-----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, VZmMIgfguk0/ZQn+L5GU4zeSQlLGUc+LaFWeyU0sqOjWjRF4DuYbBIGWAexRLStW HYQnFxl2mvszlcUUSdTCRQ== 0000891618-99-003409.txt : 19990809 0000891618-99-003409.hdr.sgml : 19990809 ACCESSION NUMBER: 0000891618-99-003409 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19990802 FILER: COMPANY DATA: COMPANY CONFORMED NAME: VERSANT 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: SEC FILE NUMBER: 000-28540 FILM NUMBER: 99675681 BUSINESS ADDRESS: STREET 1: 6539 DUMBARTON CIRCLE CITY: FREMONT STATE: CA ZIP: 94555 BUSINESS PHONE: 5107891500 MAIL ADDRESS: STREET 1: 6539 DUMBARTON CIRCLE CITY: FREMONT STATE: CA ZIP: 94555 FORMER COMPANY: FORMER CONFORMED NAME: VERSANT OBJECT TECHNOLOGY CORP DATE OF NAME CHANGE: 19960428 10QSB 1 FORM 10-QSB 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 June 30, 1999 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 CORPORATION (Exact name of Small Business Issuer as specified in its charter) California 94-3079392 State or other jurisdiction (I.R.S. Employer Identification No.) of incorporation or organization 6539 Dumbarton Circle Fremont, California 94555 (Address of principal executive offices) (Zip Code) Issuer's telephone number, including area code: (510) 789-1500 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 July 26, 1999: 10,178,810 Transitional Small Business Disclosure Format (check one): Yes [ ] No [X] 1 2 VERSANT CORPORATION FORM 10-QSB Quarterly Period Ended June 30, 1999 Table of Contents Part I. Financial Information Item 1. Financial Statements Page No. Consolidated Balance Sheets -- June 30, 1999 and December 31, 1998 3 Consolidated Statements of Operations -- Three and Six Months Ended June 30, 1999 and 1998 4 Consolidated Statements of Cash Flows -- Six Months Ended June 30, 1999 and 1998 5 Notes to Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis or Plan of Operations 11 Part II. Other Information Item 1. Legal Proceedings 20 Item 2. Changes in Securities and Use of Proceeds 20 Item 3. Defaults Upon Senior Securities 20 Item 4. Submission of Matters to a Vote of Security Holders 20 Item 5. Other Information 20 Item 6. Exhibits and Reports on Form 8K 21 Signatures 21
2 3 VERSANT CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS)
JUNE 30, DECEMBER 31, 1999 1998 ------------ ------------ (UNAUDITED) * ASSETS Current assets: Cash and cash equivalents $ 823 $ 3,564 Accounts receivable, net 7,851 5,878 Other current assets 519 1,318 ------------ ------------ Total current assets 9,193 10,760 Property and equipment, net 6,462 7,381 Other assets 321 433 Excess of cost of investment over fair value of net assets acquired 1,951 2,095 ------------ ------------ Total assets $ 17,927 $ 20,669 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Short-term bank borrowings $ 1,600 $ 2,426 Current maturities of long-term debt 1,733 2,223 Current portion of capitalized lease obligations 507 561 Accounts payable 1,923 2,331 Accrued liabilities 3,466 3,692 Deferred revenue 3,396 2,830 ------------ ------------ Total current liabilities 12,625 14,063 ------------ ------------ Long-term liabilities, net of current portion: Deferred revenue 556 704 Long-term notes payable 3,819 3,678 Capitalized lease obligations 157 369 ------------ ------------ Total liabilities 17,157 18,814 ------------ ------------ Shareholders' equity: Common stock 45,707 45,727 Accumulated deficit (44,953) (43,890) Cumulative other comprehensive income 16 18 ------------ ------------ Total shareholders' equity 770 1,855 ------------ ------------ Total liabilities and shareholders' equity $ 17,927 $ 20,669 ============ ============
* Derived from audited financial statements The accompanying notes are an integral part of these statements. 3 4 VERSANT CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ----------------------------- ----------------------------- 1999 1998 1999 1998 ---------- ---------- ---------- ---------- Revenue: License $ 4,867 $ 4,310 $ 8,638 $ 7,034 Services 2,145 2,261 4,624 4,095 ---------- ---------- ---------- ---------- Total revenue 7,012 6,571 13,262 11,129 ---------- ---------- ---------- ---------- Cost of revenue: License 177 486 466 1,100 Services 1,136 1,737 2,298 3,636 ---------- ---------- ---------- ---------- Total cost of revenue 1,313 2,223 2,764 4,736 ---------- ---------- ---------- ---------- Gross profit 5,699 4,348 10,498 6,393 ---------- ---------- ---------- ---------- Operating expenses: Marketing and sales 2,518 4,298 5,556 9,309 Research and development 1,710 1,814 3,716 3,650 General and administrative 853 991 1,659 1,900 Amortization of goodwill 106 121 231 242 ---------- ---------- ---------- ---------- Total operating expenses 5,187 7,224 11,162 15,101 ---------- ---------- ---------- ---------- Income (loss) from operations 512 (2,876) (664) (8,708) Other expense, net (201) (131) (389) (193) ---------- ---------- ---------- ---------- Income (loss) before provision for taxes 311 (3,007) (1,053) (8,901) Provision for taxes 3 5 9 14 ---------- ---------- ---------- ---------- Net income (loss) $ 308 $ (3,012) $ (1,062) $ (8,915) ========== ========== ========== ========== Basic net income (loss) per share $ 0.03 $ (0.33) $ (0.10) $ (0.98) ========== ========== ========== ========== Diluted net income (loss) per share $ 0.03 $ (0.33) $ (0.10) $ (0.98) ========== ========== ========== ========== Basic weighted average common shares 10,146 9,081 10,141 9,060 ========== ========== ========== ========== Diluted weighted average common and potential common shares 10,177 9,081 10,141 9,060 ========== ========== ========== ==========
The accompanying notes are an integral part of these statements. 4 5 VERSANT CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) (UNAUDITED)
SIX MONTHS ENDED JUNE 30, ---------------------------- 1999 1998 ---------- ---------- CASH FLOWS FROM OPERATING ACTIVITIES Net loss $ (1,062) $ (8,915) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 1,074 1,230 Accrued interest on Vertex note 141 - Provision for doubtful accounts 242 184 Changes in operating assets and liabilities: Accounts receivable (2,215) 854 Prepaid expenses and other current assets 799 465 Deposits and other assets 112 (91) Accounts payable (408) (77) Accrued liabilities and taxes (226) (352) Deferred revenue 418 (426) ---------- ---------- Net cash used in operating activities (1,125) (7,128) ---------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property and equipment (10) (1,272) Proceeds from sale and maturities of short-term investments - 6,112 ---------- ---------- Net cash provided by (used in) investing activities (10) 4,840 ---------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES: Net proceeds from sale of common stock (20) 380 Principal payments under long term note - (316) Principal payments under capital lease obligations (266) (263) Short-term note and bank debt (1,316) 1,957 ---------- ---------- Net cash (used in) provided by financing activities (1,602) 1,758 ---------- ---------- Effect of exchange rate changes on cash (4) - ---------- ---------- NET DECREASE IN CASH AND CASH EQUIVALENTS (2,741) (530) CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 3,564 3,717 ---------- ---------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 823 $ 3,187 ========== ==========
The accompanying notes are an integral part of these statements. 5 6 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED 1. BASIS OF PRESENTATION The consolidated financial statements included herein have been prepared by Versant 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 financial statements and the notes thereto should be read in conjunction with the Company's audited financial statements included in the Company's Form 10-KSB for the year ended December 31, 1998 filed with the SEC. 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, 1999, or any other future period. The Company is subject to the risks associated with other companies in a comparable stage of development. These risks include, but are not limited to, fluctuations in operating results, seasonality, a lengthy sales cycle, dependence on the acceptance of object database technology, competition, a limited customer base, dependence on key individuals, product concentration, and the potential need for additional financing. 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 there is no significant modification of the software, payments are due within the Company's normal payment terms and collection of the resulting receivable is probable. 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. Cost of license revenue consists principally of product royalty obligations, product packaging, freight, users manuals, product media, production labor costs and reserves for estimated bad debts. Cost of services revenue consists principally of personnel costs associated with providing training, consulting, technical support and nonrecurring engineering work paid for by customers. Net Income (Loss) Per Share Basic net income (loss) per share is computed by dividing net income (loss) by the weighted average number of common shares outstanding. Diluted net income (loss) per share is computed by dividing net income (loss) by the sum of the weighted average number of common shares outstanding plus the dilutive effect of shares issuable through the exercise of stock options. The dilutive effect of stock options is computed using the treasury stock method. Potential common stock is excluded from the diluted net income (loss) per share computation if its effect is antidilutive. Basic net income(loss) per share was computed using the weighted average number of shares outstanding. Diluted net income per share for the quarter ended June 30, 1999 was based on the diluted weighted average potential common shares. The diluted net loss per share for the quarter ended June 30, 1998 was the same as basic net loss per share due 6 7 to losses in this quarter thus the inclusion of potential common shares would have been antidilutive. The number of weighted average potential common shares not included in diluted loss per share for the quarter ended June 30, 1998, because they were antidilutive, was 217,181. 3. COMPREHENSIVE INCOME (LOSS) A summary of comprehensive income (loss) follows (in thousands):
Three Months Ended Six Months Ended June 30, June 30, 1999 1998 1999 1998 ---------- ---------- ---------- ---------- Net income(loss) $ 308 ($ 3,012) ($ 1,062) ($ 8,915) Foreign currency translation adjustment (80) 50 (2) (243) ========== ========== ========== ========== Comprehensive (loss) income $ 228 ($ 2,962) ($ 1,064) ($ 9,158) ========== ========== ========== ==========
4. SEGMENT INFORMATION In 1998 the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 131 "Disclosures About Segments of an Enterprise and Related Information." SFAS No. 131 established standards for reporting information about operating segments in annual financial statements and requires selected information about operating segments in interim financial reports issued to stockholders. It also established standards for related disclosures about products and services, and geographic areas. Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker, or decision making group, in deciding how to allocate resources and in assessing performance. The Company's chief operating decision making group is the Executive Management Committee, which is comprised of the Chief Executive Officer, the Chief Financial Officer and various Executive Vice Presidents of the Company. The Company is organized geographically and by line of business. The Company has three major lines of business operating segments: license, support, and consulting/training. However, the Company also evaluates certain lines of business segments by vertical industries as well as by product categories. While the Executive Management Committee evaluates results in a number of different ways, the line of business management structure is the primary basis for which it assesses financial performance and allocates resources. The license line of business licenses an object oriented database management software (ODBMS). The ODBMS software can be classified into two broad categories: systems and development tools, which enables users to create, store, retrieve, and modify the various types of data stored in a computer system. The support line of business provides customers with a wide range of support services that include on-site support, telephone or internet access to support personnel, as well as software upgrades. The consulting and training line of business provides customers with a wide range of consulting and training services to assist the customer in evaluating, installing and customizing the database as well as training classes on the use and operation of the Company's products. The accounting policies of the line of business operating segments are the same as those described in the summary of significant accounting policies. The Company does not track assets by operating segments. Consequently, it is not practicable to show assets by operating segment. 7 8 The table below presents a summary of operating segments (in thousands):
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30, ----------------------------- ----------------------------- 1999 1998 1999 1998 ---------- ---------- ---------- ---------- Revenues from Unaffiliated Customers License $ 4,867 $ 4,310 $ 8,638 $ 7,034 Support 1,335 1,132 2,861 2,130 Consulting & Training 810 1,129 1,763 1,965 ---------- ---------- ---------- ---------- Total Revenue 7,012 6,571 13,262 11,129 Distribution Margin License 4,690 3,824 8,172 5,934 Support 1,007 339 2,110 585 Consulting & Training 2 185 216 (126) ---------- ---------- ---------- ---------- Total Distribution Margin 5,699 4,348 10,498 6,393 Profit Reconciliation: Other Operating Expenses 5,187 7,224 11,162 15,101 Other Income (Expense) (201) (131) (389) (193) ---------- ---------- ---------- ---------- Loss Before Provision for Income Taxes $ 311 $ (3,007) $ (1,053) $ (8,901) ========== ========== ========== ==========
The table below presents the Company's revenues by legal subsidiary (in thousands):
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30, 1999 1998 1999 1998 ---------- ---------- ---------- ---------- Total Revenues Attributable To: United States/Canada $ 3,683 $ 3,618 $ 6,476 $ 6,383 Germany 714 808 2,691 1,344 France 1,522 473 2,291 800 United Kingdom 808 973 1,260 1,473 Australia/Asia Pacific 285 699 544 1,129 ---------- ---------- ---------- ---------- Total $ 7,012 $ 6,571 $ 13,262 $ 11,129 ========== ========== ========== ==========
5. RECENTLY ISSUED ACCOUNTING STANDARDS In December 1998, the American Institute of Certified Public Accountants issued Statement of Position 98-9, "Modification of SOP 97-2, Software Revenue Recognition, With Respect to Certain Transactions" ("SOP 98-9") which addresses software revenue recognition as it applies to certain multiple-element arrangements. SOP 98-9 also amends, Statement of Position 98-4, "Deferral of the Effective Date of a Provision of SOP 97-2," (SOP 98-4) to extend the deferral of application of certain passages of SOP 97-2 through years beginning on or before March 15, 1999. All other provisions of SOP 98-9 are effective for transactions entered into in years beginning after March 15, 1999. 6. LINE OF CREDIT The Company maintains a revolving credit line with a bank that expired on May 31, 1999. The Company has negotiated an amendment to the existing line of credit that will go into effect for the quarter ending September 30, 1999. This amended line of credit expires June 1, 2000. The maximum amount that can be borrowed under the revolving credit line is $5.0 million. As of June 30, 1999, $900,000 was allocated to a standby letter of credit to support the Company's European banking line and $1.4 million of borrowings were outstanding. Borrowings and the standby letter of credit 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. These borrowings bear interest at the bank's base lending rate, currently at 8 9 7.75%, plus 2.0%. The loan agreement contains amended financial covenants, commencing with the quarter ending September 30, 1999, and also prohibits cash dividends and mergers and acquisitions without the bank's prior approval. On March 19, 1998, the Company converted an interest only, variable rate note to a variable rate, term loan with principal and interest payable over 36 months. The term loan covenants and interest rate were amended in conjunction with the new line of credit agreement. The amended financial covenants will commence with the quarter ending September 30, 1999. Borrowings under the loan are secured by a lien on all assets acquired using the proceeds of the loan, which have been used for the acquisition of equipment and leasehold improvements. The loan bears interest at the bank's base lending rate, currently at 7.75%, plus 2.5%. The loan contains certain financial covenants and also prohibits cash dividends and mergers and acquisitions without the bank's prior approval. 7. LEGAL PROCEEDINGS The Company and certain of its present and former officers and directors were named as defendants in four class action lawsuits filed in the United States District Court for the Northern District of California, filed on January 26, 1998, February 5, 1998, March 11, 1998 and March 18, 1998, respectively. On June 19, 1998, a Consolidated Amended Complaint was filed in the above mentioned court, by the lead Plaintiff named by the court. The amended complaint alleges violations of Sections 10(b) and 20(a) of the Securities Exchange Act, and Securities and Exchange Commission Rule 10b-5 promulgated under the Securities Exchange Act, in connection with public statements about the Company's expected financial performance. The complaint seeks an unspecified amount of damages. The Company vigorously denies the plaintiffs' claims and has moved to dismiss the allegations. The Plaintiff has filed a response to the Company's motion to dismiss and the Company has filed an opposition to Plaintiff's response. The motion to dismiss was submitted to the court for consideration on November 13, 1998 and the court has not yet issued a decision. Securities litigation can be expensive to defend, consume significant amounts of management time and result in adverse judgments or settlements that could have a material adverse effect on the Company's results of operations and financial condition. The selling shareholders of the Soft Mountain shares (see Note 11 of the footnotes to the consolidated financial statements, in the annual 10-KSB for December 31, 1998) have demanded that the Company repurchase for approximately $1.1 million the 245,586 shares of the Company's common stock issued to them in conjunction with the Company's purchase of all of Soft Mountain's shares. The demand alleges that the Company has not registered the shares issued in the transaction in a timely manner. The Company disputes the right of such shareholders to receive such payment, however any potential settlement could result in the payment of cash or the issuance of additional Versant stock. Settlement discussions are ongoing. Arbitration or litigation may result if a settlement cannot be reached. On April 9, 1999, the Company filed a Form S-3 registration statement for shares of the Company's common stock issued to the Soft Mountain shareholders and others. *The registration statement became effective May 14, 1999. 8. SUBSEQUENT EVENTS In July 1999, the Company converted $3,846,551 of principal and interest outstanding under the Note to Vertex (see Note 12 of the footnotes to the consolidated financial statements, in the annual 10-KSB for December 31, 1998) into 902,946 shares of Series A Convertible Preferred Stock (Preferred Stock). In addition, the Company issued 586,853 shares of Preferred Stock to a Vertex affiliate and other investors in consideration for $2,499,994. Each share of Preferred Stock is initially convertible into two shares of Common Stock. Each share of Preferred Stock votes like one share of Common Stock until converted. In connection with the issuance of Preferred Stock, the Company issued warrants to purchase 1,489,799 shares of the Company's Common Stock for cash consideration of $73,357. The warrants have an exercise price of $2.13 per share, are immediately exercisable and expire upon the earlier of (i) July 11, 2004, (ii) an acquisition of the Company (whether by merger, consolidation, tender offer or otherwise) in which the Company's shareholders prior to the acquisition own less than a majority of the surviving corporation, or the sale of all or substantially all of the Company's assets, or (iii) 15 business days after the Company gives notice to the holder that the Company's stock price has closed above $12.00 for forty-five consecutive business days. The Preferred Stock has a participating liquidation preference over the Company's common stock initially equal to 150% of the full amount paid for such stock, which preference increases by an additional 50% per year over each of the 9 10 next two years, so long as the Preferred Stock is outstanding. The Preferred Stock automatically converts into Common Stock if the Company's common stock price exceeds $12.00 per share for forty-five consecutive business days. Neither the Preferred Stock nor the warrants have been registered under the Securities Act of 1933, and may not be offered or sold in the United States absent registration or an exemption from applicable registration requirements. Holders of the Preferred Stock and warrants have certain registration rights relating to the Common Stock issuable upon the conversion of the Preferred Stock or exercise of the warrants. The Company is obligated to file a registration statement on Form S-3 to register these shares of Common Stock by October 10, 1999. Upon conversion of the Note and issuance of the Preferred Stock, the Company had net assets of $20.5 million, total liabilities of $13.1 million and total shareholders' equity of $7.4 million. The Pro-forma financial statement below reflects the balance sheet had the Vertex note converted and the Series A Preferred Stock funded in June 1999. VERSANT CORPORATION AND SUBSIDIARIES PROFORMA CONSOLIDATED BALANCE SHEETS (IN THOUSANDS)
JUNE 30, JUNE 30, 1999 1999 ------------ ------------ (UNAUDITED) (UNAUDITED) ASSETS PRO-FORMA ACTUAL Current assets: Cash and cash equivalents $ 3,396 $ 823 Other assets 15,153 15,153 Excess of cost of investment over fair value of net assets acquired 1,951 1,951 ------------ ------------ Total assets $ 20,500 $ 17,927 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Bank and current portion of capitalized lease obligations 3,840 3,840 Accounts payable and deferred revenue 5,319 5,319 Accrued liabilities 3,239 3,466 ------------ ------------ Total current liabilities 12,398 12,625 ------------ ------------ Long-term liabilities, net of current portion: Deferred revenue 556 556 Long-term notes payable - 3,819 Capitalized lease obligations 157 157 ------------ ------------ Total liabilities 13,111 17,157 ------------ ------------ Shareholders' equity: Common stock 46,553 45,707 Preferred stock 6,346 - Warrants 73 - Accumulated deficit(1) (45,599) (44,953) Cumulative other comprehensive income 16 16 ------------ ------------ Total shareholders' equity 7,389 770 ------------ ------------ Total liabilities and shareholders' equity $ 20,500 $ 17,927 ============ ============
- ------------------------ (1) Reflects an extraordinary charge to earnings for the unamortized portion of the beneficial conversion feature, associated with the convertible debt that has been converted into equity. 10 11 ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION OVERVIEW This Management's Discussion and Analysis or Plan of Operation includes a number of forward-looking statements within the meaning of the Securities Exchange Act of 1934 (the Securities Act) which reflect our current views with respect to future events and financial performance. We have identified, with a preceding asterisk, various sentences within this Form 10-QSB which contain such forward-looking statements and words such as "believe," "anticipate," "expect," "intend" and similar expressions are also intended to identify forward-looking statements, but these are not the exclusive means of identifying such statements. The forward looking statements included in this Form 10-QSB involve numerous risks and uncertainties which are described throughout this Form 10-QSB, including under "Revenues" and "Risk Factors" within this Item 2. Please also refer to our December 31, 1998 10-KSB on file with the Securities and Exchange Commission and any more recent quarterly reports, the section labeled "Risk Factors" for additional disclosure information. The actual results that we achieve may differ materially from any forward-looking statements due to such risks and uncertainties. We were incorporated in August 1988 and commenced commercial shipments of our principal product, the Versant ODBMS, in 1991. Since that time, substantially all of our revenue has been derived from: 1) sales of development, deployment and project licenses for the Versant ODBMS 2) sales of the peripheral products for the Versant ODBMS 3) related maintenance and support, training, consulting and nonrecurring engineering fees received in connection with providing services associated with the Versant ODBMS and 4) the resale of licenses, maintenance, training and consulting for third-party products that complement the Versant ODBMS During the second quarter of 1999, the Company entered into one large pre-paid license agreement accounting for $950,000 in license revenue and approximately fourteen smaller customer license agreements, averaging between $100,000 to $500,000. This reflects the Company's efforts to generate recurring revenue opportunities and improve our ability to forecast revenues and consequently manage expenses by focusing more on smaller and recurring license opportunities with our current and potential customers than on large pre-paid project licenses. In the past, a significant portion of our total revenue has been derived from a limited number of large pre-paid licenses. *In addition, we seek to develop relationships with best-of-class value-added resellers in the telecommunications and financial services markets in order to strengthen our indirect sales activity, although we may not be successful in developing such relationships and such value-added resellers may not be successful in reselling our products. *We have taken significant actions to decrease our operating expenses in previous quarters, and we believe our operating expenses are now in line with our revenue mix and level. Worldwide headcount as of June 30, 1999 was 117 compared to the June 30, 1998 total of 159. However, our ability to manage expenses given the unpredictability of our revenues is uncertain, and we are required to maintain a significant infrastructure in order to develop, market and support our products. 11 12 RESULTS OF OPERATIONS The following table sets forth the percentages that income statement items compare to total revenue for the three and six months ended June 30, 1999 and 1998:
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ---------------------------- ---------------------------- 1999 1998 1999 1998 ---------- ---------- ---------- ---------- Revenue: License 69.4% 65.6% 65.1% 63.2% Services 30.6% 34.4% 34.9% 36.8% ---------- ---------- ---------- ---------- Total revenue 100.0% 100.0% 100.0% 100.0% Cost of revenue: License 2.5% 7.4% 3.5% 9.9% Services 16.2% 26.4% 17.3% 32.7% ---------- ---------- ---------- ---------- Total cost of revenue 18.7% 33.8% 20.8% 42.6% Gross profit 81.3% 66.2% 79.2% 57.4% Operating expenses: Marketing and sales 35.9% 65.4% 41.9% 83.6% Research and development 24.4% 27.6% 28.0% 32.8% General and administrative 12.2% 15.1% 12.5% 17.1% Amortization of goodwill 1.5% 1.8% 1.8% 2.2% ---------- ---------- ---------- ---------- Total operating expenses 74.0% 109.9% 84.2% 135.7% Income (loss) from operations 7.3% (43.7)% (5.0)% (78.3)% Other expense, net (2.9)% (2.0)% (2.9)% (1.7)% ---------- ---------- ---------- ---------- Income (loss) before taxes 4.4% (45.7)% (7.9)% (80.0)% Provision for taxes - 0.1% 0.1% 0.1% ========== ========== ========== ========== Net income (loss) 4.4% (45.8)% (8.0)% (80.1)% ========== ========== ========== ==========
REVENUE Total consolidated revenue increased 6.7% from $6.6 million in the second quarter of 1998 to $7.0 million in the second quarter of 1999. This increase in total revenue was due to an increase in license revenues. Total consolidated revenue increased 19.2% from $11.1 million for the six month period ending June 30, 1998 to $13.3 million for the corresponding period ending June 30, 1999. This increase in total revenue was due to an increase in both license and services revenues. License revenue License revenue increased 12.9% from $4.3 million in the second quarter of 1998 to $4.9 million in the second quarter of 1999. License revenue increased 22.8% to $8.6 million for the six month period ending June 30, 1999, from $7.0 million for the corresponding period in 1998. License revenue increased in the second quarter of 1999 to 69.4% of total sales compared to 65.6% in the second quarter of 1998. License revenue increased for the six month period ending June 30, 1999 to 65.1% of total sales compared to 63.2% for the corresponding period in 1998. These increases were the result of an increase in runtime licenses from current customers as well as the addition of new development license customers. See our December 31, 1998 10-KSB, on file with the SEC, section labeled "Risk Factors - Our revenue levels are unpredictable." 12 13 Services revenue Services revenue decreased 5.1% from $2.3 million in the second quarter of 1998 to $2.1 million in the second quarter of 1999. This decrease was due to reduced consulting revenues. Services revenue increased 12.9% to $4.6 million, for the six month period ending June 30, 1999, from $4.1 million in the corresponding period in 1998. This increase was due to increases in both maintenance and training revenue. International revenue International revenue increased 13% to $3.3 million in the second quarter of 1999 compared to $2.9 million in the second quarter of 1998. International revenue increased 43.0% to $6.8 million, for the six month period ending June 30, 1999, from $4.7 million in the corresponding period in 1998. The increase in international revenue during 1999 compared to 1998 resulted primarily from higher sales in Europe. This increase in international revenue resulted from the Company's increased marketing and sales investment, as well as the September 1998 acquisition of Soft Mountain. *We intend to maintain our sales and marketing activities outside the United States, including Europe, Japan and other Asia/Pacific countries, which will require significant management attention and financial resources, and which may increase costs and impact margins unless and until corresponding revenue is achieved. International revenue as a percentage of total revenue increased for the second quarter 1999 to 48% from 45% in 1998 and to 51% for the six month period ending June 30, 1999 from 43% for the corresponding period in 1998. *Due to our increased emphasis on international sales, especially through Versant Europe, we expect international revenue to remain a significant percentage of total revenue. COST OF REVENUE AND GROSS PROFIT Total cost of revenue decreased 40.9% to $1.3 million in the second quarter of 1999 from $2.2 million in the second quarter of 1998. Total cost of revenue decreased 41.6% to $2.8 million for the six month period ending June 30, 1999, from $4.7 million in the corresponding period in 1998. This decrease was the result of three factors. First, there was a substantial cost reduction in the service organization due to our restructuring efforts completed in January 1999. Second, the amortization of certain deferred license costs associated with the acquisition of Versant Europe was completed at the end of 1998. Third, the provision for bad debt reserves was lower in 1999 compared to 1998. Total cost of revenue as a percentage of total revenues decreased to 18.7% in the second quarter of 1999 and 20.8% for the six month period ending June 30, 1999 from 33.8% and 42.6% respectively, in the corresponding periods in 1998. Cost of License revenue Cost of license revenue consists primarily of amortization of deferred license costs associated with the acquisition of Versant Europe (for 1998 only), provisions for bad debt reserves, product royalty obligations incurred by us when we sublicense tools provided by third parties, royalty obligations incurred by us under porting services agreements, user manuals, product media, product packaging, production labor costs and freight. Cost of license revenue decreased 63.6% to $177,000 in the second quarter of 1999 compared to $486,000 in the second quarter of 1998. Cost of license revenue decreased 57.6% to $466,000 for the six month period ending June 30, 1999, from $1.1 million for the corresponding period in 1998. This decrease was the result of the elimination of amortization expense of certain deferred license costs associated with the acquisition of Versant Europe, reduced provisions for bad debt reserves and reduced production costs associated with the restructuring in January 1999. As a result of these decreased costs, cost of license revenue as a percentage of license revenues decreased to 3.6% for the second quarter 1999 and 5.4% for the six month period ending June 30, 1999 compared to 7.4% and 9.9%, respectively, for the corresponding periods in 1998. As part of the acquisition of Versant Europe, we allocated $1.4 million of the purchase price to deferred license costs. In the second quarter and six month period of 1999, we recognized zero expense versus $250,000 and $500,000, respectively, for the corresponding periods in 1998, of these deferred license costs as a cost of license revenue. Cost of Services revenue Cost of services revenue consists principally of personnel costs associated with providing consulting, training, technical support and nonrecurring engineering work paid for by customers. Cost of services revenue decreased 34.6% to $1.1 million in the second quarter of 1999 compared to $1.7 million in the second quarter of 1998. Cost of services revenue decreased 36.8% to $2.3 million for the six month period ending June 30, 1999, from $3.6 million for the corresponding period in 1998. These decreases were attributable to the restructuring activities completed in January 1999. Cost of services revenue as a percentage of services revenue decreased to 53.0% for the second quarter 1999 and 49.7% for the six month period ending June 30, 1999 compared to 76.8% and 88.8% respectively, for the corresponding periods in 1998. *We expect cost of services revenue to be a significant percentage of services revenue due to the need for us to maintain a significant services organization due to the lack of third-party service support, the difficulty in forecasting 13 14 billable service demand, the unevenness of demand for services (which have historically been reduced during holiday periods) and pricing pressure on fees for services encountered in connection with license sales. *We also expect to experience increased compensation pressures as a result of the intense demand for managers and engineers in Silicon Valley, which we may not be able to offset with increases in the fees we charge for maintenance and training and consulting projects due to competitive pressures and restrictions in contractual provisions regarding associated services. Since December 31, 1998 we have restructured our operations to reduce employee costs and associated expenses. Worldwide headcount as of June 30, 1999 was 117 compared to June 30, 1998 total of 159. See our December 31, 1998 10-KSB, on file with the SEC, section labeled "Risk Factors - We rely on telecommunications and financial services markets characterized by complexity and intense competition." MARKETING AND SALES EXPENSES Marketing and sales expenses consist primarily of marketing and sales personnel costs, including sales commissions, recruiting, travel, sales offices, product descriptive literature, seminars, trade shows, product management, depreciation, occupancy expense, lead generation and mailings. Marketing and sales expenses decreased 41.4% to $2.5 million in the second quarter of 1999 compared to $4.3 million in the second quarter of 1998. Marketing and sales expenses decreased 40.3% to $5.6 million for the six month period ending June 30, 1999, from $9.3 million for the corresponding period in 1998. These decreases were attributable to the restructuring activities completed in January 1999. *We expect, in 1999, marketing and sales expenses per quarter will increase slightly in absolute dollar terms but will decrease as a percentage of revenue from second quarter 1999 level, due to our efforts to control headcount, commission costs and costs associated with marketing programs. *Our operating results will be adversely affected if our marketing and sales expenditures increase more than planned or increased revenues are not achieved. As a percentage of total revenues marketing and sales expenses decreased to 35.9% for the second quarter 1999 and 41.9% for the six month period ending June 30, 1999 compared to 65.4% and 83.6% respectively, for the corresponding periods in 1998. These significant decreases in both periods were the result of reduced expenses and higher revenues. RESEARCH AND DEVELOPMENT EXPENSES Research and development expenses consist primarily of salaries, other personnel-related expenses, depreciation or the expensing of development equipment, occupancy expenses, travel, supplies and the costs of an ISO 9001 quality program. Research and development expenses decreased 5.7% to $1.7 million in the second quarter of 1999 compared to $1.8 million in the second quarter of 1998. Research and development expenses remained flat at $3.7 million for the six month period ending June 30, 1999, and for the corresponding period in 1998. The decrease for the three month period was attributable to the restructuring activities completed in January 1999. *We believe that a significant level of research and development expenditures is required to remain competitive and complete products under development. *Accordingly, we anticipate that we will continue to devote substantial resources to research and development to design, produce and increase the quality, competitiveness and acceptance of our products. *Due to increased development efforts under way, we expect research and development expenses to increase compared to the second quarter 1999 levels in absolute dollar terms but to decrease as a percentage of revenues in 1999. However, if we increase our research and development efforts more than planned or do not increase revenues, our results of operations could be adversely affected in the short term. To date, all research and development expenditures have been expensed as incurred. As a percent of total revenues, research and development costs as a percentage of total revenues decreased to 24.4% for the second quarter 1999 and 28.0% for the six month period ending June 30, 1999 compared to 27.6% and 32.8% respectively, for the corresponding periods in 1998. The decrease as a percentage of revenues was due to higher revenues. GENERAL AND ADMINISTRATIVE EXPENSES General and administrative expenses consist primarily of salaries, recruiting and other personnel-related expenses for our accounting, human resources, management information systems, legal and general management functions. In addition, general and administrative expenses include outside legal, audit and public reporting costs. General and administrative expenses decreased 13.9% to $853,000 in the second quarter of 1999 compared to $991,000 in the second quarter of 1998. General and administrative expenses decreased 12.7% to $1.7 million for the six month period ending June 30, 1999, from $1.9 million for the corresponding period in 1998. These decreases were attributable to the restructuring activities completed in January 1999. *We expect, in 1999, our quarterly general and administrative expenses to increase slightly in absolute dollar terms but decrease as a percentage of revenues from second quarter 1999 level. *However, if our G&A expenses increase more than planned or revenues do not increase over second quarter 1999 levels then our results of operations would be adversely affected. As a percentage of total revenues general and 14 15 administrative costs as a percentage of total revenues decreased to 12.2% for the second quarter 1999 and 12.5% for the six month period ending June 30, 1999 compared to 15.1% and 17.1% respectively, for the corresponding periods in 1998. The decrease as a percentage of revenues was also due to lower expenses and higher revenues. AMORTIZATION OF GOODWILL The acquisition of Versant Europe in March 1997 resulted in our recording an intangible asset representing the cost in excess of fair value of the net assets acquired in the amount of $3.3 million, which is being amortized over a seven-year period. During the second quarter of 1999, we amortized $49,000 while in the second quarter of 1998 the Company amortized $121,000, for the six month period ending June 30, 1999 we amortized $98,000. This reduction of amortization costs relates to our write down of the Versant Europe goodwill by $1.6 million in the fourth quarter of 1998, due to our revised estimated discounted cash flow over the next five years. *We will amortize $196,000 of this remaining goodwill amount in 1999. The acquisition of Soft Mountain in September 1998 resulted in our recording an intangible asset representing the cost in excess of fair value of the net assets acquired in the amount of $1.2 million, which is being amortized over a five-year period. During the second quarter of 1999, we amortized $61,200 of this amount, for the six month period we amortized $122,400. *We will amortize $245,000 of this amount in 1999. LIQUIDITY AND CAPITAL RESOURCES Cash and cash equivalents decreased by $2.7 million from $3.6 million at December 31, 1998 to $823,000 at June 30, 1999. However, see note 8 Subsequent Events regarding additional cash from the sale of equity of approximately $2.5 million received in July 1999. We had no short-term investments on December 31, 1998 or June 30, 1999, however management expects that, in the future, cash in excess of current requirements will be invested in short-term, interest-bearing, investment grade securities. For the six month period ending June 30, 1999 our operating activities used $1.1 million of cash and cash equivalents primarily as a result of funding the net loss, decreases in accrued liabilities, accounts payables and increases in our accounts receivables, offset by, reduced prepaid and other assets, increases in deferred revenues, depreciation, amortization and provision for doubtful accounts. Investing activities used a small amount of net cash as a result of selling older equipment and purchasing newer, more efficient equipment. Financing activities used cash of $1.6 million due to principle payments on our bank and lease financing arrangements. Total assets decreased by 13% from $20.7 million at December 31, 1998 to $17.9 million at June 30, 1999. The decrease in total assets was primarily due to the reduction in cash, other current assets and net property and equipment balances as depreciation expense far exceeded the additional assets added in the six month period ending June 30, 1999. *We have and will continue to make certain investments in software applications and systems to ensure that our products are Year 2000 compliant. In particular, our purchase of approximately $9 million of property and equipment during 1997 and 1998 included substantial investments in management and information systems designed to be Year 2000 compliant. We are currently in the process of testing our internal and external systems for compliance as well as contacting our customers, suppliers and providers of third-party technology that may be integrated with our products for information concerning their Year 2000 compliance status. In the event that any of our significant suppliers or customers, or such third-party technology providers, does not successfully and timely achieve Year 2000 compliance, our business or operations could be adversely affected. See "Risk Factors - Our business may be harmed by Year 2000 problems." Total liabilities decreased 9% from $18.8 million at December 31, 1998 to $17.2 million at June 30, 1999. This decrease was due to a reduction of accrued liabilities, accounts payables, reduced bank and lease debt partially offset by increases in net deferred revenue and accrued interest on our convertible secured note. However, see note 8 Subsequent Events regarding the conversion of approximately $3.8 million of debt into equity in July 1999. Total shareholders' equity decreased 59% from $1.9 million at December 31, 1998 to $.8 million at June 30, 1999. This decrease primarily results from the net loss of $1.1 million for the six month period ending June 30, 1999. Due to the conversion of the Vertex $3.8 million convertible secured debt and the issuance of $2.5 million of Preferred stock, total equity will be increased in July 1999. See note 8 Subsequent Events. At June 30, 1999, we had $823,000 in cash and cash equivalents and negative working capital of approximately $3.4 million. We maintain a revolving credit line with a bank that expired on May 31, 1999 and which was amended and 15 16 extended after the end of the quarter. The maximum amount that can be borrowed under the revolving credit line is $5.0 million. As of June 30, 1999, $900,000 was allocated to a standby letter of credit to support our European banking line and $1,400,000 of borrowings were outstanding. Borrowings and the standby letter of credit under the revolving credit line are limited to 80% of eligible accounts receivable and are secured by a lien on substantially all of our assets. These borrowings bear interest at the bank's base lending rate, currently at 7.75%, plus 2.0%. The loan agreement has been amended and contains certain financial covenants and also prohibits cash dividends and mergers and acquisitions without the bank's prior approval. There are new financial covenants commencing with the quarter ending September 30, 1999. The amended credit line expires on June 1, 2000. We entered into an interest only, variable rate note of $2.5 million with a bank that matured March 1, 1998. On March 19, 1998, this note was converted to a variable rate, term loan with principal and interest payable over 36 months. The term loan covenants and interest rate were amended in conjunction with the new line of credit agreement. The new financial covenants commence with the quarter ending September 30, 1999. Borrowings under the loan are secured by a lien on all assets acquired using the proceeds of the loan, which have been used for the acquisition of equipment and leasehold improvements. The loan bears interest at the bank's base lending rate, currently at 7.75%, plus 2.5%. The loan contains certain financial covenants and also prohibits cash dividends and mergers and acquisitions without the bank's prior approval. *We believe with the additional $2.5 million cash from the Series A equity offering and our new bank line of credit, that our current cash, cash equivalents, our lines of credit, and the net cash provided by operations, will be sufficient to meet our anticipated cash needs for working capital and capital expenditures for 1999. At June 30, 1999, our commitments for capital expenditures were not material. *If cash provided by operations is insufficient to satisfy our liquidity requirements, we will seek additional debt or equity financing. Such financing may not be available on terms acceptable to us, if at all. The sale of additional equity or convertible debt securities could result in dilution to our shareholders. *A portion of our cash may be used to acquire or invest in complementary businesses or products or to obtain the right to use complementary technologies. From time to time, we evaluate potential acquisitions of such businesses, products and technologies. We had a profitable quarter in the period ending June 30, 1999, however, in the quarter ending March 31, 1999 and for the years 1997 and 1998 we experienced net losses and negative cash flows. We are subject to fluctuations in operating results and therefore, if the company were to experience additional losses in future periods there may be a need for additional financing. The actual cash resources required to successfully implement our business plan in year 1999 will depend upon numerous factors, including but not limited to those described in our December 31, 1998 10-KSB on file with the SEC and the following additional Risk Factors. RISK FACTORS This Form 10-QSB contains forward-looking statements that involve risks and uncertainties, including, but not limited to, those set forth below, that could cause actual results to differ materially from those in the forward-looking statements. The matters set forth below should be carefully considered when evaluating our business and prospects. RISKS RELATED TO OUR BUSINESS WE HAVE LIMITED WORKING CAPITAL. We incurred a significant reduction in working capital in 1998 and a further reduction as a result of our loss during the first half of 1999. To date, we have not achieved business volume sufficient to restore profitability and a positive cash flow. We operated at a net loss of $20 million in 1998 and for the six month period ending June 30, 1999 have incurred an additional operating loss of $1.1 million. Our available cash and credit facilities may not be sufficient to fund our operations and successfully implement our business plan, part of which consists of pursuing potential strategic relationships, acquisitions of companies, products and technologies. Also, the Soft Mountain shareholders have demanded that we repurchase for approximately $1.1 million the 246,586 shares of our common stock issued to them in connection with our purchase of Soft Mountain shares as a result of our inability to register their shares by December 31, 1998. See note 8 Subsequent Events. 16 17 OUR COMMON STOCK MAY BE DELISTED FROM NASDAQ. Our common stock was listed on the Nasdaq National Market until July 19, 1999. On this date, our common stock was listed on the Nasdaq SmallCap Market on a conditional basis. To remain listed on Nasdaq SmallCap Market, Nasdaq must be satisfied that we were profitable for the quarter ending June 30, 1999 and that we have net tangible assets of at least $5.4 million after the transactions discussed in the preceding note 8 Subsequent Events. We believe that we will comply with the Nasdaq SmallCap listing requirements, but there can be no assurance until confirmation is received from Nasdaq after the filing of our quarterly report on Form 10-QSB for the quarter ending June 30, 1999. To maintain our listing on the Nasdaq SmallCap Market, there are several requirements applicable to all issuers listed there, including a minimum bid price of one dollar per share and net tangible assets of $2.0 million. We might not meet these or other continued listing requirements in the future. If our common stock were delisted, we may not be able to satisfy the higher requirements for relisting on either the Nasdaq National or Nasdaq SmallCap Market. After delisting, trading in our common stock may be conducted in the over-the-counter market in what are commonly referred to as the "pink sheets". As a result, investors would find it more difficult to buy, sell or quote our common stock. OUR EXISTING DEBT BURDEN IS SUBSTANTIAL. At June 30, 1999, we had the following outstanding borrowings: (1) $1.6 million under a bank revolving loan, which expired on May 31, 1999 (2) $1.5 million under a bank term loan, which expires on March 18, 2001 and (3) $3.6 million plus accrued interest of $200,000 under our convertible subordinated secured promissory note, which is due in October 2001. However, see note 6 Line of Credit and note 8 Subsequent Events. OUR BUSINESS MAY BE HARMED BY YEAR 2000 PROBLEMS. We and our customers and suppliers are aware and concerned about the risks associated with Year 2000 computer issues. If our systems do not recognize the correct date when the year changes to 2000, there could be a material adverse effect on our operations. We are at risk from both internal and external areas. We have categorized our risk into the following categories: (1) internal systems required to operate our business (e.g. operational, financial, product development, safety and environmental controls) (2) external supplier systems that are necessary to support our business requirements (e.g. raw materials, supplies, shipping and delivery systems, banking, payroll and government systems) and (3) product warranty exposure with our customer base. We are currently evaluating our exposure in all these areas. We have been reviewing our facility, financial and operating systems to identify and assess the requirements to bring hardware systems and software applications to Year 2000 compliance. We expect to conclude our estimate of exposure to Year 2000 problems, associated costs and required correction plans by the end of August 1999 and to correct any Year 2000 problems by October 31, 1999. We have not identified any alternative remediation plans in the event Year 2000 issues can not be adequately corrected. We will define any alternative plans if and when we discover systems that can not be made Year 2000 compliant. If implementation of upgrade or replacement systems is delayed or if significant new non-compliance issues are discovered, our operations could be materially adversely affected. We have and will continue to make certain investments in software applications and systems to ensure that we are Year 2000 compliant with respect to our internal systems. In particular, our purchase of $9 million of property and equipment during 1997 and 1998 included substantial investments in management and information systems designed to be Year 2000 compliant. We have contracted with an outside independent consulting firm to provide internal Year 2000 equipment testing and consulting services to assist us in the process of defining and implementing a Year 2000 compliance project. 17 18 This compliance project includes the following phases:
EXPECTED COMPLETION NAME OF PHASE: DESCRIPTION: STATUS: DATE: - -------------- ------------ ------- ---------- Awareness and Assessment Phase Educate the company on the Year 2000 project, Completed - the potential problems associated with this date issue, inventory our systems and products that require compliance testing. Testing and Validation Phase Test our systems and products and identify the Began August 1999 non-compliant areas, develop remediation plans, March 1999 map the conversion process to correct non-compliant areas and validate the changes that need to be made to correct non-compliant areas. Implementation and Convert non-compliant areas with compliant Begins October 1999 Certification Phase products (hardware or software), verify that all August 1999 intended changes have been made successfully and that all planned Year 2000 compliance changes have been made. Maintenance Phase This phase puts processes and procedures in Begins December 1999 place to minimize the likelihood that Year 2000 November 1999 compliance problems will be reintroduced into the compliant systems and products.
STATUS: Awareness and Assessment Phase: We have written and published an awareness statement to educate our employees, vendors and customers about the Year 2000 issues and potential problems associated with the Year 2000 rollover problem and what effect this will have on our company and customers. We have published a statement about our products, testing procedures used and their Y2k compliance. We have published these statements internally to our employees and management and will be distributing these statements via our web site "versant.com" and by mail to certain vendors and customers by the end of July 1999. We have identified all internal systems (products and software) that need to be tested for Year 2000 compliance. Testing and Validation Phase: We have tested our personal computers and servers used by our information management systems, engineering development teams and employees to complete their daily work assignments. The results were 3 personal computers (one 486 and two Pentiums), and two servers (both Pentiums) failed our Year 2000 test. We intend to replace both servers and the 486 system with existing Y2k compliant inventory, and upgrade the remaining two Pentiums with bios upgrades if possible or replace. In the process of testing our internal business software programs we have determined that certain operating systems (Win95, Win98, NT, Novell) and certain financial programs need to be upgraded with Y2k patches to be Y2k compliant. We have budgeted $50,000 for the upgrade process (software and labor) and plan to complete the upgrade process by October 1999. We will be testing or seeking validation with respect to Year 2000 compliance regarding external providers for phone service, security service, utility service, internet service and air conditioning service. We will then develop remediation plans to correct non-compliant systems. In addition to the internal testing, evaluation and remediation project, we will implement a program that will query our suppliers and providers of third-party technology that may be integrated with our products to determine if the suppliers operations', products and services are Year 2000 compliant. We sent these questionnaires to our third party providers and key suppliers at the end of June 1999. We will conclude our review by the end of August 1999. Where practical, we will take the necessary actions to reduce our exposure to suppliers that are not Year 2000 compliant by finding alternative suppliers. However, there may be critical suppliers that cannot be substituted and this could have a material adverse effect on our operations. 18 19 We believe our products are Year 2000 compliant. However, not every customer situation can be anticipated, especially in areas that involve third party products. Extensive testing has been performed on our products and additional testing will continue as we become aware of our customer's Year 2000 needs and issues. We may see an increase in customer demands for warranty service. This may create additional service costs that can not be recovered. In addition, if our products are not Year 2000 compliant, we could face litigation regarding Year 2000 compliance issues. The process to insure our systems and our supplier systems are Year 2000 compliant is expected to be significantly completed by October 31, 1999, with testing to be done through the remainder of 1999. In addition, we could face reduced demand for our products through 1999 if customers focus on purchasing solutions to their Year 2000 problems rather than purchasing our products, which are not designed to solve Year 2000 problems. Customer's purchasing plans could be affected by the Year 2000 problem if they need to expend significant resources to correct their existing systems. This situation may result in reduced funds available to implement solutions based upon our products. In addition, some customers may defer the license of our products until after the Year 2000 while they complete remediation and testing of their current systems to ensure Year 2000 compliance. A decrease in demand for our products due to customers' Year 2000 issues would seriously harm our business and results of operations. Please refer to our December 31, 1998 10-KSB, on file with the SEC, section labeled "Risk Factors" for a complete description of the risk factors facing our company. 19 20 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS The Company and certain of its present and former officers and directors were named as defendants in four class action lawsuits filed in the United States District Court for the Northern District of California, filed on January 26, 1998, February 5, 1998, March 11, 1998 and March 18, 1998, respectively. On June 19, 1998, a Consolidated Amended Complaint was filed in the above mentioned court, by the lead Plaintiff named by the court. The amended complaint alleges violations of Sections 10(b) and 20(a) of the Securities Exchange Act, and Securities and Exchange Commission Rule 10b-5 promulgated under the Securities Exchange Act, in connection with public statements about the Company's expected financial performance. The complaint seeks an unspecified amount of damages. The Company vigorously denies the plaintiffs' claims and has moved to dismiss the allegations. The Plaintiff has filed a response to the Company's motion to dismiss and the Company has filed an opposition to Plaintiff's response. The motion to dismiss was submitted to the court for consideration on November 13, 1998 and the court has not yet issued a decision. Securities litigation can be expensive to defend, consume significant amounts of management time and result in adverse judgments or settlements that could have a material adverse effect on the Company's results of operations and financial condition. The selling shareholders of the Soft Mountain shares (see Note 11 of the footnotes to the financial statements, in the annual 10-KSB for December 31, 1998) have demanded that the Company repurchase for approximately $1.1 million the 245,586 shares of the Company's common stock issued to them in conjunction with the Company's purchase of all of Soft Mountain's shares. The demand alleges that the Company has not registered the shares issued in the transaction in a timely manner. The Company disputes the right of such shareholders to receive such payment, however any potential settlement could result in the payment of cash or the issuance of additional Versant stock. Settlement discussions are ongoing. Arbitration or litigation may result if a settlement cannot be reached. On April 9, 1999, the Company filed a Form S-3 registration statement for shares of the Company's common stock issued to the Soft Mountain shareholders and others. *The registration statement became effective May 14, 1999. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS Not Applicable ITEM 3. DEFAULTS UPON SENIOR SECURITIES Not Applicable ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS At the 1999 annual meeting of shareholders held on June 10, 1999 the following matters were approved by the shareholders: (1) Five members of the board of directors were elected, David Banks, Mark Leslie, Stephen J. Gaal, Bernard Woebker and Nick Ordon. (2) The number of shares reserved under the Company's 1996 Employee Stock Purchase Plan was increased by 250,000 shares from 400,000 shares to 650,000 shares. (3) The number of shares reserved for issuance under the Company's 1996 Equity Incentive Plan was increased by 250,000 shares to 1,900,000 shares (plus any shares remaining under the Company's 1989 Stock Option Plan.) (4) The appointment of Arthur Andersen LLP as the Company's independent auditors to perform the audit of the Company's financial statements for the 1999 fiscal year was ratified. 20 21 ITEM 5. OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8K (a) Exhibit No. Exhibit Title - ----------- ------------- 10.36 Modification to Loan & Security Agreement dated June 18, 1999 27.01 Financial Data Schedule (b) On July 12, 1999 the Company filed a report on Form 8-K in connection with the issuance of the Preferred Stock. (c) On July 19, 1999 the Company filed a report on Form 8-K in connection with the delisting of its common stock from the Nasdaq National Market. 21 22 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: July 30, 1999 /s/ Gary Rhea - ------------------------ ---------------------------------------------- Gary Rhea Vice President Finance and Administration. Chief Financial Officer, Treasurer and Secretary (Duly Authorized Officer and Principal Financial Officer) 22 23 EXHIBIT INDEX EXHIBIT EXHIBIT TITLE NUMBER 10.36 -- Modification To Loan & Security Agreement dated June 18, 1999 27.01 -- Financial Data Schedule THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM (a) THE STATEMENTS OF OPERATIONS AND BALANCE SHEETS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH (b) FINANCIAL STATEMENTS. EX-10.36 2 MODIFICATION TO LOAN & SECURITY AGREEMENT 1 EXHIBIT 10.36 MODIFICATION TO LOAN & SECURITY AGREEMENT AND VARIABLE RATE-INSTALLMENT NOTE This Third Modification to Revolving Credit Loan & Security Agreement, and First Modification to Variable Rate-Installment Note (this "Modification") is entered into by and between Versant Corporation, a California corporation ("Borrower") and Comerica Bank-California, a California banking corporation ("Bank") as of June 18, 1999 at San Jose, California. RECITALS A. Bank and Versant Object Technology Corporation, a California corporation (the "Original Borrower") previously entered into that certain Revolving Credit Loan & Security Agreement (Accounts and Inventory) dated as of May 15, 1997, (the "Agreement"). B. Subsequently, Original Borrower executed that certain Variable Rate-Installment Note dated as of March 19, 1998 in the original principal amount of Two Million, Five Hundred Twenty-Two Thousand, Eighty Nine and 95/100 Dollars ($2,522,089.95), (the "Term Note"). C. Thereafter, the Agreement was amended pursuant to the following: (i) that certain Modification To Loan & Security Agreement dated as of May 6, 1998, (the "First Modification") and (ii) that certain Modification to Loan & Security Agreement dated as of August 11, 1998, (the "Second Modification"). The First Modification, the Second Modification and this Modification are sometime hereinafter referred to collectively as the "Modifications". The Agreement, as amended by the Modifications; the Term Note; and all other instruments and documents executed in connection therewith, are hereinafter referred to collectively as the "Loan Documents". D. Subsequent to the Agreement and the Term Note, Original Borrower did, pursuant to that certain Certificate of Amendment of Amended and Restated Articles of Incorporation of Versant Object Technology Corporation dated as of June 10, 1998 and filed on July 14, 1998 under filing No. A0511339, change its corporate name to Versant Corporation, (the "Name Change"). D. Borrower's obligations under the Loan Documents are secured by, among other things, a first lien priority security interest granted to Bank in and to all of Borrower's assets, including, without limitation, accounts, inventory, machinery, equipment, and cash deposits. E. Borrower has now requested that Bank (i) consent to the Name Change, and (ii) modify the terms of the Agreement to extend the term thereof to June 1, 2000 and revise certain covenants contained in the Agreement. F. Notwithstanding the provisions of the Agreement, Bank has agreed to consent to the Name Change, and to the further modification of the terms of the Agreement, subject to the terms and conditions set forth below: Page 1 of 6 2 AGREEMENT NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: A. Recitals. The foregoing recitals of facts and understandings of the parties are incorporated herein as the agreement of the parties. B. Modification of the Agreement. The Agreement is hereby modified as set forth below: 1. Section 1.5. Section 1.5 is amended by adding the following at the end thereof: "and (3) one hundred percent (100%) of accounts with respect to which the account debtor does not have its principal place of business in the United States and that are insured by FCIA on terms satisfactory to bank, but in no event in excess of an aggregate sum for all such accounts of Two Million Dollars ($2,000,000.00)." 2. Section 2. a. Section 2.1 Paragraph 1.31 and 2.1 of the Agreement are hereby deleted in their entirety, and replaced with the following: "2.1 Upon the request of Borrower, made at any time and from time to time during the term hereof, but in no event, more frequently than once during any calendar week, and so long as no Event of Default has occurred, Bank shall lend to Borrower an amount equal to the Borrowing Base; provided, however, that in no event shall Bank be obligated to make advances to Borrower under this Section 2.1 whenever the Daily Balance exceeds, at any time, either the Borrowing Base or the sum of Five Million Dollars ($5,000,000), such amount being referred to herein as an "Overadvance", however, reserving therefrom the aggregate sum of One Million Five Hundred Thousand Dollars ($1,500,000) for the issuance of Letters of Credit, (the "Letter of Credit Sublimit") subject to the following: Bank agrees from time to time during the term of this Agreement to (i) issue Letters of Credit for the account of Borrower containing terms and conditions acceptable to Bank, provided however that (a) no Letter of Credit shall have an expiration date beyond the Maturity Date (as defined in Section 3.1 of this Agreement), and (b) no Letter of Credit shall be issued unless, on the date of the proposed issuance of any Letter of Credit the advances available to Borrower hereunder are equal to 100% of the face amount of such Letter of Credit, (ii) each Letter of Credit shall be subject to the additional terms and conditions required by Bank in connection with the issuance thereof, and (iii) each draft paid by Bank under a Letter of Credit shall be deemed an advance under this Agreement and shall be subject to the terms hereof." b. Section 2.2. Section 2.2 is hereby amended by deleting therefrom the first sentence in its entirety, and replacing it with the following: "Except as herein below provided, the Credit shall bear interest, on the Daily Balance owing, at a rate of Two (2.0) percentage points per annum above the Base Rate (the "Rate")." 3. Section 3. Section 3.1 is hereby amended by deleting therefrom the first sentence in its entirety, and replacing with the following: Page 2 of 6 3 "3.1 This Agreement shall remain in full force and effect until June 1, 2000, or until sooner terminated by notice by Borrower (such date being the "Maturity Date")." 4. Section 6. a. Section 6.16. The following sub-sections of Section 6.16 are hereby amended as follows: (i) by adding the following to the end of sub-section b. thereof: . . . "In addition, Borrower shall deliver to Bank, within fifteen (15) days of the end of each month, a company prepared profit and loss statement, balance sheet and statement of cash flow reflecting comparatives of actual financial results, versus the projected financial results." (ii) by adding the following to the end of sub-section c. thereof: . . ."and in addition, a Borrowing Base Certificate on a weekly basis as of the end of the business day of each Friday, to be delivered to Bank on or before Wednesday of the immediately following week." b. Section 6.17. The following sub-sections of Section 6.17 are hereby deleted in their entirety and replaced with the following: "b. Tangible Effective Net Worth in an amount not less than $1,900,000 plus 100% of the net proceeds of any additional equity capital made available to Borrower; d. A Liquidity Ratio ( defined as (a) the sum of (i) cash plus (ii) accounts receivable to (b) the sum of the balance outstanding under this Agreement, plus (ii) the current portion of long term debt, plus (iii) accounts payable of not less than 2.25:1.0 on a fiscal quarterly basis commencing with the quarter ending September 30, 1999; e. none; and f. net operating cash, as defined in FASB 95 and 102, equal to or greater than $600,000 per quarter commencing with quarter ending September 30, 1999; . . . " g. Net income after taxes of at least One Dollar ($1.00), for each fiscal quarter of Borrower commencing with the fiscal quarter ending September 30, 1999. c. Section 6.27 Section 6.27 is hereby added at the end of Section 6. "6.27 Borrower shall perform all acts reasonably necessary to ensure that: (i)Borrower and any business in which Borrower holds a substantial interest, and (ii) all customers, suppliers and vendors that are material to Borrower's business, become Year 2000 Compliant in a timely manner. Such acts shall include, without limitation, performing a comprehensive review and assessment of all Borrower's systems and adopting a detailed plan, with itemized budget, for the remediation, monitoring and testing of such systems. As used in this paragraph, "Year 2000 Compliant" shall mean, in regard to any entity, that all software, hardware, firmware, equipment, goods or systems utilized by or material to the business operations or financial condition of such entity, will properly perform date sensitive functions before, during and after the year 2000. Borrower shall, immediately upon request, provide to Page 3 of 6 4 Bank such certifications or other evidence of Borrower's compliance with terms of this section as Bank may from time to time require." 5. Cash Collateral Account. Pursuant to the provisions of Section 4.5 of this Agreement, Borrower hereby agrees that it shall maintain a "dominion of funds" lock box account into which all proceeds of accounts shall be deposited. Such account has been, or will be established by Borrower with Bank under account No. 1891-170456 (the "Cash Collateral Account"). Borrower hereby acknowledges that the Cash Collateral Account constitutes a portion of the Collateral as defined in the Agreement. B. Modification of Term Note. Effective with the Effective Date, (as defined below) the Term Note is hereby amended by changing the rate of interest which is accruing on any unpaid balance thereunder from the Bank's base rate from time to time in effect plus one-half of one percent (.50%) per annum; to, the Bank's base rate from time to time in effect plus two and one-half percent (2.50%) per annum. C. General Provisions. 1. Modification Fee. In consideration for Bank's willingness to enter into this Modification, Borrower shall pay to Bank in cash, as a non-refundable fee, the sum of Fifty Thousand Dollars ($50,000) on or before the Effective Date, (the "Modification Fee"). 2. Legal Effect. Except as specifically set forth in this Modification, all of the terms and conditions of the Loan Documents shall remain in full force and effect in accordance with their original terms and conditions, and Borrower hereby affirms, ratifies and approves the Loan Documents executed by Original Borrower all as if the same had been executed and delivered by Borrower. Wherever the term "Borrower" is used in the Loan Documents, it shall hereafter mean Versant Corporation. 3. Further Documents. Borrower hereby agrees to execute any documents requested by Bank to effectuate this Modification, including without limitation a resolution authorizing this Modification, and the Loan Documents. 4. Definitions. Unless otherwise defined herein, the capitalized terms used herein shall have the definitions set forth in the Loan Documents. 5. Integration. This is an integrated Modification, and supersedes all prior negotiations and agreements regarding the subject matter hereof. 6. Release. Borrower does hereby release, discharge and acquit Bank, and its officers, directors, shareholders, agents and employees, and their respective successors, heirs and assigns, (collectively, the "Released Parties") of and from any and all rights, claims, demands, obligations, liabilities, indebtedness, breaches of contract, breaches of duty or any relationship, acts, omissions, misfeasance, malfeasance, causes of action, promises, damages, costs, losses and expenses of every kind, nature, description or character, and irrespective of how, why or by reason of what facts, which could or may be claimed to exist, whether known or unknown, suspected or unsuspected, liquidated or unliquidated, claimed or unclaimed, whether based on contract, tort, breach of any duty, or other legal or equitable theory or recovery, each as though fully set forth herein at length, which in any way arise out of, are connected with or relate to the Loan, as the same has been modified by this Modification, or the administration of the Loan, as well as any action or inaction of the Released Parties or any of them with respect to the Loan or the administration thereof. Notwithstanding the foregoing, this release shall not Page 4 of 6 5 apply to the extent of any such rights, claims or the like arising from any acts or omissions of the Released Parties after the Effective Date. As to all matters being released by Borrower pursuant to the provisions hereof, Borrower waives any and all rights which it may have under the provisions of California Civil Code section 1542 or under any comparable statute or rule of law. California Civil Code section 1542 provides: A General Release does not extend to claims which the creditor does not know or suspect to exist in his favor at the time of executing the release which if known by him must have materially affected his settlement with the debtor. 7. Effective Date. For purposes of this Modification, the term "Effective Date" shall mean the date upon which there shall have been delivered to Bank, in form and substance satisfactory to Bank, and its counsel, duly executed and acknowledged as appropriate, this Modification, a new Certified Copy of Borrowing Resolutions (Corporation), financing statements, updated schedules of Borrower's intellectual property, filing of documents with the U.S. Patent and Trade Office and U.S. Copyright Office as necessary to continue the perfection of Bank's security interest in Borrower's intellectual property, the Modification Fee, and such other documents and completion of such other matters as Bank shall reasonably deem necessary or appropriate. Signatures Contained On Following Page. Page 5 of 6 6 IN WITNESS WHEREOF, the parties hereto have executed this Modification as of the day and year first written above. BORROWER: VERSANT CORPORATION, a California corporation By: _________________________ Gary Rhea Its: Chief Financial Officer BANK: COMERICA BANK-CALIFORNIA, a California banking corporation By: _______________________________ Roland Tucker Its: Vice President Page 6 of 6 EX-27.01 3 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 6-MOS DEC-31-1999 JAN-01-1999 JUN-30-1999 823 0 8,428 577 0 9,193 13,616 7,154 17,927 12,625 0 0 0 45,707 (44,937) 770 13,262 13,262 2,764 2,764 11,162 0 (491) (1,053) 9 (1,062) 0 0 0 (1,062) (0.10) (0.10)
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