
Payment Remit Address ATTN: ACCOUNTS RECEIVABLE DEPT.
in the event a paper --------------------------------
check needs to be sent 2101 WEBSTER STREET, 8th FLOOR
--------------------------------
City, State OAKLAND, CA ZIP 94612
--------------------------------
Account Payee (If different than above) N/A
--------------------------------
Address
--------------------------------
City, State ZIP
--------------------------------
EFT Domestic Banking Institution CUPERTINO NATIONAL BANK
--------------------------------
Contact Name/Title TOD RACINE, VICE PRESIDENT
--------------------------------
Contact Phone Number 650-813-3806
--------------------------------
Address THREE PALO ALTO SQUARE,
--------------------------------
SUITE 150
--------------------------------
City, State PALO ALTO, CA ZIP 94306
--------------------------------
Account Number 003103838 (MAX 17)
-------------------
Bank Routing/Transit Cd ABA #121141152 (MAX 9)
-------------------
Remit Advice Option 1 80-126-9440
(see attachment) ----- -----------------------
DUNS#/UserID + Acct#--
2 See Attachment
-----
Tax ID Number 68-0255203
-------------------
By /s/ JOHN A. HEWITT JR.
--------------------------------
authorized signature
Name John A. Hewitt Jr.
--------------------------------
Title Pres. & CEO
--------------------------------
Phone Number 510 433 4206
--------------------------------
Date 9/27/99
--------------------------------
Page 16 of 17
<PAGE> 18
EFT REMITTANCE OPTIONS
OPTION 1 -- IBM sends funds electronically to trading partner's bank and sends
remittance advice electronically to the trading partner. The trading partner
must have EDI capability or be an IBM Forms Exchange user for this option. The
remittance will usually be received two days prior to the funds being deposited
- -- the Effective Date on the remittance is the date the funds will be posted to
trading partner's account.
EDI ENABLED VENDORS:
This option requires a TPA agreement form completed. This option also required
your DUNS# or Account# + UserID -- Van Net and X12 version.
IBM FORMS EXCHANGE ENABLED VENDORS:
Remittances will be sent via forms exchange. Please go to your 'inbox' to view
all remittances.
OPTION 2 -- IBM sends funds and remittance advice electronically to trading
partner's bank. Trading partner's bank forwards the remittance advice to the
trading partner. The trading partner must verify with their bank that they have
the ability to receive the deposit and remittance and must make the appropriate
arrangements with their bank for forwarding of the remittance advice. Your
remittance file will be forwarded to your bank in a CTX format as an ACH
transaction. Please register with the commercial help line at your banking
institution.
THIS OPTION WILL BE SETUP FOR NON-EDI VENDORS.
NOTE: If an option is not selected on the EFT form, your will automatically be
set up with Option 2. Please make the necessary arrangements with your bank to
receive your remittance detail.
NOTE: If you have a foreign banking institution, please contact Tim Taylor at
607-755-2144.
Page 17 of 17
<PAGE> 19
IBM AND VISION
JOINT PRODUCT AND MARKETING AGREEMENT
JOINT PRODUCT STATEMENT OF WORK
This JP-SOW is part of any incorporates by reference the terms and conditions
of the Joint Product and Marketing Agreement and capitalized terms used herein,
unless defined herein, shall have the meaning ascribed to them in the Agreement.
ATTACHMENTS
Attachment 1: Certificate of Originality
Attachment 2: Product Support
1.0 SCOPE OF WORK
This SOW covers a new version of Vision's current product line that will be
built to re-host Vision's BLS on top of (and integrating) IBM WAS-AE. This SOW
details the structure of this joint development relationship. It also describes
the content of Release 1 of the new product called "BLS/WAS-AE" for the
purposes of this SOW.
The goal of this relationship is to create a product that is relevant to the
IBM market and Vision market place. The Vision product delivery to IBM will
consist of BLS and the associated Developer Studio. The IBM product delivery to
Vision will consist of WAS-AE and WS.
2.0 DESCRIPTION OF CODE
2.1 DESCRIPTION OF INTEGRATED CODE FOR RELEASE 1. Integrated Code for Release
1 consists of the BLS Code with WAS-AE silently installed and Developer
Studio ("BLS/WAS-AE"), with WebSphere Studio ("WS") included in the product
package [*]. Release 1 will consist of a US English language version and
an International version.
2.2 INTEGRATED CODE FOR THE US ENGLISH LANGUAGE OF RELEASE 1 GENERAL
DESCRIPTION.
2.2.1 CODE NAME AND VERSION NUMBER: The Integrated Code for US English
language Release 1 is the combined product Business Logic Server
(with Developer Studio)/WebSphere Application Server, Advanced
Edition (BLS/WAS-AE) Version 1.0, in Object Code form and WS.
2.2.2 GENERAL DESCRIPTION OF ITS FUNCTION:
A. WebSphere Application Server-Advanced Edition is a portable,
Java-based web application deployment platform which supports
and executes Java Servlets, Java Beans, Java Server Pages, and
Enterprise Java Beans while interacting with enterprise
databases, transaction processing systems, and other
applications for dynamic web content. It provides the
portability and control of server-side business applications
along with the performance and manageability of Enterprise Java
Beans to offer a comprehensive Java-based Web application
platform.
B. Vision Business Logic Server provides logic execution services
for executing business rules. Vision Developer Studio is a
complete development environment for developing presentation,
business logic and data access logic for web applications.
C. BLS/WAS-AE hosts Vision's BLS on top of WAS-AE, providing the
ability to deploy business logic as Enterprise Java Beans. The
product will consist of two components: the Vision Developer
Studio and the combined server.
D. WebSphere Studio is a set of web application development tools
designed to allow web developers to create dynamic web
applications that run on the WebSphere Application Server. The
product will be delivered as its is shipped to IBM customers.
In addition to
* Confidential treatment requested for redacted portion.
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<PAGE> 20
WebSphere Studio 3.0, the package will include NetObjects
ScriptBuilder 3.0 and VisualAge for Java Professional
Edition 3.0.
2.2.3 DOCUMENTATION: Documentation consists of developer and end-user
external documentation. All documentation is produced and
delivered in a delivery format, either HLP, PDF or HTML.
2.2.4 OTHER MATERIALS: (none).
2.2.5 DELIVERY LOCATION: Distributions will be delivered by Vision
electronically to the designated IBM representative.
2.3 INTEGRATED CODE FOR THE US ENGLISH LANGUAGE VERSION OF RELEASE 1
SPECIFIC DESCRIPTION
2.3.1 CODE NAME AND VERSION NUMBER: BLS/WAS-AE, in Object Code
format, including: (i) WAS-AE (per Section 2.2 and as described
in Section 2.5 below), and (ii) BLS and Developer Studio (per
Section 2.2 and as described in Section 2.7 below) and WS (per
Section 2.2 and as described in Section 2.6 below).
2.3.2 REQUIRED FUNCTION FOR BLS/WAS-AE: BLS/WAS-AE will have all of
the features of WAS-AE (per Section 2.2 and as described in
Section 2.5 below) and BLS and Developer Studio (per Section
2.2 and as described in Section 2.7 below) plus the following:
A. Common install and configuration;
B. Ability to compile business objects into Enterprise
Java Beans;
C. Ability to host Vision Business Logic Services as
Enterprise Java Beans;
D. Ability to build and develop business logic in a non-US
English language (see below):
E. Ability to call into other Enterprise Java Beans; and
F. Ability to use RMI (over IIOP) for communication.
2.3.3 PRODUCT/OPERATING SYSTEM SUPPORTED BY BLS/WAS-AE: The server
portion will be supported on Windows NT Server Version 4.0, Sun
Solaris Version 2.6 at the latest maintenance level, AIX
Version 4.3.2 or later. The Developer Studio will be supported
on Windows NT Version 4.0, and Windows 98.
2.3.4 DOCUMENTATION FOR BLS/WAS-AE: WAS-AE end-user documentation
consisting of: (i) the WAS-AE Documentation Center (HTML only);
(ii) the Javadoc reference (HTML only, not translated); and
(iii) the Getting Started guide (HTML, RTF, and PDF) and the
BLS and Developer Studio end-user documentation consisting of:
(i) BLS Admin guide (PDF, HLP); (ii) Getting Started guide (PDF,
HLP); (iii) XDA connector manual (PDF, HLP); and (iv) Project
Management guide (PDF, HLP).
2.3.5 OTHER MATERIALS FOR BLS/WAS-AE: Test cases and test results, in
text format.
2.3.6 WS. The WS portion of the Integrated Code will have the
description provided in Section 2.6.
2.3.7 DELIVERY LOCATION AND OTHER SPECIFICS: Delivery will be
electronic via the Internet to an individual/site specified by
IBM.
2.4 INTEGRATED CODE FOR THE INTERNATIONAL VERSION OF RELEASE 1 GENERAL
DESCRIPTION. The International version of Release 1 will be the US
English language version of Release 1, with the addition of the
following:
2.4.1 [*]
2.4.2 IBM will translate these versions into the group 1 languages:
Spanish, French, Italian, German, Brazilian Portuguese,
Simplified Chinese, Traditional Chinese, Korean and Japanese.
2.5 DESCRIPTION OF WAS-AE CODE.
2.5.1 WAS-AE GENERAL DESCRIPTION.
[*] Confidential treatment requested for redacted portion.
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A. CODE NAME AND VERSION NUMBER: WAS-AE is WebSphere Application
Server Advances Edition (WAS-AE) Version 3.0, in object code form.
B. GENERAL DESCRIPTION OF ITS FUNCTION: WebSphere Application Server
Advanced Edition is a portable, Java-based web application
deployment platform which supports and executes Java Servlets, Java
Beans, Java Server Pages, and Enterprise Java Beans while
interacting with enterprise databases, transaction processing
systems, and other applications for dynamic web content. It provides
the portability and control of server-side business applications
along with the performance and manageability of Enterprise Java
Beans to offer a comprehensive Java-based Web application platform:
C. DOCUMENTATION: Documentation consists of developer and end-user
external documentation. All documentation is produced and delivered
in a softcopy format, either PDF or HTML.
D. OTHER MATERIALS: (NONE).
E. DELIVERY LOCATION: Distribution will be delivered electronically to
the designated Vision representative.
2.5.2 WAS-AE SPECIFIC DESCRIPTION.
A. CODE NAME AND VERSION NUMBER: WebSphere Application Server Advanced
Edition, in Object Code format, including:
i) all Java class files;
ii) selected DB2 files (see below);
iii) IBM HTTP Server Version 3.0 executable; and
iv) IBM JDK Version 1.1.7 for Windows NT, Version 1.1.6 for AIX
and Solaris.
B. REQUIRED FUNCTION: THE FOLLOWING ARE FEATURES OF WAS-AE:
i) Java Servlet Runtime, including servlet configuration,
virtual hosting, aliasing, and filtering;
ii) Enterprise Java Bean support;
iii) Java Server Page 0.91 and 1.0 and tag support;
iv) XML Document Structure Services;
v) Support for IBM, Apache, Microsoft, and Netscape HTTP
Servers;
vi) User Profile and Session tracking;
vii) Connection pooling;
viii) Database Connections and Databeans;
ix) Access Control;
x) Administration;
xi) Security;
xii) Workload Management;
xiii) Trace and Debug Support;
xiv) Monitoring and Graphing;
xv) Logging;
xvi) Multi-node administration;
xvii) Modeling/Cloning for WLM Support; and
xviii) Remote Servlet Execution Support.
C. The following features of DB2 are included:
i) DB2 Application Development;
ii) DB2 ADT Sample Programs;
iii) License Support for DB2;
iv) DB2 Client Application Enabler;
v) Code Page Conversion Tables;
vi) DB2 Connect;
vii) DB2 Communication Support;
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<PAGE> 22
viii) Administration Server;
ix) DB2 Engine;
x) DB2 Run-time Environment;
xi) DB2 Sample Database Source;
xii) License Support for DB2 UDB;
xiii) Java Support;
xiv) Open Database Connectivity; and
xv) DB2 Replication.
D. PRODUCT/OPERATING SYSTEM SUPPORTED: [*].
E. NATIONAL LANGUAGE SUPPORT VERSION REQUIRED: NLS Enabled
and translated into the group 1 languages: Spanish,
French, Italian, German, Brazilian Portugese, Simplified
Chinese, Traditional Chinese, Korean and Japanese.
F. DOCUMENTATION: The WAS-AE end-user documentation
includes:
i) the WAS-AE Documentation Center (HTML only);
ii) the Javadoc reference (HTML only); and
iii) the Getting Started guide (HTML, RTF, and PDF).
G. OTHER MATERIALS: Test cases and test results, in text
format.
H. DELIVERY LOCATION AND OTHER SPECIFICS: Delivery will be
electronic via the Internet to an individual/site
specified by Vision.
I. ENCRYPTION: WAS-AE will be provided in separate builds
with either 56-bit or 128-bit encryption technology. IBM
will identify the nature of the build to Vision per
Section 5.4.
2.6 DESCRIPTION OF WS CODE.
2.6.1 WS GENERAL DESCRIPTION.
A. CODE NAME AND VERSION NUMBER: WS is WebSphere Studio
Version 3.0, in Object code form.
B. GENERAL DESCRIPTION OF ITS FUNCTION: WebSphere Studio is
a set of web application development tools designed to
allow web developers to create dynamic web applications
that run on the WebSphere Application Server. The
product will be delivered as it is shipped to IBM
customers. The WS package will include WebSphere Studio
3.0, NetObjects ScriptBuilder 3.0 and VisualAge for Java
Professional Edition 3.0.
C. DOCUMENTATION: Documentation consists of Developer and
end-user external documentation. All documentation is
produced and delivered in a softcopy format, either HLP,
PDF or HTML.
D. OTHER MATERIALS: (None).
E. DELIVERY LOCATION: Distributions will be delivered via
CD-ROM to the designated Vision Representative.
2.6.2 WS SPECIFIC DESCRIPTION.
A. CODE NAME AND VERSION NUMBER: WebSphere Studio Version
3.0 in Object Code format (as well as NetObjects
ScriptBuilder 3.0 in Object Code format and VisualAge
for Java Professional Edition 3.0 in Object Code
format).
B. REQUIRED FUNCTION: The following are features of
WebSphere Studio:
i) Graphical display of the links between files in a
project;
ii) Automatic update of links whenever files change or
move;
iii) Registration of other tools for editing;
* Confidential treatment requested for redacted portion.
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iv) A built-in Page Designer to visually create and
edit HTML and JSP files;
v) Wizards that jump-start the creation of dynamic
pages using databases and JavaBeans;
vi) Staging and publishing to different (and to
multiple) servers;
vii) An integrated Debugger to find JSP and Java
code problems;
viii) Integration with popular source control
management software;
ix) Applet Designer, a visual authoring tool for
building Java applets;
x) WebArt Designer, for creating masthead images,
buttons, and other graphics; and
xi) AnimatedGif Designer, for assembling GIF
animations.
C. PRODUCT/OPERATING SYSTEM SUPPORTED: Windows NT Version
4.0 with Service Pack 3, Windows 95, or Microsoft
Windows 98.
D. NATIONAL LANGUAGE SUPPORT VERSION REQUIRED: NLS Enabled
and translated into the group 1 languages: Spanish,
French, Italian, German, Brazilian Portuguese,
Simplified Chinese, Traditional Chinese, Korean and
Japanese.
E. DOCUMENTATION: WebSphere Studio end-user documentation:
i) WS Documentation Center (HTML only);
ii) Online help files (HLP); and
iii) Getting Started guide (HTML, RTF and PDF).
F. OTHER MATERIALS: (none).
G. DELIVERY LOCATION AND OTHER SPECIFICS: Delivery will be
via CD-ROM to an individual / site specified by Vision.
In addition to WebSphere Studio 3.0, the CD will contain
NetObjects ScriptBuilder 3.0 and VisualAge for Java
Professional Edition 3.0.
2.7 DESCRIPTION OF VISION CODE (BLS AND DEVELOPER STUDIO).
2.7.1 BLS AND DEVELOPER STUDIO GENERAL DESCRIPTION
A. CODE NAME AND VERSION NUMBER: BLS is Vision Business
Logic Server Version 5.0 and Developer Studio is Vision
Developer Studio Version 5.0, both in Object Code
format.
B. GENERAL DESCRIPTION OF ITS FUNCTION: Vision Business
Logic Server provides logic execution services for
executing business rules. Vision Developer Studio is a
complete development environment for developing
presentation, business logic and data access logic for
web applications.
C. DOCUMENTATION: Documentation consists of developer and
end-user external documentation. All documentation is
produced and delivered in a delivery format, either PDF
or HLP.
D. OTHER MATERIALS: Test cases, delivered in text format.
E. DELIVERY LOCATION: Distributions will be delivered
electronically to the designated IBM representative.
2.7.2 BLS AND DEVELOPER STUDIO SPECIFIC DESCRIPTION.
A. CODE NAME AND VERSION NUMBER: Vision Business Logic
Server Version 5.0 and Vision Developer Studio Version
5.0, both in Object Code format.
B. REQUIRED FUNCTION: The following are features of Vision
Business Logic Server and Vision Developer Studio:
i) Ability to compile business objects;
ii) Ability to capture business rules;
iii) Ability to reverse engineer existing objects;
iv) Ability to deploy business objects to the
server;
v) Ability to define applications using diagrams;
vi) Ability to customize client and server objects;
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<PAGE> 24
vii) Ability to monitor business logic execution;
viii) Ability to bind business objects to presentation logic;
ix) Ability to manage result sets efficiently; and
x) Ability to integrate business rules with external data.
C. PRODUCT/OPERATING SYSTEM SUPPORTED: The Developer Studio is
supported on [*]. The Business Logic Server is supported on [*].
D. NATIONAL LANGUAGE SUPPORT VERSION REQUIRED: The Business Logic
Server will be NLS Enabled [*]. The Developer Studio will be NLS
Enabled [*].
E. DOCUMENTATION: BLS and Developer Studio end-user documentation
consists of:
i) BLS Admin guide (PDF, HLP);
ii) Getting Started guide (PDF; HLP);
iii) XDA connectors manual (PDF, HLP); and
iv) Project Management guide (PDF, HLP).
F. OTHER MATERIALS: Test cases, delivered in text format.
G. DELIVERY LOCATION AND OTHER SPECIFICS: Delivery will be
electronic via the Internet to an individual/site specified by
IBM.
3.0 IBM DELIVERABLES
3.1 WAS-AE. When it becomes available, IBM will deliver to Vision a golden
master copy of WAS-AE for integration by Vision into the Vision Code to
produce Release 1 of the Integrated Code.
3.2 WAS-AE DRIVERS. When they become available, IBM will deliver to Vision
IBM's internal drivers for WAS-AE. Based upon driver stability, the IBM
Development Manager will determine which drivers are appropriate for
delivery by IBM to Vision. This early access will allow Vision to start
both analysis of the new features and test for backward compatibility
early on in the release cycle. Vision realizes that these are early builds
and as such have not completed IBM's full test cycle; hence. IBM will
provide Vision with functional restrictions associated with these early
builds.
3.3 WS. IBM will deliver to Vision a golden master copy of WS for eventual
distribution as part of the Integrated Code.
3.4 IBM MAINTENANCE RELEASES AND PATCHES. During the term of the Agreement,
IBM will deliver all maintenance releases and patches of WAS-AE and WS
made available to other IBM customers to Vision, including those that
result from defects reported to IBM by Vision. The maintenance releases
and patches will be provided to Vision when they are provided to IBM's
commercial customers.
3.5 IBM-TRANSLATED MATERIALS. IBM will deliver the IBM-translated versions of
Vision's PII files and documentation as they are described in Section
4.1.3 to Vision for incorporation into the Vision Code.
3.6 TEST CASES. IBM will deliver to Vision those WAS-AE test cases which are
relevant to the development effort.
3.7 IBM DOCUMENTATION. IBM will deliver to Vision the WAS-AE Getting Started
Guide in source format and the WAS-AE Documentation Center in US English
and in supported translated languages as specified in Section 5.2.1 to
Vision. These guides will use the generic nomenclature and will not be
company specific in their identification of various components. However,
in the interest of shipping the respective products at the earliest
reasonable date, the product documentation may include company-specific
references in Release
* Confidential treatment requested for redacted portion.
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1. The documentation for any other IBM products addressed in this JP-SOW
will be delivered to Vision consistent with that product's IBM deliverable to
its customers.
3.8 INSTALLATION CODE. IBM will deliver to Vision WAS-AE silent install Object
Code. This Code will allow WAS-AE to be silently installed by BLS in the
BLS/WAS-AE product.
4.0 VISION DELIVERABLES
4.1 BLS/WAS-AE.
4.1.1 Preliminary Builds. Vision will deliver to IBM builds of BLS/WAS-AE
after Visions's code freeze (which is equivalent to the code and
unit test completed phase). Based upon driver stability, the Vision
Development Managers will determine which builds are appropriate
for delivery by Vision to IBM. This early access will allow IBM to
start both analysis of the new features and test for backward
compatibility early on in the release cycle. IBM realized that
these are early builds and as such have not completed Vision's full
test cycle. Vision will provide IBM with functional restrictions
associated with these early builds.
4.1.2 Final Build. Vision will deliver to IBM a fully-tested version of
BLS/WAS-AE in an installable format. The final builds will meet the
specification described in Section 9.0 "Acceptance."
4.1.3 PII Volumes. Vision will deliver to IBM its Program Integrated
Information ("PII") volumes. Vision will also deliver to IBM its
non-PII volumes. Non-PII includes HTML and product documentation
(PDF and help files). These deliveries will occur as referenced in
Section 8.0.
4.1.4 Complete NLS Build. Vision will deliver to IBM the complete NLS
builds of BLS/WAS-AE as well as a separate Vision Developer Studio
NLS build for TVT prep/entry in an operational and installable
format. These deliveries will occur as referenced in Section 8.0.
4.1.5 Final NLS Build. Vision will deliver to IBM the final NLS builds of
BLS/WAS-AE as well as a separate Vision Developer Studio NLS build
in an installable format based on TVT-exit level code. These
deliveries will occur as referenced in Section 8.0.
4.1.6 Test Cases. Vision will deliver to IBM those BLS and Developer
Studio test suites, its BLS/WAS-AE port of those test suites, and
its BLS/WAS-AE test cases that are relevant to the development
effort.
4.2 VISION MAINTENANCE RELEASES AND PATCHES. During the term of this Agreement,
Vision will deliver all maintenance releases and patches of BLS/WAS-AE to
IBM, including those that result from defects reported to Vision by IBM.
The maintenance releases and patches will be provided to Vision when they
are provided to IBM's commercial customers.
4.3 VISION DOCUMENTATION. Vision will deliver the following items in US
English to IBM as part of the BLS/WAS-AE delivery:
4.3.1 Developer's guide to using BLS/WAS-AE;
4.3.2 System Administration guide for BLS/WAS-AE;
4.3.3 Developer's Reference for BLS/WAS-AE;
4.3.4 Vision API documentation;
4.3.5 On-line help files; and
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4.3.6 Getting Started (Vision's book).
The Vision Documentation will be delivered in two output formats: Adobe
Acrobat Format (.pdf) and Windows help (.hlp). Additionally, to
facilitate the reformatting of these guides to IBM product standards,
Vision will provide the documentation source to IBM in Framemaker and
Rich Text Format. These guides will use the generic nomenclature and
will not be company specific in its identification of various
components. However, in the interest of shipping the respective products
at the earliest reasonable date, the product documentation may include
company-specific references in Release 1. For Release 1, the images will
not be converted to different documentation formats and will not be
localized to various languages.
5.0 IBM RESPONSIBILITIES
5.1 IBM DELIVERABLES. IBM will provide all IBM Deliverables to Vision in
accordance with the Schedule in Section 8.0 and the specifications
described in this SOW.
5.2 NATIONAL LANGUAGE SUPPORT ("NLS").
5.2.1 NLS Translation of Vision Code. IBM will translate the Vision
Code, perform a translation verification test ("TVT") and
deliver the IBM-translated version of these files and
documentation to Vision for eventual distribution as part of
Vision's version of the BLS/WAS-AE product. The Vision Code will
be translated into group 1 languages: Spanish, French, Italian,
German, Brazilian Portuguese, Simplified Chinese, Traditional
Chinese, Korean and Japanese. [*].
5.2.2 NLS and IBM Code. The IBM Code is NLS enabled for all platforms
[*].
5.2.3 [*]
5.2.4 Timing of Delivery. Due to the time needed to translate the PII
and non-PII volumes, the translated PII and non-PII volumes will
be available for delivery by IBM to Vision following the US
English language delivery by an expected 30 days.
5.3 TESTING AND QUALITY ASSURANCE.
5.3.1 IBM will perform a TVT per Section 5.2.1.
5.3.2 IBM will review Vision's BLS/WAS-AE test plans/cases in order to
independently confirm their comprehensiveness. Any proposed
modifications to these test plans/cases will need to be mutually
agreed upon.
5.3.3 IBM will provide the necessary number of engineers to work with
Vision during the testing process to help test and certify
acceptance (per Section 9.0) of the BLS/WAS-AE product.
* Confidential treatment requested for redacted portion.
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5.3.4 IBM will create a test plan/cases to test the BLS/WAS-AE product
that it intends to complete in parallel with the Vision testing.
At the completion of the NLS TVT, IBM or Vision may decide to
refresh the previously released English version of the product
via the service stream to incorporate any functional defect
solutions. Additional details regarding personnel requirements
will be included in the IBM's test plan.
5.3.5 IBM will report all BLS and related Vision Code and Documentation
defects to Vision for appropriate resolution. Upon receipt of the
defect solution, IBM will verify that the solution corrects the
original defect and so inform Vision. Additional testing details
will be included in IBM's test plan.
5.4 Encryption. IBM will identify to Vision the levels of encryption for each
WAS-AE build delivered to Vision. (See Section 7.5).
6.0 VISION RESPONSIBILITIES
6.1 Vision Deliverables. Vision will provide all Vision Deliverables to IBM
in accordance with the Schedule in Section 8.0 and the specifications
described in this SOW.
6.2 National Language Support ("NLS"). Vision will NLS-enable the Vision
Code and deliver to IBM as part of the BLS/WAS-AE delivery all
externalized resource files, documentation and help files for NLS
translation by IBM as described under Section 5.1. Vision will perform
an NLS enablement verification test. All of the NLS enablement test
cases, as reviewed by IBM (per Section 5.3.2), must be executed to
completion before IBM can perform a TVT.
6.3 TESTING AND QUALITY ASSURANCE.
6.3.1 Vision has a regression suite to test multiple aspects of the
Vision Developer Studio and BLS products. Vision will port the
test suite to enable testing of the BLS/WAS-AE product. In
addition, Vision will develop new tests for the integrated
product. This testing suite will be used to certify the BLS/WAS-AE
product. [*] The platform matrix will be included in the Vision's
product test documentation as referenced in Section 5.3.2. [*]
Vision intends to use its QA staff to its fullest and expects to
assign the necessary number of QA engineers to help with the
complete testing and certification of the project.
6.3.2 Vision will report all WAS-AE and related IBM Code and
Documentation defects to IBM for appropriate resolution. Upon
receipt of the defect solution from IBM, Vision will verify that
the solution corrects the original defect and so inform IBM.
Additional testing details will be included in Vision's test plan.
6.3.3 Vision personnel will be available to assist IBM in the testing of
the English language version of the BLS/WAS-AE product. At lest
one Vision employee will be expected to assist the IBM TVT team on
site with the execution of their activities to verify the proper
translation of the Vision product(s) and to maintain the TVT
schedules. Additionally, Vision may be required, at IBM's
discretion, to provide daily or more frequent delivery of product
builds (Preliminary Builds) during the TVT to allow that test to
maintain its project schedule goals. The TVT build requirements
usually pertain to the correction of translated information only,
but may also require functional defect corrections.
* Confidential treatment requested for redacted portion.
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6.3.4 Vision will review IBM's BLS/WAS-AE test plans/cases in order to
ensure their comprehensiveness. Any proposed modifications to these
test plans/cases after the review must be approved by IBM.
6.3.5 Vision will perform NLS-enablement testing per Section 6.2.
6.3.6 Vision will perform a final functional/installation regression test
on the BLS/WAS-AE final build to ensure that all components are
installed properly before delivery to IBM.
6.4 END-USER PRODUCT LICENSING. Before providing BLS/WAS-AE product to IBM,
Vision will disable all key-enabled utilities such that the use of the
BLS/WAS-AE product by IBM end-users is not contingent upon key access.
7.0 JOINT RESPONSIBILITIES
7.1 DEVELOPMENT.
7.1.1 [*]
7.1.2 [*]
7.1.3 Each party will provide the appropriate project personnel and
tracking information to the other on a regularly scheduled basis.
This will be provided during a weekly conference call.
7.2 YEAR 2000 TESTING. Vision will test the Year 2000 compliance of
BLS/WAS-AE and ensure that it is Year 2000 ready such that when used in
accordance with the appropriate documentation it is capable of correctly
processing, providing, receiving and displaying date data before and
after January 1, 2000 (including without limitation leap year
calculations), provided that all products (for example, hardware, software
and firmware) used with BLS/WAS-AE properly exchange accurate date data
with it.
7.3 PRODUCT MANUFACTURING. Each party will produce the appropriate media and
physical documentation for products incorporating the Integrated Code
independently. Each party will provide to the other the necessary CD
media layout information to enable each company to package the products
for their respective offerings.
7.4 PRODUCT USER INTERFACE. The user interface for the Integrated Code will
remain intact with the only change between the IBM and Vision versions
being the product name, icon and any terms, conditions and prices offered
by the parties. IBM will supply a product name and icon that will be used
consistently across the product for the IBM version of the Integrated
Code. IBM and Vision will include the necessary copyright and trademark
notices in the Integrated Code for each other's components.
7.5 ADMINISTRATIVE REQUIREMENTS. WAS-AE contains 56-bit or 128-bit
encryption technology. This technology is required to be registered with
the US Government and handled appropriately according to the US State
Department guidelines.
* Confidential treatment requested for redacted portion.
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7.6 CERTIFICATES OF ORIGINALITY. Each party will provide the other with a
Certificate of Originality for the IBM Code and Vision Code (respectively),
substantially in the format of Attachment 1.
8.0 SCHEDULE
The following chart describes the series of milestones that the parties
understand must be achieved in order to maintain the defined schedule. These
milestones are specified in order to ensure a reasonable set of expectations
for the delivery schedule from each party.
[*]
9.0 ACCEPTANCE
9.1 IBM's acceptance test is expected to consist of a subset of the previously
executed test cases completed by Vision and IBM. The acceptance tests may
include one or more of the following: (i) component testing; (ii)
functional verification testing; (iii) system testing; and (iv)
compatibility testing.
9.2 The acceptance criteria will be determined in advance according to the
schedule in Section 8.0. At a minimum, IBM will determine if:
9.2.1 the Integrated Code meets the specifications described in this
SOW;
* Confidential treatment requested for redacted portion.
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9.2.2 the Integrated Code executes repetitively within the system
environment described in this SOW;
9.2.3 IBM can successfully execute to completion all functional and
system test scenarios; and
9.2.4 all Severity 1 and Severity 2 (as those terms are defined in the
Product Support Attachment) problems are resolved, or an action
plan to resolve them has been agreed upon by IBM and Vision. This
action plan shall have specific dates and responsibilities
identified.
9.3 The final acceptance test of the NLS versions will be the TVT.
10.0 PRODUCT SUPPORT
10.1 For the purposes of this Section 10 and of the Product Support Attachment,
"Licensor" and "Licensee" shall refer to Vision or IBM, as applicable,
depending on whether the party is the licensor or licensee of the rights
granted in Sections 3.1 and 3.2 of the Joint Product and Marketing
Agreement.
10.2 Each party will provide the staff and processes required to deliver Level 1
and 2 product support directly to its respective customers for the
Integrated Code as defined in the Product Support Attachment.
10.3 The Licensor will provide the staff and processes required to deliver Level
3 product support to the Licensee for the Licensor's portion of the
Integrated Code (IBM Code or Vision Code, respectively) as defined in the
Product Support Attachment.
ACCEPTED AND AGREED TO: ACCEPTED AND AGREED TO:
By: /s/ JOHN R. SWEETMAN 9-27-99 By: /s/ JOHN A. HEWITT JR. 9-27-99
- -------------------------------------- ----------------------------------
IBM Signature Date Vision Signature Date
John R. Sweetman John A. Hewitt Jr.
- -------------------------------------- ----------------------------------
Printed Name Printed Name
Contract Specialist, IBM Corporation President & CEO
- -------------------------------------- ----------------------------------
Title and Organization Title and Organization
IBM Address: Vision Address:
- -------------------------------------- ---------------------------------
IBM Corporation Vision Software Tools, Inc.
3039 Cornwallis Road, 002/VRDA 2101 Webster Street, Eighth Floor
Research Triangle Park, NC 27709 Oakland, CA 94612
USA USA
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ATTACHMENT 1: CERTIFICATE OF ORIGINALITY
The Certificate of Originality questionnaire may be used to cover one complete
Licensed Work, even if that Licensed Work includes multiple modules. Write "not
applicable" or "N/A" if a question is not relevant to the furnished software
material.
1. The following Certificate of Originality applies to ___________ described
in this Statement of Work.
2. Was any portion of the software material written by anyone other than you
or your employees within the scope of their employment? YES ___ NO ___ If
YES, identify the author and the circumstances:
A) Indicate if the whole software material or only a portion thereof was
written by such party, and identify such portion:
i. Specify for each involved party the name, address, and
citizenship:
ii. If the party is a company, how did it acquire title to the
software material (e.g., software material was written by
company's employees within the scope of their employment)?
iii. If the party is an individual, did he/she create the
software material while employed by or under contractual
relationship with another party? YES ___ NO ___ If YES,
provide name and address of the other party and explain the
nature of the contractual relationship:
B) How did you acquire title to the software material written by the
other party?
3. Are any copyright, confidentiality, or proprietary notice(s) present
on the software material(s)? YES ___ NO ___ If YES, please describe such
notice(s).
4. Was any portion of the software material (e.g., Code, associated
documentation or Externals) derived from preexisting works (either yours or
a third party's), including any code from freeware, shareware, electronic
bulletin boards, or the Internet? YES ___ NO ___ If YES, please identify
the material, author, owner and copyright notice, if any, for each of the
preexisting materials.
5. Does any of the software materials (e.g., Code, associated documentation or
Externals) include recognizable voices, pictures or other likenesses?
YES ___ NO ___ If YES, how did you acquire rights to use such recognizable
voices, pictures or other likenesses?
6. Provide an explanation of any other circumstance which might affect the
licensee's ability to reproduce, distribute and market this software
material, including whether your software material was prepared from any
preexisting materials which have any: a) confidentiality or trade secret
restrictions to others; b) known or possible royalty obligations to others;
and c) used other preexisting materials developed for another party or
customer (including government) where you may not have retained full rights
to such other preexisting materials.
Authorized Signature: /s/ JOHN A. HEWITT JR.
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Name: John A. Hewitt Jr.
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Title: Pres. & CEO
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Date: 9-27-99
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ATTACHMENT 2: PRODUCT SUPPORT
This Product Support Attachment is part of and incorporates by reference the
terms and conditions of the Joint Product and Marketing Agreement and its
Statements of Work and other Attachments, and capitalized terms used herein,
unless otherwise defined herein, shall have the meaning ascribed to them in the
Agreement.
1.0 DEFINITIONS
1.1 "CUSTOMER" is the end-user of the Integrated Code.
1.2 "CORRECTION TIMES" are objectives that each party must achieve for
resolution of errors and distribution of the appropriate correction to
the Customer or to the Licensee (as appropriate).
1.21. "Severity 1" requires maximum effort support until an emergency
fix or bypass is developed and available for shipment to the Licensee.
Critical situations may require Licensee and Licensor personnel to be at
their respective work locations or available on an around-the-clock
basis. The objective will be to provide relief to Licensee within [*]
hours and provide a final solution or fix within [*] days;
1.22 "Severity 2" must be resolved within [*] calendar days;
1.23 "Severity 3" must be resolved within [*] calendar days; and
1.24 "Severity 4" must be resolved with a bypass or by the next
release of the product.
The calendar days begin when Licensor receives the PMR from Licensee and
supporting documentation and end when the Maintenance modification or
other resolution is shipped to Licensee. Licensee will consider
exceptions from these objectives when warranted by technical or business
considerations.
1.3 PMR SEVERITY LEVELS are designations assigned by Licensee to errors
reported to indicate the seriousness of the error based on the impact
that the error has on the operation of Licensee or its Customer:
1.31 SEVERITY 1 is a critical problem. Licensee or its Customer
cannot use the Licensor Code or there is a critical impact on
the operations of Licensee or its Customer which requires an
immediate solution;
1.32 SEVERITY 2 is a major problem. Licensee can use the Licensor
Code, but an important function is not available or the
operations of Licensee or its Customer are severely impacted;
1.33 SEVERITY 3 is a minor problem. Licensee can use the Licensor
Code with some functional restrictions, but it does not have a
severe or critical impact on the operations of Licensee or its
Customer; and
1.34 SEVERITY 4 is a minor problem that is not significant to the
operations of Licensee or its Customer. Licensee may be able to
circumvent the problem.
1.4 Licensee Test Systems are an appropriate configuration of installed
hardware and software that Licensee maintains which is representative of
typical Customer installations using the Integrated Code. These test
systems will contain, at a minimum, a level or prerequisite/co-requisite
hardware and software that is correspondent with that of the documented,
supported platforms of the shipping product (e.g. the product
prerequisite requirements).
1.5 Maintenance Level Service is the service provided when Licensee
identifies an error.
1.51. LEVEL 1 is the service provided in response to Licensee's
initial phone call identifying an error.
1.52. LEVEL 2 is the service provided to reproduce and attempt to
correct the error or to find that the service provider cannot reproduce
the error.
* Confidential treatment requested for redacted portion.
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1.53 Level 3 is the service provided to isolate the error at the component
level of the Code. The service provider distributes the Maintenance
Modification or circumvention or gives notice if no Maintenance
Modification or circumvention is found.
1.6 PROBLEM DETERMINATION/CHARACTERIZATION is the process of determining
whether a problem is being caused by hardware, software or documentation.
1.7 PROBLEM MANAGEMENT RECORD ("PMR") is a record created when Licensee makes
the initial support request. This record becomes a part of the Licensee's
problem management system database and records the essential information
about Licensee's question or problem.
1.8 PROBLEM SOURCE IDENTIFICATION is the process of determining which software
or documentation component is failing or attributing the failure to some
external cause such as a Licensee error or to no trouble found.
2.0 MAINTENANCE AND SUPPORT RESPONSIBILITIES
2.1 The parties will agree to the specific details of the process flow each
will follow to resolve problem calls for requests for support 30 days
prior to the general availability of the first Integrated Code product
released by one of the parties.
2.2 Licensor will provide Licensee electronic (softcopy) information on any
known problems in the Licensor Code and the work arounds and solutions, if
available, within fourteen (14) days prior to the general availability of
the Integrated Code.
2.3 IBM Customers will initiate requests for support by contacting IBM; Vision
Customers will initiate requests by contacting Vision. IBM or Vision, as
appropriate, will perform the following Maintenance Level Service (Level
1) support responsibilities for its Customers, as described below. Each
party will:
2.31 create the PMR;
2.32 obtain from the Customer a description of the problem, and verify
its severity;
2.33 search its data base for known problems;
2.34 provide the available resolution if the problem is known;
2.35 recommend local assistance as required;
2.36 if no resolution, pass the PMR to that party's Level 2 personnel; and
2.37 update the PMR, documenting Level 1 actions.
Each party will be the primary contact point for its Customers for
questions, problems and assistance concerning the Integrated Code. Either
party may use a third party to perform its obligations.
2.4 thirty days prior to general availability of the Integrated Code, each
party will establish a process to check incoming electronic requests for
Level 3 support at least twice daily.
2.5 The parties agree to the following Customer Product Maintenance Level
Service responsibilities.
2.51 Each party will perform the following Level 2 responsibilities for its
Customers:
A. receive the PMR from its Level 1 personnel;
B. analyze problem symptoms and gather additional Customer data
from its Level 1 personnel as required;
C. recreate the problem on its Test Systems;
D. determine if the error is due to improper installation of the
Integrated Code by the Customer;
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E. determine if the suspected error is due to prerequisite
or operationally related equipment or software at the
Customer location;
F. determine if the error is due to the Licensor Code;
attempt a bypass or if so, create a new PMR between
Licensee and Licensor for the error circumvention for
high impact problems, i.e., Severity 1 and 2;
G. if no resolution and the problem appears not to be with
the Licensor Code, to be a newly discovered Code or
documentation error, create a problem analysis record.
H. update the PMR, documenting Level 2 actions.
2.52 Licensor will perform the following Level 3 responsibilities if
the error is determined at Level 2 to be connected to the
Licensor Code:
A. receive the PMR and supporting documentation and
materials;
B. analyze the problem symptoms and diagnose the suspected
error;
C. notify Licensee's Level 2 personnel if additional
information, materials or documentation are required;
D. assist Licensee's Level 2 personnel in attempting to
develop a bypass or circumvention for high impact
problems, e.g., Severity 1 and 2;
E. If Maintenance Modifications are required to the
Licensor Code, provide Maintenance Modifications to
Licensee in the format specified by Licensee;
F. if Licensor requests, Licensee will assist Licensor in
obtaining additional materials to support problem
determination, problem source identification and problem
resolution;
G. provide resolution to PMRs according to the assigned
Severity Level and within the defined Correction Time,
such Correction Times including building, testing,
certifying successful tests of Maintenance
Modifications, and packaging for shipment to Licensee
and applicable Maintenance Modifications in the physical
format specified by Licensee;
H. receive technical questions, and supporting
documentation and materials;
I. analyze the technical questions and provide answers to
Licensee;
J. for high impact situations, e.g. Severity 1 and 2,
provide technical backup support to Licensee on the
Integrated Code for the Licensor Code as provided above
and provide assistance in answering questions that may
arise concerning the operation and use of the Licensor
Code that cannot be resolved by Licensee; and
K. close out the problem record with Licensee.
2.6 Level 3 Problem Resolution Criteria. The following criteria apply to
Licensor's Maintenance and Support under this Agreement. Maintenance
and Support under this Agreement. Maintenance and Support includes both
work associated with defects in the Code or Documentation. The criteria
listed below are during the times described in Section 2.6 below unless
noted differently. Licensor's obligation to resolve defects begins when
the problem is transferred to Licensor and ends when the problem is
determined not to be a defect in the Code, or when the final resolution
is accepted by Licensee.
2.7 Licensor agrees not to discuss or disclose problem resolution
information, where Licensee identifies such information as confidential
pursuant to the terms and conditions of the CDA referenced in the
Agreement, with any third parties without obtaining Licensee's prior
written consent (e-mail authorization is sufficient).
2.71 Initial Response Times. The initial response is an
acknowledgment from Licensor to Licensee that a problem has been
transferred to Licensor. Licensor must provide response to
Licensee within the following time periods:
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[*]
2.72 Temporary Relief. Unless Licensor has provided Licensee a final
resolution, Licensor agrees, if possible, to provide Licensee
Temporary Relief to the problem (as Licensee determines acceptable)
within the following time periods:
A. [*]
B. Severity 2 - Not applicable
C. Severity 3 - Not applicable
D. Severity 4 - Not applicable
2.73 Final Resolution. Licensor agrees to provide a final resolution as
soon as reasonably possible but no later than the Correction Times.
2.8 At least once every year, Licensor will provide a service pack for the
Licensor Code that includes all Maintenance Modifications to the Licensor
Code. Licensor will provide service packs for the Licensor Code to
Licensee when such versions are provided to other Licensor customers.
Additional service packs for the Licensor Code will be provided as
determined and mutually agreed to by Licensee and Licensor in the event
they become necessary due to the frequency or severity of newly
discovered defects.
2.9 Licensor will maintain procedures to ensure that new Maintenance
Modifications are compatible with previous Maintenance Modifications.
2.10 Delivery of Maintenance Modifications and migration Code to the Licensee
will be done as mutually agreed to by the Development Managers.
2.11 Vision will provide IBM with read only access to the BLS Bug Tracking
System and any knowledge database or systems used by the Vision technical
support team. IBM will provide access to similar IBM information systems
pertaining to the IBM Code to the Vision customer support, quality
assurance and development teams.
3.0 PMR ORIGINATION AND CORRECTION
3.1 Licensor will also report (via the information system/Bug Tracking System
access described in Section 2.11) to Licensee as PMR's all valid errors
discovered by Licensor and resolve such errors as set out below within
the applicable Correction Times:
3.11 the fix to the Object Code in machine-readable form including a
hard copy description of the Maintenance Modifications (which may
include a paper submission of the Maintenance Modifications);
3.12 the Maintenance Modifications to the Source Code in
machine-readable form that corresponds to the Object Code
Maintenance Modifications; and
3.13 for a procedural work-around, the corrected procedure in
machine-readable form.
3.2 Comments received by Licensee that do not form the basis of a PMR will be
forwarded to Licensor for proper and prompt handling as appropriate.
* Confidential treatment requested for redacted portion.
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4.0 TRAINING
4.1 Licensor will provide training on the Licensor Code at Licensee's
request, at Licensor's expense, and at the scope and level of effort
described below. This training will be provided on Licensor's premises
and will include:
4.11 Level 1 and Level 2 technical training and education of the
Licensee development staff on the workings of the Code;
4.12 Level 1 and Level 2 training on the Object Code version of the
Licensor Code for Licensee personnel within ninety (90) days of
delivery of the Licensor Code. This training will be for up to
fifteen (15) persons for a duration to be mutually agreed upon
and provide to Licensee the knowledge and use of any error
detection database, support detection methods, etc. that reduces
the delay to Customer issue resolution. Licensor will provide
Licensee, for its review and concurrence, a course description
including course objectives, an outline, required advance study
assignments, and course completion criteria;
4.13 Refresher and update Object Code version training at Licensee
should occur with each major release or feature enhancement.
Such training will be in a format similar to the initial course;
and
4.14 Each party will be responsible for its own travel-related
expenses.
5.0 GENERAL
5.1 Each party will provide to the other the name and phone numbers of that
party's personnel to contact when high priority problems are encountered
outside of normal working hours that require immediate assistance. IBM's
normal working hours are defined as 8:00AM to 5:00PM, Monday thru
Friday, Eastern Standard Time. Vision's normal working hours are defined
as 6:00AM to 6:00PM, Monday thru Friday, Pacific Standard Time.
5.2 Licensor will provide to Licensee, on request, information regarding
the status of reported PMRs related to the Licensor Code.
5.3 It is desirable that Licensee report PMRs and status requests to
Licensor via an electronic interface and that Licensor send Maintenance
Modifications, status updates and requests for additional documentation
to Licensee via the same interface. Licensee and Licensor will jointly
plan the electronic system. Each party is responsible for funding the
costs of this interface at its location.
5.4 Critical situations may require the parties to use the telephone for
immediate communications. The parties will follow such communications
via the electronic interface for tracking and recording purposes. Each
party is responsible for funding the costs of this communication at its
location.
5.5 In circumstances where materials have to be exchanged using facsimile or
courier services, each party is responsible for funding the costs of
these exchanges via facsimile or courier services at its location.
5.6 Licensor will participate in monthly telephone conference calls with
Licensee to review the status and performance of the parties'
obligations. These calls may be scheduled more or less frequently as
agreed to by the Development Managers. Each party is responsible for
funding the costs of these conference calls at its location.
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IBM AND VISION
JOINT PRODUCT AND MARKETING AGREEMENT
JOINT MARKETING STATEMENT OF WORK
This JM-SOW is part of and incorporates by reference the terms and conditions of
the Joint Product and Marketing Agreement and capitalized terms used herein,
unless otherwise defined herein, shall have the meaning ascribed to them in the
Agreement.
This SOW covers a new version of Vision's current product line that will be
built to re-host Vision's BLS on top of IBM WAS-AE. This SOW details the
structure of this joint marketing relationship.
1.1 The Integrated Code will be licensed and distributed by both Vision and
IBM (and their respective distributors) under their respective logos,
prices, terms, and conditions.
1.2 IBM will require a "WebSphere inside" or similar attribution of the
product and must approve the product name of the Vision release of the
Integrated Code, such approval not to be unreasonably withheld or
delayed.
IBM intends to include Vision attribution in the appropriate product
description information used with the IBM product, and will attempt to
include product identity linkage with the Vision product in the IBM
product name, but will not include the word "Vision." If necessary
Vision agrees to provide IBM the appropriate trademark license rights
in order to provide attribution to Vision.
1.3 Vision and IBM will provide skills transfer to each other's field
sales. The skills transfer will consist of sales training and "T3" or
"train the trainer" education. Each party will be responsible for its
own expenses incurred pursuant to this Section 1.3 The details and
location will be mutually agreed upon via the Marketing Program
Managers.
1.4 IBM and Vision will use reasonable efforts to develop and implement
marketing programs. Both parties will provide reasonable support to
each other to accomplish these tasks as described in the Marketing
Activities Attachment. Both parties will have the right to use
marketing collateral produced to create their own versions of the
collateral.
1.5 To create awareness and generate demand for the Releases, IBM and Vision
will each make marketing investments as further defined in the Marketing
Activities Attachment to support activities such as:
1.5.1 Relationship announcement, product announcements, ongoing press
and consultant activities;
1.5.2 Concept awareness for e-business automation and concept
education on Business Logic Server and business rules
automation;
1.5.3 Strategic positioning of the Releases in the context of IBM's
Application Framework for e-business, the WebSphere family of
web application servers, and the VisualAge family of products;
1.5.4 Product and marketing campaign web linkages;
1.5.5 e-business seminars, business shows, and customer executive
events (to the extent that such activities are led or jointly
funded by IBM, they will consist of appropriate content in
existing IBM geography-based marketing activities and will be
dependent on IBM geography approval);
1.5.6 Direct marketing campaign linage, targeted direct mail
campaigns, and telemarketing (to the extent that such activities
are led or jointly funded by IBM, they will be dependent on IBM
geography approval);
1.5.7 Direct sales and support channel training and client executive
education;
1.5.8 Indirect channel development focus including Regional SIs and
Web SIs;
1.5.9 Providing access to the other party's marketing collateral. IBM
will provide Vision with the details of the collateral access
process used within IBM. Vision will provide IBM access to the
process used within Vision.
IBM and Vision Confidential
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1.6 In order to successfully train the IBM Application Integration
Middleware (AIM) worldwide sales force, [*].
1.7 To ensure that a satisfactory level of market development and program
activities will occur, each company agrees to the minimum quarterly
investment of joint marketing funds, in addition its investment of
internal marketing resources (marketing personnel, time, travel and
living expenses, and so forth) that is described in the Marketing
Activities Attachment. The Joint Marketing funds will be used to pay
external costs for the development and execution of the marketing
programs listed in this JM-SOW, and do not include, nor will be used to
pay for, the investment of internal marketing resources of either
company.
1.8 The joint marketing activities are intended to benefit both parties'
efforts to market and sell their respective products. In joint marketing
activities that are led by IBM, IBM will promote the IBM-branded
versions of a Release as a part of its portfolio of e-business products.
1.9 All joint activities and materials must be agreed to, in writing, by
both parties prior to their occurrence or release.
1.10 In the Marketing Activities Attachment, the parties commit to funding
and programs for the first year. During the second half of year one the
parties agree to discuss the potential funding and programs for years
two and three. The parties may agree to modify the marketing activities
in light of the effectiveness of ongoing marketing efforts; such
agreement will be facilitated by the Marketing Program Managers.
1.11 The marketing activities are further defined in the Marketing
Activities Attachment. The column headings are defined as follows:
1.11.1 "ACTIVITY" provides a general description of the marketing
activities to be engaged in by the parties.
1.11.2 "ROLES AND RESPONSIBILITIES" provides a description of what role
each party will take in a particular activity and the
responsibilities associated with that role.
1.11.3 "COSTS" describes examples of the type of cost associated with
the relevant activity. In some cases, the amount of expected
committed cost is identified.
1.11.4 "JOINT MARKETING FUNDS" indicates the estimated maximum amount
tat the parties will jointly commit to an Activity or series of
Activities. Each party will be responsible for fifty percent
(50%) of the amounts listed unless alternative percentages are
otherwise noted. Where estimates for an activity or series of
activities differ by more than 5% of the referenced amounts,
then joint agreement of the revised financial commitment will be
needed before proceeding.
ACCEPTED AND AGREED TO: ACCEPTED AND AGREED TO:
By: /s/ JOHN R. SWEETMAN 9-27-99 By: /s/ JOHN A. HEWITT JR. 9-27-99
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IBM Signature Vision Signature
John R. Sweetman John A. Hewitt Jr.
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Printed Name Printed Name
Contract Specialist, IBM Corporation President & CEO
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Title and Organization Title and Organization
IBM Address: Vision Address:
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IBM Corporation Vision Software Tools, Inc.
3039 Cornwallis Road, 002/VRDA 2101 Webster Street, Eighth Floor
Research Triangle Park, NC 27709 Oakland, CA 94612
USA USA
* Confidential treatment requested for redacted portion.
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EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in this Registration Statement on Form S-1 of our
reports dated February 3, 2000, relating to the financial statements and
financial statement schedules of Versata, Inc. (formerly Vision Software Tools,
Inc.), which appear in such Registration Statement. We also consent to the
references to us under the headings "Experts" and "Selected Financial Data" in
such Registration Statement.
San Jose, California
February 8, 2000
