-----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, Em2WBWgGYFtNicLVrMQG2mzsL7B4lLqm9N+uclw3SgRDK9scgfQoTOKdujY0QDrY 2R6rr0VGWUIxgtZHSHYvww== 0001104659-00-000117.txt : 20000510 0001104659-00-000117.hdr.sgml : 20000510 ACCESSION NUMBER: 0001104659-00-000117 CONFORMED SUBMISSION TYPE: 10KSB PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000330 DATE AS OF CHANGE: 20000509 FILER: COMPANY DATA: COMPANY CONFORMED NAME: VERSANT CORP CENTRAL INDEX KEY: 0000865917 STANDARD INDUSTRIAL CLASSIFICATION: 7372 IRS NUMBER: 943079392 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10KSB SEC ACT: SEC FILE NUMBER: 000-28540 FILM NUMBER: 589499 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 10KSB 1 ANNUAL REPORT UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ------------------------ FORM 10-KSB |X| Annual report under Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 1999 | | Transition report under 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 (Name of small business issuer in its charter) California 94-3079392 (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.) 6539 Dumbarton Circle, Fremont, California 94555 (Address of principal executive offices) (Zip Code) Issuer's telephone number: (510) 789-1500 Securities registered pursuant to Section 12(b) of the Exchange Act: None Securities registered pursuant to Section 12(g) of the Exchange Act: Common Stock, no par value (Title of Class) Check whether the issuer: (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the issuer was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No__ --- Check if disclosure of delinquent filers pursuant to Item 405 of Regulation S-B is not contained in this form, and no disclosure will be contained, to the best of our knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. [X] The issuer's revenues for the year ended December 31, 1999 were $25,900,000. As of February 29, 2000, there were outstanding 10,990,869 shares of the issuer's common stock, no par value per share. As of that date, the aggregate market value of the shares of common stock held by non-affiliates of the issuer (based on the closing price of $13.687 for the issuer's common stock on the Nasdaq National Market on February 29, 2000) was approximately $126,385,156. This excludes 1,756,913 shares of common stock held by directors, officers and certain stockholders of the issuer. Exclusion of shares held by any person should not be construed to indicate that such person possesses power, direct or indirect, to direct or cause the direction of the management or policies of the issuer, or that such person is controlled by or is under common control with the issuer. DOCUMENTS INCORPORATED BY REFERENCE Portions of the issuer's definitive proxy statement for the issuer's 2000 annual meeting of shareholders to be filed with the Securities and Exchange Commission by April 30, 2000 are incorporated by reference in Part III of this Form 10-KSB. Transitional Small Business Disclosure Format (check one): Yes __ No X -- VERSANT CORPORATION ANNUAL REPORT ON FORM 10-KSB For the Year Ended December 31, 1999 TABLE OF CONTENTS Form 10-KSB Item No. Name of Item Page PART I Item 1 Description of Business 1 Item 2 Description of Property 13 Item 3 Legal Proceedings 13 Item 4 Submission of Matters to a Vote of Security Holders 14 PART II Item 5 Market for Common Equity and Related Stockholder Matters 15 Item 6 Management's Discussion and Analysis of Financial Condition and Results of Operations 17 Item 7A Quantitative and Qualitative Disclosures About Market Risk 30 Item 8 Financial Statements 30 Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 30 PART III Item 10 Directors, Executive Officers, Promoters and Control Persons; Compliance with Section 16(a) of the Exchange Act 31 Item 11 Executive Compensation 31 Item 12 Security Ownership of Certain Beneficial Owners and Management 31 Item 13 Certain Relationships and Related Transactions 31 Item 14 Exhibits, Financial Statement Schedules and Reports on Form 8-K 31 Signatures 32 Index to Consolidated Financial Statements and Financial Statement Schedule F-1 Versant(R) is a registered trademark of our company. This Form 10-KSB also includes trade names and trademarks of other companies. PART I Item 1. Description of Business This Form 10-KSB contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934 and Section 27A of the Securities Act of 1933. These forward-looking statements involve a number of risks and uncertainties which are described throughout this Form 10-KSB, including under "Revenues" and "Risk Factors" in Item 6 of this Form 10-KSB. The actual results that we achieve may differ materially from any forward-looking statements due to such risks and uncertainties. We have identified, using a preceding asterisk, various sentences within this Form 10-KSB which contain such forward-looking statements, and words such as "believes," "anticipates," "expects," "intends" and similar expressions are intended to identify forward-looking statements, but these are not the exclusive means of identifying such statements. In addition, the section labeled "Risk Factors" in Item 6 of this Form 10-KSB, which does not include asterisks for improved readability, consists primarily of forward-looking statements and associated risks. We undertake no obligation to revise any forward-looking statements in order to reflect events or circumstances that may arise after the date of this report. Readers are urged to carefully review and consider the various disclosures made by us in this report and in our other reports filed with the Securities and Exchange Commission that attempt to advise interested parties of the risks and factors that may affect our business. Overview Our company designs, develops, markets and supports object management systems including database management systems, data replication and middle tier persistence for distributed computing environments, including the growing e-business marketplace. Our core product is the Versant Object Database Management System (ODBMS), a highly scaleable database management system that combines native support for object-oriented languages with high performance database functionality and a client-server architecture. The Versant ODBMS enables users to store, manage and distribute information that we believe often cannot be supported effectively by traditional database technologies, including: (1) abstract data, such as graphics, images, video, audio and unstructured text; (2) dynamic, highly interrelated data, such as network management data, advanced financial instruments; and (3) distributed, rapidly changing content in Internet-based applications. The core ODBMS technology is also part of Versant's application server integration product suite called, Versant Enterprise Container (VEC). We offer Enterprise Java Bean (EJB) compliant application server integration for both IBM WebSphere and BEA/WebLogic. We also provide peripheral products, including object-oriented programming language interfaces, database query tools, application development tools, legacy database access tools, Internet-based integration tools and multimedia management tools. We are in the process of bundling these technology components and products into the Versant Developer Suite and the Versant enJin. Versant Developer Suite is the next generation core ODBMS product and Versant enJin is the next generation application server integration product. Both product suites are expected to be available as packaged bundles by the second quarter of 2000. In addition, we offer a variety of services, including training, consulting and technical support, to assist users in developing and deploying applications based on the Versant ODBMS. Our customers include AT&T, Alcatel Network Systems, Banque Nationale de Paris, British Airways, British Telecommunications plc, Chase Manhattan Bank, The Chicago Stock Exchange, Dresdner Kleinwort Benson, EDS, Ericsson Radio Systems, France Telecom, GE Harris, HNC Software, Lucent, MCI WorldCom, Sabre, Northern Telecom, Siemens, Sprint, Qantas, Texaco and TRW. We are a leading provider of object management systems to the telecommunications industry, where our products are used in strategic distributed applications such as network modeling and management, fault diagnosis, service activation and assurance and customer billing. We have also experienced customer acceptance in other vertical markets, including the financial services, transportation, defense, health care and energy markets. These markets are similar to the telecommunications market in their increasing need for high performance support for distributed applications involving abstract data types and dynamic, highly interrelated information. We were incorporated in California in August 1988 as Object Sciences Corporation. Our principal executive offices are located at 6539 Dumbarton Circle, Fremont, California 94555, and our telephone number is (510) 789-1500. Background Organizations are under increasing pressure to manage and adapt to the forces of accelerating change and growing complexity. The combined demands of global competition, deregulation and organizational restructuring, as well as rapid changes in products and markets and a proliferation of new technologies, increasingly complicate business operations. The rise of the Internet and related technologies has enabled companies to greatly expand their geographical reach, streamline business processes cost effectively across its supply chain and provided new sources of revenue streams. The benefits of the Internet have also created additional requirements for information infrastructures to scale to a level not seen before. Management systems must accommodate thousands of concurrent users, millions of transactions per day and an architecture made even more distributed and complex. These pressures fall heavily on enterprise information systems and emerging service providers such as portals, infomediaries and mobile commerce providers, which must model this complexity, support increasingly distributed operations and manage new types of information that are more diverse, interrelated and dynamic. In attempting to respond to these pressures, traditional information technologies are being stretched to deliver solutions for which they were neither designed nor intended. This is particularly true in the areas of software programming, Internet middleware and database management, where many existing technology paradigms date back to the 1970s or earlier. The "structured programming" approach, which still dominates most software development, requires reduction of a business problem to a series of segmented procedures that are implemented line by line to build large, monolithic software programs. This approach can be slow and error-prone, and often produces software programs that are costly to maintain and difficult to change. A newer approach to software development, object-oriented programming, responds to many of these limitations. Object-oriented programming languages, such as C++ and Java, enable software developers to realistically model the complexities of large scale, dynamic systems, and to develop, maintain and evolve complex programs more quickly and at a higher level of quality than is often possible using structured programming. In addition, Java allows software developers to create applications once that will run on any computing platform, unlike most other programming languages, which require developers to modify an application every time it is ported to a different computing platform. As a result, we believe that object-oriented programming languages, especially Java, are increasingly being used by software developers. While object-oriented technology can address many software development problems, it places new demands on existing database management systems, most of which were designed to operate with traditional programming methodologies and simpler types of data in centralized environments. The hierarchical and relational database management systems now prevalent were developed at a time when data processing operations were highly structured and performed on centralized mainframe platforms or, in the case of relational database management systems, two-tier client/server applications. These systems perform well with simple types of data (such as text and numbers) and static relationships. However, businesses are increasingly required to deploy database management systems that can effectively manage the problems and conditions listed below: o Abstract Data Types. Graphics, images, video, audio and unstructured text, often combined in one application, are proliferating in business and Internet-based applications. o Complex Data Relationships. Telecommunications networks, Internet-based applications, financial instruments, health care systems, customer support systems, airline reservation systems and logistics management often involve complex relationships among thousands of rapidly changing items. o Constant Change. Business rules, data relationships, technology and information are constantly changing, requiring information systems and applications that can be quickly deployed and flexibly evolved to adapt to changes while maintaining overall system quality and data integrity and while keeping the system in service. 2 o Highly Distributed Data. Complex, interrelated, constantly changing data may be created in or distributed to dozens or hundreds of locations around the world, and must be carefully managed to maintain integrity yet be available on demand to many users on different platforms. The growth of the Internet and the World Wide Web as mainstream computing and communication platforms compounds these challenges. The Internet incorporates new types and combinations of dynamic, abstract data, and involves a complex array of relationships among users, service and content providers, data sources and information repackagers and resellers. This computing environment is inherently distributed and dynamic and is evolving at a rapid pace. The use of the Internet for transactional e-business applications, and the proliferation of corporate Intranets, business-to-business (B2B) and business-to-consumer (B2C) companies, are accelerating this complexity, further increasing demand for new software and database technologies. Companies need to integrate Internet and e-business applications with corporate databases, but the abstract multimedia information and complex, changing data relationships prevalent in these applications are not easily accommodated by hierarchical or relational databases. Information Systems (IS) architectures have evolved to support the development of e-business applications through the deployment of application servers. Leading application server vendors include BEA/WebLogic and IBM WebSphere. These and many other vendors provide a "middle-tier" solution to manage distributed e-business applications over the Internet while allowing enterprises to maintain and leverage their line-of-business databases on the "back-end". The growing popularity of the application server is supported by the industry analyst firm, IDC's, 1999 Worldwide Market for Application Servers: Setting the Course for 2000 (published December 1999), which predicts that by the year 2003, worldwide sales of application servers will reach $2.36 billion. The line-of-business database is typically based on relational database management systems (RDBMSs). RDBMSs were developed in the 1970s to address the inflexibility of hierarchical databases. They were used initially to perform ad hoc queries and later for online transaction processing and decision support systems. An RDBMS stores data in a series of two-dimensional tables and defines relationships between data by connecting rows and columns and linking multiple tables. Indexing multiple tables and then "joining" them to create a different view of the data involves complex queries. RDBMSs are adept at handling simple types of information, such as alphanumeric data, and managing static relationships, such as that between a part number and an invoice. They are less effective in managing more abstract data types, such as graphics, video and audio, which is stored in RDBMSs as isolated binary large objects that do not support analysis, manipulation or relationships to other data. In addition, RDBMSs are relatively inefficient when used to manage complex relationships because of the inherent burden of indexing and joining multiple two-dimensional tables. This performance burden can significantly lengthen response times and is compounded when users seek to maintain data on more than one server in a distributed environment because data must be transmitted to a central server where these joins can be performed. The burden is increased as applications become more complex and information more interrelated. Relational database vendors have attempted to address some of the shortcomings of RDBMSs by "extending" their support for abstract data types with object-relational and pure object-oriented approaches, and the use of robust middleware applications that enable organizations to connect object-oriented applications to RDBMSs. The use of object-relational and middleware approaches can improve relational performance for many enterprise customers, but we believe that the performance of object-relational systems or RDBMSs augmented by middleware is limited by the two-dimensional kernel architecture of RDBMSs. For the foregoing reasons, we believe today's business organizations need to manage abstract data types as well as complex dynamic relationships in a vastly more distributed environment and that this need is often not effectively addressed by hierarchical, relational and object-relational database management systems. The Versant Solution Versant's core product, ODBMS and the Versant Enterprise Container (VEC) combine native support for object-oriented languages with high performance database functionality and a client-server architecture that supports two-tier to n-tier applications. As a standalone database, the Versant ODBMS is designed to meet commercial users' requirements for high performance, scalability, reliability and compatibility with heterogeneous computing platforms and legacy information systems. Incorporated into Versant's application server integration product (now VEC, soon to be bundled and renamed, Versant enJin), the ODBMS provides several value-added functions to the application server environment. 3 For those customers needing to store and maintain the integrity of data in the middle-tier, Versant's core technology serves as a persistent cache. This means that customers developing new e-business applications can take advantage of native object-based models, the integrity of a robust and highly reliable "persistent cache" and the streamlining of access to and from the relational database on the back-end. This last feature alone can increase performance by more than 10 times. In addition Versant benefits include: o Management of Abstract Data Types. Versant allows users to store and manage a wide range of abstract information, such as images, video, audio and unstructured text, as well as traditional types of alphanumeric data. Nearly any kind of information that can be digitized can be stored as an object in the Versant ODBMS, while maintaining the application-defined behavior and relationships of the objects. o Language-Independent Support for Object-Oriented Programming. The Versant solution provides native support for the leading object-oriented software development languages--C++ and Java. This support facilitates rapid and flexible development, maintenance and evolution of complex, dynamic applications that closely model real-world systems and processes. Objects developed in these languages are directly stored in the Versant ODBMS. In addition, Versant is language-independent, allowing objects written in one object-oriented language to interoperate with objects written in another object-oriented language. Moreover, the Versant solution supports Java, an object-oriented language that allows the development of applications that will run on any computing platform without modification. o High Performance. The Versant object-based architecture provides direct access (navigation) to stored objects. Its balanced client-server architecture enhances performance by efficiently distributing processing burdens between the client and the server to leverage the processing power of networked computers. As a result, certain customers running complex applications involving highly interrelated data on Versant have reported a ten-to-hundred-fold improvement in performance compared to RDBMSs running similar applications. o Highly Scaleable Support for Distributed Computing. The Versant object-based architecture is designed to support the transparent integration of up to 65,000 separate databases in one network, distributed over a range of hardware and software platforms. Through object-level operations, Web browser support and other design features, Versant can be scaled from small workgroup operations to thousands of users over wide area networks or the Internet. o Reliability, Availability and Serviceability. The Versant ODBMS offers a number of features designed to permit continuous operation, including features providing online backup and recovery and online modification of the database system, as well as system utilities that can operate while the system is running. These features, together with replication and disk mirroring provided by our Fault Tolerant Server, support operations 24 hours per day, 365 days per year in environments such as telecommunications network, commercial banking and airline reservation systems, where it is critical that the database be continuously available. o Support for Three-Tier Architectures. Traditional two-tier architectures are adequate for closely coupled client-server environments but become unwieldy in large, distributed systems. The Versant solution supports three-tier architectures, in which application logic resides as a middle layer between clients and data stores. This architecture insulates data from constant change, allows an end-user or application to locate data across multiple databases and improves the productivity and quality of application development and maintenance. o Support for Component Architectures. The Versant Enterprise Container (VEC) integrates with leading Java application servers including BEA WebLogic and IBM WebSphere application servers. The application servers enable users to build and deploy Enterprise Java Bean (EJB)- based applications to the VEC, thereby gaining the inherent productivity and performance advantages of the Versant ODBMS. o Integration with Users' Existing Information Systems. The Versant solution operates on a wide range of server platforms, including industry-leading UNIX platforms from Sun Microsystems, Hewlett-Packard, IBM, Digital Equipment Corporation and Silicon Graphics, Linux platforms from industry leader, Red Hat, as well as Microsoft's Windows 95, Windows 98, and Windows NT platforms. Objects can be readily accessed and stored by any combination of these platforms in a heterogeneous network. In addition, Versant-based applications can interoperate with information stored in relational database management systems, enabling such applications to complement RDBMS 4 strengths in structured applications. These compatibilities allow users to protect their existing investments in databases and information systems while migrating newer systems to object-oriented platforms. o Persistence. Traditionally, persistence for object-oriented applications required explicit application code in some object programming language. The emergence of EJB-based application servers offers an alternative to explicit programming, where application components execute in containers that provide object persistence services. The Versant Enterprise Container supports EJB's that interface to the Versant ODBMS via a Java database interface, enabling customers to utilize the Versant ODBMS as a persistence solution. Company Strategy Versant's objective is to be the leading provider of Internet middleware for object management of e-business applications. Key elements of our strategy to achieve this objective include the following: o Extend Technology Leadership. A significant component of our strategy is to leverage our knowledge and expertise in object database management systems for e-business applications. We believe that our product architecture includes a number of important technological advances and that this technological leadership is essential to our continued ability to compete effectively. In 1999, we released products that enable organizations to: (1) utilize the Versant ODBMS in conjunction with the IBM WebSphere and BEA WebLogic application server family (2) extended asynchronous replication solution that allows data to be replicated from one Versant database to another (3) improved Java Versant Interface to enable Java objects to persist in Versant ODBMS (4) made available an early developer's release for the Versant XML Toolkit providing import and export of Extended Markup Language (XML) data into and out of the Versant ODBMS. *We intend to extend our leadership position by continuing to invest in internal research and development, establishing strategic relationships with leading providers of complementary technologies and by integrating the Versant ODBMS with products offered by third parties. We note that our technological development efforts are subject to the risks typically associated with such efforts, including development delays and the technological challenges of creating new functionality and integrating third-party products into Versant's products. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Risk Factors--We depend on successful technology development." o Leverage Strength in Telecommunications to Other Vertical Markets. We are a leading provider of object database management solutions to the telecommunications market, where our products are used in such strategic, distributed applications as network modeling and management, fault diagnosis, fraud prevention, service activation and assurance and customer billing. We believe that our experience and success in this demanding market positions us to address other vertical markets such as financial services, transportation, defense, health care and energy. These markets are similar to the telecommunications market in their increasing reliance on large networks and need for high performance support for abstract data types and for distributed, complex applications involving dynamic, highly interrelated information. In 1999, we increased our focus on the financial services market and conducted several seminars worldwide to expand awareness of us and our products in this market. *We intend to continue to derive revenues from telecommunications and financial services in 2000, though we will seek additional opportunities outside these markets as well. Our success in the telecommunications, financial services and other markets is dependent, in part, on our ability to compete with alternative technology providers and the extent to which our customers and potential customers believe we have the expertise necessary to provide effective solutions in these markets. If these conditions, among others, are not satisfied, we may not be successful in generating additional opportunities in these markets. See "Management's Discussion and Analysis of Financial Condition and Results of Operations --Risk Factors--We rely on telecommunications and financial services markets." o Capitalize on the e-business Market Opportunity. *We believe that the increasing development of new e-business applications for both large-scale enterprises and for Internet startups such as portals, infomediaries and b2b vendors will significantly expand the market opportunity for our object technologies. Internet-based computing environments and applications are highly distributed and are increasingly becoming more complex, requiring highly scaleable, high performance database systems as their infrastructure. In addition, e-business applications increasingly 5 incorporate abstract data types and are increasingly being addressed by object-oriented programming languages such as Java. As a result, we believe that our object-based component architecture position us to capitalize upon the Internet-based market. Certain of our customers, including iVendor, StellarX, Covia (formerly Glyphica), CyberRoad (formerly Calvex), Future State Technology, France Telecom spin-off NetCentrex, Factiva, AVT Technologies, Syncom, Platform7, Software.com, Whiplash and France Telecom's New Development Laboratory, are using Versant technology to enhance the performance of Internet-based infrastructures and applications. *We intend to continue focusing on the Internet-based market opportunity and working with partners to improve the performance of Internet-based infrastructures. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Risk Factors--We rely on telecommunications and financial services markets." o Integrate with Component Middle-tier Servers. Today, Versant partners with the two leading application server vendors, IBM WebSphere and BEA/WebLogic. We intend to continue to integrate with leading providers of component-based servers offering persistence services. Existing standards for EJB solutions and emerging standards for common object request broker architecture (CORBA), solutions provide an important opportunity for Versant to expand into new markets. o Expand Distribution Channels. *We intend to expand our indirect distribution channels by recruiting additional value-added resellers, distributors and other resellers. *As familiarity with object-oriented technology and awareness of our products increase, we believe that we will be able to increase our use of indirect sales channels to address a broader market and to capitalize on resellers' integration capabilities. In addition, we believe that international markets present attractive opportunities, particularly as telecommunications and other industries face increasing change and competitive pressures worldwide. *We intend to continue to expand our international distribution network to capitalize on these opportunities, particularly through Versant Europe, our European subsidiary. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Risk Factors--We depend on our international operations." o Enable Customers to Implement a Complete Solution. Versant is working to bundle its technologies and products into complete solutions for our customers. By second quarter 2000, Versant expects to have available the Versant Developer Suite and the Versant enJin suite of products. These product suites are intended to enable customers to more quickly and easily develop and implement new applications. Versant also continues to work with its application server partners, IBM and BEA to further product integration between the two vendors. *We intend to expand the breadth of our product offerings through internal development efforts and through marketing, licensing and other relationships with providers of complementary technologies and other market participants. *We believe that by providing our customers with a more complete solution, we can facilitate their adoption of object-oriented technology, accelerate the development of applications in a component framework, and expand the use and value of our products. However, Versant product offerings may not be commercially accepted by our customers and are subject to potential development delays due to the technological challenges of creating new product offerings, and competing solutions may limit the market opportunity for Versant product offerings. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Risk Factors--We depend on successful technology development." o Increase Penetration of Current Customer Base. We seek to generate incremental, recurring revenue from our installed base of customers. In 1999, we significantly increased our development licenses sold compared to 1998. This action could generate significant follow-on sales of deployment licenses in 2000. A customer's successful development of an application under a development license can lead to additional revenue from deployment licenses. The scalability of the Versant solution enables customers to add end-users, providing additional license revenue to us as customers expand their use of the product. The adaptability of the Versant technology to a wide range of applications allows customers to develop applications for other functions. We also license our products on a project basis, with development and deployment licenses bundled at a lower price to the customer than if the customer had purchased such licenses separately. *Although we seek to increase our number of customers, typically through relatively smaller licenses, we believe that our practice of licensing our products on a project basis will increase. *This increase in projects could result in our realizing larger amounts of revenue at the beginning of a project than it otherwise would, with potentially reduced recurring revenue opportunities from such project in the future. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Risk Factors--Our revenue levels are unpredictable." 6 Products and Services Our key products are the Versant ODBMS, a high performance object database management system, and Versant Enterprise Container (VEC). *In addition, we offer object-oriented programming language interfaces, database query tools, application development tools and integration's with system management tools. Customers licensing the Versant ODBMS receive the database engine with one object-oriented programming language interface and a set of integrated database utilities. For additional fees, customers may obtain additional programming language interfaces, and users requiring continuous operation in mission-critical environments can license the Versant Fault Tolerant Server. We offer a variety of services to assist customers in the design, development and management of their database applications, including training, consulting and custom development services. Products Core Database Products o Versant ODBMS. The Versant ODBMS is designed to support multi-user, commercial applications in distributed environments. Its balanced client-server architecture enables the system to process a wide variety of abstract data types and complex applications in a highly concurrent, high performance manner. The product is designed to integrate over 65,000 databases connected over a like number of locations on a variety of hardware and software platforms. Each database has a theoretical storage capacity of 4.6 million terabytes, an amount far beyond the actual capacity of most existing operating systems. The Versant ODBMS implements a variety of database features, including two-phase commits for distributed transaction integrity and database triggers to monitor changing events and data and to notify users and applications when specified events occur. In addition, on-line management utilities enable routine maintenance to be performed while the database is running. These include utilities to perform backup operations, manage log files, dynamically evolve database schema, add, delete and compact volumes on disk storage and related functions. These utilities provide multiple levels of administrative access and application security. With the version 5.2 of the Versant ODBMS, we provide external transaction coordination from third-party transaction monitors, parallel queries to multiple Versant databases, distributed on-line backup of multiple Versant databases, persistent database event, and enhanced system management capabilities. We believe these new features extend our role as the premier object database provider for enterprise computing. o Versant Fault Tolerant Server. For continuous operation in mission critical environments, we offer the Versant Fault Tolerant Server. This product ensures transparent failure recovery by connecting database clients to synchronized copies of the database stored on physically separate computers. If one of the databases fails due to operating system failure, hardware breakdown or other interruption, the other database continues operation without application interruption. When the failed database is restored, the two databases automatically resynchronize and resume operations without application interruption. Language Solutions The Versant ODBMS implements an object model that is a superset of the capabilities of C++ and Java. The interface to these object-oriented languages make the database appear to be a natural and transparent extension of the language. Programs written in any of these languages can use objects written in another, allowing integration of corporate data stores regardless of application development language. Versant's Java Direct Interface, enables seamless persistence for Java applications that will run on any computing platform without modification. In addition, we provide a C language interface. Internet-based Products Versant Enterprise Container (VEC). The VEC enables users to deploy Java-based applications using Java 2 Enterprise Edition (J2EE) technologies such as Enterprise Java Beans that take advantage of the capabilities of the Versant ODBMS without customizing the applications for the Versant ODBMS. The VEC supports the BEA WebLogic application server and the IBM WebSphere Application Server. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Risk Factors--We depend on successful technology development." 7 Data Access and Integration Tools The Versant ODBMS allows users a choice of access methods for querying and manipulating data in the Versant ODBMS and to obtain data from relational databases. With the Versant SQL Suite, we offer open database connectivity capability and structured query language access to data stored in relational databases using industry-standard off-the-shelf query and reporting tools. These tools permit customers to retain their investments in legacy systems while addressing new applications with the productivity, flexibility and performance characteristics available through object technology. Licensing and Pricing of Products We license our products directly to end-users principally through four types of licenses--development licenses, deployment server licenses, deployment client licenses and project licenses (which include development and deployment licenses). Development licenses are sold on a per seat basis and authorize the customer to develop an application program that uses the Versant ODBMS. Before a customer may deploy an application, it must purchase at least one deployment server license and one deployment client license for each computer connected to the server that will run the application using the database. If the customer wishes to install several copies of the application, separate deployment licenses are required for each server computer and each client that will run the particular application. We also license our products on a project basis, where the customer simultaneously purchases development and deployment licenses for an entire project. Prices for our development and deployment contracts range from the low thousands to the high millions depending on a variety of variables. These variables include, but are not limited to the following: number of users (specific number or unlimited), number of deployments, timeframe of deployments, prepaid or as needed deployments, type of operating system(s), type of server(s) and are the servers single or multiprocessor machines. We provide alternative pricing for non-interactive environments where the product is deeply embedded in a component, such as a telephone switch, and does not have end users. Sales through distributors generally involve a significant discounts. Prices for project licenses will vary with the scope and nature of the underlying project. A typical value-added reseller develops an application incorporating the Versant ODBMS and then licenses the application to our customer. Value-added resellers purchase development licenses from us on a per seat basis on terms similar to those of development licenses sold directly to end-users. Value-added resellers are authorized by us to sub-license deployment copies of the Versant ODBMS, together with the value-added resellers' applications, to end-users. Deployment license pricing for sales through value-added resellers generally is based either on a percentage of the total price charged by the value-added reseller to our end-user customers or are based on a percentage of our list prices. We also enter into project licenses with certain value-added resellers. Services We offer a variety of services to assist customers in the design, development and management of their database applications. Training is offered in a variety of Versant-specific and object-related technologies and ranges from beginning to advanced levels. Consulting services are available for analysis and design assistance, mentoring and technical transfer, application coding, design reviews and performance analysis. In addition, we provide custom development services to customers that request unique or proprietary product extensions. These services may be performed by third-party integrators, consultants, or us, depending on the nature and complexity of the request. Maintenance and technical support services are available at an annual fee that varies depending on the type of support that the customer requires. Maintenance and support contracts, which typically have twelve-month terms, are offered concurrently with the initial license of a Versant product and entitle the customer to telephone support and to product and documentation updates. For additional fees, customers may purchase a special support package providing a dedicated support engineer, and may obtain telephone support available 24 hours per day. All maintenance contracts are renewable annually. Customers and Applications The Versant ODBMS and Versant Enterprise Container are licensed for development and/or deployment in a wide range of applications. Many of our customers have licensed multiple copies for use in different applications. Sales to 8 Ericsson Radio Systems, Siemens Medical and CDC of Canada together represented 12.8% of our total revenue in 1999; however, no single customer accounts for 10% or more of our 1999 total revenue. In any given quarter, it is typical for a relatively small number of customers to constitute a significant percentage of our total revenue. In 1997, 1998 and 1999, 39%, 42% and 30% of our total revenue were attributable to sales of products and services to telecommunications companies. In addition, in 1999, 7.1% and 4.6% of our total revenue were attributable to sales of products and services in the financial services and technology markets *Our future performance will depend in significant part on the continued growth of the use of ODBMSs in telecommunications and financial market applications and the acceptance of our products within the telecommunications and financial services industries. *In addition, we expect to become increasingly dependent upon the Internet-based and financial services markets. The failure of our products to perform favorably in and become an accepted component of telecommunications, Internet-based or financial services applications, or a slower than expected increase or a decrease in the volume of sales of our products and services to telecommunications, Internet-based or financial services companies, could have a material adverse effect on us. The following examples illustrate some of the new applications for Versant in our core markets (telecommunications, financial services, defense and transportation) and in our strategic e-business market. Core Market Customers 3Com/Bull alliance selected Versant for its Intelligent Networking Solution ("IN"). Their IN solution allows network service providers (NSPs) with access to Signaling System 7 (SS7) to connect their 3Com Total Control multi-service access platform to the telephone trunk network. This, in turn, permits carriers and NSPs to roll out scalable Internet-based services, including data, voice and fax services, over their existing data infrastructure. The 3Com Total control solution is a modular technology capable of accommodating dial-in Internet access, Internet Protocol (IP) telephony, managed remote access, dial-out services and cellular access. Check Point Software Technologies selected Versant Asynchronous Replication (VAR) for its call center application and is scheduled for production deployment next month. Check Point Software uses VAR in conjunction with Primus software in order to more efficiently share data between our world wide support centers. VAR was deployed to help Check Point meet key design goals, which include accelerating the workflow process and enhancing data sharing between global sites in order to improve customer response and decrease operational costs. Banque Nationale de Paris selected Versant as the Object Database Management System (ODBMS) of choice for its Equities Group, the world leader in OTC equity options and the second largest in overall equities products. Versant ODBMS technologies are being used in a key BNP online trading application, called Market Data Server (MDS). In real-time MDS consolidates market data including stock volatility, dividend and interest rates from around the world. BNP traders now have the most up-to-date data needed to price their derivatives instruments. The level of complexity in the application, collecting market data from a variety of sources, coupled with BNP's availability requirements, mandated the selection of an ODBMS and VAR. More traditional RDBMS were not able to scale and deliver fast performance. Additionally, VAR provided real-time update capability without impacting that performance. Versant technologies are the foundation for the eXpanded Straight Through Processing (X-STP) system, called FARAO CSD, the first fully event driven real-time Central Securities Depositories (CSDs) solution. Developed by Axioma, a leading software provider of enterprise Internet solutions, and based on Versant's Object Database Management System (ODBMS), X-STP is the first application to facilitate both domestic and cross border settlement and other financial services, e.g. custody services, securities lending and borrowing or collateral management without human intervention. The first CSD to implement Axioma's state of the art solution is the Oesterreichische Kontrollbank AG (OeKB), Austria's main financial and information service provider for exports and the capital market. OeKB is Clearing House and Central Securities Depository for the Austrian capital market and is partnering with other European CSDs. OeKB services include safekeeping and administration, book entry transfers, clearing and settlement of stock exchange and OTC transactions, and issue of global instruments of certificates for foreign registered shares. In addition to the Austrian Central Bank and Vienna Stock Exchange, OeKB partners include 97 national commercial banks and brokers, and 28 international business partners. 9 e-business Customers NetCentrex, a France Telecom spin-off, conducted an evaluation and also selected Versant as the foundation for its Personal Call Agent (PCA) application. PCA allows service providers the ability to offer traditional Centrex services to both telephony and Voice over IP (VoIP) users. The services include a network-based corporate directory, personal contact and groups management, call filtering and network-based universal messaging. The Java-based user interface allows web-based provisioning, simplifying the addition of new services. iVendor Inc, a newly launched e-merchandising network, has chosen Versant's Object-based technologies to provide a highly flexible and scalable platform for presenting millions of products from multiple vendors, through virtually thousands of online store operators. With the Versant ODBMS as one key component of its architecture, iVendor's e-merchandising network is now able to handle the tremendous demands of high traffic content sites, allowing reliable, consistent performance even at peak load periods. The iVendor network, the first of its kind, brings together products from independent suppliers into a central Versant database for presentation to iVendor online retailers, who then select products to create their own customized e-commerce sites. It has been architected to handle literally thousands of online storefronts offering millions of products, each product containing changing price points and presentations. France Telecom , one of the world's leading telecommunications carriers with 1998 revenues of $24 billion, initiated a study in 1998 to evaluate key software technologies for it's middle-tier information technology (IT) infrastructure, a program internally dubbed "@rchimede". Technologies evaluated included object modeling tools, application servers, EJBs and XML. Over a two year period France Telecom conducted performance and usability benchmarks to test the technology components against real-world application scenarios. The results indicated that traditional RDBMS environments could not deliver the performance required. France Telecom selected EJB technology, combined with Versant's object-oriented technologies, to provide middle-tier persistence, to increase performance and to enable an easy-to-use development environment. France Telecom standardized on Versant technologies for development of all object-based applications, including Voice over IP (VoIP), micro-payments, network management, directory services for Internet portals, customer service, real-time management of leased lines and the design of their mobile network. Covia's (formerly Glyphica) "customer portal" uses Versant object-based technologies as the foundation to help manage their customers over the Internet and provide their sales teams with customer data, documents and dialogue through a similar Web interface. Glyphica's PortalWare allows organizations with complex sales cycles and products to use the Internet to accelerate their sales cycles and create one-to-one relationships with their customers and partners. Marketing and sales professionals can create personalized extranets at the touch of a button, creating a window for exchanging business information with each and every customer. The above four companies exemplify Versant's thrust into e-business. This new segment of our business is the fastest growing portion of the company's portfolio, and as demonstrated, shows applications ranging from portals to Application Service Provisioning (ASP) to internet infrastructure. Further customer examples representative of this shift in 1999 include; CyberRoad (formerly Calvex), Orange County California, Ericsson-USA, Factiva, Firemans Fund, Intel, MCI-WorldCom, Nth Degree, Platform7, Quadrian, StellarX, Software.com and Whiplash. Marketing and Sales We market and sell the Versant ODBMS in the United States principally through our direct sales force and value-added resellers and internationally through our distributors, direct sales force and value-added resellers. Direct Sales As of December 31, 1999, our direct sales organization consisted of 25 employees based at our corporate headquarters in Fremont, California and at our other regional offices around the world. The direct sales organization includes a telesales force that supports our field sales personnel and maintenance renewals and handles smaller orders. The direct sales organization also includes systems engineers who answer technical questions and assist customers in running benchmarks against competitive products and developing prototype applications. In 1997, 1998 and 1999, sales by our direct sales force (including sales to value-added resellers) accounted for over 99%, 99% and 78%, respectively, of our total revenue. 10 Indirect Sales An important part of our sales strategy, going forward, will be the continued development of indirect distribution channels, such as value-added resellers, systems integrators and foreign distributors. With the continuing growth in the internet business arena, our focus towards indirect sales channels is expected to be more important as we penetrate the e-business market. Typical value-added resellers build application programs in which they embed a deployment copy of the Versant ODBMS. Systems integrators may include our products with those of others to provide a complete solution to their customers. Foreign distributors include distributors based in Japan, Italy and Israel. Value-added resellers are typically not subject to any minimum purchase or resale requirements and can cease marketing our products at any time. Certain value-added resellers, distributors and systems integrators also offer competing products that they produce or that are produced by third parties. During 1999 we had 14 value-added resellers and 3 distributors contribute, collectively, $5.7 million dollars of indirect revenue (consisting of product royalties and deployment licenses). Marketing As part of our restructuring effort in 1999, we reduced marketing headcount and budget to focus the company's efforts on rebuilding the product line for our strategic e-business segment. In fourth quarter 1999, a Vice President of Marketing was hired to develop and implement programs geared to communicating Versant's new e-business position to external and internal audiences. Programs include: Media and Analyst Relations, Investor Communications, Speaker's Program, Online Marketing, Partner Marketing Programs and Conference/Tradeshows. Sales Process The sales cycle for our core products to new customers often exceeds six months and may extend to a year or more. The sales cycle to Internet startups are shorter in length, typically 3 to 6 months, due to the increasing market and competitive pressures on them to bring new services or products to market. For existing customers with successful deployed applications, sales cycles for new applications of the Versant ODBMS are generally much shorter. During the sales cycle, meetings involving both technical and management staff are frequently conducted at the customer's site and at our headquarters. Prospective customers typically perform a detailed technical evaluation or benchmark of the Versant object-based technologies and, often, competitive products, as a part of the selection process. Upon completion of the evaluation, the customer may purchase one or more development licenses for the team of programmers that will build the application. Additionally, the customer may order maintenance, training courses and assistance from our consultants. A customer can purchase a deployment license at the same time as it purchases a development license, or can purchase a project license that covers development and deployment for an entire project. However, many customers defer their purchase of a deployment license and related maintenance until they complete application development (a process that typically takes at least six months and can exceed one year) and then decide to deploy the application. For deployed applications, a customer may purchase additional deployment licenses as additional users are added to a system, without further deliveries from us, providing additional revenue over an extended period at a relatively low incremental cost to us. Depending on the application type and the customer size, it is possible for the price of a customer's deployment licenses to substantially exceed the price of earlier development licenses. Shipping and Backlog Our software is typically shipped to customers shortly after the execution of a license agreement and upon our receipt of the order. As a result, we typically do not have a material backlog of unfilled license orders at any given time, and we do not consider backlog to be a meaningful indicator of future performance. 11 Research and Development *We have committed, and expect to continue to commit, substantial resources to our research and development efforts. Our current development efforts are focused on: (1) continuing to leverage Java for e-business applications (2) improving the integration of Versant products with leading application-servers and middleware technologies (3) improving performance and scalability of the Versant ODBMS (4) improving integration between the Versant ODBMS and relational databases (5) leveraging XML and Versant products for business-to-business applications and portals Research and development expenses were approximately $5.2 million, $7.7 million and $7.0 million in 1997, 1998 and 1999 respectively. To date, all research and development expenditures have been expensed as incurred. The Versant ODBMS has, to date, been almost entirely developed by our research and development personnel. Our development team consisted of 46 full-time employees as of December 31, 1999, most of whom are software engineers with significant experience and expertise in such technologies as: (1) object-oriented software development, including Java (2) relational database technology (3) platform engineering (4) design and integration and (5) large-scale run-time environments (6) middleware technologies We selectively supplement our internal staff with outside consultants having expertise in specific areas. In 1997, we began performing certain porting and enhancement engineering work in Pune, India, by subcontracting work through Netcon Systems, a Software Technology Park (STP) company. A STP company is a software development company shielded from import and export duties, so that India can promote its specialized software labor pool. In December 1998, we, with two Indian citizens, sponsored the creation of a STP company named Versant India. In March 1999, we purchased the common stock of Versant India from its founders. Versant India is our wholly owned subsidiary and will continue to do porting and development projects for us. Versant India has 16 employees and occupies a rented facility of 7,500 square feet in Pune, India. In 1998, we also added 14 engineers with our acquisition of Soft Mountain. As of December 31, 1999, the headcount at Soft Mountain is four. The development effort originally conducted by the Soft Mountain subsidiary has been transferred to our Versant India research and development facility in order to better utilize our worldwide development resources. *Our future success will depend on our ability to attract, train and retain highly skilled research and development personnel. Competition for such personnel is intense, especially the competition for personnel familiar with object-oriented technology. *We expect that such competition will continue for the foreseeable future and may intensify. *We believe that our future results will depend on our ability to improve our current technologies and to develop new products and product enhancements on a timely basis. The market for our products and services is characterized by changing customer demands, rapid technological change and frequent introductions of new products and product enhancements. Customer requirements for products can change rapidly as a result of innovations or changes within the computer hardware and software industries, the introduction of new products and technologies (including new hardware platforms and programming languages) and the emergence, evolution or widespread adoption of industry standards. The actual or anticipated introduction of new products, technologies and industry standards can render existing products obsolete or unmarketable or result in delays in the purchase of such products. As a result, the life cycles of our products are difficult to estimate. *We have in the past experienced delays in the introduction of new products and features, and may experience such delays in the future. If we are unable, for technological or other reasons, to develop new products or enhancements of existing products in a timely manner in response to changing market conditions or customer requirements, our business, operating results and financial condition will be materially adversely affected. 12 New products or new versions of existing products may, despite testing, contain undetected or unresolved errors or bugs that will delay their introduction or adversely affect their commercial acceptance, which could have a material adverse effect on our business, operating results and financial condition. Intellectual Property and Other Proprietary Rights We rely primarily on a combination of copyright and trademark laws, trade secrets, confidentiality procedures and contractual provisions to protect our proprietary technology. For example, we license our software pursuant to signed license agreements and, to a lesser extent, "shrink-wrap" licenses displayed in product packaging, which impose certain restrictions on the licensee's ability to utilize the software. In addition, we seek to avoid disclosure of our trade secrets, including requiring those persons with access to our proprietary information to execute confidentiality agreements with us, and we restrict access to our source code. We seek to protect our software, documentation and other written materials under trade secret and copyright laws, which afford only limited protection. On October 13, 1998 we were awarded a United States patent (No. 5,822,759) for our proprietary Cache System used within our Versant ODBMS product. For a discussion of the intellectual property risks we face, see "Management's Discussion and Analysis of financial Condition and Results of Operations--Risk Factors--We must protect our intellectual property." Competition For a discussion of the competition we face in our business, see "Management's Discussion and Analysis of Financial Condition and Results of Operations--Risk Factors--We face intense competition." Employees As of December 31, 1999, we and our subsidiaries had a total of 108 employees, 60 of whom were based in the United States, 32 of whom were based in Europe, and 16 of whom were based in India. Of the total, 46 were engaged in engineering and technical services, 27 were engaged in sales and marketing, 19 were engaged in the services organization and 16 were engaged in administration and finance. None of our employees is represented by a labor union with respect to his or her employment by us. We have experienced no organized work stoppage to date and believe that our relationship with our employees is good. *Our future performance depends in significant part upon the continued service of our key technical, sales and senior management personnel. The loss of the services of one or more of our key employees could have a material adverse effect on our business, operating results and financial condition. *Our future success also depends on our continuing ability to attract, train and motivate highly qualified technical, sales and managerial personnel. Competition for such personnel is intense, especially in Silicon Valley where our headquarters are located, and we may not be able to attract, train and motivate such personnel. Item 2. Description of Property In August 1997, we moved our principal administrative, sales, marketing and research and development operations to a new headquarters facility in Fremont, California, where we occupy 54,000 square feet under a 10 year lease. We believe that the Fremont facility will be adequate for our requirements for the next several years. We and our subsidiaries also lease space for sales offices, generally under multi-year operating lease agreements, in Pune, India; Frankfurt, Germany; Munich, Germany; Paris, France; and Hampshire, England. Item 3. Legal Proceedings Our company and certain of our 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 13 expected financial performance. The complaint seeks an unspecified amount of damages. We vigorously deny the plaintiffs' claims and have moved to dismiss the allegations. The Plaintiff has filed a response to our motion to dismiss and we have 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 our results of operations and financial condition. Item 4. Submission of Matters to a Vote of Security Holders Not applicable. 14 PART II Item 5. Market for Common Equity and Related Stockholder Matters Price Range of Common Stock Our common stock is quoted on the Nasdaq National Market under the symbol "VSNT." Our common stock commenced trading on the Nasdaq National Market on July 18, 1996. From July 19, 1999 until March 7, 2000, our common stock was quoted on the Nasdaq SmallCap Market.) Prior to July 18, 1996, there was no public trading market for our common stock. The following table lists the high and low closing prices during for the last three full years (based on closing prices as reported by Nasdaq). High Low -------- --------- 1997: First Quarter $ 22 3/4 $ 8 1/2 Second Quarter $ 9 3/8 $ 4 1/8 Third Quarter $ 16 1/4 $ 6 Fourth Quarter $ 18 5/8 $ 11 1/8 1998: First Quarter $ 14 9/16 $ 5 1/8 Second Quarter $ 7 5/16 $ 3 3/4 Third Quarter $ 5 1/2 $ 2 1/8 Fourth Quarter $ 4 1/4 $ 1 13/16 1999: First Quarter $ 2 15/32 $ 1 Second Quarter $ 2 31/32 $ 1 1/8 Third Quarter $ 3 5/32 $ 2 Fourth Quarter $ 11 13/16 $ 2 3/8 There were approximately 118 holders of record of our common stock as of February 29, 1999. We believe that a significant number of beneficial owners of our common stock hold their shares in street name. Based on information available to us, we believe we have at least 400 beneficial shareholders of our common stock. Dividend Policy We have neither declared nor paid cash dividends on our common stock in the past. *We intend to retain future earnings, if any, to fund development and growth of our business and, therefore, do not anticipate that we will declare or pay cash dividends on our common stock in the foreseeable future. Recent Sales of Unregistered Securities On July 12, 1999, we issued shares of a newly designated Series A Preferred Stock ("Series A Stock"). A total of 1,489,799 shares of Series A Stock were issued, with each share of Series A Stock intitially convertible into two shares of the Company's common stock at the market price of the Company's common stock effective July 12, 1999. Nine hundred and two thousand nine hundred and forty six (902,946) of the shares of Series A Stock were issued in exchange for an outstanding convertible secured promissory note with outstanding principal and interest of $3,846,550.82 held by Vertex Technology Fund, Ltd. ("Vertex"), and 586,853 of the shares were issued in consideration of an additional $2,499,994 in new financing. One million dollars of the new financing was provided by a Vertex affiliate, with the remainder provided by other investors. Each share of Series A Stock was sold at a price of $4.26 per share. We also issued warrants to purchase a total of 1,489,799 shares of our common stock at an exercise price of $2.13 per share as part of the transaction. The Series A Stock has a liquidation preference equal to 150% of the full amount paid for the Series A Stock, with the preference increasing by an additional 50% per year over each of the next two years, so long as the Series A Stock is 15 outstanding. The Series A Stock automatically converts into common stock if our common stock price exceeds $12.00 per share for 45 consecutive business days. The holders of Series A Stock will generally vote with the holders of common stock provided that the Series A Stock is only entitled to a number of votes equal to 50% of the number of shares of common stock into which the Series A Stock is convertible. The holders of Series A Stock were also provided with certain voting protective provisions. Neither the Series A 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. Investors in the financing were provided with certain registration rights relating to the shares of Series A Stock and warrants purchased by them. Each investor also agreed not to purchase more than 100,000 additional shares in the Company without our approval so long as such investor holds more than 5% of our outstanding securities. On November 1, 1999, we signed an agreement with a public relations firm , whereby the firm provided certain public relations services for our company. We agreed to compensate the firm for services rendered at a monthly rate of $5,000 per month and as further compensation we issued warrants to purchase up to 125,000 shares of our common stock. Warrants for 25,000 shares vested immediately and have an exercise price of $3.00 per share. The remaining warrants for up to 100,000 shares were scheduled to vest in November 2003 with an exercise price of $10.00 per share unless certain target stock prices were achieved. If target stock prices were achieved, the exercise price of the warrants would be adjusted and vesting accelerated. The public relations firm achieved a majority of its performance criteria during the fourth quarter of 1999. As a result, the warrants were valued using the Black-Scholes valuation model at the dates when the performance criteria were met. We recorded $337,000 to general and administrative expense in 1999 related to the warrants. As of December 31, 1999, warrants for 75,000 of the 100,000 shares had vested and the exercise prices were reduced to a weighted average of $4.50 per vested share. These warrants expire in November 2002. 16 Item 6. Management's Discussion and Analysis of Financial Condition and Result of Operations As indicated in the first paragraph of Item 1, above, this Form 10-KSB contains certain forward looking statements within the meaning of the Securities Exchange Act the Securities Act. We have identified, with a preceding asterisk, various sentences within this Form 10-KSB 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-KSB involve numerous risks and uncertainties which are described throughout this Form 10-KSB, including under "Revenues" and "Risk Factors" within this Item 6. The actual results that we achieve may differ materially from any forward looking statements due to such risks and uncertainties. The following table presents statements of operations data for the five years ended December 31, 1999.
Year Ended December 31, (in thousands, except per share data) ------------------------------------------------------------ STATEMENTS OF OPERATIONS DATA: 1999 1998 1997 1996 1995 ----------- ---------- ---------- ----------- ----------- Revenue: License $ 17,074 $ 14,463 $ 21,363 $12,202 $ 7,810 Services 8,794 8,770 7,827 6,191 4,067 ----------- ---------- ---------- ----------- ----------- Total revenue 25,868 23,233 29,190 18,393 11,877 Cost of revenue: License 745 2,846 1,445 1,144 1,062 Services 4,180 6,893 5,010 2,987 2,258 ----------- ---------- ---------- ----------- ----------- Total cost of revenue 4,925 9,739 6,455 4,131 3,320 ----------- ---------- ---------- ----------- ----------- Gross profit 20,943 13,494 22,735 14,262 8,557 ----------- ---------- ---------- ----------- ----------- Operating expenses: Marketing and sales 9,883 18,511 17,265 8,327 6,319 Research and development 7,011 7,722 5,225 3,323 2,048 General and administrative 3,658 3,857 2,880 1,501 1,419 Amortization of goodwill 463 546 370 - - Write down of assets - 1,555 - - - Acquired in-process R&D cost - 528 - - - Non Cash Compensation Expense 337 - - - - ----------- ---------- ---------- ----------- ----------- Total operating expenses 21,352 32,719 25,740 13,151 9,786 ----------- ---------- ---------- ----------- ----------- Income (loss) from operations (409) (19,225) (3,005) 1,111 (1,229) Interest income (expense) and other, net (1,273) (692) 705 429 70 ----------- ---------- ---------- ----------- ----------- Income (loss) before taxes (1,682) (19,917) (2,300) 1,540 (1,159) Provision for income taxes 54 18 40 129 73 ----------- ---------- ---------- ----------- ----------- Net income (loss) $ (1,736) $(19,935) $ (2,340) $ 1,411 $(1,232) =========== ========== ========== =========== =========== Basic net income (loss) per share ($0.17) ($2.16) ($0.26) $0.24 ($0.41) =========== ========== ========== =========== =========== Shares used in calculating basic net income (loss) per share 10,178 9,209 8,931 5,916 2,987 =========== ========== ========== =========== =========== Diluted net income (loss) per share ($0.17) ($2.16) ($0.26) $0.18 ($0.41) =========== ========== ========== =========== =========== Shares used in calculating diluted net income (loss) per share 10,178 9,209 8,931 7,690 2,987 =========== ========== ========== =========== ===========
Overview 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: Primarily (1) sales of development, deployment licenses and project licenses for the Versant ODBMS (2) related maintenance and support, training, consulting and nonrecurring engineering fees received in connection with providing services associated with the Versant ODBMS and (3) sales of the peripheral products for the Versant ODBMS 17 Secondarily (1)the resale of licenses, maintenance, training and consulting for third-party products that complement the Versant ODBMS We released Version 5.2 of the Versant ODBMS in December 1998. *We currently expect that licenses of the Versant ODBMS, Versant Enterprise Container and peripheral products and sales of associated services will be our principal sources of revenue for the foreseeable future. In 1997, 1998 and 1999, three customers, combined, accounted for approximately 36%, 17% and 13% of our total revenue, and the telecommunications industry accounted for 39%, 42% and 30%of our total revenue. In addition, in 1999, 12.8%, 7.1% and 4.6% of our total revenue were attributable to sales of products and services in the e-business, financial services and high technology markets. *Our future performance will depend in significant part on the continued growth of the e-business market and its dependence on highly scalable, performance and reliable object-based technologies such as ours. *The failure of our products to perform favorably in and become an accepted component of these markets, or a slower than expected increase or a decrease in the volume of sales of our products and services to these same markets, could have a material adverse effect on us. We license our products directly to end-users principally through four types of licenses-development licenses, deployment server licenses, deployment client licenses and project licenses. Development licenses are sold on a per seat basis and authorize the customer to develop an application program that uses the Versant ODBMS or VEC. Before a customer may deploy an application it has developed under a development license, it must purchase at least one deployment server license and one deployment client license for each computer connected to the server that will run the application using the database management system. If the customer wishes to install several copies of the application, separate deployment licenses are required for each server computer and each client that will run the particular application. Pricing of the Versant ODBMS and VEC varies according to several factors, including the computer platform on which the application will run and the number of users that will be able to access the server at any one time. For certain applications, we offer deployment licenses priced on a per user basis. We also license our products on a project basis, where the customer simultaneously purchases development and deployment licenses for an entire project. Value-added resellers purchase development licenses from us on a per seat basis, on terms similar to those of development licenses sold directly to end users. Value-added resellers are authorized by us to sub-license deployment copies of the Versant ODBMS or VEC, together with the value-added reseller's application, to end-users. Deployment license pricing for sales through value-added resellers generally represents either a percentage of the total price charged by the value-added reseller to our end-user customers or a percentage of our list prices. We also license our products to certain value-added resellers on a project basis. Our development, deployment and project license agreements and agreements with value-added resellers typically require the payment of a nonrefundable, one-time license fee for a license of perpetual term, although certain licenses to value-added resellers are for a limited term and/or are limited to particular applications. Revenue from license agreements is recognized upon shipment of the software if there is no significant modification of the software, payments are due within our normal payment terms and collection of the resulting receivable is deemed probable. If an acceptance period is required, revenue is recognized upon the earlier of customer acceptance or the expiration of the acceptance period. Maintenance revenue is recognized ratably over the term of the maintenance contract, which is typically twelve months. Training and consulting revenue is recognized when a customer's order has been received and the services have been performed. We have entered into contracts with certain of our customers that require us to perform development work in return for nonrecurring engineering fees. Revenue related to such nonrecurring engineering fees generally is recognized using the percentage-of-completion method of accounting. Amounts received from customers under certain license, maintenance and nonrecurring engineering agreements involving significant continuing obligations to be performed by us are included on our balance sheet as deferred revenue. We license the Versant ODBMS, Versant Enterprise Container and peripheral products and sell associated services primarily through our direct sales force to end-user customers and value-added resellers. Through late 1993, we focused our sales efforts on developing indirect sales channels and contracting for nonrecurring engineering fees from our marketing partners. In late 1993, we changed our sales strategy to a direct sales model and began increasing the size of our direct sales force. 18 During 1995, we entered into an agreement with ISAR-Vermogensverwaltung Gbr mbH, 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 our products, subject to the rights of existing distributors, and with management responsibilities for Versant's existing distributors in Europe. In March 1997, we exercised our option to acquire Versant Europe. This acquisition, in which Versant paid approximately $3.6 million in cash and stock, has been accounted for as a purchase. See note 10 of notes to our consolidated financial statements. As of December 31, 1999, Versant Europe had 32 employees. Since inception, we have invested significant resources in developing the Versant ODBMS and related technologies and in building our sales, marketing, consulting and administrative organizations. *Due to our financial performance in 1998, we restructured our worldwide organization by significantly reducing headcount in order to bring expenses in line with anticipated 1999 revenue. *Because of this action and other expense controls implemented, we were able to reduce in 1999 overall operating expenses by 35% to $21.4 million from $32.7 million in 1998. We expect to hire additional personnel and expect an increase in our promotion and selling expenditures during 2000 if we believe that market conditions support such expenses The labor market in which we operate is highly competitive, and we may be unable to retain key employees without substantial increases in our operating expenses. Recent Events Vertex Financing On July 12, 1999, we issued shares of a newly designated Series A Preferred Stock ("Series A Stock"). A total of 1,489,799 shares of Series A Stock were issued, with each share of Series A Stock initially convertible into two shares of the Company's common stock. Nine hundred and two thousand nine hundred and forty six (902,946) of the shares of Series A Stock were issued in exchange for an outstanding convertible secured promissory note with outstanding principal and interest of $3,846,550.82 held by Vertex Technology Fund, Ltd. ("Vertex"), and 586,853 of the shares were issued in consideration of an additional $2,499,994 in new financing. A Vertex affiliate provided $1 million of the new financing with the remainder provided by other investors. Each share of Series A Stock was sold at a price of $4.26 per share. We also issued warrants to purchase a total of 1,489,799 shares of our common stock at an exercise price of $2.13 per share as part of the transaction. The Series A Stock has a participating liquidation preference over our common stock initially equal to 150% of the full amount paid for the Series A Stock, which preference increases by an additional 50% per year over each of the next two years, so long as the Series A Stock is outstanding. The Series A Stock automatically converts into common stock if our common stock price exceeds $12.00 per share for 45 consecutive business days. The holders of Series A Stock will generally vote with the holders of common stock provided that the Series A Stock is only entitled to a number of votes equal to 50% of the number of shares of common stock into which the Series A Stock is convertible. The holders of Series A Stock were also provided with certain voting protective provisions. The shares eligible for resale upon execution of the warrants and conversion of the preferred stock have been registered under the Securities Act of 1933, under two separate registration statements on Form S-3. Each investor also agreed not to purchase more than 100,000 additional shares in the Company without our approval so long as such investor holds more than 5% of our outstanding securities. Results of Operations Revenue
1997 % Change 1998 % Change 1999 ----------- ----------- ------------- ----------- ----------- License revenue $21,363,000 (32%) $14,463,000 18% $17,074,000 As a percentage of total revenue 73% 62% 66% Services revenue 7,827,000 12% 8,770,000 0.3% 8,794,000 As a percentage of total revenue 27% 38% 34% Total revenue 29,190,000 (20%) 23,233,000 11% 25,868,000
19 Total revenue declined 20% from 1997 to 1998 but increased 11% from 1998 to 1999. We continue to experience significant annual and quarterly fluctuations in total revenue. *We have experienced, in prior years, a seasonal pattern in our operating results, with the fourth quarter typically having higher total revenue and income from operations than the first quarter of the following year, however we do not believe this trend will continue in 2000 compared to 1999. Also, see the section below labeled "Risk Factors." The decrease in license revenue in 1998 compared to 1997 was due primarily to the timing and complexity of sales and our inability to close large project opportunities. The increase in license revenue during 1999 compared to 1998 was attributable to: Primarily (1) increased sales in the defense and e-business market (2) increased customer deployments of applications previously subject only to development licenses, particularly in the telecommunications and the internet market Secondarily (1) restructuring and refocusing efforts within the Company sales personnel *We expect license revenue to increase in 2000 in absolute dollar terms compared to 1999, due to increased license purchases by core and e-business customers and increased sales by our Versant Europe subsidiary, each as a result of our 1999 customer development activities. *We also believe that license revenue as a percentage of total revenue will increase in 2000 compared to 1999. However, due to risks highlighted in the section, "Risk Factors," below, license revenue may decrease in absolute dollar terms or as a percentage of total revenue in 2000 when compared to 1999. The increase in services revenue during 1998 compared to 1997 was attributable principally to increased maintenance revenue from a significantly larger installed customer base, while training and consulting revenue declined due to the reduction in overall license revenues. The marginal increase in total services revenue in 1999 compared to 1998 was due to a 31% increase in maintenance revenues but was offset by a corresponding decrease in consulting revenues. The restructuring efforts within the services group did not allow us to take advantage of the consulting projects that became available during the year. *We expect that services revenue will increase in absolute dollar terms in 2000 as we increase our focus on consulting opportunities, but will decrease as a percentage of total revenue. However, due to the risks highlighted in the section, "Risk Factors," below, services revenue may not increase in absolute dollar terms in 2000 compared to 1999. We had no sales to customers representing more than 10% of total revenue in 1999 and 1998. In 1997 two customers accounted for $5.8 million and $3.1 million in revenue, respectively. International revenue increased 22% from $8.6 million in 1997 to $10.5 million in 1998. The increase in international revenue from 1997 to 1998 was driven principally by higher sales by Versant Europe, Australia and Asia Pacific, resulting from our increased marketing and sales investment, partially offset by decreased sales in Japan. International revenues grew 21% from $10.5 million in 1998 to $12.7 million in 1999. This increase was again due to the increases in Versant Europe's revenues partially offset by decreases in Australia and Asia Pacific. In addition, as a result of the acquisition of Versant Europe in March 1997, we began recognizing license and service revenue from Versant Europe that would have been recognized only at 40 % and 25 % royalty rates had Versant Europe not been acquired. *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. Our international sales are currently denominated predominantly in United States dollars. An increase in the value of the United States dollar relative to foreign currencies could make our products more expensive and, therefore, less competitive in foreign markets. We believe that the increase in the value of the United States dollar relative to foreign currencies in 1999 did not have a material effect on our operating results. *To the extent that we increase our international sales, our total revenue may be affected to a greater extent by seasonal fluctuations resulting from lower sales levels that typically occur during the summer months in Europe and other parts of the world. International revenue as a percentage of total revenue increased from 29% in 1997 to 45% in 1998 and then increased to 49% in 1999. *Due to our increased emphasis on international sales, especially through Versant Europe, we expect international revenue to increase in absolute dollar 20 terms but decrease as a percentage of total revenue; however, international revenue may not grow at all. Our international operations are subject to corresponding risks; see "Risk Factors--We depend on our international operations." Cost of Revenue and Gross Profit
1997 % Change 1998 % Change 1999 ------- ---------- -------- ---------- -------- Cost of license revenue $1,445,000 97% $2,846,000 (74%) $745,000 As a percentage of license revenue 7% 20% 4% Cost of services revenue 5,010,000 38% 6,893,000 (39%) 4,180,000 As a percentage of services revenue 64% 79% 48% Gross profit 22,735,000 (41%) 13,494,000 55% 20,943,000 As a percentage of total revenue 78% 58% 81%
Cost of license revenue consists primarily of reserves for estimated bad debts, product royalty obligations incurred by us when we sub-license tools provided by third parties, royalty obligations incurred by us under a porting services agreement, user manuals/product media, production labor costs, freight, and packaging. Cost of license revenue during 1998 increased compared to 1997 due to increased reserves for bad debts, amortization of certain deferred license costs and increased royalty costs. Cost of license revenue during 1999 decreased compared to 1998, primarily due to the elimination of amortization of certain deferred license costs, and secondarily due to reduced bad debt reserves and decreases in royalty costs. As part of the acquisition of Versant Europe, we allocated $1.4 million of the purchase price to deferred license costs. In 1998 we recognized the remaining $1.0 million of these deferred license costs as a cost of license revenue. *Although our cost of license revenue decreased in 1999 compared to 1998, both in absolute dollars and as a percentage of license revenue, we expect 2000 cost of license revenue to decline as well compared to 1999 due to the reductions in our production costs, royalty costs and freight. *For these reasons, we expect cost of license revenue to decrease slightly in absolute dollar terms, as well as decline as a percentage of license revenue in 2000, if expected revenue growth materializes. However, revenue growth in 2000, and therefore license revenue margin improvement, are subject to the risks highlighted in the section, "Risk Factors", below. Cost of services revenue consists principally of personnel costs associated with providing consulting, technical support, training and nonrecurring engineering work paid for by customers. The increase in cost of services revenue during 1998 compared to 1997 was primarily attributable to the significant increase in our service organization, due to a lack of third party support services, the increased costs of providing maintenance support to a growing customer base and secondarily to costs associated with employee turnover. Cost of services revenue as a percentage of services revenue increased in 1998 compared to 1997. This increase was primarily due to reduced service support productivity caused by reduced license revenues and higher consulting expenses associated with the use of external consultants on specialized customer projects, without an immediate increase in consulting and training revenue. The decrease in cost of services revenue during 1999 compared to 1998 was primarily attributable to the restructuring efforts worldwide in decreasing the size of our service organization while refocusing our vision and efforts to better serve our customer base worldwide. In so doing we were able to significantly reduce services cost of revenues while supporting the higher maintenance revenue levels compared to 1998. *We expect to increase our cost of service revenue in 2000 compared to 1999, both in absolute dollars as well as a percentage of revenues, through headcount and supporting expenses increases, coupled with increases in productivity. These increases are necessary to support our projected increases in services revenues and to support our increasing efforts in the consulting business, which we intend to expand in 2000. The increases in our e-business applications have given rise to substantial increased opportunities to support our customer base more effectively by offering additional consulting services, thereby reducing the need for our customers to find and train addition personnel to implement new e-business applications. Marketing and Sales Expenses
1997 % Change 1998 % Change 1999 ------- ---------- -------- ----------- --------- Marketing and sales expenses $17,265,000 7% $18,511,000 (47%) $9,883,000 As a percentage of total revenue 59% 80% 38%
21 Marketing and sales expenses consist primarily of marketing and sales personnel costs, including sales commissions, recruiting, travel, advertising, public relations, seminars, trade shows, lead generation, product descriptive literature, product management, sales offices, mailings and depreciation expense. The increase in 1998 compared to 1997 was due to increased marketing program costs to generate leads, partially offset by lower commission expenses on reduced revenues. In addition, in 1998 we increased marketing spending to expand worldwide awareness of our products and services, particularly in the Internet-based and financial services markets. The substantial decrease in 1999 marketing expenses compared to 1998 was primarily the result of our worldwide restructuring efforts and our decision to utilize the marketing program monies more efficiently by reducing duplicate efforts and programs worldwide. The focus is on worldwide programs versus regional programs, hence promoting a consistent message to our current and potential customer base. Better utilizing the internet to deliver our message will the goal in 2000. *We expect marketing and sales expenses to increase in absolute dollar terms, due to increased efforts to market our products to new (e-business) and existing (telco and financial services) business markets. However, we intend to counterbalance this increase with our restructured operations and our efforts to control commission costs and costs associated with less focused marketing programs and accordingly expect marketing and sales expenses to decrease as a percentage of revenue. *However, if we increase our marketing and sales expenditures without corresponding increases in revenue, our results of operations would be adversely affected. Research and Development Expenses
1997 % Change 1998 % Change 1999 ---------- ------------ ------------- ---------- ------------- Research and development expenses $5,225,000 48% $7,722,000 (9%) $7,011,000 As a percentage of total revenue 18% 33% 27%
Research and development expenses consist primarily of salaries, recruiting and other personnel-related expenses, the costs of an ISO 9001 quality program, depreciation or expensing of development equipment, supplies and travel. The increase during 1998 compared to 1997 resulted from: (1) higher compensation and other personnel expenses due to increased headcount (2) increased operating expenses due to new opportunities and expanded projects (3) costs of funding ongoing engineering activities in India (4) additional operating expenses associated with Soft Mountain's engineering activity The decrease during 1999 compared to 1998 primarily resulted from, reduced compensation and other personnel expenses due to decreases in headcount and secondarily due to reduced operating expenses associated with Soft Mountain's engineering activity. 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 our restructuring activities, we reduced research and development expense in absolute dollar terms and as a percentage of revenues in 1999. *Due to our e-business efforts as well as ongoing improvements in our ODBMS products we expect research and development expenses to increase slightly in 2000 in absolute dollars, but decline as a percentage of revenues. Our objective is to improve our R&D to revenue dollar productivity and better match R&D spending with revenue increases. *However, if we continue our research and development efforts without corresponding increases in revenue, our results of operations would be adversely affected. To date, all research and development expenditures have been expensed as incurred. General and Administrative Expenses
1997 % Change 1998 % Change 1999 ---------- ------------ ------------ ------------ ------------- General and administrative expenses $2,880,000 34% $3,857,000 (5%) $3,658,000 As a percentage of total revenue 10% 17% 14%
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. The significant increase during 1998 compared to 1997 resulted from: 22 (1) increased severance costs incurred in connection with changes to our management team (2) increased legal and accounting services (3) expanded travel expense associated with funding projects (4) increased facility costs The decrease in general and administrative expenses in 1999 compared to 1998 were primarily due to the restructuring efforts taken in 1999 and secondarily due to the continuing expense controls that are being used to properly match expense trends with revenue trends. *We anticipate that general and administrative expenses will increase in absolute dollar terms but decrease as a percentage of revenues in 2000 compared to 1999 levels. This anticipated increase is due to the need to rebuild part of the administrative staff that were reduced in 1999, coupled with management's awareness to continue to improve productivity by aligning expenses with revenue trends. *However, if we increase our existing administration infrastructure without corresponding increases in revenue, our results of operations would be adversely affected. 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 1998 and 1999, we amortized $485,000 and $187,000, respectively, of this amount. Additionally in 1998 we wrote down the Versant Europe goodwill by $1.6 million due to our revised estimated discounted cash flow over the next five years. *We will amortize $187,000 of this remaining goodwill amount in 2000. See note 9 of notes to our consolidated financial statements. The acquisition of Soft Mountain in September 1998 resulted in our writing off $528,000 of in-process research and development expenses associated with the purchased software and 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 1999, we amortized $245,000 of this amount. *We will amortize $245,000 of this amount in 2000. See note 10 of notes to our consolidated financial statements. Interest Income (Expense) and Other, Net
1997 % Change 1998 % Change 1999 -------- ---------- ------------- ----------- ------------- Interest income (expense) and other, net $705,000 (198 %) ($692,000) 84 % ($1,273,00) As a percentage of total revenue 2% (3%) (5%)
Interest income (expense) and other, net represents income earned on our cash, cash equivalents and short-term investments and interest expense associated with our financing activities. The decrease in interest income (expense) and other, net from 1997 to 1998 was primarily due to: (1) decreased interest income from lower cash balances (2) increased interest expense on bank debt and capital equipment leases (3) increased interest expense on our convertible secured subordinated promissory note The sharp increase in interest income (expense) and other, net from 1998 to 1999 was due to the conversion of the Vertex convertible note to equity and the subsequent write off of the remaining capitalized note discount of $787,000 as a non-cash interest expense and $158,000 of accrued interest expense which was converted to equity in association with the Vertex convertible note. See note 11 of notes to our consolidated financial statements. Provision for Income Taxes
1997 % Change 1998 % Change 1999 ------- -------- -------- -------- -------- Provision for income taxes $40,000 (55%) $18,000 200% $54,000 As a percentage of income (loss) before income taxes (2%) (0%) (3%)
We account for income taxes in accordance with Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes." We incurred net operating losses in 1997 and 1998, resulting in no federal or state tax 23 liability based on income. However, we did incur foreign withholding taxes of $18,000 and $54,000 during 1998 and 1999, which are included within the income tax provision. At December 31, 1999, we had federal and state net operating loss carryforwards of $33.6 million and $8.4 million and tax credit carryforwards of $2.4 million expiring on various dates through 2019. *Due to our history of operating losses through 1995 and in 1997, 1998 and 1999 and other factors, we believe that there is sufficient uncertainty regarding the realizability of these carryforwards, and therefore a valuation allowance of approximately $15.4 million has been recorded against our net deferred tax assets of approximately $15.4 million. We will continue to assess the realizability of the tax benefit available to us based on actual and forecasted operating results. Due to the "change in ownership" provisions of the Internal Revenue Code of 1986, the availability of net operating loss and tax credit carryforwards to offset federal taxable income in future periods is subject to an annual limitation due to changes in ownership for income tax purposes. Usage of net operating loss carryforwards is limited to approximately $4.0 million per year because of past ownership changes. Liquidity and Capital Resources
1997 % Change 1998 % Change 1999 ----------- ----------- -------------- ------------ ----------- Net cash used in operating activities ($5,655,000) 88% ($10,628,000) (94%) ($669,000) Year end cash, cash equivalents And short-term investments $9,831,000 (64%) $3,564,000 3% $3,663,000 Year end working capital (deficit) $12,228,000 n/a ($3,303,000) n/a $1,584,000
In 1999, net cash of $520,000 was used in operating activities primarily due to the cash component of our net loss for 1999, increases in accounts receivable, decreases in accounts payable, accrued liabilities and reduced deferred revenue, which were offset by non-cash depreciation and amortization expenses, non-cash compensation expense, non-cash accrued Vertex interest and discount, decreases in prepaid expenses and other current assets, and a decreased provision for doubtful accounts compared to 1998. The increase in accounts receivable was due to reduced collection activity, and lower revenues in the fourth quarter of 1999 compared to the fourth quarter of 1998. Through February 29, 2000, we had collected $3.9 million of our December 31, 1999 accounts receivable balance, leaving an accounts receivable balance of $3.4 million related to the December 31, 1999 balance. In 1998, net cash of $10.6 million was used in operating activities primarily due to the cash component of our net loss for 1998, decreases in deferred revenue, accrued liabilities and taxes and a decreased provision for doubtful accounts, which were offset by a significant decrease in accounts receivable, decreases in prepaid expenses and other current assets, and increases in accounts payable compared to 1997. The decrease in accounts receivable was due to improved collection activity, and lower revenues in the fourth quarter of 1998 compared to the fourth quarter of 1997. Through February 28, 1999, we had collected $3.2 million of our December 31, 1998 accounts receivable balance, leaving an accounts receivable balance of $3.0 million related to the December 31, 1998 balance. In 1999, our net cash used in investing activities was $115,000 due to our $80,000 increased investment in Versant India and our $35,000 net purchase of property and equipment, primarily for the acquisition of network and computer equipment, associated with Y2k improvements. *We have and will continue to make certain investments in software applications and systems to ensure that our products continue to be Year 2000 compliant. We successfully crossed the Y2k threshold with minor corrective actions, none of which had any impact on our daily operating activities. See "Risk Factors--Our business may be harmed by Year 2000 problems." In 1998 we purchased $2.0 million of property and equipment, primarily for the acquisition of network and computer equipment, leasehold improvements, furnishings and fixtures for our headquarters. In addition, in September 1998, we acquired Soft Mountain and paid the shareholders of Soft Mountain $136,000 in cash in addition to issuing them 245,586 shares of our common stock. These uses of cash for investing activities were entirely offset by net sales and maturities of short-term investments. 24 In 1999, financing activities provided a net increase of $727,000, primarily due to proceeds from the sale of preferred stock to certain of our largest shareholders, exercising of common stock warrants for common stock and secondarily to the sale of common stock to our employees under employee benefit plans. These increases were offset by the paydown of our short term receivables line of credit and long term bank note, plus the normal principal payments made under capital lease obligations. In 1998, financing activities provided $6.5 million, primarily due to proceeds from the sale of a convertible secured subordinated promissory note, the sale of common stock to certain of our largest shareholders, the sale of common stock to our employees under employee benefit plans and borrowings under a short-term accounts receivable loan. These increases were partially offset by principal payments made under capital lease obligations and our long term bank note. At December 31, 1999, we had $3.7 million in cash and cash equivalents and positive working capital of approximately $1.6 million. We maintain a revolving credit line with a bank that expires on September 30, 2000. The maximum amount that can be borrowed under the revolving credit line is $5.0 million. As of December 31, 1999, $900,000 was allocated to a standby letter of credit to support our 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 our assets. These borrowings bear interest at the bank's base lending rate (8.50% at December 31, 1999, plus 2.0%). The loan agreement contains financial covenants, commencing with this quarter ending December 31, 1999, and also prohibits cash dividends and mergers and acquisitions without the bank's prior approval. Certain of these new covenants, which the Company was not in compliance with as of December 31, 1999, have been waived through March 31, 2000. In March 2000, we negotiated new covenants for the year ending December 31, 2000, based on the Company's forecasted performance. On March 19, 1998, we 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. 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 (8.50% at December 31, 1999, plus 2.5%). The loan contains certain financial covenants and also prohibits cash dividends and mergers and acquisitions without the bank's prior approval. Certain of these covenants, which we were not in compliance with as of December 31, 1999, have been waived through March 31, 2000. In March 2000, we negotiated new covenants for the year ending December 31, 2000, based on the Company's forecasted performance. *We believe 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 2000. At December 31, 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. To date, we have not achieved business volume sufficient to restore profitability and a positive cash flow. We operated at a net loss of $1.7 million and $19.9 million in 1999 and 1998. We believe our available cash and credit facilities should be sufficient to fund our operations, however there can be no assurance of this and we are dependent upon future events, including our ability to obtain additional debt or equity financing, if financial results fall short of our goals. Additional debt or equity financing, may be required, and may not be available to us on commercially reasonable terms, or at all. Even if we were able to obtain additional debt or equity financing, the terms of this financing may significantly restrict our business activities. The actual cash resources required to successfully implement our business plan in year 2000 will depend upon numerous factors, including but not limited to those described in the following Risk Factors. 25 Risk Factors This Annual Report on Form 10-KSB 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. At December 31, 1999, we had only $1.6 million of working capital. To date we have not achieved profitability or positive cash flow on a sustained basis. As our revenue is unpredictable, and a significant portion of our expenses are fixed, a revenue shortfall could deplete our limited financial resources and require us to substantially reduce operations or to raise additional funds through debt or equity financings. Additionally, as of December 31, 1999, we had approximately $1.2 million of bank term debt financing outstanding, of which $71,000 a month is due and payable and another $1.4 million of bank revolving line debt that is due as we collect from our customers. From time to time we have been in violation of covenants of such bank debt. We will need to generate sufficient earnings to repay such debt when due, or raise additional funds through debt or equity financings. There can be no assurance any equity or debt funding would be available to us on favorable terms, if at all. The sale of additional equity or convertible debt securities would result in dilution to our shareholders. Our revenue levels are unpredictable. Our revenue has fluctuated dramatically on a quarterly and annual basis, and we expect this trend to continue. These dramatic fluctuations result from a number of factors, including: (1) the lengthy and highly consultative sales cycle associated with our products (2) uncertainty regarding the timing and scope of customer deployment schedules of applications based on the Versant ODBMS (3) fluctuations in domestic and foreign demand for our products and services, particularly in the telecommunications and financial services markets (4) the impact of new product introductions by us and our competitors (5) our unwillingness to significantly lower prices to meet prices set by our competitors (6) the effect of publications of opinions about us and our competitors and their respective products (7) customer order deferrals in anticipation of product enhancements or new product offerings by us or our competitors (8) potential customers unwillingness to invest in our products given our financial instability A number of other factors make it impossible to predict our operating results for any period prior to the end of that period. We ship our software to a customer at receipt of the customer's order, and consequently, we have little order backlog. As a result, license revenue in any quarter is substantially dependent on orders booked and shipped in that quarter. Historically, we record most of our revenue and book most of our orders in the third month of each quarter, with a concentration of such revenue and orders in the last few days of the quarter. We expect this trend to continue. Many of these factors are beyond our control. We may not be able to manage costs given the unpredictability of our revenue. We expended significant resources in 1997 and 1998 to build our infrastructure and hire personnel, before reductions, particularly in the services and sales and marketing sectors, in expectation of higher revenue growth than actually occurred. Although we have restructured our operations to reduce operating expenses in 1999, we continue to plan for revenue growth in 2000 compared to 1999. Consequently, we will continue to incur a relatively high level of fixed expenses. Although, in January 1999, we reduced significantly our worldwide headcount and implemented controls on spending in order to achieve expense reductions, if expense controls are not maintained or planned revenue growth does not materialize, our business, financial condition and results of operations will be materially harmed. We rely on our core markets, specifically the telecommunications and financial services markets characterized by complexity and intense competition. Historically, we have been highly dependent upon the telecommunications industry and are becoming increasingly dependent upon the financial services market. Our success in the telecommunications and financial service markets is dependent, in part, on our ability to compete with alternative technology providers and on whether our customers and potential customers believe we have the expertise necessary to provide effective solutions in these markets. If these conditions, among others, are not satisfied, we may not be 26 successful in generating additional opportunities in these markets. The need for and type of applications and commercial products for the telecommunications and financial services markets is continuing to develop, is rapidly changing, and is characterized by an increasing number of new entrants whose products may compete with those of ours. As a result, we cannot predict the future growth of these markets, and demand for object-oriented databases in these markets may not develop or be sustainable. We also may not be successful in attaining a significant share of these markets. In addition, organizations in these markets generally develop sophisticated and complex applications that require substantial customization of our products. Although we seek to generate consulting revenue in connection with these customization efforts, we have offered, and may, under certain circumstances continue to offer, free or reduced price consulting. This practice has impacted, and will continue to impact, our service margins and will require that we maintain a highly skilled service infrastructure with specific expertise in these markets. Our products have a lengthy sales cycle. Our sales cycle, which varies substantially from customer to customer, often exceeds nine months and can sometimes extend to a year or more. Due in part to the strategic nature of our products and associated expenditures, potential customers are typically cautious in making product acquisition decisions. The decision to license our products generally requires us to provide a significant level of education to prospective customers regarding the uses and benefits of our products, and we must frequently commit no-fee pre-sales support resources, such as assistance in performing bench marking and application prototype development. Because of the lengthy sales cycle and the relatively large average dollar size of individual licenses, a lost or delayed sale could have a significant impact on our operating results for a particular period. Although 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, we have not yet entered into such relationships and may not be successful in developing such relationships. In addition, our value-added resellers may be subject to a lengthy sales cycle for our products. Our customer concentration increases the potential volatility of our operating results. Notwithstanding our recent efforts to develop new customers, typically through the use of relatively small licenses, a significant portion of our total revenue has been, and we believe 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 is likely to cause in the future, material fluctuations in our operating results, particularly on a quarterly basis. In addition, our major customers tend to change from year to year. The loss of any one or more of our major customers or our inability to replace a customer that has become less significant in a given year with a different major customer could have a material adverse effect on our business. We depend on our international operations. A significant portion of our revenue is derived from customers located outside the United States. This requires that we operate internationally and maintain a significant presence in international markets. However, our international operations are subject to a number of risks. These risks include: (1) longer receivable collection periods (2) changes in regulatory requirements (3) dependence on independent resellers (4) multiple and conflicting regulations and technology standards (5) import and export restrictions and tariffs (6) difficulties and costs of staffing and managing foreign operations (7) potentially adverse tax consequences (8) foreign exchange fluctuations (9) the burdens of complying with a variety of foreign laws (10) the impact of business cycles and economic instability outside the United States We must defend against securities litigation. We and certain of our 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. We vigorously deny the plaintiffs' claims and has moved to dismiss the allegations. The plaintiff has filed a response to our motion to dismiss and we have 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 27 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. Our stock price is volatile. Our revenue, operating results and stock price have been and may continue to be subject to significant volatility, particularly on a quarterly basis. We have previously experienced significant shortfalls in revenue and earnings from levels expected by securities analysts and investors, which has had an immediate and significant adverse effect on the trading price of our common stock. This may occur again in the future. Additionally, as a significant portion of our revenue often occurs late in the quarter, we may not learn of revenue shortfalls until late in the quarter, which could result in an even more immediate and adverse effect on the trading price of our common stock. Stock ownership has become more concentrated and subject to dilution. As a result of the Vertex note conversion and equity financing in July 1999, ownership of our equity has become more concentrated. Based on Vertex's filings with the SEC and assuming, as of December 31, 1999, 15,030,330 shares outstanding (assuming conversion of all outstanding preferred stock and exercise of all warrants outstanding), Vertex and its affiliates would own approximately 26.6% of our common stock if it converted all of its Preferred Stock and exercised all of its warrants. The Company has registered 5,839,091 shares issuable upon conversion/exercise of the outstanding preferred stock and warrants. The issuance of such shares could result in the dilution of other shareholders, and the sale of such shares could depress the market price of our stock. 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. Our systems did recognize the correct date when the year changed to 2000, and our customers, as of the date of this filing, have not reported any material Y2k related problems, with our ODBMS and related products, to our service department. There were no material adverse effects on our operations, either internally or externally. We are also not aware of any material Y2k problems with our vendors or third party developers. Despite the foregoing measures, there can be no assurance that Year 2000 problems will not occur and the consequences of any such problems may be material to the operation of the Company and its financial results or prospects. Risks Related To Our Industry We face competition from different sectors. The competition includes Fortune 500 firms such as Oracle and Sybase with the resources to heavily promote their products and assert account control over their largest enterprise accounts. Competition from the traditional ODBMS vendors has started to shift and shakeout. Most have diverged into new markets and new businesses, leaving Objectivity and eXcelon as our key competitors. A more comprehensive list includes competitors offering object and object-relational database management systems such as Oracle Corporation, Computer Associates International, Inc., eXcelon (formerly Object Design, Inc.), Informix and its Illustra Information Technologies, Inc. subsidiary, Objectivity, Inc., Gemstone Systems, Inc., Poet Software Corporation, ONTOS, Inc. In addition, our products compete with traditional relational database management systems, many of which have been or are expected to be modified to incorporate object-oriented interface and other functionality, and to leverage Java. The principal competitors in the relational database market are Oracle, Sybase, Informix, IBM and Microsoft. In 1997, Oracle released its Oracle8 product, which, with its object option, provides object-relational database capabilities, and Computer Associates released their Jasmine ODBMS, which is a pure object-oriented database. We believe that the decision of relational database vendors to pursue object-relational or object-oriented approaches validates our belief that object-oriented database solutions will be increasingly demanded by today's business organizations. During the last year we have seen a major shift away from Smalltalk towards JAVA. In addition Versant is used more and more as a middle tier persistence layer in multi-tier applications This allows Versant to complement the product offerings from some of the more established companies in these markets. These are companies like IBM, SUN and BEA selling Java based tools and solutions. In order for Versant products to be well accepted in the marketplace, it is important for one or more of these partnerships to become strategic on both sides. There is also some movement in the market to buy as much middleware components as possible from one or just a few suppliers. Due to the introduction by Oracle and Computer Associates of competing products with lower prices than the Versant ODBMS, we 28 may not be able to maintain prices for our products at levels that will enable us to market our products profitably. Any decrease in per unit prices, as a result of competition or otherwise, could have a material adverse effect on our business, operating results and financial condition. We are also indirectly facing competition from developers of middleware products that allow users to connect object-oriented applications to existing legacy data and RDBMSs such as TopLink and Thought Inc. Many of our competitors, and especially Oracle and Computer Associates, have longer operating histories, significantly greater financial, technical, marketing, service and other resources, significantly greater name recognition, broader product offerings and a larger installed base of customers than ours. In addition, many of our competitors have well-established relationships with current and potential customers of ours. As a result, our competitors may be able to devote greater resources to the development, promotion and sale of their products, may have more direct access to corporate decision-makers based on previous relationships and may be able to respond more quickly to new or emerging technologies and changes in customer requirements. We may not be able to compete successfully against current or future competitors, and competitive pressures could have a material adverse effect on our business, operating results and financial condition. We depend on successful technology development. We believe that significant research and development expenditures will be necessary to remain competitive. While we believe our research and development expenditures will improve the Versant product lines, due to the uncertainty of software development projects, these expenditures will not necessarily result in successful product introductions. Uncertainties impacting the success of software development project introductions include technical difficulties, market conditions, competitive products and consumer acceptance of new products and operating systems. We also face certain challenges in integrating third-party technology with our products. These challenges include the technological challenges of integration, which may result in development delays, and uncertainty regarding the economic terms of our relationship with the third-party technology provider, which may result in delays of the commercial release of new products. We face further technology development challenges associated with our acquisition of Soft Mountain. The Soft Mountain R'Net product offering is still under development, and there is uncertainty in both the timing of the release and the market acceptance of the product. We have worked with BEA and IBM to develop technology that will allow the Versant Enterprise Container to support the BEA WebLogic and IBM WebSphere application server family, undiscovered bugs or errors may exist that prevent us from achieving the functionality we seek with the Versant Enterprise Container. In addition, because Java Bean containers are specific to each application server vendor and no standards have been adopted for such containers, we may not be able to take advantage of our development work with the BEA and IBM application server family's when developing solutions for other application server vendors. We do not currently have any agreements or relationships regarding the Versant Enterprise Container with other application server vendors, therefore customers will only be able to use it with BEA and/or IBM application servers. We must protect our intellectual property. Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy aspects of our products, obtain or use information that we regard as proprietary or use or make copies of our products in violation of license agreements. Policing unauthorized use of our products is difficult. In addition, the laws of many jurisdictions do not protect our proprietary rights to as great an extent as do the laws of the United States. Shrink-wrap licenses may be wholly or partially unenforceable under the laws of certain jurisdictions, and copyright and trade secret protection for software may be unavailable in certain foreign countries. Our means of protecting our proprietary rights may not be adequate, and our competitors may independently develop similar technology. To date, we have not been notified that our products infringe the proprietary rights of third parties, but third parties could claim that our current or future products infringe such rights. We expect that developers of object-oriented technology will increasingly be subject to infringement claims as the number of products, competitors and patents in our industry segment grows. Any such claim, whether meritorious or not, could be time-consuming, result in costly litigation, cause product shipment delays or require us to enter into royalty or licensing agreements. Such royalty or 29 licensing agreements might not be available on terms acceptable to us or at all, which could have a material adverse effect upon our business, operating results and financial condition. Our future success will depend in part on our ability to integrate our products with those of vendors providing complementary products. The Versant ODBMS must be integrated with compilers, development tools, operating systems and other software and hardware components to produce a complete end-user solution. We may not receive the support of these third-party vendors, some of which may compete with us, to integrate our products with the vendors' products. We depend on our personnel for whom competition is intense. Our future performance depends in significant part upon the continued service of our key technical, sales and senior management personnel. The loss of the services of one or more of our key employees could have a material adverse effect on our business. Our future success also depends on our continuing ability to attract, train and motivate highly qualified technical, sales and managerial personnel. Competition for such personnel is intense, especially in Silicon Valley where our headquarters are located, and we may not be able to attract, train and motivate such personnel. Item 7A. Quantitative and Qualitative Disclosures About Market Risk Interest Rate Risk Our exposure to market risk for changes in interest rates relate primarily to our investment portfolio. Currently, we do not use derivative financial instruments in our investment portfolio. We invest in high-credit quality issuers and, by policy, limits the amount of principal exposure to any one issuer. As stated in our policy, we seek to ensure the safety and preservation of our invested principal funds by limiting default and market risk. We seek to mitigate default risk by investing in high-credit quality securities and by positioning our investment portfolio to respond to a significant reduction in a credit rating of any investment issuer, guarantor or depository. We seek to mitigate market risk by limiting the principal and investment term of funds held with any one issuer and by investing funds in marketable securities with active secondary or resale markets. As of December 31, 1999 we had invested all our excess funds in current money market accounts and had no fixed term investments to report. Item 8. Financial Statements The financial statements and supplementary data required by Item 8 are set forth below on pages F-1 to F-20 of this report. Item 9. Changes and Disagreements with Accountants on Accounting and Financial Disclosure None. 30 PART III Item 10. Directors and Executive Officers of the Registrant; Compliance with Section 16(a) of the Exchange Act. The information concerning our directors required by this Item is incorporated by reference to our definitive proxy statement for our 2000 annual meeting of shareholders, which we will file with the Securities and Exchange Commission by April 11, 2000, under the heading "Election of Directors." The information concerning our executive officers required by this item is incorporated by reference to the proxy statement under the heading "Executive Officers." The section entitled "Compliance under Section 16(a) of the Securities Exchange Act of 1934" that will appear in our proxy statement sets forth the information concerning compliance by our officers, directors and 10% shareholders with Section 16 of the Securities Exchange Act and is incorporated herein by reference. Item 11. Executive Compensation. The information required by this item is incorporated by reference to our proxy statement under the heading "Executive Compensation." Item 12. Security Ownership of Certain Beneficial Owners and Management. The information required by this item is incorporated by reference to our proxy statement under the heading "Security Ownership of Certain Beneficial Owners and Management." Item 13. Certain Relationships and Related Transactions. The information required by this Item is incorporated by reference to our proxy statement under the heading "Certain Relationships and Related Transactions." Item 14. Other Information. On October 21, 1999, the board of directors added Mr. Hank Delevati to the board. Mr. Delevati has been the Senior Vice President of Information Technology and CIO with Aspect Communications, a provider of telecommunications equipment and application software since August 1999. Prior to Aspect Mr. Delevati was the CIO of Quantum Corporation from 1995 to 1999, CIO of Borland Corporation from 1994 to 1995 and the CIO of Logitech from 1993 to 1994, Between 1987 and 1993 Mr. Delevati worked with Sun Microsystems as their Director - Applications Development & Global Information Resources. Mr. Delevati received his Bachelor of Science in Computer Sciences from Arizona State University. Mr. Delevati is also a director of Insite Objects. Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K. (a) Exhibits. See Exhibit Index, page X-1. (b) Reports on Form 8-K filed in quarter ending December 31, 1999. With the exception of the information incorporated herein by reference to our proxy statement in Items 9, 10, 11 and 12 of Part III, the proxy statement is not deemed to be filed with this Form 10-KSB. 31 SIGNATURES In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized in the City of Fremont, State of California, on this 30th day of March, 2000. VERSANT CORPORATION By:/s/ Gary Rhea ----------------------------------- Gary Rhea Vice President-Finance and Administration In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Name Title Date PRINCIPAL EXECUTIVE OFFICER: /s/ Nick Ordon President, Chief March 27, 2000 -------------------------------------- Nick Ordon Executive Officer and Director PRINCIPAL FINANCIAL OFFICER AND PRINCIPAL ACCOUNTING OFFICER: /s/ Gary Rhea Vice President-Finance March 27, 2000 -------------------------------------- Gary Rhea and Administration ADDITIONAL DIRECTORS: /s/ Mark Leslie Director March 24, 2000 -------------------------------------- Mark Leslie /s/ Stephen J. Gaal Director March 25, 2000 -------------------------------------- Stephen J. Gaal /s/ Bernhard Woebker Director March 25, 2000 -------------------------------------- Bernhard Woebker /s/ Hank Delevati Director March 24, 2000 -------------------------------------- Hank Delevati /s/ David Banks Director March 25, 2000 -------------------------------------- David Banks
32 VERSANT CORPORATION AND SUBSIDIARIES INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
PAGE ------------------ Report of Independent Public Accountants............................. F-2 Consolidated Balance Sheets.......................................... F-3 Consolidated Statements of Operations................................ F-4 Consolidated Statements of Shareholders' Equity (Deficit)............ F-5 Consolidated Statements of Cash Flows................................ F-6 Notes to Consolidated Financial Statements........................... F-7 to F-19 Schedule II - Valuation and Qualifying Accounts and Reserves......... F-20
F-1 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Board of Directors and Shareholders of Versant Corporation: We have audited the accompanying consolidated balance sheets of Versant Corporation (a California corporation) and its subsidiaries as of December 31, 1999 and 1998, and the related consolidated statements of operations, shareholders' equity (deficit) and cash flows for each of the three years ended December 31, 1999. These consolidated financial statements and the schedule referred to below are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and schedule based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Versant Corporation and its subsidiaries as of December 31, 1999 and 1998, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1999, in conformity with accounting principles generally accepted in the United States. Our audits were made for the purpose of forming an opinion on the basic consolidated financial statements taken as a whole. The schedule appearing on page F-20 is presented for purposes of complying with the Securities and Exchange Commission's rules and is not a part of the basic consolidated financial statements. This schedule has been subjected to the auditing procedures applied in our audits of the basic consolidated financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic consolidated financial statements taken as a whole. ARTHUR ANDERSEN LLP San Jose, California January 25, 2000 F-2
VERSANT CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In thousands) December 31, -------------------------------- 1999 1998 ------------- ------------- ASSETS Current assets: Cash and cash equivalents $ 3,663 $ 3,564 Accounts receivable, net of allowance for doubtful accounts of $414 and $335 in 1999 and 1998, respectively 7,278 5,878 Other current assets 753 1,318 --------- --------- Total current assets 11,694 10,760 Property and equipment, net 5,478 7,381 Other assets 190 433 Excess of cost of investment over fair value of net assets acquired, net of accumulated amortization of $2,917 and $2,473 in 1999 and 1998, respectively 1,879 2,095 --------- --------- $ 19,241 $ 20,669 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Current portion of capital lease obligations $ 253 $ 561 Current maturities of long-term debt 1,240 2,223 Short term debt 1,400 2,426 Accounts payable 718 2,331 Accrued liabilities 3,405 3,692 Deferred revenue 3,094 2,830 --------- --------- Total current liabilities 10,110 14,063 --------- --------- Long-term liabilities, net of current portion: Capital lease obligations 127 369 Long term debt - 3,678 Deferred revenue 416 704 Shareholders' equity: Preferred stock Authorized - 3,000 shares Issued and outstanding--1,490 in 1999 and none in 1998 5,662 - Liquidation value of $9,520 Common stock: Authorized - 30,000 shares Issued and outstanding--10,561 in 1999 and 10,150 in 1998 48,528 45,727 Accumulated deficit (45,627) (43,890) Accumulated other comprehensive income 25 18 --------- --------- Total shareholders' equity 8,588 1,855 --------- --------- $ 19,241 $ 20,669 ========= =========
The accompanying notes are an integral part of these consolidated balance sheets. F-3
VERSANT CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share amounts) Year Ended December 31, -------------------------------------------- 1999 1998 1997 ------------- ------------- ------------- Revenue: License $ 17,074 $ 14,463 $ 21,363 Services 8,794 8,770 7,827 ------------- -------------- ------------- Total revenue 25,868 23,233 29,190 Cost of revenue: License 745 2,846 1,445 Services 4,180 6,893 5,010 ------------- -------------- ------------- Total cost of revenue 4,925 9,739 6,455 ------------- -------------- ------------- Gross profit 20,943 13,494 22,735 Operating expenses: Marketing and sales 9,883 18,511 17,265 Research and development 7,011 7,722 5,225 General and administrative, excluding non-cash compensation expense of $337,000 in 1999 shown below 3,658 3,857 2,880 Amortization of goodwill 463 546 370 Write down of assets - 1,555 - Acquired in-process R&D cost - 528 - Non-cash compensation expense 337 - - ------------- -------------- ------------- Total operating expenses 21,352 32,719 25,740 Loss from operations (409) (19,225) (3,005) ------------- -------------- ------------- Other income (expense): Foreign currency transaction gain (loss) 2 (34) 133 Interest expense (1,294) (640) (162) Interest and other income (expense), net 19 (18) 734 ------------- -------------- ------------- Total other income (expense) (1,273) (692) 705 Loss before taxes (1,682) (19,917) (2,300) Provision for income taxes 54 18 40 ------------- -------------- ------------- Net loss $ (1,736) $ (19,935) $ (2,340) ============= ============== ============= Net loss per share: Basic ($0.17) ($2.16) ($0.26) ============= ============== ============= Diluted ($0.17) ($2.16) ($0.26) ============= ============== ============= Weighted shares used in per share calculations Basic 10,178 9,209 8,931 ============= ============== ============ Diluted 10,178 9,209 8,931 ============= ============== ============
The accompanying notes are an integral part of these consolidated statements. F-4
VERSANT CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT) (In thousands, except share amounts) Preferred Stock Common Stock Accumulated Shareholders' --------------- ------------ Shares Amount Shares Amount Deficit Equity(Deficit) --------- -------- ---------- -------- ----------- --------------- Balance at December 31, 1996 -- -- 8,719,207 $ 40,889 $(21,615) $ 19,274 ESPP and exercises of stock options and warrants -- -- 106,866 946 -- 946 Issuance of common stock to shareholders of Versant Europe -- -- 167,545 1,145 -- 1,145 Net loss -- -- -- -- (2,340) (2,340) Other comprehensive income (loss), net of tax: Foreign currency translation adjustments -- -- -- -- 275 275 ----------- ------------ Comprehensive income -- -- -- -- (2,065) (2,065) -------- -------- --------- -------- ----------- ------------ Balance at December 31, 1997 -- -- 8,993,618 42,980 (23,680) 19,300 ESPP and exercises of stock options and warrants -- -- 210,934 734 -- 734 Issuance of common stock to shareholders of Soft Mountain -- -- 245,586 645 -- 645 Issuance of common stock to Special Situations Fund -- -- 700,000 1,368 -- 1,368 Net loss -- -- -- -- (19,935) (19,935) Other comprehensive income (loss), net of tax: Foreign currency translation adjustments -- -- -- -- (257) (257) ----------- ------------ Comprehensive loss -- -- -- -- (20,192) (20,192) -- -- -- -- ----------- ------------ Balance at December 31, 1998 -- -- 10,150,138 45,727 (43,872) 1,855 --------- -------- ---------- -------- ----------- ------------ ESPP and exercises of stock options and warrants -- -- 380,795 768 -- 768 Issuance of common stock to shareholders of Soft Mountain -- -- 30,000 148 -- 148 Issuance of preferred stock and warrants to investors in exchange for cash and notes payable 1,489,799 5,662 -- 1,548 -- 7,210 Non cash compensation cost associated with the issuance of warrants for consulting services -- -- -- 337 -- 337 Net loss -- -- -- -- (1,736) (1,736) Other comprehensive income (loss), net of tax: Foreign currency translation adjustments -- -- -- -- 7 7 ----------- ------------ Comprehensive income -- -- -- -- (1,729) (1,729) --------- -------- ---------- -------- ----------- ------------ Balance at December 31, 1999 1,489,799 $ 5,662 10,560,933 $ 48,528 $ (45,602) $ 8,588 ========= ======== ========== ======== =========== ============
The accompanying notes are an integral part of these consolidated statements. F-5
VERSANT CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) Year Ended December 31, ------------------------------------------ 1999 1998 1997 ------------ ------------ ----------- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $ (1,736) $ (19,935) $ (2,340) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 2,382 2,716 1,262 Write-off of acquired in-process R&D cost - 528 - Write down of goodwill - 1,555 - Non-cash compensation expense 337 - - Accrued discount/interest on Vertex note conversion 945 - - Provision for doubtful accounts receivable 155 (857) 208 Changes in current assets and liabilities, net of acquisitions: Accounts receivable (1,555) 4,548 (5,030) Other current assets 565 982 (2,476) Other assets 243 33 (381) Accounts payable (1,613) 1,259 597 Accrued liabilities (218) (642) 966 Deferred revenue (24) (815) 1,539 ------------ ------------ ----------- Net cash used in operating activities (520) (10,628) (5,655) ------------ ------------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of property and equipment (35) (1,989) (6,679) Purchases of short-term investments - - (20,632) Proceeds from sale and maturities of short-term investments - 6,114 29,462 Purchase of Versant Europe, net of cash acquired - - (1,987) Purchase of Versant India (80) - - Purchase of Soft Mountain, net of cash acquired - (136) - ------------ ------------ ----------- Net cash provided by (used in) investing activities (115) 3,989 164 ------------ ------------ ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from sale of common stock, net 768 2,102 946 Proceeds from sale of preferred stock, net 970 - - Proceeds from sale of warrants 1,548 - - Net borrowings(payments) under short term note and bank loan (2,009) 1,797 735 Principal payments under capital lease obligations (550) (627) (262) Borrowings(principal payments) under long term bank note - (106) 2,522 Net proceeds from long-term borrowings - 3,320 - ------------ ------------ ----------- Net cash provided by financing activities 727 6,486 3,941 ------------ ------------ ----------- Effects of exchange rate changes on cash 7 - - NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 99 (153) (1,550) CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 3,564 3,717 5,267 ------------ ------------ ----------- CASH AND CASH EQUIVALENTS AT END OF YEAR $ 3,663 3,564 $ 3,717 ============ ============ =========== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash paid for: Interest $ 348 $ 378 $ 180 Foreign withholding and state income taxes 54 18 - SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES Capital lease obligations incurred for acquisition of equipment $ - $ 607 $ 574 Issuance of common stock to shareholders of Versant Europe - - 1,145 Issuance of common stock to shareholders of Soft Mountain 148 645 - Issuance of warrants for consulting services 337 - - Conversion of notes payable to Series A Preferred Stock 3,619 - - Conversion of accrued interest and discount to Series A Preferred Stock 945
The accompanying notes are an integral part of these consolidated statements F-6 VERSANT CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1999 1. Organization, Operations and Liquidity Versant Corporation was incorporated in California in August 1988. References to the "Company" in these Notes to Consolidated Financial Statements refer to Versant Corporation and its subsidiaries. The Company operates in a single industry segment and is involved in the design, development, marketing and support of high performance object database management software systems. 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 ability to adequately finance its ongoing operations. To date, the Company has not achieved business volume sufficient to restore profitability and positive cash flow on an annual basis. The Company operated at a net loss of $1.7 million and $19.9 million in 1999 and 1998, respectively. The Company did achieve positive cash flow from operations in the second half of 1999. Management anticipates funding future operations and repaying its debt obligations from current cash resources and future cash flows from operations. If financial results fall short of projections, additional debt or equity may be required and the Company may need to implement further cost controls. No assurances can be given that such efforts will be successful, if required. 2. Summary of Significant Accounting Policies Cash and Cash Equivalents For purposes of the consolidated statements of cash flows, the Company considers all highly liquid cash investments with an original maturity of three months or less to be cash equivalents. Cash equivalents consist of United States Government obligations. Investments have been accounted for in accordance with Statement of Financial Accounting Standards (SFAS) No. 115, "Accounting for Certain Investments in Debt and Equity Securities." The Company's investments in debt securities matured at various dates through March 1998. The fair value of available-for-sale securities was determined based on quoted market prices at the reporting date for the instruments. As of December 31, 1999 and 1998, the Company did not have investments in securities. Foreign Currency Translation The functional currency of each of the Company's subsidiaries is its local currency. Accordingly, the Company applies the current rate method to translate the subsidiaries' financial statements into U.S. dollars. Translation adjustments are included as a separate component of shareholders' equity in the accompanying consolidated financial statements. Revenue Recognition The Company adopted the provisions of Statement of Position (SOP) 97-2, "Software Revenue Recognition", for transactions entered into after January 1, 1998. 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. During 1997 and 1998, the Company 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 F-7 engineering fees is generally recognized on a percentage of completion basis. There were no such contracts during 1999. 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. Segment Information In 1998 the Company adopted 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 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. ODBMS 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. F-8 The table below presents a summary of operating segments (in thousands):
Year Ended December 31, ------------------------------------------- 1999 1998 1997 ---------- ---------- ---------- Revenues from Unaffiliated Customers License $ 17,074 $ 14,463 $ 21,363 Support 5,780 4,428 3,804 Consulting & Training 3,014 4,342 4,023 ---------- ---------- ---------- Total Revenue 25,868 23,233 29,190 Distribution Margin License 16,329 11,617 19,915 Support 4,261 445 264 Consulting & Training 353 1,432 2,556 ---------- ---------- ---------- Total Distribution Margin 20,943 13,494 22,735 Profit Reconciliation: Other Operating Expenses 21,015 32,191 25,740 Acquired In-Process R&D Cost - 528 - Non-Cash Compensation Expense 337 - - Other Income (Expense) (1,273) (692) 705 ---------- ---------- ---------- Loss Before Provision for Income Taxes $ (1,682) $ (19,917) $ (2,300) ========== ========== ==========
The table below presents the Company's revenues by legal subsidiary (in thousands):
Year Ended December 31, --------------------------------- 1999 1998 1997 -------- -------- -------- Total Revenues Attributable To: United States $ 13,287 $ 13,280 $ 22,149 Germany 4,243 3,663 4,627 France 3,822 2,659 1,356 United Kingdom 3,568 2,411 354 Australia 948 1,220 704 -------- -------- -------- Total $ 25,868 $ 23,233 $ 29,190 ======== ======== ========
Property and Equipment Property and equipment, at cost, consisted of the following (in thousands)
December 31, ----------------------- 1999 1998 -------- -------- Computer equipment $ 9,066 $ 8,574 Furniture and fixtures 2,092 2,110 Software 1,165 1,138 Leasehold improvements 1,316 1,782 -------- -------- 13,639 13,604 Less--Accumulated depreciation and amortization (8,161) (6,223) -------- -------- $ 5,478 $ 7,381 ======== ========
The Company has entered into capital lease agreements for equipment with an original cost of $1,856,000, $1,856,000 and $1,199,000 at December 31, 1999, 1998 and 1997, respectively. Accumulated depreciation of leased equipment was $1,446,000, $926,000 and $249,000 at December 31, 1999, 1998 and 1997, respectively. Depreciation and Amortization Property and equipment are depreciated on a straight-line basis over the estimated useful lives of the assets of three to ten years. Leased assets are amortized over the shorter of the estimated useful life or the lease term. F-9 Amortization of Excess Cost of Assets Acquired Amortization of excess of cost of investment over fair value of assets acquired related to the Company's acquisitions. The goodwill associated with the acquisition of Versant Europe in 1997 (see note 9) was being recognized on a straight-line basis over seven years, but this estimate was changed in 1998 to a five year period. The goodwill associated with the acquisition of Soft Mountain is recognized over five years (see note 10). Software Development Costs Under the criteria set forth in SFAS No. 86, "Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed," capitalization of software development costs begins upon the establishment of technological feasibility. The Company has defined the establishment of technological feasibility as the completion of a working model. Amounts capitalizable to date under the provisions of SFAS No. 86 have not been material. Deferred Revenue Deferred revenue represents amounts received from customers under certain license, maintenance and nonrecurring engineering agreements for which the revenue earnings process has not been completed. Deferred revenue consisted of the following components (in thousands): December 31, ---------------- 1999 1998 ------- ------- Maintenance $ 3,395 $ 3,160 Development work 30 39 Training and consulting 85 335 ------- ------- $ 3,510 $ 3,534 ======= ======= Accrued Liabilities Accrued liabilities consisted of the following components (in thousands): December 31, ---------------- 1999 1998 ------- ------- Payroll and related $ 1,676 $ 1,869 Taxes payable 968 851 Other 761 972 ------- ------- $ 3,405 $ 3,692 ======= ======= Significant Customers The Company had no sales to customers representing more than 10% of total revenue in 1999 and 1998. In 1997 two customers accounted for $5.8 million and $3.1 million in revenue, respectively. International Sales International sales, consisting of sales to customers in foreign countries, were $12.7 million, $10.5 million and $8.6 million of total revenue in 1999, 1998 and 1997, respectively. International sales by country or region were as follows (in thousands): Year Ended December 31, ----------------------------------- 1999 1998 1997 -------- -------- ------- Europe $ 11,633 $ 8,733 $ 6,337 Canada 74 286 1,163 Australia 398 825 603 Japan 530 226 361 Other 21 417 106 -------- -------- ------- $ 12,656 $ 10,487 $ 8,570 ======== ======== ======= F-10 Concentration of Credit Risk Financial instruments that potentially subject the Company to a concentration of credit risk principally consist of accounts receivable and short-term investments. Credit is extended based on an evaluation of the customer's financial condition, and generally collateral is not required. As of December 31, 1999, approximately 26% of accounts receivable were concentrated with three customers. Also 30%, 42% and 39% of our total revenue in 1999, 1998 and 1997, respectively, were attributable to sales of products to telecommunications companies. The Company generally does not require collateral on accounts receivable because the majority of the Company's customers are large, well established companies. The Company provides reserves for estimated credit losses in accordance with management's ongoing evaluation. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Net Loss Per Share The Company adopted SFAS No. 128, "Earnings per Share", effective December 15, 1997. This standard revised certain methodology for computing net income (loss) per share and requires the reporting of two net income (loss) per share figures: basic net income (loss) per share and diluted net income (loss) per share. Basic net income (loss) per share is computed by dividing net income (loss) by the weighted average number of shares outstanding. Diluted net income (loss) per share is computed by dividing net income (loss) by the sum of the weighted average number of 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, and the dilutive effect of convertible preferred stock is computed using the if converted method. Dilutive securities are excluded from the diluted net income (loss) per share computation if their effect is antidilutive. The reconciliation of the numerators and denominators of the basic and diluted net loss per share computations is as follows (in thousands, except per share amounts):
Income Shares Per Share (Numerator) (Denominator) Amount ----------- ------------- ----------- FOR THE YEAR ENDED 1997: Basic and diluted net loss per share: Losses attributable to holders of common stock $ (2,340) 8,931 $ (0.26) ========== ====== ======== FOR THE YEAR ENDED 1998: Basic and diluted net loss per share: Losses attributable to holders of common stock $ (19,935) 9,209 $ (2.16) ========== ====== ======== FOR THE YEAR ENDED 1999: Basic and diluted net loss per share: Losses attributable to holders of common stock $ (1,736) 10,178 $ (0.17) ========= ====== ========
The diluted net loss per share for the years ended 1999, 1998 and 1997 was the same as basic net loss per share due to losses in these periods and thus the inclusion of potential common shares would have been antidilutive. Principles of Consolidation The consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany accounts and transactions are eliminated in consolidation. Reclassifications Certain reclassifications have been made to amounts in prior years to conform to the 1999 presentation. F-11 3. Recently Issued Accounting Pronouncements In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities", which requires companies to value derivative financial instruments, including those used for hedging foreign currency exposures, at current market value with the impact of any change in market value being charged against earnings in each period. In June 1999, the Financial Accounting Standards Board issued SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of SFAS No. 133" to defer the effective date of SFAS No. 133 until fiscal years beginning after June 15, 2000. To date, the Company has not entered into any derivative financial instrument contracts. Thus the Company anticipates that SFAS No. 133 will not have a material impact on its consolidated financial statements. In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin (SAB) 101, "Revenue Recognition in Financial Statements". SAB 101 provides guidance on applying generally accepted accounting principles to revenue recognition issues in financial statements. We will adopt SAB 101 as required in the second quarter of 2000. We do not expect the adoption of SAB 101 to have a material impact on our consolidated results of operations and financial position. 4. Lease Obligations In November 1996, the Company entered into an agreement to lease its new corporate headquarters facility under a ten-year operating lease agreement commencing on June 1, 1997 and expiring on May 31, 2007. The terms of the lease provide for certain increases in rental payments during the lease term. Rental expense under this agreement is recognized on a straight-line basis. The Company also leases field office space in Europe and India, generally under multi-year operating lease agreements. Consolidated rent expense for 1999, 1998 and 1997 was approximately $1,743,000, $2,043,000 and $1,358,000, respectively. The future annual minimum lease payments at December 31, 1999 under non-cancelable operating leases were as follows (in thousands): Year Amount ---- -------- 2000 $ 1,538 2001 1,555 2002 1,529 2003 1,510 2004 1,534 Thereafter 4,604 -------- $ 12,270 The future minimum lease payments required under these capital leases at December 31, 1999 were as follows (in thousands): Year Amount ---- ------ 2000 $ 297 2001 72 2002 42 ------ Minimum lease payments 411 Less--amount representing interest (7 1/2%-14.7%) 31 ------ Present value of net minimum lease payments 380 Current maturities 253 ------ Long term maturities $ 127 ====== 5. Line of Credit The Company maintains a revolving credit line with a bank that expires on September 30, 2000. The maximum amount that can be borrowed under the revolving credit line is $5.0 million. As of December 31, 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 substantially all of the Company's assets. These borrowings bear F-12 interest at the bank's base lending rate (8.50%, at December 31, 1999 plus 2.0%). The loan agreement contains financial covenants, commencing with quarter ended December 31, 1999, and also prohibits cash dividends and mergers and acquisitions without the bank's prior approval. Certain of these covenants, which the Company was not in compliance with as of December 31, 1999, have been waived through March 31, 2000. In March 2000 the Company negotiated new covenants for the year ending December 31, 2000, based on the Company's forecasted performance in 2000. 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 in March 1998. Borrowings under the loan are secured by 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 (8.50%, at December 31, 1999 plus 2.5%). The loan contains certain financial covenants and also prohibits cash dividends and mergers and acquisitions without the bank's prior approval. Certain of these covenants, which the Company was not in compliance with as of December 31, 1999, have been waived through March 31, 2000. In March 2000 the Company negotiated new covenants for the year ending December 31, 2000, based on the Company's forecasted performance in 2000. 6. Common Stock During 1995, the Company sold shares of Common Stock to employees at $1.00 per share, which represented fair market value on April 22, 1995. These share issuances were made pursuant to the 1989 Stock Option Plan and such amounts are included in the option grant and option exercise table in Note 7 below. In July and August of 1996, the Company completed its initial public offering of 2,380,500 shares of Common Stock (including an over-allotment option of 310,500 shares) at $8.00 per share, resulting in net proceeds to the Company of $14.9 million after offering costs. In May 1996, the Company sold 100,000 shares of Common Stock to the owners of Versant Europe, which at the time was an independent distributor of the Company's products, at a price of $7.50 per share for total proceeds to the Company of $750,000. In September 1998 in connection with the Company's acquisition of Soft Mountain, the Company agreed to register the 245,586 shares issued in such transaction with the SEC on Form S-3 by December 31, 1998 (see Note 10). The selling shareholders of the Soft Mountain shares demanded that the Company repurchase for approximately $1.1 million these 245,586 shares due to delays in the registration of such shares. The Company disputed the right of such shareholders to receive such payment, however, the Company agreed to issue an additional 30,000 shares of common stock, with a value of $148,000. This additional amount was treated as additional purchase price and capitalized as additional goodwill and will be amortized equally over the remaining four years of goodwill amortization. In December 1998, in connection with the sale of shares of common stock to Special Situations Fund, the Company issued warrants to purchase an additional 350,000 shares. In 1999, Special Situation Fund exercised its warrants to purchase the 350,000 shares of Common Stock for a total purchase price of $787,500. 7. Stock Option and Stock Purchase 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 serves as the successor equity incentive program to the Company's 1989 Stock 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 Stock Option Plan before its termination remain outstanding in accordance with their terms, but no further options have been granted under the 1989 Stock Option Plan since the Company's initial public offering. Any authorized shares that are not issued or subject to outstanding grants under the 1989 Stock Option Plan will be available for grant and issuance in connection with future awards under the 1996 Equity Plan. As of December 31, 1999, the Company has authorized 1,900,000 shares of Common Stock, plus any shares previously issuable under the 1989 Option Plan and now issuable under the 1996 Equity Plan, for issuance under the 1996 Equity Plan. As of December 31, 1999, options to purchase 2,261,280 shares were F-13 outstanding under the 1996 Equity Plan, options to purchase 9,000 shares had been exercised under the 1996 Equity Plan, and 152,944 shares were available for grant under the 1996 Equity Plan, including shares previously available for grant under the 1989 Stock Option Plan. At December 31, 1999, options to purchase 770,637 shares were exercisable under the 1996 Equity Plan. 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 Directors Plan provides for the grant of nonqualified stock options to non-employee directors of the Company, including automatic grants of options to purchase 10,000 shares of Common Stock to non-employee directors that were granted concurrently with the initial public offering, an option to new non-employee directors to purchase 10,000 shares of Common Stock on the date on which the new director joins the Board and an additional option to purchase 5,000 shares of Common Stock to each eligible director on each anniversary date of such director's initial option grant under the Directors Plan if such director has served continuously as a member of the Board since the date such director was first granted an option under the Directors Plan. 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. As of December 31, 1999, the Company has authorized 125,000 shares of Common Stock for issuance under the Directors Plan. At December 31, 1999, options for an aggregate of 92,500 shares were outstanding, and options to purchase 57,500 shares were exercisable. 1989 Stock Option Plan The 1989 Stock Option Plan was succeeded by the 1996 Equity Plan during 1996. Under the provisions of the 1989 Stock Option Plan, the Board of Directors granted either incentive or non-statutory stock options to employees, consultants, directors and officers to purchase Common Stock at an exercise price of not less than 100% of the fair value (as determined by the Board of Directors) of the shares on the date of grant, except that non-statutory options were granted at 85% of such fair value. Options expire no later than ten years from the date of grant and generally vest over a period of 5 years. As of December 31, 1999, options to purchase 63,700 shares were outstanding under the 1989 Stock Option Plan, options to purchase 1,579,927 shares had been exercised under the 1989 Stock Option Plan, and no shares were available for grant under the 1989 Stock Option Plan. As of December 31, 1999, options to purchase 54,176 shares were exercisable under the 1989 Stock Option Plan. Reserved for Future Issuance As of December 31, 1999, the Company had reserved shares of Common Stock for the following purposes: Employee stock purchase plan 325,017 Stock options available for grant 185,444 Exercise of stock options outstanding 2,417,480 --------- 2,927,941 The Company applies APB Opinion No. 25 and related interpretations in accounting for its option plans. Accordingly, no compensation cost has been recognized for its option plans. Had compensation cost for the Company's option plans been determined based on the fair value at the grant dates for the awards calculated in accordance with SFAS No. 123, the Company's net loss and net loss per share would have been reduced to the pro forma amounts indicated below (in thousands except for per share amounts):
1999 1998 1997 --------- ----------- --------- Net loss As Reported $ (1,736) $ (19,935) $ (2,340) Pro forma $ (3,709) $ (21,987) $ (3,750) Basic net loss per share As Reported $ (.17) $ (2.16) $ (0.26) Pro forma $ (.36) $ (2.39) $ (0.42) Diluted net loss per share As Reported $ (.17) $ (2.16) $ (0.26) Pro forma $ (.36) $ (2.39) $ (0.42)
F-14 The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions used for 1999, 1998 and 1997:
1999 1998 1997 ------- ------- -------- Risk free interest rate 5.6% 5.1% 6.1% Dividend yield 0% 0% 0% Volatility 80% 80% 60% Expected life 3 years 3 years 3 years Weighted average fair value of options granted $1.22 $2.69 $4.99
Option activity under all of the Company's option plans is as follows:
Options Outstanding ------------------------------ Weighted Options Number of Average Available Shares Exercise Price ----------- ----------- ---------------- Balance at December 31, 1996 744,040 765,528 $ 5.48 Authorized 850,000 -- -- Granted (1,194,215) 1,194,215 11.71 Exercised -- (69,424) 2.28 Repurchased 89,480 -- 0.90 Canceled 555,268 (555,268) 13.20 ----------- ----------- --------- Balance at December 31, 1997 1,044,573 1,335,051 $ 8.01 Authorized -- -- -- Granted (1,112,700) 1,112,700 4.84 Exercised -- (27,257) 1.42 Repurchased 7,033 -- 1.23 Canceled 381,445 (381,445) 7.59 ----------- ----------- --------- Balance at December 31, 1998 320,351 2,039,049 $ 6.45 Authorized 250,000 -- -- Granted (1,534,450) 1,534,450 2.20 Exercised -- (62,990) 0.88 Repurchased 56,378 -- -- Canceled 1,093,029 (1,093,029) 6.68 ----------- ----------- --------- Balance at December 31, 1999 185,308 2,417,480 $ 3.79 =========== =========== =========
The following table summarizes information concerning outstanding and exercisable options at December 31, 1999.
Options Outstanding Options Exercisable -------------------------------------- ----------------------------------- Number Weighted Weighted Number Outstanding Average Average Exercisable at Weighted at December 31, Remaining Exercise December 31, Average Exercise Prices 1999 Contractual Life Price 1999 Exercise Price ----------------- ----------------- ------------------ ----------- ---------------- ---------------- From $ 0.25 to $ 2.00 699,919 8.82 $ 1.33 275,891 $ 1.39 From $ 2.22 to $ 4.00 893,700 9.65 2.78 103,746 2.66 From $ 4.75 to $ 6.88 636,716 8.02 5.86 362,340 5.82 From $ 7.25 to $ 10.00 137,539 7.22 8.11 106,869 7.85 From $ 18.00 to $ 18.75 49,606 7.40 18.13 33,467 18.15 --------- ---- ------ ------- ------ From $ 0.25 to $ 18.75 2,417,480 8.79 $ 3.79 882,313 $ 3.74 ========= ==== ====== ======= ======
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 650,000 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 the last day of each offering period. As of December 31, 1999, 324,983 shares had been issued. On November 1, 1999, the Company signed an agreement with a public relations firm, whereby the firm provided certain public relations services for the Company. The Company agreed to compensate the firm for services rendered at a monthly rate of $5,000 per month and as further compensation the Company issued warrants to purchase up to 125,000 shares of the Company's common stock. Warrants for 25,000 shares vested immediately and have an exercise price of F-15 $3.00 per share. The remaining warrants for up to 100,000 shares were scheduled to vest in November 2003 with an exercise price of $10.00 per share unless certain target stock prices were achieved. If target stock prices were achieved, the exercise price of the warrants would be adjusted and vesting accelerated. The public relations firm achieved a majority of its performance criteria during the fourth quarter of 1999. As a result, the warrants were valued using the Black-Scholes valuation model at the dates when the performance criteria were met. The Company recorded $337,000 to general and administrative expense in 1999 related to the warrants. As of December 31, 1999, warrants for 75,000 of the 100,000 shares had vested and the exercise prices were reduced to a weighted average of $4.50 per vested share. These warrants expire in November 2002. 8. Income Taxes The Company accounts for income taxes pursuant to the provisions of SFAS No. 109, "Accounting for Income Taxes," which requires an asset and liability approach to accounting for income taxes. The Company incurred net operating losses in 1999, 1998 and 1997 and consequently paid no federal or state taxes based on income. The Company did pay foreign withholding taxes during those periods. The provision for income taxes consisted of the following components (in thousands): December 31, ---------------------- 1999 1998 1997 ------ ------ ------ Current: Federal $-- $-- $-- State -- -- -- Foreign withholding 54 18 40 ------ ------ ------ Total current 54 18 40 Deferred: Federal -- -- -- State -- -- -- ------ ------ ------ Total deferred -- -- -- Total provision for income taxes $54 $18 $40 ====== ====== ====== The provision for income taxes differs from the amount estimated by applying the statutory federal income tax rate to income (loss) before income taxes as follows (in thousands):
December 31, ------------------------------------------ 1999 1998 1997 --------- ----------- --------- Benefit computed at federal statutory rate $ (218) $(5,134) $ (805) State income taxes, net of federal benefit -- -- -- Change in valuation allowance 218 5,134 805 Other 54 18 40 --------- ----------- --------- Provisions for income taxes $ 54 $ 18 $ 40 --------- ----------- --------- Effective tax rate -- -- --
The components of the net deferred tax asset were as follows (in thousands): December 31, ------------------------------------- 1999 1998 1997 --------- --------- --------- Deferred tax asset: Net operating loss carryforwards $ 12,246 $ 12,782 $ 7,954 Tax credit carryforwards 2,408 2,259 1,556 --------- --------- --------- Other 731 126 523 15,385 15,167 10,033 Valuation allowance (15,385) (15,167) (10,033) --------- --------- --------- Net deferred tax asset $ -- $ -- $ -- ========= ========= ========= F-16 At December 31, 1999, the Company had federal and state net operating loss carryforwards of $33.6 million and $8.4 million, respectively, and tax credit carryforwards of $2.4 million, expiring on various dates through 2019. Due to the Company's history of operating losses through 1995, and in 1997, 1998 and 1999 and other factors, the Company believes that there is sufficient uncertainty regarding the realizability of these carryforwards, and therefore a valuation allowance of approximately $15.4 million has been recorded against the Company's net deferred tax assets of approximately $15.4 million. Management will continue to assess the realizability of the tax benefits available to the Company based on actual and forecasted operating results. 9. Acquisition of Versant Europe On March 26, 1997, the Company acquired Versant Europe, an independently owned distributor of the Company's products in Europe. The Company paid $3.6 million to the shareholder of Versant Europe consisting of $2.0 million in cash and 167,545 shares of Common Stock valued at $9.75 per share. The acquisition was accounted for using the purchase method of accounting. Accordingly, the results of operations of Versant Europe are reflected in the consolidated financial statements commencing on the date of the acquisition. The acquisition of Versant Europe resulted in the Company 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 five-year period. The Company also acquired approximately $1.4 million of prepaid sublicense credits which are being amortized and included in cost of license revenue in conjunction with associated license revenue transactions realized by Versant Europe (fully amortized at December 31, 1998). In the fourth quarter of 1998, the Company determined that the value of its intangible asset had been impaired due to weaker than anticipated operating results in Europe. Therefore, the Company recorded a "write-down of asset" charge of $1,555,000 during 1998. This charge represented the shortfall between projected future cash flows for Europe (as discounted) and the net book value of the intangible asset. As of December 31, 1998, the Company also changed its estimate of the future life of the acquired intangible asset from seven to five years. The table below presents the unaudited pro forma results (in thousands, except per share data) for the year ended December 31, 1997. 1997 -------- Total revenue $ 29,579 Net loss (2,457) Pro forma basic and diluted net loss per share ($0.27) Shares used in computing pro forma loss per share 9,088 10. Acquisition of Soft Mountain On September 15, 1998, the Company acquired 100% of the outstanding equity (the "Acquisition") of Soft Mountain S.A. ("Soft Mountain"), a French company. Soft Mountain develops event-driven middleware software solutions that combine object orientation and deterministic event processing in a distributed business system. The Acquisition was effected pursuant to a Share Purchase Agreement, dated July 30, 1998 (the "Agreement"), by and between Versant and the shareholders of Soft Mountain. Pursuant to the terms of the Agreement, the Company acquired the equity of Soft Mountain in return for approximately $136,000 in cash and 245,586 shares of Versant Common Stock, valued at $2.625 and incurred approximately $300,000 in acquisition expenses. The cash portion of the purchase price was funded by working capital. The acquisition of Soft Mountain was accounted for using the purchase method and resulted in the Company recording an intangible asset representing the cost in excess of fair market value of the net assets acquired (goodwill) in the amount of $1.2 million, which is being amortized over a five year period. The Company wrote off approximately $528,000 of in-process research and development (IPR&D) costs associated with the purchased software, as the software had not yet reached technological feasibility and had no alternative future use. The amount allocated to IPR&D was estimated based upon the stage of completion of the project, the costs to complete the project, the expected F-17 future cash flow, the life cycle of the product ultimately developed and the associated risks. If the product is not successfully developed the revenue and profitability of the Company may be adversely affected in future periods. In November 1999, the Company issued an additional 30,000 shares of Common Stock, to the original shareholders of Soft Mountain in connection with the acquisition. This additional cost was added to the original goodwill amount and is amortized equally over the remaining goodwill period. The following table presents the unaudited pro forma results assuming that the Company had acquired Soft Mountain at the beginning of 1997. Net loss per share has been adjusted to exclude the write-off of acquired in-process research and development of $528,000 in the twelve month period ended December 31, 1998. Twelve Months Twelve Months Ended 12/31/98 Ended 12/31/98 (unaudited) (unaudited) ---------------- ---------------- Revenue 23,460 30,108 Net Loss (20,113) (2,701) Basic and Diluted Loss Per Share ($2.18) ($0.29) 11. Vertex Note Conversion and Equity Financing In July 1999, the Company converted $3,846,551 of principal and interest outstanding under a note payable to Vertex (an investor) into 902,946 shares of Series A Convertible Preferred Stock (Preferred Stock). The Company had an initial $846,000 of note discount associated with the Vertex convertible note requiring the Company to recognize the differential value between market and below market equity conversion feature as a discount. The discounted value has been amortized equally over the life of the note, as an interest expense in the statements of operations. Upon the early conversion of the Note, the balance of the unamortized discount was charged to interest expense during the third quarter of 1999. In addition, the Company issued 586,853 shares of Preferred Stock to a Vertex affiliate and other investors in consideration for $2,499,994. The holders of Series A Stock will generally vote with the holders of common stock provided that the Series A Stock is only entitled to a number of votes equal to 50% of the number of shares of common stock into which the Series A Stock is convertible. The holders of Series A Stock were also provided with certain voting protective provisions. 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: (1) July 11, 2004, (2) 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 (3) 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 fair value of the warrants was estimated to be approximately $1.5 million on the date of grant using the Black-Scholes option pricing model with the following assumptions: (1) risk free interest rate of 6.0%, (2) expected dividend yields of zero, (3) expected volatility factor of the market price of the common stock of 80% and (4) an expected life of the warrants of 2 years. The Preferred Stock has a liquidation preference initially equal to 150% of the full amount paid for such stock with the preference increasing by an additional 50% per year over each of the next two years, so long as the Preferred Stock is outstanding. The liquidation value of the Preferred Stock at December 31, 1999 is $9.5 million. The shares eligible for resale upon execution of the warrants and conversion of the Preferred Stock have been registered under the Securities Act of 1933, under two separate registration statements on Form S-3. Each investor also agreed not to purchase more than 100,000 additional shares in the Company without the Company's approval so long as such investor holds more than 5% of the Company's outstanding securities. F-18 12. Special Situations Warrant Exercise On December 30, 1998, the Company raised $1.4 million through the private placement of 700,000 shares of Common Stock plus Warrants to purchase an additional 350,000 shares of Common Stock. The funding was provided by funds affiliated with Special Situations Fund, a current stockholder in the Company. The Common Stock was sold at $2.00 per share and the warrants, which permit the purchase of an additional 350,000 shares at a price of $2.25, were sold for an additional $43,750. The Warrants were exercised on December 1, 1999 for a total purchase price of $787,500. 13. 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. Also see Note 6 with respect to the resolution of a matter with Soft Mountain. F-19 VERSANT CORPORATION AND SUBSIDIARIES SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
Balance at Additions Beginning Charged to Balance at of Year Income Deductions End of Year ------------ ------------ ------------- --------------- (in thousands) Allowance for doubtful accounts and customer returns: Year ended December 31, 1997 $ 603 208 145 $ 666 Year ended December 31, 1998 $ 666 857 1,188 $ 335 Year ended December 31, 1999 $ 335 155 76 $ 414
F-20 EXHIBIT INDEX EXHIBIT INDEX EXHIBIT TITLE NUMBER 2.01 -- Acquisition Agreement dated as of March 26, 1997 by and between registrant and ISAR-Vermogensverwaltung Gbr mbH ("ISAR")(1) 3.01 -- Registrant's Amended and Restated Articles of Incorporation, as amended(2) 3.02 -- Registrant's Certificate of Amendment of Articles of Incorporation filed prior to the closing of registrant's initial public offering(2) 3.03 -- Registrant's Amended and Restated Articles of Incorporation filed following the closing of registrant's initial public offering(2) 3.04 -- Registrant's Bylaws(2) 3.05 -- Registrant's Amended and Restated Bylaws adopted prior to the closing of registrant's initial public offering(2) 3.06 -- Certificate of Amendment of Amended and Restated Articles of Versant Object Technology Corporation(7) 3.07 -- Registrant's Certificate of Determination dated July 12, 1999, incorporated by reference to the Company's current report on Form 8-K (Exhibit 3.01) filed July 12, 1999. 4.01 -- [intentionally omitted] 4.02 -- Preferred Stock Purchase Agreement, dated as of April 27, 1994, as amended(2) 10.01 -- Registrant's 1989 Stock Option Plan, as amended, and related documents(2)** 10.02 -- Registrant's 1996 Equity Incentive Plan, as amended, and related documents(3)** 10.03 -- Registrant's 1996 Directors Stock Option Plan, as amended, and related documents(4)** 10.04 -- Registrant's 1996 Employee Stock Purchase Plan, as amended, and related documents(5)** 10.05 -- Registrant's 401(k) Plan and addendum thereto(2) 10.06 -- Lease Agreement dated March 22, 1993 between Lincoln Property Company N.C., Inc. and Registrant, as amended(2) 10.07 -- Master Lease Agreement dated January 26, 1996 between LINC Capital Management, a division of Scientific Leasing Inc., and Registrant(2) X-1 10.08 -- Amended and Restated Loan and Security Agreement dated as of June 14, 1996 between Registrant and Silicon Valley Bank(2) 10.09 -- Joint Venture Agreement dated as of July 26, 1995 between Registrant and ISAR-Vermogensverwaltung Gbr mbH(2)* 10.10 -- Form of Indemnity Agreement entered into by Registrant with each of its directors and executive officers(2) 10.11 -- 1996 Executive Compensation Plan -- Rich Kadet (2)*/** 10.12 -- 1996 Executive Compensation Plan -- George Franzen (2)*/** 10.13 -- 1996 Executive Compensation Plan -- Jim Lochry (2)*/** 10.14 -- Form of Amendment to Versant Corporation Stock Option Agreement(2)** 10.15 -- Lease Agreement dated November 25, 1996 between John Arrillaga, Trustee et. al. and Versant Corporation(6) 10.16 -- Form of Letter Agreement dated October 22, 1997 between registrant and its executive officers(9)** 10.17 -- Severance Agreement and Release of Claims dated January 7, 1997 between registrant and David Banks(9)** 10.18 -- Letter Agreement dated November 26, 1997 between registrant and Nick Ordon(9)** 10.19 -- Revolving Credit Loan and Security Agreement dated May 15, 1997(7) 10.20 -- Consulting Agreement between Company and David Banks dated January 7, 1998(7) 10.21 -- Variable Rate-Installment Note dated March 19, 1998(7) 10.22 -- Equipment Rider dated March 19, 1998(7) 10.23 -- Corporate Resolution and Incumbency Certification dated March 30, 1998(7) 10.24 -- Modification to Loan and Security Agreement dated May 6, 1998(7) 10.25 -- Waiver to Loan and Security Agreement Covenants Dated August 10, 1998(8) 10.26 -- Waiver to Loan and Security Agreement Dated August 11, 1998(8) 10.27 -- Loan and Security Agreement Consent and Amendment Dated October 16, 1998(10) 10.28 -- Vertex Note Purchase Agreement Dated October 16, 1998(10) 10.29 -- Vertex Convertible Secured Subordinated Promissory Note Dated October 16, 1998(10) X-2 10.30 -- Vertex Security Agreement Dated October 16, 1998(10) 10.31 -- Vertex Registration Rights Agreement Dated October 16, 1998(10) 10.32 -- Vertex Subordination Agreement Dated October 16, 1998(10) 10.33 -- Special Situations Fund Common Stock and Warrant Purchase Agreement Dated December 28, 1998(10) 10.34 -- Special Situations Fund Stock Warrant Dated December 28, 1998(10) 10.35 -- Special Situations Fund Registration Rights Agreement Dated December 28, 1998(10) 10.36 -- Modification to Loan & Security Agreement dated June 18, 1999 incorporated by reference to the Company's previous quarterly report on Form 10-Q filed August 2, 1999. 10.37 -- Preferred Stock and Warrant Purchase Agreement entered into as of June 28, 1999 incorporated by reference to the Company's current report on Form 8-K (Exhibit 10.01) filed July 12, 1999. 10.38 -- Form of Common Stock Purchase Warrant. 1999 incorporated by reference to the Company's current report on Form 8-K (Exhibit 10.02) filed July 12, 1999. 10.39 -- Debt Cancellation Agreement between the Company and Vertex Technology Fund, Inc incorporated by reference to the Company's current report on Form 8-K (Exhibit 10.03) filed July 12, 1999. 10.40 -- Supplement to Registration Rights Agreement among the Company and the parties listed on the Schedule of Investors attached thereto incorporated by reference to the Company's current report on Form 8-K (Exhibit 10.04) filed July 12, 1999. 10.41 -- 1996 Equity Incentive Plan, Amended as of January 19,2000 (11) 10.42 -- Public Relations Firm Agreement Dated November 1,1999 (11) 10.43 -- Bank Covenant Waiver Dated January 1, 2000 (11) 10.44 -- Bank Financial Covenant Modifications Dated March 16, 2000 (11) 21.01 -- Subsidiaries of the registrant(11) 23.01 -- Consent of Arthur Andersen LLP, Independent Public Accountants(11) 27.01 -- Financial Data Schedule(11) (1) Incorporated by reference to the registrant's Current Report on Form 8-K filed with the Securities and Exchange Commission on April 10, 1997 (2) Incorporated by reference to the registrant's Registration Statement on Form SB-2 (file number 333-4910-LA) filed with and declared effective by the Securities and Exchange Commission on July 17, 1996. X-3 (3) Incorporated by reference to Exhibit 4.05 to the registrant's Registration Statement on Form S-8 (file number (333-29947) filed with the Securities and Exchange Commission on June 24, 1997. (4) Incorporated by reference to Exhibit 4.06 to the registrant's Registration Statement on Form S-8 (file number (333-29947) filed with the Securities and Exchange Commission on June 24, 1997. (5) Incorporated by reference to Exhibit 4.07 to the registrant's Registration Statement on Form S-8 (file number (333-29947) filed with the Securities and Exchange Commission on June 24, 1997. (6) Incorporated by reference to the registrant's Form 10-KSB for the year ended December 31, 1996, filed with the Securities and Exchange Commission on March 31, 1997. (7) Incorporated by reference to the registrant's Form 10-QSB for the quarter ended June 30, 1998, filed with the Securities and Exchange Commission on August 14, 1998. (8) Incorporated by reference to the registrant's Form 10-QSB for the quarter ended September 30, 1998, filed with the Securities and Exchange Commission on November 13, 1998. (9) Incorporated by reference to the registrant's Form 10-KSB for the quarter ended December 31, 1997, filed with the Securities and Exchange Commission on April 3, 1998. (10) Incorporated by reference to the registrant's Form 10-KSB for the quarter ended December 31, 1998, filed with the Securities and Exchange Commission on April 3, 1999. (11) Filed herewith. * Confidential treatment has been granted with respect to certain portions of this agreement. Such portions have been omitted from the filing and have been filed separately with the Securities and Exchange Commission. ** Management contract or compensatory plan. X-4 EX-10.41 2 1996 EQUITY INCENTIVE PLAN Exhibit - 10.41 VERSANT CORPORATION 1996 EQUITY INCENTIVE PLAN As Adopted May 21, 1996 As Amended June 5, 1997, June 10, 1999 and January 19, 2000 1. PURPOSE. The purpose of this Plan is to provide incentives to attract, retain and motivate eligible persons whose present and potential contributions are important to the success of the Company, its Parent and Subsidiaries, by offering them an opportunity to participate in the Company's future performance through awards of Options, Restricted Stock and Stock Bonuses. Capitalized terms not defined in the text are defined in Section 23. 2. SHARES SUBJECT TO THE PLAN. 2.1 Number of Shares Available. Subject to Sections 2.2 and 18, the total number of Shares reserved and available for grant and issuance pursuant to this Plan will be 2,400,000 Shares. Subject to Sections 2.2 and 18, Shares that: (a) are subject to issuance upon exercise of an Option but cease to be subject to such Option for any reason other than exercise of such Option; (b) are subject to an Award granted hereunder but are forfeited or are repurchased by the Company at the original issue price; or (c) are subject to an Award that otherwise terminates without Shares being issued will again be available for grant and issuance in connection with future Awards under this Plan. Any authorized shares not issued or subject to outstanding grants under the Versant Corporation 1989 Stock Option Plan (the "Prior Plan") on the Effective Date (as defined below) and any shares that: (a) are issuable upon exercise of options granted pursuant to the Prior Plan that expire or become unexercisable for any reason without having been exercised in full; (b) are subject to an award granted pursuant to the Prior Plan but are forfeited or are repurchased by the Company at the original issue price; or (c) are subject to an award granted pursuant to the Prior Plan that otherwise terminates without shares being issued will no longer be available for grant and issuance under the Prior Plan, but will be available for grant and issuance under this Plan. At all times the Company shall reserve and keep available a sufficient number of Shares as shall be required to satisfy the requirements of all outstanding Options granted under this Plan and all other outstanding but unvested Awards granted under this Plan. 2.2 Adjustment of Shares. In the event that the number of outstanding Shares is changed by a stock dividend, recapitalization, stock split, reverse stock split, subdivision, combination, reclassification or similar change in the capital structure of the Company without consideration, then (a) the number of Shares reserved for issuance under this Plan, (b) the Exercise Prices of and number of Shares subject to outstanding Options, and (c) the number of Shares subject to other outstanding Awards will be proportionately adjusted, subject to any required action by the Board or the shareholders of the Company and compliance with applicable securities laws; provided, however, that fractions of a Share will not be issued but will either be replaced by a cash payment equal to the Fair Market Value of such fraction of a Share or will be rounded up to the nearest whole Share, as determined by the Committee. 3. ELIGIBILITY. ISO (as defined in Section 5 below) may be granted only to employees (including officers and directors who are also employees) of the Company or of a Parent or Subsidiary of the Company. All other Awards may be granted to employees, officers, directors, consultants, independent contractors and advisors of the Company or any Parent or Subsidiary of the Company; provided such consultants, contractors and advisors render bona fide services not in connection with the offer and sale of securities in a capital-raising transaction. No person will be eligible to receive more than 400,000 Shares in any calendar year under this Plan pursuant to the grant of Awards hereunder, other than new employees of the Company or of a Parent or Subsidiary of the Company (including new employees who are also officers and directors of the Company or any Parent or Subsidiary of the Company) who are eligible to receive up to a maximum of 600,000 Shares in the calendar year in which they commence their employment. A person may be granted more than one Award under this Plan. 4. ADMINISTRATION. 4.1 Committee Authority. This Plan will be administered by the Committee or by the Board acting as the Committee. Subject to the general purposes, terms and conditions of this Plan, and to the direction of the Board, the Committee will have full power to implement and carry out this Plan. Without limitation, the Committee will have the authority to: (a) construe and interpret this Plan, any Award Agreement and any other agreement or document executed pursuant to this Plan; (b) prescribe, amend and rescind rules and regulations relating to this Plan; (c) select persons to receive Awards; (d) determine the form and terms of Awards; (e) determine the number of Shares or other consideration subject to Awards; (f) determine whether Awards will be granted singly, in combination with, in tandem with, in replacement of, or as alternatives to, other Awards under this Plan or any other incentive or compensation plan of the Company or any Parent or Subsidiary of the Company; (g) grant waivers of Plan or Award conditions; (h) determine the vesting, exercisability and payment of Awards; (i) correct any defect, supply any omission or reconcile any inconsistency in this Plan, any Award or any Award Agreement; (j) determine whether an Award has been earned; and (k) make all other determinations necessary or advisable for the administration of this Plan. 4.2 Committee Discretion. Any determination made by the Committee with respect to any Award will be made in its sole discretion at the time of grant of the Award or, unless in contravention of any express term of this Plan or Award, at any later time, and such determination will be final and binding on the Company and on all persons having an interest in any Award under this Plan. The Committee may delegate to one or more officers of the Company the authority to grant an Award under this Plan to Participants who are not Insiders of the Company. 4.3 Exchange Act Requirements. If two or more members of the Board are Outside Directors, the Committee will be comprised of at least two (2) members of the Board, all of whom are Outside Directors and Disinterested Persons. During all times that the Company is subject to Section 16 of the Exchange Act, the Company will take appropriate steps to comply with the disinterested administration requirements of Section 16(b) of the Exchange Act, which will consist of the appointment by the Board of a Committee consisting of not less than two (2) members of the Board, each of whom is a Disinterested Person. 5. OPTIONS. The Committee may grant Options to eligible persons and will determine whether such Options will be Incentive Stock Options within the meaning of the Code ("ISOs") or Nonqualified Stock Options ("NQSOs"), the number of Shares subject to the Option, the Exercise Price of the Option, the period during which the Option may be exercised, and all other terms and conditions of the Option, subject to the following: 5.1 Form of Option Grant. Each Option granted under this Plan will be evidenced by an Award Agreement which will expressly identify the Option as an ISO or an NQSO ("Stock Option Agreement"), - 2 - and will be in such form and contain such provisions (which need not be the same for each Participant) as the Committee may from time to time approve, and which will comply with and be subject to the terms and conditions of this Plan. 5.2 Date of Grant. The date of grant of an Option will be the date on which the Committee makes the determination to grant such Option, unless otherwise specified by the Committee. The Stock Option Agreement and a copy of this Plan will be delivered to the Participant within a reasonable time after the granting of the Option. 5.3 Exercise Period. Options may be exercisable immediately (subject to repurchase pursuant to Section 12 of this Plan) or may be exercisable within the times or upon the events determined by the Committee as set forth in the Stock Option Agreement governing such Option; provided, however, that no Option will be exercisable after the expiration of ten (10) years from the date the Option is granted; and provided further that no ISO granted to a person who directly or by attribution owns more than ten percent (10%) of the total combined voting power of all classes of stock of the Company or of any Parent or Subsidiary of the Company ("Ten Percent Shareholder") will be exercisable after the expiration of five (5) years from the date the ISO is granted. The Committee also may provide for the exercise of Options to become exercisable at one time or from time to time, periodically or otherwise, in such number of Shares or percentage of Shares as the Committee determines. 5.4 Exercise Price. The Exercise Price of an Option will be determined by the Committee when the Option is granted and may be not less than 85% of the Fair Market Value of the Shares on the date of grant; provided that: (i) the Exercise Price of an ISO will be not less than 100% of the Fair Market Value of the Shares on the date of grant; and (ii) the Exercise Price of any ISO granted to a Ten Percent Shareholder will not be less than 110% of the Fair Market Value of the Shares on the date of grant. Payment for the Shares purchased may be made in accordance with Section 8 of this Plan. 5.5 Method of Exercise. Options may be exercised only by delivery to the Company of a written stock option exercise agreement (the "Exercise Agreement") in a form approved by the Committee (which need not be the same for each Participant), stating the number of Shares being purchased, the restrictions imposed on the Shares purchased under such Exercise Agreement, if any, and such representations and agreements regarding Participant's investment intent and access to information and other matters, if any, as may be required or desirable by the Company to comply with applicable securities laws, together with payment in full of the Exercise Price for the number of Shares being purchased. 5.6 Termination. Notwithstanding the exercise periods set forth in the Stock Option Agreement, exercise of an Option will always be subject to the following: (a) If the Participant is Terminated for any reason except death or Disability, then the Participant may exercise such Participant's Options only to the extent that such Options would have been exercisable upon the Termination Date no later than three (3) months after the Termination Date (or such shorter or longer time period not exceeding five (5) years as may be determined by the Committee, with any exercise beyond three (3) months after the Termination Date deemed to be an NQSO), but in any event, no later than the expiration date of the Options. (b) If the Participant is Terminated because of Participant's death or Disability (or the Participant dies within three (3) months after a Termination other than because of Participant's death or disability), then Participant's Options may be exercised only to the extent that such Options would have been exercisable by Participant on the Termination Date and must be exercised by Participant (or Participant's legal representative or authorized assignee) no later than twelve (12) months after the Termination Date (or such shorter or longer time period not exceeding five (5) years as may be determined by the Committee, with any such exercise beyond (a) three (3) months after the Termination Date when the Termination is for any reason other than the Participant's death or Disability, or - 3 - (b) twelve (12) months after the Termination Date when the Termination is for Participant's death or Disability, deemed to be an NQSO), but in any event no later than the expiration date of the Options. (c) If a Participant is determined by the Board to have committed an act of theft, embezzlement, fraud, dishonesty or a breach of fiduciary duty to the Company or Subsidiary, neither the Participant, the Participant's estate nor such other person who may then hold the Option shall be entitled to exercise any Option with respect to any Shares whatsoever, after termination of service, whether or not after termination of service the Participant may receive payment from the Company or Subsidiary for vacation pay, for services rendered prior to termination, for services rendered for the day on which termination occurs, for salary in lieu of notice, or for any other benefits. In making such determination, the Board shall give the Participant an opportunity to present to the Board evidence on his behalf. For the purpose of this paragraph, termination of service shall be deemed to occur on the date when the Company dispatches notice or advice to the Participant that his service is terminated. 5.7 Limitations on Exercise. The Committee may specify a reasonable minimum number of Shares that may be purchased on any exercise of an Option, provided that such minimum number will not prevent Participant from exercising the Option for the full number of Shares for which it is then exercisable. 5.8 Limitations on ISO. The aggregate Fair Market Value (determined as of the date of grant) of Shares with respect to which ISOs are exercisable for the first time by a Participant during any calendar year (under this Plan or under any other incentive stock option plan of the Company, Parent or Subsidiary of the Company) will not exceed $100,000. If the Fair Market Value of Shares on the date of grant with respect to which ISOs are exercisable for the first time by a Participant during any calendar year exceeds $100,000, then the Options for the first $100,000 worth of Shares to become exercisable in such calendar year will be ISOs and the Options for the amount in excess of $100,000 that become exercisable in that calendar year will be NQSOs. In the event that the Code or the regulations promulgated thereunder are amended after the Effective Date of this Plan to provide for a different limit on the Fair Market Value of Shares permitted to be subject to ISO, such different limit will be automatically incorporated herein and will apply to any Options granted after the effective date of such amendment. 5.9 Modification, Extension or Renewal. The Committee may modify, extend or renew outstanding Options and authorize the grant of new Options in substitution therefor, provided that any such action may not, without the written consent of a Participant, impair any of such Participant's rights under any Option previously granted. Any outstanding ISO that is modified, extended, renewed or otherwise altered will be treated in accordance with Section 424(h) of the Code. The Committee may reduce the Exercise Price of outstanding Options without the consent of Participants affected by a written notice to them; provided, however, that the Exercise Price may not be reduced below the minimum Exercise Price that would be permitted under Section 5.4 of this Plan for Options granted on the date the action is taken to reduce the Exercise Price. 5.10 No Disqualification. Notwithstanding any other provision in this Plan, no term of this Plan relating to ISOs will be interpreted, amended or altered, nor will any discretion or authority granted under this Plan be exercised, so as to disqualify this Plan under Section 422 of the Code or, without the consent of the Participant affected, to disqualify any ISO under Section 422 of the Code. 6. RESTRICTED STOCK. A Restricted Stock Award is an offer by the Company to sell to an eligible person Shares that are subject to restrictions. The Committee will determine to whom an offer will be made, the number of Shares the person may purchase, the price to be paid (the "Purchase Price"), the restrictions to which the Shares will be subject, and all other terms and conditions of the Restricted Stock Award, subject to the following: 6.1 Form of Restricted Stock Award. All purchases under a Restricted Stock Award made pursuant to this Plan will be evidenced by an Award Agreement ("Restricted Stock Purchase Agreement") that will be in such form (which need not be the same for each Participant) as the Committee will from time to time - 4 - approve, and will comply with and be subject to the terms and conditions of this Plan. The offer of Restricted Stock will be accepted by the Participant's execution and delivery of the Restricted Stock Purchase Agreement and full payment for the Shares to the Company within thirty (30) days from the date the Restricted Stock Purchase Agreement is delivered to the person. If such person does not execute and deliver the Restricted Stock Purchase Agreement along with full payment for the Shares to the Company within thirty (30) days, then the offer will terminate, unless otherwise determined by the Committee. 6.2 Purchase Price. The Purchase Price of Shares sold pursuant to a Restricted Stock Award will be determined by the Committee and will be at least 85% of the Fair Market Value of the Shares on the date the Restricted Stock Award is granted, except in the case of a sale to a Ten Percent Shareholder, in which case the Purchase Price will be 100% of the Fair Market Value. Payment of the Purchase Price may be made in accordance with Section 8 of this Plan. 6.3 Restrictions. Restricted Stock Awards will be subject to such restrictions (if any) as the Committee may impose. The Committee may provide for the lapse of such restrictions in installments and may accelerate or waive such restrictions, in whole or part, based on length of service, performance or such other factors or criteria as the Committee may determine. 7. STOCK BONUSES. 7.1 Awards of Stock Bonuses. A Stock Bonus is an award of Shares (which may consist of Restricted Stock) for services rendered to the Company or any Parent or Subsidiary of the Company. A Stock Bonus may be awarded for past services already rendered to the Company, or any Parent or Subsidiary of the Company pursuant to an Award Agreement (the "Stock Bonus Agreement") that will be in such form (which need not be the same for each Participant) as the Committee will from time to time approve, and will comply with and be subject to the terms and conditions of this Plan. A Stock Bonus may be awarded upon satisfaction of such performance goals as are set out in advance in the Participant's individual Award Agreement (the "Performance Stock Bonus Agreement") that will be in such form (which need not be the same for each Participant) as the Committee will from time to time approve, and will comply with and be subject to the terms and conditions of this Plan. Stock Bonuses may vary from Participant to Participant and between groups of Participants, and may be based upon the achievement of the Company, Parent or Subsidiary and/or individual performance factors or upon such other criteria as the Committee may determine. 7.2 Terms of Stock Bonuses. The Committee will determine the number of Shares to be awarded to the Participant and whether such Shares will be Restricted Stock. If the Stock Bonus is being earned upon the satisfaction of performance goals pursuant to a Performance Stock Bonus Agreement, then the Committee will determine: (a) the nature, length and starting date of any period during which performance is to be measured (the "Performance Period") for each Stock Bonus; (b) the performance goals and criteria to be used to measure the performance, if any; (c) the number of Shares that may be awarded to the Participant; and (d) the extent to which such Stock Bonuses have been earned. Performance Periods may overlap and Participants may participate simultaneously with respect to Stock Bonuses that are subject to different Performance Periods and different performance goals and other criteria. The number of Shares may be fixed or may vary in accordance with such performance goals and criteria as may be determined by the Committee. The Committee may adjust the performance goals applicable to the Stock Bonuses to take into account changes in law and accounting or tax rules and to make such adjustments as the Committee deems necessary or appropriate to reflect the impact of extraordinary or unusual items, events or circumstances to avoid windfalls or hardships. 7.3 Form of Payment. The earned portion of a Stock Bonus may be paid currently or on a deferred basis with such interest or dividend equivalent, if any, as the Committee may determine. Payment may be made in the form of cash, whole Shares, including Restricted Stock, or a combination thereof, either in a lump sum payment or in installments, all as the Committee will determine. 7.4 Termination During Performance Period. If a Participant is Terminated during a Performance Period for any reason, then such Participant will be entitled to payment (whether in Shares, cash or - 5 - otherwise) with respect to the Stock Bonus only to the extent earned as of the date of Termination in accordance with the Performance Stock Bonus Agreement, unless the Committee will determine otherwise. 8. PAYMENT FOR SHARE PURCHASES. 8.1 Payment. Payment for Shares purchased pursuant to this Plan may be made in cash (by check) or, where expressly approved for the Participant by the Committee and where permitted by law: (a) by cancellation of indebtedness of the Company to the Participant; (b) by surrender of shares that either: (1) have been owned by Participant for more than six (6) months and have been paid for within the meaning of SEC Rule 144 (and, if such shares were purchased from the Company by use of a promissory note, such note has been fully paid with respect to such shares); or (2) were obtained by Participant in the public market; (c) by tender of a full recourse promissory note having such terms as may be approved by the Committee and bearing interest at a rate sufficient to avoid imputation of income under Sections 483 and 1274 of the Code; provided, however, that Participants who are not employees or directors of the Company will not be entitled to purchase Shares with a promissory note unless the note is adequately secured by collateral other than the Shares; (d) by waiver of compensation due or accrued to the Participant for services rendered; (e) with respect only to purchases upon exercise of an Option, and provided that a public market for the Company's stock exists: (1) through a "same day sale" commitment from the Participant and a broker-dealer that is a member of the National Association of Securities Dealers (an "NASD Dealer") whereby the Participant irrevocably elects to exercise the Option and to sell a portion of the Shares so purchased to pay for the Exercise Price, and whereby the NASD Dealer irrevocably commits upon receipt of such Shares to forward the Exercise Price directly to the Company; or (2) through a "margin" commitment from the Participant and a NASD Dealer whereby the Participant irrevocably elects to exercise the Option and to pledge the Shares so purchased to the NASD Dealer in a margin account as security for a loan from the NASD Dealer in the amount of the Exercise Price, and whereby the NASD Dealer irrevocably commits upon receipt of such Shares to forward the Exercise Price directly to the Company; or (f) by any combination of the foregoing. 8.2 Loan Guarantees. The Committee may help the Participant pay for Shares purchased under this Plan by authorizing a guarantee by the Company of a third-party loan to the Participant. 9. WITHHOLDING TAXES. 9.1 Withholding Generally. Whenever Shares are to be issued in satisfaction of Awards granted under this Plan, the Company may require the Participant to remit to the Company an amount sufficient to satisfy federal, state and local withholding tax requirements prior to the delivery of any certificate or certificates for such Shares. Whenever, under this Plan, payments in satisfaction of Awards are to be made in cash, such payment will be net of an amount sufficient to satisfy federal, state, and local withholding tax requirements. 9.2 Stock Withholding. When, under applicable tax laws, a Participant incurs tax liability in connection with the exercise or vesting of any Award that is subject to tax withholding and the Participant - 6 - is obligated to pay the Company the amount required to be withheld, the Committee may in its sole discretion allow the Participant to satisfy the minimum withholding tax obligation by electing to have the Company withhold from the Shares to be issued that number of Shares having a Fair Market Value equal to the minimum amount required to be withheld, determined on the date that the amount of tax to be withheld is to be determined (the "Tax Date"). All elections by a Participant to have Shares withheld for this purpose will be made in writing in a form acceptable to the Committee and will be subject to the following restrictions: (a) the election must be made on or prior to the applicable Tax Date; (b) once made, then except as provided below, the election will be irrevocable as to the particular Shares as to which the election is made; (c) all elections will be subject to the consent or disapproval of the Committee; (d) if the Participant is an Insider and if the Company is subject to Section 16(b) of the Exchange Act: (1) the election may not be made within six (6) months of the date of grant of the Award, except as otherwise permitted by SEC Rule 16b-3(e) under the Exchange Act, and (2) either (A) the election to use stock withholding must be irrevocably made at least six (6) months prior to the Tax Date (although such election may be revoked at any time at least six (6) months prior to the Tax Date) or (B) the exercise of the Option or election to use stock withholding must be made in the ten (10) day period beginning on the third day following the release of the Company's quarterly or annual summary statement of sales or earnings; and (e) in the event that the Tax Date is deferred until six (6) months after the delivery of Shares under Section 83(b) of the Code, the Participant will receive the full number of Shares with respect to which the exercise occurs, but such Participant will be unconditionally obligated to tender back to the Company the proper number of Shares on the Tax Date. 10. PRIVILEGES OF STOCK OWNERSHIP. 10.1 Voting and Dividends. No Participant will have any of the rights of a shareholder with respect to any Shares until the Shares are issued to the Participant. After Shares are issued to the Participant, the Participant will be a shareholder and have all the rights of a shareholder with respect to such Shares, including the right to vote and receive all dividends or other distributions made or paid with respect to such Shares; provided, that if such Shares are Restricted Stock, then any new, additional or different securities the Participant may become entitled to receive with respect to such Shares by virtue of a stock dividend, stock split or any other change in the corporate or capital structure of the Company will be subject to the same restrictions as the Restricted Stock; provided, further, that the Participant will have no right to retain such stock dividends or stock distributions with respect to Shares that are repurchased at the Participant's original Purchase Price pursuant to Section 12. 10.2 Financial Statements. The Company will provide financial statements to each Participant prior to such Participant's purchase of Shares under this Plan, and to each Participant annually during the period such Participant has Awards outstanding; provided, however, the Company will not be required to provide such financial statements to Participants whose services in connection with the Company assure them access to equivalent information. 11. TRANSFERABILITY. Awards granted under this Plan, and any interest therein, will not be transferable or assignable by Participant, and may not be made subject to execution, attachment or similar process, otherwise than by will or by the laws of descent and distribution or as consistent with the specific Plan and Award Agreement provisions relating thereto. During the lifetime of the Participant an Award will be exercisable only by the Participant, and any elections with respect to an Award, may be made only by the Participant. 12. RESTRICTIONS ON SHARES. At the discretion of the Committee, the Company may reserve to itself and/or its assignee(s) in the Award Agreement a right to repurchase a portion of or all Shares held by - 7 - a Participant following such Participant's Termination at any time within ninety (90) days after the later of Participant's Termination Date and the date Participant purchases Shares under this Plan, for cash and/or cancellation of purchase money indebtedness, at: (A) with respect to Shares that are "Vested" (as defined in the Award Agreement), the higher of: (l) Participant's original Purchase Price, or (2) the Fair Market Value of such Shares on Participant's Termination Date, provided, that such right of repurchase (i) must be exercised as to all such "Vested" Shares unless a Participant consents to the Company's repurchase of only a portion of such "Vested" Shares and (ii) terminates when the Company's securities become publicly traded; or (B) with respect to Shares that are not "Vested" (as defined in the Award Agreement), at the Participant's original Purchase Price, provided, that the right to repurchase at the original Purchase Price lapses at the rate of at least 20% per year over five (5) years from the date the Shares were purchased (or from the date of grant of options in the case of Shares obtained pursuant to a Stock Option Agreement and Stock Option Exercise Agreement), and if the right to repurchase is assignable, the assignee must pay the Company, upon assignment of the right to repurchase, cash equal to the excess of the Fair Market Value of the Shares over the original Purchase Price. 13. CERTIFICATES. All certificates for Shares or other securities delivered under this Plan will be subject to such stock transfer orders, legends and other restrictions as the Committee may deem necessary or advisable, including restrictions under any applicable federal, state or foreign securities law, or any rules, regulations and other requirements of the SEC or any stock exchange or automated quotation system upon which the Shares may be listed or quoted. 14. ESCROW; PLEDGE OF SHARES. To enforce any restrictions on a Participant's Shares, the Committee may require the Participant to deposit all certificates representing Shares, together with stock powers or other instruments of transfer approved by the Committee, appropriately endorsed in blank, with the Company or an agent designated by the Company to hold in escrow until such restrictions have lapsed or terminated, and the Committee may cause a legend or legends referencing such restrictions to be placed on the certificates. Any Participant who is permitted to execute a promissory note as partial or full consideration for the purchase of Shares under this Plan will be required to pledge and deposit with the Company all or part of the Shares so purchased as collateral to secure the payment of Participant's obligation to the Company under the promissory note; provided, however, that the Committee may require or accept other or additional forms of collateral to secure the payment of such obligation and, in any event, the Company will have full recourse against the Participant under the promissory note notwithstanding any pledge of the Participant's Shares or other collateral. In connection with any pledge of the Shares, Participant will be required to execute and deliver a written pledge agreement in such form as the Committee will from time to time approve. The Shares purchased with the promissory note may be released from the pledge on a pro rata basis as the promissory note is paid. 15. EXCHANGE AND BUYOUT OF AWARDS. The Committee may, at any time or from time to time, authorize the Company, with the consent of the respective Participants, to issue new Awards in exchange for the surrender and cancellation of any or all outstanding Awards. The Committee may at any time buy from a Participant an Award previously granted with payment in cash, Shares (including Restricted Stock) or other consideration, based on such terms and conditions as the Committee and the Participant may agree. 16. SECURITIES LAW AND OTHER REGULATORY COMPLIANCE. An Award will not be effective unless such Award is in compliance with all applicable federal and state securities laws, rules and regulations of any governmental body, and the requirements of any stock exchange or automated quotation system upon which the Shares may then be listed or quoted, as they are in effect on the date of grant of the Award and also on the date of exercise or other issuance. Notwithstanding any other provision in this Plan, the Company will have no obligation to issue or deliver certificates for Shares under this Plan prior to: (a) obtaining any approvals from governmental agencies that the Company determines are necessary or advisable; and/or (b) completion of any registration or other qualification of such Shares under any state or federal law or ruling of any governmental body that the Company determines to be necessary or advisable. The Company will be under no obligation to register the Shares with the SEC or to effect compliance with the registration, qualification or listing requirements of any state securities laws, stock exchange or automated quotation system, and the Company will have no liability for any inability or failure to do so. - 8 - 17. NO OBLIGATION TO EMPLOY. Nothing in this Plan or any Award granted under this Plan will confer or be deemed to confer on any Participant any right to continue in the employ of, or to continue any other relationship with, the Company or any Parent or Subsidiary of the Company or limit in any way the right of the Company or any Parent or Subsidiary of the Company to terminate Participant's employment or other relationship at any time, with or without cause. 18. CORPORATE TRANSACTIONS. 18.1 Assumption or Replacement of Awards by Successor. In the event of (a) a dissolution or liquidation of the Company, (b) a merger or consolidation in which the Company is not the surviving corporation (other than a merger or consolidation with a wholly-owned subsidiary, a reincorporation of the Company in a different jurisdiction, or other transaction in which there is no substantial change in the shareholders of the Company or their relative stock holdings and the Awards granted under this Plan are assumed, converted or replaced by the successor corporation, which assumption will be binding on all Participants), (c) a merger in which the Company is the surviving corporation but the Company's shareholders prior to the merger (other than any shareholder that merges, or controls another corporation that merges, with the Company) own less than 51% of the surviving corporation, or (d) the sale of substantially all of the assets of the Company, any or all outstanding Awards may be assumed, converted or replaced by the successor corporation (if any), which assumption, conversion or replacement will be binding on all Participants. In the alternative, the successor corporation may substitute equivalent Awards or provide substantially similar consideration to Participants as was provided to shareholders (after taking into account the existing provisions of the Awards). The successor corporation may also issue, in place of outstanding Shares of the Company held by the Participant, substantially similar shares or other property subject to repurchase restrictions no less favorable to the Participant. In the event such successor corporation (if any) refuses to assume or substitute Awards, as provided above, pursuant to a transaction described in this Subsection 18.1, such Awards will expire on such transaction at such time and on such conditions as the Board will determine. 18.2 Other Treatment of Awards. Subject to any greater rights granted to Participants under the foregoing provisions of this Section 18, in the event of the occurrence of any transaction described in Section 18.1, any outstanding Awards will be treated as provided in the applicable agreement or plan of merger, consolidation, dissolution, liquidation, sale of assets or other "corporate transaction." 18.3 Assumption of Awards by the Company. The Company, from time to time, also may substitute or assume outstanding awards granted by another company, whether in connection with an acquisition of such other company or otherwise, by either; (a) granting an Award under this Plan in substitution of such other company's award; or (b) assuming such award as if it had been granted under this Plan if the terms of such assumed award could be applied to an Award granted under this Plan. Such substitution or assumption will be permissible if the holder of the substituted or assumed award would have been eligible to be granted an Award under this Plan if the other company had applied the rules of this Plan to such grant. In the event the Company assumes an award granted by another company, the terms and conditions of such award will remain unchanged (except that the exercise price and the number and nature of Shares issuable upon exercise of any such option will be adjusted appropriately pursuant to Section 424(a) of the Code). In the event the Company elects to grant a new Option rather than assuming an existing option, such new Option may be granted with a similarly adjusted Exercise Price. 19. ADOPTION AND SHAREHOLDER APPROVAL. This Plan will become effective on the date on which the registration statement filed by the Company with the SEC under the Securities Act registering the initial public offering of the Company's Common Stock is declared effective by the SEC (the "Effective Date"); provided, however, that if the Effective Date does not occur on or before December 31, 1996, this Plan will terminate having never become effective. This Plan shall be approved by the shareholders of the Company (excluding Shares issued pursuant to this Plan), consistent with applicable laws, within twelve (12) months before or after the date this Plan is adopted by the Board. Upon the Effective Date, the Board may grant Awards pursuant to this Plan; provided, however, that: (a) no Option may be exercised prior to initial shareholder approval of this Plan; (b) no Option granted pursuant to an increase in the number of Shares subject to this Plan approved by the Board will be exercised prior to the time such increase has been approved by the shareholders of the Company; and (c) in the event that shareholder approval of such increase is not obtained within the time period provided herein, all Awards granted hereunder will be canceled, any Shares issued pursuant to any Award will be canceled, and any - 9 - purchase of Shares hereunder will be rescinded. So long as the Company is subject to Section 16(b) of the Exchange Act, the Company will comply with the requirements of Rule 16b-3 (or its successor), as amended, with respect to shareholder approval. 20. TERM OF PLAN/GOVERNING LAW. Unless earlier terminated as provided herein, this Plan will terminate ten (10) years from the date this Plan is adopted by the Board or, if earlier, the date of shareholder approval. This Plan and all agreements thereunder shall be governed by and construed in accordance with the laws of the State of California. 21. AMENDMENT OR TERMINATION OF PLAN. The Board may at any time terminate or amend this Plan in any respect, including without limitation amendment of any form of Award Agreement or instrument to be executed pursuant to this Plan; provided, however, that the Board will not, without the approval of the shareholders of the Company, amend this Plan in any manner that requires such shareholder approval pursuant to the Code or the regulations promulgated thereunder as such provisions apply to ISO plans or (if the Company is subject to the Exchange Act or Section 16(b) of the Exchange Act) pursuant to the Exchange Act or Rule 16b-3 (or its successor), as amended, thereunder, respectively. 22. NONEXCLUSIVITY OF THE PLAN. Neither the adoption of this Plan by the Board, the submission of this Plan to the shareholders of the Company for approval, nor any provision of this Plan will be construed as creating any limitations on the power of the Board to adopt such additional compensation arrangements as it may deem desirable, including, without limitation, the granting of stock options and bonuses otherwise than under this Plan, and such arrangements may be either generally applicable or applicable only in specific cases. 23. DEFINITIONS. As used in this Plan, the following terms will have the following meanings: "Award" means any award under this Plan, including any Option, Restricted Stock or Stock Bonus. "Award Agreement" means, with respect to each Award, the signed written agreement between the Company and the Participant setting forth the terms and conditions of the Award. "Board" means the Board of Directors of the Company. "Code" means the Internal Revenue Code of 1986, as amended. "Committee" means the committee appointed by the Board to administer this Plan, or if no such committee is appointed, the Board. "Company" means Versant Corporation or any successor corporation. "Disability" means a disability, whether temporary or permanent, partial or total, within the meaning of Section 22(e)(3) of the Code, as determined by the Committee. "Disinterested Person" means a director who has not, during the period that person is a member of the Committee and for one year prior to commencing service as a member of the Committee, been granted or awarded equity securities pursuant to this Plan or any other plan of the Company or any Parent or Subsidiary of the Company, except in accordance with the requirements set forth in Rule 16b-3(c)(2)(i) (and any successor regulation thereto) as promulgated by the SEC under Section 16(b) of the Exchange Act, as such rule is amended from time to time and as interpreted by the SEC. "Exchange Act" means the Securities Exchange Act of 1934, as amended. "Exercise Price" means the price at which a holder of an Option may purchase the Shares issuable upon exercise of the Option. - 10 - "Fair Market Value" means, as of any date, the value of a share of the Company's Common Stock determined as follows: (a) if such Common Stock is then quoted on the Nasdaq National Market, its closing price on the Nasdaq National Market on the date of determination as reported in The Wall Street Journal; (b) if such Common Stock is publicly traded and is then listed on a national securities exchange, its closing price on the date of determination on the principal national securities exchange on which the Common Stock is listed or admitted to trading as reported in The Wall Street Journal; (c) if such Common Stock is publicly traded but is not quoted on the Nasdaq National Market nor listed or admitted to trading on a national securities exchange, the average of the closing bid and asked prices on the date of determination as reported in The Wall Street Journal; (d) in the case of an Award made on the Effective Date, the price per share at which shares of the Company's Common Stock are initially offered for sale to the public by the Company's underwriters in the initial public offering of the Company's Common Stock pursuant to a registration statement filed with the SEC under the Securities Act; or (d) if none of the foregoing is applicable, by the Committee in good faith. "Insider" means an officer or director of the Company or any other person whose transactions in the Company's Common Stock are subject to Section 16 of the Exchange Act. "Outside Director" means any director who is not; (a) a current employee of the Company or any Parent or Subsidiary of the Company; (b) a former employee of the Company or any Parent or Subsidiary of the Company who is receiving compensation for prior services (other than benefits under a tax-qualified pension plan); (c) a current or former officer of the Company or any Parent or Subsidiary of the Company; or (d) currently receiving compensation for personal services in any capacity, other than as a director, from the Company or any Parent or Subsidiary of the Company; provided, however, that at such time as the term "Outside Director", as used in Section 162(m) of the Code is defined in regulations promulgated under Section 162(m) of the Code, "Outside Director" will have the meaning set forth in such regulations, as amended from time to time and as interpreted by the Internal Revenue Service. "Option" means an award of an option to purchase Shares pursuant to Section 5. "Parent" means any corporation (other than the Company) in an unbroken chain of corporations ending with the Company, if at the time of the granting of an Award under this Plan, each of such corporations other than the Company owns stock possessing 50% or more of the total combined voting power of all classes of stock in one of the other corporations in such chain. "Participant" means a person who receives an Award under this Plan. "Plan" means this Versant Corporation1996 Equity Incentive Plan, as amended from time to time. "Restricted Stock Award" means an award of Shares pursuant to Section 6. "SEC" means the Securities and Exchange Commission. "Securities Act" means the Securities Act of 1933, as amended. - 11 - "Shares" means shares of the Company's Common Stock reserved for issuance under this Plan, as adjusted pursuant to Sections 2 and 18, and any successor security. "Stock Bonus" means an award of Shares, or cash in lieu of Shares, pursuant to Section 7. "Subsidiary" means any corporation (other than the Company) in an unbroken chain of corporations beginning with the Company if each of the corporations other than the last corporation in the unbroken chain owns stock possessing 50% or more of the total combined voting power of all classes of stock in one of the other corporations in such chain. "Termination" or "Terminated" means, for purposes of this Plan with respect to a Participant, that the Participant has for any reason ceased to provide services as an employee, director, consultant, or advisor to the Company or a Parent or Subsidiary of the Company. An employee will not be deemed to have ceased to provide services in the case of (i) sick leave, (ii) military leave, or (iii) any other leave of absence approved by the Committee, provided, that such leave is for a period of not more than 90 days, unless reemployment upon the expiration of such leave is guaranteed by contract or statute or unless provided otherwise pursuant to formal policy adopted from time to time by the Company and issued and promulgated to employees in writing. In the case of any employee on an approved leave of absence, the Committee may make such provisions respecting suspension of vesting of the Option while on leave from the employ of the Company or a Subsidiary as it may deem appropriate, except that in no event may an Option be exercised after the expiration of the term set forth in the Option agreement. The Committee will have sole discretion to determine whether a Participant has ceased to provide services and the effective date on which the Participant ceased to provide services (the "Termination Date"). EX-10.42 3 FINANCIAL PUBLIC RELATIONS AGREEMENT Exhibit - 10.42 FINANCIAL PUBLIC RELATIONS AGREEMENT THIS FINANCIAL PUBLIC RELATIONS AGREEMENT ("Agreement") is made and entered into this 1st day of November, 1999 (the "Effective Date") by and between Versant Corporation, a California Corporation ("Company") and Liolios Group, Inc., a California Corporation ("Consultant"). RECITALS Company desires to engage Consultant to perform certain financial public relations services for it, and Consultant desires, subject to the terms and conditions of this Agreement, to perform financial public relations services for Company. NOW, THEREFORE, IN CONSIDERATION OF THE MUTUAL PROMISES AND UNDERTAKING HEREIN CONTAINED AND FOR OTHER GOOD AND VALUABLE CONSIDERATION THE RECEIPT AND SUFFICIENCY OF WHICH IS HEREBY ACKNOWLEDGED THE PARTIES AGREE AS FOLLOWS: 1. ENGAGEMENT OF CONSULTANT Company hereby engages Consultant and Consultant hereby agrees to hold itself available to render, and to render at the request of the Company, independent advisory and consulting services for the Company to the best of its ability, upon the terms and conditions hereinafter set forth. Such consulting services shall include but not be limited to the development, implementation and maintenance of an on-going stock market support system that increases broker awareness of the company's activities and stimulates investor interest in the Company. The stock market support system shall include but not be limited to a Shareholder Communication System, and Media Relation Systems, which will be defined and developed by Consultant. It is understood that Consultant's ability to relate information regarding the Company's activities is directly proportionate to information availed by the company to the Consultant. 2. TERM The term of this Agreement ("Term") shall begin as of the Effective Date and shall terminate twelve (12) months thereafter ("Anniversary Date"), unless terminated or extended in accordance with the provisions of this Agreement. 3. COMPENSATION As compensation for the services rendered by the Consultant under this Agreement, Company agrees to pay to Consultant $60,000 annually, at a rate of $5,000 per month in advance of each month. This is in addition to reimbursement of reasonable out-of-pocket authorized expenses. Further as compensation to the consultant for services rendered pursuit to this agreement, the Company shall, upon execution of this agreement, issue warrants (collectively, the "Warrants") to purchase up to 125,000 shares of common stock of VSNT (the "Stock") at a price of $.001 per share ($125.00 in the aggregate). The warrants shall vest and become exercisable, and shall terminate, pursuant to the following schedule: (a) 25,000 Warrants shall vest upon the execution of this agreement at an exercise price of $3.00 per share of Stock. (b) 25,000 Warrants shall vest at an exercise price of $3.75 per share of Stock, if and when the Stock trades at $4.00, provided that such Warrant shall terminate if not vested within (9) nine months of the Effective Date or if Consultant terminates this Agreement prior to vesting. (c) 25,000 Warrants shall vest at an exercise price of $4.50 per share of Stock, if and when the Stock trades at $6.00, provided that such Warrant shall terminate if not vested within (12) twelve months of the Effective Date or if Consultant terminates this Agreement prior to vesting. (d) 25,000 Warrants shall vest at an exercise price of $5.25 per share of Stock, if and when the Stock trades at $8.00, provided that such Warrant shall terminate if not vested within (21) twenty-one months of the Effective Date or if Consultant terminates this Agreement prior to vesting. (e) 25,000 Warrants shall vest at an exercise price of $6.00 per share of Stock, if and when the Stock trades at $10.00, provided that such Warrant shall terminate if not vested within (30) thirty months of the Effective Date or if Consultant terminates this Agreement prior to vesting. Provided however, in the case of (d) and (e) above, in the event of termination of the Agreement by Company, the number of Warrants shall be multiplied by a fraction equal to the full or partial months served prior to termination by Company divided by twelve (12) months (and not to exceed one), the remainder of such Warrants terminating on the date of termination. For purposes of determining when Warrants vest under the foregoing paragraphs, the Stock "trades" at a price when the last reported trade, as quoted by the NASDAQ Stock Market, equals or exceeds the price specified for ten (10) continuous trading days. The vested Warrants shall have a term of three (3) years from the Effective Date of this agreement.Despite the foregoing, 100,000 of the Warrants shall vest on the fourth anniversary of the Effective Date of this Agreement at a strike price of $10.00 unless the Agreement terminates prior thereto. 4. INDEPENDENT CONTRACTOR It is expressly agreed that the Consultant is acting as an independent contractor in performing its services hereunder. Company shall carry no workmen's compensation insurance or any health or accident insurance to cover Consultant. Company shall not pay any contributions to social security, unemployment insurance, Federal or state withholding taxes nor provide any other contributions or benefits which might expected in an employer-employee relationship. 5. ASSIGNMENT This Agreement is a personal one being entered into in reliance upon and in consideration of the singular personal skills and qualifications of Consultant. Consultant shall therefore not voluntarily or by operation of law assign or otherwise transfer the obligations incurred on its part pursuant to the terms of this Agreement without the prior written consent of the Company. Any attempt at assignment to transfer by Consultant of its obligation with out such consent shall be wholly void. 6. CONFIDENTIAL INFORMATION 6.1 The term "Confidential Information" shall include, but not be limited to, information regarding Company's business, plans, customers, technology, and/or products that is confidential and of substantial value to Company, which value would be impaired if such information were disclosed to third parties. Company's Confidential Information shall also include any and all non-public information, data know-how and documentation which is related to Company's object-oriented database system, language interfaces, database utilities, development tools, Company supplied benchmarks or similar test results, system internals, program strategies, and business plans. 6.2 Confidential Information shall not include information which (i) is or becomes a part of the public domain through no act or omission of the receiving party; or (ii) was in the receiving party's lawful possession prior to the disclosure and had not been obtained by the receiving party either directly or indirectly from the disclosing party; or (iii) is lawfully disclosed to the receiving party by a third party without restriction on disclosure; or (iv) is independently developed by the receiving party; or (v) is required to be disclosed by law provided that the disclosing party has had seven (7) days to respond to the request. 6.3 Consultant agrees, both during the term of this Agreement and for a period of two years thereafter, to hold Company's Confidential Information in confidence, and agrees not to make such Confidential Information available in any form to any third party, or use such Confidential Information for any other purpose than the implementation of this Agreement. Consultant agrees to take all reasonable steps to ensure that Company's Confidential Information is not disclosed or distributed by its employees or agents in violation of the provisions of this Agreement. Termination of the Agreement shall not relieve Consultant of its obligations under this Section 6. 7. TERMINATION This Agreement may be terminated by either party for any reason upon thirty (30) days notice in writing. In the event the Agreement is terminated, Consultant shall cease rendering its services to Company as of the effective date of termination and Company shall pay Consultant for the services performed and approved expenses through the date of termination. Any materials created as the result of Consultant's provision of services to Company shall be delivered to Company within ten (10) days of the date of termination. 8. GENERAL PROVISIONS 8.1 Governing Law and Jurisdiction This Agreement shall be governed by and interpreted in accordance with the laws of the State of California. Each of the Parties hereto consents to such jurisdiction for the enforcement of this Agreement and matters pertaining to the transaction and activities contemplated hereby. 8.2 Non-Circumvention and Non-Disclosure Neither the Company nor its directors, officers, agents attorneys, employees, affiliates, representatives, successors, or assigns (collectively referred to as the "Company") will attempt to consummate a transaction with any financing sources, or potential acquisition, introduced by the Consultant without first notifying Consultant, and satisfying Consultant's right to a two percent (2%) fee, on a per transaction basis. This provision will inure for a period of three (3) years form the date affixed to this document. However, any contacts introduced to the Company in the "normal course" of Consultant's primary contracted services shall not apply; further, all sources of business shall not be unreasonably withheld. The Company shall keep completely confidential the identity of all such financing parties. It is understood that this Agreement is a reciprocal one between the signatories concerning the privileged information and contacts. 8.3 Notices As such notices and communications shall be deemed to have been duly given: when delivered by hand, if personally delivered; five (5) business days after deposit in any United States Post Office in the continental United States, postage prepaid, if mailed; when answered back, if telexed, when receipt is acknowledged or confirmed, if telecopies. 8.4 Attorney's Fees In the event a dispute arises with respect to this Agreement, the party prevailing in such dispute shall be entitled to recover all expenses, including, without limitation, reasonable attorney's fees and expenses incurred in ascertaining such party's rights, in preparing to enforce or in enforcing such party's rights under this Agreement, whether or not it was necessary for such party to institute suit. Further, in the event the Company, its officers, and or its directors cause a dispute in which Consultant is involved, the Company agrees to hold Consultant harmless, and provide reasonable attorney fees. Company further agrees to notify Consultant immediately of such event. 8.5 Complete Agreement This Agreement supersedes any and all of the other agreements, either oral or in writing, between the Parties with respect to such subject matter in any manner whatsoever. Each Party to this Agreement acknowledges that no representations, inducements, promises or agreements, oral or otherwise, have been made by any Party, or anyone herein, and that no other Agreement, statement or promise not contained in the Agreement may be changed or amended only by an amendment in writing signed by all of the Parties or their respective successors-in-interest. 8.6 Binding This Agreement shall be binding upon and inure to the benefit of the successors-in-interest, assigns and personal representatives of the respective Parties. 8.7 Unenforceable Terms Any provision hereof prohibited by law or unenforceable under the law of any jurisdiction in which such provision is applicable shall adhere to such jurisdiction only be ineffective without affecting any other provision if this Agreement. To the full extent, however, that such applicable law may by waived to the end that this Agreement be deemed to be a valid and binding agreement enforceable in accordance with its terms, the Parties hereto hereby waive such applicable law knowingly and understanding the effect of such waiver. 8.8 Execution in Counterparts This Agreement may be executed in several counterparts and when so executed shall constitute one agreement binding on all the Parties, notwithstanding that all the Parties are not signatory to the original and same counterpart. 8.9 Further Assurances From time to time each Party will execute and deliver such further instruments and will take such other action as any other Party may reasonably request in order to discharge and perform their obligations and agreements hereunder and to give effect to the intentions expressed in this Agreement. 8.10 Incorporation By Reference All exhibits referred to in this Agreement are incorporated herein in their entirety by such reference. 8.11 Miscellaneous Provisions The various headings and numbers herein and the grouping of provisions of this Agreement into separate articles and paragraphs are for the purpose of convenience only and shall not be considered a part hereof. The language in all parts of this Agreement shall in all cases be construed in accordance with its fair meanings as if prepared by a all Parties to the Agreement and not strictly for or against any of the Parties. 9. Notices Any notice or other communication required or permitted hereunder shall be in writing and shall be delivered personally, telegraphed, telexed, sent by facsimile transmission (provided acknowledgement of receipt thereof is delivered to the sender) or sent by certified, registered or express mail, postage prepaid. Any such notice shall be deemed given when so delivered personally, telegraphed, telexed, sent by facsimile transmission or, if mailed, three days after the date of deposit in the United States mails as follows: If to Consultant, to: Liolios Group, Inc. 2431 West Coast Hwy., #202 Newport Beach, CA. 92663 If to Company, to: Versant Corporation 6539 Dumbarton Circle Freemont, CA. 94555 or such address as any of the above shall have specified by notice hereunder. IN WITNESS WHEREOF, the Parties hereto have executed this Agreement as of the day and year first hereinabove written. VERSANT CORPORATION By:_________________________ Name: Nick Ordon Title: President LIOLIOS GROUP, INC. By:_________________________ Name: J. Scott Liolios Title: President EX-10.43 4 COVENANT WAIVER Exhibit - 10.43 Covenant Waiver 55 Almaden Boulevard San Jose, CA 95113-1609 (408)556-5836 January 31, 2000 Via Facsimile and First Class Mail Gary O. Rhea, CFO Versant Corporation 6539 Dumbarton Circle Fremont, CA 94555 Re: Revolving Loan and Security Agreement dated as of May 15, 1997, as modified from time to time in writing (the "Agreement"), between Versant Corporation ("Borrower") and Comerica Bank - California ("Bank") Dear Gary: We have learned of the following breach of the Agreement based upon Borrower prepared financial statements and press release communication with Borrower as of the fiscal quarter ending December 31, 1999. Borrower is in violation of the following: Section 6.17 (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. Bank has agreed to waive the breach described above for the period ending December 31, 1999 until March 31, 2000. Except as specifically set forth in this letter, all other terms and conditions of the Agreement shall remain in full force and effect. This waiver is not a waiver of any other, or future breach, of any other term or condition of the Agreement. Very truly yours, Comerica Bank - California Roland Tucker Vice President EX-10.44 5 EXHIBIT - 10.44 Exhibit - 10.44 Financial Covenant Modifications 55 Almaden Boulevard San Jose, CA 95113-1609 (408)556-5836 March 16, 2000 Gary Rhea, Chief Financial Officer Versant Corporation 6539 Dumbarton Circle Fremont, CA 94555 Re: Financial covenant modifications Dear Gary: This Modification Letter Agreement ("Letter Agreement") is entered into by Versant Corporation ("Borrower") and Comerica Bank - California ("Bank") as of March 16, 2000. Borrower and Bank are currently parties to that certain Revolving Credit Loan and Security Agreement (the "Agreement") dated as of May 15, 1997, as modified from time to time in writing (together with the documents executed in connection therewith collectively the "Loan Documents") and entered into the Third Modification to Revolving Credit Loan & Security Agreement and First Modification to Variable Rate-Installment Note ("Modification") dated as of June 18, 1999. Borrower and Bank desire to and hereby do agree to modify Section B.4 of the Modification follows: The following sub-sections of Section B. 4. b. of the Modification shall be deleted in their entirety and replaced with the following: "b. Section 6.17 The following sub-sections of Section 6.17 are hereby deleted in their entirety and replaced with the following: 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 2.50:1.0 as of the last day of the fiscal quarter ending March 31, 2000; not less than 3.0:1.0 as of the last day of the fiscal quarter ending June 30, 2000; and lastly, not less than 3.5:1.0 as of the last day of the fiscal quarter ending September 30, 2000 and each fiscal quarter thereafter. Gary Rhea March 16, 2000 Page 2 f. Net Operating Cash, as defined in FASB 95 and 102, not less than [$365,000] as of the last day of the fiscal quarter ending March 31, 2000; equal to or greater than $1,000,000 as of the last day of the fiscal quarter ending June 30, 2000; not less than [$550,000] as of the last day of the fiscal quarter ending September 30, 2000; and lastly, equal to or greater than $1,000,000 as of the last day of each fiscal quarter thereafter." Except as specifically set forth in this Letter Agreement, all of terms and conditions of the Loan Documents remain in full force and effect in accordance with their original terms and conditions and Borrower hereby affirms, ratifies and approves the Loan Documents. Kindly acknowledge your agreement with the terms and conditions of this Letter Agreement by signing and returning a copy of this letter. Very truly yours, Comerica Bank - California Roland Tucker Vice President Acknowledged and Agreed to on ____________________, 2000 Versant Corporation ___________________________________ Gary Rhea, Chief Financial Officer EX-21.01 6 SUBSIDIARIES OF THE REGISTRANT SUBSIDIARIES OF THE REGISTRANT Subsidiary and Name under which Subsidiary Does Business Jurisdiction of Incorporation Versant GmbH (Europe) Germany Versant SARL France Versant Ltd. United Kingdom Versant Pty Ltd. Australia Soft Mountain S.A. France Versant India India EX-23.01 7 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our report dated January 25, 2000 included in this Form 10-KSB into the Company's previously filed Registration Statements, File Nos. 333-08537 and 333-29947 (both filed on Form S-8). ARTHUR ANDERSEN LLP San Jose, California March 30, 2000 EX-27 8 FINANCIAL DATA SCHEDULE FOR YEAR END 1999
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. 1000 12-MOS DEC-31-1999 JAN-01-1999 DEC-31-1999 3,663 0 7,692 414 0 11,694 13,639 8,161 19,241 10,110 0 0 5,662 48,528 (45,602) 19,241 25,868 25,868 4,925 4,925 21,352 0 (1,294) (1,682) 54 (1,736) 0 0 0 (1,736) (.17) (.17)
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