<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
Commission file number 000-29757
VERSATA, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 68-0255203
(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification No.)
</TABLE>
2101 WEBSTER STREET
OAKLAND, CA 94612
(Address of principal executive offices)(Zip Code)
Registrant's telephone number, including area code (510) 238-4100
------------------
Not Applicable
Former name, former address and former fiscal year, if changed
since last report
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
As of July 31, 2000, the total number of outstanding shares of the
Registrant's common stock was 40,572,206.
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INDEX
<TABLE>
<CAPTION>
PAGE NUMBER
-----------
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets at June 30, 2000 and December 31, 1999 ....................... 3
Condensed Consolidated Statements of Operations for the Three and Six Months ended
June 30, 2000 and 1999 ......................................... 4
Condensed Consolidated Statements of Cash Flows for the Six Months ended June 30, 2000
and 1999 ....................................................... 5
Notes to Condensed Consolidated Financial Statements................................................ 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results
Operations ..................................................... 8
Item 3. Quantitative and Qualitative Disclosures about Market Risk ................................. 20
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds .................................................. 20
Item 4. Submission of Matters to a Vote of Security Holders ........................................ 21
Item 6. Exhibits and Reports on Form 8-K ........................................................... 21
SIGNATURE PAGE ..................................................................................... 22
EXHIBITS ........................................................................................... 22
</TABLE>
Page 2
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
VERSATA, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
--------- ---------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ....................................... $ 64,203 $ 20,655
Short-term investments .......................................... 32,166 --
Accounts receivable, net of allowance of $1,875 at
June 30, 2000 and $886 at December 31, 1999 ................ 13,308 5,587
Unbilled receivables ............................................ 1,784 1,584
Prepaid expenses and other current assets ....................... 3,276 2,311
--------- ---------
Total current assets ................................... 114,737 30,137
Property and equipment, net .......................................... 5,382 1,902
Notes receivable from related parties ................................ 280 134
Intangible assets .................................................... 2,425 1,389
Other assets ......................................................... 226 98
--------- ---------
Total assets ........................................... $ 123,050 $ 33,660
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ................................................ $ 5,007 $ 2,025
Accrued expenses ................................................ 8,421 7,298
Deferred revenue ................................................ 7,240 4,433
Current portion of long-term debt ............................... 192 166
--------- ---------
Total current liabilities .............................. 20,860 13,922
Long-term debt, less current portion ................................. 238 320
--------- ---------
Total liabilities ...................................... 21,098 14,242
Stockholders' equity:
Convertible preferred stock ..................................... -- 26
Common stock .................................................... 40 7
Additional paid-in capital ...................................... 220,180 89,905
Notes receivable from stockholders .............................. (4,447) (2,413)
Unearned stock-based compensation ............................... (24,568) (14,732)
Accumulated other comprehensive gain ............................ 336 --
Accumulated deficit ............................................. (89,589) (53,375)
--------- ---------
Total stockholders' equity ............................. 101,952 19,418
--------- ---------
Total liabilities and stockholders' equity ............. $ 123,050 $ 33,660
========= =========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
Page 3
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VERSATA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
----------------------- -----------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenue: $ 6,077 $ 1,099 $ 10,213 $ 2,060
Software license .............................................. 7,798 1,370 13,768 2,187
Services and other fees .......................................
-------- -------- -------- --------
Total revenue ........................................... 13,875 2,469 23,981 4,247
Cost of revenue:
Software license .............................................. 221 187 415 253
Services (exclusive of stock-based
compensation of $1,770 and $81, for the three
months ended June 30, 2000 and 1999 respectively, and
$5,818 and $163 for the six months ended June 30,
2000 and 1999 respectively) ................................. 7,596 1,292 13,074 2,294
-------- -------- -------- --------
Total cost of revenue ................................... 7,817 1,479 13,489 2,547
-------- -------- -------- --------
Gross profit .................................................... 6,058 990 10,492 1,700
Operating expenses: .............................................
Sales and marketing (exclusive of stock-based
compensation of $3,603 and $248, for the three
months ended June 30, 2000 and 1999 respectively, and
$8,734 and $388 for the six months ended June 30,
2000 and 1999 respectively) ................................. 11,493 2,836 21,682 4,993
Product development (exclusive of stock-based
compensation of $847 and $97, for the three
months ended June 30, 2000 and 1999 respectively, and
$1,918 and $174 for the six months ended June 30,
2000 and 1999 respectively) ................................. 2,166 1,036 4,023 1,951
General and administrative (exclusive of stock-based
compensation of $515 and $31 , for the three
months ended June 30, 2000 and 1999 respectively, and
$1,339 and $58 for the six months ended June 30,
2000 and 1999 respectively) ................................. 3,048 696 5,049 1,103
Stock-based compensation ...................................... 6,735 457 17,809 783
Amortization of intangibles ................................... 237 -- 427 --
-------- -------- -------- --------
Total operating expenses ................................ 23,679 5,025 48,990 8,830
Loss from operations ............................................ (17,621) (4,035) (38,498) (7,130)
Interest income (expense), net .................................. 1,619 (35) 2,284 (7)
-------- -------- -------- --------
Net loss ........................................................ $(16,002) $ (4,070) $(36,214) $ (7,137)
======== ======== ======== ========
Basic and diluted net loss per share ............................ $ (.42) $ (1.53) $ (1.37) $ (3.04)
Weighted average common shares used in computing basic
and diluted net loss per share ................................ 37,698 2,663 26,444 2,350
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
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VERSATA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
-----------------------
2000 1999
-------- --------
<S> <C> <C>
Cash flows used in operating activities:
Net loss ......................................................................... $(36,214) $ (7,137)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization ................................................ 915 231
Provision for doubtful accounts ......................................... 1,136 212
Stock-based compensation expense ........................................ 17,809 783
Changes in operating assets and liabilities:
Accounts receivable ..................................................... (8,858) (2,549)
Unbilled receivables .................................................... (200) (899)
Prepaid expenses and other current assets ............................... (1,070) (85)
Other assets ............................................................ (128) (35)
Accounts payable and accrued liabilities ................................ 4,105 1,402
Deferred revenue ........................................................ 2,807 1,445
Other liabilities ....................................................... -- (112)
-------- --------
Net cash used in operating activities ............................... (19,698) (6,744)
-------- --------
Cash flows used in investing activities:
Purchase of short-term investments ............................................... (32,202) --
Purchase of property and equipment ............................................... (3,887) (367)
Increase in notes receivable from related parties ................................ (146) (41)
Net cash used in connection with acquisitions .................................... (101) --
Purchase of intangible assets .................................................... (250) --
-------- --------
Net cash used in investing activities ............................... (36,586) (408)
-------- --------
Cash flows from financing activities:
Principal payments on capital lease obligations .................................. (12) (38)
Proceeds from bridge loan ........................................................ -- 3,000
Principal payments on equipment loan ............................................. (44) (166)
Net proceeds from issuance of convertible preferred stock ........................ 1,500 --
Net proceeds from issuance of common stock ....................................... 96,654 --
Proceeds from exercise of stock warrants and options ............................. 1,589 121
Repurchase of common stock from stockholder ...................................... (6) --
Payments from stockholders on notes receivable ................................... 429 --
Loan provided to stockholder for founder shares .................................. (650) --
-------- --------
Net cash provided by financing activities ........................... 99,460 2,917
Effects of exchange rate changes on cash and cash equivalents ....................... 372 --
-------- --------
Net increase (decrease) in cash and cash equivalents ................ 43,548 (4,235)
Cash and cash equivalents at beginning of the period ................................ 20,655 5,767
-------- --------
Cash and cash equivalents at end of the period ...................................... $ 64,203 $ 1,532
======== ========
Supplemental disclosure of non-cash investing and financing activities:
Cash paid during the period for interest ............................................ $ 32 $ 40
======== ========
Common stock issued for notes receivable from stockholders .......................... $ 1,813 $ 667
======== ========
Conversion of preferred stock to common stock on the
date of public offering .......................... $ 26 $ --
======== ========
Issuance of convertible preferred stock in connection with acquisition .............. $ 1,087 $ --
======== ========
Property and equipment obtained through capital lease ............................... $ 30 $ 49
======== ========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
Page 5
<PAGE> 6
VERSATA, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. The Company
Versata, Inc. (the "Company" or "Versata") was incorporated on August 27,
1991. The predecessor of the Company reincorporated in the State of Delaware on
February 24, 2000. The Company is a global provider of E-Business Automation
System application software and services that enable businesses and other large
organizations to create, rapidly deploy and modify software applications for
intranets, extranets and the Internet. The Company markets its software
worldwide and has sales offices in the United States, Canada, United Kingdom,
Germany, France, and Hong Kong.
The condensed consolidated financial statements include the accounts of
Versata, Inc. and its subsidiaries, all of which are wholly owned, located in
North America, Europe and Asia. All intercompany accounts and transactions have
been eliminated in consolidation. Versata, Inc. and its subsidiaries are
collectively referred to as the "Company" or "Versata."
2. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with accounting principles generally accepted
in the United States for interim financial information and with the instructions
to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include
all financial information and disclosures required by accounting principles
generally accepted in the United States for complete financial statements.
However, the Company believes that the disclosures are adequate to make the
information presented not misleading. The condensed financial statements should
be read in conjunction with the financial statements and the notes thereto
included in the Company's Registration on Form S-1. In the opinion of
management, these condensed financial statements include all adjustments
(consisting only of normal recurring adjustments) necessary for a fair
presentation of the results of operations for the interim periods reported and
of the financial condition of the Company as of the date of the interim balance
sheet. The results of operations for the interim periods are not necessarily
indicative of the results to be expected for the full year.
3. Summary of Significant Accounting Policies
Revenue Recognition
The Company derives revenue from two sources as follows: (i) software
license and maintenance revenue to end users, VARs, system integrators and OEMs
and (ii) service revenue which includes 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. Generally, the Company
provides 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 post
contract customer support ("PCS") and other services such as consulting,
mentoring and training. Services are not generally 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, the Company recognizes revenue as the related
services are performed. In instances where services are deemed essential to the
software, both the software license fee and consulting fees are recognized using
the percentage of completion method of contract accounting. For licensing of the
software to OEMs, VARs and systems integrators, with progress to completion
measured by labor cost inputs. Revenue is recognized on a sell-through basis
when the software is sold by the OEM, VAR or system integrator to an end-user
customer.
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Earnings per Share
Basic earnings per share is calculated based on the weighted average
number of common shares outstanding and excludes any dilutive effects of
warrants, stock options, common stock subject to repurchase or other types of
securities. Diluted earnings per share excludes potential common stock if their
effect is anti-dilutive.
The following table sets forth the computation of basic and diluted net
loss per share (in thousands, except per share data):
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------- -----------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Numerator:
Net Loss ...................................................... $(16,002) $ (4,070) $(36,214) $ (7,137)
-------- -------- -------- --------
Denominator:
Weighted average shares outstanding ........................... 40,117 3,596 28,756 2,923
Weighted average unvested shares of common stock
subject to repurchase ................................... (2,419) (933) (2,312) (573)
-------- -------- -------- --------
Denominator for basic and diluted calculation ................. 37,698 2,663 26,444 2,350
-------- -------- -------- --------
Basic and diluted net loss per share ............................ $ (.42) $ (1.53) $ (1.37) $ (3.04)
</TABLE>
The following table sets forth potential shares of common stock that are
not included in the diluted net loss per share calculation above because to do
so would be antidilutive for the periods presented (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------- -----------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Weighted average effect of common stock equivalents:
Unvested common stock subject to repurchase.................... $ 2,419 $ 933 $ 2,312 $ 573
Options outstanding............................................ 6,913 5,469 6,645 5,533
Shares resulting from the conversion of the: 0 0
Series A convertible preferred stock......................... 0 1,480 625 1,480
Series B convertible preferred stock......................... 0 4,403 1,834 4,403
Series C convertible preferred stock......................... 0 6,205 2,616 6,205
Series D convertible preferred stock......................... 0 6,983 2,911 6,983
Series E convertible preferred stock......................... 0 0 1,876 0
Series F convertible preferred stock......................... 0 0 1,329 0
Warrants to purchase convertible preferred stock............... 95 279 151 178
Warrants to purchase common stock.............................. 240 615 357 615
--------- -------- --------- --------
Total common stock equivalents excluded from the computation
of earnings per share as their effect was antidilutive.... 9,667 26,367 20,656 25,970
========= ======== ========= ========
</TABLE>
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
fiscal years commencing after June 15, 2000. The Company will adopt SFAS No. 133
in its quarter ending March 31, 2001. The Company does not believe that the
pronouncement will not have a material impact on its financial condition or
results of operations as currently conducted.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin (SAB) No. 101 "Revenue Recognition in Financial Statements."
The SAB ("SEC") formalizes positions the staff has expressed in speeches and
comment letters. In June 2000, the SEC issued SAB No. 101B to defer the
effective date and implementation of SAB No. 101 until the fourth quarter of
fiscal 2000. The Company is presently analyzing the impact, if any, that the
adherence to the SAB will have on its financial condition or results of
operations.
In March 2000, the Financial Accounting Standards Board ("FASB") issued
FASB Interpretation No. 44, Accounting for Certain Transactions Involving Stock
Compensation -- an interpretation of APB Opinion No. 25, this interpretation has
provisions that are effective on staggered dates, some of which began after
December 15, 1998 and other that become effective after June 30, 2000. The
Company does not believe that the adoption of this interpretation will have a
material impact on its financial condition or results of operations.
Page 7
<PAGE> 8
4. Initial Public Offering
In March 2000, the Company completed an initial public offering in which
the Company sold 3,850,000 shares of its common stock for net proceeds to the
Company of $83.8 million, net of issuance cost. In March 2000, the Company's
underwriters exercised their over-allotment option, which resulted in the sale
of an additional 577,500 shares of the Company's stock which generated
additional proceeds of $12.9 million. Upon closing of the initial public
offering, each outstanding share of the Company's Convertible Preferred stock
was automatically converted into one share of common stock of Versata resulting
in the issuance of 26,950,287 shares of common stock.
5. Acquisitions
On January 20, 2000, the Company acquired McGilly Information Systems,
Inc. and Webink Computer Consultants for an aggregate purchase price of
$1,189,000. The acquisition was completed through the issuance of 72,000 shares
of the Company's Series F preferred stock and $101,000 in cash consideration.
The acquisition has been accounted for by using the purchase method of
accounting and accordingly, the purchase price has been allocated to the
tangible and intangible assets acquired on the basis of their relative values on
the acquisition date. The Company did not assume any liability with respect to
these acquisitions. The total purchase price was allocated to goodwill with an
estimated life of 36 months.
6. Comprehensive Income
Total comprehensive loss was $15.7 million and $4.1 million for the
quarters ended June 30, 2000 and 1999, respectively, and $35.9 million and $7.1
million for the six-month periods ended June 30, 2000 and 1999, respectively.
Total comprehensive loss consists of net loss, the net changes in foreign
currency translation adjustment and the net unrealized gains and losses on
available-for-sale securities.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following Management's Discussion and Analysis of Financial Condition
and Results of Operations of Versata should be read in conjunction with the
condensed consolidated financial statements of Versata and notes thereto
included elsewhere in this Form 10-Q. This discussion contains forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934. These forward-looking
statements are based on current expectations, assumptions and projections and
entail various risks and uncertainties including those set forth below under
"Risk Factors That May Affect Future Results," that could cause actual results
to differ materially from those projected in the forward-looking statements.
OVERVIEW
We provide a comprehensive suite of software and services that enable 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 over 500 customers
around the world. Since the second quarter of 1998, we generated 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 unspecified
software upgrades over a specified term, typically twelve months. Services
revenue consists of fees from professional services and customer support.
Professional services include consulting 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 generally on time-and-materials basis,
while customer support is priced based on the particular level of support chosen
by the customer.
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We recognize revenue in accordance with Statement of Position 97-2,
"Software Revenue Recognition." Software license revenue is recognized when both
parties sign a license agreement, the fee is fixed and 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 service fees generally on a
time-and-materials basis and recognize revenue as the services are performed.
Customer support revenue is recognized ratably over the term of the agreement,
typically one year. Services are not generally essential to the software. In
instances where the services are deemed essential to the software, both the
software license and consulting fees are recognized using the percentage of
completion method of contract accounting. 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 amounts billed in advance of service rendered.
As of June 30, 2000, we had deferred revenue of $7.2 million, an increase
of $2.8 million from $4.4 million as of December 31, 1999. This increase is
principally attributable to new contracts signed during the six month period
ended June 30, 2000.
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 significant component of our
total revenue as we expand our direct and indirect international sales efforts.
Net revenues from international sales represented 15.3% of our total revenue in
the second quarter of 1999 and 23.8% of our total revenue in the second quarter
of 2000. For the six months ended June 30, 2000, revenue from international
sales represented 19.2% compared to 16.5% for the same period last year. In
absolute terms, our international sales revenue increased approximately 768% in
the second quarter of 2000 as compared to the second quarter of 1999 and 567% in
the six months ended June 30, 2000 as compared to the six months ended June 30,
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 service revenue consists of salaries of professional service 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, while 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 $89.6 million and $53.4 million as of June 30, 2000 and
December 31, 1999, respectively. 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. Consequently, there can be no assurance that we will achieve or sustain
revenue growth or profitability.
Page 9
<PAGE> 10
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated the percentage
revenues represented by certain lines in our Condensed Consolidated Statements
of Operations:
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
------------------ ----------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenue: 44% 45% 43% 49%
Software license .............................................. 56% 55% 57% 51%
Services and other fees ....................................... ---- ---- ---- ----
Total revenue ........................................... 100% 100% 100% 100%
Cost of revenue:
Software license .............................................. 2% 8% 2% 6%
Services ...................................................... 55% 52% 55% 54%
---- ---- ---- ----
Total cost of revenue ................................... 56% 60% 56% 60%
---- ---- ---- ----
Gross profit .................................................... 44% 40% 44% 40%
Operating expenses: .............................................
Sales and marketing ........................................... 83% 115% 90% 118%
Product development ........................................... 16% 42% 17% 46%
General and administrative .................................... 22% 28% 21% 26%
Stock based compensation ...................................... 49% 19% 74% 18%
Amortization of intangibles ................................... 2% 0% 2% 0%
---- ---- ---- ----
Total operating expense ................................. 171% 204% 204% 208%
---- ---- ---- ----
Loss from operations ............................................ (127)% (163)% (161)% (168)%
Other income, net ............................................... 12% (1)% 10% 0%
---- ---- ---- ----
Net loss ........................................................ (115)% (165)% (151)% (168)%
==== ==== ==== ====
</TABLE>
REVENUE
Total revenue consists of software license revenue and services revenue.
Total revenue increased by $11.4 million, or 462%, from $2.5 million in the
second quarter of 1999 to $13.9 million in the second quarter of 2000. For the
six months ended June 30, 2000, total revenue increased by $19.8 million, or
465%, from $4.2 million in the same period last year to $24.0 million. These
increases were principally attributable to the continued growth in new
customers, repeat business from existing customers and rapid growth in
international markets.
Software License Revenue
Software license revenue increased by $5.0 million, or 453%, from $1.1
million in the second quarter of 1999 to $6.1 million in the second quarter of
2000. For the six months ended June 30, 2000, software license revenue increased
by $8.1 million, or 396%, from $2.1 million in the same period last year to
$10.2 million. These increases were 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 several System and Web
integration partners. As a result of the rapid growth of our international
operations, software license revenue from international sales increased by $1.5
million, or 479% from $307,000 in the second quarter of 1999 to $1.8 million in
the second quarter of 2000. For the six months ended June 30, 2000, software
license revenue from international sales increased by $2.2 million, or 355% from
$621,000 in the same period last year to $2.8 million.
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Services Revenue and Other Fees
Services revenue increased by $6.4 million, or 469%, from $1.4 million in
the second quarter of 1999 to $7.8 million in second quarter 2000. For the six
months ended June 30, 2000, service revenue increased by $11.6 million, or 530%,
from $2.2 million in the same period last year to $13.8 million. These increases
were attributable to growth in the number of our customers and support contracts
from direct sales efforts and also due to the expansion of our professional
consulting organization from the hiring of additional consultants. Services
revenue from international customers increased by $1.4 million from $70,000 in
second quarter 1999 to $1.5 million in second quarter 2000. For the six months
ended June 30, 2000, service revenue from international customers increased by
$1.7 million, or 2,042%, from $79,000 in the same period last year to $1.8
million.
COST OF REVENUE
Total cost of revenue consists of cost of software license revenue and
cost of service revenue. Total cost of revenue increased by $6.3 million, or
429%, from $1.5 million in the second quarter of 1999 to $7.8 million in the
second quarter of 2000. For the six months ended June 30, 2000, total cost of
revenue increased by $11.0 million, or 430%, from $2.5 million in the same
period last year to $13.5 million. These increases were attributable to a larger
volume of sales from the same period last year.
Cost of Software License Revenue
Cost of software license revenue consists of royalty payments to third
parties for technology incorporated into our product, the cost of manuals and
product documentation, as well as packaging and distribution costs. Cost of
software license revenue increased by $34,000 or 18%, from $187,000 in the
second quarter of 1999 to $221,000 in the second quarter of 2000. For the six
months ended June 30, 2000, cost of software license revenue increased by
$162,000, or 64%, from $253,000 in the same period last year to $415,000. These
increases were attributable to a larger volume of sales from the same period
last year.
Cost of Services Revenue
Cost of service revenue consists of salaries of professional service
personnel and payments to third party consultants incurred in providing customer
support, training, and consulting services. Cost of service revenue increased by
$6.3 million, or 488%, from $1.3 million in the second quarter of 1999 to $7.6
million in the second quarter of 2000. For the six months ended June 30, 2000,
cost of service revenue increased by $10.8 million, or 470%, from $2.3 million
in the same period last year to $13.1 million. These increases were principally
due to an increase in the number of our consulting, training and customer
support personnel and due to the expansion of our consulting services
organization through additions of two consulting and training services
organizations during first quarter 2000.
OPERATING EXPENSES
Operating expense increased by $18.7 million, or 371%, from $5.0 million
in the second quarter of 1999 to $23.7 million in the second quarter of 2000.
For the six months ended June 30, 2000, operating expenses increased by $40.2
million, or 455%, from $8.8 million in the same period last year to $49.0
million. The majority of these increases were due to an increase in the
amortization of unearned non-cash stock-based compensation. The balance of the
increases were due to increased investments in our sales and marketing
operations to increase our market position and expand our distribution channels.
Excluding the non-cash charges relating to stock-based compensation, operating
expense in the second quarter of 2000 was $16.9 million, a 267% increase over
$4.6 million in operating expense in the second quarter of 1999. For the six
months ended June 30, 2000, operating expense excluding the non-cash charges
relating to stock-based compensation increased by $23.2 million from $8.0
million in the same period last year to $31.2 million.
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Sales and Marketing
Sales and marketing expense consists of salaries, commissions, and
expense from our sales offices, travel and entertainment expense and marketing
programs. Sales and marketing expense increased by $8.7 million, or 305%, from
$2.8 million in the second quarter of 1999 to $11.5 million in the second
quarter of 2000. For the six months ended June 30, 2000, sales and marketing
expenses increased by $16.7 million, or 334%, from $5.0 million in the same
period last year to $21.7 million. These increases were attributable to
increases in the number of sales employees in North America, as well as the
expansion of our international sales operations. 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.
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 increased by $1.2
million, or 109%, from $1.0 million in the second quarter of 1999 to $2.2
million in the second quarter of 2000. For the six months ended June 30, 2000,
product development expense increased by $2.0 million, or 106%, from $2.0
million in the same period last year to $4.0 million. These increases were
primarily attributable to increases in the number of personnel in Versata's
product development and engineering organization.
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. To date, all
software development costs have been expensed in the period incurred.
General and Administrative
General and administrative expense consists of salaries for executive,
finance and administrative personnel, information systems costs, professional
service fees and allowance for doubtful accounts. General and administrative
expense increased by $2.3 million, or 338%, from $700,000 in the second quarter
of 1999 to $3.0 million in the second quarter of 2000. For the six months ended
June 30, 2000, general and administrative expense increased by $3.9 million, or
358%, from $1.1 million in the same period last year to $5.0 million. These
increases were attributable to a growing number of employees, as well as an
increase in the provision for bad debt reserve as our revenue and accounts
receivable grew.
We believe general and administrative expense will increase in future
periods, as we expect to add personnel to support our expanding operations,
and incur additional costs related to the growth of our business.
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. We incurred a non-cash charge of $6.7 million for the
second quarter of 2000 as compared to $457,000 in the second quarter of 1999,
related to the issuance of stock options with exercise prices below fair market
value on the date of grant. For the six months ended June 30, 2000, stock-based
compensation expense increased by $17.0 million, or 2,174%, from $783,000 in the
same period last year to $17.8 million. Additional unvested outstanding options
will continue to vest over the next 47 months, which will result in additional
compensation expense of approximately $24.6 million in the aggregate in periods
subsequent to June 30, 2000, which will be charged to operations over the next
47 months.
Amortization of Intangibles
We incurred non-cash charges of $237,000 in the second quarter of 2000
and $427,000 for the six months ended June 30, 2000 related to the amortization
of goodwill related to the acquisitions of Pragma6 in the fourth quarter of 1999
and, the acquisitions of McGilly and Webink in the first quarter of 2000. There
were no such charges in the comparable periods in 1999. Goodwill of
approximately $2.4 million will continue to be charged to operations ratably
over the period of benefit, which is 3 years.
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Interest Income (Expense), Net
Interest income (expense), net is primarily comprised of interest income.
We had net expense of $35,000 for the second quarter 1999 compared to net
interest income of $1.6 million for the second quarter of 2000. For the six
months ended June 30, 2000, net interest income was $2.3 million, an increase of
$2.3 million from net interest expense of $7,000 in the same period last year.
These increases were principally due to interest income earned from higher cash
balances resulting from our Initial Public Offering in the second quarter of
2000.
Net Operating Losses and Tax Credit Carry-forwards
As of December 31, 1999, we had net operating losses and research and
development credit carry-forwards of approximately $45.0 million and $635,000,
respectively. The net operating losses and research and development credit
carry-forwards will expire through 2019, if not utilized. Under the provisions
of the Internal Revenue Code of 1986, as amended (the "Code"), substantial
changes in our ownership may limit the amount of net operating loss
carry-forwards that can be utilized annually in the future to offset taxable
income. A valuation allowance has been established to fully reserve the
potential benefits of these carry-forwards in our financial statements to
reflect the uncertainty of future taxable income required to utilize available
tax loss carry-forwards 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, and our initial public offering,
resulting in the aggregate, net proceeds of approximately $167.2 million. We
have also funded our operations through equipment financing. As of June 30,
2000, we had $96.4 million in cash and cash equivalents and $93.8 million in
working capital.
Net cash used in operating activities was $19.7 million in the first six
months of 2000 and $6.7 million in the first six months ended. Net cash flows
used by operating activities in each period reflect increasing net losses,
offset by non-cash expenses including stock-based compensation, depreciation,
amortization, and provision for doubtful accounts. The use of operating cash was
also impacted to a lesser extent by changes in working capital.
Net cash used in investing activities was $36.6 million in the first six
months of 2000 and was $408,000 in the first six months of 1999. Cash used in
investing activities reflects purchases of $32.2 million of short-term
investments in the first six months of 2000, as well as 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 $99.5 million in the first
six months of 2000 and $2.9 million in the first six months of 1999. Cash
provided by financing activities includes net proceeds from the issuance of
preferred and common stock, including the Company's initial public offering in
March of 2000. Cash provided by financing activities in the first six months of
1999 includes $3 million in borrowings.
We expect to experience continued growth in our operating expenses for
the foreseeable future to execute our business plan. We anticipate that a
portion of our cash resources will be used to expand our sales, marketing and
product development activities. In addition, we may use some 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
generated by our Initial Public 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.
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RISK FACTORS THAT MAY AFFECT FUTURE RESULTS
WE HAVE INCURRED CONSISTENT OPERATING LOSSES SINCE OUR INCEPTION AND
EXPECT TO INCUR NET LOSSES AND NEGATIVE CASH FLOWS FOR THE FORSEEABLE
FUTURE
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 June 30, 2000, we had an accumulated
deficit of $89.6 million. We expect to incur additional net losses and
negative cash flows from operations on a quarterly and annual basis for
the foreseeable future. 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.
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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, which could cause our stock price to fall.
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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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. 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.
We expect to continue 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 service personnel as well
as further invest in relationships with partners who provide similar
services to customers. However, competition for qualified service
personnel is intense, and we may not be able to attract, train, retain,
or employ through acquisition, the number of highly qualified service
personnel that our business needs.
We expect our service 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 18 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 497 as of June 30, 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;
- 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 who 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.
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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 service organizations. In
addition, these companies may adopt aggressive pricing policies or offer
more attractive terms to customers, may bundle their competitive products
with broader product offerings or may introduce new products and
enhancements. 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.
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 have integrated our
E-Business Automation System with IBM's WebSphere(TM) Application Server
Advanced Edition. IBM is currently translating this product into nine
foreign languages. IBM and we 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. 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.
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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. While we anticipate that the next version will be
released in the third 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.
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 PRODUCE 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 choose not to purchase deployment licenses or additional development
licenses. In addition, as we introduce new versions of our products or
new products, our current customers may not require the functionality of
our new products and may not license these products.
If we fail to add new customers who license our product, our
services revenue will also likely decline. Our service 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.
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.
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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.
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.
OUR STOCK PRICE MAY FLUCTUATE WIDELY.
Prior to our initial public offering in March 2000, there was no
public market for our common stock. The market price of our common stock
has fluctuated substantially since our initial public offering. It may
continue to fluctuate substantially as a result of:
- quarterly fluctuations in operating results;
- announcements of new products or product enhancements by us
or our competitors;
- technological innovations by us or our competitors;
- general market conditions or market conditions specific to
our industry or our customers' industries;
- changes in earnings estimates or recommendations by
analysts; and
- amendments to the lock-up agreements between the
underwriters of our initial public offering and certain of
our stockholders.
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Stock prices of Internet-related companies have been highly
volatile. Our current stock price may not be indicative of the price that
will prevail in the market in the future. In the past, following periods
of volatility in the market price of a company's securities, securities
class action litigation has at times been instituted against that
company. If we become subject to securities litigation, we could incur
substantial costs and experience a diversion of management's attention
and resources.
WE MAY REQUIRE FUTURE ADDITIONAL FUNDING TO STAY IN BUSINESS.
Over time, we may require additional financing for our operations.
Additionally, we periodically review other companies' product lines and
technologies for potential acquisition. Any material acquisitions or
joint ventures could require additional financing. This additional
financing may not be available to us on a timely basis if at all, or, if
available, on terms acceptable to us. Moreover, additional financing may
cause dilution to existing stockholders.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Versata is exposed to a variety of risks, including changes in interest
rates affecting the return on its investments and, to a lesser extent, foreign
currency fluctuations. In the normal course of business Versata establishes
policies and procedures to manage its exposure to fluctuations in interest rates
and foreign currency values.
INTEREST RATE RISKS. Versata's exposure to interest rate risks results primarily
from its short-term investments. These securities have been classified as cash
equivalents when the maturity dates are less than 90 days at the date of
issuance, and as short-term investments when the maturity dates are between 90
and 365 days at the date of issuance. Versata does not believe its exposure to
interest rate risk is material given the short-term nature of its investment
portfolio. Declines in interest rates over time will, however, reduce our
interest income.
FOREIGN CURRENCY RISKS. As of June 30, 2000, Versata had operating subsidiaries
located in the United Kingdom, Germany, Belgium, Hong Kong and France.
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 June 30, 2000, foreign currency
fluctuations have not had a material impact on our financial position or results
of operations.
PART II
OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(a) Sales of Unregistered Securities
During the period from March 1, 2000 to May 8, 2000, employees of Versata
exercised options to purchase 73,043 shares of common stock at a weighted
average exercise price of $0.56 per share. The options were granted pursuant to
our 1997 Stock Option Plan. We sold these securities in reliance upon Rule 701
promulgated under the Securities Act of 1933, as amended.
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<PAGE> 21
(b) Use of Proceeds
Versata has invested the net proceeds from its initial public offering of
common stock in interest bearing investment grade instruments. We expect to use
the net proceeds primarily to fund working capital, technology and product
development and sales and marketing. None of the net proceeds of our initial
public offering were paid to any of our directors or officers, or to any person
owning 10% or more of any class of our equity securities.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
By written consent dated as of February 21, 2000, our stockholders
approved the following proposals:
- A proposal to approve our reincorporation in the State of Delaware;
- A proposal to approve the adoption of our 2000 Stock Incentive Plan as
the successor to the 1997 Stock Option Plan;
- A proposal to approve the adoption of our Employee Stock Purchase Plan;
- A proposal to approve the form of Indemnity Agreement for use as an
agreement between Versata and each of our executive officers and
directors; and
- A proposal to approve the Amended and Restated Certificate of
Incorporation and the Amended and Restated Bylaws of Versata Delaware.
The written consent was given by holders of 25,971,608 shares or 76.1% of
the Company's common stock on an as converted basis. Holders of 8,147,196
shares, or 23.9% of the Company's common stock on an as converted basis,
abstained.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are included herein:
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
------ -----------
<S> <C>
3.1 Amended and Restated Certificate of Incorporation of Versata
(incorporated by reference to Exhibit 3.1 to
Versata's Registration Statement on Form S-1 (Registration No. 333-92451)).
3.2 Amended and Restated Bylaws Versata (incorporated by reference to
Exhibit 3.2 to Versata's Registration Statement on Form S-1
(Registration No. 333-92451)).
10.1 Lease agreement, dated as of April 10, 2000, by and between Versata and
Kaiser Center, Inc. for the sublease of office space in Oakland, CA.
27.1 Financial Statement Data
</TABLE>
(b) Reports on Form 8-K: None.
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<PAGE> 22
VERSATA, INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
VERSATA, INC.
Date: August 14, 2000 /s/ JOHN A. HEWITT, JR
----------------------------------------
John A. Hewitt Jr.
President, Chief Executive Office and
Director
/s/ KEVIN B. FERRELL
----------------------------------------
Kevin B. Ferrell
Chief Financial Officer
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<PAGE> 23
EXHIBIT INDEX
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
------ -----------
<S> <C>
3.1 Amended and Restated Certificate of Incorporation of
Versata (incorporated by reference to Exhibit 3.1 to
Versata's Registration Statement on Form S-1
(Registration No. 333-92451)).
3.2 Amended and Restated Bylaws Versata (incorporated by
reference to Exhibit 3.2 to Versata's Registration
Statement on Form S-1 (Registration No. 333-92451)).
10.1 Lease agreement, dated as of April 10, 2000, by and
between Versata and Kaiser Center, Inc. for the sublease
of office space in Oakland, CA.
27.1 Financial Statement Data
</TABLE>
