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UNITED STATES OF AMERICA
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For
the year ended October 31, 2002
OR
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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Commission file number: 0-29757
VERSATA, INC.
(Exact name of registrant as specified in its charter)
| Delaware |
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68-0255203 |
| (State or other jurisdiction of incorporation or organization) |
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(I.R.S. Employer 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. x
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).
Yes ¨ No x
The aggregate market value of voting stock held by non-affiliates of the registrant as of April 30, 2002, was $12,017,824 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 January 15, 2003, 7,374,435 shares of the registrant’s common stock were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s definitive proxy statement relating to its 2002 annual stockholders’ meeting to be held on August 15, 2003 are incorporated by
reference into Part III of this annual report on Form 10-K.
VERSATA, INC.
FORM 10-K
For The Year Ended October 31, 2002
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| PART I |
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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 our management, based on the information currently available to our 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” (Item 1) and “Management’s Discussion and Analysis of
Financial Position and Results of Operation” (Item 7). In light of significant uncertainties inherent in forward looking information included in this report on Form 10-K, the inclusion of this information should not be regarded as a
representation that our plans and objectives will be achieved. 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.
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PART I
Overview
Versata, Inc. (“Versata” or the “Company”) was incorporated in California on August 27, 1991, and was reincorporated in the State of Delaware on
February 24, 2000. Versata provides a way for companies to manage the logic in their business systems at the business level, rather than at the system 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, and the back-office value chain (financial, customer, and resource management systems). The middle layers of this architecture-process,
transactions, and data logic, are called the business logic layers. We believe that we provide the most productive solution for creating, managing, reusing, and executing these business logic layers.
Versata believes that it fundamentally changes the way that a company manages its business logic. Traditional development and 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 pseudo-code, and write programs that are intended to meet the
original specifications; 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 software product, the Versata Logic Server. This fundamental difference enables companies to react faster to business demands by developing applications more efficiently with an
enhanced ability to change applications as the business changes. This can be primarily accomplished using existing Information Technology (“IT”) resources rather than hiring Java consultants.
Versata’s solution is well suited for large, enterprise applications with multiple data sources, database tables and 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 may be 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 we believe Versata fits best.
Our objective is to establish the Versata Logic Suite, our family of business logic products, 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 North America and in Europe. We also work with a network of consulting
and systems integration partners, companies selling pre-packaged software applications, companies developing and integrating custom software applications, and companies selling software applications over the Internet on a subscription services
basis.
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® 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. In September 2001, we further expanded our relationship with
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IBM by granting IBM the right to resell the Versata Logic Studio and Versata Logic Server 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. This arrangement has improved Versata’s visibility within IBM and
helped increase the volume of software sold through IBM.
Versata has also entered into agreements with leading
technology companies such as ILOG and MetaMatrix. Under the terms of the agreement with ILOG, the world’s leading supplier of C++ and Java software components, Versata has developed a connector between the Versata Logic Server and ILOG JRules,
and in turn, ILOG is developing a connector between their ILOG JViews for Workflow product and the Versata Logic Server. This technical collaboration is expected to result in a unified platform that will support all types of business logic:
transactions, processes, and decisions. For the first time, companies will be able to leverage an infrastructure for transactional applications that supports both business process automation for routing, escalating, and coordinating business
activities, currently offered by the Versata Logic Server, and decision or deductive rules for decision handling offered by ILOG’s business rule management software. This combination of technologies will also uniquely provide better business
management with round-trip visibility from the declarative specification of the business requirements to monitoring and managing the actual transactions, rules, and processes that govern businesses. In addition, Versata and ILOG expect to
collaborate on a variety of sales and marketing activities, such as seminars, sales events, and lead generation programs.
MetaMatrix, the Model-Driven Information Integration pioneer, and Versata offer customers a higher level of enterprise application infrastructure automation. Customers who use the MetaMatrix integration technology with Versata’s
declarative business logic solution can extend their enterprise applications with new business transactions and processes. We believe that the combined technologies not only simplify application development, but also reduce maintenance cost. Using
the Versata and MetaMatrix technologies, companies can rapidly develop data-consuming applications and can easily modify and upgrade existing applications. This agile infrastructure enables companies to adapt quickly to changes in business logic,
data sources, technologies, and platforms.
In addition, we have continued to invest in our alliances with BEA
Systems and Rational Software, which is being acquired by IBM. Finally, our network of technology partners provides complementary solutions to Versata’s products.
We also offer comprehensive professional services from training, mentoring, return on investment (“ROI”) analysis, staff augmentation and project management to
complete turnkey solution services, as well as customer support.
Versata Solution
We believe 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 (the “heart” of the application) for a distributed Java infrastructure, provides a strategic advantage for enterprise 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.
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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 need 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, companies can reduce the number of outside consultants that have to be hired.
Reduce project
risks
Our solution reduces project risks 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 by 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, Enterprise JavaBeans (“EJB”), or other standard changes. Versata enables companies to invest in designing and managing their business logic without concern for the underlying technology.
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 these 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; the difficulty of changing and updating applications to reflect business needs; business manager and IT developer collaboration issues and the
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.
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Improve IT development staff productivity
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, developers 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 (i.e. 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 four pillars:
1. 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.
2. Offer a WebSphere Studio Plug-In for Designing Business
Logic
Many enterprise companies have embraced IBM’s WebSphere Studio as their standard application
development platform. And under an open strategy initiative, IBM has invited a select group of partners to create “plug-ins” for this development environment. In response, Versata has created a plug-in, the Versata Business Logic Designer
for WebSphere Studio, which enables WebSphere Studio users to develop the business logic portion of their application using business rules technology.
Because the business logic of enterprise applications is more frequently changed than any other part of an application, this business rules approach is imperative for developers to meet constant
demands for change. In addition, this approach enables IT and business to collaborate in building an adaptable infrastructure than can be changed and reconfigured, as the business needs demand, in response to customers or competitors or to
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streamline operations. By working at a business specification level, rather than at the coding level, business analysts can more actively participate in the development and maintenance.
3. Target Companies who are Developing Large-Scale, Complex J2EE Applications
We believe companies developing large-scale, complex applications best realize our value. Most of these applications will be
used by thousands of people, and performance and scalability are critical to success. Because the Versata Logic Server has been pre-tuned for high-performance, it uniquely meets the requirements of many of these companies.
4. Narrow the Market Focus
Over 150 companies have deployed complex applications with our solutions. These deployments span 24 industry sectors, with no predominant industry emerging. In 2003 we intend to narrow the market
focus in three ways:
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Refine our sales strategy with the Federal Government by renewing purchasing contracts, adding new federal resellers, and by referencing successful federal
applications into, and within, other applicable agencies. |
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Develop whole product offerings for the financial industry—we are currently developing an offering for a specific Line-of-Business (LoB) within the
financial industry to gain a foothold into an account and industry, with an end objective to be included as a key element in the J2EE infrastructure. |
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Continue a sales and marketing focus on Independent Software Vendors (ISVs) with the integrated Versata Logic Suite offering. |
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Continually seek to leverage individual account opportunities into tactical sales programs involving industries and/or solutions. Examples may include e-Self
Service in Banking and Telecommunications, Data Cleansing and Reference Data projects across industries, and State and Local government solutions with American Management Systems, Inc. |
Further, we intend to continue our sales strategy focusing towards reaching the economic buyer as we did in 2002. In addition, we intend
to continue our 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
During
the year ended October 31, 2002, we licensed our products to 84 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. In fiscal 2002, we had 27 new license customers including, The University of Chicago, Blue Shield of California, La Poste, the French national post office, a large aerospace and defense manufacturer, a large
Boston-based Bank, a Fortune 500 medical supply company, a large manufacturer of semiconductor chips, and one of the worlds leading automobile manufacturers. In addition, 57 repeat customers licensed more software from Versata including Alltel,
American Management Systems, Electricite de France (EDF), Hella HG Hueck & Co., IBM, Interpath, Northeastern University, SCT, TJ Maxx and Union Bank of California.
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. Fidelity National
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Information Systems (formerly Micro General Corporation) accounted for approximately 14% of total revenues for the year ended October 31, 2002; British Telecommunication accounted for
approximately 17% and Fidelity National Information Systems accounted for approximately 16% of our total revenues for the ten months ended October 31, 2001 and no single customer accounted for more than 10% of total revenues for the year ended
December 31, 2000. The following are examples of the application of Versata’s products by selected new and repeat customers during the year ended 2002:
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J.P. Morgan Chase & Co. (JPMorganChase) signed an Independent Software Vendor (“ISV”) agreement with Versata to resell its operational risk
management application, Horizon, built with Versata middleware, to third parties. JPMorganChase purchased Versata software to build a risk assessment software program for its own internal use. Versata’s Java-based business logic development and
management software allowed JPMorganChase to quickly complete application development, integrate with existing third party software and permit ongoing modifications. Versata’s open development and execution environment gave JPMorganChase the
freedom to adopt and incorporate future technologies for the development and maintenance of flexible Web-based applications. In addition, Versata’s scalability and performance enabled them to meet the needs of its multiple locations as it
rolled out the product internally around the globe. |
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American Management Systems, Inc. (AMS) deployed a web-based, zero-client Revenue, ERP-II and Procurement applications utilizing Versata technology. To expedite
the development and deployment of its AMS ADVANTAGE suite of applications, AMS offers a host of fully integrated Web-based applications built from the ground up specifically for state and local governments. Recognizing AMS’s need for flexible,
timely solutions, Versata provided this leading government systems integrator with the scalable technology essential to the unique and changing requirements of its customers. AMS initially selected Versata to help bring the benefits of its AMS
ADVANTAGE product suite from a client/server COBOL based system to a distributed, Java-based model with an accelerated time-to-market. In addition to providing the application development toolkits used with the AMS ADVANTAGE Design Studio, the
Versata Logic Server also forms the basis for the AMS ADVANTAGE runtime environment. Upon system completion, and with over 300,000 business rules and 1,600 business objects comprising the AMS ADVANTAGE application, AMS calculates that Versata saved
them at least twelve months from having to build their own rules-based development platform. As AMS continues to develop more applications using Versata, it expects that the cost and time savings will increase with each new project.
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Fiserv CBS Worldwide, a unit of Fiserv, Inc. (Fiserv), signed an ISV agreement with Versata. Through the agreement, Fiserv will build, market and sell certain
financial services technology applications using the Versata Logic Server. Fiserv is using Versata to develop its Alliant suite of delivery channel management and customer lifecycle solutions, improving the speed at which Fiserv clients create and
deploy new applications to the international financial services market. While integrating delivery channels, including call center, branch and Internet, the Alliant suite of solutions provides the financial institution with a complete view of their
customer’s entire relationship, as well as the tools to efficiently manage that relationship. |
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Lehnkering Logistics B.V., a Dutch multi service logistics company, selected Versata to build a new management system for container and bulk logistics.
Lehnkering, a logistical service provider for the chemical industry, made the decision to use Versata’s process technology to build their new logistics management system, rather than using a traditional hand-coding approach. Versata’s
business logic approach is ideally suited for the task, injecting flexibility and agility into the IT organization. The Versata Logic Suite is designed to enable Lehnkering to use their existing team of developers to better respond to business
demands, preserve knowledge as a digital asset to be leveraged again and again, all while getting to market faster. Features of the new system include the ability to rapidly build and customize connectivity to customers, as well as the acceleration
and optimization of Lehnkering’s internal processes. Up to 100 employees will use this application, which will accelerate and optimize the entire documentation and communication process between Lehnkering Logistics and its clients. The company
aims to become an information broker for its customers. |
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Products
We believe that 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 IT shops. Following is a current list of Versata products:
| Products
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Description
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| Versata Logic Server |
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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. |
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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. |
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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. |
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| Versata Process Logic Engine |
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The Versata Process Logic Engine (PLE) 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 work to the right place at the right time the Process Logic Engine enables customers to maximize business
execution. The PLE can be configured as a stand-alone product or as an embedded engine within the Versata Logic Server. It is 100% Java and runs on standard application servers platforms including IBM, BEA, and Borland. The PLE is sold through our
direct sales channel. |
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| Supporting Products: |
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| Versata Logic Studio |
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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. |
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| Versata Presentation Engine and Presentation Designer |
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The Versata Presentation Engine provides a rich presentation interface to the VLS. It supports both Hypertext Markup Language (“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.
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The Versata Presentation Designer provides an automated, template-based environment for designing HTML or Java clients. |
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| Products
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Description
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| Versata Design Adapter for
Rational Rose |
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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. |
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| Versata Connector for ILOG JRules |
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Versata developed a connector between the Versata Logic Server and ILOG JRules. The collaboration has resulted in a unified platform that supports all types
of business logic—transactions, processes, and decisions. For the first time, companies can combine the functionalities of decision support with rule-based transactions and processes in a powerful way. These three core business logic
capabilities enable application development that addresses the vast majority of an enterprise’s larger business process management objectives. |
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, 2002, our services organization consisted of 40 professionals, including our consulting services organization and contractors, 25 of which were in consulting services, 13 of which were in
customer support and 2 of which were in training.
Consulting Services
Versata consulting services offers insight into the realities of complex transaction and process-based business applications. Our services
include system architecture, data modeling, system design, software application development, testing, configuration and installation, quality assurance and risk assessment and performance tuning. We also provide 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. We also offer complete turnkey services
whereby Versata professionals and our consulting partners will deliver complete customized solutions. 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. with complex business transactions used by thousands of users. We also offer complete turnkey services whereby Versata professionals and our consulting partners will deliver complete customized
solutions. 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.
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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 developer’s 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 and Cap Gemini Ernst and Young, 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 these relationships further.
Sales and Marketing
Sales
We sell our products through a multi-channel distribution model, which includes both direct and indirect channel sales. As of October 31, 2002, our sales organization
consisted of 26 professionals throughout North America, Europe and the Pacific Rim. Our sales teams typically include a sales representative and a solutions architect that are supported by a regional service manager.
As of October 31, 2002, we had 12 quota-carrying sales teams, including 11 direct teams and 1 indirect channel focused team.
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 a 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:
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IBM. A significant sales channel is our strategic relationship with IBM. This includes a reselling agreement in which the Versata
Logic Studio and Versata Logic Server 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. This arrangement has improved Versata’s visibility within IBM and increased the volume of software sold through IBM. |
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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 Advanced Logics, Aidera Consulting, IBM Global Services, Online Business Systems, Cap Gemini Ernst and Young, Logica, KPMG, American Management Systems, and Lockheed Martin Services. In 2003, we intend to further leverage
our relationship with system integrator partners. |
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Independent Software Vendors (“ISVs”) that sell pre-packaged software applications, 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 e-banc, System and Computer Technology Corporation (SCT), JPMorganChase and Company,
TradePoint Systems LLC., Active-Logistics, AMS, WRQ, Mercator, Fiserv and Ametras. |
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International Distributors. Our international distributors include vendors that sell business software products to companies in
Europe, the Middle East, and Australia. |
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 4 employees as of October 31, 2002, focuses on creating market awareness for the Versata Logic Suite, 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 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 $5.5 million for the year ended October 31, 2002; $8.8 million for the ten months ended October 31, 2001; $9.7 million for the year ended
December 31, 2000 and $4.8 million for the year ended December 31, 1999.
As of October 31, 2002, our product
development team consisted of 40 technical professionals in product development, 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 application development 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
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companies developing their software applications internally using traditional programming approaches. We also compete with a number of other sources including:
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Vendors of application server development products and services such as IBM, BEA Systems, Inc., Microsoft, Sun Microsystems, Inc. and Oracle Corporation;
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Vendors of traditional workflow and process applications such as FileNet, Saviion and IBM; |
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Vendors of Web integrated development environments such as IBM, and Borland; and |
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Companies that market business application software such as Oracle Corporation, PeopleSoft, and SAP. |
We believe that the principal competitive factors in our market are:
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Product functionality and features customized for large-scale, enterprise applications; |
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Ease of product implementation; |
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Responsiveness to business and technical changes; |
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Performance, scalability and availability; |
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Use of standards-based technology; |
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Ease of integration with customers’ existing legacy data, software applications and middleware computing infrastructure; |
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Quality of professional services offerings; |
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Quality of customer support services; |
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 That May Affect Future Results” section contained below in this Item 1 of this Report.
Intellectual Property
and Licensing
Intellectual Property
We rely on a combination of intellectual property rights 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.
While various proprietary intellectual property rights are important to our success, we believe that our business
as a whole is not materially dependent on obtaining any particular patent. 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. It is
possible that other companies could successfully challenge the validity or scope of our patent and that our patent may not provide a competitive advantage to us. We enforce our copyright, trademark, service mark and trade name rights. Furthermore,
as part of our proprietary protection procedures, we enter into non-disclosure agreements with our employees, consultants, 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
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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 including entities located in Australia, Canada, France, Germany, India and the United Kingdom.
Employees
As of October 31, 2002, we had 119 employees and
14 contractors. Of these individuals, 30 employees were in sales and marketing, 33 employees and 7 contractors were in product development, 37 employees and 3 contractors were in professional services and customer support, and 19 employees and
4 contractors 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 and uncertainties. The following section lists some, but not all, of these risks and uncertainties, which may have a material adverse effect on our business, financial condition or results
of operations. Investors should carefully consider the following risk factors in evaluating an investment in our common stock.
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 of the
worldwide economy affects the buying decision of corporate customers, such as it has in the recent years. Because our sales are primarily to Global 2000 customers, our business also depends on general economic and business conditions. A reduction in
demand for computer software, caused by a weakening of the economy, such as occurred in fiscal 2001 and fiscal 2002, or otherwise, may result in decreased revenues or lower revenue growth rates.
If We Do Not Effectively Compete With New and Existing Competitors, Our Revenues and Operating Margins Will Decline.
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, including but not
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limited to IBM, BEA Systems, Inc., Microsoft, Oracle, and Sun Microsystems 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, such as the ones mentioned herein; 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 such as occurred in the fourth quarter of fiscal 2001 and
first quarter of fiscal 2002 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 2002. Our Company’s stock price is affected by a number of factors, some of which are beyond
our control, including:
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Quarterly variations in results, announcements that our revenue or income are below analysts’ expectations; |
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The competitive landscape; |
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Technological innovations by us or our competitors; |
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Changes in earnings estimates or recommendations by analysts; |
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Sales of large blocks of our common stock, sales or the intention to sell stock by our executives and directors; |
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General economic and market conditions; |
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Additions or departures of key personnel; |
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Estimates and projections by the investment community; and |
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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 have settled our securities litigation pending final approval from the Court, 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.
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 the requirement that our common stock have a minimum bid price of
$1.00 per share and that we maintain a market value of publicly held shares of at least $5 million.
Over the
past fiscal year, our Company’s common stock has not consistently maintained a minimum bid price of $1.00 and our market value of publicly held shares has periodically dropped below the $5 million requirement for numerous trading days.
If were are unable to maintain our compliance with the NASDAQ National Market listing requirements, and any
appeal we file as a result of a notice of noncompliance receives an unfavorable determination by NASD 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.
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:
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Relatively long sales cycles for our products; |
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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; |
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Introduction of new products or product enhancements by us or our competitors; |
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Potential for delay or deferral of customer implementations of our software; |
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Changes in customer budgets; |
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Seasonality of technology purchases and other general economic conditions; and |
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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 caused
quarterly revenues and net income to fall
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significantly short of anticipated levels in the past year, and given the current economic slowdown, may well occur in future quarters.
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:
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Competition in the Internet infrastructure software market; |
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The integration of people, operations, and products from acquired businesses and technologies; |
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The overall trend toward industry consolidation; |
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The introduction and market acceptance of new technologies and standards; |
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Variations in mix of products sold; and |
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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.
We May Have to Delay Recognizing License or Service Related Revenue for a Significant Period, Which Could Negatively Impact Our Results of Operatio