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UNITED STATES OF AMERICA
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
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(Mark One)
[ ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
OR
[X] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the ten months ended October 31, 2001
Commission file number: 0-29757
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.)
300 Lakeside Drive
Suite 1500
Oakland, CA 94612
(510) 238-4100
(Address including zip code, of principal executive offices and
Registrant's telephone number including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.001 par value
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of voting stock held by non-affiliates of the
registrant as of March 20, 2002 was $23,475,345 based on the last reported sale
price of the registrant's common stock as reported by the Nasdaq National Market
for the last trading day prior to that date.
On March 20, 2002, 44,078,124 shares of the registrant's common stock were
outstanding.
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VERSATA, INC.
FORM 10-K
For The Ten Months Ended October 31, 2001
TABLE OF CONTENTS
Page
----
PART I
Item 1. Business........................................................................................................ 3
Item 2. Properties...................................................................................................... 19
Item 3. Legal Proceedings............................................................................................... 19
Item 4. Submission of Matters to a Vote of Security Holders............................................................. 19
PART II
Item 5. Market for Registrant's Common Stock and Related Stockholder Matters............................................ 20
Item 6. Selected Financial Data and Supplementary Data.................................................................. 20
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations........................... 21
Item 7A. Quantitative and Qualitative Disclosures About Market Risk...................................................... 31
Item 8. Financial Statements and Supplementary Data..................................................................... 33
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure............................ 33
PART III
Item 10. Directors and Executive Officers of the Registrant.............................................................. 34
Item 11. Executive Compensation.......................................................................................... 36
Item 12. Security Ownership of Certain Beneficial Owners and Management.................................................. 40
Item 13. Certain Relationships and Related Transactions.................................................................. 41
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K................................................ 42
Signatures............................................................................................................... 44
2
FORWARD-LOOKING STATEMENTS
In addition to historical information, this report on Form 10-K contains
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. These statements are subject to risks and
uncertainties and are based on the beliefs and assumptions of management of the
Company, based on the information currently available to the Company's
management. These statements may contain words such as "expects," "anticipates,"
"intends," "plans," "believes," "estimates," or other words indicating future
results. These statements are based on judgments with respect to, among other
things, information available to us, future economic, competitive and market
conditions and future business decisions. All are difficult or impossible to
predict accurately and many of which are beyond our control. Accordingly,
although we believe that the assumptions underlying the forward-looking
statements are reasonable, any such assumption could prove to be inaccurate and
therefore there can be no assurance that the results contemplated in the
forward-looking statements will be realized. Factors that could cause or
contribute to these differences include, but are not limited to, those discussed
in the sections entitled "Risk Factors That May Affect Future Results" and
"Management's Discussion and Analysis of Financial Position and Results of
Operation." We undertake no obligation to revise or publicly release the results
of any revision to these forward-looking statements. Given these risks and
uncertainties, readers are cautioned not to place undue reliance on the
forward-looking statements.
PART I
Item 1. Business
Overview
Versata, Inc. was incorporated in California on August 27, 1991, and was
reincorporated in the State of Delaware on February 24, 2000. Versata, Inc.
("Versata" or the "Company") provides a way for companies to manage the logic in
their business systems at the business level, rather than at the code level.
In today's "e-Business" world, for a company to take a business idea from
conception to reality, it must have a responsive software infrastructure that
provides the most flexibility with the best performance. Out of this need has
arisen the Service Oriented Architecture ("SOA") leveraging a Java 2 Enterprise
Edition ("J2EE") application server like IBM WebSphere or BEA WebLogic. The SOA
is comprised of six layers: presentation, process, transactions, data logic,
integration, & the back-office value chain (financial, customer, and resource
management systems). The middle layers of this architecture, process,
transactions, & data logic, are called the business logic layers. Versata
provides the most productive solution for creating, managing, reusing, and
executing these business logic layers.
Versata fundamentally changes the way that a company manages its business
logic. Traditional development & execution approaches follow these steps;
business analysts document the business logic as application requirements; these
requirements are then used by the programmers to draw models, sketch out
psuedo-code, and write programs that are intended to meet the original
specifications; and, these programs are then integrated with the rest of the
company's infrastructure resources and deployed to a production environment.
With Versata, the middle-steps are eliminated: the business analyst specifies
the business logic, and that business logic is executed by the Versata server.
This fundamental difference enables companies to react faster to business
demands by developing applications faster and change applications as the
business changes. This can be accomplished using existing IT resources rather
than hiring expensive Java consultants.
Versata's solution is well suited for large, enterprise applications with
multiple data sources and database tables, multiple user interfaces, with
complex business transactions used by thousands of users. Many applications
built today are departmental in nature and don't require the power of Versata;
for those we recognize that hand-coding Java is an acceptable solution. But,
when the system is mission-critical to a company's operations and supports
thousands of transactions, more power and productivity is needed, and this is
where Versata fits best.
Our objective is to establish the Versata Logic Suite as an extension to the
leading application servers for managing a company's business logic. We intend
to do this by extending our technology leadership, continuing to grow our
multi-channel distribution network, and leveraging our technology alliances.
We market our products primarily through a direct sales force in the United
States and in Europe. We also work with a network of consulting and systems
integration partners, companies selling pre-packaged software applications,
companies developing and
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integrating custom software applications, and companies selling software
applications over the Internet on a subscription services basis. These companies
are trained in Versata's technology to provide the knowledge and resources
necessary to rapidly deploy a Versata-based solution.
An important element of our sales and marketing strategy is to leverage
relationships with key technology and business partners. Our most important
strategic relationship to date has been with IBM. Our strategic marketing, sales
and development relationship with IBM provided a single product offering that
integrated our software with IBM's WebSphere(R) Application Server Advanced
Edition on an OEM basis. In September 2000, at our request, we changed our
relationship with IBM by entering into a software re-marketing agreement with
IBM to allow them to resell some of our products. As a result, IBM now offers
the Versata Logic Suite product under the Versata brand name through IBM's
Passport Advantage Program, IBM's volume licensing program. Versata product
availability on Passport Advantage eliminates special handlings, such as
separate contracts with Versata for license maintenance and support. Versata
expects that this arrangement will improve Versata's visibility within IBM and
may help increase the volume of software sold through IBM.
Versata has also entered into agreements with leading technology companies
such as ILOG and MetaMatrix. In addition, we have continued to invest in our
alliances with BEA and Rational Software. Our network of technology partners
provides complementary solutions to Versata's products.
We also offer comprehensive professional services from training, mentoring,
ROI analysis, staff augmentation and project management to complete turnkey
solution services, as well as customer support.
Versata Solution
We believe Versata Logic Suite provides the most productive solution for
delivering large, enterprise applications. Versata's approach - the declarative
creation, execution, reuse, and change of business logic (the "heart" of the
application) for a distributed Java infrastructure, provides a strategic
advantage for enterprise Information Technology (IT) shops. We believe our
solution, which consists of a comprehensive suite of software and services,
provides the following benefits to our customers:
Achieve better collaboration between business and IT organizations
Our products allow non-programmer, business-domain experts to actively
participate in and guide the translation of business requirements into
differentiated e-business software applications and processes. Developers can
reduce the time it takes to implement application changes and provide
application maintenance, enabling them to elevate their focus to new business
demands.
Reduce operating costs
Our solution improves operational efficiencies associated with application
development and maintenance by enhancing the productivity of a company's IT
resources. First, our product reduces the lines of code that needs to be
hand-written, debugged, and tested. Second, the applications that are delivered
more accurately meet the user requirements, so there are fewer change requests.
Third, existing programmers can be transitioned from other programming
technologies like Visual Basic, PowerBuilder, or COBOL, so that companies can
take advantage of the existing business domain knowledge. And, because they can
transition existing IT programmers, they can reduce the number of outside
consultants that have to be hired.
Reduce project risks
Our solution reduces the risk by taking out the error-prone translation
cycles that occur between the business user, business analyst, and the
programmer. Rather than translating the requirements, step-by-step, in Versata,
the requirements are directly executable. In addition, the use of an iterative
development approach enables the business users to identify issues sooner with
running incremental implementations, which reduce the amount of re-writing that
occurs during the project development phase.
Reduce the risk of selecting the wrong technology
Versata implements and layers its technology on top of industry standards
and migrates existing business logic to new versions of these standards. This is
important because application developers won't have to re-write their
applications as each edition of the J2EE, EJB, or other standard changes.
Versata enables a company to invest in designing and managing their business
logic without concern for the underlying technology.
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Inject agility and flexibility into business efforts
With the Versata approach, organizations employ their business logic, the
business rules and processes, to knit complex business transactions and
interactions together. This business logic penetrates far deeper into business
transactions than simply the price, availability and size of a product. They
reach into the manner, behavior patterns and conditions under which customers,
suppliers, employees and intermediaries interact. Business logic is an integral
component of and exists throughout the framework of commerce and business
transactions.
Our products enable organizations to map their business policies and
processes in the language of easy-to-understand business rules and process
models (i.e., "An account balance cannot exceed a customer's credit limit" and
"When orders exceed $30,000, send to sales manager for approval"). The Versata
"declarative business logic" approach embeds business rules and business process
into the core foundation of software applications, making it easier and quicker
to a) build those software applications and b) make system-wide changes to these
software applications once the application has been launched.
By driving key business logic, the core business rules and processes, into
the foundation of application development activities, our products address the
market need created by expensive, elongated business application development
cycles, difficulty of changing/updating applications to reflect business needs,
business manager/ IT developer collaboration issues, and complexity of
implementing large-scale, distributed Java applications.
In addition, we believe, our products facilitate rapid response to business
challenges, enabling constant innovation of processes and applications to stay
in step with technology - and ahead of competition. When changes are required to
a business application, the Versata approach allows users to systematically
implement those changes by modifying a few business rules or process models -
versus first finding, then changing, thousands of lines of programmer-developed
code. Non-programmers and business-domain experts can also actively participate
in and guide the translation of business requirements into differentiated
e-business software applications and processes.
Improve IT development staff
By making it much less complex to create and modify complicated business
applications, Versata enables companies to make their programmers more
productive in a Java-technology environment. Efficiencies associated with
developers are achieved through savings in time, re-training and outsourcing
costs. In addition, we believe our solution optimizes the use of a company's
more advanced Java developers. Rather than wasting time hand-coding every line
of an application, they can be focused on the really difficult tasks such as
custom integration and legacy interaction.
Speed time to market
Our solutions help companies shave time off application development and
maintenance. And, in the rapidly changing economy, early-to-market companies are
rewarded with increasing returns on investment. In addition, we believe
companies using our solutions can rapidly reduce their application backlog,
enabling IT to keep up with the constant demand from the business side of the
house.
Leverage standard, high-performance platforms
Our products are based on open industry standards (J2EE, EJB, XML, etc.) and
industry leading platforms such as IBM WebSphere Application Server and BEA Web
Logic Server.
Our products interact with a number of sources including leading relational
database systems, legacy software applications, and various standards-based
middleware solutions. In this way, our solution makes it possible for companies
to build and deploy new business applications using existing technology
infrastructure and systems, and with confidence that our products will prove
compatible with other infrastructures that might be installed in the future.
Strategy
Our mission is to lead Global 2000 companies seeking to build large,
distributed applications within a J2EE infrastructure to conclude that Versata
is an essential part of their Distributed Java infrastructure (J2EE and Web
Services) alongside their Application Server and Integrated Development
Environment (IDE) of choice. This strategy is based on five pillars:
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Provide an Integrated Business Logic Offering
A key differentiator for Versata is the integration of transaction and
process logic in a declarative environment. Both transaction and process logic
contribute to the value provided by Versata of allowing the business user to be
involved from the ground up, mapping his business problems effectively to the
application, and being able to see, monitor and manage the logic as a business
asset. This integrated offering is the Versata Logic Suite.
Offer Versata Logic Suite as a J2EE Infrastructure Component Plug-in
While many of our customers use and derive value from our presentation
layer, we are now selling to companies more literate in J2EE, with already
established Java Server Pages (JSP) tools for the front end. We are seen as a
mainstream J2EE vendor and as a plug-in component to a company's distributed
Java infrastructure. A part of reaching mainstream J2EE vendor status is market
visibility, which we will continue to enhance by participation in standards
groups, conferences, and other venues.
Target WebSphere Accounts who are Developing Large Applications
We believe companies developing large applications best realize our value.
Such companies are most likely found in large enterprises or Federal, State, and
Local government agencies. IBM has strong relationships in these accounts and
has an inclusive strategy with its "open" source WebSphere Studio Tooling
initiative. We intend to target IBM WebSphere customers who plan to build large
applications or are building a smaller application as the first of many within
an IT SOA.
Narrow the Market Focus
Approximately 121 companies have deployed complex applications with our
solutions. These deployments span 24 industry sectors, with no predominant
industry emerging. In 2002 we intend to narrow the market focus in three ways:
o Continue a sales and marketing focus on Independent Software Vendors
(ISVs) with the integrated Versata Logic Suite offering.
o Develop whole product offerings for up to two Target Markets - we plan
to develop an offering for a specific Line-of Business (LoB) within an
industry to gain a foothold into an account and industry, with our end
objective being to be included as a key element in the J2EE
infrastructure.
o Continually seek to leverage individual account opportunities into
tactical sales programs involving industries and/or solutions. Examples
include legacy integration with WRQ, State and Local government with
American Management Systems, Inc. and Courts applications with the
State of Utah.
Further, we intend to emphasize in the sales process the requirement of
reaching the economic buyer. In addition, we intent to initiate a longer term
strategy aimed at positioning Versata as a "Business Logic Management System,"
used by the business user to create, monitor, and manage business Logic as a
corporate strategic asset. With this strategy Versata does not leave behind the
IT organization in the pursuit of the Business user. The message is the
capability to interact at the Business Level, and execute at the IT level.
Without execution, the value diminishes to simply documentation (e.g., Computer
Aided Software Engineering (CASE)). Without operating at the business level,
system operation remains the sole purview of IT. Combining both empowers
business users, and builds bridges between IT and business users.
Customers
In 2001, we licensed our products to 61 customers worldwide for use in a
wide range of e-business software applications in diverse markets such as
financial services and insurance, telecommunications, energy, government,
manufacturing, health care, and retail, and 30 of which were new customers
including Bank of America, Fiserv, Inc., Mercator Software, Inc., Northeastern
University, Interpath, and WRQ, Inc. In addition, 31 repeat customers licensed
more software from Versata including Federal Home Loan Bank of Pittsburgh,
American Management Systems, IBM, and Micro General Corporation.
We intend to continue our sales efforts to increase both the number of new
customers and the percentage of repeat customers. We target Global 2000
companies in the U.S. or their equivalents abroad. El Paso Energy Corporation
accounted for 12% of our revenue
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for the year ended December 31, 1999; no single customer accounted for more than
10% of total revenues for the year ended December 31, 2000. British
Telecommunication accounted for 17% and Micro General Corporation accounted for
16% of our total revenues for the ten months ended October 31, 2001. The
following are examples of the application of Versata's products by selected new
and repeat customers during the ten months ended 2001:
o American Management Systems (AMS), with revenues of $1.28 billion in
2000, manages complex IT, eBusiness and systems integration projects
for 43 state governments, many federal agencies and hundreds of Fortune
500 companies. AMS used our technology to develop and deploy the
financial and tax applications in its Advantage suite, which is a host
of fully integrated Web applications for state and local government
administrative functions.
o British Telecommunications plc (BT) has increased its investment in
Versata software and maintenance to continue developing new customer
service applications to be deployed across BT's operations. In the
multi-year strategic deal, BT is employing our unique business logic
approach in automating the business logic that drives the customers'
experience with BT's operations. The Versata Logic Server is serving as
a strategic component of BT's core customer service architecture that
includes the BEA WebLogic platform. By significantly reducing the
complexity of developing and maintaining Java-based applications, BT
believes that Versata will allow them to enhance customer service by
increasing response time, reducing costs and bringing to market
additional customer products and services. Because of our ability to
create and change applications in real time, BT's initial pilot
projects have already shown significant time-to-market benefits
compared to standard Java development methods, enabling applications to
be delivered faster and gain commercial competitive advantage quicker.
o Mercator Software announced the release of their Process Integrator
1.0, based on the Versata process and workflow technology in January of
2002. Their Process Integrator graphically models and automates
business processes that coordinate human activities with enterprise
applications, corporate data, Internet resources, and trading partner
interactions. It is part of Mercator Software's intelligent business
integration solutions unifying any internal operations and connecting
them with partners and customers while leveraging current technology
investments. Over 7,000 businesses, including more than 1,100
enterprise customers in financial services, healthcare,
telecommunications, energy, utilities, manufacturing, retail, and
distribution, use Mercator software to maximize their performance.
o United Bank of California (UBOC), the third largest chartered bank in
California, has used the Versata Logic Server to build their customer
relationship management system that will allow over 700 UBOC employees
at 115 branches throughout California to significantly enhance service
to their retail and small business customers. UBOC's new system
leverages the unique business logic-based technology of the Versata
Logic Server. UBOC believes Versata allowed them to deploy its customer
relationship management system more quickly than other methods. United
California Bank was looking to transition to the new Web-centric
technologies-Java, HTML and application servers-while leveraging
existing application infrastructures. To accomplish this, UBOC used the
Versata Logic Server to automate the business logic behind the system.
The system was rolled out using Versata's CORBA edition, but was
recently upgraded to the IBM WebSphere EJB edition. The UBOC project
began the project at the end of 1999. Representative of how it helps
speed customers to market, UBOC was able to rollout phase one in
just over two months. In June 2000, a contact management system, part
of the overall customer relationship management system, was rolled out.
Along the way additional components, such as a customer survey and
mortgage applications, were quickly and easily added, highlighting the
flexibility of working with Versata's rules-based technology.
o National Wildfire Coordination Group (NWCG) has begun deployment of a
new automated dispatching system that operates using the Versata Logic
Server. NWCG agencies include: Bureau of Indian Affairs, Bureau of Land
Management, Fish and Wildlife Service, National Park Service, US Forest
Service, Tribal Council, and State Forestry Agencies. The name of the
application is ROSS, which stands for National Interagency Resource
Ordering and Status System. ROSS provides automated support to dispatch
and coordination offices for all member agencies of the NWCG. The ROSS
application will automate the current manual resource ordering and
status process. It is estimated that due to improvements in efficiency
alone, the cost savings will amount to more than $15.7 million a year.
The ROSS Project is the first information systems project to be
sponsored by the NWCG and is also the first and largest wildland fire
management information systems project of its kind in the nation. In
addition to wildland fires, the ROSS application will be used in
support of flood, hurricane, earthquake, volcanic, and other national
disaster relief efforts. Nearly 400 interagency dispatch offices
throughout the nation will operate the ROSS application. The ROSS
application, built using the Versata Logic Server (by Lockheed Martin
Information Support Services), is being used in the Rocky Mountain Area
and at the National Interagency Coordination Center (in Boise, ID).
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Products
The Versata Logic Suite provides the most productive solution for delivering
large, enterprise applications. Versata's approach - the declarative creation,
execution, reuse and change of business logic for a distributed Java
infrastructure, within IBM WebSphere and BEA WebLogic servers, provides a
strategic advantage for enterprise Information Technology (IT) shops. Following
is a current list of Versata products:
Products Description
Main Products:
Versata Logic Server The Versata Logic Server (VLS) is
an application server extension,
which manages and executes business
logic. The VLS has two core
engines, the Transaction Logic
Engine and the Process Logic
Engine.
The Versata Transaction Logic
Engine enables business rules
execution for transactional
business logic and provides a J2EE
framework for the necessary,
reusable services such as
cross-object navigation,
transaction sequencing,
event-action synchronization and
more.
The Versata Process Logic Engine is
the runtime component that enacts
business processes, routes work to
participants, and provides
integration points with external
enterprise systems. By facilitating
on-the-fly process changes,
involving external customers in the
processes, and delivering the work
to the right place at the right
time the Process Logic Engine
enables customers to maximize
business execution.
Versata Interaction Server The Versata Interaction Server
(VIS) is a stand-alone version of
the Versata Process Logic Engine
and is a process automation engine
and design environment that extends
core business processes across
people, systems and time. VIS is
sold exclusively through our ISV
Sales Channel. VIS is principally
concerned with the way activities
are planned, sequenced, delivered,
and performed over time. VIS
automates process across software
applications without programming.
Like VLS, VIS runs stand-alone or
on standard application server
platforms-- including IBM and BEA.
Supporting Products:
Versata Logic Studio The Versata Logic Studio houses the
designers for both the Transaction
Logic and Process Logic Engines.
The Transaction Logic components
start from data object designs with
business logic and rule
specifications. The Logic Studio
then compiles and deploys the data
objects as transactional components
(EJB's) into the pre-built J2EE
pattern framework hosted within the
Versata Logic Server. The Process
Logic components, defined
graphically in the language of the
business analysts as activity
diagrams or work-flows, contain the
sequences of activities,
sub-processes and transitions that
define the sequence, delivery and
execution of transactional
interactions over time, people and
systems.
Versata Presentation Server and The Versata Presentation Server
Presentation Designer provides a rich presentation
interface to VLS. It supports both
HTML and Java clients including
browsers, applets in browsers,
standalone applets, and
applications as they interact with
the Versata Logic Server. This
includes server-side state and
session management and presentation
services for HTML clients.
The Versata Presentation Designer
provides an automated,
template-based environment for
designing HTML or Java clients.
Versata JSP Integration Toolkit The Versata JSP Integration Toolkit
will allow for Java Server Pages
(JSP) developers to access Versata
resources via several different
methods: in-line Java within the
HTML of the JSP page, Java Beans,
or custom tags.
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Versata Design Adapter for Rational Rose The Versata Design Adapter for
Rational Rose allows for greater
integration with the Rose modeling
environment during development
time. The Unified Modeling Language
(UML) is the industry-standard
language for specifying,
visualizing, constructing, and
documenting object-oriented
applications by providing a
graphical representation of the
business objects and their
relationship to other business
objects. The Versata Design Adapter
for Rational Rose synchronizes the
view of the application(s) business
objects represented as a UML Class
Diagram (an analysis/high-level
design view) in Rational Rose and
their design/implementation
representation in the Versata Logic
Studio.
Services
An important component of our overall solution is our ability to provide our
customers with comprehensive professional services -- from training, mentoring,
customer support, staff augmentation and project management or rapid
requirements development to complete turnkey solution services. Through this
comprehensive suite of services, we enable our customers to automate e-business
software applications without regard for internal staffing constraints. As of
October 31, 2001, our services organization consisted of 63 professionals,
comprised of our consulting services organization and contractors, 14 of which
were in customer support and 5 in training.
Consulting Services
We provide mentoring, staff augmentation and project management services to
assist customers in developing and deploying large, enterprise applications with
multiple data sources and database tables, multiple user interfaces, with
complex business transactions used by thousands of users. Many applications
built today are departmental in nature and don't require the power of Versata;
for those we recognize that hand-coding Java is an acceptable solution. But,
when the system is mission-critical to a company's operations and supports
thousands of transactions, more power is needed and this is where we believe we
fit best.
Our services include system architecture, data modeling, system design,
software application development, testing, configuration and installation, and
performance tuning. These services can be provided at our customers' sites as
well as via remote electronic connection, offering our customers the balance
between personal interaction and speed of responsiveness.
Training Services
We offer our customers introductory and advanced training in the use of our
products. These training services are offered in several geographic locations,
either as standard public training classes located throughout the U.S. and
Europe or on-site private training classes. We price these services per course
or on a per day basis.
Customer Support
We believe that a high level of customer support services is essential to
our success. We offer a range of customer support services including business
hour telephone and e-mail support from our Oakland, Australia, German and United
Kingdom facilities, 24-hour-a-day/seven-day-a-week production system support and
on-site support on request. We also provide our customers with access to a
developers knowledge base news group, discussion groups and other repositories
of information regarding our products. Our customers typically purchase annual
customer support contracts at prices dependent upon their desired level of
customer service.
Services Partners
In addition to our internal services organization, we have relationships
with resellers, professional service organizations and global system integrators
that offer consulting, training and customer support services including IBM
Global Services, Online Business Systems, Cap Gemini, Atos Origin, and Logica,
to cooperate in the deployment of our products to customers. Our service
partners are encouraged to attend and complete a series of Versata training
courses. These relationships expose the customer base of these companies to our
software and we intend to develop them further.
Sales and Marketing
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Sales
We sell our products through a multi-channel distribution model, which
includes both direct and indirect channel sales. As of October 31, 2001, our
sales organization consisted of 49 professionals throughout North America,
Europe and the Pacific Rim. Our direct sales teams typically include a sales
representative, a solutions architect and are supported by a regional service
manager.
At the end of October 31, 2001, we had 22 quota-carrying sales teams,
including 17 direct teams and 5 indirect channel focused teams.
We utilize sales teams consisting of both sales and technical professionals
to create organization-specific proposals, presentations and demonstrations that
address the specific needs of each potential customer. Our sales model can
include a proof of concept and/or return on investment (ROI) approach to winning
competitive sales opportunities. In many of these competitive situations, the
tangible results of our proof of concept/ ROI substantiate the time-to-market
advantage, ability to support business flexibility and ease of use, which often
lead to a full project implementation.
We complement our direct sales force with channel sales through various
types of relationships that either sell, or help us sell, our products and
services. These include:
o IBM. A significant sales channel is our strategic relationship with IBM.
This includes a re-selling agreement in which the Versata Logic Suite is
available through IBM's Passport Advantage Program, IBM's volume licensing
program. Versata product availability on Passport Advantage eliminates the
special handlings, such as separate contracts with Versata for license
maintenance and support. Versata expects that this arrangement will improve
Versata's visibility within IBM and may help increase the volume of
software sold through IBM.
o System Integrator Partners. Our system integrator partners include
companies that custom develop and integrate software applications, such as
global system integrators as well as regional consulting partners. These
partners refer our products to new customers and then typically provide the
customers with consulting and system integration services. Our Systems
Integrator partners include IBM Global Services, Online Business Systems,
Cap Gemini, EDS, Atos Origin, Logica, KPMG, American Management Systems,
and Lockheed Martin Services. In 2002, we intend to expand our relationship
with System Integrator Partners.
o Independent Software Vendors and Application Service Providers (ISV/ASPs).
Our partners that sell pre-packaged software applications, often referred
to as independent software vendors, and our application service provider
partners use our software to create and maintain their integrated software
products. We typically receive a royalty from these partners for every
software sale that integrates the Versata products. Some of these partners
included Mercator Software, WRQ, Inc., Fiserv Solutions, Inc., and Cap
Gemini.
o International Distributors. Our international distributors include vendors
that sell business software products to companies in Europe, Middle East,
and Australia.
With the addition of Versata's new product release, Versata Logic Suite 5.5,
the first product on the market to combine business logic for both transaction
processing and process automation, we believe our sales teams will be able to
sell a comprehensive solution that will enable our clients to increase their
return on investment.
We have rolled out a new third party sales force automation system. This
system will provide our sales force and management with real time account data
and allow us to better manage our sales cycles. This software will also allow us
to do customized marketing to our current and prospective customers.
Marketing
We support our sales efforts through a variety of marketing initiatives
implemented through both our corporate headquarters and our regional offices.
Our marketing organization, which consisted of 9 employees as of October 31,
2001, focuses on creating market awareness for the Versata System, generating
sales leads, forming relationships with leading technology companies, promoting
our e-business automation leadership and educating industry analysts about our
solution. We conduct a variety of marketing initiatives worldwide to educate our
target market. We have engaged in marketing activities such as business
seminars, trade shows, press relations, industry analyst programs, ongoing
public relations, advisory councils, direct mailings and telemarketing, managing
and maintaining our Website, and producing and distributing sales support
materials. Our marketing organization also serves an integral
10
role in acquiring, organizing and prioritizing customer and industry feedback in
order to help provide product direction to our development organizations. We
formalized this customer-driven approach by establishing advisory council
meetings to provide forums for discussing customer needs and requirements.
Advisory council meetings provide a useful forum in which to share information,
test product concepts and collect data on customer and industry needs. We intend
to continue to pursue these programs in the future.
Product Development
The Internet infrastructure industry is characterized by extremely rapid
technological change, which requires constant attention to computing technology
trends, shifting consumer demand, and rapid product innovation.
Most of the Versata's software products are developed internally. We also
license software technology from third parties. Internal development enables us
to maintain closer technical control over the products and gives us the freedom
to designate which modifications and enhancements are most important and when
they should be implemented. Product documentation is also generally created
internally. We believe that a crucial factor in the success of a new product is
getting it to market quickly without compromising product quality. Before
releasing new software, the product undergoes extensive quality assurance and
testing.
Product development expenses, excluding stock-based compensation, totaled
approximately $3.3 million for the year ended December 31, 1998; $4.8 million
for the year ended December 31, 1999; $9.7 million for the year ended December
31, 2000; and $8.8 million for the ten months ended October 31, 2001.
As of October 31, 2001, Versata employed 52 technical professionals in
product development including quality assurance and technical documentation
positions. The Versata product development team has benefited from a low
turnover rate despite the intensely competitive environment for software
engineers.
Competition
The Internet infrastructure software market is intensely competitive,
subject to technological changes and significantly affected by new product
introductions and other market activities of industry participants. We expect
the competition in this industry to persist and intensify in the future. Our
primary competition comes from companies developing their software applications
internally using traditional programming approaches. We also compete with a
number of other sources including:
o vendors of application server development products and services such as
IBM, BEA Systems, Inc., Microsoft, Sun Microsystems, Inc. and Oracle
Corporation;
o vendors of traditional workflow and process applications such as
FileNet, Saviion and Fujitsu;
o vendors of Web integrated development environments such as IBM,
Borland, and WebGain; and
o companies that market business application software such as Oracle
Corporation, PeopleSoft, and SAP.
We believe that the principal competitive factors in our market are:
o product functionality and features;
o ease of product implementation;
o responsiveness to business and technical changes;
o performance, scalability and availability;
o use of standards-based technology;
o ease of integration with customers' existing legacy data, software
applications and middleware computing infrastructure;
o quality of professional services offerings;
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o quality of customer support services;
o price; and
o Company reputation.
Although we believe that we currently compete favorably with respect to most
of these factors, our market is just reaching the mainstream customer and is
evolving rapidly. We may not be able to maintain our competitive position
against current and potential competitors, especially those with greater
financial, sales, marketing, professional services, technical support, training
and other resources. The risks associated with competition are more fully
discussed in the "Risk Factors" section contained below in this Item 1 of this
Report.
Intellectual Property and Licensing
Intellectual Property
We rely on a combination of patent, copyright, trademark, trade secret laws
and licensing arrangements to establish and protect our intellectual property.
These legal protections afford only limited protection for our technology, and
we cannot provide any assurance that other companies will not develop
technologies that are similar or superior to our technology. If we fail to
protect our proprietary technology, our business could be seriously harmed.
We currently have a U.S. patent relating to our automated development tool
that uses a drag-and-drop metaphor. This patent is scheduled to expire on April
9, 2016. In addition, we have a U.S. patent pending relating to our business
rules automation in database application development and maintenance. It is
possible that other companies could successfully challenge the validity or scope
of our patents and that our patents may not provide a competitive advantage to
us. We cannot predict whether this patent application will result in an issued
patent, or if a patent is issued, whether it will provide any meaningful
protection. We enforce our trademark, service mark and trade name rights. We
have used and applied to register certain trademarks to distinguish our products
from those of its competitors in the U.S. and abroad. Furthermore, as part of
our proprietary protection procedures, we enter into non-disclosure agreements
with our employees, customers, distributors and business partners and into
license agreements with respect to our software, documentation and other
proprietary information. We further seek to avoid disclosure of our intellectual
property by restricting access to our source code. Despite these precautions,
third parties could copy or otherwise obtain and use our products or technology
without authorization, or develop similar technology independently. In addition,
the laws of many countries do not protect our proprietary rights to as great an
extent as do the laws of the U.S.
Currently, we are not aware of any pending claims that our products,
trademarks or other proprietary rights infringe upon the proprietary rights of
third parties. While we rely on patent, copyright, trademark, trade secret laws
and contractual restrictions to protect our technology, we believe that factors
such as the creativity and technological skills of our personnel, new product
developments, frequent product enhancements and reliable customer service and
product maintenance are more essential to establishing and maintaining a
technology leadership position. See the "Risk Factors" section under Item 1 for
a discussion of the risks associated with proprietary rights.
Third Party Licensing
We integrate third-party software into our products. While we believe that
alternative sources of such third-party software is available and based upon
past experience and standard industry practice such licenses generally could be
obtained on commercially reasonable terms, any significant interruption in the
supply of such products could adversely impact our sales of our Products unless
and until we could secure another supplier.
International Operations
We have established international subsidiaries, namely in the British Virgin
Islands, Canada, United Kingdom, Hong Kong, Germany, Australia, France, and
India. All but one of our subsidiaries is wholly owned.
Employees
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As of October 31, 2001, we had 200 employees and 6 contractors. Of these
individuals, 58 employees and 4 contractors were in sales and marketing, 52
employees were in development and engineering services, 63 employees and 1
contractor were in professional services and customer support, and 30 employees
and 1 contractor were in finance and administration. Our employees are not
represented by any collective bargaining unit, and we believe our relations with
employees are satisfactory.
Risk Factors That May Affect Future Results
We operate in a rapidly changing environment that involves numerous risks,
some of which are beyond our control. The following discussion highlights some
of these risks.
Weakening of World Wide Economic Conditions Realized in the Internet
Infrastructure Software Market May Result in Decreased Revenues or Lower Revenue
Growth Rates.
The revenue growth of our business depends on the overall demand for
computer software, particularly in the product segments in which we compete. Any
slowdown, including the current slowdown, of the worldwide economy affects the
buying decision of corporate customers. Specifically since our sales are
primarily to Global 2000 customers, our business also depends on general
economic and business conditions within specific industries. A reduction in
demand for computer software, caused by a weakening of the economy, such as
occurred in 2001, or otherwise, has resulted in decreased revenues and lower
revenue growth rates.
The Internet Infrastructure Software Market is Highly Competitive and We May
Lose Market Share 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. 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. Furthermore, 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. If we fail to compete successfully with our competitors, the demand for
our products would decrease. Any reduction in demand could lead to loss of
market share, a decrease in the price of our products, fewer customer orders,
reduced revenues, reduced margins, and increased operating losses. These
competitive pressures could seriously harm our business and operating results.
New Versions and Releases of Our Products May Contain Errors or Defects and
Result in Loss of Revenue.
The software products we offer are complex and, despite extensive testing
and quality control, may have had, and in the future could have errors or
defects, especially when we first introduce them. Typically we need to issue
corrective releases of our software products to fix any defects or errors.
Defects or errors could also cause damage to our reputation, loss of revenues,
product returns or order cancellations, lack of market acceptance of our
products, and expose us to litigation. Accordingly, defects or errors
particularly if they are more numerous than expected could have a material and
adverse effect on our business, results of operations and financial condition.
Our Failure to Accurately Forecast Sales May Lead to a Disappointment of Market
Expectations.
Our Company uses a "pipeline" system, a common industry practice, to
forecast sales and trends in our business. Our sales personnel monitor the
status of all proposals, such as the date when they estimate that a customer
will make a purchase decision and the potential dollar amount of the sale. We
aggregate these estimates periodically in order to generate a sales pipeline. We
compare the pipeline at various points in time to look for trends in our
business. While this pipeline analysis may provide us with some guidance in
business planning and budgeting, these pipeline estimates are necessarily
speculative and may not consistently correlate to revenues in a particular
quarter or over a longer period of time. A variation in the conversion of the
pipeline into contracts or in the pipeline itself
13
could cause our Company to improperly plan or budget and thereby adversely
affect our business or results of operations. In particular, the current
slowdown in the economy is causing purchasing decisions to be delayed, reduced
in amount or cancelled which will therefore reduce the overall license pipeline
conversion rates in a particular period of time.
The Price of Our Common Stock is Volatile and It May Fluctuate Significantly.
The market price of our common stock has fluctuated significantly and has
declined sharply since our initial public offering in March 2000 and more
recently in 2001. Our Company's stock price is affected by a number of factors,
some of which are beyond our control including:
o quarterly variations in results, announcements that our revenue or
income are below analysts' expectations;
o the competitive landscape;
o technological innovations by us or our competitors;
o changes in earnings estimates or recommendations by analysts;
o sales of large blocks of our common stock, sales or the intention to
sell stock by our executives and directors;
o general economic and market conditions;
o additions or departures of key personnel;
o estimates and projections by the investment community; and
o fluctuations in our stock trading volume, which is particularly common
among highly volatile securities of software companies.
As a result, our stock price is subject to significant volatility. In the
past, following periods of volatility or decline in the market price of a
company's securities, securities class action litigation has at times been
instituted against that company. We are currently subject to securities
litigation, and may be subject to additional litigation. This could cause us to
incur substantial costs and experience a diversion of management's attention and
resources.
Our Quarterly Revenues and Operating Results May Fluctuate in Future Periods.
Our revenues are relatively difficult to forecast and vary from quarter to
quarter due to various factors including the:
o relatively long sales cycles for our products;
o size and timing of individual license transactions, the closing of
which tend to be delayed by customers until the end of a fiscal quarter
as a negotiating tactic;
o introduction of new products or product enhancements by us or our
competitors;
o potential for delay or deferral of customer implementations of our
software;
o changes in customer budgets;
o seasonality of technology purchases and other general economic
conditions; and
o changes in our pricing policies or those of our competitors.
Accordingly, our quarterly results are difficult to predict until the end of
the quarter. Delays in product delivery or closing of sales near the end of a
quarter could cause quarterly revenues and net income to fall significantly
short of anticipated levels; and given the current economic slowdown, may well
occur in the foreseeable future.
14
Our license revenues in any quarter are substantially dependent on orders
booked and shipped in that quarter. We typically receive and fulfill a majority
of our orders within the quarter, with the substantial majority of our orders
received in the last month of each fiscal quarter. As a result, we may not learn
of revenue shortfalls until late in a fiscal quarter, after it is too late to
adjust expenses for that quarter. Since our operating expenses are relatively
fixed and are based on anticipated revenue levels, a delay in bookings from even
a small number of license transactions could cause significant variations in
revenues quarter to quarter and could cause net income to fall significantly
short of anticipated levels. As an example, the dollar amounts of large orders
for our products have been increasing and therefore the operating results for a
quarter could be materially adversely affected if a number of large orders are
either not received or are delayed, due to cancellations, delays, or deferrals
by customers. Revenue shortfalls below our expectations could have an immediate
and significant adverse effect on our results of operations.
Our services revenue in any quarter is substantially dependent on our
license revenue. Services are normally purchased in conjunction with software,
although it is not a requirement. Should our license revenues decrease, there
will be a reduced market for our services. Any revenue shortfall in services
could have an immediate and significant adverse effect on our results of
operations.
Our operating results have in the past been, and will continue to be, subject to
quarterly fluctuations as a result of a number of factors. These factors
include:
o competition in the Internet infrastructure software market;
o the integration of people, operations, and products from acquired
businesses and technologies;
o the overall trend toward industry consolidation;
o the introduction and market acceptance of new technologies and
standards;
o variations in mix of products sold; and
o changes in general economic conditions and specific economic conditions
in the Internet infrastructure software market.
Any of the above factors could have a material adverse impact on our
operations and financial results.
The Private Securities Class Action Lawsuits and State Derivative Action Against
Us and Certain of Our Directors and Officers Could Have a Material Adverse
Effect On Our Business, Financial Condition and Results of Operations.
We and certain of our former officers and a director have been named as
defendants in a private securities class action lawsuit. In addition, two
derivative actions on behalf of our Company were filed against certain current
and former officers and directors in the Superior Court for Alameda County,
California. Depending on the outcome of such litigation, we may be required to
pay substantial damages or settlement costs, which could have a material adverse
effect on our financial condition or results of operations. Regardless of the
outcome of these matters, we may incur substantial defense costs and that such
actions may cause a diversion of management time and attention.
Our liability insurance for actions taken by officers and directors provides
only limited liability protection. To the extent that these policies do not
adequately cover our expenses related to any shareholder lawsuits, our business
and financial condition could be seriously harmed. Under Delaware law, in
connection with our charter documents and indemnification agreements we entered
into with our executive officers and directors, we must indemnify our current
and former officers and directors to the fullest extent permitted by law.
Subject to certain conditions, the indemnification may cover expenses and
liabilities reasonably incurred in connection with the investigation, defense,
settlement, or appeal of legal proceedings.
Any Potential Delisting of Versata's Common Stock From the Nasdaq National
Market Could Harm Our Business.
Versata's common stock trades on the Nasdaq National Market, which has
certain compliance requirements for continued listing of common stock, including
a requirement that Versata's common stock have a minimum bid price of $1.00 per
share.
Our Company's common stock has not maintained a minimum bid price of $1.00
over the last consecutive 30 trading days as required by the Nasdaq National
Market. On February 19, 2002 we received a notice on the minimum bid price non-
compliance from Nasdaq National Market. We have until May 20, 2002 to regain
compliance or be subject to delisting procedures subject to Versata's right to
15
appeal. The company does not intend to have the stock delisted and is reviewing
its options, which may include, subject to our stockholders' approval, a reverse
stock split which our board of directors has approved.
If any appeal we file receives an unfavorable determination by NASD and we
are unsuccessful with our reverse stock split, our common stock would be removed
from listing on the Nasdaq National Market that could have a material adverse
effect on us and on the price of our common stock.
We Have Incurred Increasing Operating Losses Since Our Inception and are Likely
to Incur Net Losses and Negative Cash Flows for the Foreseeable Future.
We have experienced operating losses in each quarterly and annual period
since inception. 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. As of October 31, 2001, we
had an accumulated deficit of $184.2 million. Although we have an objective of
achieving profitability as soon as practical, we cannot assure you that we will
be successful. In order to achieve and maintain profitability, we will need to
increase revenues while decreasing expenses.
We May Require Future Additional Funding to Stay in Business.
We may require additional financing for our operations. We have not been
operating on a profitable basis and have relied on the sale of stock to finance
our operations. We may need to return to the capital markets in order to receive
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
will cause dilution to existing stockholders.
If We Do Not Develop and Enhance New and Existing Products to Keep Pace With
Technological, Market and Industry Changes, Our Revenues May Decline.
Rapid technological advances in software development, evolving standards in
software technology and frequent new product introductions and enhancements,
characterize the markets for our products. Product introductions and short
product life cycles necessitate high levels of expenditures for research and
development. To maintain our competitive position, we must:
o enhance and improve existing products and continue to introduce new
products that keep pace with technological developments;
o satisfy increasingly sophisticated customer requirements; and
o achieve market acceptance.
The success of new products is dependent on several factors including proper
new product definition, product cost, timely completion and introduction of new
products, differentiation of new products from those of our competitors, and
market acceptance of these products. There can be no assurance that we will
successfully identify new product opportunities, develop and bring new products
to market in a timely manner, and achieve market acceptance of our products or
that products and technologies developed by others will not render our products
or technologies obsolete or noncompetitive. Our inability to run on new or
increasingly popular operating systems, and/or our failure to successfully
enhance and improve our products in a timely manner could have a material
adverse effect on our business, results of operations, financial condition or
cash flows.
If the Versata Products 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 the Versata
products and related services in the future. The market for the Versata products
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
16
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 products and related services and to enhance the
brand awareness of our software and services.
If Java Technology Does Not Continue to be Widely Adopted for E-business
Application Development, Our Business Will Suffer.
Our products are based on Java technology, an object-oriented software
programming language and distributed computing platform developed by Sun
Microsystems. Java is a relatively new language and was developed primarily for
the Internet and corporate intranet applications. It is still too early to
determine whether Java will achieve greater acceptance as a programming language
and platform for enterprise applications. Alternatives to Java include
Microsoft's C+ language and .net computing platform. Should Java not continue to
be widely adopted, or is adopted more slowly than anticipated, our business will
suffer. Alternatively, if Sun Microsystems makes significant changes to the Java
language or its proprietary technology, or fails to correct defects and
limitations in these products, our ability to continue improving and shipping
our products could be impaired. In the future, our customers also may require
the ability to deploy our products on platforms for which technically acceptable
Java implementations either do not exist or are not available on commercially
reasonable terms.
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 business 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 products, our services
revenue will also likely decline. Our service revenue is derived from fees for
professional services and customer support related to our products. 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 further 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 further decline.
Our Failure to Maintain Ongoing Sales Through Distribution Channels Will Result
in Lower Revenues.
To date, we have sold our products principally through our direct sales
force, as well as through indirect sales channels, such as packaged application
software vendors (ISVs), systems integrators and independent consultants,
application service providers (ASPs) and distributors, particularly IBM. Our
ability to achieve revenue growth in the future will depend in part on our
success in making our direct sales force more efficient and in further
establishing and expanding relationships with distributors, ASPs, ISVs, OEMs and
systems integrators. We intend to seek distribution arrangements with additional
ISVs to embed our Versata Logic Suite and Versata Interaction Suite in their
products. It is possible that we will not be able to increase the efficiency of
our direct sales force or other distribution channels, or secure license
agreements with additional ISVs on commercially reasonable terms. Moreover, even
if we succeed in these endeavors, it still may not increase our revenues. If we
invest resources in these types of expansion and our revenues do not
correspondingly increase, our business, results of operations and financial
condition will be materially and adversely affected.
We rely on informal relationships with a number of consulting and systems
integration firms to enhance our sales, support, service and marketing efforts,
particularly with respect to implementation and support of our products as well
as lead generation and assistance in the sales process. We will need to expand
our relationships with third parties in order to support license revenue growth.
Many such firms have similar, and often more established, relationships with our
principal competitors. It is possible that these and other third parties will
not provide the level and quality of service required to meet the needs of our
customers, that we will not be able to maintain an effective, long term
relationship with these third parties, and that these third parties will not
successfully meet the needs of our customers.
Our Business is Subject to Risks From International Operations.
17
We conduct business internationally. Accordingly, a portion of our revenues
is derived from international sales and is therefore subject to the related
risks including the general economic conditions in each country, the overlap of
different tax structures, the difficulty of managing an organization spread over
various countries, changes in regulatory requirements, compliance with a variety
of foreign laws and regulations, longer payment cycles and volatilities of
exchange rates in certain countries. There can be no assurances that we will be
able to successfully address each of these challenges. Other risks associated
with international operations include import and export licensing requirements,
trade restrictions and changes in tariff rates.
Recent terrorist activities and related military and security operations could
adversely affect our revenues and operations.
As a result of the recent terrorist activities and related military and
security operations, economic activity throughout the United States and much of
the world was substantially disrupted. These events temporarily impacted our
operations and our ability to generate revenues. Any future terrorist activities
or any continued military or security operations involving the U.S. could have a
similar or worse effect on our operating results, particularly if such attacks
or operations occur in the last month or weeks of our fiscal quarter or are
significant enough to further weaken the U.S. or global economy. In particular,
such activities and operations could result in reductions in information
technology spending, and deferrals, reductions or cancellations of customer
orders for our products and services.
If We Infringe the Patents or Proprietary Rights of Others Our Business,
Financial Condition and Operating Results Would be Harmed.
We do not believe our products infringe the proprietary rights of third
parties, but third parties may nevertheless assert infringement claims against
us in the future. Regardless of whether these claims have merit, they can be
time consuming and expensive to defend or settle, and can harm our business and
reputation. Furthermore, we may initiate claims or litigation against third
parties for infringement of our proprietary rights or to establish the validity
of our proprietary rights. Litigation, whether resolved in our favor or not,
could be time-consuming to defend, result in increased costs, divert
management's attention and resources, cause product shipment delays or require
us to enter into unfavorable royalty or licensing agreements.
We May Incur Substantial Expenses If We are Sued for Product Liability.
Our license agreements with our customers typically contain provisions
designed to limit our exposure to potential product liability claims. It is
possible, however, that the limitation of liability provisions contained in our
license agreements may not be effective as a result of existing or future
federal, state or local laws or ordinances or unfavorable judicial decisions.
Although we have not experienced any product liability claims to date, sale and
support of our products entails the risk of such claims, which could be
substantial in light of customers' use of such products in mission-critical
applications. If a claimant brings a product liability claim against us, it
could have a material adverse effect on our business, results of operations and
financial condition. Our products interoperate with many parts of complicated
computer systems, such as mainframes, servers, personal computers, application
software, databases, operating systems and data transformation software. Failure
of any one of these parts could cause all or large parts of computer systems to
fail. In such circumstances, it may be difficult to determine which part failed,
and it is likely that customers will bring a lawsuit against several suppliers.
Even if our software was not at fault, we could suffer material expense and
material diversion of management time in defending any such lawsuits.
Since the Licensing of Our Technology is a Key Component of Sales, Our Business
May Suffer If We Cannot Protect Our Intellectual Property.
Approximately 47% of our revenue for the ten months ended October 31, 2001,
was derived from the license of software products. We rely on a combination of
contractual provisions, confidentiality procedures, and patent, trademark, trade
secret and copyright laws to protect the proprietary aspects of our technology.
We currently have a U.S. patent relating to our automated development tool that
uses a drag-and-drop metaphor. This patent is scheduled to expire on April 9,
2016. In addition, we have a U.S. patent pending relating to our business rules
automation in database application development and maintenance. We cannot
predict whether this patent application will result in an issued patent, or if a
patent is issued, whether it will provide any meaningful protection. Moreover,
these legal protections afford only limited protection, and competitors may gain
access to our intellectual property, which may result in the loss of our
customers.
Despite our efforts to protect our proprietary rights, unauthorized parties
may attempt to copy aspects of our products or to obtain and use our proprietary
information. Litigation may be necessary to enforce our intellectual property
rights, to protect our trade secrets and to determine the validity and scope of
the proprietary rights of others. Any litigation could result in substantial
costs and diversion
18
of resources with no assurance of success and could seriously harm our business
and operating results. In addition, we sell our products internationally, and
the laws of many countries do not protect our proprietary rights as well as do
the laws of the United States. Our patent and future patents, if any, may be
successfully challenged or may not provide us with any competitive advantages.
Item 2. Properties
Our principal executive and administrative offices are located in
approximately 75,000 square feet of office space in Oakland, California, and we
have subleased approximately 50,000 square fee of this space, including 25,000
square feet of which is subleased for the remaining term of our lease. Our
monthly net lease payments on the Oakland facility are approximately $90,000.
This lease expires in August 2008. We also maintain leased offices or an
"executive suite" in Hamburg, Frankfurt, and Neuss (Germany), London and Paris.
We believe that our existing facilities are adequate to meet our current and
projected needs, or that suitable additional or substitute space will be
available as needed.
Item 3. Legal Proceedings
Securities Class Action
Since April 11, 2001, several securities class action complaints were filed
against us, and certain of our current and former officers and directors. In
August 2001, the class action lawsuits were consolidated before one judge in the
United States District Court for the Northern District of California. On October
19, 2001 the lead plaintiffs filed an amended class action complaint naming us,
certain of our former officers and a current director, as defendants. The
amended class action complaint alleges claims under section 10(b) and section
20(a) of the Securities Exchange Act of 1934 and claims under section 11 and 15
of the Securities Act of 1933. The amended complaint seeks an unspecified amount
of damages on behalf of persons who purchased our stock during the class period.
It is premature to come to any conclusions as to the allegations and potential
damages. We intend to defend these actions vigorously. The hearing for our
motion to dismiss the action is set for May 10, 2002. We expensed the deductible
amount of directors' and officers' liability insurance of $350,000 in April
2001.
State Derivative Action
Since June 11, 2001, two derivative actions were filed on our behalf against
certain current and former officers and directors in Superior Court of Alameda
County, California. The complaints also name us as a nominal defendant. The
complaints allege that the defendants breached their fiduciary duties, abused
their control of the corporation, and engaged in gross mismanagement of the
corporation, by allegedly making or permitting the Company to make false
financial statements and seek, among other things, compensatory damages. On
November 7, 2001, the state court issued an Order granting Versata's Motion to
Stay Proceedings in the consolidated derivative action until the earlier of the
filing of an answer by Versata in the Federal action or dismissal of that
action.
With the exception of the $350,000 discussed above, no estimate can be made
of the ultimate loss or possible range of ultimate loss associated with the
resolution of these contingencies.
Litigation and other claims
We are also subject to legal proceedings and claims, either asserted or
unasserted, which arise in the ordinary course of business. While the outcome of
these proceedings and claims cannot be predicted with certainty, management does
not believe that the outcome of any of these legal matters will have a material
adverse effect on our consolidated results of operations or consolidated
financial position. We intend to defend these actions vigorously.
Item 4. Submission of Matters to a Vote of Security Holders
None.
19
PART II
Item 5. Market for Registrant's Common Stock and Related Stockholder Matters
(a) Price Range of Common Stock
Our common stock is listed on the Nasdaq National Market under the symbol
"VATA." Public trading of our common stock commenced on March 3, 2000. Prior to
that date, there was no public market for our common stock. The following table
sets forth, for the periods indicated, the high and low sale price per share of
our common stock on the Nasdaq National Market:
High Low
---- ---
Ten Months Ended October 31, 2001:
First Quarter (from January 1 through March 31, $ 9.38 $ 0.20
2001..............................................
Second Quarter (from April 1 through June 30, 1.75 0.20
2001).............................................
Third Quarter (July 1 through September 30, 2001) 0.85 0.20
High Low
---- ---
Year Ended December 31, 2000:
First Quarter (from March 3, 2000).............. $100.94 $52.13
Second Quarter.................................. 60.19 12.00
Third Quarter................................... 47.50 19.13
Fourth Quarter.................................. 26.38 3.88
We believe that a number of factors may cause the market price of our common
stock to fluctuate. See "Item 1. Business-- Risk Factors." As of March 20, 2002,
there were 461 holders of record of our common stock.
We have never paid or declared any cash dividends on our common stock or
other securities and do not anticipate paying cash dividends in the foreseeable
future. We currently intend to retain all future earnings, if any, for use in
the operations of our business.
(b) Use of Proceeds from Sales of Registered Securities
On March 2, 2000 the Securities and Exchange Commission declared effective
our Registration Statement on Form S-1 (File No. 333-92451) relating to our
initial public offering of our common stock. The 4,427,500 shares offered by us
under the Registration Statement were sold at a price of $24.00 per share. The
aggregate proceeds to the Company from the offering were $97,100,000 after
deducting the underwriting discounts and commissions of $7,438,200 and expenses
incurred in connection with the offering of approximately $1,721,800. The
Company closed its initial public offering on March 8, 2000.
Versata has invested the net proceeds from its initial public offering in
interest-bearing investment-grade instruments. The net proceeds generated from
the offering have been used primarily to fund the Company's working capital,
capital expenditures and general corporate needs. In addition, the Company paid
approximately $1,176,000 in connection with the acquisition of Verve, Inc.
Recent Sales of Unregistered Securities
None.
Item 6. Selected Financial Data and Supplementary Data
You should read the following selected financial data in conjunction with
the consolidated financial statements and related notes and "Management's
Discussion and Analysis of Financial Condition and Results of Operations." The
statement of operations data for the years ended December 31, 2000, 1999, and
1998 and for the ten months ended October 31, 2001, and the balance sheet data
at December 31, 1999 and 2000 and October 31, 2001 are derived from the audited
financial statements included elsewhere in this Transition Report on Form 10-K.
The statement of operations data for the years ended December 31, 1996, 1997 and
1998, and the balance sheet data at December 31, 1996, 1997, 1998 and 1999 are
derived from audited financial statements not included in this Transition Report
on Form 10-K.
20
Ten Months Year Ended December 31,
Ended --------------------------------------------------------------------
October 31, 2000 1999 1998 1997 1996
------------ ----------- ----------- ---------- ----------- ----------
2001 (a)
--------
(In thousands)
Consolidated Statement of
Operations Data:
Revenue............................ $ 29,380 $ 56,608 $ 12,582 $ 3,950 $ 1,406 $ 1,124
---------- ---------- ---------- --------- ---------- ---------
Loss from operations............... (64,317) (72,903) (21,496) (7,883) (10,012) (9,203)
Net loss........................... (62,876) (67,901) (21,800) (8,134) (9,844) (9,013)
Net loss attributable to common
Stockholders..................... (62,876)(c) (67,901) (32,600) (8,134) (9,844) (9,013)
---------- ---------- ---------- --------- ---------- ---------
Basic and diluted net loss per
share............................ $ (1.56) $ (2.06) $ (9.18) $ (3.99) $ (5.72) $ (6.05)
========== ========== ========== ========= ========== =========
As of As of December 31,
------------------------------------------------------
October 2000 1999 1998 1997 1996
-------- ----------- --------- -------- -------- ------
31, 2001
--------
(In thousands)
Balance Sheet Data:
Cash and cash equivalents............. $ 21,871 $ 39,272(b) $ 20,655 $ 5,767 $ 2,388 $ 1,332
Working capital....................... 14,824 57,958 16,215 3,878 835 54
Total assets.......................... 45,782 119,839 33,660 8,468 4,235 3,374
Total long-term liabilities........... 1,850 218 320 498 1,175 612
Stockholders' equity.................. 28,790 87,545 19,418 4,356 889 820
----------
(a) In December 2001, we changed our fiscal year-end from December 31 to
October 31.
(b) Cash and cash equivalents rose as a result of net cash raised during
Initial Public Offering of $97.1 million, offset by increasing
operating expenses.
(c) Net loss for the ten months ended October 31, 2001 reflects
restructuring and other non-recurring expenses of $19.7 million and
impairment charge of $4.1 million.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Overview
We provide software and services that accelerate and simplify the way
business logic is developed and maintained for enterprise applications. Business
logic is an umbrella term referring to the aggregated set of business rules and
business processes that govern and define a business' operations. Business logic
is a critical part of today's new generation of enterprise applications, which
are increasingly built in the Java 2 Enterprise Edition (J2EE) programming
language.
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 in 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 suite of
software products. To date, we have licensed our products and provided services
to over 500 customers around the world.
21
On December 31, 2001, Versata announced a change in its fiscal year end from
December 31 to October 31. The change was effective for the ten-month period
ended October 31, 2001. Versata had previously released results for the three
months ended March 31, June 30 and September 30 of 2001. The comparisons in this
transition report will be for the ten-month period ended October 31, 2001 and
the twelve-month periods ended December 31, 2000, 1999 and 1998.
We derive our revenue from the sale of software product licenses and from
related services. Our software is generally priced on a per central processing
unit (CPU) 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, training, mentoring, staff augmentation and project management or
rapid requirements development to complete turnkey solution services. 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. Professional services are sold generally on a
time-and-materials basis, while customer support is priced based on the
particular level of support chosen by the customer.
As of October 31, 2001, we had deferred revenue of $6.2 million, a decrease
of $2.5 million from $8.7 million at December 31, 2000. The decrease is
principally attributable to slow sales during the period.
We market our products and services through our direct sales force,
international distributors, consulting and system integration 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 revenues from international sales have increased during the years
ended December 31, 2000, 1999 and 1998 and for the ten months ended October 31,
2001, our revenues to date have been derived predominantly from customers in the
United States. Net revenues from international sales represented 31%, 22%, 14%
and 9% of our total revenue for the ten months ended October 31, 2001, and the
years ended December 31, 2000, 1999 and 1998, respectively.
Our cost of software license revenue consists of royalty payments to third
parties for technology incorporated into our products, the cost of manuals and
product documentation, as well as packaging, distribution and electronic
delivery 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. 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 $184.2 million as of October 31, 2001 and $121.3 million
and $53.4 million as of December 31, 2000, and December 31, 1999, respectively.
In January 2001, we implemented a cost cutting initiative that included a
reduction in total staff of approximately 70 people, or 13% of the total
workforce. This reduction impacted all departments, but primarily reflected a
shift in the strategy of our services organization.
In March 2001, we announced a restructuring effort to realign our expenses
with a business plan geared to the changing economy. This restructuring was
designed to align the workforce with customer needs and focus on core business
products. The restructuring plan included the discontinuation of further
development of non-core business products, facility consolidations, and a
reduction in total staff, including domestic and international employees and
contractors, including staff in our subsidiaries, of approximately 107 positions
across all departments. We expensed $6.9 million for restructuring and other
expenses in the three months ended March 31, 2001.
In May 2001, we further reduced staff by approximately 50 positions, across
all departments, and closed additional field offices. We expensed $3.5 million
for restructuring and other expenses in the three months ended June 30, 2001.
22
In August 2001, we again reduced staff by 20%, 43 positions in the United
States and 17 positions internationally. We expensed an additional $5.3 million
in restructuring and other costs.
In October 2001 an additional 46 positions were eliminated, 25 in the United
States and 21 positions internationally.
In January 2002, we eliminated 40 positions, or 23% of our workforce. We
expensed an additional $309,000 in restructuring and other expenses relating to
this reduction.
Results of Operations
The following table sets forth, for the periods indicated, certain items
from the consolidated statements of operations of Versata expressed as a
percentage of total revenues:
Ten Months Year Ended
Ended -------------------------------------------
October December December 31, December 31,
31, 2001 31, 2000 1999 1998
-------- -------- ---- ----
Revenue:
Software license............................... 47.3% 47.4% 53.5% 48.7%
Services....................................... 52.7 52.6 46.5 51.3
--------- --------- ---------- ----------
Total Revenue.......................... 100.0 100.0 100.0 100.0
Cost of revenue
Software license............................... 0.7 1.9 4.0 5.9
Services....................................... 59.8 53.9 48.6 56.9
--------- --------- ---------- ----------
Total cost of revenue.................. 60.5 55.8 52.6 62.8
--------- --------- ---------- ----------
Gross profit..................................... 39.5 44.2 47.4 37.2
--------- --------- ---------- ----------
Operating expense:
Sales and marketing............................ 90.2 82.5 124.1 113.8
Product development............................ 29.9 17.2 37.9 82.9
General and administrative..................... 36.0 22.4 24.8 34.9
Stock-based compensation....................... 5.6 45.1 31.4 5.1
Amortization of intangibles.................... 29.6 2.4 - -
Impairment of investment....................... - 1.8 - -
Restructuring and other nonrecurring expenses.. 67.0 1.6 - -
--------- --------- ---------- ----------
Total operating expense................ 258.3 173.0 218.2 236.7
--------- --------- ---------- ----------
Loss from operations............................. (218.9) (128.8) (170.8) (199.5)
Other income (expense), net...................... 4.9 8.9 (2.5) (6.4)
--------- --------- ---------- ----------
Net loss......................................... (214.0)% (119.9)% (173.3)% (205.9)%
========= ========= ========== ==========
Ten Months Ended October 31, 2001 Compared to Twelve Months Ended December 31,
2000
On December 31, 2001, we announced a change in our fiscal year from December 31
to October 31. The change was effective for the ten-month period ended October
31, 2001. We had previously released results for the three months ended March
31, June 30, and September 30 of 2001. The comparisons in the comments below are
comparing the ten months ended October 31, 2001 to the twelve months ended
December 31, 2000.
Revenue
Total Revenue. Total revenue consists of software license revenue and
services revenue. Total revenue for the ten months ended October 31, 2001
decreased by $27.2 million, or 48%, to $29.4 million from $56.6 million for the
year ended December 31, 2000. This decrease was principally attributable to
decreased Information Technology (IT) spending and overall economic and market
conditions. As a percentage of total revenue, software license revenue was 47%
for the ten months ended October 31, 2001 and 47% for the year ended December
31, 2000, respectively, while services revenue was 53% and 53%, respectively.
Software License Revenue. Software license revenue decreased by $12.9
million, or 48%, from $26.8 million in 2000 to $13.9 million for the ten months
ended October 31, 2001. This decrease was primarily attributable to decreased IT
spending and overall
23
economic and market conditions. License revenue from international sales
decreased by $1.2 million or approximately 17% from $7.0 million in 2000 to $5.8
million for the ten months ended October 31, 2001.
Services Revenue
Services Revenue. Services revenue decreased by $14.3 million, or 48.0%,
from $29.8 million in 2000 to $15.5 million for the ten months ended October 31,
2001. This trend for professional services, and more specifically for our
consulting unit, represents our ongoing efforts to reduce our volatility within
this business by referring work to third parties and accepting only profitable
assignments. The level of our new software sales also impacts our services
revenue.
Cost of Revenue
Total Cost of Revenue. Total cost of revenue consists of cost of software
license revenue and cost of service revenue. Total cost of revenue decreased by
$13.8 million, or 44%, from $31.6 million in 2000 to $17.8 million for the ten
months ended October 31, 2001. This decrease was mainly attributable to a lower
volume of sales for the ten months ended October 31, 2001 as compared to the
year ended December 31, 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 decreased by $882,000 or
81%, from $1.1 million in 2000 to $206,000 for the ten months ended October 31,
2001. These decreases were attributable to lower direct costs associated with
lower volume of sales.
Cost of Services Revenue. Cost of service revenue consists of salaries and
overhead costs of professional service personnel and payments to third-party
consultants incurred in providing customer support, training and consulting
services. Cost of service revenue decreased by $13.0 million, or 42%, from $30.5
million in 2000 to $17.6 million in the ten months ended October 31, 2001. This
decrease is as a result of the restructuring initiatives initiated by management
in January 2001 in response to the revenue declines.
Gross Profit
Gross profit. Gross profit decreased by $13.4 million, or 54%, from $25.0
million in 2000 to $11.6 million for the ten months ended October 31, 2001. As a
percentage of total revenue, gross margin decreased by 4% from 44% in 2000 to
40% for the ten months ended October 31, 2001. The decrease in gross profit
results primarily from fixed costs, such as customer support personnel, and the
higher percentage of third-party partners employed on our jobs at higher cost
than company employees.
Operating Expenses
Operating expenses. Operating expenses decreased by $22.0 million, or 22%,
from $97.9 million in 2000 to $75.9 million in the ten months ended October 31,
2001. The majority of this decrease was due to cost-cutting initiatives and
reductions in force. As a percentage of revenue, operating expenses increased
from 173.0% in 2000 to 258.5% for the ten months ended October 31, 2001.
Excluding the restructuring and other nonrecurring expenses, operating expenses
for the ten months ended October 31, 2001 were $56.2 million, a 41% decrease
from $95.6 million in 2000.
Sales and Marketing. Sales and marketing expense includes salaries,
commissions, expense from our sales offices, travel and entertainment expense,
marketing programs and recruitment expenses. Sales and marketing expenses
decreased by $20.2 million, or 43%, from $46.7 million in 2000 to $26.5 million
for the ten months ended October 31, 2001. These decreases were largely
attributable to a $4.8 million reduction in salary expense and $3.3 million
reduction in travel and entertainment expense due to reduction in workforce. In
addition, these expenses decreased as a result of decreased spending on
marketing programs of $4.1 million and $4.2 million reduction in sales
commissions related to the decrease in revenue. As a percentage of revenue,
sales and marketing expense increased from 82.5% in 2000 to 90.2% for the ten
months ended October 31, 2001 due to the fixed nature of marketing costs that
were not proportionate to lower sales volume.
Product Development. Product development expenses include 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 decreased by $934,000, or
10%, from $9.7 million in 2000 to $8.8 million for the ten months ended October
31, 2001. This decrease was
24
primarily attributable to the reduction in workforce, including use of
third-party consultants, during the ten months ended October 31, 2001. As a
percentage of total revenue, product development expense increased from 17.2% in
2000 to 29.9% in the ten months ended October 31, 2001, as product development
expense was spread across a significantly smaller revenue base in the ten months
ended October 31, 2001. To date, all software development costs have been
expensed in the period incurred.
General and Administrative. General and administrative expenses consist of
salaries for executive, finance and administrative personnel, information
systems costs and bad debt expense. General and administrative expenses
decreased by $2.1 million, or 16%, from $12.7 million in 2000 to $10.6 million
for the ten months ended October 31, 2001. This decrease was primarily due to a
reduction in salary expense of $290,000 related to reduction in force and a
decrease in bad debt expense of $624,000 as a result of lower sales volume and
focused collection efforts. As a percentage of total revenue, general and
administrative expenses increased from 22.4% in 2000 to 36.0% for the ten months
ended October 31, 2001, as we continue to spread our relatively fixed costs
across a significantly smaller revenue base during the ten months ended October
31, 2001.
Stock-Based Compensation. Stock-based compensation expense includes the
amortization of unearned employee stock-based compensation offset by reversals
of previously expensed amounts for cancellations of the related options. The
impact of variable accounting for the stock appreciations rights assumed on the
acquisition of Verve is also included in this caption. Employee stock-based
compensation expense is amortized on an accelerated basis over the vesting
period of the related options, generally 50 months. Stock-based compensation
expense also includes expenses for stock granted to consultants in exchange for
services. We incurred a non-cash charge of $1.7 million for the ten months
ended October 31, 2001 as compared to $25.5 million in 2000. The decrease
primarily relates to the impact of option cancellations for terminated
employees. As of October 31, 2001, additional unvested outstanding options were
scheduled to vest over the next 31 months, which will result in additional
compensation expenses of approximately $2.6 million in the aggregate in periods
subsequent to October 31, 2001. This future expense will be reduced in the event
of related option cancellations for employee terminations in the future.
Amortization of Intangibles and Impairment Charge. We incurred non-cash
amortization charges of $4.6 million for the ten months ended October 31, 2001.