<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 14, 2000
REGISTRATION NO. 333-92451
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
VERSATA, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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<S> <C> <C>
CALIFORNIA
(PRIOR TO REINCORPORATION IN 7372 68-0255203
DELAWARE)
(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:
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JOHN W. LARSON, ESQ. PETER V. LEPARULO, ESQ.
PATRICK J. SHEA, ESQ. BRADFORD E. MONKS, ESQ.
ANGELA C. HILT, ESQ. THOMAS R. BRIDA, ESQ.
BROBECK, PHLEGER & HARRISON LLP ORRICK, HERRINGTON & SUTCLIFFE LLP
ONE MARKET 400 SANSOME STREET
SPEAR STREET TOWER SAN FRANCISCO, CA 94111
SAN FRANCISCO, CA 94105 (415) 392-1123
(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. [ ]
------------------------
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 JANUARY 14, 2000
PROSPECTUS
[VERSATA LOGO]
Shares
Common Stock
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This is an initial public offering of shares of common stock of Versata, Inc. We
are offering shares in this offering. No public market currently
exists for our common stock. We anticipate that the initial public offering
price will be between $ and $ 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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<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 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
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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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...................... 24
</TABLE>
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PAGE
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Business............................. 37
Management........................... 54
Related Party Transactions........... 67
Principal Stockholders............... 74
Description of Securities............ 77
Shares Eligible for Future Sale...... 81
Underwriting......................... 83
Legal Matters........................ 85
Experts.............................. 85
Where You Can Find Additional
Information........................ 86
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 September 30, 1999, we had licensed our product to over 400 customers
worldwide for use in a wide range of business-to-business, business-to-employee
and business-to-consumer software applications. More than 30 customers have
purchased our products and services for over $100,000, including Canadian
Pacific Ships, El Paso Energy, Hilton Hotels, 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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- 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.
CORPORATE INFORMATION
Versata, Inc., through its predecessors Vision Software Tools, Inc. and
Image Innovation Solutions, Inc., was incorporated in California on August 27,
1991. 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.......... shares
Common stock outstanding after this
offering............................ shares
Use of proceeds..................... For general corporate purposes,
including working capital, product
development and capital expenditures.
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 September 30, 1999. It also
reflects the automatic conversion of all outstanding series of preferred stock
into common stock upon completion of this offering. In addition to the shares of
common stock to be outstanding after this offering, there are:
- 3,049,322 shares that could be issued upon the exercise of options
outstanding as of September 30, 1999 at a weighted average exercise price
of $0.62 per share;
- 1,918,900 shares that could be issued upon the exercise of options issued
subsequent to September 30, 1999 at a weighted average exercise price of
$2.71;
- 1,223,316 shares that could be issued under our option plans at December
1, 1999;
- 614,836 shares that could be issued upon the exercise of warrants
outstanding as of September 30, 1999 at a weighted average exercise price
of $0.52 and 286,186 shares issuable upon conversion of preferred stock
issuable upon the exercise of warrants outstanding as of September 30,
1999 at a weighted average exercise price of $3.08; 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 before the commencement of
this offering.
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<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>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
--------------------------------------- -------------------------
1996 1997 1998 1998 1999
---------- ---------- ----------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
STATEMENT OF
OPERATIONS DATA:
Total revenue......... $ 1,124 $ 1,406 $ 3,950 $ 2,709 $ 7,416
Gross profit.......... 215 95 1,468 1,111 3,261
Loss from
operations.......... (9,203) (10,012) (7,883) (5,143) (12,462)
Net loss.............. $ (9,013) $ (9,844) $ (8,134) $ (5,433) (12,911)
Net loss per share:
Basic and diluted... $ (6.05) $ (5.72) $ (3.99) $ (2.82) $ (4.12)
Weighted average
shares
outstanding...... 1,489,294 1,720,649 2,038,393 1,926,744 3,131,586
Unaudited pro forma
net loss per share:
Basic and diluted... $ (0.52) $ (0.55)
Weighted average
shares
outstanding...... 15,703,882 23,350,909
</TABLE>
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<CAPTION>
SEPTEMBER 30, 1999
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PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
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BALANCE SHEET DATA (UNAUDITED):
Cash and cash equivalents............................ $ 8,340 $24,968
Working capital...................................... 7,431 24,059
Total assets......................................... 18,253 34,881
Total long-term liabilities.......................... 140 140
Stockholders' equity................................. 8,837 25,465
</TABLE>
The pro forma information reflects the net proceeds of $628,000 from the
sale of 179,396 shares of Series E preferred stock at $3.50 per share on October
8, 1999 and the net proceeds of $16.0 million from the sale of 2,877,698 shares
of Series F preferred stock at $5.56 per share on November 30, 1999.
The pro forma as adjusted information 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 $ million from the
sale of shares of common stock in this offering at an assumed
public offering price of $ per share after deducting underwriting
discounts and commissions and offering expenses. See "Use of Proceeds"
and "Capitalization."
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<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 $12.9 million for
the nine months ended September 30, 1999. As of September 30, 1999, we had an
accumulated deficit of $44.5 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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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 $3.7 million, or 50.3% of total revenue, in the first nine months of
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 80
employees and independent contractors devoting substantially all of their time
to us as of December 31, 1998 to 249 as of January 4, 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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AS A RESULT OF OUR AGREEMENT TO CO-BRAND AN INTEGRATED PRODUCT WITH IBM, WE MAY
COMPETE WITH IBM IN THE MARKET FOR THAT INTEGRATED PRODUCT.
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.
THE SUCCESS OF OUR BUSINESS MODEL DEPENDS ON THE CONTINUED GROWTH OF E-COMMERCE.
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.
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
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<PAGE> 14
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 year ended December 31, 1998 and the nine
months ended September 30, 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 11.9% of
our revenue for the nine months ended September 30, 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 expanded our direct sales force by approximately 70 persons 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 MAKES IT DIFFICULT FOR US TO PREDICT OUR QUARTERLY RESULTS.
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, including year 2000 errors. Serious defects or errors
could result in lost revenue or a delay in market acceptance. Customers could
seek significant compensation from
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<PAGE> 17
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 nine months ended September 30,
1999, only approximately 15% 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 60% of our revenue is currently 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 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.
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<PAGE> 20
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
$ per share.
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,
approximately % of our outstanding common stock. They will own %
if the underwriters exercise their over-allotment option in full. As a result,
these stockholders will be able to exercise control over all matters requiring
stockholder approval, including the election of directors and 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.
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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. We
undertake no obligation to update publicly any forward-looking statement for any
reason, 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 shares of
common stock offered will be $ million, assuming an initial public offering
price of $ 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
$ million in net proceeds from this offering.
We intend to use the net proceeds for general corporate purposes, including
working capital, product development and capital expenditures. In addition, we
may use a portion of the net proceeds to acquire or invest in complementary
businesses, products or services or to obtain the right to use complementary
technologies. We currently have no agreements or commitments with respect to any
acquisition or investment. Management will retain broad discretion in the
allocation of the net proceeds of the 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. Pending these uses, we will
invest the net proceeds of this offering in short-term, interest-bearing
investment-grade securities.
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. Our line of
credit with Venture Banking Group, a division of Cupertino National Bank,
prohibits us from paying dividends while we have any outstanding obligations
under the line of credit or while the bank is committed to make any advances to
us.
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CAPITALIZATION
The following table sets forth our cash and cash equivalents and total
capitalization as of September 30, 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 $628,000 from the sale of 179,396 shares of Series E
preferred stock at $3.50 per share on October 8, 1999; and
- the net proceeds of $16.0 million from the sale of 2,877,698 shares of
Series F preferred stock at $5.56 per share on November 30, 1999; and
- on a pro forma as adjusted basis to 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 from the sale of
shares of common stock in this offering at an assumed
initial public offering price of $ per share after deducting
underwriting discounts and commissions and offering expenses.
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1999
-------------------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
----------- ------------ --------------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
<S> <C> <C> <C>
Cash and cash equivalents........................ $ 8,340 $ 24,968
======== ========
Total long-term liabilities...................... 140 140
Stockholders' equity:
Convertible preferred stock, issuable in
series, $0.001 par value, 30,580,000 shares
authorized, actual and pro forma; 23,395,334
shares issued and outstanding, actual;
26,452,428 shares issued and outstanding,
pro forma; 5,000,000 shares authorized, no
shares issued and outstanding, pro forma as
adjusted.................................... 23 26
Common stock, $0.001 par value, 40,000,000
authorized, actual and pro forma; 6,407,682
shares issued and outstanding, actual and
pro forma; 150,000,000 shares authorized,
shares issued and outstanding, pro
forma as adjusted........................... 5 5
Additional paid-in capital..................... 56,957 73,582
Notes receivable from stockholders............. (697) (697)
Unearned stock-based compensation.............. (2,965) (2,965)
Accumulated deficit............................ (44,486) (44,486)
-------- --------
Total stockholders' equity................ 8,837 25,465
-------- --------
Total capitalization...................... $ 8,977 $ 25,605
======== ========
</TABLE>
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The common stock outstanding as shown above is based on shares outstanding
as of September 30, 1999 and excludes:
- 3,049,322 shares that could be issued upon the exercise of options
outstanding as of September 30, 1999 at a weighted average exercise price
of $0.62 per share;
- 1,918,900 shares that could be issued upon the exercise of options issued
subsequent to September 30, 1999 at a weighted average exercise price of
$2.71;
- 1,223,316 shares that could be issued under our option plans at December
1, 1999;
- 614,836 shares that could be issued upon the exercise of warrants
outstanding as of September 30, 1999 at a weighted average exercise price
of $0.52 and 286,186 shares issuable upon conversion of preferred stock
issuable upon the exercise of warrants outstanding as of September 30,
1999 at a weighted average exercise price of $3.08; 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.
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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
September 30, 1999, was approximately $ million, or $ 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 September 30, 1999 after giving effect to: (i) the sale of
shares of Series E preferred stock on October 8, 1999; (ii) the sale of shares
of Series F preferred stock on November 30, 1999; and (iii) the conversion of
all outstanding series of preferred stock into common stock upon completion of
this offering.
After giving effect to the sale of shares of our common
stock, at an assumed initial public offering price of $ per share, and after
deducting estimated underwriting discounts and commissions and offering
expenses, our pro forma as adjusted net tangible book value at September 30,
1999 would have been $ , or $ per share. This represents an
immediate increase in net tangible book value of $ per share to existing
stockholders and an immediate and substantial dilution of $ 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............. $
Pro forma net tangible book value per share at
September 30, 1999..................................... $
Increase per share attributable to new investors..........
-----
Pro forma as adjusted net tangible book value per share
after the offering........................................
--------
As adjusted dilution per share to new investors............. $
========
</TABLE>
Assuming the exercise in full of the underwriters' over-allotment option,
our pro forma as adjusted net tangible book value at September 30, 1999 would
have been approximately $ per share, representing an immediate increase in
net tangible book value of $ per share to our existing stockholders and an
immediate and substantial dilution in net tangible book value of $ per share
to new investors.
The following table summarizes, at September 30, 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 $ 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............ % $ % $
New investors....................
----------- ----- -------- -----
Totals................. 100.0% $ 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, 1996, 1997 and 1998, and the balance sheet data as of
December 31, 1997 and 1998, 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, 1994 and 1995 and the balance sheet data as of December 31, 1995
and 1996, are derived from audited consolidated financial statements not
included in this prospectus. The statement of operations data for the nine
months ended September 30, 1998 and 1999 and the balance sheet data as of
September 30, 1999 are derived from the unaudited consolidated financial
statements included in this prospectus and include all adjustments, consisting
of only normal recurring adjustments, necessary for the fair statement of such
information when read in conjunction with the audited consolidated financial
statements and related notes. 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>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
--------------------------------------------------------------- ------------------------
1994 1995 1996 1997 1998 1998 1999
---------- ---------- ---------- ---------- ----------- ---------- -----------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue:
Software license................ $ -- $ 64 $ 872 $ 526 $ 1,924 $ 1,353 $ 3,733
Services........................ 234 -- 252 880 2,026 1,356 3,683
---------- ---------- ---------- ---------- ----------- ---------- -----------
Total revenue................. 234 64 1,124 1,406 3,950 2,709 7,416
---------- ---------- ---------- ---------- ----------- ---------- -----------
Cost of revenue:
Software license................ -- 84 127 234 170 375
Services........................ 130 11 825 1,184 2,248 1,428 3,780
---------- ---------- ---------- ---------- ----------- ---------- -----------
Total cost of revenue......... 130 11 909 1,311 2,482 1,598 4,155
---------- ---------- ---------- ---------- ----------- ---------- -----------
Gross profit...................... 104 53 215 95 1,468 1,111 3,261
---------- ---------- ---------- ---------- ----------- ---------- -----------
Operating expense:
Sales and marketing............. 104 957 4,583 4,779 4,495 2,905 9,064
Product development............. 475 2,432 3,486 3,547 3,275 2,466 3,033
General and administrative...... 224 637 1,349 1,781 1,379 883 1,967
Stock-based compensation........ -- -- -- -- 202 -- 1,659
---------- ---------- ---------- ---------- ----------- ---------- -----------
Total operating expense....... 803 4,026 9,418 10,107 9,351 6,254 15,723
---------- ---------- ---------- ---------- ----------- ---------- -----------
Loss from operations.............. (699) (3,973) (9,203) (10,012) (7,883) (5,143) (12,462)
Other income (expense), net....... 17 42 190 168 (251) (290) (449)
---------- ---------- ---------- ---------- ----------- ---------- -----------
Net loss................. $ (682) $ (3,931) $ (9,013) $ (9,844) $ (8,134) $ (5,433) $ (12,911)
========== ========== ========== ========== =========== ========== ===========
Net loss per share:
Basic and diluted............... $ (0.57) $ (3.14) $ (6.05) $ (5.72) $ (3.99) $ (2.82) $ (4.12)
========== ========== ========== ========== =========== ========== ===========
Weighted average shares
outstanding................... 1,200,000 1,251,691 1,489,294 1,720,649 2,038,393 1,926,744 3,131,586
========== ========== ========== ========== =========== ========== ===========
Unaudited pro forma net loss per
share:
Basic and diluted............... $ (0.52) $ (0.55)
=========== ===========
Weighted average shares
outstanding................... 15,703,882 23,350,909
=========== ===========
</TABLE>
22
<PAGE> 27
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------- SEPTEMBER 30,
1994 1995 1996 1997 1998 1999
------ ------ ------ ------ ------ -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents.................. $1,235 $4,764 $1,332 $2,338 $5,767 $8,340
Working capital............................ 1,128 4,405 54 835 3,878 7,431
Total assets............................... 1,367 5,665 3,374 4,235 8,468 18,253
Total long-term liabilities................ 196 720 612 1,175 498 140
Stockholders' equity....................... 1,041 4,435 820 889 4,356 8,837
</TABLE>
23
<PAGE> 28
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 more than 400
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 49.9% and 50.3% of our total revenue in the nine months ended
September 30, 1998 and 1999, respectively, while services revenue accounted for
50.1% and 49.7%, 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
24
<PAGE> 29
reasonably estimated, as well as contracts for which professional services have
not yet been performed.
As of September 30, 1999, we had deferred revenue of $4.1 million, an
increase of $3.2 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 $1.9
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 8.4% of our total revenue for the
nine months ended September 30, 1998, and 14.6% of our total revenue in the nine
months ended September 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
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 $44.5 million as of September 30, 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 249 as
of January 4, 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
25
<PAGE> 30
and marketing and management personnel and cash compensation for these employees
is likely to 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 during the nine months
ended September 30, 1999 with exercise prices below fair value, we recognized a
total unearned compensation expense of $4.4 million which will be amortized on
an accelerated basis over the vesting periods of the options, usually 50 months.
In October and November 1999, we will record an additional $4.8 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, 1995 is not presented because revenue during that period
was not material.
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
----------------------------- ------------------
1996 1997 1998 1998 1999
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Revenue:
Software license................... 77.6% 37.4% 48.7% 49.9% 50.3%
Services........................... 22.4 62.6 51.3 50.1 49.7
------- ------- ------- ------- -------
Total revenue................... 100.0 100.0 100.0 100.0 100.0
Cost of revenue:
Software license................... 7.5 9.0 5.9 6.3 5.0
Services........................... 73.4 84.2 56.9 52.7 51.0
------- ------- ------- ------- -------
Total cost of revenue........... 80.9 93.2 62.8 59.0 56.0
------- ------- ------- ------- -------
Gross profit......................... 19.1 6.8 37.2 41.0 44.0
------- ------- ------- ------- -------
Operating expense:
Sales and marketing................ 407.7 339.9 113.8 107.3 122.2
Product development................ 310.1 252.3 82.9 91.0 40.9
General and administrative......... 120.0 126.7 34.9 32.6 26.5
Stock-based compensation........... -- -- 5.1 -- 22.4
------- ------- ------- ------- -------
Total operating expense......... 837.9 718.9 236.7 230.9 212.0
------- ------- ------- ------- -------
Loss from operations................. (818.8) (712.1) (199.5) (189.9) (168.0)
Other income (expense), net.......... 16.9 11.9 (6.4) (10.7) (6.1)
------- ------- ------- ------- -------
Net loss............................. (801.9)% (700.2)% (205.9)% (200.6)% (174.1)%
======= ======= ======= ======= =======
</TABLE>
NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO THE NINE MONTHS ENDED SEPTEMBER
30, 1998
REVENUE
Total revenue consists of software license revenue and services revenue.
Total revenue increased by $4.7 million, or 173.8%, from $2.7 million in the
nine months ended September 30, 1998 to $7.4 million in the nine months ended
September 30, 1999. This increase was attributable to an increase in our
customer base, which was largely the result of the release of an upgrade of our
26
<PAGE> 31
software product in September 1998. As a percentage of total revenue, software
license revenue was 49.9% and 50.3% in the nine months ended September 30, 1998
and September 30, 1999, respectively, while services revenue was 50.1% and
49.7%, respectively.
Software License Revenue. Software license revenue increased by $2.4
million, or 175.9%, from $1.3 million in the nine months ended September 30,
1998 to $3.7 million in the nine months ended September 30, 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
$702,000, or 360.0%, from $195,000 in the nine months ended September 30, 1998
to $897,000 in the nine months ended September 30, 1999. As a percentage of
software license revenue, international sales increased from 14.1% in the nine
months ended September 30, 1998 to 22.8% in the nine months ended September 30,
1999.
Services Revenue. Services revenue increased by $2.3 million, or 171.6%,
from $1.4 million in the nine months ended September 30, 1998 to $3.7 million in
the nine months ended September 30, 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
466.7%, from $33,000, in the nine months ended September 30, 1998 to $187,000,
in the nine months ended September 30, 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 $2.6 million, or 160.0%,
from $1.6 million in the nine months ended September 1998 to $4.2 million in the
nine months ended September 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 $205,000, or
120.6%, from $170,000 in the nine months ended September 30, 1998 to $375,000 in
the nine months ended September 30, 1999. This increase was attributable to a
larger volume of sales orders in the 1999 period. Gross profit on software
license revenue increased by $2.2 million, or 193.5%, from $1.2 million in the
nine months ended September 30, 1998 to $3.3 million in the nine months ended
September 30, 1999. Gross profit as a percentage of software license revenue
increased from 87.4% to 90.0% for the nine months ended September 30, 1999 as
compared to the nine months ended September 30, 1998. 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 increased by $2.4 million, or 164.7%, from $1.4 million in the
nine months ended September 30, 1998 to $3.8 million in the nine months ended
September 30, 1999. This increase was principally due to an increase in the
number of our consulting, training and customer support personnel from 20 at
September 30, 1998 to 31 at September 30, 1999, reflecting the increase in
consulting services that we provided in the 1999 period. As a percentage of
total services revenue, cost of services revenue decreased from 105.2% to 102.6%
for the nine months ended September 30, 1999 as compared to the nine months
ended September 30, 1998, primarily as a result of higher billing rates.
27
<PAGE> 32
GROSS PROFIT
Gross profit increased $2.2 million, or 193.5%, from $1.1 million in the
nine months ended September 30, 1998 to $3.3 million for the nine months ended
September 30, 1999. As a percentage of total revenue, gross margin increased
from 41.0% to 44.0% for the nine months September 30, 1998 and September 30,
1999, respectively. This increase reflects improved margins in both software
license revenue and services revenue for the reasons explained above.
OPERATING EXPENSE
Operating expense increased by $9.4 million, or 151.4%, from $6.3 million
in the nine months ended September 30, 1998 to $15.7 million in the nine months
ended September 30, 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
230.9% in the nine months ended September 30, 1998 to 212.0% in the nine months
ended September 30, 1999, as we spread our operating expenses across a
significantly larger revenue base in the 1999 period.
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 increased by $6.2 million,
or 212.0%, from $2.9 million in the nine months ended September 30, 1998 to $9.1
million in the nine months ended September 30, 1999. Of this increase, $3.8
million was due to increases in payroll and related costs, travel costs and
costs as a result of the growth in the number of sales and marketing personnel,
$1.2 million was due to increased marketing programs to increase market
awareness of our products, and $744,000 was due to increased commissions as a
result of higher sales volumes. We had 26 sales and marketing professionals at
September 30, 1998 compared to 78 at September 30, 1999. As a percentage of
total revenue, sales and marketing expense increased from 107.3% in the nine
months ended September 30, 1998 to 122.2% in the nine months ended September 30,
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 increased by $567,000, or
23.0%, from $2.5 million in the nine months ended September 30, 1998 to $3.0
million in the nine months ended September 30, 1999. This increase was primarily
attributable to increases in the number of personnel to support product
development and engineering activities, from 21 at September 30, 1998 to 29 at
September 30, 1999. As a percentage of total revenue, product development
expense decreased from 91.0% in the 1998 period to 40.9% in the 1999 period, 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 increased by $1.1 million, or
28
<PAGE> 33
122.8%, from $883,000 in the nine months ended September 30, 1998 to $2.0
million in the nine months ended September 30, 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 $830,000, as of September 30, 1999.
The Company's policy for determining the allowance for doubtful accounts is
based on a percentage of dollar volume sales supplemented by specifically
identified doubtful accounts. This increase occurred in response to the
broadening of our customer base and increasing accounts receivable balance. As a
percentage of total revenue, general and administrative expense decreased from
32.6% in the nine months ended September 30, 1998 to 26.5% in the nine months
ended September 30, 1999, as our costs were spread across a significantly larger
revenue base in the 1999 period. We believe general 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 the nine months ended September 30, 1999 was $1.7
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 $290,000 for the nine months ended September 30, 1998 as
compared to net expense of $449,000 for the nine months ended September 30,
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.
29
<PAGE> 34
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.
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.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO THE YEAR ENDED DECEMBER 31, 1996
REVENUE
Total revenue increased by $282,000, or 25.1%, from $1.1 million in 1996 to
$1.4 million in 1997. This increase was largely due to the launch of the first
generation of our Versata E-Business
30
<PAGE> 35
Automation System that was launched in September 1997. In 1996, we generated
revenue solely from our non Web-based software and related services. As a
percentage of total revenue, software license revenue was 77.6% and 37.4% in
1996 and 1997, respectively, while services revenue was 22.4% and 62.6%,
respectively.
Software License Revenue. Software license revenue decreased by $346,000,
or 39.7%, from $872,000 in 1996 to $526,000 in 1997. The decrease was
attributable to the discontinuation of one of our non Web-based software
products during 1997 and the phase-out of the other beginning in late 1997. We
launched the first generation of our Versata E-Business Automation System in
September 1997 and benefited only from three months of sales from this product.
Services Revenue. Services revenue increased by $628,000, or 249.2%, from
$252,000 in 1996 to $880,000 in 1997. The increase was principally due to the
increase of consulting services associated with a full year of services revenue
for 1997 as compared to approximately six months of services revenue for 1996.
COST OF REVENUE
Total cost of revenue increased by $402,000, or 44.2%, from $909,000 in
1996 to $1.3 million in 1997.
Cost of Software License Revenue. Cost of software license revenue
increased by $43,000, or 51.2%, from $84,000 in 1996 to $127,000 in 1997. This
increase was principally due to a charge taken in 1997 for discontinued product
prior to the introduction of our new products in September 1997. Cost of
software license revenue as a percentage of revenue was 7.5% and 9.0% in 1996
and 1997, respectively.
Cost of Services Revenue. Cost of services revenue increased by $359,000,
or 43.5%, from $825,000 in 1996 to $1.2 million in 1997. This increase was
principally due to an increase in our professional consulting services and our
support organization.
GROSS PROFIT
Gross profit decreased by $120,000, or 55.8%, from $215,000 in 1996 to
$95,000 in 1997. Gross profit as a percentage of total revenue was 19.1% and
6.8%, in 1996 and 1997, respectively. This decrease was principally due to a
higher service revenue mix to software license mix in 1997.
OPERATING EXPENSE
Operating expense increased by $689,000, or 7.3%, from $9.4 million in 1996
to $10.1 million in 1997. This increase was principally due to higher sales and
marketing expenses related to the launch of the first generation of our Versata
E-Business Automation System and an increase in general and administrative
expense. As a percentage of revenue, operating expense decreased from 837.9% in
1996 to 718.8% in 1997.
Sales and Marketing. Sales and marketing expense increased by $196,000, or
4.3%, from $4.6 million in 1996 to $4.8 million in 1997. This increase was
principally due to increased marketing programs prior to the launch of the first
generation of our Versata E-Business Automation System in September 1997. As a
percentage of revenue, sales and marketing expense was 407.7% and 339.9% in 1996
and 1997, respectively.
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<PAGE> 36
Product Development. Product development expense was relatively unchanged
at $3.5 million for 1996 and 1997. Product development expense as a percentage
of revenue was 310.1% and 252.3% in 1996 and 1997, respectively.
General and Administrative. General and administrative expense increased by
$432,000, or 32.0%, from $1.4 million in 1996 to $1.8 million in 1997. This
increase was principally due to increases in headcount and in our allowance for
doubtful accounts. In addition, we incurred a one-time restructuring charge of
$182,000 related to the restructuring in late 1997. General and administrative
expense as a percentage of revenue was 120.0% and 126.7% in 1996 and 1997,
respectively.
Other income (expense), net. Other income (expense), net decreased by
$22,000, or 11.6%, from $190,000 in 1996 to $168,000 in 1997. The change was
principally due to higher interest income from higher average cash balances
during 1997 as compared to 1998.
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<PAGE> 37
QUARTERLY RESULTS OF OPERATIONS
The following table sets forth our historical unaudited quarterly
information for our most recent seven quarters, both in absolute dollars and as
a percentage of total revenue for each quarter. This quarterly information has
been prepared on a basis consistent with our audited financial statements and,
we believe, includes all adjustments, consisting of normal recurring
adjustments, necessary for a fair presentation of the information shown. Our
quarterly operating results have fluctuated and may continue to fluctuate
significantly as a result of a variety of factors and operating results for any
quarter are not necessarily indicative of results for a full fiscal year.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
--------------------------------------------------------------------------------
MAR. 31, JUN. 30, SEP. 30, DEC. 31, MAR. 31, JUN. 30, SEP. 30,
1998 1998 1998 1998 1999 1999 1999
-------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenue:
Software license......................... $ 233 $ 346 $ 774 $ 572 $ 961 $ 1,099 $ 1,673
Services................................. 292 417 647 669 817 1,370 1,496
------- ------- ------- ------- ------- ------- -------
Total revenue...................... 525 763 1,421 1,241 1,778 2,469 3,169
Cost of revenue:
Software license......................... 28 63 79 64 66 187 122
Services................................. 356 399 672 821 1,002 1,292 1,486
------- ------- ------- ------- ------- ------- -------
Total cost of revenue.............. 384 462 751 885 1,068 1,479 1,608
Gross profit............................... 141 301 670 356 710 990 1,561
------- ------- ------- ------- ------- ------- -------
Operating expense:
Sales and marketing...................... 704 901 1,301 1,589 2,157 2,836 4,071
Product development...................... 769 817 880 809 915 1,036 1,082
General and administrative............... 253 289 340 497 407 696 864
Stock-based compensation................. -- -- -- 202 420 473 766
------- ------- ------- ------- ------- ------- -------
Total operating expense............ 1,726 2,007 2,521 3,097 3,899 5,041 6,783
------- ------- ------- ------- ------- ------- -------
Loss from operations....................... (1,585) (1,706) (1,851) (2,741) (3,189) (4,051) (5,222)
Other income (expense), net................ (13) (64) (214) 40 28 (35) (442)
------- ------- ------- ------- ------- ------- -------
Net loss......................... $(1,598) $(1,770) $(2,065) $(2,701) $(3,161) $(4,086) $(5,664)
======= ======= ======= ======= ======= ======= =======
AS A PERCENTAGE OF REVENUE:
Revenue:
Software license......................... 44.4% 45.3% 54.5% 46.1% 54.0% 44.5% 52.8%
Services................................. 55.6 54.7 45.5 53.9 46.0 55.5 47.2
------- ------- ------- ------- ------- ------- -------
Total revenue...................... 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
Services................................. 67.8 52.3 47.3 66.1 56.4 52.3 46.9
------- ------- ------- ------- ------- ------- -------
Total cost of revenue.............. 73.1 60.6 52.9 71.3 60.1 59.9 50.7
Gross profit............................... 26.9 39.4 47.1 28.7 39.9 40.1 49.3
------- ------- ------- ------- ------- ------- -------
Operating expense:
Sales and marketing...................... 134.1 118.1 91.6 128.0 121.3 114.9 128.5
Product development...................... 146.5 107.0 61.9 65.2 51.5 42.0 34.1
General and administrative............... 48.2 37.9 23.9 40.1 22.9 28.1 27.3
Stock-based compensation................. -- -- -- 16.3 23.6 19.2 24.2
------- ------- ------- ------- ------- ------- -------
Total operating expense............ 328.8 263.0 177.4 249.6 219.3 204.2 214.0
------- ------- ------- ------- ------- ------- -------
Loss from operations....................... (301.9) (223.6) (130.3) (220.9) (179.4) (164.1) (164.8)
Other income (expense), net................ (2.5) (8.4) (15.0) 3.2 1.6 (1.4) (13.9)
------- ------- ------- ------- ------- ------- -------
Net loss......................... (304.4)% (232.0)% (145.3)% (217.6)% (177.8)% (165.5)% (178.7)%
======= ======= ======= ======= ======= ======= =======
</TABLE>
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<PAGE> 38
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 -- Our limited operating history as a company
focused on Web-based software products makes it difficult to evaluate our
business and makes forecasting difficult; the failure to meet expectations could
cause the price of our common stock to decline" and "-- The unpredictability of
our quarterly operating results may adversely affect the trading price of our
common stock."
NET OPERATING LOSSES AND TAX CREDIT CARRYFORWARDS
As of September 30, 1999, we had net operating losses and research and
experimentation credit carryforwards of approximately $38.5 million and
$635,000, respectively, for federal tax purposes, and approximately $31.0
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 $68.8 million, including $628,000 from the sale of Series E
preferred stock and $16.0 million from the sale of Series F preferred stock
received subsequent to September 30, 1999. We have also funded our operations
through equipment financing. As of September 30, 1999, we had $8.3 million in
cash and cash equivalents and $7.4 million in working capital. We have one bank
line of credit with the Venture Banking Group, a division of Cupertino National
Bank for amounts borrowed to finance equipment. This term loan bears interest at
the bank's prime rate plus 0.75%. At September 30, 1999, we had a total of
$381,000 outstanding
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<PAGE> 39
under this bank line of credit. Borrowings under the bank line of credit are
secured by substantially all of our assets. We also obtained a capital financing
line from Phoenix Leasing Incorporated to purchase up to $1.0 million in fixed
assets. Any borrowings under this financing line are payable over 36 months,
with an effective interest rate of approximately 17%. At September 30, 1999,
there was no borrowing outstanding under this line. Borrowings under this line
are collateralized by the equipment being financed.
Net cash used in operating activities was $8.6 million in 1997, $7.0
million in 1998 and $11.5 million for the nine months ended September 30, 1999.
Net cash flows used in operating activities for each period reflect net losses
and 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 $812,000 for the nine months ended September 30, 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 $14.8 million for the nine months ended September 30, 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 period ended
September 30, 1999, we derived approximately 12.0% 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.
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<PAGE> 40
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 September 30, 1999, foreign
currency fluctuations have not had a material impact on our financial position
or results of operations.
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.
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<PAGE> 41
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 September 30, 1999, we had licensed our products to more than 400
customers worldwide for use in a wide range of e-business software applications.
Over 30 customers have purchased our products and services for over $100,000,
including Canadian Pacific Ships, El Paso Energy, Hilton Hotels, 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
37
<PAGE> 42
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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<PAGE> 43
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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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 15 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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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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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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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. IBM's
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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 January 4, 2000, our services organization consisted
of 55 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 over 400
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
Online Business Systems
Performance Software
Premier Solutions
SIS Propalogica
Template Software
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
Since January 1, 1998, over 30 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 11.9% of our revenue for the nine months ended September 30, 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, Dimerco
Express, 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, IT Web, 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.
The IBM agreement terminates on
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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 January 4, 2000, our
sales organization consisted of 124 professionals located in 20 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
1, 1999, we had approximately 125 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 1, 1999, we had approximately 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 1, 1999, we had
approximately 14 distributors. These partners include 2Support,
Bi-Vision, Coalescent, Grupo Informatica and Template Software.
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 13 professionals as of January 4,
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, IBM has 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, $3.7 million for the year ended December 31, 1998
and $3.0 million for the nine months ended September 30, 1999. As of January 4,
2000, we had 32 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 January 4, 2000, we had 249 employees and independent contractors
devoting substantially all of their time to us. Of these individuals, 137 were
in sales and marketing, 32 were in development and engineering services, 55 were
in professional services and customer support, and 25 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 37,000 square feet of office space in Oakland, California. Monthly
lease payments on the Oakland facility are approximately $66,000. This lease
expires in November 2000. We also maintain leased offices in Atlanta, Hamburg,
London, Paris, New Jersey, New York, Texas and Virginia. We have additional
offices in Boston, Calgary, Chicago, Dallas, Denver, Hong Kong, Houston, Los
Angeles, 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,
Secretary and Director
Kevin Ferrell............................ 52 Chief Financial Officer
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. 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
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 two
directors, Messrs. Feddersen and Larson.
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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 on
November 16, 1999 and approved by the stockholders in 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, 1998 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. No individual who would otherwise have been includable in the table on
the basis of salary and bonus earned during 1998 has resigned or otherwise
terminated his or her employment during 1998.
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 1998. Mr. Stangl, who joined us on
December 14, 1998, had an annualized base salary for 1998 of $145,000. 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... $160,000 $60,000 868,000
Val Huber
Vice President, Development
and Chief Technology Officer....................... 135,000 60,000 180,000
Peter Harrison
Vice President, Sales.............................. 140,000 60,000 165,000
Michael DeVries
Vice President, Marketing.......................... 140,000 74,000 180,000
Michael Stangl
Vice President, Professional Services.............. 7,000 -- 375,000
</TABLE>
OPTION GRANTS IN FISCAL YEAR 1998
The following table sets forth information with respect to stock options
granted to each of our named executive officers in 1998. No stock appreciation
rights were granted during 1998.
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. Stock price appreciation 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 of the common
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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 POTENTIAL REALIZABLE
---------------------------------------------------- VALUE AT ASSUMED
PERCENTAGE OF ANNUAL RATES OF
NUMBER OF TOTAL STOCK PRICE
SECURITIES OPTIONS APPRECIATION FOR
UNDERLYING GRANTED TO EXERCISE OPTION TERM
OPTIONS EMPLOYEES IN PRICE PER EXPIRATION --------------------
NAME GRANTED FISCAL 1998 SHARE DATE 5% 10%
---- ---------- -------------- --------- ---------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
John A. Hewitt, Jr. ....... 120,000 3.52% $0.20 6/16/08 $15,093 $ 38,250
73,000 2.14 0.20 6/16/08 9,182 23,269
25,000 0.73 0.20 6/16/08 3,144 7,969
500,000 14.65 0.20 9/30/08 62,889 159,373
150,000 4.40 0.20 9/30/08 18,867 47,812
Val Huber.................. 105,000 3.08 0.20 9/30/08 13,207 33,469
75,000 2.20 0.20 9/30/08 9,433 23,906
Peter Harrison............. 105,000 3.08 0.20 9/30/08 13,207 33,469
60,000 1.76 0.20 9/30/08 7,547 19,124
Michael DeVries............ 105,000 3.08 0.20 9/30/08 13,207 33,469
75,000 2.20 0.20 9/30/08 9,433 23,906
Michael Stangl............. 300,000 8.80 0.20 12/13/08 37,734 95,625
75,000 2.20 0.20 12/13/08 9,433 23,906
</TABLE>
In 1998, we granted options to purchase up to a total of 3,412,335 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. Each option has
a maximum term of 10 years, subject to earlier termination upon the optionee's
termination of service with us. Except as otherwise described below, 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. In general, this repurchase right lapses as to 12% of the
shares after six months of service and as to the remaining shares in equal
monthly installments over an additional 44-month period. However:
- The shares subject to the 120,000-share option granted to Mr. Hewitt on
June 17, 1998 vest as to 10,000 shares per month, measured from January
1, 1998.
- The shares subject to the 73,000-share option granted to Mr. Hewitt on
June 17, 1998 vest as to 3,000 shares per month, measured from January 1,
1998. This option qualifies as an incentive stock option for federal tax
purposes and replaces an option for the same number of shares, with the
same exercise price and vesting schedule, which was granted to Mr. Hewitt
in 1997 and did not qualify as an incentive stock option. That option was
cancelled as of June 17, 1998.
- The shares subject to the 25,000-share option granted to Mr. Hewitt on
June 17, 1998 will vest in the event we appoint a new Chief Executive
Officer but, in any event, the option will become exercisable and fully
vested five years from the date of grant.
- The options granted in October 1998 to Messrs. Hewitt, Huber, Harrison
and DeVries to purchase 150,000, 75,000, 60,000 and 75,000 shares,
respectively, and the option granted to Mr. Stangl in December 1998 to
purchase 75,000 shares, are performance-based options which become
exercisable and vested in full on November 30, 2003 for Messrs. Hewitt,
Huber, Harrison and DeVries and on February 13, 2004 for Mr. Stangl.
However, if we attain our
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annual financial target for the 1999 fiscal year, as set forth in our
operating plan for that year, 50% of the option shares will become
exercisable and vested as of December 31, 1999 and if we attain our
annual financial target established for the 2000 fiscal year, as set
forth in our operating plan for that year, the remaining 50% of the
option shares will become exercisable and vested as of December 31, 2000.
Our annual financial target for the 1999 fiscal year is $13.7 million in
bookings. Our annual financial target for the 2000 fiscal year will be
determined at the time our operating plan for that year is finalized.
Should we be acquired by merger or asset sale before December 31, 2000,
the 50% of the option shares allocated to the year in which the
acquisition occurs will immediately accelerate and become fully
exercisable and the options will terminate with respect to any option
shares which are not otherwise exercisable at that time.
In October 1999, we granted to the following named executive officers
options to purchase up to the following numbers of shares of common stock at an
exercise price of $2.50 per share:
- John A. Hewitt, Jr. received an option to purchase up to 400,000 shares
of common stock;
- Val Huber received an option to purchase up to 75,000 shares of common
stock;
- Peter Harrison received an option to purchase up to 75,000 shares of
common stock;
- Michael DeVries received an option to purchase up to 75,000 shares of
common stock; and
- Michael Stangl received an option to purchase up to 75,000 shares of
common stock.
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, Mr. Ferrell was appointed Chief Financial Officer and 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.
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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, 1998. No options or stock appreciation
rights were exercised during 1998 and no stock appreciation rights were
outstanding as of December 31, 1998. The value of unexercised in-the-money
options at December 31, 1998 is calculated on the basis of the assumed initial
public offering price of $ , 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, 1998 DECEMBER 31, 1998
---------------------------- ----------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
John A. Hewitt, Jr. ................ 805,625 285,000
Val Huber........................... 340,000 135,000
Peter Harrison...................... 214,600 170,400
Michael DeVries..................... 180,000 250,000
Michael Stangl...................... 300,000 75,000
</TABLE>
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 on
November 16, 1999 and approved by the stockholders in 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 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 (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;
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- 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.
- 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
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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 24,000 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, 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 8,000 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
24,000-share automatic option grant will vest in a series of three successive
annual installments upon the optionee's completion of each year of board service
measured from the grant date. The shares subject to each 8,000-share annual
option grant will vest upon optionee's completion of one year 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
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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 on November 16,
1999 and approved by the stockholders in 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. 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
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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.
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
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<PAGE> 70
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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RELATED PARTY TRANSACTIONS
SERIES F FINANCING
On November 30, 1999, we issued a total of 2,877,698 shares of Series F
preferred stock at a purchase price of $5.56 per share. Of the 2,877,698 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 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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Eugene Wong, one of our directors, is trustee of the Wong Family Trust.
John A. Hewitt, Jr., our President, Chief Executive Officer, Secretary 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>
NUMBER OF TOTAL PRINCIPAL
PURCHASER WARRANTS AMOUNT OF 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> 73
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>
NUMBER TOTAL PRINCIPAL
PURCHASER OF WARRANTS AMOUNT OF 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
Vulcan Ventures, Inc...................................... 51,810 321,607
Entities affiliated with Hambrecht & Quist................ 47,472 292,297
Morgenthaler Venture Partners IV, L.P. ................... 136,960 843,753
</TABLE>
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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>
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
John W. Larson.............................................. 10,000 27,000
Rekhi Family Trust.......................................... 37,037 100,000
</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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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
NUMBER AMOUNT
PURCHASER OF WARRANTS OF 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, 50,000
shares were sold to Kanwal Rekhi for a total purchase price of $75,000, 50,000
shares were sold to John A. Hewitt, Jr. for a total purchase price of $100,000
and 15,259 shares were sold to H&W Development Corp. for a total purchase price
of $30,518.
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.
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 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
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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 December 1, 1999, Mr. Wong had received
approximately $33,125 in fees and 53,000 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, 1998 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 no Duet services have been used. At
September 30, 1999, a net balance of $225,000 (unaudited) was outstanding and is
recorded in current liabilities.
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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 September 30, 1999, Xpede made purchases from
us of approximately $450,000.
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PRINCIPAL STOCKHOLDERS
The table below sets forth information regarding the beneficial ownership
of our common stock as of December 1, 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
32,964,516 shares of common stock outstanding as of December 1, 1999, as
adjusted to reflect the conversion of all outstanding shares of preferred stock
upon the closing of this offering into 26,516,434 shares of common stock. For
purposes of calculating each stockholder's percentage ownership, all options and
warrants exercisable within 60 days of December 1, 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 AFTER
NAME AND ADDRESS OF BENEFICIAL OWNER OWNED TO OFFERING THE OFFERING
------------------------------------ ------------ ----------- ------------
<S> <C> <C> <C>
Morgenthaler Venture Partners IV, L.P.(1)........... 5,715,749 17.24%
Entities affiliated with The Goldman Sachs
Group(2).......................................... 2,468,434 7.49%
Vulcan Ventures, Inc.(3)............................ 2,070,510 6.27%
Charles River Partnership VII(4).................... 1,964,168 5.95%
Entities affiliated with Alta V Limited
Partnership(5).................................... 1,790,241 5.42%
Entities affiliated with Hambrecht & Quist(6)....... 1,697,396 5.14%
John A. Hewitt, Jr.(7).............................. 1,520,511 4.55%
Val Huber(8)........................................ 486,650 1.47%
Peter Harrison(9)................................... 432,000 1.30%
Michael DeVries(10)................................. 430,000 1.30%
Michael Stangl(11).................................. 389,857 1.18
Kevin Ferrell(12)................................... 500,000 1.50%
Naren Bakshi(13).................................... 774,000 2.35%
Donald W. Feddersen(4).............................. 1,964,168 5.95%
John W. Larson(14).................................. 93,399 *
Gary Morgenthaler(1)................................ 5,715,749 17.24%
Kanwal Rekhi(15).................................... 664,795 2.02%
Eugene Wong(16)..................................... 240,591 *
Robert Davoli(17)................................... 1,781,124 5.40%
All directors and executive officers as a group (13
persons)(18)...................................... 14,992,844 43.37%
</TABLE>
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<PAGE> 79
- -------------------------
* 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.
(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.
(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.
(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.
(7) Includes 400,000 shares of common stock issuable upon exercise of
immediately exercisable options within 60 days of December 1, 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 718,000 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 75,000 shares of common stock issuable upon exercise of
immediately exercisable options within 60 days of December 1, 1999. Also
includes warrants to purchase 1,090 shares of Series E preferred stock at
an exercise price of $3.50 and 300,000 shares of common stock, subject to
Versata's right of repurchase.
(9) Includes 251,100 shares of common stock issuable upon exercise of
immediately exercisable options within 60 days of December 1, 1999.
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<PAGE> 80
(10) Includes 75,000 shares of common stock issuable upon exercise of
immediately exercisable options within 60 days of December 1, 1999. Also
includes 355,000 shares of common stock, subject to Versata's right of
repurchase.
(11) Includes 75,000 shares of common stock issuable upon exercise of
immediately exercisable options within 60 days of December 1, 1999. Also
includes 300,000 shares of common stock, subject to Versata's right of
repurchase.
(12) Includes 400,000 shares of common stock, issuable upon exercise of
immediately exercisable options within 60 days of December 1, 1999.
(13) Includes 20,000 shares of common stock, subject to Versata's right of
repurchase.
(14) Includes 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. Also includes warrants to purchase
1,589 shares of common stock at an exercise price of $0.20.
(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 warrants to purchase 15,951 shares of common stock at an
exercise price of $0.20, warrants to purchase 7,301 shares of common stock
at an exercise price of $3.50, and 25,000 shares of common stock, subject
to Versata's right of repurchase.
(16) Includes 7,000 shares of common stock issuable upon exercise of immediately
exercisable options within 60 days of December 1, 1999. Also includes
warrants to purchase 2,906 shares of Series E preferred stock at an
exercise price of $3.50.
(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 25,186
shares of preferred stock, subject to Versata's right of repurchase.
(18) Includes 487,610 shares of common stock issuable upon exercise of options
and warrants.
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<PAGE> 81
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, a total of 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 1, 1999, we had 293 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 1, 1999, there were warrants outstanding to purchase a total of
605,531 shares of our common stock and 198,773 shares of our preferred stock.
Warrants exercisable for shares of our common stock will remain
outstanding after the completion of this offering and have various expiration
dates. 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
24,838,736 shares of common stock and warrants to purchase up to approximately
shares of our preferred 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;
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<PAGE> 83
- extends additional rights to dissenting stockholders in any
reorganization, including a merger, sale of assets or exchange of shares;
and
- 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
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<PAGE> 84
- 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 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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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
shares of common stock outstanding, shares if the
underwriters exercise their over-allotment option in full, assuming in each case
no exercise of options or warrants.
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
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>
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
agreement.
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).
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).
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>
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 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.
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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 September 30, 1999, options to purchase a total of 3,049,322 shares
of common stock were outstanding, 228,918 of which were vested and/or
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
Directors, officers and securityholders of Versata holding a total of
shares of common stock have agreed, 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 24,838,736 shares of our
outstanding common stock and warrants to purchase up to 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, and SG
Cowen Securities Corporation, 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.............................
Total.....................................................
</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 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 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
shares of common stock have agreed that they will not 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 106
filed public offerings of equity securities, of which 79 have been completed,
and has acted as a syndicate member in an additional 54 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> 89
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
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.
LEGAL MATTERS
The validity of the common stock offered will be passed upon for us by
Brobeck, Phleger & Harrison LLP, San Francisco, California. Attorneys at the
firm of Brobeck, Phleger & Harrison LLP beneficially own a total of 91,810
shares of our preferred stock. John Larson, one of our directors, is a senior
partner of Brobeck, Phleger & Harrison LLP and owns 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, 1997 and 1998 and for each of the
three years in the period ended December 31, 1998 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.
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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. 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. Each statement in this prospectus
relating to a contract or document filed as an exhibit is qualified in all
respects by the filed exhibit. 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.
86
<PAGE> 91
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> 92
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Board of Directors of
Versata, Inc.
The reincorporation described in Note 14 to the consolidated financial
statements had not been consummated at December 1, 1999. When it has been
consummated, we will be in a position to furnish the following report:
"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, 1997 and 1998, and the results of their
operations and their cash flows for each of the three years in the period
ended December 31, 1998, 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
December 1, 1999
F-2
<PAGE> 93
VERSATA, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA
STOCKHOLDERS'
DECEMBER 31, EQUITY AT
-------------------- SEPTEMBER 30, SEPTEMBER 30,
1997 1998 1999 1999
-------- -------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 2,338 $ 5,767 $ 8,340
Accounts receivable, net of allowance for doubtful
accounts................................................ 536 1,511 6,355
Unbilled receivable....................................... -- -- 1,510
Prepaid expenses and other current assets................. 132 214 502
-------- -------- --------
Total current assets.................................. 3,006 7,492 16,707
Property and equipment, net................................. 1,091 853 1,354
Notes receivable from officers.............................. 100 100 137
Other assets................................................ 38 23 55
-------- -------- --------
$ 4,235 $ 8,468 $ 18,253
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 488 $ 804 $ 1,686
Accrued liabilities....................................... 1,006 1,504 3,089
Equipment loan, current portion........................... 316 333 312
Capital lease obligations, current portion................ 105 63 72
Deferred revenue.......................................... 256 910 4,117
-------- -------- --------
Total current liabilities............................. 2,171 3,614 9,276
Equipment loan, non current................................. 632 298 69
Capital lease obligations, non current...................... 146 88 71
Other long-term liabilities................................. 397 112 --
-------- -------- --------
3,346 4,112 9,416
-------- -------- --------
Commitments (Note 4 and 13)
Stockholders' equity:
Convertible preferred stock, issuable in series, $0.001
par value; 30,580,000 shares authorized; 24,751,180
shares designated; 12,087,508, 19,070,637 and 23,395,334
(unaudited) shares issued and outstanding, respectively,
actual; no shares issued and outstanding, pro forma..... 12 19 23 $ --
Common stock, $0.001 par value: 40,000,000 shares
authorized; 1,729,586, 2,243,699 and 6,407,682
(unaudited) shares issued and outstanding, respectively,
actual; 150,000,000 shares authorized, 29,803,016 shares
issued and outstanding, pro forma....................... 1 1 5 28
Additional paid-in capital................................ 24,317 37,059 56,957 56,957
Notes receivable from stockholders........................ -- (44) (697) (697)
Unearned stock-based compensation......................... -- (1,104) (2,965) (2,965)
Accumulated deficit....................................... (23,441) (31,575) (44,486) (44,486)
-------- -------- -------- --------
Total stockholders' equity............................ 889 4,356 8,837 $ 8,837
-------- -------- -------- ========
$ 4,235 $ 8,468 $ 18,253
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE> 94
VERSATA, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------- ------------------------
1996 1997 1998 1998 1999
---------- ---------- ----------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenue:
Software license.............. $ 872 $ 526 $ 1,924 $ 1,353 $ 3,733
Services.................... 252 880 2,026 1,356 3,683
---------- ---------- ----------- ---------- -----------
Total revenue.......... 1,124 1,406 3,950 2,709 7,416
---------- ---------- ----------- ---------- -----------
Cost of revenue:
Software license............ 84 127 234 170 375
Services.................... 825 1,184 2,248 1,428 3,780
---------- ---------- ----------- ---------- -----------
Total cost of
revenue............. 909 1,311 2,482 1,598 4,155
---------- ---------- ----------- ---------- -----------
Gross profit.................. 215 95 1,468 1,111 3,261
---------- ---------- ----------- ---------- -----------
Operating expense:
Sales and marketing......... 4,583 4,779 4,495 2,905 9,064
Product development......... 3,486 3,547 3,275 2,466 3,033
General and
administrative........... 1,349 1,781 1,379 883 1,967
Stock-based compensation.... -- -- 202 -- 1,659
---------- ---------- ----------- ---------- -----------
Total operating
expense............. 9,418 10,107 9,351 6,254 15,723
---------- ---------- ----------- ---------- -----------
Loss from operations.......... (9,203) (10,012) (7,883) (5,143) (12,462)
Interest expense.............. -- (96) (365) (342) (636)
Other income (expense), net... 190 264 114 52 187
---------- ---------- ----------- ---------- -----------
Net loss...................... $ (9,013) $ (9,844) $ (8,134) $ (5,433) $ (12,911)
========== ========== =========== ========== ===========
Net loss per share:
Basic and diluted........... $ (6.05) $ (5.72) $ (3.99) $ (2.82) $ (4.12)
========== ========== =========== ========== ===========
Weighted average shares
outstanding.............. 1,489,294 1,720,649 2,038,393 1,926,744 3,131,586
========== ========== =========== ========== ===========
Unaudited pro forma net loss
per share:
Basic and diluted........... $ (0.52) $ (0.55)
=========== ===========
Weighted average shares
outstanding.............. 15,703,882 23,350,909
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE> 95
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, 1996......... 3,905,926 $ 4 1,357,512 $ 1 $ 9,018 $ (3) $ --
Payments from stockholders on notes
receivable........................ -- -- -- -- -- 3 --
Series B convertible preferred
stock issued for cash, net
issuance costs of $2.............. 1,976,702 2 -- -- 5,333 -- --
Common stock issued upon exercise
of options........................ -- -- 405,748 -- 69 (9) --
Net loss........................... -- -- -- -- -- -- --
---------- --- --------- --- ------- ----- -------
Balance at December 31, 1996....... 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)
Series C convertible preferred
stock issued upon exercise of
warrants (unaudited).............. 22,500 -- -- -- 36 -- --
Series E convertible preferred
stock issued for cash, net of
issuance costs of $70
(unaudited)....................... 3,428,571 3 -- -- 11,927 -- --
Series E convertible preferred
stock issued upon conversion and
cancellation of bridge loans and
accrued interest (unaudited)...... 873,626 1 -- -- 3,057 -- --
Stock-based compensation expense... -- -- -- -- 410 -- --
Warrants issued in connection with
Series E convertible preferred
stock financing (unaudited)....... -- -- -- -- 521 -- --
Common stock issued upon exercise
of stock options (unaudited)...... -- -- 856,878 1 173 -- --
Common stock repurchased........... -- -- (8,430) -- -- -- --
Issuance of restricted common stock
in exchange for notes receivable
on exercise of options
(unaudited)....................... -- -- 3,315,535 3 664 (667) --
Payments on note receivables from
shareholders...................... -- -- -- -- -- 14 --
Unearned stock-based compensation
(unaudited)....................... -- -- -- -- 3,110 -- (3,110)
Amortization of unearned
stock-based compensation
(unaudited)....................... -- -- -- -- -- -- 1,249
Net loss (unaudited)............... -- -- -- -- -- -- --
---------- --- --------- --- ------- ----- -------
Balance at September 30, 1999
(unaudited)....................... 23,395,334 $23 6,407,682 $ 5 $56,957 $(697) $(2,965)
========== === ========= === ======= ===== =======
<CAPTION>
ACCUMULATED
DEFICIT TOTAL
----------- --------
<S> <C> <C>
Balance at January 1, 1996......... $ (4,584) $ 4,436
Payments from stockholders on notes
receivable........................ -- 3
Series B convertible preferred
stock issued for cash, net
issuance costs of $2.............. -- 5,335
Common stock issued upon exercise
of options........................ -- 60
Net loss........................... (9,013) (9,013)
-------- --------
Balance at December 31, 1996....... (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
Series C convertible preferred
stock issued upon exercise of
warrants (unaudited).............. -- 36
Series E convertible preferred
stock issued for cash, net of
issuance costs of $70
(unaudited)....................... -- 11,930
Series E convertible preferred
stock issued upon conversion and
cancellation of bridge loans and
accrued interest (unaudited)...... -- 3,058
Stock-based compensation expense... -- 410
Warrants issued in connection with
Series E convertible preferred
stock financing (unaudited)....... -- 521
Common stock issued upon exercise
of stock options (unaudited)...... -- 174
Common stock repurchased........... -- --
Issuance of restricted common stock
in exchange for notes receivable
on exercise of options
(unaudited)....................... -- --
Payments on note receivables from
shareholders...................... -- 14
Unearned stock-based compensation
(unaudited)....................... -- --
Amortization of unearned
stock-based compensation
(unaudited)....................... -- 1,249
Net loss (unaudited)............... (12,911) (12,911)
-------- --------
Balance at September 30, 1999
(unaudited)....................... $(44,486) $ 8,837
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE> 96
VERSATA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
--------------------------- ------------------
1996 1997 1998 1998 1999
------- ------- ------- ------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows used in operating activities:
Net loss.................................................. $(9,013) $(9,844) $(8,134) $(5,433) $(12,911)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization......................... 365 547 537 410 360
Provision for doubtful accounts....................... -- (15) 223 29 530
Warrants issued in connection with bridge loans
recorded as interest expense........................ -- -- 137 137 521
Stock-based compensation expense...................... -- -- 202 -- 1,659
Change in operating assets and liabilities:
Increase in accounts receivable..................... (480) (18) (1,198) (1,433) (6,884)
Increase (decrease) in prepaid expenses and other
current assets................................... (69) 34 (68) (204) (357)
Increase in accounts payable and accrued
liabilities...................................... 536 552 933 683 2,526
Increase in deferred revenue........................ 95 145 654 543 3,207
Increase (decrease) in other long-term
liabilities...................................... (186) 30 (285) (5) (113)
------- ------- ------- ------- --------
Net cash used in operating activities............ (8,752) (8,569) (6,999) (5,273) (11,462)
------- ------- ------- ------- --------
Cash flows used in investing activities:
Issuance of note receivable from officer................ (100) -- -- -- --
Purchase of property and equipment...................... (642) (402) (299) (223) (812)
------- ------- ------- ------- --------
Net cash used in investing activities............ (742) (402) (299) (223) (812)
------- ------- ------- ------- --------
Cash flows from financing activities:
Principal payments under capital lease obligations...... (86) (111) (100) (81) (57)
Net proceeds from issuance of convertible preferred
stock................................................. 5,335 9,134 8,270 3,473 11,930
Proceeds from equipment loan............................ -- 1,000 -- -- --
Payments on equipment loan.............................. -- (53) (316) (233) (250)
Proceeds from issuance of common stock.................. 60 4 57 48 174
Proceeds from exercise of warrants...................... -- -- -- -- 36
Payments from stockholders on notes receivable.......... 3 3 -- -- 14
Proceeds from bridge loans.............................. 750 -- 2,816 2,816 3,000
------- ------- ------- ------- --------
Net cash provided by financing activities........ 6,062 9,977 10,727 6,023 14,847
------- ------- ------- ------- --------
Net increase (decrease) in cash and cash
equivalents.................................... (3,432) 1,006 3,429 527 2,573
Cash and cash equivalents at beginning of the year........ 4,764 1,332 2,338 2,338 5,767
------- ------- ------- ------- --------
Cash and cash equivalents at end of the year.............. $ 1,332 $ 2,338 $ 5,767 $ 2,865 $ 8,340
======= ======= ======= ======= ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the period for interest.................. $ 51 $ 96 $ 110 $ 84 $ 53
======= ======= ======= ======= ========
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING
ACTIVITIES
Common stock issued for notes receivable from
stockholders............................................ $ 44 $ -- $ 44 $ 44 $ 667
======= ======= ======= ======= ========
Issuance of preferred stock upon conversion and
cancellation of bridge loans and accrued interest....... $ -- $ 771 $ 2,935 $ 2,935 $ 3,058
======= ======= ======= ======= ========
Property and equipment obtained through capital lease..... $ 215 $ -- $ -- $ -- $ 49
======= ======= ======= ======= ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE> 97
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 create and deploy e-business applications than can
be modified to meet changing e-business requirements. The Company's software
product utilizes technology that change how companies deploy and modify
e-business applications.
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, SEPTEMBER 30,
1998 1999
------------ -------------
(UNAUDITED)
<S> <C> <C>
Cash........................................................ $ 223 $ 157
Money market funds.......................................... 5,544 3,683
Certificate of deposits..................................... -- 4,500
------ ------
$5,767 $8,340
====== ======
</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.
F-7
<PAGE> 98
VERSATA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
CONCENTRATION OF CREDIT RISK
Financial instruments which potentially subject the Company to
concentrations of credit risk consist primarily of temporary cash investments,
certificates of deposits, money market accounts, and billed and unbilled
accounts receivable. The Company places its temporary cash investments with one
major financial institution. At December 31, 1997 and 1998 and at September 30,
1999, the Company had deposits in excess of federally insured limits of
$2,238,000, $5,667,000 and $8,240,000 (unaudited), 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 period presented:
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
-------------------- --------------
CUSTOMER 1996 1997 1998 1998 1999
-------- ---- ---- ---- ----- -----
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
A.............................................. -- 14% -- -- --
B.............................................. -- 10% -- 12% --
C.............................................. -- -- 18% 19% --
D.............................................. -- -- 13% 12% --
E.............................................. -- -- -- -- 12%
</TABLE>
At December 31, 1997, ten customers accounted for 69% of accounts
receivable. At December 31, 1998, four customers accounted for 37% of accounts
receivable. At September 30, 1999 (unaudited), no customer accounts for more
than 10% of accounts receivable.
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
F-8
<PAGE> 99
VERSATA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 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.
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 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.
F-9
<PAGE> 100
VERSATA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 year ended December 31, 1998 and for the nine month period ended
September 30, 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, 1996, 1997
and 1998 and for the nine months ended September 30, 1999. Foreign currency
transaction gains and losses have been immaterial to date.
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-
F-10
<PAGE> 101
VERSATA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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, and
Series E convertible preferred stock.
The following table sets forth the computation of basic and diluted net
loss per share of the period indicated (in thousands, except per share and per
share data):
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------ -----------------------
1996 1997 1998 1998 1999
---------- ---------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Numerator:
Net loss........................ $ (9,013) $ (9,844) $ (8,134) $ (5,433) $ (12,911)
========== ========== ========== ========== ==========
Denominator:
Weighted average shares
outstanding................ 1,489,294 1,720,649 2,038,393 1,979,807 4,087,557
Weighted average unvested
shares of common stock
subject to repurchase...... -- -- -- (53,063) (955,971)
---------- ---------- ---------- ---------- ----------
Denominator for basic and
diluted calculation........ 1,489,294 1,720,649 2,038,393 1,926,744 3,131,586
========== ========== ========== ========== ==========
Net loss per share:
Basic and diluted............. $ (6.05) $ (5.72) $ (3.99) $ (2.82) $ (4.12)
========== ========== ========== ========== ==========
</TABLE>
F-11
<PAGE> 102
VERSATA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 anti-dilutive for the periods indicated:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
----------------------------------- -----------------------
1996 1997 1998 1998 1999
--------- ---------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Weighted average effect of common
stock equivalents:
Unvested common stock subject
to repurchase............... -- -- -- 53,063 955,971
Options outstanding............ 1,228,650 2,624,001 3,440,635 2,986,935 4,556,236
Shares resulting from the
conversion of the:
Series A convertible
preferred stock........... 1,480,000 1,480,000 1,480,000 1,480,000 1,480,000
Series B convertible
preferred stock........... 4,107,349 4,402,628 4,402,628 4,402,628 4,402,628
Series C convertible
preferred stock........... -- 2,967,354 6,204,880 6,204,880 6,206,130
Series D convertible
preferred stock........... -- -- 1,577,981 205,961 6,983,129
Series E convertible
preferred stock........... -- -- -- -- 1,147,436
Warrants to purchase
convertible preferred
stock....................... 25,212 55,093 58,010 63,344 220,400
Warrants to purchase common
stock....................... 54,375 137,850 226,332 410,571 614,836
--------- ---------- ---------- ---------- ----------
Total common stock
equivalents excluded from
the computation of
earnings per share as
their effect was
antidilutive.............. 6,895,586 11,666,926 17,390,466 15,807,382 26,566,766
========= ========== ========== ========== ==========
</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 and Series E 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 September 30,
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
F-12
<PAGE> 103
VERSATA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 14.6% (unaudited) of the Company's total
revenue for the nine months ended September 30, 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 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 10. 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.
INTERIM RESULTS
The unaudited interim financial statements as of September 30, 1999 and for
the nine months ended September 30, 1998 and 1999 have been prepared on the same
basis as the annual financial statements as of December 31, 1998 and, in the
opinion of management, reflect all adjustments, which include only normal
recurring adjustments, necessary to present fairly the Company's financial
position as of September 30, 1999 and its results of operations and cash flows
for the nine months ended September 30, 1998 and 1999. The results for the nine
months ended September 30, 1999 are not necessarily indicative of the results to
be expected for the year ending December 31, 1999.
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,
F-13
<PAGE> 104
VERSATA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 -- BALANCE SHEET COMPONENTS (IN THOUSANDS):
ACCOUNTS RECEIVABLE
<TABLE>
<CAPTION>
DECEMBER 31,
------------------- SEPTEMBER 30,
1997 1998 1999
------- ------- -------------
(UNAUDITED)
<S> <C> <C> <C>
Accounts receivable............................. $ 613 $ 1,811 $ 7,185
Less allowance for doubtful accounts............ (77) (300) (830)
------- ------- -------
$ 536 $ 1,511 $ 6,355
======= ======= =======
</TABLE>
PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
DECEMBER 31,
ESTIMATED ------------------- SEPTEMBER 30,
USEFUL LIFE 1997 1998 1999
----------- ------- ------- -------------
(YEARS) (UNAUDITED)
<S> <C> <C> <C> <C>
Equipment........................... 3 $ 1,365 $ 1,640 $ 2,335
Furniture and fixtures.............. 5 216 238 325
Leasehold improvements.............. 2 47 49 79
Equipment under capital leases...... 3 - 5 476 476 525
------- ------- -------
2,104 2,403 3,264
Less: Accumulated depreciation and
amortization...................... (1,013) (1,550) (1,910)
------- ------- -------
$ 1,091 $ 853 $ 1,354
======= ======= =======
</TABLE>
Accumulated amortization related to equipment under capital leases at
December 31, 1997 and 1998 and at September 30, 1999 totaled approximately $250,
$356, and $407 (unaudited), respectively.
ACCRUED LIABILITIES
<TABLE>
<CAPTION>
DECEMBER 31,
------------------- SEPTEMBER 30,
1997 1998 1999
------- ------- -------------
(UNAUDITED)
<S> <C> <C> <C>
Accrued payroll and related liabilities......... $ 390 $ 603 $ 1,523
Accrued royalties............................... 92 365 356
Accrued professional fees....................... 84 166 523
Other accrued liabilities....................... 440 370 687
------- ------- -------
$ 1,006 $ 1,504 $ 3,089
======= ======= =======
</TABLE>
F-14
<PAGE> 105
VERSATA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4 -- 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 September 30,
1999, a net balance of $225,000 (unaudited) 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 September 30, 1999,
the principal amount outstanding on this facility was $100,000 (unaudited).
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 September 30, 1999, a balance of $37,000 (unaudited)
was outstanding.
NOTE 5 -- BORROWINGS
BANK LINE-OF-CREDIT
In January 1997, the Company entered into an Equipment Loan Facility
Arrangement (the "Facility") 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% at December 31, 1998 and 9% at September
30, 1999). In connection with this line of credit, the Company is 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 facility 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 9.) At
September 30, 1999 (unaudited), the Company was in compliance with all financial
covenants. Under the terms of the Facility, 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.
F-15
<PAGE> 106
VERSATA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Future minimum payments under the Facility at December 31, 1998 and
September 30, 1999 are as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1998 1999
------------ -------------
(UNAUDITED)
<S> <C> <C>
YEAR ENDING DECEMBER 31,
1999................................. $ 333 $ --
2000................................. 281 312
2001................................. 18 69
----- -----
Total principal amounts due........ 632 381
Less: Current portion................ (333) (312)
===== =====
$ 298 $ 69
===== =====
</TABLE>
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. There was no borrowing
outstanding under this line at September 30, 1999 (unaudited). 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.
UNSECURED CONVERTIBLE BRIDGE LOAN
In April 1999, certain existing shareholders 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 9) and was recognized as interest
expense during the period prior to the conversion of the loan into Series E
preferred stock.
F-16
<PAGE> 107
VERSATA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6 -- INCOME TAXES:
The primary components of the net deferred tax asset are as follows (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------- SEPTEMBER 30,
1997 1998 1999
------- -------- -------------
(UNAUDITED)
<S> <C> <C> <C>
Net operating loss carryforwards..................... $ 8,037 $ 11,181 $ 15,242
Research and experimentation credit carryforwards.... 395 822 1,050
Other long-term liabilities.......................... 213 322 493
Deferred revenue..................................... 113 7 (32)
Property and equipment............................... (47) (127) 77
------- -------- --------
8,711 12,205 16,830
Less: Valuation allowance............................ (8,711) (12,205) (16,830)
------- -------- --------
$ -- $ -- $ --
======= ======== ========
</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 in 1998 and $4,625,000 during the nine months ended September 30,
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, 1998 and September 30, 1999 (unaudited), 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, SEPTEMBER 30,
1998 1999
------------------ ------------------
FEDERAL STATE FEDERAL STATE
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net operating loss carryforwards............... $29,060 $22,313 $38,501 $30,999
Research and experimentation credit
carryforwards.................................. 500 322 635 415
</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> 108
VERSATA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7 -- CONVERTIBLE PREFERRED STOCK:
At December 31, 1998, 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 1,480,000 $ 2,391 $ 2,220
B....................................... 4,540,000 4,402,628 11,859 11,887
C....................................... 6,711,180 6,204,880 9,900 9,990
D....................................... 7,000,000 6,983,129 11,205 11,243
---------- ---------- ------- -------
19,751,180 19,070,637 $35,355 $35,340
========== ========== ======= =======
</TABLE>
At September 30, 1999 (unaudited), 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 1,480,000 $ 2,391 $ 2,220
B....................................... 4,540,000 4,402,628 11,859 11,887
C....................................... 6,711,180 6,227,380 9,936 10,026
D....................................... 7,000,000 6,983,129 11,205 11,243
E....................................... 5,000,000 4,302,197 14,988 15,058
---------- ---------- ------- -------
24,751,180 23,395,334 $50,379 $50,434
========== ========== ======= =======
</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 and $0.35 per share for Series E, 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 the preferred stock are entitled
to receive, prior and in preference to any distribution of any assets or surplus
funds of the Company to holders of the common stock, the amount of $1.50 per
share for each share of Series A then held by them, $2.70 per share for each
share of Series B then held by them, $1.61 per share for each share of Series C
then held by them, $1.61 per share for each share of Series D then held by them
and $3.50 per share for each share of Series E then held by them, and, in
addition, an amount equal to all declared but unpaid dividends on the preferred
stock (the "Liquidation Preference"). If, upon occurrence of such event, the
assets
F-18
<PAGE> 109
VERSATA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
and funds distributed among the holders of the preferred stock are insufficient
to permit the payment to such holders of the full preferential amount to which
each series is entitled, then the entire assets and funds of the Company legally
available for distribution are to be distributed among the holders of the
preferred stock in proportion to the full liquidation preference to which each
such holder is entitled.
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
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 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 and
Series D and any subsequently issued Series of preferred stock then outstanding
voting as a class are entitled to elect two directors.
F-19
<PAGE> 110
VERSATA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8 -- COMMON STOCK
The Company's Certificate of Incorporation, as amended, authorizes the
Company to issue 40,000,000 shares of common stock.
The Company has granted restricted stock to certain employees. At December
31, 1998, the Company had no shares of restricted common stock outstanding. As
of September 30, 1999 (unaudited), the Company had 3,647,599 shares of
restricted common stock outstanding. The Company has the right to repurchase
these shares at the original issue price. The Company's right to repurchase such
shares declines on a percentage basis, usually over 50 months, based on the
length of the employees' continued employment with the Company. At September 30,
1999 (unaudited), 1,792,809 of such shares were subject to repurchase.
A total of 3,315,535 of these shares were issued in exchange for notes
receivable of $653,000, which are full recourse and additionally collateralized
by the underlying shares of common stock. These notes receivable are payable on
various dates through March 2004 and bear interest at a fixed rate of 7.0% per
annum. These notes receivable have been included in stockholders' equity.
At December 31, 1998 and September 30, 1999, the Company had reserved
shares of common stock for future issuance as follows:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1998 1999
------------ -------------
(UNAUDITED)
<S> <C> <C>
Conversion of Series A preferred
stock................................ 1,500,000 1,500,000
Conversion of Series B preferred
stock.............................. 4,402,628 4,402,628
Conversion of Series C preferred
stock.............................. 6,252,566 6,265,159
Conversion of Series D preferred
stock.............................. 6,993,129 6,993,129
Conversion of Series E preferred
stock.............................. -- 4,520,604
Exercise of options under stock
option plans....................... 6,433,427 3,386,138
---------- ----------
25,581,750 27,067,658
========== ==========
</TABLE>
F-20
<PAGE> 111
VERSATA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9 -- 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 as follows:
<TABLE>
<CAPTION>
FISCAL
YEAR FISCAL
OF NUMBER NUMBER EXERCISE YEAR OF
GRANT OUTSTANDING EXERCISABLE PRICE EXPIRATION VALUE
------- ----------- ----------- -------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Series A preferred stock warrants......... 1995 20,000 20,000 $2.00 2000 de minimus
Series C preferred stock warrants......... 1996 12,593 12,593 $1.61 2001 de minimus
Series C preferred stock warrants......... 1998 12,593 12,593 $1.61 2003 de minimus
Series C preferred stock warrants......... 1999 12,593 6,300 $1.61 2004 de minimus
Series D preferred stock warrants......... 1998 10,000 10,000 $1.61 2003 de minimus
Series E preferred stock warrants......... 1999 218,407 218,407 $3.50 2004 $521,000
Common stock warrants..................... 1994 4,375 4,375 $1.50 1999 de minimus
Common stock warrants..................... 1995 50,000 50,000 $1.50 1999 de minimus
Common stock warrants..................... 1997 95,400 95,400 $1.50 2002 de minimus
Common stock warrants..................... 1998 465,061 465,061 $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 $410,000 and was
recognized during the period during which the services were performed.
NOTE 10 -- 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.
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
F-21
<PAGE> 112
VERSATA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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, 1995......................... 317,914 1,397,809 $0.24
Additional options authorized...................... 952,251 -- --
Options granted.................................... (1,417,940) 1,417,940 0.23
Options exercised.................................. -- (405,748) 0.17
Options canceled................................... 211,170 (211,170) 0.18
---------- ----------
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 (unaudited).......... 1,116,694 -- --
Repurchase of common stock (unaudited)............. 8,430 -- --
Options granted below intrinsic value
(unaudited)..................................... (2,012,375) 2,012,375 0.84
Options exercised (unaudited)...................... -- (4,172,413) 0.20
Options canceled (unaudited)....................... 199,849 (199,849) 0.20
---------- ----------
Balance at September 30, 1999 (unaudited)............ 336,816 3,049,322 0.62
========== ==========
</TABLE>
F-22
<PAGE> 113
VERSATA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following table summarizes information concerning outstanding and
exercisable options as of December 31, 1998:
<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 5,035,579 8.3 $0.19 1,236,869 $0.17
$0.25 - $0.50 373,630 6.9 0.30 277,164 0.30
--------- ---------
5,409,209 8.2 0.20 1,514,033 0.20
========= =========
</TABLE>
The following table summarizes information concerning outstanding and
exercisable options as of September 30, 1999 (unaudited):
<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 2,280,262 8.6 $0.20 215,658 $0.20
$0.25 - $0.50 10,460 5.4 0.30 10,460 0.30
$1.00 - $1.25 366,800 9.8 1.25 2,800 1.25
$2.25 - $2.50 391,800 10.0 2.50 --
--------- -------
3,049,322 8.9 0.62 228,918 0.22
========= =======
</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.
F-23
<PAGE> 114
VERSATA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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>
NINE MONTHS
YEAR ENDED DECEMBER 31, ENDED
------------------------------------ SEPTEMBER 30,
1996 1997 1998 1999
---- ------------ ------------ -------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Risk-free rates....................... 6.75% 5.80% - 6.77% 4.18% - 5.63% 4.55% - 5.88%
Expected lives (in years)............. 5.0 5.0 5.0 5.0
Dividend yield........................ 0.0% 0.0% 0.0% 0.0%
Expected volatility................... 0.0% 0.0% 0.0% 0.0%
</TABLE>
The weighted average fair value of these options granted in 1996, 1997 and
1998 and during the nine months ended September 30, 1999 was $0.17, $0.047,
$0.044 and $0.047, respectively.
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:
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED DECEMBER 31, ENDED
----------------------------- SEPTEMBER 30,
1996 1997 1998 1999
------- ------- ------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Net loss
As reported (in thousands)................ $(9,013) $(9,844) $(8,134) $(12,911)
Pro forma (in thousands).................. $(9,059) $(9,897) $(8,214) $(13,092)
Net loss per share
As reported............................... $ (6.05) $ (5.72) $ (3.99) $ (4.12)
Pro forma................................. $ (6.08) $ (5.75) $ (4.03) $ (4.18)
</TABLE>
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, 1996 through
September 30, 1999 was $4,416,000. Amortization expense recognized during the
year ended December 31, 1998 and the nine months ended September 30, 1999 was
$202,000 and $1,249,000 (unaudited), respectively.
During October and November 1999, the Company granted options to purchase
1,892,400 shares of common stock to existing and new employees at a weighted
average exercise price of $2.71 per share. In connection with these grants, the
Company recognized approximately $4.8 million in unearned compensation that will
be recognized over the related vesting period.
F-24
<PAGE> 115
VERSATA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
If the stock-based compensation for the year ended December 31, 1998 and
the nine months ended September 30, 1999 had been allocated across the relevant
functional expense categories within cost of revenue and operating expenses, it
would be allocated as follows (in thousands):
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
1998 1999
------------ -------------
(UNAUDITED)
<S> <C> <C>
Cost of service revenue...................... $ 64 $ 240
Sales and marketing.......................... 74 924
Product development.......................... 49 398
General and administrative................... 15 97
---- ------
$202 $1,659
==== ======
</TABLE>
NOTE 11 -- 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, 1996, 1997 and 1998 and for the nine months ended September 30,
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 at September 30, 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 $246,000, respectively.
NOTE 12 -- PRO FORMA NET LOSS PER SHARE (UNAUDITED):
Pro forma net loss per share for the year ended December 31, 1998 and the
nine months ended September 30, 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 and Series E
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 13,665,489 and
20,219,323 for the year ended December 31, 1998 and the nine months ended
September 30, 1999, respectively. 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.
F-25
<PAGE> 116
VERSATA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 13 -- 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.
Future minimum lease payments under all noncancelable leases at December
31, 1998 are as follows (in thousands):
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
------- ---------
<S> <C> <C>
YEAR ENDING DECEMBER 31,
1999........................................................ $ 83 $458
2000........................................................ 68 $432
2001........................................................ 27 --
2002........................................................ -- --
---- ----
Total minimum lease payments.............................. 178 $890
----
Less interest............................................... (27)
----
Present value of minimum lease payments..................... 151
Less current portion........................................ (63)
----
$ 88
====
</TABLE>
Rent expense for the years ended December 31, 1996, 1997 and 1998 and for
the nine months ended September 30, 1999 was approximately $342,000, $303,000,
$477,000, and $436,000 (unaudited), respectively.
NOTE 14 -- SUBSEQUENT EVENTS:
INITIAL PUBLIC OFFERING
In November 1999, the Company's Board of Directors authorized management to
file a registration statement with the Securities and Exchange Commission to
permit the Company to sell shares of its common stock to the public.
REINCORPORATION
The Company intends to reincorporate in the State of Delaware prior to the
effectiveness of the offering referred to above. 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.
F-26
<PAGE> 117
VERSATA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
OFFERING OF SERIES E PREFERRED STOCK
In October 1999, the Company completed an additional offering of Series E
preferred stock. Pursuant to this offering, a total of 179,396 additional shares
of Series E preferred stock were sold at a price of $3.50 per share, for net
proceeds to the Company of $628,000. The holders of these Series E preferred
stock have the same rights as those holders of the Series E shares issued prior
to September 30, 1999 as discussed in Note 7.
OFFERING OF SERIES F PREFERRED STOCK
On November 30, 1999, the Company completed an offering of Series F
preferred stock. Pursuant to this offering, a total of 2,877,698 shares of
Series F preferred stock were sold at a price of $5.56 per share, for a net
proceeds to the Company of approximately $16,000,000.
The voting, dividends, liquidation and conversion rights with respect to
Series F are as follows:
DIVIDENDS
The holders of Series F preferred stock shall be entitled to receive
dividends, in parity with the Series A, Series B, Series C, Series D and
Series E preferred stock, out of any assets legally available therefor,
prior and in preference to any declaration or payment of any dividend
(payable other than in common stock or other securities and rights
convertible into or entitling the holder thereof to receive, directly or
indirectly, additional shares of common stock of the Company) on the common
stock of the Company, at the rate of $0.556 per share per annum or if
greater (as determined on a per annum basis and on as converted basis), an
amount equal to that paid on any other outstanding shares of the Company,
payable quarterly when, as and if declared by the Board of Directors. Such
dividends shall not be cumulative.
CONVERSION
Each share of Series F preferred stock shall be convertible, at the
option of the holder thereof, at any time after the date of issuance of
such share, into such number of fully paid and nonassessable shares of
common stock as is determined by dividing the Original Issue Price by the
Conversion Price at the time in effect. The initial Conversion Price per
share for the Series F preferred stock shall be the Original Issue Price.
Each share of Series F preferred stock shall automatically be
converted into shares of common stock at the Conversion Price at the time
in effect upon the earlier of (i) the closing of a firm commitment
underwritten public offering pursuant to an effective registration
statement under the Act covering the offer and sale of common stock of the
Company at a price per share of at least $10.00 and an aggregate offering
amount of at least $25 million, or (ii) the date upon which this Company
obtains the consent of the holders of at least a majority of the then
outstanding shares of preferred stock (voting on an as-converted basis).
LIQUIDATION
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
F-27
<PAGE> 118
VERSATA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 and Series E 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).
VOTING
The holder of each share of Series F preferred stock shall have the
right to one vote for each share of common stock into which such Series F
preferred stock could then be converted, and with respect to such vote,
such holder shall have full voting rights and powers equal to the voting
rights and powers of the holders of common stock, and shall be entitled,
notwithstanding any provision hereof, to notice of any stockholders'
meeting in accordance with the bylaws of this Company, and shall be
entitled to vote, together with holders of common stock, with respect to
any question upon which holders of common stock have the right to vote.
F-28
<PAGE> 119
PROSPECTUS
[VERSATA LOGO]
Shares
Common Stock
THOMAS WEISEL PARTNERS LLC
DAIN RAUSCHER WESSELS
SG COWEN
- --------------------------------------------------------------------------------
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> 120
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........................................ $ 15,180
NASD Filing Fee............................................. 6,250
Nasdaq National Market Listing Fee.......................... *
Printing and Engraving Expenses............................. 200,000
Legal Fees and Expenses..................................... *
Accounting Fees and Expenses................................ *
Blue Sky Fees and Expenses.................................. 3,000
Transfer Agent Fees......................................... 10,000
Miscellaneous............................................... *
--------
Total............................................. *
</TABLE>
- -------------------------
* To be provided by amendment
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
II-1
<PAGE> 121
required to indemnify them. Reference is also made to the underwriting agreement
contained in 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. From August 1994 to November 1995, we issued 1,480,000 shares of
Series A preferred stock to accredited investors for total cash
consideration of $2,403,239.
3. From May to September 1995, we issued convertible promissory notes
in the principal amount of $1,450,000 and warrants to purchase 64,500
shares of Series B preferred stock at an exercise price of $2.70 to
accredited investors. The notes were cancelled and converted into shares of
Series B preferred stock on November 21, 1995.
4. From November 1995 to March 1996, we issued 4,402,628 shares of
Series B preferred stock to accredited investors for total cash
consideration of $11,887,096, which includes conversion of the convertible
promissory notes described in Item 3 above into a total of 537,037 shares
of Series B preferred stock.
5. On December 1, 1995, we issued warrants to purchase 10,000 shares
of Series A preferred stock to Robert Davoli as compensation for consulting
services at an exercise price of $2.00 per share.
6. On December 1, 1995, we issued warrants to purchase 10,000 shares
of Series A preferred stock to Sippl MacDonald as compensation for
consulting services at an exercise price of $2.00 per share.
7. 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.
8. In October 1996, we issued warrants to purchase 22,500 shares of
Series C preferred stock to an accredited investor in connection with a
drawdown under a facility at an exercise price of $1.61 per share.
9. 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.
10. 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 7 above
into a total of 478,920 shares of Series C preferred stock.
11. 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
II-2
<PAGE> 122
were cancelled and converted into a total of 1,823,013 shares of Series D
preferred stock on September 22, 1998.
12. 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.
13. 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 11 above
into a total 1,748,949 shares of Series D preferred stock.
14. 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.
15. 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 14 above
into a total of 873,628 shares of Series E preferred stock.
16. 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.
17. 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.
18. 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.
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> 123
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> 124
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> 125
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 January 14, 2000.
VERSATA, INC.
By: /s/ JOHN A. HEWITT, JR.
------------------------------------
John A. Hewitt, Jr.
President, Chief Executive Officer
and Secretary
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 January 14, 2000
- ----------------------------------------------------- Officer, Secretary and
John A. Hewitt, Jr. Director (Principal
Executive Officer)
* Chief Financial Officer January 14, 2000
- ----------------------------------------------------- (Principal Accounting
Kevin Ferrell Officer)
* Vice President, Development January 14, 2000
- ----------------------------------------------------- and Chief Technology Officer
Val Huber
* Vice President, Sales January 14, 2000
- -----------------------------------------------------
Peter Harrison
* Vice President, Marketing January 14, 2000
- -----------------------------------------------------
Michael DeVries
* Vice President, Professional January 14, 2000
- ----------------------------------------------------- Services
Michael Stangl
* Chairman of the Board January 14, 2000
- -----------------------------------------------------
Gary Morgenthaler
* Director January 14, 2000
- -----------------------------------------------------
Naren Bakshi
</TABLE>
II-6
<PAGE> 126
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
* Director January 14, 2000
- -----------------------------------------------------
Robert Davoli
* Director January 14, 2000
- -----------------------------------------------------
Donald W. Feddersen
* Director January 14, 2000
- -----------------------------------------------------
John W. Larson
Director January 14, 2000
- -----------------------------------------------------
Kanwal Rekhi
* Director January 14, 2000
- -----------------------------------------------------
Eugene Wong
*By: /s/ JOHN A. HEWITT, JR. Director January 14, 2000
- -----------------------------------------------------
John A. Hewitt, Jr., Attorney-in-Fact
</TABLE>
II-7
<PAGE> 127
REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE
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, 1997 and
1998 and for each of the three years in the period ended December 31, 1998,
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
December 1, 1999
II-8
<PAGE> 128
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
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
</TABLE>
II-9
<PAGE> 129
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 10.1
VERSATA, INC.
2000 STOCK INCENTIVE PLAN
ARTICLE ONE
GENERAL PROVISIONS
I. PURPOSE OF THE PLAN
This 2000 Stock Incentive Plan is intended to promote the interests of
Versata, Inc., a Delaware corporation, by providing eligible persons in the
Corporation's service with the opportunity to acquire a proprietary interest, or
otherwise increase their proprietary interest, in the Corporation as an
incentive for them to remain in such service.
Capitalized terms shall have the meanings assigned to such terms in the
attached Appendix.
II. STRUCTURE OF THE PLAN
A. The Plan shall be divided into five separate equity incentive
programs:
- the Discretionary Option Grant Program under which eligible persons
may, at the discretion of the Plan Administrator, be granted options to purchase
shares of Common Stock,
- the Salary Investment Option Grant Program under which eligible
employees may elect to have a portion of their base salary invested each year in
special option grants,
- the Stock Issuance Program under which eligible persons may, at the
discretion of the Plan Administrator, be issued shares of Common Stock directly,
either through the immediate purchase of such shares or as a bonus for services
rendered the Corporation (or any Parent or Subsidiary),
- the Automatic Option Grant Program under which eligible
non-employee Board members shall automatically receive option grants at
designated intervals over their period of continued Board service, and
- the Director Fee Option Grant Program under which non-employee
Board members may elect to have all or any portion of their annual retainer fee
otherwise payable in cash applied to a special stock option grant.
<PAGE> 2
B. The provisions of Articles One and Seven shall apply to all equity
programs under the Plan and shall govern the interests of all persons under the
Plan.
III. ADMINISTRATION OF THE PLAN
A. The Primary Committee shall have sole and exclusive authority to
administer the Discretionary Option Grant and Stock Issuance Programs with
respect to Section 16 Insiders. Administration of the Discretionary Option Grant
and Stock Issuance Programs with respect to all other persons eligible to
participate in those programs may, at the Board's discretion, be vested in the
Primary Committee or a Secondary Committee, or the Board may retain the power to
administer those programs with respect to all such persons. However, any
discretionary option grants or stock issuances for members of the Primary
Committee must be authorized by a disinterested majority of the Board.
B. Members of the Primary Committee or any Secondary Committee shall
serve for such period of time as the Board may determine and may be removed by
the Board at any time. The Board may also at any time terminate the functions of
any Secondary Committee and reassume all powers and authority previously
delegated to such committee.
C. Each Plan Administrator shall, within the scope of its
administrative functions under the Plan, have full power and authority (subject
to the provisions of the Plan) to establish such rules and regulations as it may
deem appropriate for proper administration of the Discretionary Option Grant and
Stock Issuance Programs and to make such determinations under, and issue such
interpretations of, the provisions of those programs and any outstanding options
or stock issuances thereunder as it may deem necessary or advisable. Decisions
of the Plan Administrator within the scope of its administrative functions under
the Plan shall be final and binding on all parties who have an interest in the
Discretionary Option Grant and Stock Issuance Programs under its jurisdiction or
any stock option or stock issuance thereunder.
D. The Primary Committee shall have the sole and exclusive authority to
determine which Section 16 Insiders and other highly compensated Employees shall
be eligible for participation in the Salary Investment Option Grant Program for
one or more calendar years. However, all option grants under the Salary
Investment Option Grant Program shall be made in accordance with the express
terms of that program, and the Primary Committee shall not exercise any
discretionary functions with respect to the option grants made under that
program.
E. Service on the Primary Committee or the Secondary Committee shall
constitute service as a Board member, and members of each such committee shall
accordingly be entitled to full indemnification and reimbursement as Board
members for their service on such committee. No member of the Primary Committee
or the Secondary Committee shall be liable for any act or omission made in good
faith with respect to the Plan or any option grants or stock issuances under the
Plan.
F. Administration of the Automatic Option Grant and Director Fee Option
Grant Programs shall be self-executing in accordance with the terms of those
programs, and no Plan Administrator shall exercise any discretionary functions
with respect to any option grants or stock issuances made under those programs.
2.
<PAGE> 3
IV. ELIGIBILITY
A. The persons eligible to participate in the Discretionary Option Grant
and Stock Issuance Programs are as follows:
(i) Employees,
(ii) non-employee members of the Board or the board of
directors of any Parent or Subsidiary, and
(iii) consultants and other independent advisors who provide
services to the Corporation (or any Parent or Subsidiary).
B. Only Employees who are Section 16 Insiders or other highly
compensated individuals shall be eligible to participate in the Salary
Investment Option Grant Program.
C. Each Plan Administrator shall, within the scope of its administrative
jurisdiction under the Plan, have full authority to determine, (i) with respect
to the option grants under the Discretionary Option Grant Program, which
eligible persons are to receive such grants, the time or times when those grants
are to be made, the number of shares to be covered by each such grant, the
status of the granted option as either an Incentive Option or a Non-Statutory
Option, the time or times when each option is to become exercisable, the vesting
schedule (if any) applicable to the option shares and the maximum term for which
the option is to remain outstanding and (ii) with respect to stock issuances
under the Stock Issuance Program, which eligible persons are to receive such
issuances, the time or times when the issuances are to be made, the number of
shares to be issued to each Participant, the vesting schedule (if any)
applicable to the issued shares and the consideration for such shares.
D. The Plan Administrator shall have the absolute discretion either to
grant options in accordance with the Discretionary Option Grant Program or to
effect stock issuances in accordance with the Stock Issuance Program.
E. Only non-employee Board members shall be eligible to participate in
Automatic Option Grant and the Director Fee Option Grant Programs.
V. STOCK SUBJECT TO THE PLAN
A. The stock issuable under the Plan shall be shares of authorized but
unissued or reacquired Common Stock, including shares repurchased by the
Corporation on the open market. The number of shares of Common Stock initially
reserved for issuance over the term of the Plan shall not exceed [______]
shares. Such reserve shall consist of the number of shares estimated to remain
available for issuance, as of the Plan Effective Date, under the Predecessor
Plan as last approved by the Corporation's stockholders, including the shares
subject to outstanding options under that Predecessor Plan.
B. The number of shares of Common Stock available for issuance under the
Plan shall automatically increase on the first trading day of the second fiscal
quarter of each calendar year, beginning with the year 2000, by an amount equal
to three percent (3%) of the
3.
<PAGE> 4
total number of shares of Common Stock outstanding on the last trading day of
the immediately preceding fiscal quarter, but in no event shall any such annual
increase exceed 3,000,000 shares.
C. No one person participating in the Plan may receive stock options,
separately exercisable stock appreciation rights and direct stock issuances for
more than 1,000,000 shares of Common Stock in the aggregate per calendar year.
D. Shares of Common Stock subject to outstanding options (including
options incorporated into this Plan from the Predecessor Plan) shall be
available for subsequent issuance under the Plan to the extent (i) those options
expire or terminate for any reason prior to exercise in full or (ii) the options
are cancelled in accordance with the cancellation-regrant provisions of Article
Two. Unvested shares issued under the Plan and subsequently cancelled or
repurchased by the Corporation at the original issue price paid per share,
pursuant to the Corporation's repurchase rights under the Plan shall be added
back to the number of shares of Common Stock reserved for issuance under the
Plan and shall accordingly be available for reissuance through one or more
subsequent option grants or direct stock issuances under the Plan. However,
should the exercise price of an option under the Plan be paid with shares of
Common Stock or should shares of Common Stock otherwise issuable under the Plan
be withheld by the Corporation in satisfaction of the withholding taxes incurred
in connection with the exercise of an option or the vesting of a stock issuance
under the Plan, then the number of shares of Common Stock available for issuance
under the Plan shall be reduced by the gross number of shares for which the
option is exercised or which vest under the stock issuance, and not by the net
number of shares of Common Stock issued to the holder of such option or stock
issuance. Shares of Common Stock underlying one or more stock appreciation
rights exercised under Section IV of Article Two, Section III of Article Three,
Section II of Article Five or Section III of Article Six of the Plan shall NOT
be available for subsequent issuance under the Plan.
E. If any change is made to the Common Stock by reason of any stock
split, stock dividend, recapitalization, combination of shares, exchange of
shares or other change affecting the outstanding Common Stock as a class without
the Corporation's receipt of consideration, appropriate adjustments shall be
made by the Plan Administrator to (i) the maximum number and/or class of
securities issuable under the Plan, (ii) the maximum number and/or class of
securities for which any one person may be granted stock options, separately
exercisable stock appreciation rights and direct stock issuances under the Plan
per calendar year, (iii) the number and/or class of securities for which grants
are subsequently to be made under the Automatic Option Grant Program to new and
continuing non-employee Board members, (iv) the number and/or class of
securities and the exercise price per share in effect under each outstanding
option under the Plan and under each installment of option shares scheduled to
vest or become exercisable subsequently pursuant to such option, (v) the number
and/or class of securities and exercise price per share in effect under each
outstanding option incorporated into this Plan from the Predecessor Plan and
under each installment of option shares scheduled to vest or become exercisable
subsequently pursuant to such option and (vi) the maximum number and/or class of
securities by which the share reserve is to increase automatically each calendar
year pursuant to the provisions of Section V.B of this Article One. Such
adjustments to the outstanding options are to be effected in a manner which
shall preclude the enlargement or dilution of rights and benefits under such
options. The adjustments determined by the Plan Administrator shall be final,
binding and conclusive.
4.
<PAGE> 5
ARTICLE TWO
DISCRETIONARY OPTION GRANT PROGRAM
I. OPTION TERMS
Each option shall be evidenced by one or more documents in the form
approved by the Plan Administrator; provided, however, that each such document
shall comply with the terms specified below. Each document evidencing an
Incentive Option shall, in addition, be subject to the provisions of the Plan
applicable to such options.
A. EXERCISE PRICE.
1. The exercise price per share shall be fixed by the Plan
Administrator but shall not be less than one hundred percent (100%) of the Fair
Market Value per share of Common Stock on the option grant date.
2. The exercise price shall become immediately due upon exercise of
the option and shall, subject to the provisions of Section I of Article Seven
and the documents evidencing the option, be payable in one or more of the forms
specified below:
(i) cash or check made payable to the Corporation,
(ii) shares of Common Stock held for the requisite period
necessary to avoid a charge to the Corporation's earnings for financial
reporting purposes and valued at Fair Market Value on the Exercise
Date, or
(iii) to the extent the option is exercised for vested shares,
through a special sale and remittance procedure pursuant to which the
Optionee shall concurrently provide irrevocable instructions to (a) a
Corporation-designated brokerage firm to effect the immediate sale of
the purchased shares and remit to the Corporation, out of the sale
proceeds available on the settlement date, sufficient funds to cover
the aggregate exercise price payable for the purchased shares plus all
applicable Federal, state and local income and employment taxes
required to be withheld by the Corporation by reason of such exercise
and (b) the Corporation to deliver the certificates for the purchased
shares directly to such brokerage firm in order to complete the sale.
Except to the extent such sale and remittance procedure is utilized,
payment of the exercise price for the purchased shares must be made on the
Exercise Date.
B. EXERCISE AND TERM OF OPTIONS. Each option shall be exercisable at
such time or times, during such period and for such number of shares as shall be
determined by the Plan Administrator and set forth in the documents evidencing
the option. However, no option shall have a term in excess of ten (10) years
measured from the option grant date.
5.
<PAGE> 6
C. EFFECT OF TERMINATION OF SERVICE.
1. The following provisions shall govern the exercise of any options
held by the Optionee at the time of cessation of Service or death:
(i) Any option outstanding at the time of the Optionee's
cessation of Service for any reason shall remain exercisable for such
period of time thereafter as shall be determined by the Plan
Administrator and set forth in the documents evidencing the option, but
no such option shall be exercisable after the expiration of the option
term.
(ii) Any option held by the Optionee at the time of death and
exercisable in whole or in part at that time may be subsequently
exercised by the personal representative of the Optionee's estate or by
the person or persons to whom the option is transferred pursuant to the
Optionee's will or the laws of inheritance or by the Optionee's
designated beneficiary or beneficiaries of that option.
(iii) Should the Optionee's Service be terminated for
Misconduct or should the Optionee otherwise engage in Misconduct while
holding one or more outstanding options under this Article Two, then
all those options shall terminate immediately and cease to be
outstanding.
(iv) During the applicable post-Service exercise period, the
option may not be exercised in the aggregate for more than the number
of vested shares for which the option is exercisable on the date of the
Optionee's cessation of Service. Upon the expiration of the applicable
exercise period or (if earlier) upon the expiration of the option term,
the option shall terminate and cease to be outstanding for any vested
shares for which the option has not been exercised. However, the option
shall, immediately upon the Optionee's cessation of Service, terminate
and cease to be outstanding to the extent the option is not otherwise
at that time exercisable for vested shares.
2. The Plan Administrator shall have complete discretion, exercisable
either at the time an option is granted or at any time while the option remains
outstanding, to:
(i) extend the period of time for which the option is to
remain exercisable following the Optionee's cessation of Service from
the limited exercise period otherwise in effect for that option to such
greater period of time as the Plan Administrator shall deem
appropriate, but in no event beyond the expiration of the option term,
and/or
(ii) permit the option to be exercised, during the applicable
post-Service exercise period, not only with respect to the number of
vested shares of Common Stock for which such option is exercisable at
the time of the Optionee's cessation of Service but also with respect
to one or more additional installments in which the Optionee would have
vested had the Optionee continued in Service.
6.
<PAGE> 7
D. STOCKHOLDER RIGHTS. The holder of an option shall have no stockholder
rights with respect to the shares subject to the option until such person shall
have exercised the option, paid the exercise price and become a holder of record
of the purchased shares.
E. REPURCHASE RIGHTS. The Plan Administrator shall have the discretion
to grant options which are exercisable for unvested shares of Common Stock.
Should the Optionee cease Service while holding such unvested shares, the
Corporation shall have the right to repurchase, at the exercise price paid per
share, any or all of those unvested shares. The terms upon which such repurchase
right shall be exercisable (including the period and procedure for exercise and
the appropriate vesting schedule for the purchased shares) shall be established
by the Plan Administrator and set forth in the document evidencing such
repurchase right.
F. LIMITED TRANSFERABILITY OF OPTIONS. During the lifetime of the
Optionee, Incentive Options shall be exercisable only by the Optionee and shall
not be assignable or transferable other than by will or the laws of inheritance
following the Optionee's death. Non-Statutory Options shall be subject to the
same restrictions, provided, however, that a Non-Statutory Option may be
assigned in whole or in part during the Optionee's lifetime to one or more
members of the Optionee's family or to a trust established exclusively for one
or more such family members or to Optionee's former spouse, to the extent such
assignment is in connection with the Optionee's estate plan or pursuant to a
domestic relations order. The assigned portion may only be exercised by the
person or persons who acquire a proprietary interest in the option pursuant to
the assignment. The terms applicable to the assigned portion shall be the same
as those in effect for the option immediately prior to such assignment and shall
be set forth in such documents issued to the assignee as the Plan Administrator
may deem appropriate. Notwithstanding the foregoing, the Optionee may also
designate one or more persons as the beneficiary or beneficiaries of his or her
outstanding Incentive or Non-Statutory Options under this Article Two, and those
options shall, in accordance with such designation, automatically be transferred
to such beneficiary or beneficiaries upon the Optionee's death while holding
those options. Such beneficiary or beneficiaries shall take the transferred
options subject to all the terms and conditions of the applicable agreement
evidencing each such transferred option, including (without limitation) the
limited time period during which the option may be exercised following the
Optionee's death.
II. INCENTIVE OPTIONS
The terms specified below shall be applicable to all Incentive Options.
Except as modified by the provisions of this Section II, all the provisions of
Articles One, Two and Seven shall be applicable to Incentive Options. Options
which are specifically designated as Non-Statutory Options when issued under the
Plan shall not be subject to the terms of this Section II.
A. ELIGIBILITY. Incentive Options may only be granted to Employees.
B. DOLLAR LIMITATION. The aggregate Fair Market Value of the shares of
Common Stock (determined as of the respective date or dates of grant) for which
one or more options granted to any Employee under the Plan (or any other option
plan of the Corporation or any Parent or Subsidiary) may for the first time
become exercisable as Incentive Options during any one calendar year shall not
exceed the sum of One Hundred Thousand Dollars ($100,000). To the extent the
Employee holds two (2) or more such options which become exercisable for the
7.
<PAGE> 8
first time in the same calendar year, the foregoing limitation on the
exercisability of such options as Incentive Options shall be applied on the
basis of the order in which such options are granted.
C. 10% STOCKHOLDER. If any Employee to whom an Incentive Option is
granted is a 10% Stockholder, then the exercise price per share shall not be
less than one hundred ten percent (110%) of the Fair Market Value per share of
Common Stock on the option grant date, and the option term shall not exceed five
(5) years measured from the option grant date.
III. CORPORATE TRANSACTION/CHANGE IN CONTROL
A. In the event of any Corporate Transaction, each outstanding option
shall automatically accelerate so that each such option shall, immediately prior
to the effective date of the Corporate Transaction, become exercisable for all
the shares of Common Stock at the time subject to such option and may be
exercised for any or all of those shares as fully vested shares of Common Stock.
However, an outstanding option shall NOT become exercisable on such an
accelerated basis if and to the extent: (i) such option is, in connection with
the Corporate Transaction, to be assumed by the successor corporation (or parent
thereof) or (ii) such option is to be replaced with a cash incentive program of
the successor corporation which preserves the spread existing at the time of the
Corporate Transaction on any shares for which the option is not otherwise at
that time exercisable and provides for subsequent payout in accordance with the
same exercise/vesting schedule applicable to those option shares or (iii) the
acceleration of such option is subject to other limitations imposed by the Plan
Administrator at the time of the option grant.
B. All outstanding repurchase rights shall automatically terminate, and
the shares of Common Stock subject to those terminated rights shall immediately
vest in full, in the event of any Corporate Transaction, except to the extent:
(i) those repurchase rights are to be assigned to the successor corporation (or
parent thereof) in connection with such Corporate Transaction or (ii) such
accelerated vesting is precluded by other limitations imposed by the Plan
Administrator at the time the repurchase right is issued.
C. Immediately following the consummation of the Corporate Transaction,
all outstanding options shall terminate and cease to be outstanding, except to
the extent assumed by the successor corporation (or parent thereof).
D. Each option which is assumed in connection with a Corporate
Transaction shall be appropriately adjusted, immediately after such Corporate
Transaction, to apply to the number and class of securities which would have
been issuable to the Optionee in consummation of such Corporate Transaction had
the option been exercised immediately prior to such Corporate Transaction.
Appropriate adjustments to reflect such Corporate Transaction shall also be made
to (i) the exercise price payable per share under each outstanding option,
provided the aggregate exercise price payable for such securities shall remain
the same, (ii) the number and class of securities subject to each installment of
option shares scheduled to vest or become exercisable under each outstanding
option after the consummation of the Corporate Transaction, (iii) the maximum
number and/or class of securities available for issuance over the remaining term
of the Plan, (iv) the maximum number and/or class of securities for which any
one person may be granted stock options, separately exercisable stock
appreciation rights and direct stock issuances under the Plan per calendar year
and (v) the maximum number and/or class of
8.
<PAGE> 9
securities by which the share reserve is to increase automatically each calendar
year. To the extent the actual holders of the Corporation's outstanding Common
Stock receive cash consideration for their Common Stock in consummation of the
Corporate Transaction, the successor corporation may, in connection with the
assumption of the outstanding options under this Plan, substitute one or more
shares of its own common stock with a fair market value equivalent to the cash
consideration paid per share of Common Stock in such Corporate Transaction.
E. The Plan Administrator shall have the discretionary authority to
structure one or more outstanding options under the Discretionary Option Grant
Program so that those options shall, immediately prior to the effective date of
such Corporate Transaction, become exercisable for all the shares of Common
Stock at the time subject to those options and may be exercised for any or all
of those shares as fully vested shares of Common Stock, whether or not those
options are to be assumed in the Corporate Transaction. In addition, the Plan
Administrator shall have the discretionary authority to structure one or more of
the Corporation's repurchase rights under the Discretionary Option Grant Program
so that those rights shall not be assignable in connection with such Corporate
Transaction and shall accordingly terminate upon the consummation of such
Corporate Transaction, and the shares subject to those terminated rights shall
thereupon vest in full.
F. The Plan Administrator shall have full power and authority to
structure one or more outstanding options under the Discretionary Option Grant
Program so that those options shall become exercisable for all the shares of
Common Stock at the time subject to those options in the event the Optionee's
Service is subsequently terminated by reason of an Involuntary Termination
within a designated period (not to exceed eighteen (18) months) following the
effective date of any Corporate Transaction in which those options are assumed
and do not otherwise accelerate. In addition, the Plan Administrator may
structure one or more of the Corporation's repurchase rights so that those
rights shall immediately terminate with respect to any shares held by the
Optionee at the time of his or her Involuntary Termination, and the shares
subject to those terminated repurchase rights shall accordingly vest in full at
that time.
G. The Plan Administrator shall have the discretionary authority to
structure one or more outstanding options under the Discretionary Option Grant
Program so that those options shall, immediately prior to the effective date of
a Change in Control, become exercisable for all the shares of Common Stock at
the time subject to those options and may be exercised for any or all of those
shares as fully vested shares of Common Stock. In addition, the Plan
Administrator shall have the discretionary authority to structure one or more of
the Corporation's repurchase rights under the Discretionary Option Grant Program
so that those rights shall terminate automatically upon the consummation of such
Change in Control, and the shares subject to those terminated rights shall
thereupon vest in full. Alternatively, the Plan Administrator may condition the
automatic acceleration of one or more outstanding options under the
Discretionary Option Grant Program and the termination of one or more of the
Corporation's outstanding repurchase rights under such program upon the
subsequent termination of the Optionee's Service by reason of an Involuntary
Termination within a designated period (not to exceed eighteen (18) months)
following the effective date of such Change in Control.
9.
<PAGE> 10
H. The portion of any Incentive Option accelerated in connection with a
Corporate Transaction or Change in Control shall remain exercisable as an
Incentive Option only to the extent the applicable One Hundred Thousand Dollar
($100,000) limitation is not exceeded. To the extent such dollar limitation is
exceeded, the accelerated portion of such option shall be exercisable as a
Nonstatutory Option under the Federal tax laws.
I. The outstanding options shall in no way affect the right of the
Corporation to adjust, reclassify, reorganize or otherwise change its capital or
business structure or to merge, consolidate, dissolve, liquidate or sell or
transfer all or any part of its business or assets.
IV. CANCELLATION AND REGRANT OF OPTIONS
The Plan Administrator shall have the authority to effect, at any time
and from time to time, with the consent of the affected option holders, the
cancellation of any or all outstanding options under the Discretionary Option
Grant Program (including outstanding options incorporated from the Predecessor
Plan) and to grant in substitution new options covering the same or a different
number of shares of Common Stock but with an exercise price per share based on
the Fair Market Value per share of Common Stock on the new grant date.
V. STOCK APPRECIATION RIGHTS
A. The Plan Administrator shall have full power and authority to grant
to selected Optionees tandem stock appreciation rights and/or limited stock
appreciation rights.
B. The following terms shall govern the grant and exercise of tandem
stock appreciation rights:
(i) One or more Optionees may be granted the right,
exercisable upon such terms as the Plan Administrator may establish, to
elect between the exercise of the underlying option for shares of
Common Stock and the surrender of that option in exchange for a
distribution from the Corporation in an amount equal to the excess of
(a) the Fair Market Value (on the option surrender date) of the number
of shares in which the Optionee is at the time vested under the
surrendered option (or surrendered portion thereof) over (b) the
aggregate exercise price payable for such shares.
(ii) No such option surrender shall be effective unless it is
approved by the Plan Administrator, either at the time of the actual
option surrender or at any earlier time. If the surrender is so
approved, then the distribution to which the Optionee shall be entitled
may be made in shares of Common Stock valued at Fair Market Value on
the option surrender date, in cash, or partly in shares and partly in
cash, as the Plan Administrator shall in its sole discretion deem
appropriate.
(iii) If the surrender of an option is not approved by the
Plan Administrator, then the Optionee shall retain whatever rights the
Optionee had under the surrendered option (or surrendered portion
thereof) on the option surrender date and may exercise such rights at
any time prior to the later of (a) five (5) business days after the
receipt of the rejection notice or (b) the last day
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<PAGE> 11
on which the option is otherwise exercisable in accordance with the
terms of the documents evidencing such option, but in no event may such
rights be exercised more than ten (10) years after the option grant
date.
C. The following terms shall govern the grant and exercise of limited
stock appreciation rights:
(i) One or more Section 16 Insiders may be granted limited
stock appreciation rights with respect to their outstanding options.
(ii) Upon the occurrence of a Hostile Take-Over, each
individual holding one or more options with such a limited stock
appreciation right shall have the unconditional right (exercisable for
a thirty (30)-day period following such Hostile Take-Over) to surrender
each such option to the Corporation. In return for the surrendered
option, the Optionee shall receive a cash distribution from the
Corporation in an amount equal to the excess of (A) the Take-Over Price
of the shares of Common Stock at the time subject to such option
(whether or not the option is otherwise exercisable for vested shares
of Common Stock) over (B) the aggregate exercise price payable for
those shares. Such cash distribution shall be paid within five (5) days
following the option surrender date.
(iii) At the time such limited stock appreciation right is
granted, the Plan Administrator shall pre-approve any subsequent
exercise of that right in accordance with the terms of this Paragraph
C. Accordingly, no further approval of the Plan Administrator or the
Board shall be required at the time of the actual option surrender and
cash distribution.
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ARTICLE THREE
SALARY INVESTMENT OPTION GRANT PROGRAM
I. OPTION GRANTS
The Primary Committee shall have the sole and exclusive authority to
determine the calendar year or years (if any) for which the Salary Investment
Option Grant Program is to be in effect and to select the Section 16 Insiders
and other highly compensated Employees eligible to participate in the Salary
Investment Option Grant Program for such calendar year or years. Each selected
individual who elects to participate in the Salary Investment Option Grant
Program must, prior to the start of each calendar year of participation, file
with the Plan Administrator (or its designate) an irrevocable authorization
directing the Corporation to reduce his or her base salary for that calendar
year by an amount not less than Ten Thousand Dollars ($10,000.00) nor more than
Fifty Thousand Dollars ($50,000.00). Each individual who files such a timely
authorization shall automatically be granted an option under the Salary
Investment Grant Program on the first trading day in January of the calendar
year for which the salary reduction is to be in effect.
II. OPTION TERMS
Each option shall be a Non-Statutory Option evidenced by one or more
documents in the form approved by the Plan Administrator; provided, however,
that each such document shall comply with the terms specified below.
A. EXERCISE PRICE.
1. The exercise price per share shall be thirty-three and one-third
percent (33 1/3%) of the Fair Market Value per share of Common Stock on the
option grant date.
2. The exercise price shall become immediately due upon exercise of
the option and shall be payable in one or more of the alternative forms
authorized under the Discretionary Option Grant Program. Except to the extent
the sale and remittance procedure specified thereunder is utilized, payment of
the exercise price for the purchased shares must be made on the Exercise Date.
B. NUMBER OF OPTION SHARES. The number of shares of Common Stock subject
to the option shall be determined pursuant to the following formula (rounded
down to the nearest whole number):
X = A/(B x 66 2/3%), where
X is the number of option shares,
A is the dollar amount of the reduction in the Optionee's base salary
for the calendar year to be in effect pursuant to this program, and
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<PAGE> 13
B is the Fair Market Value per share of Common Stock on the option
grant date.
C. EXERCISE AND TERM OF OPTIONS. The option shall become exercisable in
a series of twelve (12) successive equal monthly installments upon the
Optionee's completion of each calendar month of Service in the calendar year for
which the salary reduction is in effect. Each option shall have a maximum term
of ten (10) years measured from the option grant date.
D. EFFECT OF TERMINATION OF SERVICE. Should the Optionee cease Service
for any reason while holding one or more options under this Article Three, then
each such option shall remain exercisable, for any or all of the shares for
which the option is exercisable at the time of such cessation of Service, until
the earlier of (i) the expiration of the ten (10)-year option term or (ii) the
expiration of the three (3)-year period measured from the date of such cessation
of Service. Should the Optionee die while holding one or more options under this
Article Three, then each such option may be exercised, for any or all of the
shares for which the option is exercisable at the time of the Optionee's
cessation of Service (less any shares subsequently purchased by Optionee prior
to death), by the personal representative of the Optionee's estate or by the
person or persons to whom the option is transferred pursuant to the Optionee's
will or the laws of inheritance or by the designated beneficiary or
beneficiaries of the option. Such right of exercise shall lapse, and the option
shall terminate, upon the earlier of (i) the expiration of the ten (10)-year
option term or (ii) the three (3)-year period measured from the date of the
Optionee's cessation of Service. However, the option shall, immediately upon the
Optionee's cessation of Service for any reason, terminate and cease to remain
outstanding with respect to any and all shares of Common Stock for which the
option is not otherwise at that time exercisable.
III. CORPORATE TRANSACTION/CHANGE IN CONTROL/ HOSTILE TAKE-OVER
A. In the event of any Corporate Transaction while the Optionee remains
in Service, each outstanding option held by such Optionee under this Salary
Investment Option Grant Program shall automatically accelerate so that each such
option shall, immediately prior to the effective date of the Corporate
Transaction, become exercisable for all the shares of Common Stock at the time
subject to such option and may be exercised for any or all of those shares as
fully-vested shares of Common Stock. Each such outstanding option shall
terminate immediately following the Corporate Transaction, except to the extent
assumed by the successor corporation (or parent thereof) in such Corporate
Transaction. Any option so assumed and shall remain exercisable for the
fully-vested shares until the earlier of (i) the expiration of the ten (10)-year
option term or (ii) the expiration of the three (3)-year period measured from
the date of the Optionee's cessation of Service.
B. In the event of a Change in Control while the Optionee remains in
Service, each outstanding option held by such Optionee under this Salary
Investment Option Grant Program shall automatically accelerate so that each such
option shall, immediately prior to the effective date of the Change in Control,
become exercisable for all the shares of Common Stock at the time subject to
such option and may be exercised for any or all of those shares as fully-vested
shares of Common Stock. The option shall remain so exercisable until the
earliest to occur of (i) the expiration of the ten (10)-year option term, (ii)
the expiration of the three (3)-year period measured from the date of the
Optionee's cessation of Service, (iii) the termination
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<PAGE> 14
of the option in connection with a Corporate Transaction or (iv) the surrender
of the option in connection with a Hostile Take-Over.
C. Upon the occurrence of a Hostile Take-Over, the Optionee shall have a
thirty (30)-day period in which to surrender to the Corporation each outstanding
option granted him or her under the Salary Investment Option Grant Program. The
Optionee shall in return be entitled to a cash distribution from the Corporation
in an amount equal to the excess of (i) the Take-Over Price of the shares of
Common Stock at the time subject to the surrendered option (whether or not the
option is otherwise at the time exercisable for those shares) over (ii) the
aggregate exercise price payable for such shares. Such cash distribution shall
be paid within five (5) days following the surrender of the option to the
Corporation. The Primary Committee shall, at the time the option with such
limited stock appreciation right is granted under the Salary Investment Option
Grant Program, pre-approve any subsequent exercise of that right in accordance
with the terms of this Paragraph C. Accordingly, no further approval of the
Primary Committee or the Board shall be required at the time of the actual
option surrender and cash distribution.
D. Each option which is assumed in connection with a Corporate
Transaction shall be appropriately adjusted, immediately after such Corporate
Transaction, to apply to the number and class of securities which would have
been issuable to the Optionee in consummation of such Corporate Transaction had
the option been exercised immediately prior to such Corporate Transaction.
Appropriate adjustments shall also be made to the exercise price payable per
share under each outstanding option, provided the aggregate exercise price
payable for such securities shall remain the same. To the extent the actual
holders of the Corporation's outstanding Common Stock receive cash consideration
for their Common Stock in consummation of the Corporate Transaction, the
successor corporation may, in connection with the assumption of the outstanding
options under this Plan, substitute one or more shares of its own common stock
with a fair market value equivalent to the cash consideration paid per share of
Common Stock in such Corporate Transaction.
E. The grant of options under the Salary Investment Option Grant Program
shall in no way affect the right of the Corporation to adjust, reclassify,
reorganize or otherwise change its capital or business structure or to merge,
consolidate, dissolve, liquidate or sell or transfer all or any part of its
business or assets.
IX. REMAINING TERMS
The remaining terms of each option granted under the Salary Investment
Option Grant Program shall be the same as the terms in effect for option grants
made under the Discretionary Option Grant Program.
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<PAGE> 15
ARTICLE FOUR
STOCK ISSUANCE PROGRAM
I. STOCK ISSUANCE TERMS
Shares of Common Stock may be issued under the Stock Issuance Program
through direct and immediate issuances without any intervening option grants.
Each such stock issuance shall be evidenced by a Stock Issuance Agreement which
complies with the terms specified below. Shares of Common Stock may also be
issued under the Stock Issuance Program pursuant to share right awards which
entitle the recipients to receive those shares upon the attainment of designated
performance goals.
A. PURCHASE PRICE.
1. The purchase price per share shall be fixed by the Plan
Administrator, but shall not be less than one hundred percent (100%) of the Fair
Market Value per share of Common Stock on the issuance date.
2. Subject to the provisions of Section I of Article Seven, shares of
Common Stock may be issued under the Stock Issuance Program for any of the
following items of consideration which the Plan Administrator may deem
appropriate in each individual instance:
(i) cash or check made payable to the Corporation, or
(ii) past services rendered to the Corporation (or any Parent or
Subsidiary).
B. VESTING PROVISIONS.
1. Shares of Common Stock issued under the Stock Issuance Program
may, in the discretion of the Plan Administrator, be fully and immediately
vested upon issuance or may vest in one or more installments over the
Participant's period of Service or upon attainment of specified performance
objectives. The elements of the vesting schedule applicable to any unvested
shares of Common Stock issued under the Stock Issuance Program shall be
determined by the Plan Administrator and incorporated into the Stock Issuance
Agreement. Shares of Common Stock may also be issued under the Stock Issuance
Program pursuant to share right awards which entitle the recipients to receive
those shares upon the attainment of designated performance goals.
2. Any new, substituted or additional securities or other property
(including money paid other than as a regular cash dividend) which the
Participant may have the right to receive with respect to the Participant's
unvested shares of Common Stock by reason of any stock dividend, stock split,
recapitalization, combination of shares, exchange of shares or
15.
<PAGE> 16
other change affecting the outstanding Common Stock as a class without the
Corporation's receipt of consideration shall be issued subject to (i) the same
vesting requirements applicable to the Participant's unvested shares of Common
Stock and (ii) such escrow arrangements as the Plan Administrator shall deem
appropriate.
3. The Participant shall have full stockholder rights with respect to
any shares of Common Stock issued to the Participant under the Stock Issuance
Program, whether or not the Participant's interest in those shares is vested.
Accordingly, the Participant shall have the right to vote such shares and to
receive any regular cash dividends paid on such shares.
4. Should the Participant cease to remain in Service while holding
one or more unvested shares of Common Stock issued under the Stock Issuance
Program or should the performance objectives not be attained with respect to one
or more such unvested shares of Common Stock, then those shares shall be
immediately surrendered to the Corporation for cancellation, and the Participant
shall have no further stockholder rights with respect to those shares. To the
extent the surrendered shares were previously issued to the Participant for
consideration paid in cash or cash equivalent (including the Participant's
purchase-money indebtedness), the Corporation shall repay to the Participant the
cash consideration paid for the surrendered shares and shall cancel the unpaid
principal balance of any outstanding purchase-money note of the Participant
attributable to the surrendered shares.
5. The Plan Administrator may in its discretion waive the surrender
and cancellation of one or more unvested shares of Common Stock which would
otherwise occur upon the cessation of the Participant's Service or the
non-attainment of the performance objectives applicable to those shares. Such
waiver shall result in the immediate vesting of the Participant's interest in
the shares of Common Stock as to which the waiver applies. Such waiver may be
effected at any time, whether before or after the Participant's cessation of
Service or the attainment or non-attainment of the applicable performance
objectives.
6. Outstanding share right awards under the Stock Issuance Program
shall automatically terminate, and no shares of Common Stock shall actually be
issued in satisfaction of those awards, if the performance goals established for
such awards are not attained. The Plan Administrator, however, shall have the
discretionary authority to issue shares of Common Stock under one or more
outstanding share right awards as to which the designated performance goals have
not been attained.
II. CORPORATE TRANSACTION/CHANGE IN CONTROL
A. All of the Corporation's outstanding repurchase rights under the
Stock Issuance Program shall terminate automatically, and all the shares of
Common Stock subject to those terminated rights shall immediately vest in full,
in the event of any Corporate Transaction, except to the extent (i) those
repurchase rights are to be assigned to the successor corporation (or parent
thereof) in connection with such Corporate Transaction or (ii) such accelerated
vesting is precluded by other limitations imposed in the Stock Issuance
Agreement.
B. The Plan Administrator shall have the discretionary authority to
structure one or more of the Corporation's repurchase rights under the Stock
Issuance Program so that
16.
<PAGE> 17
those rights shall automatically terminate in whole or in part, and the shares
of Common Stock subject to those terminated rights shall immediately vest, in
the event the Participant's Service should subsequently terminate by reason of
an Involuntary Termination within a designated period (not to exceed eighteen
(18) months) following the effective date of any Corporate Transaction in which
those repurchase rights are assigned to the successor corporation (or parent
thereof).
C. The Plan Administrator shall also have the discretionary authority to
structure one or more of the Corporation's repurchase rights under the Stock
Issuance Program so that those rights shall automatically terminate in whole or
in part, and the shares of Common Stock subject to those terminated rights shall
immediately vest, in the event the Participant's Service should subsequently
terminate by reason of an Involuntary Termination within a designated period
(not to exceed eighteen (18) months) following the effective date of any Change
in Control.
III. SHARE ESCROW/LEGENDS
Unvested shares may, in the Plan Administrator's discretion, be held in
escrow by the Corporation until the Participant's interest in such shares vests
or may be issued directly to the Participant with restrictive legends on the
certificates evidencing those unvested shares.
17.
<PAGE> 18
ARTICLE FIVE
AUTOMATIC OPTION GRANT PROGRAM
I. OPTION TERMS
A. GRANT DATES. Option grants shall be made on the dates specified
below:
1. Each individual who is first elected or appointed as a
non-employee Board member at any time on or after the Underwriting Date shall
automatically be granted, on the date of such initial election or appointment, a
Non-Statutory Option to purchase 36,000 shares of Common Stock, provided that
individual has not previously been in the employ of the Corporation or any
Parent or Subsidiary.
2. On the date of each Annual Stockholders Meeting, beginning with
the 2001 Annual Stockholders Meeting, each individual who is to continue to
serve as a non-employee Board member, whether or not that individual is standing
for re-election to the Board at that particular Annual Meeting, shall
automatically be granted a Non-Statutory Option to purchase 12,000 shares of
Common Stock, provided such individual has served as a non-employee Board member
for at least six (6) months. There shall be no limit on the number of such
12,000-share option grants any one non-employee Board member may receive over
his or her period of Board service, and non-employee Board members who have
previously been in the employ of the Corporation (or any Parent or Subsidiary)
or who have otherwise received one or more stock option grants from the
Corporation prior to the Underwriting Date shall be eligible to receive one or
more such annual option grants over their period of continued Board service.
B. EXERCISE PRICE.
1. The exercise price per share shall be equal to one hundred percent
(100%) of the Fair Market Value per share of Common Stock on the option grant
date.
2. The exercise price shall be payable in one or more of the
alternative forms authorized under the Discretionary Option Grant Program.
Except to the extent the sale and remittance procedure specified thereunder is
utilized, payment of the exercise price for the purchased shares must be made on
the Exercise Date.
C. OPTION TERM. Each option shall have a term of ten (10) years measured
from the option grant date.
D. EXERCISE AND VESTING OF OPTIONS. Each option shall be immediately
exercisable for any or all of the option shares. However, any unvested shares
purchased under the option shall be subject to repurchase by the Corporation, at
the exercise price paid per share, upon the Optionee's cessation of Board
service prior to vesting in those shares. The shares subject to each initial
36,000-share grant shall vest, and the Corporation's repurchase right shall
lapse, in a series of thirty-six (36) successive equal monthly installments upon
the Optionee's completion of each month of service as a Board member over the
thirty-six (36) month period measured from the option grant date. The shares
subject to each annual 12,000-share option
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<PAGE> 19
grant shall vest in a series of twelve (12) equal monthly installments, upon the
Optionee's completion of each month of service as a Board member over the twelve
(12)-month period of Board service measured from the grant date.
E. LIMITED TRANSFERABILITY OF OPTIONS. Each option under this Article
Five may be assigned in whole or in part during the Optionee's lifetime to one
or more members of the Optionee's family or to a trust established exclusively
for one or more such family members or to Optionee's former spouse, to the
extent such assignment is in connection with the Optionee's estate plan or
pursuant to domestic relations order. The assigned portion may only be exercised
by the person or persons who acquire a proprietary interest in the option
pursuant to the assignment. The terms applicable to the assigned portion shall
be the same as those in effect for the option immediately prior to such
assignment and shall be set forth in such documents issued to the assignee as
the Plan Administrator may deem appropriate. The Optionee may also designate one
or more persons as the beneficiary or beneficiaries of his or her outstanding
options under this Article Five, and those options shall, in accordance with
such designation, automatically be transferred to such beneficiary or
beneficiaries upon the Optionee's death while holding those options. Such
beneficiary or beneficiaries shall take the transferred options subject to all
the terms and conditions of the applicable agreement evidencing each such
transferred option, including (without limitation) the limited time period
during which the option may be exercised following the Optionee's death.
F. TERMINATION OF BOARD SERVICE. The following provisions shall govern
the exercise of any options held by the Optionee at the time the Optionee ceases
to serve as a Board member:
(i) The Optionee (or, in the event of Optionee's death, the
personal representative of the Optionee's estate or the person or
persons to whom the option is transferred pursuant to the Optionee's
will or the laws of inheritance or the designated beneficiary or
beneficiaries of such option) shall have a twelve (12)-month period
following the date of such cessation of Board service in which to
exercise each such option.
(ii) During the twelve (12)-month exercise period, the option
may not be exercised in the aggregate for more than the number of
vested shares of Common Stock for which the option is exercisable at
the time of the Optionee's cessation of Board service.
(iii) Should the Optionee cease to serve as a Board member by
reason of death or Permanent Disability, then all shares at the time
subject to the option shall immediately vest so that such option may,
during the twelve (12)-month exercise period following such cessation
of Board service, be exercised for all or any portion of those shares
as fully-vested shares of Common Stock.
(iv) In no event shall the option remain exercisable after the
expiration of the option term. Upon the expiration of the twelve
(12)-month exercise period or (if earlier) upon the expiration of the
option term, the option shall terminate and cease to be outstanding for
any vested shares for which the
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<PAGE> 20
option has not been exercised. However, the option shall, immediately
upon the Optionee's cessation of Board service for any reason other
than death or Permanent Disability, terminate and cease to be
outstanding to the extent the option is not otherwise at that time
exercisable for vested shares.
II. CORPORATE TRANSACTION/CHANGE IN CONTROL/HOSTILE TAKE-OVER
A. In the event of any Corporate Transaction, the shares of Common Stock
at the time subject to each outstanding option but not otherwise vested shall
automatically vest in full so that each such option shall, immediately prior to
the effective date of the Corporate Transaction, become exercisable for all the
option shares as fully-vested shares of Common Stock and may be exercised for
any or all of those vested shares. Immediately following the consummation of the
Corporate Transaction, each automatic option grant shall terminate and cease to
be outstanding, except to the extent assumed by the successor corporation (or
parent thereof).
B. In connection with any Change in Control, the shares of Common Stock
at the time subject to each outstanding option but not otherwise vested shall
automatically vest in full so that each such option shall, immediately prior to
the effective date of the Change in Control, become exercisable for all the
option shares as fully-vested shares of Common Stock and may be exercised for
any or all of those vested shares. Each such option shall remain exercisable for
such fully-vested option shares until the expiration or sooner termination of
the option term or the surrender of the option in connection with a Hostile
Take-Over.
C. All outstanding repurchase rights shall automatically terminate, and
the shares of Common Stock subject to those terminated rights shall immediately
vest in full, in the event of any Corporate Transaction or Change in Control.
D. Upon the occurrence of a Hostile Take-Over, the Optionee shall have a
thirty (30)-day period in which to surrender to the Corporation each of his or
her outstanding automatic option grants. The Optionee shall in return be
entitled to a cash distribution from the Corporation in an amount equal to the
excess of (i) the Take-Over Price of the shares of Common Stock at the time
subject to each surrendered option (whether or not the Optionee is otherwise at
the time vested in those shares) over (ii) the aggregate exercise price payable
for such shares. Such cash distribution shall be paid within five (5) days
following the surrender of the option to the Corporation. No approval or consent
of the Board or any Plan Administrator shall be required at the time of the
actual option surrender and cash distribution.
E. Each option which is assumed in connection with a Corporate
Transaction shall be appropriately adjusted, immediately after such Corporate
Transaction, to apply to the number and class of securities which would have
been issuable to the Optionee in consummation of such Corporate Transaction had
the option been exercised immediately prior to such Corporate Transaction.
Appropriate adjustments shall also be made to the exercise price payable per
share under each outstanding option, provided the aggregate exercise price
payable for such securities shall remain the same. To the extent the actual
holders of the Corporation's outstanding Common Stock receive cash consideration
for their Common Stock in consummation of the Corporate Transaction, the
successor corporation may, in connection with
20.
<PAGE> 21
the assumption of the outstanding options under this Plan, substitute one or
more shares of its own common stock with a fair market value equivalent to the
cash consideration paid per share of Common Stock in such Corporate Transaction.
F. The grant of options under the Automatic Option Grant Program shall
in no way affect the right of the Corporation to adjust, reclassify, reorganize
or otherwise change its capital or business structure or to merge, consolidate,
dissolve, liquidate or sell or transfer all or any part of its business or
assets.
III. REMAINING TERMS
The remaining terms of each option granted under the Automatic Option
Grant Program shall be the same as the terms in effect for option grants made
under the Discretionary Option Grant Program.
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<PAGE> 22
ARTICLE SIX
DIRECTOR FEE OPTION GRANT PROGRAM
I. OPTION GRANTS
The Primary Committee shall have the sole and exclusive authority to
determine the calendar year or years for which the Director Fee Option Grant
Program is to be in effect. For each such calendar year the program is in
effect, each non-employee Board member may irrevocably elect to apply all or any
portion of the annual retainer fee otherwise payable in cash for his or her
service on the Board for that year to the acquisition of a special option grant
under this Director Fee Option Grant Program. Such election must be filed with
the Corporation's Chief Financial Officer prior to the first day of the calendar
year for which the annual retainer fee which is the subject of that election is
otherwise payable. Each non-employee Board member who files such a timely
election shall automatically be granted an option under this Director Fee Option
Grant Program on the first trading day in January in the calendar year for which
the annual retainer fee which is the subject of that election would otherwise be
payable in cash.
II. OPTION TERMS
Each option shall be a Non-Statutory Option governed by the terms and
conditions specified below.
A. EXERCISE PRICE.
1. The exercise price per share shall be thirty-three and one-third
percent (33 1/3%) of the Fair Market Value per share of Common Stock on the
option grant date.
2. The exercise price shall become immediately due upon exercise of
the option and shall be payable in one or more of the alternative forms
authorized under the Discretionary Option Grant Program. Except to the extent
the sale and remittance procedure specified thereunder is utilized, payment of
the exercise price for the purchased shares must be made on the Exercise Date.
B. NUMBER OF OPTION SHARES. The number of shares of Common Stock subject
to the option shall be determined pursuant to the following formula (rounded
down to the nearest whole number):
X = A/(B x 66 2/3%), where
X is the number of option shares,
A is the portion of the annual retainer fee subject to the
non-employee Board member's election, and
B is the Fair Market Value per share of Common Stock on the option
grant date.
22.
<PAGE> 23
C. EXERCISE AND TERM OF OPTIONS. The option shall become exercisable in
a series of twelve (12) equal monthly installments upon the Optionee's
completion of each calendar month of Board service during the calendar year for
which the retainer fee election is in effect. Each option shall have a maximum
term of ten (10) years measured from the option grant date.
D. LIMITED TRANSFERABILITY OF OPTIONS. Each option under this Article
Six may be assigned in whole or in part during the Optionee's lifetime to one or
more members of the Optionee's family or to a trust established exclusively for
one or more such family members or to Optionee's former spouse, to the extent
such assignment is in connection with Optionee's estate plan or pursuant to a
domestic relations order. The assigned portion may only be exercised by the
person or persons who acquire a proprietary interest in the option pursuant to
the assignment. The terms applicable to the assigned portion shall be the same
as those in effect for the option immediately prior to such assignment and shall
be set forth in such documents issued to the assignee as the Plan Administrator
may deem appropriate. The Optionee may also designate one or more persons as the
beneficiary or beneficiaries of his or her outstanding options under this
Article Six, and those options shall, in accordance with such designation,
automatically be transferred to such beneficiary or beneficiaries upon the
Optionee's death while holding those options. Such beneficiary or beneficiaries
shall take the transferred options subject to all the terms and conditions of
the applicable agreement evidencing each such transferred option, including
(without limitation) the limited time period during which the option may be
exercised following the Optionee's death.
E. TERMINATION OF BOARD SERVICE. Should the Optionee cease Board service
for any reason (other than death or Permanent Disability) while holding one or
more options under this Director Fee Option Grant Program, then each such option
shall remain exercisable, for any or all of the shares for which the option is
exercisable at the time of such cessation of Board service, until the earlier of
(i) the expiration of the ten (10)-year option term or (ii) the expiration of
the three (3)-year period measured from the date of such cessation of Board
service. However, each option held by the Optionee under this Director Fee
Option Grant Program at the time of his or her cessation of Board service shall
immediately terminate and cease to remain outstanding with respect to any and
all shares of Common Stock for which the option is not otherwise at that time
exercisable.
F. DEATH OR PERMANENT DISABILITY. Should the Optionee's service as a
Board member cease by reason of death or Permanent Disability, then each option
held by such Optionee under this Director Fee Option Grant Program shall
immediately become exercisable for all the shares of Common Stock at the time
subject to that option, and the option may be exercised for any or all of those
shares as fully-vested shares until the earlier of (i) the expiration of the ten
(10)-year option term or (ii) the expiration of the three (3)-year period
measured from the date of such cessation of Board service. In the event of the
Optionee's death while holding such option, the option may be exercised by the
personal representative of the Optionee's estate or by the person or persons to
whom the option is transferred pursuant to the Optionee's will or the laws of
inheritance or by the designated beneficiary or beneficiaries of such option.
Should the Optionee die after cessation of Board service but while
holding one or more options under this Director Fee Option Grant Program, then
each such option may be exercised, for any or all of the shares for which the
option is exercisable at the time of the
23.
<PAGE> 24
Optionee's cessation of Board service (less any shares subsequently purchased by
Optionee prior to death), by the personal representative of the Optionee's
estate or by the person or persons to whom the option is transferred pursuant to
the Optionee's will or the laws of inheritance or by the designated beneficiary
or beneficiaries of such option. Such right of exercise shall lapse, and the
option shall terminate, upon the earlier of (i) the expiration of the ten
(10)-year option term or (ii) the three (3)-year period measured from the date
of the Optionee's cessation of Board service.
III. CORPORATE TRANSACTION/CHANGE IN CONTROL/HOSTILE TAKE-OVER
A. In the event of any Corporate Transaction while the Optionee remains
a Board member, each outstanding option held by such Optionee under this
Director Fee Option Grant Program shall automatically accelerate so that each
such option shall, immediately prior to the effective date of the Corporate
Transaction, become exercisable for all the shares of Common Stock at the time
subject to such option and may be exercised for any or all of those shares as
fully-vested shares of Common Stock. Each such outstanding option shall
terminate immediately following the Corporate Transaction, except to the extent
assumed by the successor corporation (or parent thereof) in such Corporate
Transaction. Any option so assumed and shall remain exercisable for the
fully-vested shares until the earlier of (i) the expiration of the ten (10)-year
option term or (ii) the expiration of the three (3)-year period measured from
the date of the Optionee's cessation of Board service.
B. In the event of a Change in Control while the Optionee remains in
Service, each outstanding option held by such Optionee under this Director Fee
Option Grant Program shall automatically accelerate so that each such option
shall, immediately prior to the effective date of the Change in Control, become
exercisable for all the shares of Common Stock at the time subject to such
option and may be exercised for any or all of those shares as fully-vested
shares of Common Stock. The option shall remain so exercisable until the
earliest to occur of (i) the expiration of the ten (10)-year option term, (ii)
the expiration of the three (3)-year period measured from the date of the
Optionee's cessation of Board service, (iii) the termination of the option in
connection with a Corporate Transaction or (iv) the surrender of the option in
connection with a Hostile Take-Over.
C. Upon the occurrence of a Hostile Take-Over, the Optionee shall have a
thirty (30)-day period in which to surrender to the Corporation each outstanding
option granted him or her under the Director Fee Option Grant Program. The
Optionee shall in return be entitled to a cash distribution from the Corporation
in an amount equal to the excess of (i) the Take-Over Price of the shares of
Common Stock at the time subject to each surrendered option (whether or not the
option is otherwise at the time exercisable for those shares) over (ii) the
aggregate exercise price payable for such shares. Such cash distribution shall
be paid within five (5) days following the surrender of the option to the
Corporation. No approval or consent of the Board or any Plan Administrator shall
be required at the time of the actual option surrender and cash distribution.
D. Each option which is assumed in connection with a Corporate
Transaction shall be appropriately adjusted, immediately after such Corporate
Transaction, to apply to the number and class of securities which would have
been issuable to the Optionee in consummation
24.
<PAGE> 25
of such Corporate Transaction had the option been exercised immediately prior to
such Corporate Transaction. Appropriate adjustments shall also be made to the
exercise price payable per share under each outstanding option, provided the
aggregate exercise price payable for such securities shall remain the same. To
the extent the actual holders of the Corporation's outstanding Common Stock
receive cash consideration for their Common Stock in consummation of the
Corporate Transaction, the successor corporation may, in connection with the
assumption of the outstanding options under this Plan, substitute one or more
shares of its own common stock with a fair market value equivalent to the cash
consideration paid per share of Common Stock in such Corporate Transaction.
E. The grant of options under the Director Fee Option Grant Program
shall in no way affect the right of the Corporation to adjust, reclassify,
reorganize or otherwise change its capital or business structure or to merge,
consolidate, dissolve, liquidate or sell or transfer all or any part of its
business or assets.
IV. REMAINING TERMS
The remaining terms of each option granted under this Director Fee
Option Grant Program shall be the same as the terms in effect for option grants
made under the Discretionary Option Grant Program.
25.
<PAGE> 26
ARTICLE SEVEN
MISCELLANEOUS
I. FINANCING
The Plan Administrator may permit any Optionee or Participant to pay the
option exercise price under the Discretionary Option Grant Program or the
purchase price of shares issued under the Stock Issuance Program by delivering a
full-recourse, interest bearing promissory note payable in one or more
installments. The terms of any such promissory note (including the interest rate
and the terms of repayment) shall be established by the Plan Administrator in
its sole discretion. In no event may the maximum credit available to the
Optionee or Participant exceed the sum of (i) the aggregate option exercise
price or purchase price payable for the purchased shares (less the par value of
such shares) plus (ii) any Federal, state and local income and employment tax
liability incurred by the Optionee or the Participant in connection with the
option exercise or share purchase.
II. TAX WITHHOLDING
A. The Corporation's obligation to deliver shares of Common Stock upon
the exercise of options or the issuance or vesting of such shares under the Plan
shall be subject to the satisfaction of all applicable Federal, state and local
income and employment tax withholding requirements.
B. The Plan Administrator may, in its discretion, provide any or all
holders of Non-Statutory Options or unvested shares of Common Stock under the
Plan (other than the options granted or the shares issued under the Automatic
Option Grant or Director Fee Option Grant Program) with the right to use shares
of Common Stock in satisfaction of all or part of the Withholding Taxes to which
such holders may become subject in connection with the exercise of their options
or the vesting of their shares. Such right may be provided to any such holder in
either or both of the following formats:
Stock Withholding: The election to have the Corporation withhold,
from the shares of Common Stock otherwise issuable upon the exercise of such
Non-Statutory Option or the vesting of such shares, a portion of those shares
with an aggregate Fair Market Value equal to the percentage of the Withholding
Taxes (not to exceed one hundred percent (100%)) designated by the holder.
Stock Delivery: The election to deliver to the Corporation, at the
time the Non-Statutory Option is exercised or the shares vest, one or more
shares of Common Stock previously acquired by such holder (other than in
connection with the option exercise or share vesting triggering the Withholding
Taxes) with an aggregate Fair Market Value equal to the percentage of the
Withholding Taxes (not to exceed one hundred percent (100%)) designated by the
holder.
26.
<PAGE> 27
III. EFFECTIVE DATE AND TERM OF THE PLAN
A. The Plan shall become effective immediately on the Plan Effective
Date. However, the Salary Investment Option Grant Program and the Director Fee
Option Grant Program shall not be implemented until such time as the Primary
Committee may deem appropriate. Options may be granted under the Discretionary
Option Grant at any time on or after the Plan Effective Date, and the initial
option grants under the Automatic Option Grant Program shall also be made on the
Plan Effective Date to any non-employee Board members eligible for such grants
at that time. However, no options granted under the Plan may be exercised, and
no shares shall be issued under the Plan, until the Plan is approved by the
Corporation's stockholders. If such stockholder approval is not obtained within
twelve (12) months after the Plan Effective Date, then all options previously
granted under this Plan shall terminate and cease to be outstanding, and no
further options shall be granted and no shares shall be issued under the Plan.
B. The Plan shall serve as the successor to the Predecessor Plan, and no
further option grants or direct stock issuances shall be made under the
Predecessor Plan after the Plan Effective Date. All options outstanding under
the Predecessor Plan on the Plan Effective Date shall be incorporated into the
Plan at that time and shall be treated as outstanding options under the Plan.
However, each outstanding option so incorporated shall continue to be governed
solely by the terms of the documents evidencing such option, and no provision of
the Plan shall be 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.
C. One or more provisions of the Plan, including (without limitation)
the option/vesting acceleration provisions of Article Two relating to Corporate
Transactions and Changes in Control, may, in the Plan Administrator's
discretion, be extended to one or more options incorporated from the Predecessor
Plan which do not otherwise contain such provisions.
D. The Plan shall terminate upon the earliest to occur of (i) November
15, 2009, (ii) the date on which all shares available for issuance under the
Plan shall have been issued as fully-vested shares or (iii) the termination of
all outstanding options in connection with a Corporate Transaction. Should the
Plan terminate on November 15, 2009, then all option grants and unvested stock
issuances outstanding at that time shall continue to have force and effect in
accordance with the provisions of the documents evidencing such grants or
issuances.
IV. AMENDMENT OF THE PLAN
A. The Board shall have complete and exclusive power and authority to
amend or modify the Plan in any or all respects. However, no such amendment or
modification shall adversely affect the rights and obligations with respect to
stock options or unvested stock issuances at the time outstanding under the Plan
unless the Optionee or the Participant consents to such amendment or
modification. In addition, certain amendments may require stockholder approval
pursuant to applicable laws or regulations.
B. Options to purchase shares of Common Stock may be granted under the
Discretionary Option Grant and Salary Investment Option Grant Programs and
shares of Common Stock may be issued under the Stock Issuance Program that are
in each instance in
27.
<PAGE> 28
excess of the number of shares then available for issuance under the Plan,
provided any excess shares actually issued under those programs shall be held in
escrow until there is obtained stockholder approval of an amendment sufficiently
increasing the number of shares of Common Stock available for issuance under the
Plan. If such stockholder approval is not obtained within twelve (12) months
after the date the first such excess issuances are made, then (i) any
unexercised options granted on the basis of such excess shares shall terminate
and cease to be outstanding and (ii) the Corporation shall promptly refund to
the Optionees and the Participants the exercise or purchase price paid for any
excess shares issued under the Plan and held in escrow, together with interest
(at the applicable Short Term Federal Rate) for the period the shares were held
in escrow, and such shares shall thereupon be automatically cancelled and cease
to be outstanding.
V. USE OF PROCEEDS
Any cash proceeds received by the Corporation from the sale of shares of
Common Stock under the Plan shall be used for general corporate purposes.
VI. REGULATORY APPROVALS
A. The implementation of the Plan, the granting of any stock option
under the Plan and the issuance of any shares of Common Stock (i) upon the
exercise of any granted option or (ii) under the Stock Issuance Program shall be
subject to the Corporation's procurement of all approvals and permits required
by regulatory authorities having jurisdiction over the Plan, the stock options
granted under it and the shares of Common Stock issued pursuant to it.
B. No shares of Common Stock or other assets shall be issued or
delivered under the Plan unless and until there shall have been compliance with
all applicable requirements of Federal and state securities laws, including the
filing and effectiveness of the Form S-8 registration statement for the shares
of Common Stock issuable under the Plan, and all applicable listing requirements
of any stock exchange (or the Nasdaq National Market, if applicable) on which
Common Stock is then listed for trading.
VII. NO EMPLOYMENT/SERVICE RIGHTS
Nothing in the Plan shall confer upon the Optionee or the Participant
any right to continue in Service for any period of specific duration or
interfere with or otherwise restrict in any way the rights of the Corporation
(or any Parent or Subsidiary employing or retaining such person) or of the
Optionee or the Participant, which rights are hereby expressly reserved by each,
to terminate such person's Service at any time for any reason, with or without
cause.
28.
<PAGE> 29
APPENDIX
The following definitions shall be in effect under the Plan:
A. AUTOMATIC OPTION GRANT PROGRAM shall mean the automatic option grant
program in effect under Article Five of the Plan.
B. BOARD shall mean the Corporation's Board of Directors.
C. CHANGE IN CONTROL shall mean a change in ownership or control of the
Corporation effected through either of the following transactions:
(i) the acquisition, directly or indirectly by any person or
related group of persons (other than the Corporation or a person that
directly or indirectly controls, is controlled by, or is under common
control with, the Corporation), of beneficial ownership (within the
meaning of Rule 13d-3 of the 1934 Act) of securities possessing more
than fifty percent (50%) of the total combined voting power of the
Corporation's outstanding securities pursuant to a tender or exchange
offer made directly to the Corporation's stockholders, or
(ii) a change in the composition of the Board over a period of
thirty-six (36) consecutive months or less such that a majority of the
Board members ceases, by reason of one or more contested elections for
Board membership, to be comprised of individuals who either (A) have
been Board members continuously since the beginning of such period or
(B) have been elected or nominated for election as Board members during
such period by at least a majority of the Board members described in
clause (A) who were still in office at the time the Board approved such
election or nomination.
D. CODE shall mean the Internal Revenue Code of 1986, as amended.
E. COMMON STOCK shall mean the Corporation's common stock.
F. CORPORATE TRANSACTION shall mean either of the following
stockholder-approved transactions to which the Corporation is a party:
(i) a merger or consolidation in which securities possessing
more than fifty percent (50%) of the total combined voting power of the
Corporation's outstanding securities are transferred to a person or
persons different from the persons holding those securities immediately
prior to such transaction, or
(ii) the sale, transfer or other disposition of all or
substantially all of the Corporation's assets in complete liquidation
or dissolution of the Corporation.
<PAGE> 30
G. CORPORATION shall mean Versata, Inc., a Delaware corporation, and any
corporate successor to all or substantially all of the assets or voting stock of
Versata, Inc. which shall by appropriate action adopt the Plan.
H. DIRECTOR FEE OPTION GRANT PROGRAM shall mean the special stock option
grant in effect for non-employee Board members under Article Six of the Plan.
I. DISCRETIONARY OPTION GRANT PROGRAM shall mean the discretionary
option grant program in effect under Article Two of the Plan.
J. EMPLOYEE shall mean an individual who is in the employ of the
Corporation (or any Parent or Subsidiary), subject to the control and direction
of the employer entity as to both the work to be performed and the manner and
method of performance.
K. EXERCISE DATE shall mean the date on which the Corporation shall have
received written notice of the option exercise.
L. FAIR MARKET VALUE per share of Common Stock on any relevant date
shall be determined in accordance with the following provisions:
(i) If the Common Stock is at the time traded on the Nasdaq
National Market, then the Fair Market Value shall be the closing
selling price per share of Common Stock on the date in question, as
such price is reported by the National Association of Securities
Dealers on the Nasdaq National Market. If there is no closing selling
price for the Common Stock on the date in question, then the Fair
Market Value shall be the closing selling price on the last preceding
date for which such quotation exists.
(ii) If the Common Stock is at the time listed on any Stock
Exchange, then the Fair Market Value shall be the closing selling price
per share of Common Stock on the date in question on the Stock Exchange
determined by the Plan Administrator to be the primary market for the
Common Stock, as such price is officially quoted in the composite tape
of transactions on such exchange. If there is no closing selling price
for the Common Stock on the date in question, then the Fair Market
Value shall be the closing selling price on the last preceding date for
which such quotation exists.
(iii) For purposes of any option grants made on the
Underwriting Date, the Fair Market Value shall be deemed to be equal to
the price per share at which the Common Stock is to be sold in the
initial public offering pursuant to the Underwriting Agreement.
M. HOSTILE TAKE-OVER shall mean the acquisition, directly or indirectly,
by any person or related group of persons (other than the Corporation or a
person that directly or indirectly controls, is controlled by, or is under
common control with, the Corporation) of beneficial ownership (within the
meaning of Rule 13d-3 of the 1934 Act) of securities possessing more than fifty
percent (50%) of the total combined voting power of the Corporation's
outstanding securities pursuant to a tender or exchange offer made directly to
the Corporation's stockholders which the Board does not recommend such
stockholders to accept.
A-2.
<PAGE> 31
N. INCENTIVE OPTION shall mean an option which satisfies the
requirements of Code Section 422.
O. INVOLUNTARY TERMINATION shall mean the termination of the Service of
any individual which occurs by reason of:
(i) such individual's involuntary dismissal or discharge by
the Corporation for reasons other than Misconduct, or
(ii) such individual's voluntary resignation following (A) a
change in his or her position with the Corporation which materially
reduces his or her duties and responsibilities or the level of
management to which he or she reports, (B) a reduction in his or her
level of compensation (including base salary, fringe benefits and
target bonus under any corporate-performance based bonus or incentive
programs) by more than fifteen percent (15%) or (C) a relocation of
such individual's place of employment by more than fifty (50) miles,
provided and only if such change, reduction or relocation is effected
by the Corporation without the individual's consent.
P. MISCONDUCT shall mean the commission of any act of fraud,
embezzlement or dishonesty by the Optionee or Participant, any unauthorized use
or disclosure by such person of confidential information or trade secrets of the
Corporation (or any Parent or Subsidiary), or any other intentional misconduct
by such person adversely affecting the business or affairs of the Corporation
(or any Parent or Subsidiary) in a material manner. The foregoing definition
shall not be deemed to be inclusive of all the acts or omissions which the
Corporation (or any Parent or Subsidiary) may consider as grounds for the
dismissal or discharge of any Optionee, Participant or other person in the
Service of the Corporation (or any Parent or Subsidiary).
Q. 1934 ACT shall mean the Securities Exchange Act of 1934, as amended.
R. NON-STATUTORY OPTION shall mean an option not intended to satisfy the
requirements of Code Section 422.
S. OPTIONEE shall mean any person to whom an option is granted under the
Discretionary Option Grant, Salary Investment Option Grant, Automatic Option
Grant or Director Fee Option Grant Program.
T. PARENT shall mean any corporation (other than the Corporation) in an
unbroken chain of corporations ending with the Corporation, provided each
corporation in the unbroken chain (other than the Corporation) owns, at the time
of the determination, stock possessing fifty percent (50%) or more of the total
combined voting power of all classes of stock in one of the other corporations
in such chain.
U. PARTICIPANT shall mean any person who is issued shares of Common
Stock under the Stock Issuance Program.
V. PERMANENT DISABILITY OR PERMANENTLY DISABLED shall mean the inability
of the Optionee or the Participant to engage in any substantial gainful activity
by reason of any
A-3.
<PAGE> 32
medically determinable physical or mental impairment expected to result in death
or to be of continuous duration of twelve (12) months or more. However, solely
for purposes of the Automatic Option Grant and Director Fee Option Grant
Programs, Permanent Disability or Permanently Disabled shall mean the inability
of the non-employee Board member to perform his or her usual duties as a Board
member by reason of any medically determinable physical or mental impairment
expected to result in death or to be of continuous duration of twelve (12)
months or more.
W. PLAN shall mean the Corporation's 2000 Stock Incentive Plan, as set
forth in this document.
X. PLAN ADMINISTRATOR shall mean the particular entity, whether the
Primary Committee, the Board or the Secondary Committee, which is authorized to
administer the Discretionary Option Grant and Stock Issuance Programs with
respect to one or more classes of eligible persons, to the extent such entity is
carrying out its administrative functions under those programs with respect to
the persons under its jurisdiction.
Y. PLAN EFFECTIVE DATE shall mean the date the Plan shall become
effective and shall be coincident with the Underwriting Date.
Z. PREDECESSOR PLAN shall mean the Corporation's 1997 Stock Option Plan
in effect immediately prior to the Plan Effective Date hereunder.
AA. PRIMARY COMMITTEE shall mean the committee of two (2) or more
non-employee Board members appointed by the Board to administer the
Discretionary Option Grant and Stock Issuance Programs with respect to Section
16 Insiders and to administer the Salary Investment Option Grant Program solely
with respect to the selection of the eligible individuals who may participate in
such program.
BB. SALARY INVESTMENT OPTION GRANT PROGRAM shall mean the salary
investment option grant program in effect under Article Three of the Plan.
CC. SECONDARY COMMITTEE shall mean a committee of one or more Board
members appointed by the Board to administer the Discretionary Option Grant and
Stock Issuance Programs with respect to eligible persons other than Section 16
Insiders.
DD. SECTION 16 INSIDER shall mean an officer or director of the
Corporation subject to the short-swing profit liabilities of Section 16 of the
1934 Act.
EE. SERVICE shall mean the performance of services for the Corporation
(or any Parent or Subsidiary) by a person in the capacity of an Employee, a
non-employee member of the board of directors or a consultant or independent
advisor, except to the extent otherwise specifically provided in the documents
evidencing the option grant or stock issuance.
FF. STOCK EXCHANGE shall mean either the American Stock Exchange or the
New York Stock Exchange.
A-4.
<PAGE> 33
GG. STOCK ISSUANCE AGREEMENT shall mean the agreement entered into by
the Corporation and the Participant at the time of issuance of shares of Common
Stock under the Stock Issuance Program.
HH. STOCK ISSUANCE PROGRAM shall mean the stock issuance program in
effect under Article Four of the Plan.
II. SUBSIDIARY shall mean any corporation (other than the Corporation)
in an unbroken chain of corporations beginning with the Corporation, provided
each corporation (other than the last corporation) in the unbroken chain owns,
at the time of the determination, stock possessing fifty percent (50%) or more
of the total combined voting power of all classes of stock in one of the other
corporations in such chain.
JJ. TAKE-OVER PRICE shall mean the greater of (i) the Fair Market Value
per share of Common Stock on the date the option is surrendered to the
Corporation in connection with a Hostile Take-Over or (ii) the highest reported
price per share of Common Stock paid by the tender offeror in effecting such
Hostile Take-Over. However, if the surrendered option is an Incentive Option,
the Take-Over Price shall not exceed the clause (i) price per share.
KK. 10% STOCKHOLDER shall mean the owner of stock (as determined under
Code Section 424(d)) possessing more than ten percent (10%) of the total
combined voting power of all classes of stock of the Corporation (or any Parent
or Subsidiary).
LL. UNDERWRITING AGREEMENT shall mean the agreement between the
Corporation and the underwriter or underwriters managing the initial public
offering of the Common Stock.
MM. UNDERWRITING DATE shall mean the date on which the Underwriting
Agreement is executed and priced in connection with an initial public offering
of the Common Stock.
NN. WITHHOLDING TAXES shall mean the Federal, state and local income and
employment withholding taxes to which the holder of Non-Statutory Options or
unvested shares of Common Stock may become subject in connection with the
exercise of those options or the vesting of those shares.
A-5.
<PAGE> 1
EXHIBIT 10.2
VERSATA, INC.
EMPLOYEE STOCK PURCHASE PLAN
I. PURPOSE OF THE PLAN
This Employee Stock Purchase Plan is intended to promote the
interests of Versata, Inc., a Delaware corporation, by providing eligible
employees with the opportunity to acquire a proprietary interest in the
Corporation through participation in a payroll deduction based employee stock
purchase plan designed to qualify under Section 423 of the Code.
Capitalized terms herein shall have the meanings assigned to such
terms in the attached Appendix.
II. ADMINISTRATION OF THE PLAN
The Plan Administrator shall have full authority to interpret and
construe any provision of the Plan and to adopt such rules and regulations for
administering the Plan as it may deem necessary in order to comply with the
requirements of Code Section 423. Decisions of the Plan Administrator shall be
final and binding on all parties having an interest in the Plan.
III. STOCK SUBJECT TO PLAN
A. The stock purchasable under the Plan shall be shares of
authorized but unissued or reacquired Common Stock, including shares of Common
Stock purchased on the open market. The number of shares of Common Stock
initially reserved for issuance over the term of the Plan shall be limited to
500,000 shares.
B. The number of shares of Common Stock available for issuance under
the Plan shall 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 Common Stock outstanding on the
last trading day of the immediately preceding first fiscal quarter, but in no
event shall any such annual increase exceed 1,000,000 shares.
C. Should any change be made to the Common Stock by reason of any
stock split, stock dividend, recapitalization, combination of shares, exchange
of shares or other change affecting the outstanding Common Stock as a class
without the Corporation's receipt of consideration, appropriate adjustments
shall be made to (i) the maximum number and class of securities issuable under
the Plan, (ii) the maximum number and class of securities purchasable per
Participant on any one Purchase Date, (iii) the maximum number and class of
securities purchasable in total by all Participants on any one Purchase Date,
(iv) the maximum number and/or class of securities by which the share reserve is
to increase automatically each calendar year pursuant to the provisions of
Section III.B of this Article One and (v) the number and class of securities and
the price per share in effect under each outstanding purchase right in order to
prevent the dilution or enlargement of benefits thereunder.
<PAGE> 2
IV. OFFERING PERIODS
A. Shares of Common Stock shall be offered for purchase under the
Plan through a series of successive overlapping offering periods until such time
as (i) the maximum number of shares of Common Stock available for issuance under
the Plan shall have been purchased or (ii) the Plan shall have been sooner
terminated.
B. Offering periods shall commence at semi-annual intervals on the
first business day of February and August each year over the term of the Plan.
Accordingly, two (2) separate offering periods shall commence in each calendar
year over the term of the Plan. Each offering period shall be of twenty-four
(24) months' duration unless otherwise determined by the Plan Administrator
prior to the start date of such offering period. However, the initial offering
period shall commence at the Effective Time and terminate on the last business
day in January 2002. The second offering period shall commence on the first
business day in August 2000 and terminate on the last business day in July 2002.
The date on which an offering period begins shall be designated the Start Date
of such offering period.
C. Each offering period shall be comprised of a series of one or
more successive Purchase Intervals. Purchase Intervals shall run from the first
business day in February to the last business day in July each year and from the
first business day in August each year to the last business day in January in
the following year. However, the first Purchase Interval in effect under the
initial offering period shall commence at the Effective Time and terminate on
the last business day in July 2000.
D. Should the Fair Market Value per share of Common Stock on any
Purchase Date within an offering period be less than the Fair Market Value per
share of Common Stock on the Start Date of that offering period, then that
offering period shall automatically terminate immediately after the purchase of
shares of Common Stock on such Purchase Date and participants in such terminated
offering period shall automatically be enrolled in the new offering period
commencing on the next business day following such Purchase Date.
V. ELIGIBILITY
A. Each individual who is an Eligible Employee on the Start Date of
any offering period under the Plan may enter that offering period on such start
date.
B. Each individual who first becomes an Eligible Employee after the
start date of an offering period may enter a subsequent offering period on the
Start Date of that offering period.
C. An Eligible Employee may participate in only one offering period
at any time.
D. Except as provided in Section IV.D above, to participate in the
Plan for a particular offering period, the Eligible Employee must complete the
enrollment forms prescribed by the Plan Administrator (including a stock
purchase agreement and a payroll deduction authorization) and file such forms
with the Plan Administrator (or its designate) on or before the scheduled Start
Date of such offering period.
2.
<PAGE> 3
VI. PAYROLL DEDUCTIONS
A. The payroll deduction authorized by the Participant for purposes
of acquiring shares of Common Stock during an offering period may be any
multiple of one percent (1%) of the Cash Earnings paid to the Participant on
each payroll date during each Purchase Interval within that offering period, up
to a maximum of fifteen percent (15%). The deduction rate so authorized shall
continue in effect throughout the offering period, except to the extent such
rate is changed in accordance with the following guidelines:
(i) The Participant may, at any time during the offering
period, reduce his or her rate of payroll deduction to become effective as
soon as possible after filing the appropriate form with the Plan
Administrator. The Participant may not, however, effect more than one (1)
such reduction per Purchase Interval.
(ii) The Participant may, prior to the commencement of any new
Purchase Interval within the offering period, increase the rate of his or
her payroll deduction by filing the appropriate form with the Plan
Administrator. The new rate (which may not exceed the fifteen percent
(15%) maximum) shall become effective on the start date of the first
Purchase Interval following the filing of such form.
B. Payroll deductions shall begin on the first pay day
administratively feasible following the Start Date of the offering period and
shall (unless sooner terminated by the Participant) continue through the pay day
ending with or immediately prior to the last day of that offering period. The
amounts so collected shall be credited to the Participant's book account under
the Plan, but no interest shall be paid on the balance from time to time
outstanding in such account. The amounts collected from the Participant shall
not be required to be held in any segregated account or trust fund and may be
commingled with the general assets of the Corporation and used for general
corporate purposes.
C. Payroll deductions shall automatically cease upon the termination
of the Participant's purchase right in accordance with the provisions of the
Plan.
D. The Participant's acquisition of Common Stock under the Plan on
any Purchase Date shall neither limit nor require the Participant's acquisition
of Common Stock on any subsequent Purchase Date, whether within the same or a
different offering period.
VII. PURCHASE RIGHTS
A. GRANT OF PURCHASE RIGHTS. A Participant shall be granted a
separate purchase right for each offering period in which he or she
participates. The purchase right shall be granted on the Start Date of the
offering period and shall provide the Participant with the right to purchase
shares of Common Stock, in a series of successive installments over the
remainder of such offering period, upon the terms set forth below. The
Participant shall execute a stock purchase agreement embodying such terms and
such other provisions (not inconsistent with the Plan) as the Plan Administrator
may deem advisable.
3.
<PAGE> 4
Under no circumstances shall purchase rights be granted under the
Plan to any Eligible Employee if such individual would, immediately after the
grant, own (within the meaning of Code Section 424(d)) or hold outstanding
options or other rights to purchase, stock possessing five percent (5%) or more
of the total combined voting power or value of all classes of stock of the
Corporation or any Corporate Affiliate.
B. EXERCISE OF THE PURCHASE RIGHT. Each purchase right shall be
automatically exercised in installments on each successive Purchase Date within
the offering period, and shares of Common Stock shall accordingly be purchased
on behalf of each Participant on each such Purchase Date. The purchase shall be
effected by applying the Participant's payroll deductions for the Purchase
Interval ending on such Purchase Date to the purchase of whole shares of Common
Stock at the purchase price in effect for the Participant for that Purchase
Date.
C. PURCHASE PRICE. The purchase price per share at which Common
Stock will be purchased on the Participant's behalf on each Purchase Date within
the offering period shall be equal to eighty-five percent (85%) of the lower of
(i) the Fair Market Value per share of Common Stock on the Start Date of that
offering period or (ii) the Fair Market Value per share of Common Stock on that
Purchase Date.
D. NUMBER OF PURCHASABLE SHARES. The number of shares of Common
Stock purchasable by a Participant on each Purchase Date during the offering
period shall be the number of whole shares obtained by dividing the amount
collected from the Participant through payroll deductions during the Purchase
Interval ending with that Purchase Date by the purchase price in effect for the
Participant for that Purchase Date. However, the maximum number of shares of
Common Stock purchasable per Participant on any one Purchase Date shall not
exceed 2,500 shares, subject to periodic adjustments in the event of certain
changes in the Corporation's capitalization. In addition, the maximum number of
shares of Common Stock purchasable in total by all Participants on any one
Purchase Date shall not exceed 125,000 shares, subject to periodic adjustments
in the event of certain changes in the Corporation's capitalization. However,
the Plan Administrator shall have the discretionary authority, exercisable prior
to the start of any offering period under the Plan, to increase or decrease the
limitations to be in effect for the number of shares purchasable per Participant
and in total by all Participants on each Purchase Date during that offering
period.
E. EXCESS PAYROLL DEDUCTIONS. Any payroll deductions not applied to
the purchase of shares of Common Stock on any Purchase Date because they are not
sufficient to purchase a whole share of Common Stock shall be held for the
purchase of Common Stock on the next Purchase Date. However, any payroll
deductions not applied to the purchase of Common Stock by reason of the
limitation on the maximum number of shares purchasable per Participant or in
total by all Participants on the Purchase Date shall be promptly refunded.
F. TERMINATION OF PURCHASE RIGHT. The following provisions shall
govern the termination of outstanding purchase rights:
(i) A Participant may, at any time prior to the next scheduled
Purchase Date in the offering period, terminate his or her outstanding
4.
<PAGE> 5
purchase right by filing the appropriate form with the Plan Administrator
(or its designate), and no further payroll deductions shall be collected
from the Participant with respect to the terminated purchase right. Any
payroll deductions collected during the Purchase Interval in which such
termination occurs shall, at the Participant's election, be immediately
refunded or held for the purchase of shares on the next Purchase Date. If
no such election is made at the time such purchase right is terminated,
then the payroll deductions collected with respect to the terminated right
shall be refunded as soon as possible.
(ii) The termination of such purchase right shall be
irrevocable, and the Participant may not subsequently rejoin the offering
period for which the terminated purchase right was granted. In order to
resume participation in any subsequent offering period, such individual
must re-enroll in the Plan (by making a timely filing of the prescribed
enrollment forms) on or before the scheduled Start Date of that offering
period.
(iii) Should the Participant cease to remain an Eligible
Employee for any reason (including death, disability or change in status)
while his or her purchase right remains outstanding, then that purchase
right shall immediately terminate, and all of the Participant's payroll
deductions for the Purchase Interval in which the purchase right so
terminates shall be immediately refunded. However, should the Participant
cease to remain in active service by reason of an approved unpaid leave of
absence, then the Participant shall have the right, exercisable up until
the last business day of the Purchase Interval in which such leave
commences, to (a) withdraw all the payroll deductions collected to date on
his or her behalf for that Purchase Interval or (b) have such funds held
for the purchase of shares on his or her behalf on the next scheduled
Purchase Date. In no event, however, shall any further payroll deductions
be collected on the Participant's behalf during such leave. Upon the
Participant's return to active service (x) within ninety (90) days
following the commencement of such leave or (y) prior to the expiration of
any longer period for which such Participant's right to reemployment with
the Corporation is guaranteed by statute or contract, his or her payroll
deductions under the Plan shall automatically resume at the rate in effect
at the time the leave began, unless the Participant withdraws from the
Plan prior to his or her return. An individual who returns to active
employment following a leave of absence which exceeds in duration the
applicable (x) or (y) time period will be treated as a new Employee for
purposes of subsequent participation in the Plan and must accordingly
re-enroll in the Plan (by making a timely filing of the prescribed
enrollment forms) on or before the scheduled Start Date of the offering
period.
G. CHANGE IN CONTROL. Each outstanding purchase right shall
automatically be exercised, immediately prior to the effective date of any
Change in Control, by applying the payroll deductions of each Participant for
the Purchase Interval in which such Change in Control occurs to the purchase of
whole shares of Common Stock at a purchase price per share equal to eighty-five
percent (85%) of the lower of (i) the Fair Market Value per share of Common
Stock on the Start Date of the offering period in which such Change in Control
occurs or (ii) the Fair
5.
<PAGE> 6
Market Value per share of Common Stock immediately prior to the effective date
of such Change in Control. However, the applicable limitation on the number of
shares of Common Stock purchasable per Participant shall continue to apply to
any such purchase, but not the limitation applicable to the maximum number of
shares of Common Stock purchasable in total by all Participants on any one
Purchase Date.
The Corporation shall use its best efforts to provide at least ten
(10)-days prior written notice of the occurrence of any Change in Control, and
Participants shall, following the receipt of such notice, have the right to
terminate their outstanding purchase rights prior to the effective date of the
Change in Control.
H. PRORATION OF PURCHASE RIGHTS. Should the total number of shares
of Common Stock to be purchased pursuant to outstanding purchase rights on any
particular date exceed the number of shares then available for issuance under
the Plan, the Plan Administrator shall make a pro-rata allocation of the
available shares on a uniform and nondiscriminatory basis, and the payroll
deductions of each Participant, to the extent in excess of the aggregate
purchase price payable for the Common Stock pro-rated to such individual, shall
be refunded.
I. ASSIGNABILITY. The purchase right shall be exercisable only by
the Participant and shall not be assignable or transferable by the Participant.
J. STOCKHOLDER RIGHTS. A Participant shall have no stockholder
rights with respect to the shares subject to his or her outstanding purchase
right until the shares are purchased on the Participant's behalf in accordance
with the provisions of the Plan and the Participant has become a holder of
record of the purchased shares.
VIII. ACCRUAL LIMITATIONS
A. No Participant shall be entitled to accrue rights to acquire
Common Stock pursuant to any purchase right outstanding under this Plan if and
to the extent such accrual, when aggregated with (i) rights to purchase Common
Stock accrued under any other purchase right granted under this Plan and (ii)
similar rights accrued under other employee stock purchase plans (within the
meaning of Code Section 423)) of the Corporation or any Corporate Affiliate,
would otherwise permit such Participant to purchase more than Twenty-Five
Thousand Dollars ($25,000.00) worth of stock of the Corporation or any Corporate
Affiliate (determined on the basis of the Fair Market Value per share on the
date or dates such rights are granted) for each calendar year such rights are at
any time outstanding.
B. For purposes of applying such accrual limitations to the purchase
rights granted under the Plan, the following provisions shall be in effect:
(i) The right to acquire Common Stock under each outstanding
purchase right shall accrue in a series of installments on each successive
Purchase Date during the offering period on which such right remains
outstanding.
(ii) No right to acquire Common Stock under any outstanding
purchase right shall accrue to the extent the Participant has already
6.
<PAGE> 7
accrued in the same calendar year the right to acquire Common Stock under
one or more other purchase rights at a rate equal to Twenty-Five Thousand
Dollars ($25,000.00) worth of Common Stock (determined on the basis of the
Fair Market Value per share on the date or dates of grant) for each
calendar year such rights were at any time outstanding.
C. If by reason of such accrual limitations, any purchase right of a
Participant does not accrue for a particular Purchase Interval, then the payroll
deductions which the Participant made during that Purchase Interval with respect
to such purchase right shall be promptly refunded.
D. In the event there is any conflict between the provisions of this
Article and one or more provisions of the Plan or any instrument issued
thereunder, the provisions of this Article shall be controlling.
IX. EFFECTIVE DATE AND TERM OF THE PLAN
A. The Plan was adopted by the Board on November 16, 1999 and shall
become effective at the Effective Time, provided no purchase rights granted
under the Plan shall be exercised, and no shares of Common Stock shall be issued
hereunder, until (i) the Plan shall have been approved by the stockholders of
the Corporation and (ii) the Corporation shall have complied with all applicable
requirements of the 1933 Act (including the registration of the shares of Common
Stock issuable under the Plan on a Form S-8 registration statement filed with
the Securities and Exchange Commission), all applicable listing requirements of
any stock exchange (or the Nasdaq National Market, if applicable) on which the
Common Stock is listed for trading and all other applicable requirements
established by law or regulation. In the event such stockholder approval is not
obtained, or such compliance is not effected, within twelve (12) months after
the date on which the Plan is adopted by the Board, the Plan shall terminate and
have no further force or effect, and all sums collected from Participants during
the initial offering period hereunder shall be refunded.
B. Unless sooner terminated by the Board, the Plan shall terminate
upon the earliest of (i) the last business day in January 2010, (ii) the date on
which all shares available for issuance under the Plan shall have been sold
pursuant to purchase rights exercised under the Plan or (iii) the date on which
all purchase rights are exercised in connection with a Change in Control. No
further purchase rights shall be granted or exercised, and no further payroll
deductions shall be collected, under the Plan following such termination.
X. AMENDMENT OF THE PLAN
A. The Board may alter, amend, suspend or terminate the Plan at any
time to become effective immediately following the close of any Purchase
Interval. However, the Plan may be amended or terminated immediately upon Board
action, if and to the extent necessary to assure that the Corporation will not
recognize, for financial reporting purposes, any compensation expense in
connection with the shares of Common Stock offered for purchase under the Plan,
should the financial accounting rules applicable to the Plan at the Effective
Time
7.
<PAGE> 8
be subsequently revised so as to require the Corporation to recognize
compensation expense in the absence of such amendment or termination.
B. In no event may the Board effect any of the following amendments
or revisions to the Plan without the approval of the Corporation's stockholders:
(i) increase the number of shares of Common Stock issuable under the Plan,
except for permissible adjustments in the event of certain changes in the
Corporation's capitalization, (ii) alter the purchase price formula so as to
reduce the purchase price payable for the shares of Common Stock purchasable
under the Plan or (iii) modify the eligibility requirements for participation in
the Plan.
XI. GENERAL PROVISIONS
A. All costs and expenses incurred in the administration of the Plan
shall be paid by the Corporation; however, each Plan Participant shall bear all
costs and expenses incurred by such individual in the sale or other disposition
of any shares purchased under the Plan.
B. Nothing in the Plan shall confer upon the Participant any right
to continue in the employ of the Corporation or any Corporate Affiliate for any
period of specific duration or interfere with or otherwise restrict in any way
the rights of the Corporation (or any Corporate Affiliate employing such person)
or of the Participant, which rights are hereby expressly reserved by each, to
terminate such person's employment at any time for any reason, with or without
cause.
C. The provisions of the Plan shall be governed by the laws of the
State of California without resort to that State's conflict-of-laws rules.
8.
<PAGE> 9
SCHEDULE A
CORPORATIONS PARTICIPATING IN
EMPLOYEE STOCK PURCHASE PLAN
AS OF THE EFFECTIVE TIME
Versata, Inc.
<PAGE> 10
APPENDIX
The following definitions shall be in effect under the Plan:
A. BOARD shall mean the Corporation's Board of Directors.
B. CASH EARNINGS shall mean the (i) regular base salary paid to a
Participant by one or more Participating Companies on each payroll date during
such individual's period of participation in one or more offering periods under
the Plan plus (ii) all overtime payments, bonuses, commissions, profit-sharing
distributions and other incentive-type payments received on each such date. Such
Cash Earnings shall be calculated before deduction of (A) any income or
employment tax withholdings or (B) any contributions made by the Participant to
any Code Section 401(k) salary deferral plan or Code Section 125 cafeteria
benefit program now or hereafter established by the Corporation or any Corporate
Affiliate. However, Cash Earnings shall NOT include any contributions made on
the Participant's behalf by the Corporation or any Corporate Affiliate to any
employee benefit or welfare plan now or hereafter established (other than Code
Section 401(k) or Code Section 125 contributions deducted from such Cash
Earnings).
C. CHANGE IN CONTROL shall mean a change in ownership of the
Corporation pursuant to any of the following transactions:
(i) a merger or consolidation in which securities possessing
more than fifty percent (50%) of the total combined voting power of the
Corporation's outstanding securities are transferred to a person or
persons different from the persons holding those securities immediately
prior to such transaction, or
(ii) the sale, transfer or other disposition of all or
substantially all of the assets of the Corporation in complete liquidation
or dissolution of the Corporation, or
(iii) the acquisition, directly or indirectly, by a person or
related group of persons (other than the Corporation or a person that
directly or indirectly controls, is controlled by or is under common
control with the Corporation) of beneficial ownership (within the meaning
of Rule 13d-3 of the 1934 Act) of securities possessing more than fifty
percent (50%) of the total combined voting power of the Corporation's
outstanding securities pursuant to a tender or exchange offer made
directly to the Corporation's stockholders.
D. CODE shall mean the Internal Revenue Code of 1986, as amended.
E. COMMON STOCK shall mean the Corporation's common stock.
F. CORPORATE AFFILIATE shall mean any parent or subsidiary
corporation of the Corporation (as determined in accordance with Code Section
424), whether now existing or subsequently established.
A-1.
<PAGE> 11
G. CORPORATION shall mean Versata, Inc., a Delaware corporation, and
any corporate successor to all or substantially all of the assets or voting
stock of Versata, Inc. which shall by appropriate action adopt the Plan.
H. EFFECTIVE TIME shall mean the time at which the Underwriting
Agreement is executed and the Common Stock priced for the initial public
offering of such Common Stock. Any Corporate Affiliate which becomes a
Participating Corporation after such Effective Time shall designate a subsequent
Effective Time with respect to its employee-Participants.
I. ELIGIBLE EMPLOYEE shall mean any person who is employed by a
Participating Corporation on a basis under which he or she is regularly expected
to render more than twenty (20) hours of service per week for more than five (5)
months per calendar year for earnings considered wages under Code Section
3401(a).
J. FAIR MARKET VALUE per share of Common Stock on any relevant date
shall be determined in accordance with the following provisions:
(i) If the Common Stock is at the time traded on the Nasdaq
National Market, then the Fair Market Value shall be the closing selling
price per share of Common Stock on the date in question, as such price is
reported by the National Association of Securities Dealers on the Nasdaq
National Market. If there is no closing selling price for the Common Stock
on the date in question, then the Fair Market Value shall be the closing
selling price on the last preceding date for which such quotation exists.
(ii) If the Common Stock is at the time listed on any Stock
Exchange, then the Fair Market Value shall be the closing selling price
per share of Common Stock on the date in question on the Stock Exchange
determined by the Plan Administrator to be the primary market for the
Common Stock, as such price is officially quoted in the composite tape of
transactions on such exchange. If there is no closing selling price for
the Common Stock on the date in question, then the Fair Market Value shall
be the closing selling price on the last preceding date for which such
quotation exists.
(iii) For purposes of the initial offering period which begins
at the Effective Time, the Fair Market Value shall be deemed to be equal
to the price per share at which the Common Stock is sold in the initial
public offering pursuant to the Underwriting Agreement.
K. 1933 ACT shall mean the Securities Act of 1933, as amended.
L. PARTICIPANT shall mean any Eligible Employee of a Participating
Corporation who is actively participating in the Plan.
M. PARTICIPATING CORPORATION shall mean the Corporation and such
Corporate Affiliate or Affiliates as may be authorized from time to time by the
Board to extend the benefits of the Plan to their Eligible Employees. The
Participating Corporations in the Plan are listed in attached Schedule A.
A-2.
<PAGE> 12
N. PLAN shall mean the Corporation's Employee Stock Purchase Plan,
as set forth in this document.
O. PLAN ADMINISTRATOR shall mean the committee of two (2) or more
Board members appointed by the Board to administer the Plan.
P. PURCHASE DATE shall mean the last business day of each Purchase
Interval. The first Purchase Date shall be July 30, 2000.
Q. PURCHASE INTERVAL shall mean each successive six (6)-month period
within the offering period at the end of which there shall be purchased shares
of Common Stock on behalf of each Participant.
R. START DATE shall mean the date on which an offering period begins
and shall be either the first business day in February or August each year
provided, however, that the Start Date of the initial offering period shall be
the Effective Time.
S. STOCK EXCHANGE shall mean either the American Stock Exchange or
the New York Stock Exchange.
T. UNDERWRITING AGREEMENT shall mean the agreement between the
Corporation and the underwriter or underwriters managing the initial public
offering of the Common Stock.
A-3.
<PAGE> 1
Exhibit 21.1
LIST OF SUBSIDIARIES
<TABLE>
<CAPTION>
NAME OF SUBSIDIARY JURISDICTION OF INCORPORATION
<S> <C>
1. Vision Software (Europe) Limited United Kingdom
2. Vision Software Tools Europe BVBA Belgium
3. Vision Software GmbH Germany
4. Versata (Canada) Limited Canada
5. Versata (France) France
6. Versata (Asia) Limited Hong Kong
7. Versata International BVI British Virgin Islands
</TABLE>
<PAGE> 1
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 December 1, 1999, relating to the financial statements and
financial statement schedules of Versata, Inc. (formerly Vision Software Tools,
Inc.), which appears 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 Francisco, California
January 14, 2000
