<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 September 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
Commission file number 000-29757
VERSATA, INC.
(Exact name of registrant as specified in its charter)
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)
(510) 238-4100
(Registrant's telephone number, including area code)
------------------
Not Applicable
(Former name, former address and former fiscal year, if changed
since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
As of September 30, 2000, the total number of outstanding shares of the
Registrant's common stock was 40,750,075.
<PAGE> 2
INDEX
<TABLE>
<CAPTION>
PAGE NUMBER
-----------
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets at September 30, 2000 and December 31,
1999 ........................................................................... 3
Condensed Consolidated Statements of Operations for the Three and Nine Months
ended September 30, 2000 and 1999 .............................................. 4
Condensed Consolidated Statements of Cash Flows for the Nine Months ended
September 30, 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 .................................................................. 8
Item 3. Quantitative and Qualitative Disclosures about Market Risk ............. 19
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds .............................. 19
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>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
VERSATA, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
------------- ------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ................................. $ 48,026 $ 20,655
Short-term investments .................................... 40,003 --
Accounts receivable, net of allowance of $1,958 at
September 30, 2000 and $886 at December 31, 1999 ..... 14,143 5,587
Unbilled receivables ...................................... 4,178 1,584
Prepaid expenses and other current assets ................. 3,356 2,311
--------- --------
Total current assets ............................. 109,706 30,137
Property and equipment, net .................................... 6,556 1,902
Notes receivable from related parties .......................... 176 134
Intangible assets .............................................. 2,190 1,389
Other assets ................................................... 1,239 98
--------- --------
Total assets ..................................... $ 119,867 $ 33,660
========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable .......................................... $ 5,823 $ 2,025
Accrued expenses .......................................... 9,486 7,298
Deferred revenue .......................................... 8,031 4,433
Current portion of long-term debt ......................... 146 166
--------- --------
Total current liabilities ........................ 23,486 13,922
Long-term debt, less current portion ........................... 239 320
--------- --------
Total liabilities ................................ 23,725 14,242
Stockholders' equity:
Convertible preferred stock ............................... -- 26
Common stock .............................................. 41 7
Additional paid-in capital ................................ 221,045 89,905
Notes receivable from stockholders ........................ (4,234) (2,413)
Unearned stock-based compensation ......................... (18,426) (14,732)
Accumulated other comprehensive gain ...................... 48 --
Accumulated deficit ....................................... (102,332) (53,375)
--------- --------
Total stockholders' equity ....................... 96,142 19,418
--------- --------
Total liabilities and stockholders' equity ....... $ 119,867 $ 33,660
========= ========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
<PAGE> 4
VERSATA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
---------------------- -----------------------
2000 1999 2000 1999
-------- ------- -------- --------
<S> <C> <C> <C> <C>
Revenue:
Software license ................................................. $ 8,572 $ 1,673 $ 18,785 $ 3,733
Services and other fees .......................................... 9,031 1,496 22,799 3,683
-------- ------- -------- --------
Total revenue .............................................. 17,603 3,169 41,584 7,416
Cost of revenue:
Software license ................................................. 376 122 791 375
Services (exclusive of stock-based compensation
of $1,148 and $93, for the three months ended
September 30, 2000 and 1999 respectively, and $6,966
and $256 for the nine months ended September 30,
2000 and 1999 respectively) .................................... 8,392 1,486 21,466 3,780
-------- ------- -------- --------
Total cost of revenue ...................................... 8,768 1,608 22,257 4,155
-------- ------- -------- --------
Gross profit ....................................................... 8,835 1,561 19,327 3,261
Operating expenses:
Sales and marketing (exclusive of stock-based
compensation of $2,619 and $415, for the three
months ended September 30, 2000 and 1999 respectively, and
$11,353 and $803 for the nine months ended September 30,
2000 and 1999 respectively) .................................... 12,070 4,071 33,752 9,064
Product development (exclusive of stock-based
compensation of $541 and $148, for the three
months ended September 30, 2000 and 1999 respectively, and
$2,459 and $322 for the nine months ended September 30,
2000 and 1999 respectively) .................................... 2,740 1,082 6,763 3,033
General and administrative (exclusive of stock-based
compensation of $185 and $53, for the three
months ended September 30, 2000 and 1999 respectively, and
$1,524 and $111 for the nine months ended September 30,
2000 and 1999 respectively) .................................... 3,285 864 8,334 1,967
Stock-based compensation ......................................... 4,493 709 22,302 1,492
Amortization of intangibles ...................................... 233 -- 660 --
-------- ------- -------- --------
Total operating expenses ................................... 22,821 6,726 71,811 15,556
Loss from operations ............................................... (13,986) (5,165) (52,484) (12,295)
Interest income (expense), net ..................................... 1,487 (442) 3,771 (449)
Other non-operating expenses ....................................... (244) -- (244) --
-------- ------- -------- --------
Net loss ........................................................... $(12,743) $(5,607) $(48,957) $(12,744)
======== ======= ======== ========
Basic and diluted net loss per share ............................... $ (.33) $ (1.24) $ (1.61) $ (4.06)
======== ======= ======== ========
Weighted average common shares used in computing basic
and diluted net loss per share ................................... 38,424 4,505 30,361 3,140
======== ======= ======== ========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
<PAGE> 5
VERSATA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
------------------------
2000 1999
--------- --------
<S> <C> <C>
Cash flows used in operating activities:
Net loss ........................................................................ $ (48,957) $(12,744)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization .......................................... 1,651 360
Provision for doubtful accounts ........................................ 1,072 530
Warrants issued in connection with bridge loans recorded as
interest expense ...................................................... -- 521
Stock-based compensation expense ....................................... 22,302 1,492
Changes in operating assets and liabilities:
Accounts receivable .................................................... (9,628) (5,374)
Unbilled receivables ................................................... (2,594) (1,510)
Prepaid expenses and other current assets .............................. (1,011) (288)
Other assets ........................................................... (1,141) (69)
Accounts payable and accrued expenses .................................. 5,986 2,525
Deferred revenue ....................................................... 3,598 3,207
Other liabilities ...................................................... -- (112)
--------- --------
Net cash used in operating activities .............................. (28,722) (11,462)
--------- --------
Cash flows used in investing activities:
Purchase of short-term investments .............................................. (40,001) --
Purchase of property and equipment .............................................. (5,672) (812)
Increase in notes receivable from related parties ............................... (42) --
Net cash used in connection with acquisitions ................................... (101) --
Purchase of intangible assets ................................................... (250) --
--------- --------
Net cash used in investing activities .............................. (46,066) (812)
--------- --------
Cash flows from financing activities:
Principal payments on capital lease obligations ................................. (63) (57)
Proceeds from bridge loan ....................................................... -- 3,000
Principal payments on equipment loan ............................................ (68) (250)
Net proceeds from issuance of convertible preferred stock ....................... 1,500 11,930
Net proceeds from issuance of common stock ...................................... 96,654 174
Proceeds from issuance of common stock under employee stock purchase plan ....... 1,773 --
Proceeds from exercise of stock warrants and options ............................ 2,331 36
Repurchase of common stock from stockholder ..................................... (6) --
Payments from stockholders on notes receivable .................................. 642 14
Loan provided to stockholder for founder shares ................................. (650) --
--------- --------
Net cash provided by financing activities .......................... 102,113 14,847
Effects of exchange rate changes on cash and cash equivalents ...................... 46 --
--------- --------
Net increase (decrease) in cash and cash equivalents ............... 27,371 2,573
Cash and cash equivalents at beginning of the period ............................... 20,655 5,767
--------- --------
Cash and cash equivalents at end of the period ..................................... $ 48,026 $ 8,340
========= ========
Supplemental disclosure of non-cash investing and financing activities:
Common stock issued for notes receivable from stockholders ......................... $ 1,813 $ 667
========= ========
Conversion of preferred stock to common stock on the date of public offering ....... $ 26 $ --
========= ========
Issuance of convertible preferred stock in connection with acquisition ............. $ 1,087 $ --
========= ========
Issuance of convertible preferred stock upon conversion and cancellation of
bridge loans and accrued interest ................................................ $ -- $ 3,058
========= ========
Property and equipment obtained through capital lease .............................. $ 30 $ 49
========= ========
Other supplemental cash flow disclosures:
Cash paid during the period for interest ........................................... $ 48 $ 53
========= ========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
<PAGE> 6
VERSATA, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. The Company
Versata, Inc. (the "Company" or "Versata") was incorporated on August
27, 1991. The predecessor of the Company reincorporated in the State of Delaware
on February 24, 2000. The Company is a global provider of E-Business Automation
System application software and services that enable businesses and other large
organizations to create, rapidly deploy and modify software applications for
intranets, extranets and the Internet. The Company markets its software
worldwide and has sales offices in the United States, Canada, United Kingdom,
Germany, France, and Hong Kong.
The condensed consolidated financial statements include the accounts of
Versata, Inc. and its subsidiaries, all of which are wholly owned, located in
North America, Europe and Asia. All intercompany accounts and transactions have
been eliminated in consolidation. Versata, Inc. and its subsidiaries are
collectively referred to as the "Company" or "Versata."
2. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with accounting principles generally accepted
in the United States for interim financial information and with the instructions
to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include
all financial information and disclosures required by accounting principles
generally accepted in the United States for complete financial statements.
However, the Company believes that the disclosures are adequate to make the
information presented not misleading. The condensed financial statements should
be read in conjunction with the financial statements and the notes thereto
included in the Company's Registration on Form S-1. In the opinion of
management, these condensed financial statements include all adjustments
(consisting only of normal recurring adjustments) necessary for a fair
presentation of the results of operations for the interim periods reported and
of the financial condition of the Company as of the date of the interim balance
sheet. The results of operations for the interim periods are not necessarily
indicative of the results to be expected for the full year.
3. Summary of Significant Accounting Policies
Revenue Recognition
The Company derives revenue from two sources as follows: (i) software
license and maintenance revenue to end users, VARs, system integrators and OEMs
and (ii) service revenue which includes consulting, training services and
customer support. Effective January 1, 1998, the Company adopted SOP 97-2,
Software Revenue Recognition, with the exception of the provision deferred by
SOP 98-4, Deferral of the Effective Date of a Provision of SOP 97-2. In
accordance with the adopted provisions of SOP 97-2, the Company records revenue
from licensing of software products to end-users when a license agreement is
signed by both parties, the fee is fixed and determinable, collection is
probable and delivery of the product has occurred. Generally, the Company
provides payment terms that range from thirty days to ninety days from the
invoice date. Accordingly, payment terms that exceed ninety days are not
considered fixed and determinable and revenue is recognized as payments become
due. When contracts contain multiple elements, and for which vendor specific
objective evidence ("VSOE") of fair value exists for the undelivered elements,
the Company recognizes revenue for the delivered elements based upon the
residual contract value as prescribed by SOP 98-9, Modifications of SOP 97-2,
Software Revenue Recognition. Undelivered elements consist primarily of post
contract customer support ("PCS") and other services such as consulting,
mentoring and training. Services are not generally considered essential to the
functionality of the software. The Company recognizes revenue allocated to
maintenance and support ratably over the period of the maintenance and the
support contracts, respectively, which is generally twelve months. For revenue
related 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. Revenue is
recognized on a sell-through basis when the software is sold by the OEM, VAR or
system integrator to an end-user customer.
6
<PAGE> 7
Earnings per Share
Basic earnings per share is calculated based on the weighted average
number of common shares outstanding and excludes any dilutive effects of
warrants, stock options, common stock subject to repurchase or other types of
securities. Diluted earnings per share excludes potential common stock if their
effect is anti-dilutive.
The following table sets forth the computation of basic and diluted net
loss per share (in thousands, except per share data):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- -----------------------
2000 1999 2000 1999
-------- ------- -------- --------
<S> <C> <C> <C> <C>
Numerator:
Net Loss ............................................. $(12,743) $(5,607) $(48,957) $(12,744)
======== ======= ======== ========
Denominator:
Weighted average shares outstanding .................. 40,613 6,414 32,708 4,087
Weighted average unvested shares of common stock
subject to repurchase .......................... (2,189) (1,909) (2,347) (947)
-------- ------- -------- --------
Denominator for basic and diluted calculation ........ 38,424 4,505 30,361 3,140
======== ======= ======== ========
Basic and diluted net loss per share ................... $ (.33) $ (1.24) $ (1.61) $ (4.06)
======== ======= ======== ========
</TABLE>
The following table sets forth potential shares of common stock that are
not included in the diluted net loss per share calculation above because to do
so would be antidilutive for the periods presented (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------- --------------------
2000 1999 2000 1999
------ ------- ------- -------
<S> <C> <C> <C> <C>
Weighted average effect of common stock equivalents:
Unvested common stock subject to repurchase ....................... $2,189 $ 1,909 $ 2,347 $ 947
Options outstanding ............................................... 6,882 2,600 6,718 4,555
Shares resulting from the conversion of the:
Series A convertible preferred stock ............................ -- 1,480 1,500 1,480
Series B convertible preferred stock ............................ -- 4,403 4,403 4,403
Series C convertible preferred stock ............................ -- 6,209 6,278 6,206
Series D convertible preferred stock ............................ -- 6,983 6,991 6,983
Series E convertible preferred stock ............................ -- 3,442 4,510 1,147
Series F convertible preferred stock ............................ -- -- 3,239 --
Warrants to purchase convertible preferred stock .................. -- 305 100 220
Warrants to purchase common stock ................................. -- 615 238 615
------ ------- ------- -------
Total common stock equivalents excluded from the computation
of earnings per share as their effect is antidilutive ......... $9,071 $27,946 $36,324 $26,556
====== ======= ======= =======
</TABLE>
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, Accounting for Derivative Instruments and Hedging Activities. SFAS No. 133
establishes a new model for accounting for derivatives and hedging activities
and supercedes and amends a number of existing accounting standards. SFAS No.
133 requires that all derivatives be recognized in the balance sheet at their
fair market value and the corresponding derivative gains or losses be either
reported in the statement of operations or as a deferred item depending on the
type of hedge relationship that exists with respect to any derivatives. In July
1999, the Financial Accounting Standards Board issued SFAS No. 137, Accounting
for Derivative Instruments and Hedging Activities -- Deferral of the Effective
Date of FASB Statement No. 133. SFAS No. 137 deferred the effective date until
fiscal years commencing after June 15, 2000. The Company will adopt SFAS No. 133
in its quarter ending March 31, 2001. The Company does not believe that the
pronouncement will have a material impact on its financial condition or results
of operations as currently conducted.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin (SAB) No. 101, Revenue Recognition in Financial Statements.
The SAB ("SEC") formalizes positions the staff has expressed in speeches and
comment letters. In June 2000, the SEC issued SAB No. 101B to defer the
effective date and implementation of SAB No. 101 until the fourth quarter of
fiscal 2000. The Company is presently analyzing the impact, if any, that the
adherence to the SAB will have on its financial condition or results of
operations.
In March 2000, the Financial Accounting Standards Board ("FASB") issued
FASB Interpretation No. 44, Accounting for Certain Transactions Involving Stock
Compensation -- an Interpretation of APB Opinion No. 25, this interpretation has
provisions that are effective on
7
<PAGE> 8
staggered dates, some of which began after December 15, 1998 and other that
become effective after June 30, 2000. The Company does not believe that the
adoption of this interpretation will have a material impact on its financial
condition or results of operations.
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 closure 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
$1,188,000. The acquisition was completed through the issuance of 72,000 shares
of the Company's Series F preferred stock and $101,000 in cash consideration.
The acquisition has been accounted for by using the purchase method of
accounting and accordingly, the purchase price has been allocated to the
tangible and intangible assets acquired on the basis of their relative values on
the acquisition date. The Company did not assume any liability with respect to
these acquisitions. The total purchase price was allocated to goodwill with an
estimated life of 36 months.
6. Comprehensive Income
Total comprehensive loss was $13.0 million and $5.6 million for the
quarters ended September 30, 2000 and 1999, respectively, and $48.9 million and
$12.7 million for the nine-month periods ended September 30, 2000 and 1999,
respectively. Total comprehensive loss consists of net loss, the net changes in
foreign currency translation adjustment and the net unrealized gains and losses
on available-for-sale securities.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following Management's Discussion and Analysis of Financial
Condition and Results of Operations of Versata should be read in conjunction
with the condensed consolidated financial statements of Versata and notes
thereto included elsewhere in this Form 10-Q. This discussion contains
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These
forward-looking statements are based on current expectations, assumptions and
projections and entail various risks and uncertainties including those set forth
below under "Risk Factors That May Affect Future Results," that could cause
actual results to differ materially from those projected in the forward-looking
statements.
OVERVIEW
We provide a comprehensive suite of software and services that enable
our customers to rapidly deploy e-business software applications that can be
modified quickly to meet constantly changing business requirements. From our
incorporation in August 1991 through December 1994, we were a professional
services company and generated revenue from technical consulting projects. In
January 1995, we commenced development efforts on our initial software products,
from which we generated revenue from late 1995 through early 1998. In September
1996, we began development of our first Web-based software product, which we
began shipping commercially in September 1997. In September 1998, we introduced
the first generation of what is now our Versata E-Business Automation System. To
date, we have licensed our products and provided services to over 535 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 generated from the sale of
our Versata E-Business Automation System. Our software is priced on a per server
basis. Software license revenue also includes product maintenance, which
provides the customer with unspecified software upgrades over a specified term,
typically twelve months. Services revenue consists of fees from professional
services and customer support. Professional services include consulting and
training. Customers typically purchase these professional services from us to
enlist our support by way of training and mentoring activities directed at
optimizing the customer's use of our software product, generally when the sale
is made through direct sales efforts. Professional services are sold
8
<PAGE> 9
generally on a 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 updates, and revenue is recognized
ratably over the term of the agreement, typically one year, as a component of
software license revenue. We bill professional service fees generally on a
time-and-materials basis and recognize revenue as the services are performed.
Customer support revenue is recognized ratably over the term of the agreement,
typically one year. Services are not generally essential to the functionality of
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
that 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 services rendered.
As of September 30, 2000, we had deferred revenue of $8.0 million, an
increase of $3.6 million from $4.4 million as of December 31, 1999. This
increase is principally attributable to new contracts signed during the nine
month period ended September 30, 2000.
We market our products and services through our direct sales force,
consulting partners, companies that sell pre-packaged software applications,
companies that custom develop and integrate software applications and companies
that sell software applications over the Internet on a subscription services
basis, often referred to as application service providers.
Our most important strategic relationship to date has been 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 would integrate our Versata Logic Server and
Versata Studio technology with IBM's WebSphere Application Server Advanced
Edition and WebSphere Studio. Under the agreement, we both offered the new
product under our respective brand names. In September 2000, at our request we
changed our relationship with IBM by entering into a Software Remarketing
Agreement with IBM to allow IBM to resell our E-Business Automation System. As a
result, IBM now offers the product under the Versata brand name.
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
20.5% of our total revenue in the third quarter of 2000 and 8.3% of our total
revenue in the third quarter of 1999. For the nine months ended September 30,
2000, revenue from international sales represented 34.5% compared to 13% for the
same period last year. In absolute terms, our international sales revenue
increased approximately 1,264% in the third quarter of 2000 as compared to the
third quarter of 1999 and 758% in the nine months ended September 30, 2000 as
compared to the nine months ended September 30, 1999.
Our 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. Our cost
of service revenue consists of salaries of professional service personnel, and
payments to third party consultants incurred in providing customer support,
training, and consulting services. We currently generate positive gross margins
from our consulting and training services, while our fixed cost of customer
support services exceeds our revenue generated from support activities. We
expect this trend to continue for the next several quarters. Cost of services
revenue as a percentage of services revenue is likely to vary significantly from
period to period depending on overall utilization rates, the mix of services we
provide and whether these services are provided by us or by third-party
contractors.
Since our inception, we have incurred substantial costs to develop our
technology and products, to recruit and train personnel for our product
development, sales and marketing and professional services departments, and to
establish our administrative infrastructure. To date, all software development
costs have been expensed in the period incurred. Historically, our operating
expenses have exceeded the revenue generated by our products and services. As a
result, we have incurred net losses in each quarter since inception and had an
accumulated deficit of $102.3 million and $53.4 million as of September 30, 2000
and December 31, 1999, respectively. We anticipate that our operating expenses
will increase substantially in future quarters as we increase sales and
marketing operations, expand distribution channels, establish additional
domestic and international sales offices, increase product development, broaden
professional services, expand facilities and support, and improve operational
and financial systems. Consequently, there can be no assurance that we will
achieve or sustain revenue growth or profitability.
9
<PAGE> 10
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated the percentage
revenues represented by certain lines in our Condensed Consolidated Statements
of Operations:
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
------------------ -----------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenue:
Software license .................. 49% 53% 45% 50%
Services and other fees ........... 51% 47% 55% 50%
---- ---- ---- ----
Total revenue ............... 100% 100% 100% 100%
Cost of revenue:
Software license .................. 2% 4% 2% 5%
Services .......................... 48% 47% 52% 51%
---- ---- ---- ----
Total cost of revenue ....... 50% 51% 54% 56%
---- ---- ---- ----
Gross profit ........................ 50% 49% 46% 44%
Operating expenses:
Sales and marketing ............... 69% 128% 81% 122%
Product development ............... 16% 34% 16% 41%
General and administrative ........ 19% 27% 20% 27%
Stock based compensation .......... 26% 22% 54% 20%
Amortization of intangibles ....... 1% 0% 2% 0%
---- ---- ---- ----
Total operating expense ..... 131% 211% 173% 210%
---- ---- ---- ----
Loss from operations ................ (81)% (162)% (127)% (166)%
Interest income (expense) ........... 8% (14)% 9% (6)%
Other non-operating expenses ........ (1)% 0% (1)% 0%
---- ---- ---- ----
Net loss ............................ (74)% (176)% (119)% (172)%
==== ==== ==== ====
</TABLE>
REVENUE
Total revenue consists of software license revenue and services revenue.
Total revenue increased by $14.4 million, or 455%, from $3.2 million in the
third quarter of 1999 to $17.6 million in the third quarter of 2000. For the
nine months ended September 30, 2000, total revenue increased by $34.2 million,
or 461%, from $7.4 million in the same period last year to $41.6 million. These
increases were principally attributable to the continued growth in new
customers, repeat business from existing customers and rapid growth in
international markets.
Software License Revenue
Software license revenue increased by $6.9 million, or 412%, from $1.7
million in the third quarter of 1999 to $8.6 million in the third quarter of
2000. For the nine months ended September 30, 2000, software license revenue
increased by $15.1 million, or 403%, from $3.7 million in the same period last
year to $18.8 million. These increases were primarily attributable to growth in
both the number of licenses sold as well as higher average sales prices realized
for software licenses. Software license revenue also benefited from the
expansion of our distribution channels through the addition of several system
and web integration partners. As a result of the rapid growth of our
international operations, software license revenue from international sales
increased by $1.7 million or 866% from $192,000 in the third quarter of 1999 to
$1.9 million in the third quarter of 2000. For the nine months ended September
30, 2000, software license revenue from international sales increased by $3.9
million, or 476% from $813,000 in the same period last year to $4.7 million.
Services Revenue
Services revenue increased by $7.5 million, or 504%, from $1.5 million
in the third quarter of 1999 to $9 million in third quarter 2000. For the nine
months ended September 30, 2000, service revenue increased by $19.1 million, or
519%, from $3.7 million in the same period last year to $22.8 million. These
increases were attributable to growth in the number of customers and support
contracts and are also due to the expansion of our professional services
organization as a result of our hiring additional consultants.
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<PAGE> 11
Services revenue from international customers increased by $1.7 million from
$72,000 in third quarter 1999 to $1.8 million in third quarter 2000. For the
nine months ended September 30, 2000, service revenue from international
customers increased by $3.4 million, or 2,282%, from $151,000 in the same period
last year to $3.6 million.
COST OF REVENUE
Total cost of revenue consists of cost of software license revenue and
cost of service revenue. Total cost of revenue increased by $7.2 million, or
445%, from $1.6 million in the third quarter of 1999 to $8.8 million in the
third quarter of 2000. For the nine months ended September 30, 2000, total cost
of revenue increased by $18.1 million, or 436%, from $4.2 million in the same
period last year to $22.3 million. These increases were attributable to a larger
volume of sales from the same period last year.
Cost of Software License Revenue
Cost of software license revenue consists of royalty payments to third
parties for technology incorporated into our product, the cost of manuals and
product documentation, as well as packaging and distribution costs. Cost of
software license revenue increased by $254,000 or 208%, from $122,000 in the
third quarter of 1999 to $376,000 in the third quarter of 2000. For the nine
months ended September 30, 2000, cost of software license revenue increased by
$416,000, or 111%, from $375,000 in the same period last year to $791,000. These
increases were attributable to a larger volume of sales from the same period
last year.
Cost of Services Revenue
Cost of service revenue consists of salaries of professional service
personnel and payments to third party consultants incurred in providing customer
support, training, and consulting services. Cost of service revenue increased by
$6.9 million, or 465%, from $1.5 million in the third quarter of 1999 to $8.4
million in the third quarter of 2000. For the nine months ended September 30,
2000, cost of service revenue increased by $17.7 million, or 468%, from $3.8
million in the same period last year to $21.5 million. These increases were
principally due to an increase in the number of our consulting, training and
customer support personnel and due to the expansion of our consulting services
organization through additions of two consulting and training services
organizations during the first quarter of 2000.
OPERATING EXPENSES
Operating expense increased by $16.1 million, or 239%, from $6.7 million
in the third quarter of 1999 to $22.8 million in the third quarter of 2000. For
the nine months ended September 30, 2000, operating expenses increased by $56.2
million, or 362%, from $15.6 million in the same period last year to $71.8
million. The majority of these increases were due to an increase in the
amortization of unearned non-cash stock-based compensation. The balance of the
increases were due to increased investments in our sales and marketing
operations to improve our market position and expand our distribution channels.
Excluding the non-cash charges relating to stock-based compensation, operating
expense in the third quarter of 2000 was $18.3 million, a 205% increase over $6
million in operating expense in the third quarter of 1999. For the nine months
ended September 30, 2000, operating expense excluding the non-cash charges
relating to stock-based compensation increased by $35.4 million from $14.1
million in the same period last year to $49.5 million.
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 196%, from
$4.1 million in the third quarter of 1999 to $12.1 million in the third quarter
of 2000. For the nine months ended September 30, 2000, sales and marketing
expenses increased by $24.7 million, or 272%, from $9.1 million in the same
period last year to $33.8 million. These increases were attributable to growth
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
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<PAGE> 12
continue to increase in future periods as we continue to expand our sales and
marketing efforts.
Product Development
Product development expense includes costs associated with the
development of new products, enhancements to existing products, quality
assurance and technical publication activities. These costs consist primarily of
employee salaries and the cost of consulting resources that supplement our
product development teams. Product development expense increased by $1.7
million, or 153%, from $1.1 million in the third quarter of 1999 to $2.8 million
in the third quarter of 2000. For the nine months ended September 30, 2000,
product development expense increased by $3.8 million, or 123%, from $3.0
million in the same period last year to $6.8 million. These increases were
primarily attributable to increases in the number of personnel in Versata's
product development and engineering organization.
We believe that continued investment in product development is critical
to attaining our strategic objectives, and, as a result, we expect product
development expense to increase significantly in future periods. To date, all
software development costs have been expensed in the period incurred.
General and Administrative
General and administrative expense consists of salaries for executive,
finance and administrative personnel, information systems costs and allowance
for doubtful accounts. General and administrative expense increased by $2.4
million, or 280%, from $900,000 in the third quarter of 1999 to $3.3 million in
the third quarter of 2000. For the nine months ended September 30, 2000, general
and administrative expense increased by $6.3 million, or 324%, from $2 million
in the same period last year to $8.3 million. These increases were attributable
to a growing number of employees, as well as an increase in the provision for
bad debt reserve as our revenue and accounts receivable grew.
We believe general and administrative expense will increase in future
periods, as we expect to add personnel to support our expanding operations, and
incur additional costs related to the growth of our business.
Stock-Based Compensation
Stock-based compensation expense includes the amortization of unearned
employee stock-based compensation and expenses for stock granted to consultants
in exchange for services. Employee stock-based compensation expense is amortized
on an accelerated basis over the vesting period of the related options,
generally 50 months. We incurred a non-cash charge of $4.5 million for the third
quarter of 2000 as compared to $709,000 in the third quarter of 1999, related to
the issuance of stock options with exercise prices below fair market value on
the date of grant. For the nine months ended September 30, 2000, stock-based
compensation expense increased by $20.8 million, or 1,395%, from $1.5 million in
the same period last year to $22.3 million. Additional unvested outstanding
options will continue to vest over the next 44 months, which will result in
additional compensation expense of approximately $18.4 million in the aggregate
in periods subsequent to September 30, 2000, which will be charged to operations
over the next 44 months.
Amortization of Intangibles
We incurred non-cash charges of $233,000 in the third quarter of 2000
and $660,000 for the nine months ended September 30, 2000 for the amortization
of goodwill related to the acquisitions of Pragma6 in the fourth quarter of
1999, and the acquisitions of McGilly and Webink in the first quarter of 2000.
There were no such charges in the comparable periods in 1999. Goodwill of
approximately $2.2 million will continue to be charged to operations ratably
over the period of benefit, which is three years.
Interest Income (Expense), Net
Interest income (expense), net is primarily comprised of interest income
from our cash and investments. We had net expense of $442,000 for the third
quarter 1999 compared to net interest income of $1.5 million for the third
quarter of 2000. For the nine months ended September 30, 2000, net interest
income was $3.8 million, an increase of $4.2 million from net interest expense
of $449,000 in the same period last year. These increases were
12
<PAGE> 13
principally due to interest income earned from higher cash balances resulting
from our initial public offering in the first quarter of 2000.
Other Non-Operating Expenses
Other non-operating expenses consist of office relocation costs incurred
in the third quarter of 2000 in the amount of $244,000. There were no such
expenses for the comparable period in 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 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 September 30,
2000, we had $88.0 million in cash and cash equivalents and short-term
investments and $86.2 million in working capital. Net cash used in operating
activities was $28.7 million in the first nine months of 2000 and $11.5 million
in the first nine months of 1999. Net cash flows used by operating activities in
each period reflect increasing net losses, offset by non-cash expenses including
stock-based compensation, depreciation, amortization, and provision for doubtful
accounts. The use of operating cash was also impacted to a lesser extent by
changes in working capital.
Net cash used in investing activities was $46.1 million in the first
nine months of 2000 and was $812,000 in the first nine months of 1999. The
increase in cash used in investing activities during the first nine months of
2000 primarily reflects purchases of $40.0 million of short-term investments and
purchases of $5.7 million of property and equipment. Our capital expenditures
consisted of purchases of operating resources to manage our operations,
including computer hardware and software, office furniture and equipment and
leasehold improvements. We expect that our capital expenditures will continue to
increase in the future.
Net cash provided by financing activities was $102.1 million in the
first nine months of 2000 and $14.8 million in the first nine months of 1999.
Cash provided by financing activities includes net proceeds from the issuance of
preferred and common stock, including the Company's initial public offering in
March of 2000. Cash provided by financing activities in the first nine months of
1999 includes $3.0 million in borrowings.
We expect to experience continued growth in our operating expenses for
the foreseeable future to execute our business plan. We anticipate that a
portion of our cash resources will be used to expand our sales, marketing and
product development activities. In addition, we may use some cash resources to
fund acquisitions of, or investments in, complementary businesses, technologies
or product lines.
We believe that the net proceeds from the sale of common stock generated
by our initial public offering, together with funds generated from operations,
will be sufficient to meet our working capital and capital expenditure
requirements for at least the next twelve months. Thereafter, we may find it
necessary to obtain additional equity or debt financing. In the event additional
financing is required, we may not be able to raise it on acceptable terms or at
all.
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<PAGE> 14
RISK FACTORS THAT MAY AFFECT FUTURE RESULTS
WE HAVE INCURRED CONSISTENT OPERATING LOSSES SINCE OUR INCEPTION AND ARE LIKELY
TO INCUR NET LOSSES AND NEGATIVE CASH FLOWS FOR THE FORSEEABLE FUTURE
We have experienced operating losses in each quarterly and annual period
since inception, and we expect incur significant losses in the future. If our
revenue grows less than we anticipate or if our operating expenses increase more
than expected or are not reduced in the event of lower revenue, we may never
achieve profitability. 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 the year ended
December 31, 1998, and $21.8 million for the year ended December 31, 1999. As of
September 30, 2000, we had an accumulated deficit of $102.3 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
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<PAGE> 15
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.
IF OUR E-BUSINESS AUTOMATION SYSTEM AND RELATED SERVICES DO NOT ACHIEVE
WIDESPREAD MARKET ACCEPTANCE, THE SOURCE OF SUBSTANTIALLY ALL OF OUR REVENUE
WILL BE AT RISK.
We cannot predict the level of market acceptance that will be achieved
or maintained by our products and services. If either the Internet
infrastructure software market in general, or the market for our software or
related services in particular, fails to grow or grows more slowly than we
anticipate, or if either market fails to accept our products and related
services, the source of substantially all of our revenue will be at risk. We
expect to continue to derive substantially all our revenue from and be dependent
upon our E-Business Automation System and related services in the future. The
market for our E-Business Automation System and related services is new, rapidly
evolving and highly competitive, and we cannot be certain that a viable market
for our products will ever develop or be sustained. Our future financial
performance will depend in large part on the successful development,
introduction and customer acceptance of our new products, product enhancements
and related services in a timely and cost effective manner. We expect to
continue to commit significant resources to market and further develop our
E-Business Automation System and related services and to enhance the brand
awareness of our software and services.
FAILURE TO EXPAND OR GROW THE SERVICE OFFERINGS THAT COMPLEMENT OUR E-BUSINESS
AUTOMATION SYSTEM WOULD PUT AT RISK A SUBSTANTIAL COMPONENT OF OUR REVENUE.
We believe that growth in our product license revenue depends on our
ability to provide our customers with comprehensive services and to educate
third-party resellers, instructors and consultants on how to provide similar
services. These services include customer support, training, mentoring, staff
augmentation and project management services. If we fail to attract, train and
retain the skilled persons who deliver these services, our business and
operating results could be seriously harmed. We plan to increase the number of
our service personnel as well as further invest in relationships with partners
who provide similar services to customers. However, competition for qualified
service personnel is intense, and we may not be able to attract, train, retain,
or employ through acquisition, the number of highly qualified service personnel
that our business needs.
We expect our service revenue to increase in dollar amount as we
continue to provide consulting, training and customer support services that
complement our products and as our installed base of customers grows. A decline
in the price of or demand for our service offerings could put at risk a
substantial component of our revenue.
OUR MANAGEMENT MAY NOT BE ABLE TO INCREASE THE NUMBER OF OUR EMPLOYEES FAST
ENOUGH TO KEEP PACE WITH OUR GROWTH, WHICH MAY LEAD TO A FLATTENING OR DECLINE
IN OUR REVENUE.
We have expanded our operations rapidly in the last 21 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 507 as of September 30, 2000. We anticipate
continued rapid expansion of our operations in the foreseeable future to pursue
existing and potential market opportunities. This rapid growth is placing, and
will continue to place, significant demands on management and operational
resources. To be successful, we will need to:
- implement additional management information systems;
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<PAGE> 16
- improve our operating, administrative, financial and accounting
systems, procedures and controls;
- attract, train and retain new employees; and
- maintain close coordination among our executive, engineering,
professional services, accounting, finance, marketing, sales and
operations organizations.
Our growth has resulted, and any future growth will result, in increased
responsibilities for management personnel, many of who have been employed by us
for a relatively short period of time. In addition, we may not adequately
anticipate all the demands that growth may impose on our systems, procedures and
structure. Any failure to anticipate and respond adequately to these demands or
manage our growth effectively could cause our revenue to flatten or decline.
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.
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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 product licenses and services to current and new customers. Many of our
customers initially make a limited purchase of our products and services for
pilot programs. These customers may not choose to purchase additional licenses
to expand their use of our products. These and other potential customers also
may not yet have developed or deployed initial software applications based on
our products. If these customers do not successfully develop and deploy these
initial software applications, they may choose not to purchase deployment
licenses or additional development licenses. In addition, as we introduce new
versions of our products or new products, our current customers may not require
the functionality of our new products and may not license these products.
If we fail to add new customers who license our product, our services
revenue will also likely decline. Our service revenue is derived from fees for
professional services and customer support. The total amount of services and
support fees we receive in any period depends in large part on the size and
number of software licenses that we have previously sold as well as our
customers electing to renew their customer support agreements. In the event of a
downturn in our software license revenue or a decline in the percentage of
customers who renew their annual support agreements, our services revenue could
become flat or decline.
OUR LIMITED EXPERIENCE IN MANAGING A LARGE SALES FORCE MAY IMPAIR OUR ABILITY TO
EXPAND SALES AND GENERATE INCREASED REVENUE.
Until recently, we did not have a large direct sales force. Over the
past year, we have rapidly expanded our direct sales force and plan to hire
additional sales personnel commensurate with our sales objectives. We may
experience difficulty in integrating the new members of our sales team into our
operations. Our products and services require a sophisticated sales effort
targeted at the senior management of our prospective customers. Newly hired
employees will require extensive training and generally take at least nine
months to achieve full productivity. Moreover, each sales team typically
includes a sales representative, a system engineer and an inside salesperson. We
have limited experience in managing a large, expanding, geographically dispersed
sales force. In addition, we have limited experience marketing our products
broadly to a large number of potential customers. We cannot be certain that we
will be able to hire enough qualified individuals in the future or that newly
hired employees will achieve necessary levels of productivity.
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
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<PAGE> 18
proceeds from this offering;
- incur substantial debt, which may not be available on favorable terms;
- assume contingent liabilities; or
- take substantial charges in connection with the amortization of
goodwill and other intangible assets.
Acquisitions also entail numerous risks, including:
- difficulties in assimilating acquired operations, products and
personnel with our pre-existing business and operations;
- unanticipated costs;
- diversion of management's attention from other business concerns;
- adverse effects on existing business relationships with suppliers and
customers;
- risks of entering markets in which we have limited or no prior
experience; and
- potential loss of key employees from either our preexisting business
or the acquired organization.
We may not be able to successfully integrate any businesses, products,
technologies or personnel that we might acquire in the future, and our failure
to do so could harm our business and operating results.
OUR STOCK PRICE MAY FLUCTUATE WIDELY.
Prior to our initial public offering in March 2000, there was no public
market for our common stock. The market price of our common stock has fluctuated
substantially since our initial public offering. It may continue to fluctuate
substantially as a result of:
- quarterly fluctuations in operating results;
- announcements of new products or product enhancements by us or our
competitors;
- technological innovations by us or our competitors;
- general market conditions or market conditions specific to our
industry or our customers' industries;
- changes in earnings estimates or recommendations by analysts; and
- amendments to the lock-up agreements between the underwriters of our
initial public offering and certain of our stockholders.
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.
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Over time, we may require additional financing for our operations.
Additionally, we periodically review other companies' product lines and
technologies for potential acquisition. Any material acquisitions or joint
ventures could require additional financing. This additional financing may not
be available to us on a timely basis if at all, or, if available, on terms
acceptable to us. Moreover, additional financing may cause dilution to existing
stockholders.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Versata is exposed to a variety of risks, including changes in interest
rates affecting the return on its investments and, to a lesser extent, foreign
currency fluctuations. In the normal course of business Versata establishes
policies and procedures to manage its exposure to fluctuations in interest rates
and foreign currency values.
INTEREST RATE RISKS. Versata's exposure to interest rate risks results primarily
from its short-term investments. These securities have been classified as cash
equivalents when the maturity dates are less than 90 days at the date of
issuance, and as short-term investments when the maturity dates are between 90
and 365 days at the date of issuance. Versata does not believe its exposure to
interest rate risk is material given the short-term nature of its investment
portfolio. Declines in interest rates over time will, however, reduce our
interest income.
FOREIGN CURRENCY RISKS. As of September 30, 2000, Versata had operating
subsidiaries located in the United Kingdom, Germany, Belgium, Hong Kong and
France. Internationally, Versata invoices customers primarily in U.S. dollars
and we maintain only nominal foreign currency cash balances. Working funds
necessary to facilitate the short-term operations of our subsidiaries are kept
in local currencies in which they do business. We do not currently enter into
foreign currency hedge transactions. Through September 30, 2000, foreign
currency fluctuations have not had a material impact on our financial position
or results of operations.
PART II
OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(a) Sales of Unregistered Securities
During the period from March 1, 2000 to May 8, 2000, employees of
Versata exercised options to purchase 73,043 shares of common stock at a
weighted average exercise price of $0.56 per share. The options were granted
pursuant to our 1997 Stock Option Plan. We sold these securities in reliance
upon Rule 701 promulgated under the Securities Act of 1933, as amended.
(b) Use of Proceeds
Versata has invested the net proceeds from its initial public offering
of common stock in interest bearing investment grade instruments. We expect to
use the net proceeds primarily to fund working capital, technology and product
development and sales and marketing. None of the net proceeds of our initial
public offering were paid to any of our directors or officers, or to any person
owning 10% or more of any class of our equity securities.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
We held our Annual Meeting of Stockholders on September 6, 2000. At the
meeting Kanwal Rekhi and Eugene Wong were elected as Class I Directors. The vote
with respect to each nominee is set for the below:
<TABLE>
<CAPTION>
Shares Shares
Voting For Withheld
---------- ----------
<S> <C> <C>
Kanwal Rekhi 25,684,312 27,738
Eugene Wong 25,683,050 29,000
</TABLE>
Additional Directors of Versata whose term of office continued after the
meeting are Gary Morgenthaler, Naren Bakshi, Donald Feddersen, John A.
Hewitt, Jr., Robert Davoli and John W. Larson.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are included herein:
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
------ -----------
<S> <C>
3.1 Amended and Restated Certificate of Incorporation of
Versata incorporated by reference to Exhibit 3.1 to
Versata's Registration Statement on Form S-1 (Registration
No. 333-92451)).
3.2 Amended and Restated Bylaws Versata (incorporated by
reference to Exhibit 3.2 to Versata's Registration
Statement on Form S-1 (Registration No. 333-92451)).
**10.1 Software Remarketing Agreement, effective September 27,
2000, between Versata and International Business Machines
Corporation.
27.1 Financial Statement Data
</TABLE>
--------------
** Confidential treatment has been requested as to certain portions of this
agreement. Such omitted confidential information has been designated by an
asterisk and has been filed separately with the Securities and Exchange
Commission pursuant to Rule 24b-2 under the Securities Exchange Act of 1934,
as amended, pursuant to an application for confidential treatment.
(b) Reports on Form 8-K: None.
20
<PAGE> 21
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: November 14, 2000 /s/ JOHN A. HEWITT, JR
------------------------------------
John A. Hewitt Jr.
President, Chief Executive Officer
and Director
/s/ KEVIN B. FERRELL
------------------------------------
Kevin B. Ferrell
Chief Financial Officer
21
<PAGE> 22
EXHIBIT INDEX
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
------ -----------
<S> <C>
3.1 Amended and Restated Certificate of Incorporation of
Versata (incorporated by reference to Exhibit 3.1 to
Versata's Registration Statement on Form S-1 (Registration
No. 333-92451)).
3.2 Amended and Restated Bylaws Versata (incorporated by
reference to Exhibit 3.2 to Versata's Registration
Statement on Form S-1 (Registration No. 333-92451)).
**10.1 Software Remarketing Agreement, effective September 27,
2000, between Versata and International Business Machines
Corporation.
27.1 Financial Statement Data
</TABLE>
--------------
** Confidential treatment has been requested as to certain portions of this
agreement. Such omitted confidential information has been designated by an
asterisk and has been filed separately with the Securities and Exchange
Commission pursuant to Rule 24b-2 under the Securities Exchange Act of 1934,
as amended, pursuant to an application for confidential treatment.
22
