<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
Commission file number 0-
VERSATA, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 68-0255203
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
2101 WEBSTER STREET
OAKLAND, CA 94612
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)(ZIP CODE)
Registrant's telephone number, including area code (510) 238-4100
------------------
Not Applicable
FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR, IF CHANGED
SINCE LAST REPORT
Indicate by check whether the registrant (1) has filed all reports
required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No ______
The registrant has not been subject to such filing requirement for the
past 90 days, as it closed its initial public offering on Form S-1 on March 8,
2000.
As of May 10, 2000, the total number of outstanding shares of the
Registrant's common stock was 39,805,435.
<PAGE> 2
INDEX
<TABLE>
<CAPTION>
PAGE
NUMBER
------
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets at March 31, 2000 and December 31, 1999................. 3
Condensed Consolidated Statements of Operations for the Three Months
ended March 31, 2000, and 1999................................................................ 4
Condensed Consolidated Statements of Cash Flows for the Three Months
ended March 31, 2000, and 1999................................................................ 5
Notes to Condensed Consolidated Financial Statements.......................................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations.................................................................................... 7
Item 3. Quantitative and Qualitative Disclosures about Market Risk.................................... 9
PART II. OTHER INFORMATION
Item 2. Changes in Securities from sales of registered securities..................................... 20
Item 4. Submission of Matters to a Vote of Security Holders........................................... 20
Item 6. Exhibits and Reports on Form 8-K.............................................................. 20
SIGNATURE PAGE............................................................................................. 21
EXHIBITS................................................................................................... 22
</TABLE>
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
VERSATA, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
----------- ------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents .................................... $ 110,829 $ 20,655
Accounts receivable, net of allowance of $913 at
March 31, 2000 and $886 at December 31, 1999 ............ 9,401 5,587
Unbilled receivables ......................................... 1,068 1,584
Prepaid expenses and other current assets .................... 3,501 2,311
--------- ---------
Total current assets ................................ 124,799 30,137
Property and equipment, net ....................................... 3,339 1,902
Notes receivable from related parties ............................. 423 134
Intangible assets ................................................. 2,637 1,389
Other assets ...................................................... 332 98
--------- ---------
Total assets ........................................ $ 131,530 $ 33,660
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ............................................. $ 6,003 $ 2,025
Accrued expenses ............................................. 8,981 7,298
Deferred revenue ............................................. 6,183 4,433
Current portion of long-term debt ............................ 179 166
--------- ---------
Total current liabilities ........................... 21,346 13,922
Long-term debt, less current portion .............................. 264 320
--------- ---------
Total liabilities .................................. 21,610 14,242
Stockholders' equity:
Convertible preferred stock .................................. -- 26
Common stock ................................................. 40 7
Additional paid-in capital ................................... 225,646 89,905
Notes receivable from stockholders ........................... (4,604) (2,413)
Deferred compensation ........................................ (37,575) (14,732)
Accumulated deficit .......................................... (73,587) (53,375)
--------- ---------
Total stockholders' equity ......................... 109,920 19,418
--------- ---------
Total liabilities and stockholders' equity ......... $ 131,530 $ 33,660
========= =========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
<PAGE> 4
VERSATA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
---------------------------
2000 1999
-------- --------
<S> <C> <C>
Revenue:
Software license ..................................................... $ 4,136 $ 961
Services and other fees .............................................. 5,970 817
-------- --------
Total revenue ............................................... 10,106 1,778
Cost of revenue:
Software license ..................................................... 194 66
Services and other fees (exclusive of stock-based compensation
of $4,048 and $83, respectively) ................................... 5,478 1,002
-------- --------
Total cost of revenue ....................................... 5,672 1,068
-------- --------
Gross profit .............................................................. 4,434 710
-------- --------
Operating expenses:
Sales and marketing (exclusive of stock-based compensation
of $5,130 and $140, respectively) .................................. 10,189 2,157
Product development (exclusive of stock-based compensation
of $1,072 and $77, respectively).................................... 1,857 820
General and administrative (exclusive of stock-based compensation
of $824 and $26, respectively) ..................................... 2,001 502
Stock-based compensation ............................................. 11,074 326
Amortization of intangibles .......................................... 190 --
-------- --------
Total operating expenses .................................... 25,311 3,805
-------- --------
Loss from operations ...................................................... (20,877) (3,095)
Interest income, net ...................................................... 665 28
-------- --------
Net loss .................................................................. $(20,212) $ (3,067)
======== ========
Basic and diluted net loss per share ...................................... $ (1.33) $ (1.37)
======== ========
Weighted average common shares used in computing basic and diluted net loss
per share ........................................................... 15,203 2,245
======== ========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
<PAGE> 5
VERSATA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-----------------------------
2000 1999
--------- ---------
<S> <C> <C>
Cash flows used in operating activities:
Net loss .................................................................... $ (20,212) $ (3,067)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization ........................................... 406 115
Provision for doubtful accounts ......................................... 376 50
Stock-based compensation expense ........................................ 11,074 326
Changes in operating assets and liabilities:
Accounts receivable ................................................ (4,191) (1,101)
Unbilled receivables ............................................... 516 (503)
Prepaid expenses and other current assets .......................... (1,295) (82)
Other assets ....................................................... (234) (3)
Accounts payable and accrued liabilities ........................... 5,661 191
Deferred revenue ................................................... 1,750 757
--------- ---------
Net cash used in operating activities .......................... (6,149) (3,317)
--------- ---------
Cash flows used in investing activities:
Purchase of property and equipment .......................................... (1,547) (71)
Increase in notes receivable from related parties ........................... (289) (45)
Net cash used in connection with acquisitions ............................... (351) --
--------- ---------
Net cash used in investing activities .......................... (2,187) (116)
--------- ---------
Cash flows from financing activities:
Principal payments under capital lease obligations .......................... (21) (18)
Principal payments on equipment loan ........................................ (22) (83)
Net proceeds from issuance of convertible preferred stock ................... 1,500 --
Net proceeds from issuance of common stock .................................. 96,654 1
Proceeds from exercise of preferred stock warrants .......................... 90 --
Proceeds from exercise of common stock warrants ............................. 113 --
Proceeds from exercise of options ........................................... 580 --
Repurchase of common stock from stockholder ................................. (6) --
Payments from stockholders on notes receivable .............................. 272 --
Loan provided to shareholder for founder shares ............................. (650) --
--------- ---------
Net cash provided by (used in) financing activities ............ 98,510 (100)
--------- ---------
Net increase(decrease) in cash and cash equivalents ............ 90,174 (3,533)
Cash and cash equivalents at beginning of the period ........................... 20,655 5,767
--------- ---------
Cash and cash equivalents at end of the period ................................. $ 110,829 $ 2,234
========= =========
Supplemental disclosure of cash flow information cash paid during
the period for interest ..................................................... $ 17 $ 20
========= =========
Supplemental disclosures of non-cash investing and financing activities
Common stock issued for notes receivable from stockholders ..................... $ 1,813 $ --
========= =========
Conversion of preferred stock to common stock on the date of public offering ... $ 26 --
========= =========
Issuance of convertible preferred stock in connection with acquisition ......... $ 1,087 $ --
========= =========
Property and equipment obtained through capital lease .......................... $ -- $ 49
========= =========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
<PAGE> 6
VERSATA, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. The Company
Versata, Inc. (the "Company" or "Versata") was incorporated on August
27, 1991. The Company reincorporated in the State of Delaware on February 24,
2000. The Company is a global provider of E-Business Automation System
application software and services that enable businesses and other large
organizations to create, rapidly deploy and modify software applications for
intranets, extranets and the Internet. The Company markets its software
worldwide and has sales offices in the United States, Canada, United Kingdom,
Germany, France, and Hong Kong.
The condensed consolidated financial statements include the accounts of
Versata, Inc. and its international subsidiaries, all of which are wholly owned,
located in North America, Europe and Asia. All intercompany accounts and
transactions have been eliminated in consolidation. Versata, Inc. and its
subsidiaries are collectively referred to as the "Company" or "Versata."
2. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with accounting principles generally accepted
in the United States for interim financial information and with the instructions
to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include
all financial information and disclosures required by accounting principles
generally accepted in the United States for complete financial statements.
However, the Company believes that the disclosures are adequate to make the
information presented not misleading. The condensed financial statements should
be read in conjunction with the financial statements and the notes thereto
included in the Company's Registration on Form S-1. In the opinion of
management, these condensed financial statements include all adjustments
(consisting only of normal recurring adjustments) necessary for a fair
presentation of the results of operations for the interim periods reported and
of the financial condition of the Company as of the date of the interim balance
sheet. The results of operations for the interim periods are not necessarily
indicative of the results to be expected for the full year.
3. Summary of significant accounting policies
Revenue Recognition
The Company derives revenue from two sources as follows: (i) software
license and maintenance revenue to end users, VARs, system integrators and OEMs
and (ii) service revenue which includes consulting, training services and
customer support. To date there have been only a limited number of transactions
involving licenses with OEMs, VARs or system integrators that allow subsequent
resale to end-user customers. Effective January 1, 1998, the Company adopted SOP
97-2, Software Revenue Recognition, with the exception of the provision deferred
by SOP 98-4, Deferral of the Effective Date of a Provision of SOP 97-2. In
accordance with the adopted provisions of SOP 97-2, the Company records revenue
from licensing of software products to end-users when a license agreement is
signed by both parties, the fee is fixed and determinable, collection is
probable and delivery of the product has occurred. Generally, the Company
provides payment terms that range from thirty days to ninety days from the
invoice date. Accordingly, payment terms that exceed ninety days are not
considered fixed and determinable and revenue is recognized as payments become
due. When contracts contain multiple elements, and for which vendor specific
objective evidence ("VSOE") of fair value exists for the undelivered elements,
the Company recognizes revenue for the delivered elements based upon the
residual contract value as prescribed by SOP 98-9, Modifications of SOP 97-2,
Software Revenue Recognition. Undelivered elements consist primarily of post
contract customer support ("PCS") and other services such as consulting and
training. Services are not generally considered essential to the functionality
of the software. The Company recognizes revenue allocated to maintenance and
support ratably over the period of the maintenance and the support contracts,
respectively, which is generally twelve months. For revenue allocated to
consulting services, the Company recognizes revenue as the related services are
performed. In instances where services are deemed essential to the software,
both the software license fee and consulting fees are recognized using the
percentage of completion method of contract accounting. For licensing of the
software to OEMs, VARs and systems integrators which involve minimum
non-refundable royalty prepayment, the royalty prepayment is recorded in prepaid
expenses upon receipt of the cash payment. Revenue from these transactions is
not recognized until the software is sold by the OEM, VAR or system integrator
to an end-user customer.
Earnings per Share
Basic earnings per share is calculated based on the weighted average
number of common shares outstanding and excludes any dilutive effects of
warrants, stock options, common stock subject to repurchase or other types of
securities. Diluted earnings per share excludes potential common stock if their
effect is antidilutive.
The following table sets forth the computation of basic and diluted loss
per share:
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
2000 1999
--------- -------
(Unaudited)
<S> <C> <C>
Numerator:
Net loss ................................................. $ (20,212) $(3,067)
========= =======
Denominator:
Weighted average shares outstanding ...................... 17,640 2,245
Weighted average unvested shares of
common stock subject to repurchase .................... (2,437) --
--------- -------
Denominator for basic and diluted calculation ............ 15,203 2,245
========= =======
Basic and diluted net loss per share .......................... $ (1.33) $ (1.37)
========= =======
</TABLE>
The Company has excluded all preferred stock, outstanding stock options,
warrants and shares subject to repurchase by the Company from the calculation of
loss per share because all such securities are anti-dilutive for all periods
presented. Shares subject to repurchase by the Company will be included in the
computation of earnings per share when the Company's option to repurchase these
shares expires. The number of potential common stock excluded from the diluted
calculation was 31,875,483 and 25,360,154 at March 31, 2000 and 1999,
respectively.
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. The Company has determined that the
pronouncement will not have a material impact on its financial condition or
results of operations as currently conducted.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin (SAB) No. 101 "Revenue Recognition in Financial Statements."
The SAB formalizes positions the staff has expressed in speeches and comment
letters. SAB 101 is effective no later than the second fiscal quarter of the
fiscal year beginning after December 15, 1999. The Company is presently
analyzing the impact, if any, that the adherence to the SAB will have on our
financial condition or results of operations.
In March 2000, the Financial Accounting Standards Board ("FASB") issued
FASB Interpretation No. 44, Accounting for Certain Transactions Involving Stock
Compensation -- an interpretation of APB Opinion No. 25, this interpretation
has provisions that are effective on staggered dates, some of which began after
December 15, 1998 and other that become effective after June 30, 2000. The
Company does not believe that the adoption of this interpretation will have a
material impact on our financial condition or results of operations.
Page 6 of 26
<PAGE> 7
4. Initial Public Offering
In March 2000, the Company completed an initial public offering in
which the Company sold 3,850,000 shares of its common stock for net proceeds to
the Company of $83.8 million, net of issuance cost. In March 2000, the Company's
underwriters exercised their over-allotment option, which resulted in the sale
of an additional 577,500 shares of the Company's stock which generated
additional proceeds of $12.9 million. Upon closing of the initial public
offering, each outstanding share of the Company's Convertible Preferred stock
was automatically converted into one share of common stock of Versata resulting
in the issuance of 26,950,287 shares of common stock.
5. Acquisitions
On January 20, 2000, the Company acquired McGilly Information Systems,
Inc. and Webink Computer Consultants for an aggregate purchase price of
$1,189,000. The acquisition was completed through the issuance of 72,000 shares
of the Company's Series F preferred stock and $101,000 in cash consideration.
The acquisition has been accounted for by using the purchase method of
accounting and accordingly, the purchase price has been allocated to the
tangible and intangible assets acquired on the basis of their relative values on
the acquisition date. The Company did not assume any liability with respect to
these acquisitions. The total purchase price was allocated to goodwill with an
estimated life of 36 months.
6. Subsequent Events
In April 2000 the Company entered into a new lease agreement for its
headquarters facilities. The lease commences in August 2000 with a term of 8
years and contains two renewal options. In connection with the lease, the
Company is required to maintain a letter of credit totaling $5.9 million.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following Management's Discussion and Analysis of Financial
Condition and Results of Operations of Versata should be read in conjunction
with the condensed consolidated financial statements of Versata and notes
thereto included elsewhere in this Form 10-Q. This discussion contains
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These
forward-looking statements are based on current expectations, assumptions and
projections and entail various risks and uncertainties including those set forth
below under "Risk Factors That May Affect Future Results," that could cause
actual results to differ materially from those projected in the forward-looking
statements.
OVERVIEW
We provide a comprehensive suite of software and services that enable
our customers to rapidly deploy e-business software applications that can be
modified quickly to meet constantly changing business requirements. From our
incorporation in August 1991 through December 1994, we were a professional
services company and generated revenue from technical consulting projects. In
January 1995, we commenced development efforts on our initial software products,
from which we generated revenue from late 1995 through early 1998. In September
1996, we began development of our first Web-based software product, which we
began shipping commercially in September 1997. In September 1998, we introduced
the first generation of what is now our Versata E-Business
Page 7 of 26
<PAGE> 8
Automation System. To date, we have licensed our products and provided services
to over 500 customers around the world. Since the second quarter of
1998, we generated our revenue exclusively from our Web-based software products
and related services.
We derive our revenue from the sale of software product licenses and
from related services. Software license revenue is derived from the sale of
software licenses for our Versata E-Business Automation System. Our software
licenses are priced based on the size of the customer's project. Software
license revenue also includes product maintenance, which provides the customer
with unspecified software upgrades over a specified term, typically twelve
months. Services revenue consists of fees from professional services and
customer support. Professional services include consulting and training.
Customers typically purchase these professional services from us to enlist our
support in implementation activities, generally when the sale is made through
direct sales efforts. Professional services are sold generally on
time-and-materials basis, while customer support is priced based on the
particular level of support chosen by the customer.
We recognize revenue in accordance with Statement of Position 97-2,
"Software Revenue Recognition." Software license revenue is recognized when both
parties sign a license agreement, the fee is fixed and determinable, collection
is probable and delivery of the product has occurred. Our customers usually
purchase maintenance agreements for product upgrades, and revenue is recognized
ratably over the term of the agreement, typically one year, as a component of
software license revenue. We bill professional service fees generally on a
time-and-materials basis and recognize revenue as the services are performed. We
offer differing levels of customer support and revenue is recognized ratably
over the term of the customer support agreement, typically one year. Services
are not generally essential to the software. In instances where the services
are deemed essential to the software, both the software license and consulting
fees are recognized using the percentage of completion method of contract
accounting. Fees from arrangements, which provide for extended payment terms are
recognized as revenue when payments become due. The portion of fees related to
either products delivered or services rendered which are not due under our
standard payment terms is reflected in deferred revenue and in unbilled
receivable until payments become due. Deferred revenue balances also include
amounts billed in advance of service rendered.
As of March 31, 2000, we had deferred revenue of $6.2 million, an
increase of $1.8 million from $4.4 million as of December 31, 1999. This
increase is principally attributable to additions to deferred revenue due to new
contracts signed during the quarter.
We market our products and services through our direct sales force,
consulting partners, companies that sell pre-packaged software applications,
companies that custom develop and integrate software applications and companies
that sell software applications over the Internet on a subscription services
basis, often referred to as application service providers. While our revenue to
date has been derived predominantly from customers in the United States, we
believe international revenue will represent a more significant component of our
total revenue as we expand our direct and indirect international sales efforts.
Net revenues from international sales represented 18.7% of our total revenue in
the first quarter of 1999 and 18.2% of our total revenue in the first quarter
of 2000, but in absolute terms, our international sales revenue increased
approximately 454.5% in the first quarter of 2000 as compared to the first
quarter of 1999.
Our cost of software license revenue consists of royalty payments to
third parties for technology incorporated in our product, the cost of manuals
and product documentation, as well as packaging and distribution costs. Our cost
of service revenue consists of salaries of professional service personnel, and
payments to third party consultants incurred in providing customer support,
training, and consulting services. We currently generate positive gross margins
from our consulting and training services, while our fixed cost of customer
support services exceeds our revenue generated from support activities. We
expect this trend to continue for the next several quarters. Cost of services
revenue as a percentage of services revenue is likely to vary significantly from
period to period depending on overall utilization rates, the mix of services we
provide and whether these services are provided by us or by third-party
contractors.
Page 8 of 26
<PAGE> 9
Since our inception, we have incurred substantial costs to develop our
technology and products, to recruit and train personnel for our product
development, sales and marketing and professional services departments, and to
establish our administrative infrastructure. To date, all software development
costs have been expensed in the period incurred. Historically, our operating
expenses have exceeded the revenue generated by our products and services. As a
result, we have incurred net losses in each quarter since inception and had an
accumulated deficit of $53.4 million and $73.6 million as of December 31, 1999
and March 31, 2000, respectively. We anticipate that our operating expenses will
increase substantially in future quarters as we increase sales and marketing
operations, expand distribution channels, establish additional domestic and
international sales offices, increase product development, broaden professional
services, expand facilities and support, and improve operational and financial
systems. We expect to incur additional net losses and negative cash flows from
operations on a quarterly and annual basis for the foreseeable future. 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.
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated the percentage
revenues represented by certain lines in our Condensed Consolidated Statements
of Operations:
<TABLE>
<CAPTION>
Three Months Ended March 31,
2000 1999
------ ------
<S> <C> <C>
Revenue:
Software license ............................ 40.93% 54.05%
Services and other fees ..................... 59.07 45.95
------ ------
Total revenue ................... 100.00 100.00
------ ------
Cost of revenue:
Software license ............................ 1.92 3.71
Services and other fees ..................... 54.21 56.36
------ ------
Total cost of revenue ........... 56.13 60.07
------ ------
Gross profit ..................................... 43.87 39.93
Operating expenses:
Sales and marketing ......................... 100.82 121.32
Product development ......................... 18.38 46.12
General and administrative .................. 19.80 28.23
Stock-based compensation .................... 109.58 18.33
Amortization of intangibles ................. 1.88 --
------ ------
Total operating expense ......... 250.46 214.00
------ ------
Loss from operations ............................. (206.59) (174.07)
------
Other income, net ................................ 6.59 1.57
------ ------
Net loss ......................................... (200.00)% (172.50)%
====== ======
</TABLE>
REVENUE
Total revenue consists of software license revenue and services revenue.
Total revenue increased by $8.3 million, or 468.4%, from $1.8 million in the
first quarter of 1999 to $10.1 million in the first quarter of 2000. This
increase was principally attributable to the continued growth in new customers,
repeat business from existing customers and rapid growth in international
markets.
Software License Revenue
Software license revenue increased by $3.2 million, or 330.4%, from
$961,000 in the first quarter of 1999 to $4.1 million in the first quarter of
2000. This increase was primarily attributable to growth in both the number of
licenses sold as well as higher average sales prices realized for software
licenses. Software license revenue also
Page 9 of 26
<PAGE> 10
benefited from the expansion of our distribution channels through the addition
of several System and Web integration partners. As a result of the rapid growth
of our international operations during 1999, revenue from international sales
increased by $1.1 million, or 327.6% from $323,000 in the first quarter of 1999
to $1.4 million in the first quarter of 2000.
Services Revenue and Other Fees
Services revenue increased by $5.2 million, or 630.7%, from $817,000 in
first quarter of 1999 to $6.0 million in first quarter 2000. This increase was
attributable to growth in the number of our customers and support contracts from
direct sales efforts and also due to the expansion of our professional
consulting organization from the addition of three consulting and training
organizations and hiring of additional consultants. Services revenue from
international customers increased by $451,000, from $9,000 in first quarter 1999
to $460,000 in first quarter 2000.
COST OF REVENUE
Total cost of revenue consists of cost of software license revenue and cost
of service revenue. Total cost of revenue increased by $4.6 million, or 431.1%,
from $1.1 million in the first quarter of 1999 to $5.7 million in the first
quarter of 2000.
Cost of Software License Revenue
Cost of software license revenue consists of royalty payments to third
parties for technology incorporated into our product, the cost of manuals and
product documentation, as well as packaging and distribution costs. Cost of
software license revenue increased by $128,000 or 193.9%, from $66,000 in the
first quarter of 1999 to $194,000 in the first quarter of 2000. This increase
was attributable to a larger volume of sales orders during first quarter 2000.
Cost of Services Revenue and Other Fees
Cost of service revenue consists of salaries of professional service
personnel and payments to third party consultants incurred in providing customer
support, training, and consulting services. Cost of service revenue increased by
$4.5 million, or 446.7%, from $1 million in the first quarter of 1999 to $5.5
million in the first quarter of 2000. This increase was principally due to an
increase in the number of our consulting, training and customer support
personnel and due to the expansion of our consulting services organization
through additions of two consulting and training services organizations during
first quarter 2000, required to meet the service needs of our increased number
of customers.
OPERATING EXPENSES
Operating expense increased by $21.5 million, or 565.2%, from $3.8
million in the first half of 1999 to $25.3 million in the first quarter of 2000.
Approximately 50% of this increase was due to an increase in the amortization of
unearned non-cash stock-based compensation. The balance of the increase was due
to increased investment in our sales and marketing operations to increase our
market position and expand our distribution channels. Eliminating the non-cash
charges relating to stock-based compensation, operating expense in the first
quarter of 2000 was $14.2 million, a 305.7% increase over $3.5 million in
operating expense in the first quarter of 1999.
Sales and Marketing
Sales and marketing expense consists of salaries, commissions, and
expense from our sales offices, travel and entertainment expense and marketing
programs. Sales and marketing expense increased by $8.0 million, or 372.4%, from
$2.2 million in the first quarter of 1999 to $10.2 million in the first quarter
of 2000. This increase is attributable to increases in the number of sales
employees in North America, as well as the expansion of our international sales
operations. We anticipate that our sales and marketing expense will continue to
increase in future periods as we continue to expand our sales and marketing
efforts.
Page 10 of 26
<PAGE> 11
Product Development
Product development expense includes costs associated with the
development of new products, enhancements to existing products, quality
assurance and technical publication activities. These costs consist primarily of
employee salaries and the cost of consulting resources that supplement our
product development teams. Product development expense increased by $1 million,
or 126.5%, from $820,000 in the first quarter of 1999 to $1.9 million in the
first quarter of 2000. This increase was primarily attributable to increases in
the number of personnel in Versata's product development and engineering
organization.
We believe that continued investment in product development is critical
to attaining our strategic objectives, and, as a result, we expect product
development expense to increase significantly in future periods. To date, all
software development costs have been expensed in the period incurred.
General and Administrative
General and administrative expense consists of salaries for executive,
finance and administrative personnel, information systems costs, professional
service fees and allowance for doubtful accounts. General and administrative
expense increased by $1.5 million, or 298.6%, from $502,000 in the first quarter
of 1999 to $2.0 million in the first quarter of 2000. These increases are
attributable to a growing number of employees, as well as an increase in the
provision for bad debt reserve as our revenue and accounts receivable grew.
We believe general and administrative expense will increase in future
periods, as we expect to add personnel to support our expanding operations,
incur additional costs related to the growth of our business 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. We incurred a non-cash charge of $11.1 million for the
first quarter of 2000 as compared to $326,000 in the first quarter of 1999,
related to the issuance of stock options with exercise prices below fair market
value on the date of grant. Additional unvested outstanding options will
continue to vest over the next 50 months, which will result in additional
compensation expense of approximately $37.6 million in the aggregate in periods
subsequent to March 31, 2000, which will be charged to operations over the next
50 months.
Amortization of intangibles
We incurred a non-cash charge of $190,000 in the first quarter of 2000
related to the amortization of goodwill related to the acquisitions of Pragma6
in the fourth quarter of 1999 and, the acquisitions of McGilly and Webink in the
first quarter of 2000. There were no such charges in the comparable first
quarter 1999. Goodwill of approximately $2.6 million will continue to be charged
to operations ratably over the next three years.
Interest income (expense), net
Interest income (expense), net is primarily comprised of interest
income. We had net income of $28,000 for the first quarter 1999 compared to
$665,000 for the first quarter of 2000. This increase was principally due to
interest income earned from higher cash balances resulting from our Initial
Public Offering in the first quarter of 2000 compared to first quarter of 1999.
Net Operating Losses and Tax Credit Carry-forwards
As of December 31, 1999, we had net operating losses and research and
development credit carry-forwards of approximately $45.0 million and $635,000,
respectively. The net operating losses and research and development credit
carry-forwards will expire through 2019, if not utilized. Under the provisions
of the Internal Revenue Code of 1986, as amended (the "Code"), substantial
changes in our ownership may limit the amount
Page 11 of 26
<PAGE> 12
of net operating loss carry-forwards that can be utilized annually in the future
to offset taxable income. A valuation allowance has been established to fully
reserve the potential benefits of these carry-forwards in our financial
statements to reflect the uncertainty of future taxable income required to
utilize available tax loss carry-forwards and other deferred tax assets.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, we have funded our operations primarily through the
private sale of our equity securities, and our initial public offering,
resulting in the aggregate, net proceeds of approximately $167.2 million. We
have also funded our operations through equipment financing. As of March 31,
2000, we had $110.8 million in cash and cash equivalents and $103.9 million in
working capital. We have an equipment loan from a leasing company for amounts
borrowed to finance equipment. This loan is payable over 36 months, with an
effective interest rate of 17%. At March 31, 2000, we had a total of
approximately $340,000 outstanding under this loan.
Net cash used in operating activities was $6.6 million in the first
quarter of 2000 and $3.3 million in the first quarter of 1999. Net cash flows
used by operating activities in each period reflect increasing net losses,
non-cash expenses including stock-based compensation, depreciation,
amortization, and provision for doubtful accounts. The use of operating cash
was also impacted to a lesser extent by changes in working capital.
Net cash used in investing activities was $2.2 million in first quarter
2000 and was $116,000 in the first quarter of 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. Investing activities in the first
quarter of 2000 also reflect the purchase of two consulting and training
organizations.
Net cash provided by financing activities was $99.0 million in the first
quarter of 2000. In the first quarter of 1999, net cash of $100,000 was used in
financing activities. Cash provided by financing activities includes net
proceeds from the issuance of preferred and common stock, including the
Company's initial public offering in March of 2000.
We expect to experience significant growth in our operating expenses,
particularly sales and marketing and product development expenses, for the
foreseeable future to execute our business plan. We anticipate that a portion of
our cash resources will be used to expand our marketing and product development
activities. In addition, we may use some cash resources to fund acquisitions of,
or investments in, complementary businesses, technologies or product lines.
We believe that the net proceeds from the sale of the common stock
generated by our initial public offering, together with funds generated from
operations, will be sufficient to meet our working capital and capital
expenditure requirements for at least the next twelve months. Thereafter,
we may find it necessary to obtain additional equity or debt financing. In the
event additional financing is required, we may not be able to raise it on
acceptable terms or at all.
Page 12 of 26
<PAGE> 13
CONVERSION TO EURO
We conduct business in eight European countries, and for the quarter
ended March 31, 2000, we derived 17.7% 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.
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. The Company has determined that the
pronouncement will not have a material impact on its financial condition or
results of operations as currently conducted.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin (SAB) No. 101 "Revenue Recognition in Financial Statements."
The SAB formalizes positions the staff has expressed in speeches and comment
letters. SAB 101 is effective no later than the second fiscal quarter of the
fiscal year beginning after December 15, 1999. We are presently analyzing the
impact, if any, that the adherence to the SAB will have on our financial
condition or results of operations.
In March 2000, the Financial Accounting Standards Board ("FASB") issued
FASB Interpretation No. 44, Accounting for Certain Transactions Involving Stock
Compensation -- an interpretation of APB Opinion No. 25, this interpretation
has provisions that are effective on staggered dates, some of which began after
December 15, 1998 and other that become effective after June 30, 2000. The
Company does not believe that the adoption of this interpretation will have a
material impact on our financial condition or results of operations.
Page 13 of 26
<PAGE> 14
RISK FACTORS THAT MAY AFFECT FUTURE RESULTS
WE HAVE INCURRED CONSISTENT OPERATING LOSSES SINCE OUR INCEPTION AND
EXPECT TO INCUR NET LOSSES AND NEGATIVE CASH FLOWS FOR THE FORSEEABLE
FUTURE
We have never been profitable. We have experienced operating
losses in each quarterly and annual period since inception, and we
expect to incur significant losses in the future. If our revenue grows
more slowly than we anticipate or if our operating expenses increase
more than we expect or are not reduced in the event of lower revenue, we
may never achieve profitability. We incurred net losses of $3.9 million
for the year ended December 31, 1995, $9.0 million for the year ended
December 31, 1996, $9.8 million for the year ended December 31, 1997,
$8.1 million for the year ended December 31, 1998, and $21.8 million
for the year ended December 31, 1999. As of March 31, 2000, we had an
accumulated deficit of $73.6 million. We expect to incur additional net
losses and negative cash flows from operations on a quarterly and annual
basis for the foreseeable future. We expect our operating expenses will
increase substantially as we continue to expand our business. We also
expect to significantly increase our product development, sales and
marketing, and general and administrative expenses in future periods.
As a result, we will need to significantly increase our revenue to
achieve and maintain profitability.
OUR OPERATING RESULTS WILL SUFFER IF WE CANNOT ACCURATELY FORECAST
OUR REVENUE.
We began to derive our revenue exclusively from Web-based
software products and services in early 1998. As a result of our limited
operating history in the Internet infrastructure software market, it is
difficult to forecast our revenue accurately, and we have limited
historical financial data upon which to base planned operating expenses.
Our operating expenses are largely based on anticipated revenue
projections, and a high percentage of our expenses are and will continue
to be fixed in the short-term. As a result, we may not be able to
quickly reduce spending if revenue is lower than we projected. If our
revenue falls short of our expectations in any quarter, our operating
results would be harmed, which could cause our stock price to fall.
THE UNPREDICTABILITY OF OUR QUARTERLY OPERATING RESULTS MAY CAUSE THE
PRICE OF OUR COMMON STOCK TO DECLINE.
Our quarterly operating results have not been predictable and
are likely to vary from expectations in the future, making it difficult
to predict future performance. These variations result from a number of
factors beyond our control such as:
- the size and timing of individual sales orders;
- unexpected delays in introducing new products and services;
- customer budget constraints;
- the mix of product license and services revenue;
- the mix of direct and indirect channel sales;
- the level of product competition in our market and the timing
and market acceptance of new product introductions and upgrades
by us or our competitors;
- changes in the rapidly evolving Internet infrastructure software
market;
- costs related to possible acquisitions of new technology and
businesses; and
- general economic conditions.
We believe that period-to-period comparisons of our operating
results will not necessarily be meaningful in predicting future
performance. If we do not achieve our expected revenue, it is possible
that our operating results will fall below the expectations of market
analysts or investors in some future quarter or quarters. Our failure to
meet these expectations would likely adversely affect the trading price
of our common stock.
Although we have limited historical financial data, we believe
that our quarterly operating results may experience seasonal
fluctuations. For instance, quarterly results may fluctuate based on our
clients' calendar year budgeting cycles, deferral of customer orders in
anticipation of product enhancements or new products, slow summer
purchasing patterns particularly in Europe and our compensation policies
that tend to compensate sales personnel for achieving annual sales
quotas, typically in the latter half of the year.
Page 14 of 26
<PAGE> 15
IF OUR E-BUSINESS AUTOMATION SYSTEM AND RELATED SERVICES DO NOT ACHIEVE
WIDESPREAD MARKET ACCEPTANCE, THE SOURCE OF SUBSTANTIALLY ALL OF OUR
REVENUE WILL BE AT RISK.
We cannot predict the level of market acceptance that will be
achieved or maintained by our products and services. If either the
Internet infrastructure software market in general, or the market for
our software or related services in particular, fails to grow or grows
more slowly than we anticipate, or if either market fails to accept our
products and related services, the source of substantially all of our
revenue will be at risk. We expect to continue to derive substantially
all our revenue from and be dependent upon our E-Business Automation
System and related services in the future. The market for our E-Business
Automation System and related services is new, rapidly evolving and
highly competitive, and we cannot be certain that a viable market for
our products will ever develop or be sustained. Our future financial
performance will depend in large part on the successful development,
introduction and customer acceptance of our new products, product
enhancements and related services in a timely and cost effective manner.
We expect to continue to commit significant resources to market and
further develop our E-Business Automation System and related services
and to enhance the brand awareness of our software and services.
FAILURE TO EXPAND OR GROW THE SERVICE OFFERINGS THAT COMPLEMENT OUR
E-BUSINESS AUTOMATION SYSTEM WOULD PUT AT RISK A SUBSTANTIAL COMPONENT
OF OUR REVENUE.
We believe that growth in our product license revenue depends on
our ability to provide our customers with comprehensive services and to
educate third-party resellers, instructors and consultants on how to
provide similar services. These services include customer support,
training, mentoring, staff augmentation and project management services.
If we fail to attract, train and retain the skilled persons who deliver
these services, our business and operating results could be seriously
harmed. We plan to increase the number of our service personnel 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 service revenue to increase in dollar amount as we
continue to provide consulting, training and customer support services
that complement our products and as our installed base of customers
grows. A decline in the price of or demand for our service offerings
could put at risk a substantial component of our revenue.
OUR MANAGEMENT MAY NOT BE ABLE TO INCREASE THE NUMBER OF OUR EMPLOYEES
FAST ENOUGH TO KEEP PACE WITH OUR GROWTH, WHICH MAY LEAD TO A FLATTENING
OR DECLINE IN OUR REVENUE.
We have expanded our operations rapidly in the last 15 months.
To keep pace with this expansion, we have increased our overall
personnel from 90 employees and independent contractors devoting
substantially all of their time to us as of December 31, 1998 to 457 as
of March 31, 2000. We anticipate continued rapid expansion of our
operations in the foreseeable future to pursue existing and potential
market opportunities. This rapid growth is placing, and will continue to
place, significant demands on management and operational resources. To
be successful, we will need to:
- implement additional management information systems;
- improve our operating, administrative, financial and accounting
systems, procedures and controls;
- attract, train and retain new employees; and
- maintain close coordination among our executive, engineering,
professional services, accounting, finance, marketing, sales and
operations organizations.
Our growth has resulted, and any future growth will result, in
increased responsibilities for management personnel, many of who have
been employed by us for a relatively short period of time. In addition,
we may not adequately anticipate all the demands that growth may impose
on our systems, procedures and structure. Any
Page 15 of 26
<PAGE> 16
failure to anticipate and respond adequately to these demands or manage
our growth effectively could cause our revenue to flatten or decline.
THE INTERNET INFRASTRUCTURE SOFTWARE MARKET IS HIGHLY COMPETITIVE AND WE
MAY LOSE MARKET SHARE TO COMPANIES DEVELOPING THEIR OWN SOFTWARE AND TO
LARGER COMPETITORS WITH GREATER RESOURCES.
The Internet infrastructure software market in general, and the
market for our software and related services in particular, are new,
rapidly evolving and highly competitive. We expect competition in this
market to persist and intensify in the future. While our primary
competition comes from companies developing their e-business software
applications internally using traditional programming approaches, we
also compete with a number of other sources, including vendors of
application server products and services, vendors of Web integrated
development environments and companies that market software applications
for businesses.
Many of our competitors have longer operating histories and
significantly greater financial, technical, marketing and other
resources than we do. As a result, they may be able to respond more
quickly to new or changing opportunities, technologies and customer
requirements. Many of our competitors also have more extensive customer
bases, broader customer relationships and broader industry alliances
that they could leverage, thereby establishing relationships with many
of our current and potential customers. These companies also have
significantly more established customer support and professional service
organizations. In addition, these companies may adopt aggressive pricing
policies or offer more attractive terms to customers, may bundle their
competitive products with broader product offerings or may introduce new
products and enhancements. In addition, current and potential
competitors may establish cooperative relationships among themselves or
with third parties to enhance their products. As a result, it is
possible that new competitors or alliances among competitors may emerge
and rapidly acquire significant market share.
WE MAY FACE ADDITIONAL COMPETITIVE PRESSURE AS A RESULT OF OUR AGREEMENT
TO CO-BRAND AN INTEGRATED PRODUCT WITH IBM, IBM'S PROMOTION OF
TECHNOLOGIES THAT ARE NOT COMPATIBLE WITH OUR TECHNOLOGY, AND INCREASING
CONSOLIDATION IN THE APPLICATION SERVER MARKET.
As a result of an agreement with IBM, we have integrated our
E-Business Automation System with IBM's WebSphere(TM) Application Server
Advanced Edition. IBM is currently translating this product into nine
foreign languages. IBM and we will offer the new product under our
respective brand names. Although we will receive license fees from IBM,
this co-branding will likely result in a situation where we compete with
IBM in the market for e-business automation products and services while
simultaneously maintaining a working relationship with IBM. IBM has a
longer operating history, a significantly larger installed base of
customers and substantially greater financial, distribution, marketing
and technical resources than we do. As a result, we may not be able to
compete effectively with IBM in the future, and our business, operating
results and financial condition may be materially adversely affected.
We expect that IBM's commitment to and presence in the market
for technology that allows for flexible creation, deployment and
modification of e-business software applications will substantially
increase competitive pressure in the market. Notwithstanding our current
agreement, IBM may in the future promote technologies and standards more
directly competitive with or not compatible with our business rules
automation technology.
In addition, increasing consolidation in the application server
market around major software suppliers such as BEA Systems, IBM,
Microsoft, Oracle and Sun Microsystems could create new competitive
forces in the market for e-business automation. Our failure to maintain
and enhance our competitive position will limit our ability to retain
and increase our market share, resulting in serious harm to our business
and operating results.
Page 16 of 26
<PAGE> 17
OUR BUSINESS IS DEPENDENT UPON ENHANCEMENTS TO OUR E-BUSINESS AUTOMATION
SYSTEM, AND FAILURE TO DO SO SUCCESSFULLY COULD CAUSE FUTURE SALES TO
DECLINE.
Our future financial performance depends significantly on
revenue from future enhancements to our E-Business Automation System
that we are currently developing and plan to develop. Any delay or
difficulties in completing these enhancements could seriously harm our
business and operating results. We are currently developing a new
release of our E-Business Automation System, which will include
functionality that we do not currently have. While we anticipate that
the next version will be released in the third quarter of 2000, this
version still requires significant additional development that could
result in delay, and we cannot predict with certainty the date of
commercial release. In addition, we cannot be certain that enhanced
versions of our E-Business Automation System will meet customers'
expectations.
Page 17 of 26
<PAGE> 18
WE DEPEND ON INCREASED BUSINESS FROM OUR CURRENT AND NEW CUSTOMERS AND
IF WE FAIL TO GENERATE REPEAT AND EXPANDED BUSINESS OR GROW OUR CUSTOMER
BASE, OUR PRODUCE AND SERVICES REVENUE WILL LIKELY DECLINE.
In order to be successful, we need to broaden our customer base
by selling licenses and services to current and new customers. Many of
our customers initially make a limited purchase of our products and
services for pilot programs. These customers may not choose to purchase
additional licenses to expand their use of our products. These and other
potential customers also may not yet have developed or deployed initial
software applications based on our products. If these customers do not
successfully develop and deploy these initial software applications,
they may choose not to purchase deployment licenses or additional
development licenses. In addition, as we introduce new versions of our
products or new products, our current customers may not require the
functionality of our new products and may not license these products.
If we fail to add new customers who license our product, our
services revenue will also likely decline. Our service revenue is
derived from fees for professional services and customer support. The
total amount of services and support fees we receive in any period
depends in large part on the size and number of software licenses that
we have previously sold as well as our customers electing to renew their
customer support agreements. In the event of a downturn in our software
license revenue or a decline in the percentage of customers who renew
their annual support agreements, our services revenue could become flat
or decline.
Page 18 of 26
<PAGE> 19
OUR LIMITED EXPERIENCE IN MANAGING A LARGE SALES FORCE MAY IMPAIR OUR
ABILITY TO EXPAND SALES AND GENERATE INCREASED REVENUE.
Until recently, we did not have a large direct sales force. Over
the past year, we have rapidly expanded our direct sales force and plan
to hire additional sales personnel commensurate with our sales
objectives. We may experience difficulty in integrating the new members
of our sales team into our operations. Our products and services require
a sophisticated sales effort targeted at the senior management of our
prospective customers. Newly hired employees will require extensive
training and generally take at least nine months to achieve full
productivity. Moreover, each sales team typically includes a sales
representative, a system engineer and an inside salesperson. We have
limited experience in managing a large, expanding, geographically
dispersed sales force. In addition, we have limited experience marketing
our products broadly to a large number of potential customers. We cannot
be certain that we will be able to hire enough qualified individuals in
the future or that newly-hired employees will achieve necessary levels
of productivity.
Page 19 of 26
<PAGE> 20
ANY ACQUISITIONS WE MAKE COULD DISRUPT OUR BUSINESS AND CONSEQUENTLY
HARM OUR FINANCIAL CONDITION.
As part of our business strategy, we review on an ongoing basis
acquisition prospects that we believe would be advantageous to the
development of our business. While we have no current agreements with
respect to any major acquisitions, we may make acquisitions of
businesses, products, consulting organizations or technologies in the
future. If we make any acquisitions, we could take any or all of the
following actions, any of which could materially and adversely affect
our financial results and the price of our common stock:
- issue equity securities that would dilute existing
stockholders' percentage ownership;
- use a substantial portion of our available cash,
including proceeds from this offering;
- incur substantial debt, which may not be available on
favorable terms;
- assume contingent liabilities; or
- take substantial charges in connection with the
amortization of goodwill and other intangible assets.
Acquisitions also entail numerous risks, including:
- difficulties in assimilating acquired operations,
products and personnel with our pre-existing business
and operations;
- unanticipated costs;
- diversion of management's attention from other business
concerns;
- adverse effects on existing business relationships with
suppliers and customers;
- risks of entering markets in which we have limited or no
prior experience; and
- potential loss of key employees from either our
preexisting business or the acquired organization.
We may not be able to successfully integrate any businesses,
products, technologies or personnel that we might acquire in the future,
and our failure to do so could harm our business and operating results.
Page 20 of 26
<PAGE> 21
OUR STOCK PRICE MAY FLUCTUATE WIDELY.
Prior to our initial public offering in March 2000, there was no
public market for our common stock. The market price of our common stock
has fluctuated substantially since our initial public offering. It may
continue to fluctuate substantially as a result of:
- quarterly fluctuations in operating results;
- announcements of new products or product enhancements by
us or our competitors;
- technological innovations by us or our competitors;
- general market conditions or market conditions specific
to our industry or our customers' industries; and
- changes in earnings estimates or recommendations by
analysts.
Stock prices of Internet-related companies have been highly
volatile. Our current stock price may not be indicative of the price
that will prevail in the market in the future. In the past, following
periods of volatility in the market price of a company's securities,
securities class action litigation has at times been instituted against
that company. If we become subject to securities litigation, we could
incur substantial costs and experience a diversion of management's
attention and resources.
WE MAY REQUIRE FUTURE ADDITIONAL FUNDING TO STAY IN BUSINESS.
Over time, we may require additional financing for our operations.
Additionally, we periodically review other companies' product lines and
technologies for potential acquisition. Any material acquisitions or joint
ventures could require additional financing. This additional financing may not
be available to us on a timely basis if at all, or, if available, on terms
acceptable to us. Moreover, additional financing may cause dilution to existing
stockholders.
Page 21 of 26
<PAGE> 22
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Versata is exposed to a variety of risks, including changes in interest rates
affecting the return on its investments and, to a lesser extent, foreign
currency fluctuations. In the normal course of business Versata establishes
policies and procedures to manage its exposure to fluctuations in interest rates
and foreign currency values.
INTEREST RATE RISKS. Versata's exposure to interest rate risks results primarily
from its short-term investments. These securities have been classified as cash
equivalents as the maturity dates are less than 90 days at the date of issuance.
Versata does not believe its exposure to interest rate risk is material given
the short-term nature of its investment portfolio. Declines in interest rates
over time will, however, reduce our interest income.
FOREIGN CURRENCY RISKS. As of March 31, 2000, Versata had operating subsidiaries
located in the United Kingdom, Germany, Belgium, Hong Kong and France.
Internationally, Versata invoices customers primarily in U.S. dollars and we
maintain only nominal foreign currency cash balances. Working funds necessary to
facilitate the short-term operations of our subsidiaries are kept in local
currencies in which they do business. We do not currently enter into foreign
currency hedge transactions. Through March 31, 2000, foreign currency
fluctuations have not had a material impact on our financial position or results
of operations.
Page 22 of 26
<PAGE> 23
PART II
OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(a) Sales of Unregistered Securities
During January and February 2000, Versata granted options to purchase
2,883,600 shares of common stock to existing and new employees at a weighted
average exercise price of $7.55 per share. The options were granted pursuant to
our 1997 Stock Option Plan. These options were granted by us in reliance upon
Rule 701 promulgated under the Securities Act of 1933, as amended.
On January 19, 2000, we issued 269,784 shares of Series F preferred
stock to accredited investors for a total cash consideration of $1,500,000. On
January 24, 2000, we issued 72,000 shares of Series F preferred stock in
connection with the acquisition of two consulting services organizations for a
total consideration of $1,087,000.
None of the foregoing preferred stock 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 and
Regulation D promulgated thereunder. 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.
(b) Use of Proceeds
On March 2, 2000, the Securities and Exchange Commission declared
effective the Company's Registration Statement on Form S-1 (Commission File No.
333-92451). Pursuant to this Registration Statement, the Company completed an
initial public offering which closed on March 8, 2000, of 4,427,500 shares of
its common stock (including 577,500 shares sold pursuant to the exercise of the
Underwriters' over-allotment option) at an initial public offering price of
$24.00 per share ("the Offering"). The Offering was managed by Thomas Weisel
Partners LLC, Dain Rauscher Incorporated, SG Cowen Securities Corporation and
DLIdirect Inc. Proceeds to the Company, after calculation of the underwriters
discount and commission, from the Offering totaled approximately $96.7 million,
net of other Offering costs of approximately $2.2 million, none of which were
paid to our directors or officers, or to any person owning more than 10% of any
class of our equity securities. Upon completion of the offering, the Company's
preferred stock was converted into 26,950,287 shares of common stock. Upon
conversion of the preferred stock, all rights to accrued and unpaid dividends
were waived.
Versata has invested the net proceeds from its initial public offering
of common stock in interest bearing investment grade instruments. We expect to
use the net proceeds primarily to fund working capital, technology and product
development and sales and marketing. None of the net proceeds of our initial
public offering were paid to any of our directors or officers, or to any person
owning 10% or more of any class of our equity securities.
Page 23 of 26
<PAGE> 24
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
By written consent dated as of February 21, 2000, our stockholders
approved the following proposals:
- - A proposal to approve our reincorporation in the State of Delaware;
- - A proposal to approve the adoption of our 2000 Stock Incentive Plan as
the successor to the 1997 Stock Option Plan;
- - A proposal to approve the adoption of our Employee Stock Purchase Plan;
- - A proposal to approve the form of Indemnity Agreement for use as an
agreement between Versata and each of our executive officers and
directors; and
- - A proposal to approve the Amended and Restated Certificate of
Incorporation and the Amended and Restated Bylaws of Versata Delaware.
The written consent was given by holders of 25,971,608 shares or 76.1%
of the Company's common stock on an as converted basis. Holders of 8,147,196
shares, or 23.9% of the Company's common stock on an as converted basis,
abstained.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are included herein:
NUMBER DESCRIPTION
------ -----------
3.1 Amended and Restated Certificate of Incorporation of
Versata (incorporated by reference to Exhibit 3.1 to
Versata's Registration Statement on Form S-1
(Registration No. 333-92451)).
3.2 Amended and Restated Bylaws Versata (incorporated by
reference to Exhibit 3.2 to Versata's Registration
Statement on Form S-1 (Registration No. 333-92451)).
27.1 Financial Statement Data
(b) Reports on Form 8-K: None.
Page 24 of 26
<PAGE> 25
VERSATA, INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
VERSATA, INC.
Date: May 15, 2000 /s/ JOHN A. HEWITT, JR
--------------------------------------
John A. Hewitt Jr.
President, Chief Executive Office and
Director
/s/ KEVIN B. FERRELL
--------------------------------------
Kevin B. Ferrell
Chief Financial Officer
Page 25 of 26
<PAGE> 26
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Page No. Description
- ----------- -------- -----------
<S> <C> <C>
3.1 Amended and Restated Certificate of
Incorporation of Versata (incorporated by
reference to Exhibit 3.1 to Versata's
Registration Statement on Form S-1
(Registration No. 333-92451)).
3.2 Amended and Restated Bylaws Versata
(incorporated by reference to Exhibit 3.2 to
Versata's Registration Statement on Form S-1
(Registration No. 333-92451)).
27.1 Financial Data Schedule
</TABLE>
Page 26 of 26
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM (A) VERSATA,
INC. FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
(B) FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 110,829
<SECURITIES> 0
<RECEIVABLES> 10,314
<ALLOWANCES> 913
<INVENTORY> 5
<CURRENT-ASSETS> 124,799
<PP&E> 5,540
<DEPRECIATION> 2,201
<TOTAL-ASSETS> 131,530
<CURRENT-LIABILITIES> 21,346
<BONDS> 0
0
0
<COMMON> 40
<OTHER-SE> 109,880
<TOTAL-LIABILITY-AND-EQUITY> 131,530
<SALES> 10,106
<TOTAL-REVENUES> 10,106
<CGS> 5,672
<TOTAL-COSTS> 5,672
<OTHER-EXPENSES> 24,935
<LOSS-PROVISION> 376
<INTEREST-EXPENSE> 20
<INCOME-PRETAX> (20,212)
<INCOME-TAX> 0
<INCOME-CONTINUING> (20,212)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (20,212)
<EPS-BASIC> (1.33)
<EPS-DILUTED> (1.33)
</TABLE>
