-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, WYG11wuNY28nkVwn811mfN14bmGbGZKcrNg1WiJ5sUk75cn4+gn/EP/Ngee9MxO5 oRJPlO7yKVs8mhXhs3xNrg== 0000891618-96-002728.txt : 19961115 0000891618-96-002728.hdr.sgml : 19961115 ACCESSION NUMBER: 0000891618-96-002728 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19960930 FILED AS OF DATE: 19961113 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: VERSANT OBJECT TECHNOLOGY CORP CENTRAL INDEX KEY: 0000865917 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PREPACKAGED SOFTWARE [7372] IRS NUMBER: 943079392 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10QSB SEC ACT: 1934 Act SEC FILE NUMBER: 333-04910-LA FILM NUMBER: 96662436 BUSINESS ADDRESS: STREET 1: 41380 WILLOW ROAD CITY: MENLO PK STATE: CA ZIP: 94025 BUSINESS PHONE: 4153297500 10QSB 1 FORM 10QSB FOR THE PERIOD ENDED SEPTEMBER 30, 1996 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-QSB (Mark One) (X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 1996 OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission File Number 0-28540 VERSANT OBJECT TECHNOLOGY CORPORATION (Exact name of Small Business Issuer as specified in its charter) California 94-3079392 State or other jurisdiction (I.R.S. Employer of incorporation or organization Identification No.) 1380 Willow Road Menlo Park, California 94025 (Address of principal executive offices) (Zip Code) Issuer's telephone number, including area code: (415) 329-7500 Check whether the Issuer (1) 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 --- --- The number of shares of common stock, no par value, outstanding as of October 31, 1996: 8,718,452 Transitional Small Business Disclosure Format (check one): Yes No X --- --- 2 VERSANT OBJECT TECHNOLOGY CORPORATION FORM 10-QSB Quarterly Period Ended September 30, 1996 Table of Contents Part I. Financial Information
Item 1. Financial Statements Page No. Condensed Balance Sheets -- September 30, 1996 and December 31, 1995 3 Condensed Statements of Operations -- Quarters Ended September 30, 1996 and 1995, and Nine Months Ended September 30, 1996 and 1995 4 Condensed Statements of Cash Flows -- Nine Months Ended September 30, 1996 and 1995 5 Notes to Condensed Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 8 Part II. Other Information -- Not Applicable. Signature 14
3 Part I. Financial Information Item 1. Financial Statements VERSANT OBJECT TECHNOLOGY CORPORATION CONDENSED BALANCE SHEETS (in thousands)
September 30, December 31, 1996 1995 ------------- ------------ (unaudited) ASSETS Current assets: Cash and cash equivalents $ 2,476 $ 1,281 Short-term investments 12,741 -- Accounts receivable, net 6,492 4,025 Other current assets 375 561 -------- -------- Total current assets 22,084 5,867 Property and equipment, net 553 365 Long-term deposits 72 91 -------- -------- $ 22,709 $ 6,323 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Current portion of capitalized lease obligations $ 101 $ 27 Accounts payable 281 193 Accrued liabilities 1,996 2,235 Deferred revenue 1,537 1,864 Deferred income taxes 75 -- -------- -------- Total current liabilities 3,990 4,319 -------- -------- Long-term liabilities, net of current portion: Capitalized lease obligations 173 74 Deferred rent -- 39 -------- -------- Total long-term liabilities 173 113 -------- -------- Shareholders' equity: Preferred stock and warrants -- 4,429 Common stock 40,857 20,488 Accumulated deficit (22,311) (23,026) -------- -------- Total shareholders' equity 18,546 1,891 -------- -------- $ 22,709 $ 6,323 ======== ========
See accompanying notes 4 VERSANT OBJECT TECHNOLOGY CORPORATION CONDENSED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED)
Three Months Ended Nine Months Ended September 30, September 30, 1996 1995 1996 1995 ---- ---- ---- ---- Revenue: License $ 3,053 $ 1,588 $ 8,024 $ 5,126 Services 1,929 977 4,752 3,143 -------- -------- -------- -------- Total revenue 4,982 2,565 12,776 8,269 -------- -------- -------- -------- Cost of revenue: License 278 154 769 857 Services 965 679 2,155 1,656 -------- -------- -------- -------- Total cost of revenue 1,243 833 2,924 2,513 -------- -------- -------- -------- Gross profit 3,739 1,732 9,852 5,756 -------- -------- -------- -------- Operating expenses: Marketing and sales 1,987 1,547 5,842 4,563 Research and development 928 478 2,450 1,471 General and administrative 409 247 995 1,067 -------- -------- -------- -------- Total operating expenses 3,324 2,272 9,287 7,101 -------- -------- -------- -------- Income (loss) from operations 415 (540) 565 (1,345) Interest income and other, net 256 12 238 69 Foreign tax expense (2) (4) (13) (67) -------- -------- -------- -------- Income (loss) before taxes 669 (532) 790 (1,343) Provision for income taxes 63 -- 75 -- -------- -------- -------- -------- Net income (loss) $ 606 $ (532) $ 715 $ (1,343) ======== ======== ======== ======== Net income per share $ 0.07 $ 0.10 ======== ======== Pro forma net loss per share $ (0.09) $ (0.23) ======== ======= Weighted average common and common equivalent shares 8,831 5,976 7,273 5,822 ======== ======== ======== ========
See accompanying notes 5 VERSANT OBJECT TECHNOLOGY CORPORATION CONDENSED STATEMENTS OF CASH FLOWS (IN THOUSANDS) (UNAUDITED)
Nine Months Nine Months Ended Ended September 30, 1996 September 30, 1995 ------------------ ------------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $ 715 $ (1,343) Adjustments to reconcile net income (loss) to net cash used in operating activities: Depreciation and amortization 266 205 Deferred rent (10) -- Changes in current assets and liabilities: Increase in accounts receivable (2,506) (252) (Increase) decrease in other current assets 261 (258) Increase (decrease) in accounts payable 87 (38) Increase in income tax payable 75 -- Decrease in accrued liabilities (269) (706) (Decrease) increase in deferred revenue (326) 35 -------- -------- Net cash used in operating activities (1,707) (2,357) -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property and equipment (454) (256) (Increase) decrease in short-term investments (12,741) 1,692 (Increase) decrease in long-term deposits (17) 72 -------- -------- Net cash (used in) provided by investing activities (13,212) 1,508 -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from sale of common stock, net of repurchases 15,940 303 Proceeds from (payment of) capital lease obligations 174 (18) -------- -------- Net cash provided by financing activities 16,114 285 -------- -------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1,195 (564) CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 1,281 1,647 -------- -------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 2,476 $ 1,083 ======== ========
See accompanying notes 6 NOTES TO CONDENSED FINANCIAL STATEMENTS - UNAUDITED 1. Basis of Presentation The condensed financial statements included herein have been prepared by Versant Object Technology Corporation ("Versant" or the "Company"), without audit, pursuant to rules and regulations of the Securities and Exchange Commission (the "SEC"). Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. However, the Company believes that the disclosures are adequate to make the information presented not misleading. These condensed financial statements and the notes thereto should be read in conjunction with the Company's audited financial statements included in the Company's Form SB-2 Registration Statement declared effective by the SEC on July 17, 1996 as well as the Form 10QSB for the period ending June 30, 1996. The unaudited information has been prepared on the same basis as the annual financial statements and, in the opinion of the Company's management, reflects all normal recurring adjustments necessary for a fair presentation of the information for the periods presented. The interim results presented herein are not necessarily indicative of the results of operations that may be expected for the full fiscal year ending December 31, 1996 or any other future period. 2. Summary of Significant Accounting Policies REVENUE RECOGNITION Revenue consists mainly of revenue earned under software license agreements, maintenance agreements and consulting and training activities. Revenue from perpetual software license agreements is recognized as revenue upon shipment of the software if no significant vendor obligations remain, payments are due within the Company's normal payment terms and collection of the resulting receivable is probable. In instances where a significant vendor obligation exists, revenue recognition is delayed until such obligation is satisfied. If an acceptance period is required, revenue is recognized upon the earlier of customer acceptance or the expiration of the acceptance period. The Company has entered into contracts with certain of its customers that require the Company to perform development work in return for nonrecurring engineering fees. Revenue related to such nonrecurring engineering fees is generally recognized on a percentage of completion basis. Maintenance revenue is recognized ratably over the term of the maintenance contract. Consulting and training revenue is recognized when a customer's purchase order is received and the services are performed. NET INCOME PER SHARE Except as noted below, net income per share is computed using the weighted average number of outstanding shares of common and common equivalents from outstanding stock options (using the treasury stock method when dilutive). Common equivalent shares were excluded from the computation if their effect was antidilutive except that, pursuant to the SEC Staff Accounting Bulletin and Staff policy, such computations include all common and common stock equivalent shares issued within 12 months preceding the filing date of the Company's initial public offering as if they were outstanding for all periods presented (using the treasury stock method assuming the public offering price). Mandatorily redeemable convertible preferred stock outstanding during the period were included (using the if converted method) in the computation as common equivalent shares even though the effect is antidilutive. Primary and fully diluted earnings per common share were substantially the same in all periods presented. 7 INVESTMENTS Investments have been accounted for in accordance with Statement of Financial Accounting Standards (SFAS) No. 115. The Company classifies its investments as held to maturity investments as defined under the provisions of SFAS 115 and carries such investments at amortized cost in its balance sheet. SOFTWARE DEVELOPMENT COST The Company capitalizes eligible computer software development costs upon the establishment of technological feasibility, which the Company has defined as completion of a working model. For the periods presented, costs eligible for capitalization were insignificant and, thus, the Company charged all software development costs to research and development expense as incurred. INITIAL PUBLIC OFFERING In July and August 1996, the Company consummated a public offering of 2,380,500 shares of common stock (including an over-allotment option of 310,500 shares, which was exercised in August 1996) at $8.00 per share (which included 243,658 shares sold by stockholders), resulting in net proceeds to the Company of approximately $14.9 million after offering costs. Upon the closing of the offering, all outstanding shares of preferred stock were converted to common stock on a one-for-one basis. Proceeds from the offering were invested in cash equivalents and short-term investments consisting primarily of United States Treasury Bills, with $300,000 used to repay indebtedness under the Company's bank credit line. 3. Stock Plans 1996 Equity Incentive Plan In May 1996, the Board adopted the 1996 Equity Incentive Plan (the "1996 Equity Plan") and the Company's shareholders approved the 1996 Equity Plan in June 1996. The 1996 Equity Plan will serve as the successor equity incentive program to the Company's 1989 Option Plan. The 1996 Equity Plan provides for the grant of stock options and stock bonuses and the issuance of restricted stock by the Company to its employees, officers, directors, consultants, independent contractors and advisors. Options granted under the 1989 Option Plan before its termination upon the effective date of the offering, will remain outstanding in accordance with their terms, but no further options will be granted under the 1989 Option Plan. The Company has reserved 850,000 shares of common stock for issuance under the 1996 Equity Plan. Any authorized shares that are not issued or subject to outstanding grants under the 1989 Option Plan will be available for grant and issuance in connection with future awards under the 1996 Equity Plan. 1996 Employee Stock Purchase Plan In May 1996, the Board adopted the 1996 Employee Stock Purchase Plan (the "Purchase Plan") and the Company's shareholders approved the Purchase Plan in June 1996. The Company has reserved 125,000 shares of common stock for issuance under the Purchase Plan. The Purchase Plan will enable eligible employees to purchase common stock at 85% of the lower of the fair market value of the Company's common stock on the first or last day of each offering period. 1996 Directors Stock Option Plan In May 1996, the Board adopted the 1996 Directors Stock Option Plan (the "Directors Plan") and the Company's shareholders approved the Directors Plan in June 1996. The Company has reserved 75,000 shares of common stock for issuance under the Directors Plan. The Directors Plan provides for the grant of nonqualified stock options to nonemployee directors of the Company. The exercise price of all options granted under the Directors Plan will be the fair market value of the common stock on the date of grant. All options issued under the Directors Plan will vest as to 50% of the shares on each of the first two anniversaries following the date of grant, provided the optionee continues as a member of the Board or as a consultant to the Company. 8 ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW This Management's Discussion and Analysis of Financial Condition and Results of Operations includes a number of forward-looking statements within in the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and Section 27A of the Securities Act of 1933, as amended, which reflect the Company's current views with respect to future events and financial performance. These forward-looking statements are subject to certain risks and uncertainties, including those discussed below and in the Company's Form SB-2 Registration Statement, declared effective by the SEC on July 17, 1996, that could cause actual results to differ materially from historical results or those anticipated in the forward-looking statements. The Company has identified with a preceding asterisk ("*") various sentences within this Form 10-QSB which contain such forward-looking statements, and words such as "believes," "anticipates," "expects," "may," "future," "intends" and similar expressions are intended to identify forward-looking statements; however, neither the preceding asterisk nor these words are the exclusive means of identifying such statements. In addition, the remainder of this "overview" section, which has no asterisks for improved readability, includes a substantial number of forward-looking statements. The Company undertakes no obligation to revise any forward-looking statements in order to reflect events or circumstances that may arise after the date of this report. Substantially all of Versant's revenue has been derived from (i) sales of development and deployment licenses for the Versant ODBMS, (ii) related maintenance and support, training, consulting and nonrecurring engineering fees (the "Associated Services") and (iii) the resale of licenses, maintenance, training and consulting for third-party products that complement the Versant ODBMS ("Third-Party Products"). The Company currently expects that licenses of the Versant ODBMS and Associated Services will be the Company's principal sources of revenue for the foreseeable future. As a consequence, the Company's future operating results will depend upon its ability to expand market acceptance of the Versant ODBMS. Versant commenced field trials of version 5.0 of its ODBMS in the third quarter. The Company also entered into a strategic relationship with Spyglass, Inc. during the quarter. As part of the relationship Versant has licensed the Versant ODBMS to Spyglass for use in the Surfwatch Proserver as the core caching engine. Spyglass has also licensed the Versant ODBMS for future use within other Spyglass products, including the Spyglass Web Server and Spyglass WebNotes products. The Company's operating results have varied significantly in the past and are expected to vary significantly in the future, on a quarterly and annual basis, as a result of a number of factors, many of which are outside the Company's control. These factors include demand for the Company's products and services and the size, timing and structure of significant licenses by customers. The Company's license revenue is substantially dependent on orders booked and shipped in that quarter, and historically a majority of the Company's revenue in any quarter has been recorded in the third month of that quarter, with a concentration of such revenue in the last few days of the quarter. Due to these and other factors, the Company's revenue for any future period will vary significantly from any prior period, and it is impossible to predict revenue for any period prior to its end. A significant portion of the Company's total revenue has been, and the Company believes will continue to be, derived from a limited number of orders placed by large organizations. The timing of such orders and their fulfillment has caused, and likely will continue to cause, material fluctuations in the Company's operating results, particularly on a quarterly basis. In the third quarter of 1996, one customer, an independent European owned distributor, accounted for approximately 36% of total revenue. The Company's sales cycle, which varies substantially from customer to customer, often exceeds six months and can extend to a year or more. Because of this lengthy sales cycle and the relatively large average dollar size of individual licenses, lost or delayed sales can have a significant impact on the Company's operating results for a particular period. Further, in the third quarter of 1996, approximately 56% of the Company's license revenue was derived from customers in the telecommunications 16 9 industry. There can be no assurance that the Company will earn comparable revenue from these customers or this industry in future periods. Although Versant was profitable in the second and fourth quarters of 1995 and the second and third quarters of 1996, it has never been profitable on an annual basis, and there can be no assurance that the Company will be profitable on a quarterly or annual basis in the future. The Company's limited operating history and the relative immaturity of its market make the prediction of future operating results impossible. The market for the Company's products is highly competitive, and the Company may experience increasing pricing pressures from both its current competitors and new market entrants. Any material reduction in the price of the Company's products would materially adversely affect the Company's operating results. RESULTS OF OPERATIONS The following table sets forth the percentages that income statement items are to total revenue for the three months ended September 30, 1996 and 1995 and the nine months ended September 30, 1996 and 1995.
Three Months Ended Nine Months Ended September 30, September 30, ------------------ ------------------- 1996 1995 1996 1995 ---- ---- ---- ---- Revenue: License 61.28 % 61.91 % 62.81 % 61.99 % Services 38.72 38.09 37.19 38.01 ------ ------ ------ ------ Total revenue 100.00 100.00 100.00 100.00 ------ ------ ------ ------ Cost of revenue: License 5.58 6.00 6.02 10.36 Services 19.37 26.47 16.87 20.03 ------ ------ ------ ------ Total cost of revenue 24.95 32.47 22.89 30.39 ------ ------ ------ ------ Gross profit 75.05 67.53 77.11 69.61 ------ ------ ------ ------ Operating expenses: Marketing and sales 39.88 60.31 45.73 55.18 Research and development 18.63 18.64 19.18 17.79 General and administrative 8.21 9.63 7.79 12.90 ------ ------ ------ ------ Total operating expenses 66.72 88.58 72.70 85.87 ------ ------ ------ ------ Income (loss) from operations 8.33 (21.05) 4.41 (16.26) Interest income (expense), net 5.14 0.47 1.86 0.83 Foreign tax expense (0.04) (0.16) (0.10) (0.81) ------ ------ ------ ------ Income (loss) before taxes 13.43 (20.74) 6.17 (16.24) Provision for income taxes 1.26 0.00 0.59 0.00 ------ ------ ------ ------ Net income (loss) 12.17 % (20.74)% 5.58 % (16.24)% ====== ====== ====== ======
10 Revenue The Company's total revenue increased 94%, from $2.6 million in the third quarter of 1995 to $5.0 million in the third quarter of 1996. This increase was fueled by growth in international revenues which increased from $750,000 in the third quarter of 1995 to $2.3 million in the third quarter of 1996. The Company's total revenue increased 55%, from $8.3 million for the nine months ended September 30, 1995 to $12.8 million in the corresponding period of 1996. This increase was due to an expansion of the sales of the Company's products and services. License revenue increased 92% from $1.6 million in the third quarter of 1995 to $3.1 million in the third quarter of 1996. The increase in license revenue was primarily due to a $1.4 million order received from Versant Europe, an independent European owned distributor, for resale to a major European customer, as well as increased deployments by the Company's customers. License revenue increased 57%, from $5.1 million for the nine months ended September 30, 1995 to $8.0 million for the corresponding period of 1996. The increase in license revenue is primarily due to increased deployments by the Company's customers as well as a larger average order size. License revenue as a percentage of total revenue remained stable at approximately 62% and 63% for the nine months ended September 30, 1995 and 1996, respectively. Services revenue increased 97%, from $977,000 in the third quarter of 1995 to $1.9 million in the third quarter of 1996. The Company's services revenue increased 51%, from $3.1 million for the nine months ended September 30, 1995 to $4.8 million in the corresponding period of 1996. The increase in services revenue was principally due to an increase in training and consulting business with end-user customers and increased maintenance revenue from a larger installed base. Export sales increased from 29% of the Company's total revenue in the third quarter of 1995 to 46% in the third quarter of 1996. Export sales accounted for 37% of total revenue for the nine months ended September 30, 1995 and 31% of total revenue for the corresponding period of 1996. The primary sources of the Company's export sales are direct sales to Australia and Canada and royalties from Versant Europe. *The Company intends to expand its sales and marketing activities outside the United States, which will require significant management attention and financial resources. During 1995, the Company entered into an agreement with ISAR-Vermogensverwaltung Gbr mbH ("ISAR"), an entity formed by a group of European investors, pursuant to which ISAR organized and funded Versant Europe. Versant provided Versant Europe with exclusive European distribution rights for the Company's products, subject to the rights of existing distributors, and with management responsibilities for Versant's existing distributors in Europe. Versant has the right to acquire Versant Europe at a formula price. Versant has expanded operations in its Australian branch to include five sales and technical services employees. International operations are subject to a number of risks including longer receivable collection periods and greater difficulty in accounts receivable collections, unexpected changes in regulatory requirements, dependence on independent resellers, multiple and conflicting regulations and technology standards, import and export restrictions and tariffs, difficulties and costs of staffing and managing foreign operations, potentially adverse tax consequences, the burdens of complying with a variety of foreign laws and the impact of business cycles and economic instability outside the United States. During September 1996, Versant learned that MCI Communications, a major Versant customer, had initiated a business re-evaluation of its new Horizon customer billing system and replaced the project manager. Due to this re-evaluation, Versant did not recognize license revenue in the third quarter for licenses previously ordered by MCI under the Horizon contract. MCI subsequently announced a proposed merger with British Telecom. Versant does not know what impact, if any, the proposed merger or project re-evaluation will have on the Horizon project or Versant's relationship with MCI. Cost of Revenue Total cost of revenue increased 49%, from $833,000 in the third quarter of 1995 to $1.2 million in the third quarter of 1996, principally as a result of the expansion of the training and consulting organization. However, total cost of revenue as a percentage of total revenue decreased from 32% in the third quarter of 1995 to 25% in the third quarter of 1996. The 11 Company's total cost of revenue increased 16%, from $2.5 million for the nine months ended September 30, 1995 to $2.9 million for the nine months ended September 30, 1996. However, total cost of revenue as a percentage of total revenue decreased from 30% for the nine months ended September 30, 1995 to 23% for the nine months ended September 30, 1996. Cost of license revenue consists primarily of product royalty obligations incurred by the Company when it sub-licenses Third-Party Products, royalty obligations incurred by the Company under a porting services agreement, bad debt reserves, product packaging, freight, user manuals, product media and production labor costs. Cost of license revenue increased 81%, from $154,000 in the third quarter of 1995 to $278,000 in the third quarter of 1996, due primarily to an increase in the Company's bad debt reserve. Cost of license revenue as a percentage of license revenue remained stable at 10% and 9% for the third quarters of 1995 and 1996 respectively. Cost of license revenues decreased 10% from $857,000 or 17% of license revenue for the nine months ended September 30, 1995 to $769,000 or 10% of license revenue in the corresponding period of 1996. The decrease in cost of license revenue was primarily due to a decrease in royalty obligations on Third-Party Products partially offset by an increase in the Company's bad debt reserve. Cost of services revenue consists principally of personnel costs associated with providing training, consulting, technical support and nonrecurring engineering work paid for by customers. These costs increased 42% from $679,000 in the third quarter of 1995 to $965,000 in the third quarter of 1996. Cost of services revenue increased 30% from $l.7 million for the nine months ended September 30, 1995 to $2.2 million for the nine months ended September 30, 1996. These cost increases are due to the expansion of the training, consulting and support organizations. Cost of services as a percentage of services revenue decreased from 70% in the third quarter of 1995 to 50% in the third quarter of 1996. Cost of services revenue as a percentage of services revenue decreased from 53% for the nine months ended September 30, 1995 to 45% in the corresponding period in 1996. Cost of service revenue as a percentage of service revenue has declined due to an increase in maintenance revenue without a corresponding increase in the cost of maintenance revenue and a reduction in the number of outside consultants that the Company has hired to meet its consulting obligations. The cost of services as a percentage of service revenues may vary between periods due to the mix of services provided by the Company and the resources used to provide these services. *The Company anticipates that cost of services revenue as a percentage of services revenue will not continue to decline. *To the extent that services revenue increases relative to license revenue, overall gross margins would decline, which could have an adverse effect on the Company's operating results and financial condition. Operating Expenses Marketing and sales expenses consist primarily of marketing and sales personnel costs, including sales commissions, recruiting and travel, advertising, public relations, seminars, trade shows, product descriptive literature, product management, sales offices and mailings. Marketing and sales expenses increased 28% from $1.5 million in the third quarter of 1995 to $2.0 million in the third quarter of 1996. Marketing and sales expenses increased 28% from $4.6 million for the nine months ended September 30, 1995 to $5.8 million for the corresponding period in 1996. The increase in marketing and sales expenses was primarily due to increased commissions associated with higher levels of revenue, expanded marketing activities, including trade shows and promotional expenses as well as growth of the sales force. Marketing and sales expenses as a percentage of revenue decreased from 60% in the third quarter of 1995 to 40% in the third quarter of 1996. Marketing and sales expenses as a percentage of revenue decreased from 55% for the nine months ended September 30, 1995 to 46% in the corresponding period in 1996. The decrease in marketing and sales expenses as a percentage of total revenue was attributable to the growth in revenue. *The Company expects to continue hiring additional marketing and sales personnel and to increase promotional expenses and that marketing and sales expense may increase as a percentage of total revenue as a result. Research and development expenses consist primarily of salaries, recruiting and personnel-related expenses, the costs of an ISO 9001 quality program, depreciation of development equipment, supplies and travel. Research and development expenses increased 94% from $478,000 or 19% of total revenue in the third quarter of 1995 to $928,000 or 19% of total revenue in the third quarter of 1996. Research and development costs increased 67% from $1.5 million or 18% of total revenue for the nine months ended September 30, 1995 to $2.5 million or 19% of total revenue in the corresponding period in 1996. The increase in research and development expense is primarily attributable to an increase in the number of software engineers and related recruiting expenses as well as the costs of an ongoing ISO 9001 quality certification program. To date, nearly all research and development expenditures have been expensed as incurred. *The Company anticipates that it will continue to devote substantial resources to research and development. 12 General and administrative expenses consist primarily of salaries, recruiting and other personnel-related expenses for the Company's accounting, human resources, management information systems, legal and general management functions. In addition, general and administrative expenses include outside legal and audit costs. General and administrative expenses increased 66% from $247,000 in the third quarter of 1995 to $409,000 in the third quarter of 1996. The increase in general and administrative expense is largely due to the costs associated with being a public company as well as an expanded organization. General and administrative expenses as a percentage of revenue decreased from 10% in the third quarter of 1995 to 8% in the third quarter of 1996 primarily due to the growth of revenue. General and administrative expenses decreased 7% from $1.1 million or 13% of total revenue for the nine months ended September 30, 1995 to $995,000 or 8% of total revenue for the corresponding period in 1996. General and administrative expenses were unusually high in the first nine months of 1995 due to the cost of litigating an intellectual property matter settled in 1995. General and administrative expenses outside of these litigation costs have increased modestly and therefore have decreased as a percentage of total revenue due to the growth of revenue. *The Company believes that its general and administrative expenses will continue to increase as the Company expands its administrative staff and incurs additional costs related to being a public company. Interest income and other, net includes interest earned on the Company's cash reserves, interest expense related principally to leases and $120,000 of other income stemming from a contract settlement. The increase from $12,000 in the third quarter of 1995 to $256,000 in the third quarter of 1996 was due to the interest earned on the proceeds received from the initial public offering as well as the contract settlement. The Company's effective tax rate of 9% for the nine months ended September 30, 1996 reflects a federal alternative minimum tax provision. The effective tax rate presented in all periods presented is lower than the statutory rate principally due to the utilization of net operating loss carryforwards. As of September 30, 1996, the Company had a total of 97 employees, 92 of whom were based in the United States and 5 of whom were based in Australia. Of the total, 49 were engaged in engineering and technical services, 37 were engaged in sales and marketing and 11 were engaged in production, administration and finance. *The Company expects to continue to expand its operations in all functional areas and to continue to increase employment to support this expansion. Liquidity and Capital Resources Total assets as of September 30, 1996 increased $16.4 million from December 31, 1995. The increase was primarily due to the Company's initial public offering completed on July 23, 1996 resulting in net proceeds to the Company of approximately $14.9 million after offering costs. Net accounts receivable increased $2.5 million primarily due to increased sales activity as well as a delay in payment by MCI Communications related to its reevaluation of the Horizon project. Versant is working with MCI to resolve these payment delays. Total liabilities as of September 30, 1996, decreased $269,000 from December 31, 1995. The decrease was primarily due to decreases in accrued liabilities and deferred revenue. The decrease in accrued liabilities resulted primarily from payment of amounts due to Miramar Technology for royalties and expenses related to Argos partially offset by increases in commissions payable as well as Employee Stock Purchase Plan contributions made by employees and held by the Company prior to the purchase of Versant stock. The decrease in deferred revenue is primarily attributable to performance on nonrecurring engineering contracts. For the nine months ended September 30, 1996, operating activities used $1.7 million primarily as a result of an increase in accounts receivable. Investing activities used cash of $13.2 million primarily as a result of short-term investment of the proceeds of the initial public offering. Financing activities provided $16.1 million primarily from the proceeds of the initial public offering. At September 30, 1996, the Company had $2.5 million in cash and cash equivalents and $12.7 million in short-term investments. The Company maintains a revolving credit line with a bank that expires June 1997. The Company's short-term investments consist of United States Treasury Bills. Management expects that, in the future, cash in excess of current requirements will be invested in short-term, interest-bearing, investment grade securities. The maximum amount that can be borrowed under the revolving credit line is $2.5 million. Borrowings under the revolving credit line are limited to 80% of eligible accounts receivable and are secured by a lien on substantially all of the Company's assets (which lien shall be released at such time and for so long, as the Company meets certain net profit and tangible net worth tests). These borrowings bear interest at a rate of 0.50% over the bank's prime lending rate. The loan agreement contains certain financial covenants and also prohibits cash dividends and mergers and acquisitions without the Bank's prior approval. The Company is currently in compliance with these covenants. The Company also has a line of credit from a finance company that provides $500,000 for use in leasing of approved 13 capital equipment through March 31, 1997. The Company expects that its available funds will satisfy the Company's projected working capital and capital expenditures for at least the next twelve months. 14 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. VERSANT OBJECT TECHNOLOGY CORPORATION Date: November 14, 1996 /s/ Richard I. Kadet ------------------------------------------------ Richard I. Kadet Vice President Finance and Administration. Chief Financial Officer, Treasurer and Secretary (Duly Authorized Officer and Principal Financial Officer) 15 EXHIBIT INDEX Exhibit No. - ----------- Ex. 27 Financial Data Schedule EX-27 2 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE STATEMENTS OF OPERATIONS AND BALANCE SHEETS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 9-MOS DEC-31-1996 SEP-30-1996 2,476 12,741 6,884 392 0 22,084 3,756 3,203 22,709 3,990 0 0 0 40,857 (22,311) 22,709 12,776 12,776 0 2,924 9,300 0 44 790 75 715 0 0 0 715 0.10 0.10
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